Item 2. 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. 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 Condensed Consolidated Financial Statements (Unaudited) and accompanying Notes appearing elsewhere in this Report.Report (the “Notes”). In addition, reference should be made to our audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Fiscal 2017 Form 10-K.2017-2018 Update 8-K. Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in this MD&A under “Forward-Looking Statements and Factors that May Affect Future Results.”
The following is a list of the sections of this MD&A, together with our perspective on their contents, which we hope will assist in reading these pages:
Forward-Looking Statements and Factors that May Affect Future Results — cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.
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• | Results of Operations — an analysis of our consolidated results of operations and the results in each of our business segments, to the extent the segment results are helpful to an understanding of our business as a whole, for the periods presented in our Condensed Consolidated Financial Statements (Unaudited). |
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• | Liquidity, Capital Resources and Financial Strategies — an analysis of cash flows, funding of pension plans, common stock repurchases, dividends, capital structure and resources, off-balance sheet arrangements and commercial commitments and contractual obligations. |
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• | Critical Accounting Policies and Estimates — information about accounting policies that require critical judgments and estimates and about accounting standards that have been issued, but are not yet effective for us, and their potential impact on our financial condition, results of operations and cash flows. |
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• | Forward-Looking Statements and Factors that May Affect Future Results — cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections. |
We report the financial results of our continuing operations in the following three 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;
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• | 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 C4ISR solutions for the defense industry and ATM solutionsclassified customers and mission-critical communication systems for the civil aviation industry; and
Space and Intelligence Systems, providing intelligence, space protection, geospatial, complete Earth observation, universe exploration, PNT, and environmental solutions for national security, defense, civil and commercial customers, using advanced sensors, antennasmilitary aviation and payloads, as well as ground processingother customers; and information analytics.
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• | Space and Intelligence Systems, providing intelligence, space protection, geospatial, complete Earth observation, universe exploration, 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 described in more detail in “Basisthe Adoption of Presentation”New Accounting Standards section in Note A — Significant Accounting Policies and Recent Accounting Standardsand Note B — Discontinued Operationsin the Notes, effective June 30, 2018, we adopted ASC 606, a new revenue recognition standard that 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. Effective June 30, 2018, we also adopted ASU 2017-07, which changed the presentation of components of net periodic pension and postretirement benefit costs other than the service cost component in connection with our divestitureCondensed Consolidated Statement of CapRock and entering into the definitive agreement to sell IT Services in the third quarter of fiscal 2017, our other remaining operations that had been part of our former Critical Networks segment, including our ATM business primarily serving the FAA, were integrated with our Electronic Systems segment effective for the third quarter of fiscal 2017, and our Critical Networks segment was eliminated. TheIncome (Unaudited). Our historical results, discussion and presentation of our business segments as set forth in our Condensed Consolidated Financial Statements (Unaudited) and accompanying Notes and this MD&A reflect the impact of the adoption of these changesnew standards for all periods presented in order to present all segment information on a comparable basis. There is no impact on our previously reported consolidated statements
The classification of income, balance sheets or statements of cash flows resulting from these segment changes.
Certain prior-yearcertain prior-period amounts havehas been reclassifiedadjusted in our Condensed Consolidated Financial Statements (Unaudited) to conform with current-yearcurrent-period classifications. Reclassifications include certain human resourcesdirect selling and ITbid 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 the Notes.
As described in more detail in Note S — Pending Merger in the Notes, we entered into the Merger Agreement with L3 and Merger Sub on October 12, 2018, pursuant to which we and L3 have agreed to combine in an all-stock merger of equals. We and L3 continue to expect the merger to close in the previously announced time frame of mid-calendar year 2019, although we can give no assurances regarding the timing or occurrence of closing.
Amounts contained in this Report may not always add to totals due to rounding.
RESULTS OF OPERATIONS
Highlights
Operations results for the third quarter of fiscal 2018,2019, in each case compared with the third quarter of fiscal 2017,2018, included:
Revenue increased 511 percent to $1.57$1.73 billion from $1.49$1.56 billion;
Gross margin increased6 percent to $561 million from $531 million;
Operating income decreased 7 10 percent to $256$589 million from $275$534 million;
Income from continuing operations increased 2423 percent to $203$243 million from $164$198 million;
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• | Income from continuing operations per diluted common share increased24 percent to $2.02 from $1.63; |
Income from continuing operations per diluted common shareCommunication Systems segment revenue increased27 19 percent to $1.67$568 million from $1.31;
$479 million and operating income increased 19 percent to $172 million from $144 million;CommunicationElectronic Systems segment revenue increased 47 percent to $481$649 million from $461$606 million and operating income increased 14 percent to $123 million from $108 million; and
Space and Intelligence Systems segment revenue increased 7 percent to $514 million from $482 million and operating income increased 5 percent to $147$87 million from $140 million;
Electronic Systems revenue increased 10 percent to $609 million from $553 million and operating income decreased 3 percent to $112 million from $115 million; and
Space and Intelligence Systems revenue increased 1 percent to $482 million from $475 million and operating income increased 8 percent to $82 million from $76$83 million.
Net cash provided by operating activities decreased 53increased 280 percent to $230 million, reflecting our $300 million voluntary pension contribution, in the first three quarters of fiscal 2018 from $489$874 million in the first three quarters of fiscal 2017.2019 from $230 million in the first three quarters of fiscal 2018.
Consolidated Results of Operations
| | | | Quarter Ended | | Three Quarters Ended | Quarter Ended | | Three Quarters Ended |
| | March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) | | March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) | March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) | | March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | (Dollars in millions, except per share amounts) | (Dollars in millions, except per share amounts) |
Revenue: | Revenue: | | | | | | | | | | | | | | | | | | | | | | |
Communication Systems | Communication Systems | $ | 481 |
| | $ | 461 |
| | 4 | % | | $ | 1,380 |
| | $ | 1,304 |
| | 6 | % | $ | 568 |
| | $ | 479 |
| | 19 | % | | $ | 1,577 |
| | $ | 1,377 |
| | 15 | % |
Electronic Systems | Electronic Systems | 609 |
| | 553 |
| | 10 | % | | 1,733 |
| | 1,660 |
| | 4 | % | 649 |
| | 606 |
| | 7 | % | | 1,855 |
| | 1,729 |
| | 7 | % |
Space and Intelligence Systems | Space and Intelligence Systems | 482 |
| | 475 |
| | 1 | % | | 1,413 |
| | 1,396 |
| | 1 | % | 514 |
| | 482 |
| | 7 | % | | 1,515 |
| | 1,410 |
| | 7 | % |
Corporate eliminations | Corporate eliminations | (4 | ) | | — |
| | * |
| | (10 | ) | | (2 | ) | | * |
| (3 | ) | | (5 | ) | | * |
| | (11 | ) | | (9 | ) | | * |
|
Total revenue | Total revenue | 1,568 |
| | 1,489 |
| | 5 | % | | 4,516 |
| | 4,358 |
| | 4 | % | 1,728 |
| | 1,562 |
| | 11 | % | | 4,936 |
| | 4,507 |
| | 10 | % |
Cost of product sales and services | Cost of product sales and services | (1,007 | ) | | (958 | ) | | 5 | % | | (2,904 | ) | | (2,775 | ) | | 5 | % | (1,139 | ) | | (1,028 | ) | | 11 | % | | (3,244 | ) | | (2,969 | ) | | 9 | % |
Gross margin | Gross margin | 561 |
| | 531 |
| | 6 | % | | 1,612 |
| | 1,583 |
| | 2 | % | 589 |
| | 534 |
| | 10 | % | | 1,692 |
| | 1,538 |
| | 10 | % |
% of total revenue | % of total revenue | 36 | % | | 36 | % | | | | 36 | % | | 36 | % | | | 34 | % | | 34 | % | | | | 34 | % | | 34 | % | | |
Engineering, selling and administrative expenses | Engineering, selling and administrative expenses | (305 | ) | | (256 | ) | | 19 | % | | (812 | ) | | (785 | ) | | 3 | % | (310 | ) | | (331 | ) | | (6 | )% | | (893 | ) | | (890 | ) | | — |
|
% of total revenue | % of total revenue | 19 | % | | 17 | % | | | | 18 | % | | 18 | % | | | 18 | % | | 21 | % | | | | 18 | % | | 20 | % | | |
Operating income | 256 |
| | 275 |
| | (7 | )% | | 800 |
| | 798 |
| | — |
| |
% of total revenue | 16 | % | | 18 | % | | | | 18 | % | | 18 | % | | | |
Non-operating income (loss) | — |
| | — |
| | * |
| | (2 | ) | | 2 |
| | * |
| |
Non-operating income | | 46 |
| | 46 |
| | — |
| | 140 |
| | 136 |
| | 3 | % |
Net interest expense | Net interest expense | (41 | ) | | (42 | ) | | (2 | )% | | (123 | ) | | (129 | ) | | (5 | )% | (42 | ) | | (41 | ) | | 2 | % | | (128 | ) | | (123 | ) | | 4 | % |
Income from continuing operations before income taxes | Income from continuing operations before income taxes | 215 |
| | 233 |
| | (8 | )% | | 675 |
| | 671 |
| | 1 | % | 283 |
| | 208 |
| | 36 | % | | 811 |
| | 661 |
| | 23 | % |
Income taxes | Income taxes | (12 | ) | | (69 | ) | | (83 | )% | | (166 | ) | | (199 | ) | | (17 | )% | (40 | ) | | (10 | ) | | 300 | % | | (127 | ) | | (167 | ) | | (24 | )% |
Effective tax rate | Effective tax rate | 6 | % | | 30 | % | | | | 25 | % | | 30 | % | | | 14 | % | | 5 | % | | | | 16 | % | | 25 | % | | |
Income from continuing operations | Income from continuing operations | $ | 203 |
| | $ | 164 |
| | 24 | % | | $ | 509 |
| | $ | 472 |
| | 8 | % | $ | 243 |
| | $ | 198 |
| | 23 | % | | $ | 684 |
| | $ | 494 |
| | 38 | % |
% of total revenue | % of total revenue | 13 | % | | 11 | % | | | | 11 | % | | 11 | % | | | 14 | % | | 13 | % | | | | 14 | % | | 11 | % | | |
Income from continuing operations per diluted common share | Income from continuing operations per diluted common share | $ | 1.67 |
| | $ | 1.31 |
| | 27 | % | | $ | 4.19 |
| | $ | 3.77 |
| | 11 | % | $ | 2.02 |
| | $ | 1.63 |
| | 24 | % | | $ | 5.67 |
| | $ | 4.07 |
| | 39 | % |
* Not meaningful | * Not meaningful | | | | | | | | | | | | | | | | | | | | | | |
Revenue
Third Quarter 20182019 Compared With Third Quarter 2017: 2018: The increase in revenue in the third quarter of fiscal 20182019 compared with the third quarter of fiscal 20172018 was due to higher revenue in all three of our segments.
