Company Quick10K Filing
Quick10K
Harris
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$166.12 118 $19,600
10-Q 2018-12-28 Quarter: 2018-12-28
10-Q 2018-09-28 Quarter: 2018-09-28
10-K 2018-06-29 Annual: 2018-06-29
10-Q 2018-03-30 Quarter: 2018-03-30
10-Q 2017-12-29 Quarter: 2017-12-29
10-Q 2017-09-29 Quarter: 2017-09-29
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-30 Quarter: 2016-12-30
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-07-01 Annual: 2016-07-01
10-Q 2016-04-01 Quarter: 2016-04-01
10-Q 2016-01-01 Quarter: 2016-01-01
10-Q 2015-10-02 Quarter: 2015-10-02
10-K 2015-07-03 Annual: 2015-07-03
10-Q 2015-04-03 Quarter: 2015-04-03
10-Q 2015-01-02 Quarter: 2015-01-02
10-Q 2014-09-26 Quarter: 2014-09-26
10-K 2014-06-27 Annual: 2014-06-27
10-Q 2014-03-28 Quarter: 2014-03-28
10-Q 2013-12-27 Quarter: 2013-12-27
8-K 2019-04-05 Regulation FD, Exhibits
8-K 2019-04-04 Shareholder Vote, Other Events, Exhibits
8-K 2019-02-25 Other Events, Exhibits
8-K 2019-01-29 Earnings, Regulation FD, Exhibits
8-K 2019-01-11 Other Events
8-K 2018-12-13 Other Events, Exhibits
8-K 2018-12-10 Other Events
8-K 2018-10-26 Shareholder Vote
8-K 2018-10-15 Earnings, Regulation FD, Other Events, Exhibits
8-K 2018-10-12 Enter Agreement, Officers, Exhibits
8-K 2018-08-30 Officers, Amend Bylaw, Exhibits
8-K 2018-07-31 Earnings, Regulation FD, Exhibits
8-K 2018-06-28 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-25 Other Events
8-K 2018-06-04 Other Events, Exhibits
8-K 2018-05-30 Amend Bylaw, Exhibits
8-K 2018-05-29 Other Events, Exhibits
8-K 2018-05-24 Other Events
8-K 2018-05-02 Earnings, Regulation FD, Exhibits
8-K 2018-04-27 Officers, Exhibits
8-K 2018-02-27 Other Events, Exhibits
8-K 2018-01-30 Earnings, Regulation FD, Exhibits
GOOG Alphabet Google 853,080
PG Procter & Gamble 266,220
TROW Price T Rowe Group 25,250
WPP WPP 14,970
PTEN Patterson Uti Energy 3,260
SLCT Select Bancorp 234
HCAP Harvest Capital Credit 68
STRM Streamline Health Solutions 21
GBPT Globe Photos 0
PNTTE Punto Group 0
HRS 2018-12-28
Part I. Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-10.A exhibit10a_ceoxsidexletter.htm
EX-12 exhibit122qfy19.htm
EX-15 exhibit152qfy19.htm
EX-31.1 exhibit3112qfy19.htm
EX-31.2 exhibit3122qfy19.htm
EX-32.1 exhibit3212qfy19.htm
EX-32.2 exhibit3222qfy19.htm

Harris Earnings 2018-12-28

HRS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 hrsq2fy1910-q.htm 10-Q Document

harriswrblack3x1a19.jpg
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                              to                            _
Commission File Number: 1-3863
HARRIS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
34-0276860
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1025 West NASA Boulevard
Melbourne, Florida
 
329l9
(Address of principal executive offices)
 
(Zip Code)
 
(321) 727-9l00
(Registrant’s telephone number, including area code)
 
No changes
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                         þ   Yes    p  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                                                     þ  Yes    p  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
  
 
Accelerated filer
o
Non-accelerated filer
 
o
  
 
Smaller reporting company
o
Emerging growth company
 
o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. p
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      p  Yes    þ  No
The number of shares outstanding of the registrant’s common stock as of January 25, 2019 was 117,829,781 shares.



HARRIS CORPORATION
FORM 10-Q
For the Quarter Ended December 28, 2018
INDEX
 
 
 
 
Page
Part I. Financial Information:
 
Item 1. Financial Statements (Unaudited):
 
Condensed Consolidated Statement of Income for the Quarter and Two Quarters Ended December 28, 2018 and December 29, 2017
Condensed Consolidated Statement of Comprehensive Income for the Quarter and Two Quarters Ended December 28, 2018 and December 29, 2017
Condensed Consolidated Balance Sheet at December 28, 2018 and June 29, 2018
Condensed Consolidated Statement of Cash Flows for the Two Quarters Ended December 28, 2018 and December 29, 2017
Condensed Consolidated Statement of Equity for the Quarter and Two Quarters Ended December 28, 2018 and December 29, 2017
Notes to Condensed Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
 
 
Part II. Other Information:
 
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
 
 
Signature
This Quarterly Report on Form 10-Q contains trademarks, service marks and registered marks of Harris Corporation and its subsidiaries.




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 
Quarter Ended
 
Two Quarters Ended
 
December 28, 2018
 
December 29, 2017
 
December 28, 2018
 
December 29, 2017
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Revenue from product sales and services
$
1,666

 
$
1,535

 
$
3,208

 
$
2,945

Cost of product sales and services
(1,095
)
 
(1,022
)
 
(2,105
)
 
(1,941
)
Engineering, selling and administrative expenses
(304
)
 
(291
)
 
(583
)
 
(559
)
Non-operating income
47

 
44

 
94

 
90

Interest income

 
1

 
1

 
1

Interest expense
(43
)
 
(42
)
 
(87
)
 
(83
)
Income from continuing operations before income taxes
271

 
225

 
528

 
453

Income taxes
(46
)
 
(94
)
 
(87
)
 
(157
)
Income from continuing operations
225

 
131

 
441

 
296

Discontinued operations, net of income taxes

 

 
(3
)
 
(6
)
Net income
$
225

 
$
131

 
$
438

 
$
290

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
1.91

 
$
1.10

 
$
3.74

 
$
2.49

Discontinued operations

 

 
(0.03
)
 
(0.06
)
 
$
1.91

 
$
1.10

 
$
3.71

 
$
2.43

Diluted
 
 
 
 
 
 
 
Continuing operations
$
1.88

 
$
1.08

 
$
3.66

 
$
2.44

Discontinued operations
(0.01
)
 

 
(0.02
)
 
(0.05
)
 
$
1.87

 
$
1.08

 
$
3.64

 
$
2.39

 
 
 
 
 
 
 
 
Cash dividends paid per common share
$
0.685

 
$
0.570

 
$
1.370

 
$
1.140

Basic weighted average common shares outstanding
117.7

 
118.5

 
117.8

 
118.8

Diluted weighted average common shares outstanding
120.0

 
120.9

 
120.3

 
121.1

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

1


HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Quarter Ended
 
Two Quarters Ended
 
December 28, 2018
 
December 29, 2017
 
December 28, 2018
 
December 29, 2017
 
 
 
