L3HARRIS TECHNOLOGIES, INC. /DE/ (LHX) FY 2025 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an understanding of our

financial condition and results of operations for fiscal 2024 compared with fiscal 2023. A discussion of fiscal 2023

compared to fiscal 2022 can be found in Part II. Item 7. Management's Discussion and Analysis of Financial

Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended

December 29, 2023 (our “Fiscal 2023 Form 10-K”). This MD&A is provided as a supplement to, should be read in

conjunction with and is qualified in its entirety by reference to, our Consolidated Financial Statements and

accompanying Notes appearing elsewhere in this Report. Except for the historical information contained herein, the

discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results

could differ materially from those discussed herein. Factors that could cause or contribute to such differences

include, but are not limited to, those discussed in Part I. Item 1A. Risk Factors of this Report. For additional

information, see  Part I. Item 1. Business - Cautionary Statement Regarding Forward-Looking Statements of this

Report.

OVERVIEW

We are the Trusted Disruptor in the defense industry. With customers’ mission-critical needs in mind, we deliver

end-to-end technology solutions connecting the space, air, land, sea and cyber domains in the interest of global

security. We support government customers in more than 100 countries, with our largest customers being various

departments and agencies of the U.S. Government, their prime contractors and international allies. Our products and

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services have defense and civil government applications, as well as commercial applications. As of January 3, 2025,

we had approximately 47,000 employees, including approximately 18,000 engineers and scientists.

We structure our operations primarily around the products, systems and services we sell and the markets we

serve, and we report our financial results in four business segments: SAS, IMS, CS and AR. See Note 14: Business

Segments in the Notes for further information regarding our business segments.

U.S. and International Budget Environment

The percentage of our revenue that was derived from sales to U.S. Government customers, including foreign

military sales funded through the U.S. Government, whether directly or through prime contractors, was 76%, 76%

and 74%, in fiscal 2024, 2023 and 2022, respectively.

On March 9, 2024, the President signed the first tranche of GFY 2024 appropriations funding bills into law,

which funded six government agencies, including the National Aeronautics and Space Administration, the National

Oceanic and Atmospheric Administration, and the Federal Aviation Administration, through the remainder of GFY

2024 which ended on September 30, 2024. A second funding bill, signed into law on March 23, 2024, funded all

remaining agencies, including the DoD, through the remainder of GFY 2024. The bill provided approximately

$844 billion in funding for DoD. This was in line with our expectations for 3% growth for defense over GFY 2023

levels and in line with the first year of the Fiscal Responsibility Act of 2023 (“FRA”) caps.

On March 11, 2024, the President’s Budget Request for GFY 2025 was released. The DoD requested

$850 billion, a 1% topline increase consistent with the FRA caps.

On April 24, 2024, the President signed into law a supplemental GFY 2024 appropriations package that included

$67 billion in funding for key DoD programs, bringing the DoD funding for GFY 2024 to $911 billion.

Congress has not yet reached a final agreement on GFY 2025 funding. A short-term CR was enacted on

December 21, 2024 that will fund the U.S. Government until March 14, 2025. While operating under a CR,

government agencies are allocated a portion of GFY 2024 enacted funds, and DoD is prohibited from starting new

programs. If Congress does not enact all 12 GFY 2025 appropriations bills by April 30, 2025, a 1% automatic

sequestration cut will go into effect as mandated by the FRA.

Further complicating the budget outlook is the need to raise the debt ceiling in 2025. Congressional inaction

may lead to a default and potentially create economic instability.

The overall defense spending environment, both in the U.S. and internationally, reflects the continued impacts of

global conflicts and geopolitical tensions, and changes to U.S. Government or international spending priorities have

and could in the future impact our business.

For a discussion of U.S. Government funding risks and international business risks see “Item 1. Business -

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 our business and may

continue to impact our future results. The ongoing uncertainty relates to the impacts of inflation, interest rates and

ongoing federal deficits, which could raise the cost of borrowing for the federal government impacting U.S.

Government spending priorities and the demand for our products. For a discussion of inflation-related risks, see

“Item 1A. Risk Factors” of this Report.

Operating Environment, Strategic Priorities and Key Performance Measures

As a proven alternative to traditional primes and new entrants, our flexible business model allows us to operate

as either a prime, merchant supplier, or subcontractor, offering both commercial pricing and traditional government

acquisition approaches. Our products are used across many customer platforms and this platform-agnostic

approach gives us a unique advantage in rapidly adapting to the changing threat environment while effectively

partnering with new entrants and non-traditional contractors. Customer demand for our solutions remains robust,

and we ended fiscal 2024 with backlog of $34.2 billion, a 5% increase over the prior year. Also in fiscal 2024, we

invested $515 million (2% of total revenue) in company-funded R&D focused on technologies that expand our

capabilities across our domains.