First Three Quarters 20182019 Compared With First Three Quarters 2017: 2018: The increase in revenue in the first three quarters of fiscal 20182019 compared with the first three quarters of fiscal 20172018 was due to the same reason as noted above regarding the third quartershigher revenue in all three of fiscal 2018 and 2017.our segments.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
Gross Margin
Third Quarter 20182019 Compared With Third Quarter 2017: 2018: The increase in gross margin in the third quarter of fiscal 20182019 compared with the third quarter of fiscal 20172018 was primarily due to higher revenue in all three segments, productivity savings and incremental pension income, partially offset by a less favorable mix of program revenue and product sales.our segments.
First Three Quarters 20182019 Compared With First Three Quarters 2017: 2018: The increase in gross margin in the first three quarters of fiscal 20182019 compared with the first three quarters of fiscal 20172018 was primarily due to the same reasons as noted above regarding the third quartershigher revenue in all three of fiscal 2018 and 2017 as well as an unfavorable impact from the Automatic Dependent Surveillance-Broadcast (“ADS-B”) program, including a favorable contract settlement in the second quarter of fiscal 2017 and the program transition from build-out to sustainment.our segments.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
Engineering, Selling and Administrative Expenses
Third Quarter 20182019 Compared With Third Quarter 2017: 2018: The increasesdecreases in engineering, selling and administrative (“ESA”) expenses and ESA expenses as a percentage of total revenue (“ESA percentage”) in the third quarter of fiscal 20182019 compared with the third quarter of fiscal 20172018 were primarily due to the absence of $45 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of business in the third quarter of fiscal 2018, partially offset by $16 million of L3 merger-related transaction and integration costs and increased investments in bids and proposals and R&D in the third quarter of fiscal 2019.
First Three Quarters 2019 Compared With First Three Quarters 2018: The slight increase in ESA expenses in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to $29 million of L3 merger-related transaction and integration costs and increased investments in bids and proposals and R&D, partially offset by $45 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of business in the third quarter of fiscal 2018 and a $12 million adjustment for deferred compensation in the second quarter of fiscal 2018. The decrease in ESA percentage in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to management of expenses on higher revenue.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
Non-Operating Income
Third Quarter 2019 Compared With Third Quarter 2018: Non-operating income in the third quarter of fiscal 2019 was comparable with the third quarter of fiscal 2018.
First Three Quarters 2019 Compared With First Three Quarters 2018: The slight increase in non-operating income in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to an increase in the non-service cost components of pension income and a debt extinguishment loss recognized in the second quarter of fiscal 2018.
See Note A — Significant Accounting Policies and Recent Accounting Standards in the Notes for further information.
Income Taxes
Third Quarter 2019 Compared With Third Quarter 2018: Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 14.1 percent in the third quarter of fiscal 2019 compared with 4.8 percent in the third quarter of fiscal 2018. In the third quarter of fiscal 2019, our effective tax rate benefited from the favorable impact of excess tax benefits related to equity-based compensation and from favorable adjustments recorded upon the filing of our Federal tax returns. In the third quarter of fiscal 2018, our effective tax rate benefited from a $33 million adjustment to the provisional amount recorded in the second quarter of fiscal 2018 to revalue our net deferred tax balances as a result of the Tax Act. Additionally, our effective tax rate for the third quarter of fiscal 2018 benefited from the favorable impact of excess tax benefits related to equity-based compensation.
First Three Quarters 2019 Compared With First Three Quarters 2018: Our effective tax rate was 15.7 percent in the first three quarters of fiscal 2019 compared with 25.3 percent in the first three quarters of fiscal 2018. In addition to the items noted above for the third quarter of fiscal 2019, our effective tax rate for the first three quarters of fiscal 2019 benefited from a reduction in the deferred tax liability maintained on the basis differences related to the unremitted foreign earnings and an increase in R&D credit. Our effective tax rate for the first three quarters of fiscal 2018 was impacted by a $25 million write-down of existing net deferred tax asset balances due to the enactment of lower U.S. statutory corporate income tax rates and other tax law changes from the Tax Act, the corresponding impact of our lower fiscal 2018 tax rate, the favorable impact of releasing provisions for uncertain tax positions, the favorable impact of differences in GAAP and tax accounting related to investments and the favorable impact of excess tax benefits related to equity-based compensation.
Income From Continuing Operations
Third Quarter 2019 Compared With Third Quarter 2018: The increase in income from continuing operations in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to the combined effects of the reasons noted above in this “Consolidated Results of Operations” discussion regarding the third quarters of fiscal 2019 and 2018.
First Three Quarters 2019 Compared With First Three Quarters 2018: The increase in income from continuing operations in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to the combined effects of the reasons noted above in this “Consolidated Results of Operations” discussion regarding the first three quarters of fiscal 2019 and 2018.
Income From Continuing Operations Per Diluted Common Share
Third Quarter 2019 Compared With Third Quarter 2018: The increase in income from continuing operations per diluted common share in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to higher income from continuing operations and fewer diluted weighted average common shares outstanding due to repurchases of shares of common stock under our repurchase program during the last quarter of fiscal 2018 and first quarter of fiscal 2019.
First Three Quarters 2019 Compared With First Three Quarters 2018: The increase in income from continuing operations per diluted common share in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to the same reasons noted above regarding the third quarters of fiscal 2019 and 2018.
See “Common Stock Repurchases” below in this MD&A for further information.
Discussion of Business Segment Results of Operations
Communication Systems Segment
|
| | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) | | March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) |
| | | | | | | | | | | |
| (Dollars in millions) |
Revenue | $ | 568 |
| | $ | 479 |
| | 19 | % | | $ | 1,577 |
| | $ | 1,377 |
| | 15 | % |
Cost of product sales and services | (310 | ) | | (246 | ) | | 26 | % | | (837 | ) | | (706 | ) | | 19 | % |
Gross margin | 258 |
| | 233 |
| | 11 | % | | 740 |
| | 671 |
| | 10 | % |
% of revenue | 45 | % | | 49 | % | | | | 47 | % | | 49 | % | | |
ESA expenses | (86 | ) | | (89 | ) | | (3 | )% | | (266 | ) | | (267 | ) | | — | % |
% of revenue | 15 | % | | 19 | % | | | | 17 | % | | 19 | % | | |
Segment operating income | $ | 172 |
| | $ | 144 |
| | 19 | % | | $ | 474 |
| | $ | 404 |
| | 17 | % |
% of revenue | 30 | % | | 30 | % | | | | 30 | % | | 29 | % | | |
Third Quarter 2019 Compared With Third Quarter 2018: The increase in segment revenue in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to $66 million of higher revenue from Tactical Communications, reflecting a ramp in U.S. Department of Defense modernization programs, and higher revenue in Public Safety and Professional Communications due to increased demand from state and federal agencies.
The increase in segment gross margin in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to higher volume and operational efficiencies, partially offset by program and product mix. Segment gross margin as a percentage of revenue (“gross margin percentage”) decreased in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 primarily due to program and product mix. The decreases in segment ESA expenses and segment ESA percentage in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 reflected management of expenses on higher revenue.
The increase in segment operating income and comparability of segment operating income as a percentage of revenue (“operating margin percentage”) in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 reflected the combined effects of the items discussed above regarding this segment.
On April 4, 2019, we entered into a definitive agreement under which we will sell our Night Vision business. See Note T — Subsequent Events in the Notes for additional information.
First Three Quarters 2019 Compared With First Three Quarters 2018: The increase in segment revenue in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to $136 million higher revenue from Tactical Communications and higher revenue in Public Safety and Professional Communications and Night Vision.
The increase in segment gross margin, decrease in segment gross margin percentage and decreases in segment ESA expenses and segment ESA percentage for the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 were primarily due to the same reasons noted above regarding this segment for the third quarters of fiscal 2019 and 2018.
The increases in segment operating income and operating margin percentage in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 reflected the combined effects of the items discussed above regarding this segment for the first three quarters of fiscal 2019 and 2018.
Electronic Systems Segment
|
| | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) | | March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) |
| | | | | | | | | | | |
| (Dollars in millions) |
Revenue | $ | 649 |
| | $ | 606 |
| | 7 | % | | $ | 1,855 |
| | $ | 1,729 |
| | 7 | % |
Cost of product sales and services | (449 | ) | | (424 | ) | | 6 | % | | (1,284 | ) | | (1,207 | ) | | 6 | % |
Gross margin | 200 |
| | 182 |
| | 10 | % | | 571 |
| | 522 |
| | 9 | % |
% of revenue | 31 | % | | 30 | % | | | | 31 | % | | 30 | % | | |
ESA expenses | (77 | ) | | (74 | ) | | 4 | % | | (216 | ) | | (208 | ) | | 4 | % |
% of revenue | 12 | % | | 12 | % | | | | 12 | % | | 12 | % | | |
Segment operating income | $ | 123 |
| | $ | 108 |
| | 14 | % | | $ | 355 |
| | $ | 314 |
| | 13 | % |
% of revenue | 19 | % | | 18 | % | | | | 19 | % | | 18 | % | | |
Third Quarter 2019 Compared With Third Quarter 2018: The increase in segment revenue in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to $78 million of higher revenue from growth in avionics, release systems and electronic warfare on long-term platforms, including F-35, F/A-18 and F-16, partially offset by lower revenue from the conclusion of certain Mission Networks programs and the timing of the transition of the United Arab Emirates (“UAE”) integrated battle management system program from a start-up to a full capability phase.
The increase in segment gross margin in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to higher segment revenue. The increase in segment gross margin percentage in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to operational performance. The increase in segment ESA expenses in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to increased investments in bids and proposals and R&D. Segment ESA percentage in the third quarter of fiscal 2019 was comparable with the third quarter of fiscal 2018.
The increases in segment operating income and segment operating margin percentage in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 reflected the combined effects of the items discussed above regarding this segment.
First Three Quarters 2019 Compared With First Three Quarters 2018: The increase in segment revenue in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to $166 million of higher revenue from growth in avionics, release systems and electronic warfare on long-term platforms, including F-35, F/A-18 and F-16, partially offset by lower revenue from the timing of the transition of the UAE integrated battle management system program from a start-up to a full capability phase.