 
 
 
 
 
 
(In millions)
Net income
$
225

 
$
131

 
$
438

 
$
290

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss), net of income taxes
(8
)
 
(4
)
 
(8
)
 
21

Net unrealized gain on hedging derivatives, net of income taxes

 

 
1

 
1

Net unrecognized loss on postretirement obligations, net of income taxes
(1
)
 

 
(2
)
 

Other comprehensive income (loss), net of income taxes
(9
)
 
(4
)
 
(9
)
 
22

Total comprehensive income
$
216

 
$
127

 
$
429

 
$
312

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

2


HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
 
December 28, 2018
 
June 29, 2018
 
 
 
 
 
(In millions, except shares)
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
343

 
$
288

Receivables
494

 
466

Contract assets
829

 
782

Inventories
425

 
411

Income taxes receivable
102

 
174

Other current assets
118

 
103

Total current assets
2,311

 
2,224

Non-current Assets
 
 
 
Property, plant and equipment
901

 
900

Goodwill
5,370

 
5,372

Other intangible assets
930

 
989

Non-current deferred income taxes
99

 
119

Other non-current assets
241

 
247

Total non-current assets
7,541

 
7,627

 
$
9,852

 
$
9,851

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Short-term debt
$
103

 
$
78

Accounts payable
521

 
622

Contract liabilities
479

 
372

Compensation and benefits
128

 
142

Other accrued items
275

 
317

Income taxes payable
11

 
15

Current portion of long-term debt, net
305

 
304

Total current liabilities
1,822

 
1,850

Non-current Liabilities
 
 
 
Defined benefit plans
635

 
714

Long-term debt, net
3,411

 
3,408

Non-current deferred income taxes
60

 
79

Other long-term liabilities
512

 
522

Total non-current liabilities
4,618

 
4,723

Equity
 
 
 
Shareholders’ Equity:
 
 
 
Preferred stock, without par value; 1,000,000 shares authorized; none issued

 

Common stock, $1.00 par value; 500,000,000 shares authorized; issued and outstanding 117,774,474 shares at December 28, 2018 and 118,280,120 shares at June 29, 2018
118

 
118

Other capital
1,681

 
1,714

Retained earnings
1,824

 
1,648

Accumulated other comprehensive loss
(211
)
 
(202
)
Total shareholders’ equity
3,412

 
3,278

 
$
9,852

 
$
9,851

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

3


HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
 
Two Quarters Ended
 
December 28, 2018
 
December 29, 2017
 
 
 
 
 
(In millions)
Operating Activities
 
 
 
Net income
$
438

 
$
290

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of acquisition-related intangibles
58

 
58

Depreciation and other amortization
71

 
72

Share-based compensation
70

 
24

Pension income
(68
)
 
(68
)
(Increase) decrease in:
 
 
 
Accounts receivable
(28
)
 
(14
)
Contract assets
(47
)
 
(84
)
Inventories
(14
)
 
(23
)
Increase (decrease) in:
 
 
 
Accounts payable
(101
)
 
(78
)
Contract liabilities
107

 
47

Income taxes
76

 
216

Other
(93
)
 
(67
)
Net cash provided by operating activities
469

 
373

Investing Activities
 
 
 
Additions of property, plant and equipment
(67
)
 
(43
)
Adjustment to proceeds from sales of businesses, net

 
(2
)
Net cash used in investing activities
(67
)
 
(45
)
Financing Activities
 
 
 
Proceeds from borrowings
26

 
248

Repayments of borrowings
(3
)
 
(363
)
Proceeds from exercises of employee stock options
18

 
18

Repurchases of common stock
(200
)
 
(150
)
Cash dividends
(163
)
 
(137
)
Other financing activities
(20
)
 
(10
)
Net cash used in financing activities
(342
)
 
(394
)
Effect of exchange rate changes on cash and cash equivalents
(5
)
 
4

Net increase (decrease) in cash and cash equivalents
55

 
(62
)
Cash and cash equivalents, beginning of year
288

 
484

Cash and cash equivalents, end of quarter
$
343

 
$
422

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

4


HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)

 
Common
Stock
 
Other
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Balance at June 29, 2018
$
118

 
$
1,714

 
$
1,648

 
$
(202
)
 
$
3,278

Net income

 

 
213

 

 
213

Shares issued under stock incentive plans
1

 
15

 

 

 
16

Shares issued under defined contribution plans

 
23

 

 

 
23

Share-based compensation expense

 
14

 

 

 
14

Repurchases and retirement of common stock
(1
)
 
(118
)
 
(99
)
 

 
(218
)
Cash dividends ($.685 per share)

 

 
(82
)
 

 
(82
)
Balance at September 28, 2018
118

 
1,648

 
1,680

 
(202
)
 
3,244

Net income

 

 
225

 

 
225

Other comprehensive income

 

 

 
(9
)
 
(9
)
Shares issued under stock incentive plans

 
2

 

 

 
2

Shares issued under defined contribution plans

 
17

 

 

 
17

Share-based compensation expense

 
15

 

 

 
15

Repurchases and retirement of common stock

 
(1
)
 

 

 
(1
)
Cash dividends ($.685 per share)

 

 
(81
)
 

 
(81
)
Balance at December 28, 2018
$
118

 
$
1,681

 
$
1,824

 
$
(211
)
 
$
3,412

 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2017
$
120

 
$
1,741

 
$
1,318

 
$
(276
)
 
$
2,903

Net income

 

 
159

 

 
159

Other comprehensive income

 

 

 
26

 
26

Shares issued under stock incentive plans

 
14

 

 

 
14

Share-based compensation expense

 
11

 

 

 
11

Repurchases and retirement of common stock
(1
)
 
(73
)
 
(48
)
 

 
(122
)
Forward contract component of accelerated share repurchase

 
38

 

 

 
38

Cash dividends ($.570 per share)

 

 
(69
)
 

 
(69
)
Balance at September 29, 2017
119

 
1,731

 
1,360

 
(250
)
 
2,960

Net income

 

 
131

 

 
131

Other comprehensive income

 

 

 
(4
)
 
(4
)
Shares issued under stock incentive plans

 
4

 

 

 
4

Share-based compensation expense

 
12

 

 

 
12

Repurchases and retirement of common stock

 
(42
)
 
(34
)
 

 
(76
)
Cash dividends ($.570 per share)

 

 
(68
)
 

 
(68
)
Balance at December 29, 2017
$
119

 
$
1,705

 
$
1,389

 
$
(254
)
 