In fiscal 2024, we made considerable progress with our LHX NeXt initiative, our targeted three-year program

designed to enhance organizational agility and performance by leveraging our scale and relationships across

segments, driving operational efficiency and competitiveness for the enterprise. With this program we are investing

in enterprise tools and optimized, revamped processes to unlock further opportunities for margin expansion and

create additional value for our shareholders.

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Our strategic priorities continue to be performance, growth and innovation. We plan to continue to invest,

consistent with profitable growth opportunities, and sustain our culture of innovation, while delivering on our

commitments to investors, our customers and on every contract we are awarded.  We intend to accomplish this by:

•Building upon our solid foundation and operational rigor to execute for our customers;

•Focusing on profitable growth while securing strategic positions as a prime or subcontractor; and

•Leveraging innovation as a competitive advantage to develop rapid solutions.

We use the following key financial performance measures to manage our business, which are discussed in detail

below in the “Operations Review” and “Liquidity and Capital Resources” sections of this MD&A:

•Revenue;

•Operating income and margin; and

•Net cash provided by operating activities.

We use these measures, along with other performance measures that are not defined by U.S. Generally

Accepted Accounting Principles (“GAAP”), to assess the success of our business and our ability to create

shareholder value. We believe these measures are balanced among long-term and short-term performance, growth

and innovation. We also use some of these and other performance metrics for executive compensation purposes.

OPERATIONS REVIEW

Consolidated Results of Operations

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(1)“FAS” is defined as Financial Accounting Standards.

(2)“EPS” is defined as Earnings Per Share.

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Revenue. As described in more detail in Note 13: Acquisitions and Divestitures and elsewhere in the Notes,

during fiscal 2024 and 2023, we completed certain business divestitures. There was no significant revenue

attributable to divested businesses.

Products revenue. The following table presents products revenue by segment, net of intersegment:

Products revenue for fiscal 2024 increased $1,440 million, due to the inclusion of a full year of products revenue

from AR, rather than a partial year of revenue in fiscal 2023 (“the AR Partial Year”) following the July 28, 2023

acquisition of Aerojet Rocketdyne Holdings, Inc. (“AJRD”), as well as increased products revenues of $441 million

and $264 million at CS and IMS, respectively, partially offset by decreased products revenue of $91 million at SAS.

Services revenue. The following table presents services revenue by segment, net of intersegment:

Services revenue for fiscal 2024 increased $466 million, from the inclusion of a full year of services revenue

from AR rather than the AR Partial Year, as well as increased services revenue of $101 million at SAS, partially offset

by decreased services revenues of $68 million and $36 million at CS and IMS, respectively.

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

Cost of Revenue.

Cost of products revenue. The following table presents cost of products revenue by segment, net of

intersegment:

Cost of products revenue increased $1,308 million primarily from the inclusion of a full year of cost of products

revenue from AR rather than the AR Partial Year and increased cost of products revenue of $419 million and $214

million at CS and IMS, respectively.

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Cost of services revenue. The following table presents cost of services revenue by segment, net of intersegment:

Cost of services revenue increased $187 million, primarily from the inclusion of a full year of cost of services

revenue from AR rather than the AR Partial Year and increased cost of services revenue of $61 million at SAS,

partially offset by decreased cost of services revenue of $163 million and $47 million at CS and IMS, respectively.

Gross Margin. Gross margin for fiscal 2024 increased compared to fiscal 2023, largely due to the increases in

revenue noted above and a favorable net change in estimate at completion (“EAC”) adjustments which increased

gross margin by $124 million, partially offset by a higher mix of lower margin revenue, primarily in our CS segment.

Gross margin as a percentage of revenue remained flat compared to fiscal 2023. For discussion of operating income

by segment see “Business Segment Results of Operations” below in this MD&A for further information.

General and Administrative (“G&A”) Expenses. The following table presents the components of G&A expenses:

______________

(1)Costs associated with transforming multiple functions, systems and processes to increase agility and competitiveness, including third-party

consulting, workforce optimization and incremental IT expenses for implementation of new systems.

(2)See Note 13: Acquisitions and Divestitures in the Notes for further information.

(3)Includes other segment G&A expenses such as payroll and benefits, outside services, facilities, insurance and other expenses, as well as

unallocated corporate expenses, such as a portion of management and administration, legal, environmental, compensation, retiree benefits

and other corporate G&A expenses and eliminations.

G&A expenses increased $255 million for fiscal 2024 compared with fiscal 2023 primarily due to increases in

LHX NeXt implementation costs, including $42 million related to employee severance charges and $110 million for

third-party consulting expenses, incremental IT expenses for implementation of new systems and other costs. G&A

expenses also increased from higher amortization of acquisition-related intangibles, partially offset by a decrease in

merger, acquisition, and divestiture-related expenses. Additionally, other G&A expenses increased $85 million

primarily due to increases of $97 million in our AR segment from the AR Partial Year and $86 million in corporate,

primarily from increases related to corporate-led initiatives and a $15 million legal reserve, partially offset by

decreases in other G&A costs of $84 million and $15 million in our SAS and CS segments, respectively, primarily

from LHX NeXt driven cost savings.