The increase in segment gross margin in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to higher segment revenue, favorable mix and productivity savings. The increase in segment gross margin percentage in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to favorable mix and productivity savings. The increase in segment ESA expenses in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to the same reasons noted above regarding this segment for the third quarters of fiscal 2019 and 2018. Segment ESA percentage in the first three quarters of fiscal 2019 was comparable with the first three quarters of fiscal 2018.
The increases in segment operating income and segment operating margin percentage in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 reflected the combined effects of the items discussed above regarding this segment for the first three quarters of fiscal 2019 and 2018.
Space and Intelligence Systems Segment |
| | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) | | March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) |
| | | | | | | | | | | |
| (Dollars in millions) |
Revenue | $ | 514 |
| | $ | 482 |
| | 7 | % | | $ | 1,515 |
| | $ | 1,410 |
| | 7 | % |
Cost of product sales and services | (345 | ) | | (326 | ) | | 6 | % | | (1,021 | ) | | (955 | ) | | 7 | % |
Gross margin | 169 |
| | 156 |
| | 8 | % | | 494 |
| | 455 |
| | 9 | % |
% of revenue | 33 | % | | 32 | % | | | | 33 | % | | 32 | % | | |
ESA expenses | (82 | ) | | (73 | ) | | 12 | % | | (229 | ) | | (205 | ) | | 12 | % |
% of revenue | 16 | % | | 15 | % | | | | 15 | % | | 15 | % | | |
Segment operating income | $ | 87 |
| | $ | 83 |
| | 5 | % | | $ | 265 |
| | $ | 250 |
| | 6 | % |
% of revenue | 17 | % | | 17 | % | | | | 17 | % | | 18 | % | | |
Third Quarter 2019 Compared With Third Quarter 2018: The increase in segment revenue in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to $45 million of higher revenue from classified programs, driven by exquisite systems, next generation technology and small satellites, partially offset by lower revenue from environmental programs.
The increase in segment gross margin in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to higher segment revenue. The increase in segment gross margin percentage in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to improved program execution. The increases in segment ESA expenses and segment ESA percentage in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 were primarily due to increased investments in bids and proposals and R&D.
The increase in segment operating income and comparability of segment operating margin percentage in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 reflected the combined effects of the items discussed above regarding this segment.
First Three Quarters 2019 Compared With First Three Quarters 2018: The increase in segment revenue in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 was primarily due to $136 million of higher revenue from classified programs, partially offset by lower revenue from environmental programs.
The increases in segment gross margin, segment gross margin percentage and segment ESA expenses in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 were primarily due to the same reasons noted above regarding this segment for the third quarters of fiscal 2019 and 2018. Segment ESA percentage in the first three quarters of fiscal 2019 was comparable with the first three quarters of fiscal 2018.
The increase in segment operating income and slight decrease of segment operating margin percentage in the first three quarters of fiscal 2019 compared with the first three quarters of fiscal 2018 reflected the combined effects of the items discussed above regarding this segment for the first three quarters of fiscal 2019 and 2018.
Unallocated Corporate Expense |
| | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) | | March 29, 2019 | | March 30, 2018 | | % Inc/(Dec) |
| | | | | | | | | | | |
| (Dollars in millions) |
Unallocated corporate expense and corporate eliminations | $ | 31 |
| | $ | 61 |
| | (49 | )% | | $ | 79 |
| | $ | 107 |
| | (26 | )% |
Amortization of intangible assets from Exelis acquisition | 25 |
| | 25 |
| | — | % | | 76 |
| | 75 |
| | 1 | % |
Third Quarter 2019 Compared With Third Quarter 2018: The decrease in unallocated corporate expense in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 was primarily due to $45 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of business in the third quarter of fiscal 2018, and higher research and development costs, partially offset by not incurring$16 million of L3 merger-related transaction and integration costs in the third quarter of fiscal 2018 any Exelis acquisition-related charges, which totaled $8 million in the third quarter of fiscal 2017.2019.
First Three Quarters 20182019 Compared With First Three Quarters 2017: 2018: The increasedecrease in ESA expenses and comparability of ESA percentageunallocated corporate expense in the first three quarters of fiscal 20182019 compared with the first three quarters of fiscal 2017 were2018 was primarily due to $45 million of
charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of business in the third quarter of fiscal 2018 and a $12 million adjustment for deferred compensation in the second quarter of fiscal 2018, partially offset by not incurring$29 million of L3 merger-related transaction and integration costs in the first three quarters of fiscal 2018 any Exelis acquisition-related charges, which totaled $38 million in the first three quarters of fiscal 2017.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
Operating Income
Third Quarter 2018 Compared With Third Quarter 2017: The decreases in operating income and operating income as a percentage of total revenue (“operating margin percentage”) in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 were primarily due to the combined effects of the reasons noted above in this “Consolidated Results of Operations” discussion regarding the third quarters of fiscal 2018 and 2017.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in operating income and comparability of operating margin percentage in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 were primarily due to the combined effects of the reasons noted above in this “Consolidated Results of Operations” discussion regarding the first three quarters of fiscal 2018 and 2017.
Income Taxes
Third Quarter 2018 Compared With Third Quarter 2017: Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 5.6 percent in the third quarter of fiscal 2018 compared with 29.6 percent in the third quarter of fiscal 2017. In the third quarter of fiscal 2018, our effective tax rate was impacted by a $33 million favorable adjustment to our provisional deferred tax balances estimated in connection with the preparation of our financial statements for the second quarter of fiscal 2018. This adjustment was primarily due to revaluing our deferred tax asset related to our $300 million voluntary pension contribution made during the third quarter of fiscal 2018. In the third quarter of fiscal 2017, our effective tax rate benefited from the favorable impact of excess tax benefits related to equity-based compensation, by differences in GAAP and tax accounting related to investments and by additional deductions and additional research credits claimed on our fiscal 2016 tax return compared with our recorded estimates at the end of fiscal 2016, partially offset by the recognition of certain tax expenses following our classification of CapRock and IT Services as discontinued operations.
First Three Quarters 2018 Compared With First Three Quarters 2017: Our effective tax rate was 24.6 percent in the first three quarters of fiscal 2018 compared with 29.7 percent in the first three quarters of fiscal 2017. In the three quarters ended March 30, 2018, our effective tax rate was impacted by a $19 million estimated write-down of existing net deferred tax asset balances due to the enactment of lower U.S. statutory corporate income tax rates and other tax law changes, the corresponding impact of our lower estimated fiscal 2018 tax rate and the favorable impact of releasing provisions for uncertain tax positions. In the three quarters ended March 31, 2017, our effective tax rate was impacted by the discrete items noted above favorably impacting the quarter ended March 31, 2017.
Income From Continuing Operations
Third Quarter 2018 Compared With Third Quarter 2017: The increase in income from continuing operations in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to the combined effects of the reasons noted above in this “Consolidated Results of Operations” discussion regarding the third quarters of fiscal 2018 and 2017.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in income from continuing operations in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was primarily due to the combined effects of the reasons noted above in this “Consolidated Results of Operations” discussion regarding the first three quarters of fiscal 2018 and 2017.
Income From Continuing Operations Per Diluted Common Share
Third Quarter 2018 Compared With Third Quarter 2017: The increase in income from continuing operations per diluted common share in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to higher income from continuing operations and fewer diluted weighted average common shares outstanding due to repurchases of shares of common stock under our repurchase program during the fourth quarter of fiscal 2017 and first three quarters of fiscal 2018.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in income from continuing operations per diluted common share in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was primarily due to the same reasons as noted above regarding the third quarters of fiscal 2018 and 2017.
See “Common Stock Repurchases” below in this MD&A for further information.
Discussion of Business Segment Results of Operations
Communication Systems Segment
|
| | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) | | March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) |
| | | | | | | | | | | |
| (Dollars in millions) |
Revenue | $ | 481 |
| | $ | 461 |
| | 4 | | $ | 1,380 |
| | $ | 1,304 |
| | 6 |
Cost of product sales and services | (248 | ) | | (242 | ) | | 2 | | (714 | ) | | (668 | ) | | 7 |
Gross margin | 233 |
| | 219 |
| | 6 | | 666 |
| | 636 |
| | 5 |
% of revenue | 48 | % | | 48 | % | | | | 48 | % | | 49 | % | | |
ESA expenses | (86 | ) | | (79 | ) | | 9 | | (257 | ) | | (257 | ) | | — |
% of revenue | 18 | % | | 17 | % | | | | 19 | % | | 20 | % | | |
Segment operating income | $ | 147 |
| | $ | 140 |
| | 5 | | $ | 409 |
| | $ | 379 |
| | 8 |
% of revenue | 31 | % | | 30 | % | | | | 30 | % | | 29 | % | | |
Third Quarter 2018 Compared With Third Quarter 2017: The increase in segment revenue in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to growth in Tactical Communications and Night Vision. The increase in Tactical Communications revenue was due to $39 million higher U.S. Department of Defense tactical radio sales, reflecting readiness demand from the U.S. Army and U.S. Air Force, partially offset by $31 million lower international tactical communications revenue. The increase in Night Vision revenue was primarily due to demand from the U.S. Army.
The increase in segment gross margin in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to the increase in revenue. Segment gross margin percentage in the third quarter of fiscal 2018 was comparable with the third quarter of fiscal 2017 as the impact of a less favorable mix of program and product sales was offset by productivity savings. The increase in segment ESA expenses and segment ESA percentage in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to higher employment and distribution costs.
The increases in segment operating income and segment operating margin percentage in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 reflected the combined effects of the items discussed above regarding this segment.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increases in segment revenue and segment gross margin in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 were primarily due to the same reasons as noted above regarding this segment for the third quarters of fiscal 2018 and 2017.
Segment gross margin percentage for the first three quarters of fiscal 2018 decreased slightly compared with the first three quarters of fiscal 2017 primarily due to a less favorable mix of program revenue and product sales, mostly offset by productivity savings. The slight decrease in segment ESA percentage in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was primarily due to cost containment.
The increases in segment operating income and operating margin percentage in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 reflected the combined effects of the items discussed above regarding this segment for the first three quarters of fiscal 2018 and 2017.