$
2,959

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

5


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A — Significant Accounting Policies and Recent Accounting Standards
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) include the accounts of Harris Corporation and its consolidated subsidiaries. As used in these Notes to Condensed Consolidated Financial Statements (Unaudited) (these “Notes”), the terms “Harris,” “Company,” “we,” “our” and “us” refer to Harris Corporation and its consolidated subsidiaries. Intracompany transactions and accounts have been eliminated in consolidation. The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared by Harris, without an audit, in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all information and footnotes necessary for a complete presentation of financial condition, results of operations, cash flows and equity in conformity with GAAP for annual financial statements. In the opinion of management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial condition, results of operations and cash flows for the periods presented therein. The results for the quarter and two quarters ended December 28, 2018 are not necessarily indicative of the results that may be expected for the full fiscal year or any subsequent period. The balance sheet at June 29, 2018 has been derived from our audited financial statements, but does not include all of the information and footnotes required by GAAP for annual financial statements. We provide complete, audited financial statements in our Annual Report on Form 10-K, which includes information and footnotes required by the rules and regulations of the SEC. The information included in this Quarterly Report on Form 10-Q (this “Report”) should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 29, 2018 (our “Fiscal 2018 Form 10-K”) and in our Current Report on Form 8-K filed with the SEC on December 13, 2018 (our “Fiscal 2017-2018 Update 8-K”), which updated and superseded historical fiscal 2018 and fiscal 2017 financial information contained in Item 7, Item 8 and certain other Items in our Fiscal 2018 Form 10-K to reflect the impact for those two fiscal years of retrospective application of Accounting Standards Update (“ASU”) 2014-09, Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606), as amended (“ASC 606”), and ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”), each of which we adopted effective June 30, 2018. See “Adoption of New Accounting Standards” below in this Note A for additional information.
Amounts contained in this Report may not always add to totals due to rounding.
Reclassifications
The classification of certain prior-period amounts has been adjusted in our Condensed Consolidated Financial Statements (Unaudited) to conform with current-period classifications. Reclassifications include certain direct selling and bid and proposal costs from the “Cost of product sales and services” line item to the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited) and in these Notes.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes and related disclosures. These estimates and assumptions are based on experience and other information available prior to issuance of the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes. Materially different results can occur as circumstances change and additional information becomes known.
Adoption of New Accounting Standards
As discussed above, we adopted ASC 606 effective June 30, 2018. This standard supersedes nearly all revenue recognition guidance under GAAP and International Financial Reporting Standards and supersedes some cost guidance for construction-type and production-type contracts. The guidance in this standard is principles-based, and, consequently, entities are required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to separate performance obligations. The core principle of this standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To help financial statement users better understand the nature, amount,

6


timing and potential uncertainty of the revenue and cash flows, this standard requires significantly more interim and annual disclosures.
We adopted the requirements of the new standard using the full retrospective transition method. We opted for this transition method because we believe it provides enhanced comparability and transparency across periods. We elected to apply the practical expedient related to backlog disclosures for prior reporting periods and the practical expedient related to evaluating the effects of contract modifications that occurred prior to the earliest period presented. No other transition practical expedients were applied. Retrospective application of this standard resulted in the recognition of a cumulative-effect adjustment of $15 million to reduce the opening balance of retained earnings at July 2, 2016.
This standard also resulted in the establishment of “Contract assets” and “Contract liabilities” line items and the reclassification to these line items of amounts previously presented in the “Receivables,” “Inventories” and “Advance payments and unearned income” line items in our Condensed Consolidated Balance Sheet. See Note 2: “Accounting Changes or Recent Accounting Pronouncements” in our Notes to Consolidated Financial Statements in our Fiscal 2017-2018 Update 8-K for a table summarizing the effect of adopting ASC 606 on our previously reported Consolidated Balance Sheet as of June 29, 2018. Total net cash provided by operating activities and total net cash provided by or used in investing activities and financing activities in our previously reported Condensed Consolidated Statements of Cash Flows (Unaudited) were not impacted by our adoption of ASC 606.
We also adopted ASU 2017-07 effective June 30, 2018, as discussed above. This update requires that entities present components of net periodic pension and postretirement benefit costs other than the service cost component (“non-service cost amounts”) separately from the service cost component. We adopted this update retrospectively by recasting each prior period presented, using as our estimation basis for recasting prior periods the amounts disclosed in Note 13: “Pension and Other Postretirement Benefits” in our Notes to Consolidated Financial Statements in our Fiscal 2018 Form 10-K. Retrospective application of this update resulted in reclassification to the “Non-operating income” line item of non-service cost amounts that were included in the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Condensed Consolidated Statement of Income (Unaudited) prior to adopting ASU 2017-07.

7


The following table summarizes the effect of adopting ASC 606 and ASU 2017-07 on our previously reported Condensed Consolidated Statement of Income (Unaudited) for the quarter and two quarters ended December 29, 2017:
 
Quarter Ended December 29, 2017
 
Previously Reported
 
Effect of Adopting ASC 606
 
Effect of Adopting ASU 2017-07
 
Currently Reported
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Revenue from product sales and services
$
1,535

 
$

 
$

 
$
1,535

Cost of product sales and services
(987
)
 
1

 
(36
)
 
(1,022
)
Engineering, selling and administrative expenses
(276
)
 
(5
)
 
(10
)
 
(291
)
Non-operating income (loss)
(2
)
 

 
46

 
44

Interest income
1

 

 

 
1

Interest expense
(42
)
 

 

 
(42
)
Income from continuing operations before income taxes
229

 
(4
)
 

 
225

Income taxes
(90
)
 
(4
)
 

 
(94
)
Income from continuing operations
139

 
(8
)
 

 
131

Discontinued operations, net of income taxes

 

 

 

Net income
$
139

 
$
(8
)
 
$

 
$
131

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
1.17

 
$
(0.07
)
 
$

 
$
1.10

Discontinued operations

 

 

 

 
$
1.17

 
$
(0.07
)
 
$

 
$
1.10

Diluted
 
 
 
 
 
 
 
Continuing operations
$
1.15

 
$
(0.07
)
 
$

 
$
1.08

Discontinued operations

 

 

 

 
$
1.15

 
$
(0.07
)
 
$

 
$
1.08

 
Two Quarters Ended December 29, 2017
 
Previously Reported
 
Effect of Adopting ASC 606
 
Effect of Adopting ASU 2017-07
 
Currently Reported
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Revenue from product sales and services
$
2,948

 
$
(3
)
 
$

 
$
2,945

Cost of product sales and services
(1,872
)
 
4

 
(73
)
 
(1,941
)
Engineering, selling and administrative expenses
(532
)
 
(8
)
 
(19
)
 
(559
)
Non-operating income (loss)
(2
)
 

 
92

 
90

Interest income
1

 

 

 
1

Interest expense
(83
)
 

 

 
(83
)
Income from continuing operations before income taxes
460

 
(7
)
 

 
453

Income taxes
(154
)
 
(3
)
 

 
(157
)
Income from continuing operations
306

 
(10
)
 

 
296

Discontinued operations, net of income taxes
(6
)
 

 