Impairment of Goodwill and Other Assets. In fiscal 2024, we recognized a $14 million non-cash charge for

impairment of goodwill in connection with the divestiture of our antenna and related businesses (“Antenna disposal

group”) and a $24 million non-cash charge for impairment of other assets at CS associated with the Tactical Data

Links (“TDL”) acquisition. In fiscal 2023, we recognized a $296 million non-cash charge for impairment of goodwill

in connection with the pending divestiture of our CAS disposal group and $78 million of other asset impairments

associated with in-process R&D, customer contracts and a facility closure.

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Non-service FAS Pension Income and Other, Net. The following table presents the components of non-service

FAS pension income and other, net:

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(1)Includes interest cost, expected return on plan assets, amortization of net actuarial gain, and amortization of prior service (credit) cost

components of net periodic benefit income under our defined benefit plans. See Note 9: Retirement Benefits in the Notes for more

information on the composition of non-service FAS pension income.

(2)Other, net primarily includes changes in the market value of our rabbi trust assets, gains and losses on our equity investments in

nonconsolidated affiliates and royalty income.

Interest Expense, Net. Our net interest expense increased $132 million in fiscal 2024 compared with fiscal 2023

primarily due to a full year of interest on the $3.25 billion aggregate principal amount of fixed-rate debt issued in

July 2023 in connection with the AJRD acquisition, the issuance of $2.25 billion aggregate principal amount of long-

term fixed-rate debt in March 2024 and higher average outstanding notes under our commercial paper program (“CP

Program”) during fiscal 2024, partially offset by repayment of the entire outstanding $2.25 billion, three-year senior

unsecured term loan facility (“Term Loan 2025”) in March 2024. See the “Liquidity and Capital Resources”

discussion below in this MD&A and Note 8: Debt and Credit Arrangements in the Notes for further information.

Income Taxes. Our effective tax rate increased to 5.3% in fiscal 2024 compared with 1.9% in fiscal 2023. Our

effective tax rate for both years benefited from R&D credits, tax deductions for foreign derived intangible income

(“FDII”) and favorable resolution of specific audit uncertainties. The year-over-year increase in the rate is the result

of favorable impacts of divestitures and internal restructuring in fiscal 2023, partially offset by favorable

adjustments to our valuation allowance position as a result of our ability to utilize certain state tax credits in fiscal

2024. See Note 7: Income Taxes in the Notes for further information.

Diluted EPS. Diluted EPS increased 22% in fiscal 2024 compared with fiscal 2023 primarily due to higher net

income from the combined effects of reasons noted in the sections above, notably the absence of a prior year CAS

disposal group goodwill impairment and an increase in fiscal 2024 gross margin, partially offset by increases in G&A

expenses and interest expense, net.

Business Segment Results of Operations

SAS. Our SAS segment includes space payloads, sensors and full-mission solutions; classified intelligence and

cyber; airborne combat systems, and mission networks for air traffic management operations. See “Item 1. Business”

of this Report for a description of the sectors in SAS.

SAS segment revenue remained flat in fiscal 2024 compared with fiscal 2023 due to higher revenues of $138

million in Intel & Cyber, primarily from program growth and $82 million in Mission Networks from higher volumes,

offset by lower revenues of $217 million in Airborne Combat Systems, from lower revenue of $115 million

associated with the divestiture of the Antenna disposal group and the remaining decrease primarily from lower F-35

related volume as TR-3 development transitions from development to a more gradual production ramp. At

January 3, 2025 and December 29, 2023, SAS segment ending backlog was $9.4 billion and $9.5 billion,

respectively.

SAS segment operating income increased in fiscal 2024 compared with fiscal 2023, primarily due to LHX NeXt

driven cost savings realized during fiscal 2024, higher volume in Mission Networks and $46 million from the

monetization of legacy end of life assets, aligned with our transformation and value creation priorities, in addition to

the impact of a $27 million non-cash charge for impairment of other assets which occurred during fiscal 2023. Such

increase was partially offset by unfavorable EAC adjustments from program execution on classified fixed-price

development programs in Space Systems that are in the later stages of completion.

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IMS. Our IMS segment includes ISR; passive sensing and targeting; electronic attack; autonomy; power and

communications; networks; sensors; aviation products; and pilot training operations. See “Item 1. Business” of this

Report for a description of the sectors in IMS.

IMS segment revenue increased in fiscal 2024 compared with fiscal 2023 primarily due to higher revenues of

$73 million in Defense Electronics from higher demand for advanced electronics, $56 million in ISR from higher

aircraft missionization volume, $49 million in Commercial Aviation Solutions from higher volume, $31 million in

Global Optical Systems from higher commercial revenue for airborne electro-optical sensors and $27 million in

Maritime from volume on classified programs. At January 3, 2025 and December 29, 2023, IMS segment ending

backlog was $10.5 billion and $9.7 billion, respectively.