Electronic Systems Segment
|
| | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) | | March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) |
| | | | | | | | | | | |
| (Dollars in millions) |
Revenue | $ | 609 |
| | $ | 553 |
| | 10 | % | | $ | 1,733 |
| | $ | 1,660 |
| | 4 | % |
Cost of product sales and services | (430 | ) | | (383 | ) | | 12 | % | | (1,222 | ) | | (1,125 | ) | | 9 | % |
Gross margin | 179 |
| | 170 |
| | 5 | % | | 511 |
| | 535 |
| | (4 | )% |
% of revenue | 29 | % | | 31 | % | | | | 29 | % | | 32 | % | | |
ESA expenses | (67 | ) | | (55 | ) | | 22 | % | | (189 | ) | | (175 | ) | | 8 | % |
% of revenue | 11 | % | | 10 | % | | | | 11 | % | | 11 | % | | |
Segment operating income | $ | 112 |
| | $ | 115 |
| | (3 | )% | | $ | 322 |
| | $ | 360 |
| | (11 | )% |
% of revenue | 18 | % | | 21 | % | | | | 19 | % | | 22 | % | | |
Third Quarter 2018 Compared With Third Quarter 2017: The increase in segment revenue in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to $25 million of higher revenue from Avionics, reflecting growth on the F-35 and other international platforms, and higher revenue from C4ISR (including wireless solutions), Mission Networks and Electronic Warfare, with growth on the F-16 and F/A-18 platforms.
The increase in segment gross margin in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to the increase in revenue and productivity savings, partially offset by a less favorable mix of program revenue. The decrease in segment gross margin percentage was primarily due to a less favorable mix of program revenue, partially offset by productivity savings. The increases in segment ESA expenses and ESA percentage in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 were primarily due to higher R&D expenses and timing of other expense accruals.
The decreases in segment operating income and operating margin percentage in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 reflected the combined effects of the items discussed above regarding this segment.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in segment revenue in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was primarily due to $77 million of higher revenue from Avionics and C4ISR, including wireless solutions, higher revenue from Electronic Warfare and $13 million of incremental inception-to-date services revenue in our ATM business, partially offset by a $36 million unfavorable impact from the ADS-B program, including the favorable contract settlement in the second quarter of fiscal 2017 and the program transition from build-out to sustainment.
Segment gross margin decreased $24 million and segment gross margin percentage decreased 3 percentage points in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 as the benefit of higher volume, productivity savings and higher pension income was more than offset by a $36 million unfavorable impact from the ADS-B program, including the favorable contract settlement in the second quarter of fiscal 2017 and the program transition from build-out to sustainment, a less favorable mix of program revenue and a reduction in benefits from net EAC adjustments. The increase in segment ESA expenses and the comparability of ESA percentage in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 were primarily due to higher R&D expenses and the timing of other expense accruals.
The decreases in segment operating income and operating margin percentage in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 reflected the combined effects of the items discussed above regarding this segment for the first three quarters of fiscal 2018 and 2017.
Space and Intelligence Systems Segment |
| | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) | | March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) |
| | | | | | | | | | | |
| (Dollars in millions) |
Revenue | $ | 482 |
| | $ | 475 |
| | 1 | | $ | 1,413 |
| | $ | 1,396 |
| | 1 | % |
Cost of product sales and services | (333 | ) | | (333 | ) | | — | | (978 | ) | | (984 | ) | | (1 | )% |
Gross margin | 149 |
| | 142 |
| | 5 | | 435 |
| | 412 |
| | 6 | % |
% of revenue | 31 | % | | 30 | % | | | | 31 | % | | 30 | % | | |
ESA expenses | (67 | ) | | (66 | ) | | 2 | | (185 | ) | | (181 | ) | | 2 | % |
% of revenue | 14 | % | | 14 | % | | | | 13 | % | | 13 | % | | |
Segment operating income | $ | 82 |
| | $ | 76 |
| | 8 | | $ | 250 |
| | $ | 231 |
| | 8 | % |
% of revenue | 17 | % | | 16 | % | | | | 18 | % | | 17 | % | | |
Third Quarter 2018 Compared With Third Quarter 2017: The increase in segment revenue in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to $15 million of higher revenue from classified programs, reflecting the ramp of small satellite, ground-based processing and space surveillance programs, partially offset by lower civil revenue reflecting the impact of lower revenue from environmental programs.
The increases in segment gross margin and gross margin percentage in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 were primarily due to higher revenue, incremental pension income and a more favorable mix of program revenue. Segment ESA expenses and ESA percentage were comparable in the third quarter of fiscal 2018 with the third quarter of fiscal 2017.
The increases in segment operating income and operating margin percentage in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 reflected the combined effects of the items discussed above regarding this segment.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in segment revenue in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was primarily due to $41 million of higher revenue from classified programs, primarily driven by space superiority programs, partially offset by lower civil revenue reflecting lower revenue from environmental programs.
The increases in segment gross margin, gross margin percentage and ESA expenses and the comparability of ESA percentage in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 were primarily due to the same reasons as noted above regarding this segment for the third quarters of fiscal 2018and 2017.
The increases in segment operating income and operating margin percentage in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 reflected the combined effects of the items discussed above regarding this segment for the first three quarters of fiscal 2018 and 2017.
Unallocated Corporate Expense |
| | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | Three Quarters Ended |
| | March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) | | March 30, 2018 | | March 31, 2017 | | % Inc/(Dec) |
| | | | | | | | | | | | |
| | (Dollars in millions) |
Unallocated corporate expense and corporate eliminations | $ | 60 |
| | $ | 29 |
| | 107 | % | | $ | 106 |
| | $ | 90 |
| | 18 | % |
Amortization of intangible assets from Exelis acquisition | 25 |
| | 27 |
| | (7 | )% | | 75 |
| | 82 |
| | (9 | )% |
Third Quarter 2018 Compared With Third Quarter 2017: The increase in unallocated corporate expense in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to $45 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of business, partially offset by the absence of Exelis acquisition-related charges, which totaled $8 million in the third quarter of fiscal 2017, and the timing of other expense accruals.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in unallocated corporate expense in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was primarily due to $45 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of
business in the quarter ended March 30, 2018, and a $12 million non-cash charge from an adjustment for deferred compensation in the quarter ended December 29, 2017, partially offset by the absence in the first three quarters of fiscal 2018 of any Exelis acquisition-related charges, which totaled $38 million in the first three quarters of fiscal 2017.
Discontinued Operations
As described in more detail in Note B — Discontinued Operationsin the Notes, IT Services and CapRock are reported as discontinued operations in this Report.2019.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES
Cash Flows
| | | Three Quarters Ended | Three Quarters Ended |
| March 30, 2018 | | March 31, 2017 | March 29, 2019 | | March 30, 2018 |
| | | | | | |
| (In millions) | (In millions) |
Net cash provided by operating activities | $ | 230 |
| | $ | 489 |
| $ | 874 |
| | $ | 230 |
|
Net cash provided by (used in) investing activities | (81 | ) | | 271 |
| |
Net cash used in investing activities | | (104 | ) | | (81 | ) |
Net cash used in financing activities | (196 | ) | | (942 | ) | (722 | ) | | (196 | ) |
Effect of exchange rate changes on cash and cash equivalents | 6 |
| | (3 | ) | (2 | ) | | 6 |
|
Net decrease in cash and cash equivalents | (41 | ) | | (185 | ) | |
Net increase (decrease) in cash and cash equivalents | | 46 |
| | (41 | ) |
Cash and cash equivalents, beginning of year | 484 |
| | 487 |
| 288 |
| | 484 |
|
Cash and cash equivalents, end of quarter | $ | 443 |
| | $ | 302 |
| $ | 334 |
| | $ | 443 |
|
Our Condensed Consolidated Statement of Cash Flows (Unaudited) includes cash flows from discontinued operations related to CapRock, IT Services and our former broadcast communications business (“Broadcast Communications”). See Note B — Discontinued Operationsin the Notes for additional information regarding discontinued operations, including depreciation, amortization and capital expenditures. Except for disclosures related to our cash flows, or unless otherwise specified, disclosures in our Condensed Consolidated Financial Statements (Unaudited), the accompanying Notes and this MD&A relate solely to our continuing operations.
Cash and cash equivalents: The $46 million net increase in cash and cash equivalents from the end of fiscal 2018 to the end of the third quarter of fiscal 2019 was primarily due to:
$874 million of net cash provided by operating activities; partially offset by
$278 million of net repayments of borrowings, including $300 million used for repayment at maturity of the entire principal amount of our Floating Rate Notes due February 27, 2019;
$244 million used to pay cash dividends;
$200 million used to repurchase shares of our common stock; and
$104 million used for additions of property, plant and equipment.
The $41 million net decrease in cash and cash equivalents from the end of fiscal 2017 to the end of the third quarter of fiscal 2018 was primarily due to:
$230 million of net cash provided by operating activities, reflecting the impact of a $300 million voluntary pension contribution;
$185 million of net proceeds from borrowings, including $250 million in proceeds from the issuance of the Floating Rate Notes due April 2020, $300 million in proceeds from the issuance of the Floating Rate Notes due February 2019, $253 million used for repayment of our remaining outstanding indebtedness under the 5-year tranche of our variable-rate term loans due May 29, 2020, $16 million used for repayment of outstanding indebtedness under the 3-year tranche of our variable-rate term loans due May 29, 2018 and $75 million used for repayment of short-term debt outstanding under our commercial paper program; and
$31 million of proceeds from exercises of employee stock options; more than offset by
$205 million used to pay cash dividends;
$197 million used to repurchase shares of our common stock; and
$79 million used for additions of property, plant and equipment.
The $185 million net decrease in cash and cash equivalents from the end of fiscal 2016 to the end of the third quarter of fiscal 2017 was primarily due to:
$489 million of net cash provided by operating activities;
$375 million in net cash proceeds from the sale of CapRock; and
$50 million of proceeds from exercises of employee stock options; more than offset by
$460 million used to repurchase shares of our common stock;
$313 million of net repayment of borrowings, including $248 million of repayment of our variable-rate term loans and $250 million of repayment of the entire outstanding aggregate principal amount of our 4.25% notes due October 1, 2016;
$199 million used to pay cash dividends;
$79 million used for net additions of property, plant and equipment;
$25 million for adjustments to proceeds from the sale of a business; and
$20 million used in other financing activities.