 
(6
)
Net income
$
300

 
$
(10
)
 
$

 
$
290

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
2.57

 
$
(0.08
)
 
$

 
$
2.49

Discontinued operations
(0.05
)
 
(0.01
)
 

 
(0.06
)
 
$
2.52

 
$
(0.09
)
 
$

 
$
2.43

Diluted
 
 
 
 
 
 
 
Continuing operations
$
2.52

 
$
(0.08
)
 
$

 
$
2.44

Discontinued operations
(0.05
)
 

 

 
(0.05
)
 
$
2.47

 
$
(0.08
)
 
$

 
$
2.39



8




The following table presents the effect of adopting ASC 606 on our previously reported Condensed Consolidated Statement of Cash Flows (Unaudited) for the two quarters ended December 29, 2017:
 
Two Quarters Ended December 29, 2017
 
Previously Reported
 
Effect of Adopting ASC 606
 
Currently Reported
 
 
 
 
 
 
 
(In millions, except shares)
Net income
$
300

 
$
(10
)
 
$
290

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Amortization of acquisition-related intangibles(1)
58

 

 
58

Depreciation and other amortization(1)
72

 

 
72

Share-based compensation
24

 

 
24

Pension income
(68
)
 

 
(68
)
(Increase) decrease in:
 
 
 
 
 
Accounts receivable
(19
)
 
5

 
(14
)
Contract assets

 
(84
)
 
(84
)
Inventories
(102
)
 
79

 
(23
)
Increase (decrease) in:
 
 
 
 
 
Accounts payable
(78
)
 

 
(78
)
Advance payments and unearned income
38

 
(38
)
 

Contract liabilities

 
47

 
47

Income taxes
213

 
3

 
216

Other
(65
)
 
(2
)
 
(67
)
Net cash provided by operating activities
$
373

 
$

 
$
373

_______________
(1)
“Amortization of acquisition-related intangibles” includes amortization of non-Exelis Inc. acquisition-related intangibles, which was previously included in the “Depreciation and amortization” line item in our Condensed Consolidated Statement of Cash Flows (Unaudited) in our Form 10-Q for the quarter ended December 29, 2017.
Accounting Standards Issued But Not Yet Effective
In February 2016, the Financial Accounting Standards Board issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires, among other things, the recognition of right-of-use assets and liabilities on the balance sheet for most lease arrangements and disclosure of certain information about leasing arrangements. This standard currently allows two transition methods with certain practical expedients available. Companies may elect to use the modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements or to initially apply this standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This standard is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018, which for us is our fiscal 2020.
We have developed a project plan to evaluate the impact of this standard and design and implement future processes, tools and controls. The majority of our current lease arrangements are classified as operating leases under existing GAAP lease guidance, and we expect they will continue to be classified as operating leases under the new standard. Although we are continuing to evaluate the impact to our consolidated balance sheet of recognizing right-of-use assets and lease liabilities for the majority of our current lease obligations, which could be material, we do not expect this standard to have a material impact on our results of operations or cash flows. We have not yet made a decision on the transition method, as this determination is primarily dependent on the completion of our evaluation.

9


Note B — Stock Options and Other Share-Based Compensation
During the two quarters ended December 28, 2018, we had options or other share-based compensation outstanding under two shareholder-approved employee stock incentive plans (“SIPs”), the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010) and the Harris Corporation 2015 Equity Incentive Plan (the “2015 EIP”). Grants of share-based awards after October 23, 2015 were made under our 2015 EIP. We believe that share-based awards more closely align the interests of participants with those of shareholders. Certain share-based awards provide for accelerated vesting if there is a change in control (as defined under our SIPs). The compensation cost related to our share-based awards that was charged against income was $15 million and $29 million for the quarter and two quarters ended December 28, 2018, respectively, and $13 million and $24 million for the quarter and two quarters ended December 29, 2017, respectively.
The aggregate number of shares of our common stock that we issued under the terms of our SIPs, net of shares withheld for tax purposes and inclusive of both continuing and discontinued operations, was 45,739 and 449,692 for the quarter and two quarters ended December 28, 2018, respectively, and 67,717 and 398,932 for the quarter and two quarters ended December 29, 2017, respectively. Awards granted to participants under our 2015 EIP during the quarter ended December 28, 2018 consisted of 3,538 restricted shares and restricted units. There were no stock options or performance units granted during the quarter ended December 28, 2018. Awards granted to participants under our 2015 EIP during the two quarters ended December 28, 2018 consisted of 270,963 stock options, 92,758 restricted shares and restricted units and 135,629 performance units. The fair value as of the grant date of each stock option award was determined using the Black-Scholes-Merton option-pricing model and the following assumptions: expected dividend yield of 1.61 percent; expected volatility of 19.87 percent; risk-free interest rates averaging 2.72 percent; and expected term of 5.03 years. The fair value as of the grant date of each restricted share award and restricted unit award was based on the closing price of our common stock on the grant date. The fair value as of the grant date of each performance unit award was determined based on the fair value from a multifactor Monte Carlo valuation model that simulates our stock price and total shareholder return (“TSR”) relative to companies in our TSR peer group, less a discount to reflect the delay in payments of cash dividend-equivalents that are made only upon vesting.
Note C — Restructuring and Other Exit Costs
We record charges for restructuring and other exit activities related to sales or terminations of product lines, closures or relocations of business activities, changes in management structure and fundamental reorganizations that affect the nature and focus of operations. Such charges include termination benefits, contract termination costs and costs to consolidate facilities or relocate employees. We record these charges at their fair value when incurred. In cases where employees are required to render service until they are terminated in order to receive the termination benefits and will be retained beyond the minimum retention period, we record the expense ratably over the future service period. These charges are included as a component of the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Condensed Consolidated Statement of Income (Unaudited).
In the fourth quarter of fiscal 2018, we recorded a $5 million charge for consolidation of certain Exelis Inc. (collectively with its subsidiaries, “Exelis”) facilities initiated in fiscal 2017. This charge is included as a component of the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income in our Fiscal 2017-2018 Update 8-K. We had liabilities of $18 million and $27 million at December 28, 2018 and June 29, 2018, respectively, associated with this integration activity and with previous restructuring actions. The majority of the remaining liabilities at December 28, 2018 represent lease obligations associated with exited facilities with remaining terms of five years or less.
Note D — Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are summarized below:
 
December 28, 2018
 
June 29, 2018
 
 
 
 
 
(In millions)
Foreign currency translation, net of income taxes of $2 million at December 28, 2018 and June 29, 2018
$
(107
)
 
$
(99
)
Net unrealized loss on hedging derivatives, net of income taxes of $6 million and $7 million at December 28, 2018 and June 29, 2018, respectively
(19
)
 
(20
)
Unrecognized postretirement obligations, net of income taxes of $30 million at December 28, 2018 and June 29, 2018
(85
)
 
(83
)
 
$
(211
)
 