IMS segment operating income increased in fiscal 2024 compared with fiscal 2023 primarily due to a

$296 million non-cash charge for impairment of goodwill associated with the CAS disposal group in fiscal 2023, in

addition to improved program performance of $69 million, higher overall revenue volumes and LHX NeXt driven cost

savings realized in fiscal 2024.

CS. 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.

CS segment revenue increased in fiscal 2024 compared with fiscal 2023 primarily due to higher revenues of

$208 million in Tactical Communications and $95 million in Integrated Vision Solutions associated with increased

domestic and international demand for our resilient communication equipment, related waveforms, and night vision

devices and $86 million in Broadband Communications from higher volumes. At January 3, 2025 and December 29,

2023, CS segment ending backlog was $7.3 billion and $6.3 billion, respectively.

CS segment operating income increased in fiscal 2024 compared with fiscal 2023 primarily due to LHX NeXt

driven cost savings realized during fiscal 2024, partially offset by a higher mix of domestic radios related to

competitive IDIQ contracts and a $24 million non-cash charge for impairment of other assets at Broadband

Communications related to the TDL acquisition.

AR. Our AR segment includes missile solutions with propulsion technologies for strategic defense, missile

defense, and hypersonic and tactical systems; and space propulsion and power systems for national security space

and exploration missions. See “Item 1. Business” of this Report for a description of the sectors in AR.

AR segment revenue and operating income increased in fiscal 2024 compared with fiscal 2023 primarily due to

the AR Partial Year. At January 3, 2025, AR segment ending backlog was $7.0 billion and $7.2 billion, respectively.

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Unallocated Corporate Expenses. Unallocated corporate expenses include the portion of corporate costs not

included in management’s evaluation of segment operating performance.

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(1)The increase in unallocated corporate department expense is primarily from increases related to corporate-led initiatives and a $15 million

legal reserve.

(2)Includes amortization of intangible assets acquired in connection with business combinations. Because our acquisitions benefit the entire

Company, the amortization was not allocated to any segment.

(3)See Note 13: Acquisitions and Divestitures in the Notes for further information.

(4)For fiscal 2024, includes a non-cash charge for impairment of goodwill related to our Antenna disposal group divestiture. For fiscal 2023,

includes a $21 million non-cash charge for impairment of in-process R&D associated with a facility closure and an $18 million non-cash

charge for impairment of a customer contract. See Note 13: Acquisitions and Divestitures and Note 6: Goodwill and Intangible Assets in the

Notes for further information.

(5)Includes costs associated with transforming multiple functions, systems and processes to increase agility and competitiveness, including

third-party consulting, workforce optimization and incremental IT expenses for implementation of new systems. For further information on

our LHX NeXt initiative and implementation costs see Note 14: Business Segments in the Notes and the “General and Administrative

Expenses” discussion above in this MD&A.

(6)Represents the difference between U.S. Government Cost Accounting Standards (“CAS”) pension cost and the service cost component of net

periodic benefit income under our defined benefit plans. See Note 1: Significant Accounting Policies in the Notes for additional information

regarding the FAS/CAS operating adjustment.

LIQUIDITY AND CAPITAL RESOURCES

We prioritize cash flow generation through our commitment to operational excellence, efficient balance sheet

management and continuous cost reduction efforts. We consistently assess various capital deployment options,

considering both our long-term outlook and the evolving market conditions, recognizing the importance of

adaptability as market dynamics change over time.

Our primary capital deployment priorities involve a focus on funding the business, including investing in training,

facilities and digital infrastructure, debt repayment to be achieved through the prioritization of capital allocation and

returning cash to our shareholders through dividends and share repurchases.

Capital Resources

As of January 3, 2025, we had cash and cash equivalents of $615 million, of which $300 million was held by our

foreign subsidiaries, a significant portion of which we believe can be repatriated to the U.S. with minimal tax cost.

Additionally, we have two credit facilities and a CP Program, supported by amounts available under the credit

facilities.

Credit Facilities. At January 3, 2025, we had no outstanding borrowings under our credit facilities, had available

borrowing capacity of $2,985 million, net of outstanding borrowings under our CP Program, and were in compliance

with all covenants under both of the following:

2024 Credit Facility. On January 26, 2024, we established a new $1.5 billion, 364-day senior unsecured

revolving credit facility (“2024 Credit Facility”) by entering into a 364-day credit agreement with a syndicate of

lenders which matured on January 24, 2025 (“2024 Credit Agreement”). The 2024 Credit Agreement replaced the

prior $2.4 billion 364-Day Credit Agreement (“2023 Credit Agreement”).

2022 Credit Facility. On July 29, 2022, we established 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

with a syndicate of lenders.

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In fiscal 2025, we expect to refinance the 2022 Credit Agreement to increase the capacity and extend the

maturity of the existing facility. Additionally, in fiscal 2025, we expect to establish a new 364-day senior unsecured

revolving credit facility by entering into a 364-day credit agreement with a syndicate of lenders.