At March 30, 2018,29, 2019, we had cash and cash equivalents of $443$334 million, and we have a senior unsecured $1 billion revolving credit facility that expires in July 2020 (all ofJune 2023 (of which $900 million was available to us as of March 30, 2018)29, 2019, as a result of $100 million of short-term debt outstanding under our commercial paper program). Additionally, we had $4.2$3.4 billion of long-term debt outstanding at March 30, 2018,29, 2019, the majority of which we incurred in connection with our acquisition of Exelis in the fourth quarter of fiscal 2015. For further information regarding our long-term debt, see Note J — Long-Term Debtin the Notes and Note 13: “Long-Term Debt”“Debt” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K.2017-2018 Update 8-K. Our $443$334 million of cash and cash equivalents at March 30, 201829, 2019 included $137$141 million held by our foreign subsidiaries, of which $78$67 million was considered permanently reinvested. Determining the future tax cost of repatriating such funds to the U.S. is not practical at this time, because the cost impact of the rules regarding the netting of earnings of related foreign subsidiaries is subject to clarification. However, we have no current plans to repatriate such funds.the funds considered permanently reinvested.
Given our current cash position, outlook for funds generated from operations, credit ratings, available credit facility, cash needs and debt structure, we have not experienced to date, and do not expect to experience, any material issues with liquidity, although we can give no assurances concerning our future liquidity, particularly in light of our overall level of debt, U.S. Government budget uncertainties (including the recent, or any potential successive, U.S. Government shutdown) and the state of global commerce and financial uncertainty.
We also currently believe that existing cash, funds generated from operations, our credit facility and access to the public and private debt and equity markets will be sufficient to provide for our anticipated working capital requirements, capital expenditures, dividend payments, repurchases under our share repurchase program and repayments of our term loan and debt securities at maturity for the next 12 months and the reasonably foreseeable future thereafter. Our total capital expenditures in fiscal 20182019 are expected to be approximately $130$170 million. We anticipate tax payments in fiscal 20182019 to be less than our tax expense for the same period, subject to adjustment for certain timing differences.period. Other than those cash outlays noted in “Contractual Obligations” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2017 Form 10-K (including repayment at maturity of the entire $500 million principal amount of our 1.999% Notes due April 27, 2018)2017-2018 Update 8-K and “Commercial Commitments and Contractual Obligations” below in this MD&A, capital expenditures, dividend payments, and repurchases under our share repurchase program no otherand payments associated with our pending merger with L3 (including transaction and integration costs), we do not anticipate any significant cash outlays are anticipated during the remainder of fiscal 2018.2019.
There can be no assurance, however, that our business will continue to generate cash flows at current levels or that the cost or availability of future borrowings, if any, under our commercial paper program or our credit facility or in the debt markets will not be impacted by any potential future credit or capital markets disruptions. If we are unable to maintain cash balances or generate sufficient cash flow from operations to service our obligations, we may be required to sell assets, reduce capital expenditures, reduce or eliminate strategic acquisitions, reduce or terminate our share repurchases, reduce or eliminate dividends, refinance all or a portion of our existing debt or obtain additional financing. Our ability to make principal payments or pay interest on or refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the defense, government and other markets we serve and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.
Net cash provided by operating activities: The $259$644 million decreaseincrease in net cash provided by operating activities in the first three quarters of fiscal 20182019 compared with the first three quarters of fiscal 20172018 was primarily due to a $158 million increase in pension contributions, including a $300 million voluntary contribution to our U.S. qualified pension plans during the third quarter of fiscal 2018, (see the “Fundingimpact of Pension Plans” discussion below in this MD&A for additional information), higher relative accounts receivable and inventory balances and the absence in fiscal 2018 of cash flows from discontinued operations that were included in the first three quarters of fiscal 2017, partially offset by lower net income, tax payments.a $115 million decrease in cash used to fund working capital, reflecting a reduction in accounts receivables despite higher revenue, and a $50 million decrease in cash used for matching contributions to defined contribution plans.
Net cash used in investing activities: The $352$23 million decreaseincrease in net cash used in investing activities in the first three quarters of fiscal 20182019 compared with the first three quarters of fiscal 20172018 was primarily due to the absence in fiscal 2018 of $375 million in proceeds from the sale of businesses that occurred in the third quarter of fiscal 2017, partially offset by a $25 million adjustmentincrease in the first quartercash used for additions of fiscal 2017 to the proceeds from the sale of Broadcast Communications.property, plant and equipment.
Net cash used in financing activities: The $746$526 million decreaseincrease in net cash used in financing activities in the first three quarters of fiscal 20182019 compared with the first three quarters of fiscal 20172018 was primarily due to $317$278 million moreof net repayments of borrowings in the first three quarters of fiscal 2019 compared with $185 million of net proceeds from borrowings $263in the first three quarters of fiscal 2018 and a $39 million lessincrease in cash used to repurchase shares of our common stock under our share repurchase program and $181 million less used to repay borrowings.
pay dividends.
Funding of Pension Plans
Funding requirements under applicable laws and regulations are a major consideration in making contributions to our U.S. pension plans. Although we have significant discretion in making voluntary contributions, the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and further amended by the Worker, Retiree, and Employer Recovery Act of 2008, the Moving Ahead for Progress in the 21st Century Act (“MAP-21”), and applicable Internal Revenue Code regulations mandate minimum funding thresholds. Failure to satisfy the minimum funding thresholds could result in restrictions on our ability to amend the plans or make benefit payments. With respect to our U.S. qualified defined benefit pension plans, we intend to contribute annually not less than the required minimum funding thresholds.
The Highway and Transportation Funding Act of 2014 and the Bipartisan Budget Act of 2015 further extended the interest rate stabilization provision of MAP-21 until 2020. We made voluntary contributions to our U.S. qualified defined benefit pension plans of $300 million and $400 million during the third quarter of fiscal 2018 and the fourth quarter of fiscal 2017, respectively. As a result, we anticipate making no contributions to our U.S. qualified defined benefit pension plans and minor contributions to our non-U.S. pension plan during the remainder of fiscal 2018.2019.
Future required contributions primarily will depend on the actual annual return on assets and the discount rate used to measure the benefit obligation at the end of each year. Depending on these factors, and the resulting funded status of our pension plans, the level of future statutory required minimum contributions could be material. We had net unfunded defined benefit plan obligations of $868$601 million at March 30, 2018.29, 2019. See Note 14: “Pension and Other Postretirement Benefits” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K2017-2018 Update 8-K and Note KJ — Postretirement Benefit Plansin the Notes for further information regarding our pension plans.
Common Stock Repurchases
During the first three quarters of fiscal 2019, we used $200 million to repurchase 1,219,750 shares of our common stock under our repurchase program at an average price per share of $163.99, including commissions of $.02 per share. During the
first three quarters of fiscal 2018, we used $197 million to repurchase 1,466,713 shares of our common stock under our repurchase program at an average price per share of $134.36, including commissions of $.01 per share. During the first three quarters of fiscal 2017, we used $460 million to repurchase 4,408,469 shares of our common stock under our repurchase program at an average price per share of $104.38, including the $350 million we paid on February 6, 2017 for 2,929,879 and 277,357 shares of our common stock we received in the third and fourth quarters of fiscal 2017, respectively, under a fixed-dollar accelerated share repurchase transaction agreement we entered into February 6, 2017. In the first three quarters of fiscal 20182019 and fiscal 2017, $102018, $24 million and $20$10 million, respectively, in shares of our common stock were delivered to us or withheld by us to satisfy withholding taxes on employee share-based awards. Shares purchased by us are cancelled and retired.
As of March 30, 2018,29, 2019, we had a remaining, unused authorization of approximately $776$501 million under our repurchase program, which does not have an expiration date. Repurchases under our repurchase program are expected to be funded with available cash and commercial paper and may be made through open market purchases, private transactions, transactions structured through investment banking institutions or any combination thereof. The level of our repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board of Directors may deem relevant. The timing, volume and nature of repurchases are subject to market conditions, applicable securities laws and other factors and are at our discretion and may be suspended or discontinued at any time. Pursuant to the Merger Agreement, we will not make repurchases of our common stock at least until after closing of the pending merger, without L3’s consent. Additional information regarding our repurchase program is set forth in this Report under Part II. Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds.”
Dividends
On August 25, 2017,2018, our Board of Directors increased the quarterly cash dividend rate on our common stock from $.53$.570 per share to $.57$.685 per share, for an annualized cash dividend rate of $2.28$2.740 per share, which was our sixteenthseventeenth consecutive annual increase in our quarterly cash dividend rate. Our annualized cash dividend rate in fiscal 20172018 was $2.12$2.280 per share. There can be no assurances that our annualized cash dividend rate will continue to increase. Quarterly cash dividends are typically paid in March, June, September and December. We currently expect that cash dividends will continue to be paid in the near future, but we can give no assurances concerning payment of future dividends. The declaration of dividends and the amount thereof will depend on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board of Directors may deem relevant.
Capital Structure and Resources
20152018 Credit Agreement: We have a $1 billion, 5-year senior unsecured revolving credit facility (the “2015“2018 Credit Facility”) under a Revolving Credit Agreement (the “2015“2018 Credit Agreement”) entered into on July 1, 2015June 26, 2018 with a syndicate of lenders. For a description of the 20152018 Credit Facility and the 20152018 Credit Agreement, see Note 11:12: “Credit Arrangements” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K.2017-2018 Update 8-K.
We were in compliance with the covenants in the 20152018 Credit Agreement at March 30, 2018,29, 2019, including the covenant requiring that we not permit our ratio of consolidated total indebtedness to total capital, each as defined in the 20152018 Credit
Agreement, to be greater than 0.65 to 1.00. At March 30, 2018,29, 2019, we had no borrowings outstanding under the 20152018 Credit Agreement.Agreement but we had $100 million in borrowings outstanding under our commercial paper program that was supported by the 2018 Credit Facility.
Long-Term Debt: For a description of our long-term variable-rate and fixed-rate debt, see Note J — Long-Term Debt
in the Notes and Note 13: “Long-Term Debt”“Debt” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K.2017-2018 Update 8-K.
During the second quarter of fiscal 2018, we completed the issuance and sale of $250 million in aggregate principal amount of Floating Rate Notes due April 30, 2020 and used the net proceeds, together with cash on hand, to repay in full the $253 million in remaining outstanding indebtedness under the 5-year tranche of our $1.3 billion senior unsecured term loan facility pursuant to our Term Loan Agreement, dated as of March 16, 2015.
During the third quarter of fiscal 2018, we completed the issuance and sale of $300 million in aggregate principal amount of Floating Rate Notes due February 27, 2019 and used the proceeds to make a voluntary contribution to our U.S. qualified pension plans.