$
(202
)
Accumulated other comprehensive loss at June 29, 2018 reflects a reclassification to retained earnings of $35 million in stranded tax effects as a result of our adoption of an accounting standards update, including $30 million from “Unrecognized postretirement obligations, net of income taxes,” $4 million from “Net unrealized loss on hedging derivatives, net of income taxes” and $1 million from “Foreign currency translation, net of income taxes.” See Note 2: “Accounting Changes or Recent

10


Accounting Pronouncements” in our Fiscal 2017-2018 Update 8-K for additional information regarding this accounting standards update.
Note E — Receivables
Receivables are summarized below:
 
December 28, 2018
 
June 29, 2018
 
 
 
 
 
(In millions)
Accounts receivable
$
497

 
$
468

Less allowances for collection losses
(3
)
 
(2
)
 
$
494

 
$
466

We have a receivables sale agreement (“RSA”) with a third-party financial institution that permits us to sell, on a non-recourse basis, up to $50 million of outstanding receivables at any given time. From time to time, we have sold certain customer receivables under the RSA, which we continue to service and collect on behalf of the third-party financial institution. Receivables sold pursuant to the RSA meet the requirements for sales accounting under ASC 860, Transfers and Servicing, and, accordingly, are derecognized from our Condensed Consolidated Balance Sheet (Unaudited) at the time of sale. Outstanding accounts receivable sold pursuant to the RSA were not material at December 28, 2018 and June 29, 2018. Impairment losses related to receivables from contracts with customers were not material during the quarter or two quarters ended December 28, 2018 or the quarter or two quarters ended December 29, 2017.
Note F — Contract Assets and Contract Liabilities
Contract assets include unbilled amounts typically resulting from revenue recognized exceeding amounts billed to customers for contracts utilizing the percentage of completion (“POC”) cost-to-cost revenue recognition method. We bill customers as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals, upon achievement of contractual milestones or upon deliveries and, in certain arrangements, the customer may withhold payment of a small portion of the contract price until contract completion. Contract liabilities include advance payments and billings in excess of revenue recognized, including deferred revenue associated with extended product warranties. Contract assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period. The increase in contract liabilities in the two quarters ended December 28, 2018 was primarily due to an increase in the receipt of advance payments and the timing of contractual billing milestones. Changes in contract assets and contract liabilities balances during the quarter and two quarters ended December 28, 2018 were not materially impacted by any factors other than those described above.
Contract assets and contract liabilities are summarized below:
 
December 28, 2018
 
June 29, 2018
 
 
 
 
 
(In millions)
Contract assets
$
829

 
$
782

Contract liabilities, current
(479
)
 
(372
)
Contract liabilities, non-current(1)
(7
)
 
(7
)
Net contract assets
$
343

 
$
403

_______________
(1)
Represents the non-current portion of deferred revenue associated with extended product warranties, which is included as a component of the “Other long-term liabilities” line item in our Condensed Consolidated Balance Sheet (Unaudited).
The components of contract assets are summarized below:
 
December 28, 2018
 
June 29, 2018
 
 
 
 
 
(In millions)
Unbilled contract receivables, gross
$
946

 
$
881

Progress payments
(117
)
 
(99
)
 
$
829

 
$
782

Impairment losses related to our contract assets were not material during the two quarters ended December 28, 2018 and December 29, 2017. For the quarter and two quarters ended December 28, 2018, we recognized revenue of $49 million and $207 million, respectively, related to contract liabilities that were outstanding at June 29, 2018. For the quarter and two quarters ended December 29, 2017, we recognized revenue of $53 million and $163 million, respectively, related to contract liabilities that were outstanding at June 30, 2017.

11


Note G — Inventories
Inventories are summarized below:
 
December 28, 2018
 
June 29, 2018
 
 
 
 
 
(In millions)
Finished products
$
69

 
$
91

Work in process
128

 
121

Raw materials and supplies
228

 
199

 
$
425

 
$
411

Note H — Property, Plant and Equipment
Property, plant and equipment are summarized below:
 
December 28, 2018
 
June 29, 2018
 
 
 
 
 
(In millions)
Land
$
43

 
$
43

Software capitalized for internal use
171

 
171

Buildings
625

 
620

Machinery and equipment
1,394

 
1,349

 
2,233

 
2,183

Less accumulated depreciation and amortization
(1,332
)
 
(1,283
)
 
$
901

 
$
900

Depreciation and amortization expense related to property, plant and equipment was $33 million and $68 million for the quarter and two quarters ended December 28, 2018, respectively, and $36 million and $73 million for the quarter and two quarters ended December 29, 2017, respectively.
Note I — Accrued Warranties
Changes in our liability for standard product warranties, which is included as a component of the “Other accrued items” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited), during the two quarters ended December 28, 2018 were as follows:
 
(In millions)
Balance at June 29, 2018
$
24

Warranty provision for sales
9

Settlements
(6
)
Balance at December 28, 2018
$
27


We also sell extended product warranties and recognize revenue from these arrangements over the warranty period. Costs of warranty services under these arrangements are recognized as incurred and are included as a component of the “Contract liabilities” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited). Deferred revenue associated with extended product warranties was $16 million at December 28, 2018 and June 29, 2018.

12


Note J — Postretirement Benefit Plans
The following tables provide the components of our net periodic benefit income for our defined benefit plans, including defined benefit pension plans and other postretirement defined benefit plans:
 
Quarter Ended December 28, 2018
 
Two Quarters Ended December 28, 2018
 
Pension
 
Other Benefits
 
Pension
 
Other Benefits
 
 
 
 
 
 
 
 
 
(In millions)
Net periodic benefit income
 
 
 
 
 
 
 
Service cost
$
9

 
$

 
$
18

 
$

Interest cost
53

 
2

 
105

 
4

Expected return on plan assets
(96
)
 
(4
)
 
(191
)
 
(8
)
Amortization of net actuarial gain

 
(1
)
 

 
(3
)
Total net periodic benefit income
$
(34
)
 
$
(3
)
 
$
(68
)
 
$
(7
)
 
Quarter Ended December 29, 2017
 
Two Quarters Ended December 29, 2017
 
Pension
 
Other Benefits
 
Pension
 
Other Benefits
 
 
 
 
 
 
 
 
 
(In millions)
Net periodic benefit income
 
 
 
 
 
 
 
Service cost
$
9

 
$
1

 
$
19

 
$
1

Interest cost
49

 
2

 
97

 
4

Expected return on plan assets
(92
)
 
(4
)
 
(184
)
 
(8
)
Amortization of net actuarial gain

 
(1
)
 

 
(1
)
Total net periodic benefit income
$
(34
)
 
$
(2
)
 
$
(68
)
 
$
(4
)
The service cost component of net periodic benefit income is included in the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Condensed Consolidated Statement of Income (Unaudited). The non-service cost components of net periodic pension income are included in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited).
We made a $300 million voluntary contribution to our U.S. qualified pension plans in the third quarter of fiscal 2018. As a result of this voluntary contribution as well as a $400 million voluntary contribution made during fiscal 2017, we made no contributions to our U.S. qualified defined benefit pension plans during the quarter and two quarters ended December 28, 2018, and we currently anticipate making no contributions to our U.S. qualified defined benefit pension plans and minor contributions to a non-U.S. pension plan during the remainder of fiscal 2019. We made no contributions to our U.S. qualified defined benefit pension plans during the quarter and two quarters ended December 29, 2017.
The U.S. Salaried Retirement Plan (“U.S. SRP”), a U.S. qualified pension plan, is our largest defined benefit pension plan, with assets valued at $4.6 billion and a projected benefit obligation of $5.2 billion as of June 29, 2018. Effective December 31, 2016, accruals under the U.S. SRP benefit formula were frozen for all employees and replaced with a 1% cash balance benefit formula for certain employees who were not highly compensated on December 31, 2016.