CP Program. At January 3, 2025, we had $515 million in outstanding notes under our CP Program. Under the CP

Program, we may issue unsecured commercial paper notes up to a maximum aggregate amount of $3.0 billion. From

time to time, we use borrowings under the CP Program for general corporate purposes, including the funding of

acquisitions, debt repayment, dividend payments and repurchases of our common stock. See the “Financing

Activities” discussion below in this MD&A for further information about our CP Program.

Cash Flow

The following table provides a summary of our cash flow information:

Operating Activities. The $463 million increase in net cash provided by operating activities in fiscal 2024

compared with fiscal 2023 was primarily due to an increase in net income, excluding the impact of non-cash

adjustments, and tax planning strategies, partially offset by $220 million less cash provided by working capital (i.e.,

receivables, contract assets, inventories, accounts payable and contract liabilities), primarily due to timing.

Cash flow from operations was positive in all of our business segments in fiscal 2024.

Investing Activities. Our primary investing activities include net cash paid for acquired businesses, capital

expenditures and cash proceeds from sales of businesses.

The $6,758 million decrease in net cash used in investing activities in fiscal 2024 compared with fiscal 2023

was primarily due to the $6,688 million cash used for the acquisitions of TDL and AJRD in fiscal 2023 and an

increase of $202 million in net cash proceeds from the sale of businesses in fiscal 2024 (see “Divestitures” section

below), partially offset by $100 million of contributions to our rabbi trust assets in fiscal 2024.

Divestitures. During fiscal 2024, we completed the divestitures of our Antenna disposal group and Aerojet

Ordnance Tennessee, Inc. (“AOT disposal group”) for net cash proceeds of  $170 million and $103 million,

respectively. During fiscal 2023, we completed the divestiture of Visual Information Solutions for net cash proceeds

of $71 million. See Note 13: Acquisitions and Divestitures in the Notes for further information.

Financing Activities. Our primary financing activities include issuances of long-term debt and commercial paper,

exercises of employee stock options, repayments of long-term debt and commercial paper, dividend payments and

repurchases of common stock.

The $6,818 million change in net cash used in financing activities in fiscal 2024 compared with net cash

provided by financing activities in fiscal 2023 was primarily due to a decrease in net proceeds from long-term debt

and an increase in net repayments of commercial paper of $4,741 million and $2,683 million, respectively, partially

offset by a decrease in repayments of long-term debt of $550 million and an increase in proceeds from exercises of

employee stock options of $109 million.

Long-term debt. During fiscal 2024, we closed the issuance and sale of $2.25 billion aggregate principal amount

of the new long-term fixed-rate debt consisting of the 5.05% 2029 Notes, the 5.25% 2031 Notes, and the 5.35%

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2034 Notes (collectively, the “March Issued 2024 Notes”) and closed the issuance and sale of $600 million

aggregate principal amount of the of the 5.50% Notes due 2054 (“5.50% 2054 Notes”).

We used the proceeds from the March Issued 2024 Notes to repay the entire $2.25 billion outstanding balance

of Term Loan 2025 and net proceeds from the 5.50% 2054 Notes to repay borrowings under our CP Program and

intend to use such proceeds to repay the $600 million in aggregate principal amount of 3.832% notes due April

2025 (“3.832% 2025 Notes”) upon maturity. Additionally, in fiscal 2024, we repaid the $350 million aggregate

principal amount of our 3.95% notes, due May 2024 (“3.95% 2024 Notes”).

During fiscal 2023, we drew $2.25 billion in long-term debt on Term Loan 2025 and utilized the proceeds to

fund the TDL acquisition, including a portion of associated transaction and integration costs, and to repay the entire

outstanding $250 million aggregate principal amount of our Floating Rate Notes due March 2023. Additionally, we

closed the issuance and sale of $3.25 billion aggregate principal amount of fixed-rate debt consisting of the 5.4%

2027 Notes, the 5.4% 2033 Notes and the 5.6% 2053 Notes (collectively, the “AJRD Notes”). The AJRD Notes were

used to fund a portion of the purchase price for the AJRD acquisition, and to pay related fees and expenses.

We repaid the entire outstanding $800 million aggregate principal amount of our 3.85% notes, due June 2023

(“3.85% 2023 Notes”) through cash.

CP program. During fiscal 2024, we had a maximum outstanding balance of $2,799 million and a daily average

outstanding balance of $2,100 million under our CP Program. We expect balances under the CP Program to remain

elevated as compared to historical norms through fiscal 2025.

Dividends. Information concerning our dividends is set forth above under “Item 5. Market for Registrant’s

Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Report.

Common stock repurchases. During fiscal 2024, we repurchased 2.5 million shares of our common stock under

our share repurchase program for $554 million. At January 3, 2025, we had a remaining unused authorization under

our repurchase program of $3,381 million.

During fiscal 2023, we repurchased 2.5 million shares of our common stock under our share repurchase

program for $518 million.

The level and timing of our repurchases depends on a number of factors, including our financial condition,

capital requirements, cash flows, results of operations, future business prospects and other factors our Board and

management may deem relevant. The timing, volume and nature of repurchases are also subject to market

conditions, applicable securities laws and other factors and are at our discretion and may be suspended or

discontinued at any time. Additional information regarding our repurchase program is set forth above under “Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of

this Report.