Short-Term Debt: Our short-term debt at March 30, 201829, 2019 and June 30, 201729, 2018 was $5$103 million and $80$78 million, respectively. Our short-term debt at March 30,29, 2019 and June 29, 2018 consisted of commercial paper and local borrowing by international subsidiaries for working capital needs. Our short-term debt at June 30, 2017 consisted of local borrowing by international subsidiaries for working capital needs and commercial paper. Our commercial paper program was supported at March 30, 201829, 2019 and June 30, 201729, 2018 by the 20152018 Credit Facility.
Other Agreements: We have a 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 and which we account for as sales of receivables with sale proceeds included in net cash from operating activities. The impact to net cash from operating activities from these transactions was not material in the first three quarters of fiscal 20182019 and 2017.2018.
Off-Balance Sheet Arrangements
In accordance with the definition under SEC rules, any of the following qualify as off-balance sheet arrangements:
Any obligation under certain guarantee contracts;
A retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;
Any obligation, including a contingent obligation, under certain derivative instruments; and
Any obligation, including a contingent obligation, under a material variable interest in an unconsolidated entity that is held by, and material to, the registrant, where such entity provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and developmentR&D services with the registrant.
As of March 30, 2018,29, 2019, we were not participating in any material transactions that generated relationships with unconsolidated entities or financial partnerships, including variable interest entities, and we did not have any material retained or contingent interest in assets as defined above. As of March 30, 2018,29, 2019, we did not have material financial guarantees or other contractual commitments that we believe are reasonably likely to adversely affect our financial position,condition, results of operations or cash flows, and we were not a party to any related party transactions that materially affect our financial position,condition, results of operations or cash flows.
We have, from time to time, divested certain of our businesses and assets. In connection with these divestitures, we often provide representations, warranties and/or indemnities to cover various risks and unknown liabilities, such as environmental liabilities and tax liabilities. We cannot estimate the potential liability from such representations, warranties and indemnities because they relate to unknown conditions. We do not believe, however, that the liabilities relating to these representations, warranties and indemnities will have a material adverse effect on our financial position,condition, results of operations or cash flows.
Due to our downsizing of certain operations pursuant to acquisitions, divestitures, restructuring plans or otherwise, certain properties leased by us have been sublet to third parties. In the event any of these third parties vacates any of these premises, we would be legally obligated under master lease arrangements. We believe that the financial risk of default by such sublessees is individually and in the aggregate not material to our financial position,condition, results of operations or cash flows.
Commercial Commitments and Contractual Obligations
The amounts disclosed in our Fiscal 2017 Form 10-K2017-2018 Update 8-K include our contractual obligations and commercial commitments. Except for changes in our long-termshort-term debt as described under “Capital Structure and Resources” in this MD&A and the repayment at maturity of the entire $300 million principal amount of our Floating Rate Notes due February 27, 2019, no material changes occurred during the first three quarters of fiscal 20182019 in our contractual cash obligations to repay debt, to purchase goods and services, to make payments under operating leases or our commercial commitments, or in our contingent liabilities on outstanding surety bonds, standby letters of credit or other arrangements as disclosed in our Fiscal 2017 Form 10-K.2017-2018 Update 8-K.
In connection with the Merger Agreement and the transactions contemplated thereby, we have a contractual obligation to issue 1.30 shares of our common stock for each share of L3 common stock outstanding at closing of the pending merger, and we expect to incur other expenses, such as transaction costs, other payments required as a result of the merger and integration and post-closing restructuring costs. See Note S — Pending Merger in the Notes for further information. In addition, we may have obligations under other contractual arrangements that are accelerated or otherwise impacted as a result of the merger.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Condensed Consolidated Financial Statements (Unaudited) and accompanying Notes are prepared in accordance with GAAP. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and expensesbacklog as well as disclosures of contingent assets and liabilities. Actual results may differ from our estimates. These estimates and assumptions are affected by the application of our accounting policies. Our significantEffective June 30, 2018, we adopted ASC 606, a new revenue recognition standard under which revenue is recognized as control transfers to the customer. 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. Under ASC 606, revenue for our contracts is generally recognized over time using the cost-to-cost method, which is consistent with the revenue recognition model we used for the majority of our contracts prior to the adoption of this standard. In most cases, the accounting policiesfor contracts where we previously recognized revenue as units were delivered has changed under ASC 606 such that we now recognize revenue as costs are describedincurred. In addition, for certain of our contracts, there is a change in the number of performance obligations under ASC 606, which has altered the timing of revenue and margin recognition. Refer to Note 1:1 — “Significant Accounting Policies” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K.2017-2018 Update 8-K for a description of our updated revenue recognition accounting policies and other significant accounting policies updated in connection with our adoption of ASC 606, as well as for all other significant accounting policies. Critical accounting policies and estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies and estimates for us include: (i) revenue recognition on contracts and contract estimates (discussed in greater detail in the following paragraphs), (ii) postretirement benefit plans, (iii) provisions for excess and obsolete inventory losses, (iv) impairment testing of goodwill, and (v) income taxes and tax valuation allowances. For additional discussion of our critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2017 Form 10-K.2017-2018 Update 8-K.
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 recognized over time, typically using the POC cost-to-cost method generallyof revenue recognition, whereby we measure our progress toward completion of performance obligations based on the ratio of costs incurred to date to estimated total costs at completion under the contract. Because costs incurred represent work performed, we believe this method best depicts the transfer of control to the customer. We determine the transaction price for each contract (i.e., the “cost-to-cost” method) or the ratio of actual units delivered to estimated total units to be delivered under the contract (i.e., the “units-of-delivery” method) with consideration given for risk of performance and estimated profit. The majoritybased on our best estimate of the consideration we expect to receive, and this includes assumptions regarding variable consideration, such as award and incentive fees. 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 in our Space and Intelligence Systems and Electronic Systems segments (and to a certain extent, revenue in our Communication Systems segment) relates to development and production contracts, andrecognized will not occur when the uncertainty associated with the variable consideration is resolved.
Under the POC cost-to-cost method of revenue recognition, is primarily used for these contracts. Change orders, claims or other items that may change the scope of a development or production contract are included in contract value only when the value can be reliably estimated and realization is probable. Possible incentives or penalties and award fees applicable to performance on development and production contracts are considered in estimating contract value and profit rates and are recorded when there is sufficient information to assess anticipated contract performance. Incentive provisions that increase earnings based solely on a single significant event are generally not recognized until the event occurs. We are party to certain contracts with incentive provisions or award fees that are subject to uncertainty until the conclusion of the contract, and our customers may be entitled to reclaim and receive previous award fee payments.
Under the POC method of accounting, a single estimated total profit margin is used to recognize profit for each development and production contractperformance obligation over its period of performance. Recognition of profit on fixed-price development and production contractsa contract requires estimates of the total cost at completion and transaction price and the measurement of progress toward completion. The estimated profit or loss on a development or production contract is equal to the difference between the estimated contract value and the estimated total cost attowards completion. Due to the long-term nature of many of our programs,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 includeinclude: 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 availabilityincentives (such as incentive fees, award fees and timingpenalties) and other forms of funding fromvariable consideration as well as our historical experience and expectation for performance on the customer and the recoverability of any claims outside the original development or production contract included in the estimate to complete.contract. At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at completion in line with these expectations. After establishing the estimated total cost at completion, we follow a standard estimate at completion (“EAC”)EAC process in which we review the progress and performance on our ongoing development and production 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, atas the outset of a cost-reimbursable contract (for example, contracts containing award or incentive fees), we establish an estimate of total contract value, or revenue, based on our expectation of performance on the contract. As the cost-reimbursable contract progresses, our estimates of total contract valuetransaction price may increase or decrease if, for example, we receive award fees that are higher or lower than expected award fees.expected. When adjustments in estimated total costs at completion or in estimated total contract valuetransaction price are determined, the related impact toon 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. AnticipatedAny anticipated losses on development and productionthese contracts or programs in progress are charged to operating income when identified. We have not made any material changesfully recognized in the methodologies used to recognize revenue on development and production contracts or to estimate our costs related to development and production contractsperiod in which the past three fiscal years.losses become evident.
EAC adjustments had the following impacts to operating income for the periods presented:
| | | Quarter Ended | | Three Quarters Ended | Quarter Ended | | Three Quarters Ended |
| March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 | March 29, 2019 | | March 30, 2018 | | March 29, 2019 | | March 30, 2018 |
| | | | | | | | | | | | | | |
| (In millions) | (In millions) |
Favorable adjustments | $ | 26 |
| | $ | 26 |
| | $ | 90 |
| | $ | 90 |
| $ | 32 |
| | $ | 26 |
| | $ | 100 |
| | $ | 90 |
|
Unfavorable adjustments | (21 | ) | | (15 | ) | | (84 | ) | | (60 | ) | (26 | ) | | (30 | ) | | (95 | ) | | (105 | ) |
Net operating income adjustments | $ | 5 |
| | $ | 11 |
| | $ | 6 |
| | $ | 30 |
| $ | 6 |
| | $ | (4 | ) | | $ | 5 |
| | $ | (15 | ) |
Third Quarter 20182019 Compared With Third Quarter 2017: 2018: The reduction in benefitnet favorable impact to operating income from EAC adjustments in the third quarter of fiscal 2019 compared to the net unfavorable impact to operating income from EAC adjustments in the third quarter of fiscal 2018 compared with the third quarter quarter of fiscal 2017 was primarily due to lower net risk retirements.higher cost efficiencies realized in the third quarter of fiscal 2019 and the conclusion of certain Mission Networks programs that realized cost growth in third quarter of fiscal 2018, partially offset by a $12 million unfavorable adjustment in the third quarter of fiscal 2019 from a reduction in estimated transaction price for a fixed-price infrastructure development contract.
First Three Quarters 20182019 Compared With First Three Quarters 2017: 2018: The reduction in benefitnet favorable impact to operating income from EAC adjustments in the first three quarters of fiscal 2019 compared to the net unfavorable impact to operating income from EAC adjustments in the first three quarters of fiscal 2018 compared withwas primarily due to the conclusion of certain Mission Networks programs that realized cost growth in first three quarters of fiscal 2017 was primarily due to2018, partially offset by a $15$12 million unfavorable adjustment in the third quarter of fiscal 2019 from a reduction in estimated transaction price for growth in EAC costs on a mission networksfixed-price infrastructure development program.contract.