13


Note K — Income From Continuing Operations Per Share
The computations of income from continuing operations per common share are as follows: 
 
Quarter Ended
 
Two Quarters Ended
 
December 28, 2018
 
December 29, 2017
 
December 28, 2018
 
December 29, 2017
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Income from continuing operations
$
225

 
$
131

 
$
441

 
$
296

Adjustments for participating securities outstanding

 
(1
)
 
(1
)
 
(1
)
Income from continuing operations used in per basic and diluted common share calculations (A)
$
225

 
$
130

 
$
440

 
$
295

 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding (B)
117.7

 
118.5

 
117.8

 
118.8

Impact of dilutive share-based awards
2.3

 
2.4

 
2.5

 
2.3

Diluted weighted average common shares outstanding (C)
120.0

 
120.9

 
120.3

 
121.1

Income from continuing operations per basic common share (A)/(B)
$
1.91

 
$
1.10

 
$
3.74

 
$
2.49

Income from continuing operations per diluted common share (A)/(C)
$
1.88

 
$
1.08

 
$
3.66

 
$
2.44

Potential dilutive common shares primarily consist of employee stock options and restricted and performance unit awards. Income from continuing operations per diluted common share excludes the antidilutive impact of 399,243 and 279,705 weighted average share-based awards outstanding for the quarter and two quarters ended December 28, 2018, respectively, and 222 and 81,496 weighted average share-based awards outstanding for the quarter and two quarters ended December 29, 2017, respectively.
Note L — Income Taxes
On December 22, 2017, H.R.1, also known as the “Tax Cuts and Jobs Act,” was signed into U.S. law (“Tax Act”). Among other provisions, the Tax Act reduced the U.S. statutory corporate income tax rate from a maximum 35 percent to a flat 21 percent, effective January 1, 2018.
Effective Tax Rate
Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 17.0 percent in the quarter ended December 28, 2018 compared with 41.8 percent in the quarter ended December 29, 2017. In the quarter ended December 28, 2018, our effective tax rate benefited from a reduction in the deferred tax liability maintained on the basis differences related to the unremitted foreign earnings and an increase in the research and development (“R&D”) credit, partially offset by an unfavorable impact of the differences in GAAP and tax accounting related to investments. In the quarter ended December 29, 2017, our effective tax rate was impacted by a $58 million ($.48 per diluted share) write-down of existing net deferred tax asset balances based on the lower tax rate and other tax law changes from the Tax Act, a $26 million ($.21 per diluted share) benefit from the impact of our lower fiscal 2018 tax rate, a $22 million ($.18 per diluted share) favorable impact of releasing provisions for uncertain tax positions and the favorable impact of differences in GAAP and tax accounting related to investments.
Our effective tax rate was 16.5 percent in the two quarters ended December 28, 2018 compared with 34.7 percent in the two quarters ended December 29, 2017. In addition to the items noted above for the quarters ended December 28, 2018 and December 29, 2017, our effective tax rate for the two quarters ended December 28, 2018 and December 29, 2017 benefited from the favorable impact of excess tax benefits related to equity-based compensation.
Tax Law Changes
During the quarter ended December 28, 2018, we completed our accounting for the income tax impact of enactment of the Tax Act and there were no material changes from the estimates reported in our Fiscal 2017-2018 Update 8-K.
The Tax Act provides for a one-time transition tax on our post-1986 earnings and profits of foreign subsidiaries (“foreign E&P”) that was previously deferred from U.S. income tax expense. We have determined that we do not owe any one-time transition tax.
We have also completed our evaluation of the U.S. federal corporate income tax impacts of the Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income provisions of the Tax Act, and our tax expense includes the impact of these provisions as a period cost in our effective tax rate.

14


Because of the potential impact of deficit allocations on the tax basis for netted foreign E&P, we are maintaining a deferred tax liability of approximately $19 million in respect of potential cumulative tax basis differences of $88 million. Other than this deferred tax liability, we have not provided for additional income taxes on any remaining undistributed foreign E&P not subject to the transition tax, or any outside tax basis differences inherent in our foreign subsidiaries, because all other amounts continue to be reinvested indefinitely.
Note M — Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.
Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed using the best information available in the circumstances.
In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the external pricing services, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value, including net asset value (“NAV”). Additionally, in certain circumstances, the NAV reported by an asset manager may be adjusted when sufficient evidence indicates NAV is not representative of fair value.
The following table presents assets and liabilities measured at fair value on a recurring basis (at least annually) at December 28, 2018 and June 29, 2018:
 
December 28, 2018
 
June 29, 2018
 
Total
 
Level 1
 
Total
 
Level 1
 
 
 
 
 
 
 
 
 
(In millions)
Assets
 
 
 
 
 
 
 
Deferred compensation plan assets:(1)
 
 
 
 
 
 
 
Equity and fixed income securities
$
46

 
$
46

 
$
46

 
$
46

Investments measured at NAV:
 
 
 
 
 
 
 
Equity and fixed income funds
56

 
 
 
63

 
 
Corporate-owned life insurance
27

 
 
 
27

 
 
Total investments measured at NAV
83

 
 
 
90

 
 
Total fair value of deferred compensation plan assets
$
129

 
 
 
$
136

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
  Deferred compensation plan liabilities:(2)
 
 
 
 
 
 
 
Equity securities and mutual funds
$
20

 
$
20

 
$
38

 
$
38

Investments measured at NAV:
 
 
 
 
 
 
 
Common/collective trusts and guaranteed investment contracts
132

 
 
 
111

 
 
Total fair value of deferred compensation plan liabilities
$
152

 


 
$
149

 


_______________  
(1)
Represents diversified assets held in a “rabbi trust” associated with our non-qualified deferred compensation plans, which we include in the “Other current assets” and “Other non-current assets” line items in our Condensed Consolidated Balance Sheet (Unaudited) and which are measured at fair value.
(2)
Primarily represents obligations to pay benefits under certain non-qualified deferred compensation plans, which we include in the “Compensation and benefits” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited). Under these plans, participants designate investment options (including stock and fixed-income funds), which serve as the basis for measurement of the notional value of their accounts.