Cash Requirements

Total Fixed-Rate Debt. At January 3, 2025, we had fixed-rate debt, which reflects our total long-term debt,

including current portion but excluding finance leases, of $11.5 billion, of which $610 million is due within the next

12 months. The majority of our fixed-rate debt has been incurred in connection with merger and acquisition activity.

Additionally, we have outstanding interest on fixed-rate debt of $4.9 billion, of which $534 million is due within the

next 12 months. See Note 8: Debt and Credit Arrangements in the Notes for further information regarding our fixed-

rate debt.

Purchase Obligations. At January 3, 2025, we had purchase obligations of approximately $9.2 billion, of which

approximately 60% are due within the next 12 months. Our purchase obligations mainly consist of outstanding

commitments on open purchase orders made to suppliers, subcontractors and other outsourcing partners under

U.S. Government contracts and managed service agreements. Our risk associated with these purchase obligations is

generally limited to the termination liability provisions within such contracts. As such, we do not believe there to be

a material liquidity risk associated with outstanding purchase obligations.

Operating and finance lease commitments. At January 3, 2025, we had operating and finance lease

commitments of $1.2 billion, of which $199 million is due within the next 12 months. See Note 11: Leases in the

Notes for further information regarding our lease commitments.

Defined Benefit Pension Contributions. With respect to our U.S. qualified defined benefit pension plans, we

intend to contribute annually no less than the required minimum funding thresholds. In fiscal 2024, we made

approximately $30 million of contributions to our U.S. qualified defined benefit pension plans. We expect to make

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approximately $23 million of contributions to these plans in fiscal 2025 and may consider voluntary contributions

thereafter.

Future required contributions primarily will depend on the actual annual return on plan assets and the discount

rate used to measure the benefit obligation at the end of each year. Depending on these factors, and the resulting

funded status of our pension plans, the level of future statutory required minimum contributions could be material.

We had net defined benefit plan assets of $789 million as of January 3, 2025 compared with $66 million as of

December 29, 2023. The improvement in funded status as of January 3, 2025 is primarily due to more favorable

than expected return on plan assets and decreased pension obligations resulting from higher discount rates. See

Note 9: Retirement Benefits in the Notes for further information regarding our pension plans.

Commercial Commitments

We have entered into commercial commitments in the normal course of business including surety bonds,

standby letter of credit agreements and other arrangements with financial institutions and customers primarily

relating to the guarantee of future performance on certain contracts to provide products and services to customers

or to obtain insurance policies with our insurance carriers. See Note 15: Legal Proceedings, Commitments and

Contingencies in the Notes for additional information.

Liquidity Assessment

Given our current cash position, outlook for funds generated from operations, credit ratings, available credit

facilities, cash needs and debt structure, we have not experienced to date, and do not expect to experience, any

material issues with liquidity for the next 12 months and in the longer term, although we can give no assurances

concerning our future liquidity, particularly in light of our overall level of debt, U.S. Government budget uncertainties

and the state of global commerce and general political and global financial uncertainty.

Based on our current business plan and revenue prospects, we believe that our existing cash, funds generated

from operations, availability under our senior unsecured credit facilities and our CP Program and access to the public

and private debt and equity markets will be sufficient to provide for our anticipated working capital requirements,

capital expenditures, dividend payments, repurchases under our share repurchase program and repayments of our

debt securities at maturity for the next 12 months and the reasonably foreseeable future thereafter. Our capital

expenditures for fiscal 2025 are expected to be approximately 2% of revenue.

CRITICAL ACCOUNTING ESTIMATES

Preparation of this Report in accordance with GAAP requires us to make estimates and assumptions that affect

the reported amount of assets, liabilities, revenue, expenses and backlog as well as disclosure of contingent assets

and liabilities. While the following is not intended to be a comprehensive list of our accounting estimates, we

consider the estimates discussed below as critical to an understanding of our financial statements because their

application places the most significant demands on our judgment, with financial reporting results dependent on

estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Specific

risks for these critical accounting estimates are described in the following paragraphs. The impact and any

associated risks described in the following paragraphs related to these estimates on our business operations are

discussed throughout this MD&A where such estimates affect our reported and expected financial results. Senior

management has discussed the development and selection of the critical accounting estimates and the related

disclosure included herein with the Audit Committee of our Board. Actual results may differ from those estimates.

Revenue Recognition

A significant portion of our business is derived from development and production contracts. Revenue and profit

related to development and production contracts are generally recognized over-time, typically using the percentage

of completion (“POC”) cost-to-cost method of revenue recognition, whereby we measure our progress towards

completion of the performance obligation based on the ratio of costs incurred to date to estimated costs at

completion under the contract. Because costs incurred represent work performed, we believe this method best

depicts the transfer of control of the asset to the customer. Under the POC cost-to-cost method of revenue

recognition, a single estimated profit margin is used to recognize profit for each performance obligation over its

period of performance.