We also recognize revenue from arrangements requiringcontracts with multiple performance obligations. For these contracts, we allocate the delivery ortransaction price to each performance of multiple deliverables or elements under a bundled sale. In these arrangements, judgment is required to determine the appropriate accounting, including whether the individual deliverables represent separate units of accounting for revenue recognition purposes, and the timing of revenue recognition for each deliverable. If we determine that individual deliverables represent separate units of accounting, we recognize the revenue associated with each unit of accounting separately, and contract revenue is allocated among the separate units of accounting at the inception of the arrangementobligation based on the relative standalone selling price. If options or change orders materially change the scope of work or price of the contract subsequentgood or service underlying each performance obligation. The standalone selling price represents the amount for which we would sell the good or service to inception, we reevaluate and adjust our prior conclusions regarding units of accounting and allocation of contract revenuea customer on a standalone basis (i.e., not sold as necessary.bundled sale with any other products or services). The allocation of sellingtransaction price among the separate units of accountingperformance obligations may impact the timing of revenue recognition but will not change the total revenue recognized on the arrangement. We establishcontract. Our contracts with the U.S. Government, including foreign military sales contracts, are subject to the Federal Acquisition Regulations and the prices of our contract deliverables are typically based on our estimated or actual costs plus a reasonable profit margin. As a result, the standalone selling prices of the goods and services in these contracts are typically equal to the selling prices stated in the contract, thereby eliminating the need to allocate (or reallocate) the transaction price usedto the multiple performance obligations. In our non-U.S. Government contracts, we also generally use the expected cost plus a margin approach to determine standalone selling price. In addition, we determine standalone selling price for each deliverablecertain contracts that are commercial in nature based on observable selling prices. In determining the vendor-specificappropriate 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 (“VSOE”) of selling price, or third-party evidence (“TPE”) of selling price if VSOE of selling price is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE of selling price is available. In determining VSOE of selling price, a substantial majorityWe may also consider our cost structure and pricing objectives, the nature of the recent standalone salesproposal, the effects of customization of pricing, our practices used to establish pricing of bundled products, the expected technological life of the deliverable must be priced within a relatively narrow range. In determining TPE of selling price, we evaluate competitor prices forproduct, margins earned on similar deliverables when sold separately. Generally, comparable pricing of our productscontracts with different customers and other factors to those of our competitors with similar functionality cannot be obtained. In determining BESP, we consider both market data and entity-specific factors, including market conditions,determine the geographies in which our products are sold, our competitive position and strategy, and our profit objectives.
The FASB has issued a comprehensive new revenue recognition standard that supersedes nearly all existing revenue recognition guidance under GAAP and will be effective for us in fiscal 2019. See Note A — Significant Accounting Policies and Recent Accounting Standards in the Notes for additional information.appropriate margin.
Impact of Recently Issued Accounting Standards
Accounting standards that have been recently issued, but are not yet effective for us, are described in Note A — Significant Accounting Policies and Recent Accounting Standardsin the Notes, which describes the potential impact that these standards are expected to have on our financial position,condition, results of operations and cash flows.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that may not materialize or prove to be correct, which could cause our results to differ materially from those expressed in or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements concerning: our plans, strategies and objectives for future operations; new products, systems, technologies, services or developments; future economic conditions, performance or outlook; future political conditions; the outcome of contingencies; the potential level of share repurchases, dividends or pension contributions; potential acquisitions or divestitures; the value of contract awards and programs; expected cash flows or capital expenditures; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects” and similar words or expressions. You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of filing of this Report and are not guarantees of future performance or actual results. Forward-looking statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The following are some of the factors we believe could cause our actual results to differ materially from our historical results or our current expectations or projections:
We depend on U.S. Government customers for a significant portion of our revenue, and the loss of these relationships, a reduction in U.S. Government funding or a change in U.S. Government spending priorities could have an adverse impact on our business, financial condition, results of operations and cash flows.
We depend significantly on U.S. Government contracts, which often are only partially funded, subject to immediate termination, and heavily regulated and audited. The termination or failure to fund, or negative audit findings for, one or more of these contracts could have an adverse impact on our business, financial condition, results of operations and cash flows.
We could be negatively impacted by a security breach, through cyber attack, cyber intrusion, insider threats or otherwise, or other significant disruption of our IT networks and related systems or of those we operate for certain of our customers.
The U.S. Government’s budget deficit, the national debt and sequestration, as well as any inability of the U.S. Government’s inabilityGovernment to complete its budget process for any government fiscal year and consequently having to operate on funding levels equivalent to its prior fiscal year pursuant to a “continuing resolution” or shut down, could have an adverse impact on our business, financial condition, results of operations and cash flows.
The level of returns on defined benefit plan assets, changes in interest rates and other factors could affect our earningsfinancial condition, results of operations and cash flows in future periods.
We enter into fixed-price contracts that could subject us to losses in the event of cost overruns or a significant increase in inflation.
We use estimates in accounting for many of our programs, and changes in our estimates could adversely affect our future financial results.
We derive a significant portion of our revenue from international operations and are subject to the risks of doing business internationally, including fluctuations in currency exchange rates.
Our reputation and ability to do business may be impacted by the improper conduct of our employees, agents or business partners.
We may not be successful in obtaining the necessary export licenses to conduct certain operations abroad, and Congress may prevent proposed sales to certain foreign governments.
Our future success will depend on our ability to develop new products, systems, services and technologies that achieve market acceptance in our current and future markets.
We participate in markets that are often subject to uncertain economic conditions, which makes it difficult to estimate growth in our markets and, as a result, future income and expenditures.
We cannot predict the consequences of future geo-political events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our profitability.
We have made, and may continue to make, strategicStrategic transactions, including acquisitions and divestitures, that involve significant risks and uncertainties.uncertainties that could adversely affect our business, financial condition, results of operations and cash flows.
Disputes with our subcontractors andor the inability of our subcontractors to perform, or our key suppliers to timely deliver our components, parts or services, could cause our products, systems or services to be produced or delivered in an untimely or unsatisfactory manner.
Third parties have claimed in the past and may claim in the future that we are infringing directly or indirectly upon their intellectual property rights, and third parties may infringe upon our intellectual property rights.
The outcome of litigation or arbitration in which we are involved from time to time is unpredictable, and an adverse decision in any such matter could have a material adverse effect on our financial condition, results of operations and cash flows.
We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or indemnity.
Changes in our effective tax rate may have an adverse effect on our results of operations.
Our level of indebtedness and our ability to make payments on or service our indebtedness and our unfunded defined benefit plans liability may adversely affect our financial and operating activities or our ability to incur additional debt.
A downgrade in our credit ratings could materially adversely affect our business.
Unforeseen environmental issues could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We have significant operations in locations that could be materially and adversely impacted in the event of a natural disaster or other significant disruption.
Changes in future business or other market conditions could cause business investments and/or recorded goodwill or other long-term assets to become impaired, resulting in substantial losses and write-downs that would adversely affect our results of operations.
Some of our workforce is represented by labor unions, so our business could be harmed in the event of a prolonged work stoppage.
We must attract and retain key employees, and any failure to do so could seriously harm us.
We may be responsible for U.S. Federal income tax liabilities that relate to the spin-off of Vectrus, Inc. (“Vectrus”) completed by Exelis.
In connection with the Vectrus spin-off, Vectrus indemnified Exelis for certain liabilities and Exelis indemnified Vectrus for certain liabilities. This indemnity may not be sufficient to insure us against the full amount of the liabilities assumed by Vectrus and Vectrus may be unable to satisfy its indemnification obligations to us in the future.
The Vectrus spin-off may expose us to potential liabilities arising out of state and Federal fraudulent conveyance laws and legal distribution requirements.
The ITT Corporation (“ITT”) spin-off of Exelis may expose us to potential liabilities arising out of state and Federal fraudulent conveyance laws and legal distribution requirements.
If we are required to indemnify ITT or Xylem, Inc. in connection with the ITT spin-off of Exelis, we may need to divert cash to meet those obligations and our financial results could be negatively impacted.
Additional details and discussions concerning some of the factors that could affect our forward-looking statements or future results are set forth in our Fiscal 20172018 Form 10-K under Item 1A. “Risk Factors” and in Part II. Item 1A. “Risk Factors” in this Report. The foregoing list of factors and the factors set forth in Item 1A. “Risk Factors” included in our Fiscal 20172018 Form 10-K and in Part II. Item 1A. “Risk Factors” in this Report are not exhaustive. Additional risks and uncertainties not known to us or that we currently believe not to be material also may adversely impact our business, financial condition, results of operations and cash flows. Should any risks or uncertainties develop into actual events, these developments could have a material adverse effect on our business, financial condition, results of operations and cash flows. The forward-looking statements contained in this Report are made as of the date of filing of this Report, and we disclaim any intention or obligation, other than imposed by law, to update or revise any forward-looking statements or to update the reasons actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or developments or otherwise. For further information concerning risk factors, see Part II. Item 1A. “Risk Factors” in this Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
In the normal course of business, we are exposed to risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks.
Foreign Exchange and Currency: We use foreign currency forward contracts and options to hedge both balance sheet and off-balance sheet future foreign currency commitments. Factors that could impact the effectiveness of our hedging programs for foreign currency include accuracy of sales estimates, volatility of currency markets (particularly with respect to the United Kingdom due to Brexit) and the cost and availability of hedging instruments. A 10 percent change in currency exchange rates for our foreign currency derivatives held at March 30, 201829, 2019 would not have had a material impact on the fair value of such instruments or our results of operations or cash flows. This quantification of exposure to the market risk associated with foreign currency financial instruments does not take into account the offsetting impact of changes in the fair value of our foreign denominated assets, liabilities and firm commitments. See Note ON — Derivative Instruments and Hedging Activities in the Notes for additional information.
Interest Rates: As of At March 30, 2018,29, 2019, we had long-term fixed-rate debt obligations. The fair value of these obligations is impacted by changes in interest rates; however, a 10 percent change in interest rates for our long-term fixed-rate debt
obligations at March 30, 201829, 2019 would not have had a material impact on the fair value of these obligations. Additionally, there is no interest-rate risk associated with these obligations on our results of operations or cash flows, because the interest rates are fixed and because our long-term fixed-rate debt is not putable to us (i.e., not required to be redeemed by us prior to maturity). We can give no assurances, however, that interest rates will not change significantly or have a material effect on the fair value of our long-term debt obligations over the next twelve months.
As ofAt March 30, 2018,29, 2019, we also had long-term variable-rate debt obligations of $570$250 million, comprised of $250 million of Floating Rate Notes due April 30, 2020, $300 million of Floating Rate Notes due February 27, 2019 and $20 million of the 3-year tranche of our senior unsecured term loan facility due May 29, 2018.2020. These debt obligations bear interest that is variable based on certain short-term indices, thus exposing us to interest-rate risk; however, a 10 percent change in interest rates for these debt obligations at March 30, 2018 29, 2019
would not have had a material impact on our results of operations or cash flows. See Note J — Long-Term Debtin the Notesand Note 13: “Long-Term Debt”“Debt” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K2017-2018 Update 8-K for further information.