15


The following table presents the carrying amounts and estimated fair values of our significant financial instruments that were not measured at fair value (carrying amounts of other financial instruments not listed in the table below approximate fair value due to the short-term nature of those items):
 
December 28, 2018
 
June 29, 2018
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
 
 
 
 
 
 
(In millions)
Long-term debt (including current portion)(1)
$
3,716

 
$
3,800

 
$
3,712

 
$
3,848

_______________  
(1)
Fair value was estimated using a market approach based on quoted market prices for our debt traded in the secondary market. If our long-term debt in our balance sheet were measured at fair value, it would be categorized in Level 2 of the fair value hierarchy.
Note N — Derivative Instruments and Hedging Activities
In the normal course of business, we are exposed to global market risks, including the effect of changes in foreign currency exchange rates. We use derivative instruments to manage our exposure to such risks and formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting. We recognize all derivatives in our Condensed Consolidated Balance Sheet (Unaudited) at fair value. We do not hold or issue derivatives for speculative trading purposes.
At December 28, 2018, we had two open foreign currency forward contracts with an aggregate notional amount of $5 million, one of which had a notional amount of $4 million and was classified as a fair value hedge, and the other had a notional amount of $1 million and was classified as a cash flow hedge. This compares with open foreign currency forward contracts with an aggregate notional amount of $39 million at June 29, 2018, of which $4 million were classified as fair value hedges and $35 million were classified as cash flow hedges. At December 28, 2018, contract expiration dates ranged from 3 days to approximately 3 months with a weighted average contract life of 2 months.
Fair Value Hedges
We use foreign currency forward contracts and options to hedge certain balance sheet items, including foreign currency denominated accounts receivable and inventory. Changes in the value of the derivatives and the related hedged items are reflected in earnings, in the “Cost of product sales and services” line item in our Condensed Consolidated Statement of Income (Unaudited). At December 28, 2018, we had an outstanding foreign currency forward contract denominated in the Canadian Dollar to hedge a certain balance sheet item. The net gains or losses on foreign currency forward contracts designated as fair value hedges were not material in the quarter or two quarters ended December 28, 2018 or in the quarter or two quarters ended December 29, 2017. In addition, no amounts were recognized in earnings in the quarter or two quarters ended December 28, 2018 or in the quarter or two quarters ended December 29, 2017 related to hedged firm commitments that no longer qualify as fair value hedges.
Cash Flow Hedges
We use foreign currency forward contracts and options to hedge off-balance sheet future foreign currency commitments and also have hedged U.S. Dollar payments to suppliers to maintain our anticipated profit margins in our international operations. At December 28, 2018, we had an outstanding foreign currency forward contract denominated in the Euro to hedge a certain forecasted transaction. The net gains or losses from cash flow hedges recognized in earnings or recorded in other comprehensive income, including gains or losses related to hedge ineffectiveness, were not material in the quarter or two quarters ended December 28, 2018 or in the quarter or two quarters ended December 29, 2017.
Note O — Changes in Estimates
Contract Estimates
Under the POC cost-to-cost method of revenue recognition, a single estimated profit margin is used to recognize profit for each performance obligation over its period of performance. Recognition of profit on a contract requires estimates of the total cost at completion and transaction price and the measurement of progress towards completion. Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment. Factors that must be considered in estimating the cost of the work to be completed include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Factors that must be considered in estimating the total transaction price include contractual cost or performance incentives (such as incentive fees, award fees and penalties) and other forms of variable consideration as well as our historical experience and expectation for performance on the contract. At the outset of each contract, we gauge its complexity and perceived risks and establish an

16


estimated total cost at completion in line with these expectations. After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive award fees that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.
Net EAC adjustments resulting from changes in estimates impacted our operating income favorably by $2 million ($.02 per diluted share) and unfavorably by $1 million for the quarter and two quarters ended December 28, 2018, respectively, and unfavorably by $16 million ($11 million after-tax or $.09 per diluted share) and $11 million ($8 million after-tax or $.06 per diluted share) for the quarter and two quarters ended December 29, 2017, respectively. Revenue recognized from performance obligations satisfied in prior periods was $9 million and $16 million for the quarter and two quarters ended December 28, 2018, respectively, and $16 million and $30 million for the quarter and two quarters ended December 29, 2017, respectively.
Income Taxes
See Note L — Income Taxes in these Notes for changes in estimates disclosures associated with our accounting for income taxes.
Note P — Backlog
Backlog, which is the equivalent of our remaining performance obligations, represents the future revenue we expect to recognize as we perform on our current contracts. Backlog comprises both funded backlog (i.e., firm orders for which funding is authorized and appropriated) and unfunded backlog. Backlog excludes unexercised contract options and potential orders under ordering-type contracts, such as indefinite delivery, indefinite quantity contracts.
At December 28, 2018, our ending backlog was $8.0 billion. We expect to recognize approximately half of the revenue associated with this backlog within the next twelve months and the substantial majority of the revenue associated with this backlog within the next 3 years.
Note Q — Business Segment Information
We structure our operations primarily around the products, systems and services we sell and the markets we serve, and we report the financial results of our continuing operations in the following three reportable segments, which are also referred to as our business segments:
Communication Systems, serving markets in tactical communications and defense products, including tactical ground and airborne radio communications solutions and night vision technology, and in public safety networks;
Electronic Systems, providing electronic warfare, avionics, and command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”) solutions for defense and classified customers and mission-critical communication systems for civil and military aviation and other customers; and
Space and Intelligence Systems, providing intelligence, space protection, geospatial, complete Earth observation, universe exploration, positioning, navigation and timing (“PNT”), and environmental solutions for national security, defense, civil and commercial customers, using advanced sensors, antennas and payloads, as well as ground processing and information analytics.
As discussed in more detail in Note A — Significant Accounting Policies and Recent Accounting Standards in these Notes and in Note 1: “Significant Accounting Policies” and Note 2: “Accounting Changes or Recent Accounting Pronouncements” in our Notes to Consolidated Financial Statements in our Fiscal 2017-2018 Update 8-K, effective June 30, 2018, we adopted ASC 606 and ASU 2017-07 using the full retrospective method. The historical results, discussion and presentation of our business segments as set forth in our Condensed Consolidated Financial Statements (Unaudited) and these Notes reflect the impact of our adoption of ASC 606 and ASU 2017-07 for all periods presented in order to present all segment information on a comparable basis. The accounting policies of our business segments are the same as those described in Note 1: “Significant Accounting Policies” in our Notes to Consolidated Financial Statements in our Fiscal 2017-2018 Update 8-K.
We evaluate each segment’s performance based on segment operating income or loss, which we define as profit or loss from operations before income taxes, including pension income and excluding interest income and expense, royalties and related intellectual property expenses, equity method investment income or loss and gains or losses from securities and other investments. Intersegment sales are generally transferred at cost to the buying segment, and the sourcing segment recognizes a profit that is eliminated. The “Corporate eliminations” line item in the table below represents the elimination of intersegment sales. The “Unallocated corporate expense and corporate eliminations” line item in the table below represents the portion of