Recognition of profit on a contract requires estimates of the total cost at completion and transaction price and

the measurement of progress towards completion. Due to the long-term nature of many of our contracts, developing

the estimated total cost at completion and total transaction price often requires judgment. Factors that must be

considered in estimating the cost of the work to be completed include: the nature and complexity of the work to be

performed, subcontractor performance, the cost and availability of purchased materials and services, labor cost and

availability and the risk and impact of delayed performance. Factors that must be considered in estimating the total

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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. We follow a standard EAC process in which we review the progress

and performance on our ongoing contracts. 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, there are many reasons estimated contract costs can increase, including: (i)

supply chain disruptions, inflation and labor issues; (ii) design or other development challenges; and (iii) program

execution challenges (including from technical or quality issues and other performance concerns). Additionally, as

the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we

receive incentive or award fees that are higher or lower than expected.

When changes in estimated total costs at completion or in estimated total transaction price are determined, the

related impact on operating income is recognized on a cumulative basis. Cumulative EAC adjustments represent the

cumulative effect of the changes on current and prior periods; revenue and operating margins in future periods are

recognized as if the revised estimates had been used since contract inception. Any anticipated losses on these

contracts are fully recognized in the period in which the losses become evident. In fiscal 2024 and fiscal 2023,

earnings were impacted by recognition of net favorable EAC adjustments of $39 million and net unfavorable EAC

adjustments of $85 million, respectively.

During fiscal 2024, we recognized approximately $100 million in unfavorable EAC adjustments related to three

classified fixed-price development programs in Space Systems, however, there were no individual EAC adjustments

that were material to our results of operations on a consolidated or segment basis in fiscal 2024 or 2023.

We recognize revenue from numerous contracts with multiple performance obligations. For these contracts, we

allocate the transaction price to each performance obligation based on the relative standalone selling price of the

product or service underlying each performance obligation. The standalone selling price represents the amount for

which we would sell the product or service to a customer on a standalone basis (i.e., not sold as a bundled sale with

any other products or services). The allocation of transaction price among separate performance obligations may

impact the timing of revenue recognition but will not change the total revenue recognized on the contract.

A substantial majority of our revenue is derived from contracts with the U.S. Government, including foreign

military sales contracts. These contracts are subject to the Federal Acquisition Regulation (“FAR”) and the prices of

our contract deliverables are typically based on our estimated or actual costs plus margin. As a result, the

standalone selling prices of the products and services in these contracts are typically equal to the selling prices

stated in the contract, thereby eliminating the need to allocate (or reallocate) the transaction price to the multiple

performance obligations. In our non-U.S. Government contracts, when standalone selling prices are not directly

observable, we also generally use the expected cost plus margin approach to determine standalone selling price. In

determining the appropriate margin under the cost plus margin approach, we consider historical margins on similar

products sold to similar customers or within similar geographies where objective evidence is available. We may also

consider our cost structure and profit objectives, the nature of the proposal, the effects of customization of pricing,

our practices used to establish pricing of bundled products, the expected technological life of the product, margins

earned on similar contracts with different customers and other factors to determine the appropriate margin.

Defined Benefit Plans

Certain of our current and former employees participate in defined benefit plans in the U.S., Canada and United

Kingdom, which are sponsored by L3Harris. See Note 9: Retirement Benefits in the Notes for additional information

related to our defined benefit plans.

Significant Assumptions

The determination of the projected benefit obligation (“PBO”) and recognition of net periodic benefit income

related to defined benefit plans depend on various assumptions, including discount rates, expected return on plan

assets, rate of future compensation increases, mortality, termination and other factors.

We develop assumptions using relevant experience, in conjunction with market-related data for each plan.

Assumptions are reviewed annually with third-party experts and adjusted as appropriate. Actual results that differ

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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 average remaining service period of the plan’s active

participants.

The following table presents the significant assumptions used to determine the PBO:

The following table presents the significant assumptions used to determine net periodic benefit income:

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 PBO and generally decreases our net periodic

benefit income. A decrease in the discount rate increases the PBO and generally increases our net periodic benefit

income. 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. 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 25 basis point change in the discount

rate of our combined U.S. defined benefit pension plans would have the following impact on our PBO at January 3,

2025 and net periodic benefit income for the next twelve months:

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 timeframes based on our strategic

allocation, which is detailed in Note 9: Retirement Benefits in the Notes. Future returns are based on independent

estimates of long-term asset class returns. Based on this approach, the weighted average long-term annual rate of

return on assets was estimated to be 7.45% for both fiscal 2024 and 2025.

Sensitivity Analysis. We estimate that a 25 basis point change in the expected return on plan assets of our

combined U.S. defined benefit pension plans would have the following impact on net periodic benefit income for the

next twelve months:

Goodwill

We test our goodwill for impairment annually as of the first business day of our fourth fiscal quarter, which was

September 30 in fiscal 2024, 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

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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 we operate;

(iii) increase in materials, labor or other costs; (iv) negative or declining cash flows; (v) changes in management,

changes in strategy or significant litigation; (vi) changes in the composition or carrying amount of net assets or an

expectation of disposing all or a portion of the reporting unit; or (vii) a sustained decrease in share price.

If we perform a quantitative assessment for a certain reporting unit, we calculate the fair value of that reporting

unit and compare the fair value to the reporting unit’s net book value. We estimate fair values of our reporting units

based on projected cash flows. Values derived from projected cash flows are corroborated through review of

revenue and/or earnings multiples applied to the latest twelve months’ revenue and earnings of our reporting units.

Projected cash flows are based on our best estimate of future revenues, operating costs and balance sheet metrics

reflecting our view of the financial and market conditions of the underlying business; and the resulting cash flows are

discounted using an appropriate discount rate that reflects the risk in the forecasted cash flows. The revenues and

earnings multiples applied to the revenues and earnings of our reporting units are based on current multiples of

revenues and earnings for similar businesses, and based on revenues and earnings multiples paid for recent

acquisitions of similar businesses made in the marketplace. We then assess whether any implied control premium,

based on a comparison of fair value based purely on our stock price and outstanding shares with fair value

determined by using all of the above-described models, is reasonable. If the fair value of a reporting unit exceeds its

carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit

exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Fiscal 2024 Impairment Tests. We performed our annual impairment test of all of our reporting units’ goodwill

as of September 30, 2024 and concluded that for each of our reporting units no impairment existed.

Business realignment. Effective for fiscal 2024, to better align our businesses, we adjusted our IMS segment by

realigning our Electro Optical and Maritime sectors, which are also reporting units, splitting Electro Optical into two

sectors, Global Optical Systems and Defense Electronics, and moving one Electro Optical business to the Maritime

sector. Global Optical Systems and Defense Electronics represent one reporting unit. Immediately before and after

the realignment, we performed a quantitative impairment assessment under our former and new reporting unit

structure. These assessments indicated no impairment existed either before or after the realignment.

Antenna disposal group divestiture. For information related to the Antenna disposal group divestiture, including

goodwill allocation, impairment testing and resulting impairment see Note 6: Goodwill and Intangible Assets in the

Notes.

Fiscal 2023 Impairment Tests. For information related to fiscal 2023 impairment tests and resulting

impairments see Note 6: Goodwill and Intangible Assets in the Notes.

At-risk goodwill. Based on the fiscal 2024 annual impairment testing, all of our reporting units had clearances

above 25%. Based on the fiscal 2023 annual impairment testing, our Broadband reporting unit had clearance of

approximately 20% and goodwill of $2,656 million and our ISR and Electro Optical reporting units had clearances of

approximately 6% and goodwill of $3,186 million and $2,193 million, respectively.

An impairment of goodwill could result from a number of circumstances, including different assumptions used in

determining the fair value of the reporting units; changes to U.S. Government spending priorities or ability to win

competitively awarded contracts; an inability to meet our forecast; the rescission of significant contract awards as a

result of competitors protesting or challenging contracts awarded to us; or an increase in interest rates without a

corresponding increase in future revenue.

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

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projected discounted cash flows. The process of evaluating the potential impairment of goodwill is highly subjective

and requires significant judgment. Material changes in these estimates could occur and result in additional

impairments in future periods.

Business Combinations

We account for business combinations using the acquisition method of accounting, whereby identifiable assets

acquired and liabilities assumed are measured at their estimated fair value as of the date of acquisition and any

excess of the fair value of consideration transferred over the fair values of identifiable assets and liabilities is

recorded as goodwill. See Note 13: Acquisitions and Divestitures 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 Consolidated 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 2024.

Our Consolidated Balance Sheet as of January 3, 2025 included deferred tax assets of $120 million and

deferred tax liabilities of $942 million. For all jurisdictions in which we have net deferred tax assets, we expect that

our existing levels of pre-tax earnings are sufficient to generate the amount of future taxable income needed to

realize these tax assets. Our valuation allowance related to our deferred tax assets, which is reflected in our

Consolidated Balance Sheet, was $238 million as of January 3, 2025. 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 Balance Sheet.

As of January 3, 2025, we had $758 million of unrecognized tax benefits, of which $666 million would favorably

impact our future tax rates in the event that the tax benefits are eventually recognized.

It is reasonably possible that there could be a significant change to our unrecognized tax benefits during the

course of the next twelve months as ongoing tax examinations continue, other tax examinations commence or

various statutes of limitations expire. However, an estimate of the range of possible changes is not practicable for

the remaining unrecognized tax benefits because of the significant number of jurisdictions in which we do business

and the number of open tax periods under various states of examination. See Note 7: Income Taxes in the Notes for

additional information.

Impact of Recently Adopted and Issued Accounting Pronouncements

See Note 1: Significant Accounting Policies in the Notes for information relating to the impact of recently adopted

and issued accounting pronouncements.

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