17


corporate expenses not allocated to our business segments and the elimination of intersegment profits. The “Pension adjustment” line item in the table below represents the reconciliation of the non-service components of net periodic pension and postretirement benefit costs, which are a component of segment operating income but are included in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited) as a result of our adoption of ASU 2017-07 as discussed in Note A — Significant Accounting Policies and Recent Accounting Standards in these Notes. The non-service components of net periodic pension and postretirement benefit costs include interest cost, expected return on plan assets and amortization of net actuarial gain.
Segment revenue, segment operating income and a reconciliation of segment operating income to total income from continuing operations before income taxes are as follows:
 
Quarter Ended
 
Two Quarters Ended
 
December 28, 2018
 
December 29, 2017
 
December 28, 2018
 
December 29, 2017
 
 
 
 
 
 
 
 
 
(In millions)
Revenue
 
 
 
 
 
 
 
Communication Systems
$
540

 
$
492

 
$
1,009

 
$
898

Electronic Systems
617

 
582

 
1,206

 
1,123

Space and Intelligence Systems
513

 
462

 
1,001

 
928

Corporate eliminations
(4
)
 
(1
)
 
(8
)
 
(4
)
 
$
1,666

 
$
1,535

 
$
3,208

 
$
2,945

Income From Continuing Operations Before Income Taxes
Segment Operating Income:
 
 
 
 
 
 
 
Communication Systems
$
162

 
$
145

 
$
302

 
$
260

Electronic Systems
117

 
97

 
232

 
206

Space and Intelligence Systems
92

 
80

 
178

 
167

Unallocated corporate expense and corporate eliminations(1)
(58
)
 
(54
)
 
(99
)
 
(96
)
Pension adjustment
(46
)
 
(46
)
 
(93
)
 
(92
)
Non-operating income
47

 
44

 
94

 
90

Net interest expense
(43
)
 
(41
)
 
(86
)
 
(82
)
 
$
271

 
$
225

 
$
528

 
$
453

_______________
(1)
Unallocated corporate expense and corporate eliminations included: (i) $13 million of L3 Technologies, Inc. (“L3”) merger-related transaction and integration costs for the quarter and two quarters ended December 28, 2018; (ii) a $12 million adjustment for deferred compensation in the quarter and two quarters ended December 29, 2017 and (iii) $26 million and $51 million of expense in the quarter and two quarters ended December 28, 2018, respectively, compared with $25 million and $50 million of expense in the quarter and two quarters ended December 29, 2017, respectively, for amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis. Because the acquisition of Exelis benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired in the Exelis acquisition was recorded as unallocated corporate expense. Corporate eliminations of intersegment profits were not material in the quarter or two quarters ended December 28, 2018 or the quarter or two quarters ended December 29, 2017.


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Disaggregation of Revenue
Communication Systems: Communication Systems operates principally on a “commercial” market-driven business model through which the business segment provides ready-to-ship commercial off-the-shelf products to customers in the U.S. and internationally. Communication Systems revenue is primarily derived from fixed-price contracts and is generally recognized at the point in time when the product is received and accepted by the customer. We disaggregate Communication Systems revenue by geographical region, as we believe this category best depicts how the nature, amount, timing and uncertainty of Communication Systems revenue and cash flows are affected by economic factors:
 
Quarter Ended
 
Two Quarters Ended
 
December 28, 2018
 
December 29, 2017
 
December 28, 2018
 
December 29, 2017
 
 
 
 
 
 
 
 
 
(In millions)
Revenue By Geographical Region
 
 
 
 
 
 
 
United States
$
299

 
$
276

 
$
558

 
$
484

International
241

 
216

 
451

 
414

 
$
540

 
$
492

 
$
1,009

 
$
898

Electronic Systems: Electronic Systems revenue is primarily derived from U.S. Government development and production contracts and is generally recognized over time using the POC cost-to-cost method. We disaggregate Electronic Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Electronic Systems revenue and cash flows are affected by economic factors:
 
Quarter Ended
 
Two Quarters Ended
 
December 28, 2018
 
December 29, 2017
 
December 28, 2018
 
December 29, 2017
 
 
 
 
 
 
 
 
 
(In millions)
Revenue By Customer Relationship
 
 
 
 
 
 
 
Prime contractor
$
399

 
$
410

 
$
793

 
$
808

Subcontractor
218

 
172

 
413

 
315

 
$
617

 
$
582

 
$
1,206

 
$
1,123

Revenue By Contract Type
 
 
 
 
 
 
 
Fixed-price(1)
$
508

 
$
463

 
$
986

 
$
885

Cost-reimbursable
109

 
119

 
220

 
238

 
$
617

 
$
582

 
$
1,206

 
$
1,123

Revenue By Geographical Region
 
 
 
 
 
 
 
United States
$
486

 
$
464

 
$
964

 
$
890

International
131

 
118

 
242

 
233

 
$
617

 
$
582

 
$
1,206

 
$
1,123

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

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Space and Intelligence Systems: Space and Intelligence Systems revenue is primarily derived from U.S. Government development and production contracts and is generally recognized over time using the POC cost-to-cost method. We disaggregate Space and Intelligence Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Space and Intelligence Systems revenue and cash flows are affected by economic factors:
 
Quarter Ended
 
Two Quarters Ended
 
December 28, 2018
 
December 29, 2017
 
December 28, 2018
 
December 29, 2017
 
 
 
 
 
 
 
 
 
(In millions)
Revenue By Customer Relationship
 
 
 
 
 
 
 
Prime contractor
$
362

 
$
329

 
$
714

 
$
663

Subcontractor
151

 
133

 
287

 
265

 
$
513

 
$
462

 
$
1,001

 
$
928

Revenue By Contract Type
 
 
 
 
 
 
 
Fixed-price(1)
$
188

 
$
120

 
$
360

 
$
243

Cost-reimbursable
325

 
342

 
641

 
685

 
$
513

 
$
462

 
$
1,001

 
$
928

Revenue By Geographical Region
 
 
 
 
 
 
 
United States
$
500

 
$
446

 
$
976

 
$
898

International
13

 
16

 
25

 
30

 
$
513

 
$
462

 
$
1,001

 
$
928

_______________
(1)
Includes revenue derived from time-and-materials contracts.
Total assets by business segment are summarized below:
 
December 28, 2018
 
June 29, 2018
 
 
 
 
 
(In millions)
Total Assets
 
 
 
Communication Systems
$
1,578

 
$
1,567

Electronic Systems
4,196

 
4,174

Space and Intelligence Systems
2,242

 
2,193

Corporate