We utilize derivative instruments, from time to time, to mitigate interest rate risk associated with anticipated debt transactions. If the derivative instrument is designated as a cash flow hedge, gains and losses from changes in the fair value of such instrument are deferred and included as a component of accumulated other comprehensive income and reclassified to interest expense in the period in which the hedged transaction affects earnings.
At March 29, 2019, we had an outstanding yield-based treasury lock agreement with a notional amount of $400 million to hedge our exposure to fluctuations in the 10-year U.S. Treasury rate associated with our anticipated issuance of long-term notes to redeem or repay at maturity the entire $400 million outstanding principal amount of our 2.7% Notes due April 27, 2020. An unrealized after-tax loss of $8 million associated with this treasury lock was deferred in accumulated other comprehensive income at March 29, 2019. A 10 percent change in the 10-year U.S. Treasury rate would not have had a material impact on the fair value of this treasury lock agreement or our results of operations or cash flows. See Note N — Derivative Instruments and Hedging Activities in the Notes for additional information.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures: We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15 under the Exchange Act, as of the end of the third quarter of fiscal 2018,2019, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based on this work and other evaluation procedures, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that as of the end of the third quarter of fiscal 20182019 our disclosure controls and procedures were effective.
(b) Changes in Internal Control: We periodically review our internal control over financial reporting as part of our efforts to ensure compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we routinely review our system of internal control over financial reporting to identify potential changes to our processes and systems that may improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating the activities of business units, migrating certain processes to our shared services organizations, formalizing policies and procedures, improving segregation of duties and increasing monitoring controls. In addition, when we acquire new businesses, we incorporate our controls and procedures into the acquired business as part of our integration activities. We are continuing our implementation of a new income tax provision software designed to enhance process stability and further facilitate the computation and recording of tax provisions for our U.S. and international entities. We are also have beguncontinuing the process of a multi-year, phased implementation targeted for completion in fiscal 2020 of a new core enterprise resource planning (“ERP”) system in certain business units, which we expect to reduce the number of ERP systems across the Company and enhance our system of internal control over financial reporting. We expect the initial implementation of the new core ERP system in each affected business unit to involve changes to related processes that are part of our system of internal control over financial reporting and to require testing for effectiveness and potential further changes as implementation progresses. During the first quarter of fiscal 2018, we successfully completed the initial implementation of the new core ERP system in 2two business units and during the first quarter of fiscal 2019, we completed the implementation of the new core ERP system in two additional business units. ThereOther than the system and related process changes described above, there have been no changes in our internal control over financial reporting that occurred during the third quarter of fiscal 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
General. From time to time, as a normal incident of the nature and kind of businesses in which we are or were engaged, various claims or charges are asserted and litigation or arbitration is commenced by or against us arising from or related to matters, including, but not limited to: product liability; personal injury; patents, trademarks, trade secrets or other intellectual property; labor and employee disputes; commercial or contractual disputes; strategic acquisitions or divestitures; the prior sale or use of former products allegedly containing asbestos or other restricted materials; breach of warranty; or environmental matters. Claimed amounts against us may be substantial, but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitral awards. We record accruals for losses related to those matters against us that we consider to be probable and that can be reasonably estimated. Gain contingencies, if any, are recognized when they are realized and legal costs generally are expensed when incurred. At March 30, 2018,29, 2019, our accrual for the potential resolution of lawsuits, claims or proceedings that we consider probable of being decided unfavorably to us was not material. Although it is not feasible to predict the outcome of these matters with certainty, it is reasonably possible that some lawsuits, claims or proceedings may be disposed of or decided unfavorably to us and in excess of the amounts currently accrued. Based on available information, in the opinion of management, settlements, arbitration awards and final judgments, if any, that are considered probable of being rendered against us in litigation or arbitration in existence at March 30, 201829, 2019 are reserved against or would not have a material adverse effect on our financial condition, results of operations or cash flows.
Merger Litigation. As described in Note R — Legal Proceedings and Contingencies in the Notes, in connection with our pending merger with L3 (see Note S — Pending Merger in the Notes for additional information), two putative class action lawsuits and one individual lawsuit were filed against the L3 Parties in the U.S. District Court for the Southern District of New York between December 19, 2018 and January 15, 2019, and a third putative class action lawsuit, Kent v. L3 Technologies, Inc., et al., was filed against the L3 Parties and the Harris Parties in the U.S. District Court for the District of Delaware on January 4, 2019. The complaints in the lawsuits contained substantially similar allegations contending, among other things, that the registration statement on Form S-4 in support of the pending merger misstated or failed to disclose certain allegedly material information in violation of federal securities laws. The complaint in the Kent lawsuit further alleged that the Harris Parties were liable for these violations as “controlling persons” of L3 within the meaning of federal securities laws. On March 12, 2019, the parties to the actions entered into an agreement to settle all claims that were or could have been alleged in the action subject to, among other things, the supplementation by L3 of certain disclosures contained in the registration statement, which were reflected in a Current Report on Form 8-K filed by L3 with the SEC on March 13, 2019, and the dismissal of the four lawsuits, all of which were dismissed by March 18, 2019.
Tax Audits. Our tax filings are subject to audit by taxing authorities in jurisdictions where we conduct or conducted business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or ultimately through legal proceedings. We believe we have adequately accrued for any ultimate amounts that are likely to result from these audits; however, final assessments, if any, could be different from the amounts recorded in our Condensed Consolidated Financial Statements (Unaudited).
Item 1A. Risk Factors.
Investors should carefully review and consider the information regarding certain factors that could materially affect our business, results of operations, financial condition and cash flows as set forth under Item 1A. “Risk Factors” in our Fiscal 20172018 Form 10-K. Other than the updated risk factorExcept as set forth below in this Item 1A. “Risk Factors,” we do not believe that there have been any material changes to the risk factors previously disclosed in our Fiscal 20172018 Form 10-K. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently believe not to be material also may adversely impact our business, financial condition, results of operations and cash flows.
We couldIn addition to the risk factors previously disclosed in our Fiscal 2018 Form 10-K, the following are risks related to our pending all-stock merger of equals with L3, which is discussed in Note S — Pending Merger in the Notes:
Because the exchange ratio is fixed and will not be negatively impactedadjusted in the event of any change in either our or L3’s stock price, the value of the shares of the combined company is uncertain.
The market price for shares of common stock of the combined company following the completion of the merger may be affected by a security breach, through cyber attack, cyber intrusionfactors different from, or otherwise,in addition to, those that historically have affected or other significant disruptioncurrently affect the market prices of shares of our IT networkscommon stock and related systemsL3 common stock.
The shares of common stock of the combined company to be received by L3 stockholders as a result of the merger will have rights different from the shares of L3 common stock.
Our stockholders and L3 stockholders will each have reduced ownership and voting interest in and will exercise less influence over management of the combined company.
Until the completion of the merger or the termination of thosethe merger agreement in accordance with its terms, we operate forand L3 are each prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to us or L3 and our respective stockholders.
Obtaining required approvals and satisfying closing conditions may prevent or delay completion of our customers.the merger.
We faceand L3 must obtain certain regulatory approvals and clearances to consummate the risk, as does any company,merger, which, if delayed, not granted or granted with unacceptable conditions, could prevent, substantially delay or impair consummation of a security breach, whether through cyber attackthe merger, result in additional expenditures of money and resources or cyber intrusion overreduce the Internet, malware, computer viruses, attachmentsanticipated benefits of the merger.
Failure to e-mails, persons insideattract, motivate and retain executives and other key employees could diminish the anticipated benefits of the merger.
The merger, including uncertainty regarding the merger, may cause customers, suppliers or strategic partners to delay or defer decisions concerning us and L3 and adversely affect each company’s ability to effectively manage their respective businesses.
The opinions rendered to us and L3 from our organizationrespective financial advisors will not reflect changes in circumstances between the dates of such opinions and the completion of the merger.
Whether or not the merger is completed, the announcement and pendency of the merger could cause disruptions in the businesses of us and L3, which could have an adverse effect on our respective businesses and financial results.
The merger agreement may be terminated in accordance with accessits terms and the merger may not be consummated.
The termination of the merger agreement could negatively impact us or L3.
The directors and executive officers of us and L3 have interests and arrangements that may be different from, or in addition to, systems inside our organization, or other significant disruption of our IT networks and related systems or those of our suppliersand L3 stockholders generally.
We or subcontractors. We face an added risk of a security breachL3 may waive one or other significant disruptionmore of the IT networksclosing conditions without re-soliciting stockholder approval.
The merger agreement contains provisions that could discourage a potential competing acquirer that might be willing to pay more to acquire or merge with either us or L3.
We and related systems that we develop, install, operateL3 each will incur significant transaction, merger-related and maintain for certain of our customers, which may involve managingrestructuring costs in connection with the merger.
Our stockholders and protecting information relatingL3 stockholders will not be entitled to national security and other sensitive government functions or personally identifiable or protected health information. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, is persistent and substantial as the volume, intensity and sophistication of attempted attacks and intrusions from around the world remain elevated and unlikely to diminish. As an advanced technology-based solutions provider, and particularly as a government contractor, we face a heightened risk of a security breach or disruption from threats to gain unauthorized access to our and our customers’ proprietary or classified information on our IT networks and related systems and to the IT networks and related systems that we operate and maintain for certain of our customers. These types of information and IT networks and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our customers. We make significant efforts to maintain the security and integrity of these types of information and IT networks and related systems and have implemented various measures to manage the risk of a security breach or disruption. Our efforts and measures have not been entirely effectiveappraisal rights in the casemerger.
Litigation filed against the L3 Parties and the Harris Parties could prevent or delay the consummation of every cyber security incident, but no incident has had a material negative impact on us to date. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber attacks and intrusions,merger or disruptions will occurresult in the payment of damages following completion of the merger.
The failure to successfully combine the businesses of us and L3 may adversely affect the combined company’s future and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact,results.
The combined company may not be detected. In some cases,able to retain customers or suppliers or customers or suppliers may seek to modify contractual obligations with the resources of foreign governmentscombined company, which could have an adverse effect on the combined company’s business and operations.
The combined company may be behind such attacks dueexposed to increased litigation, which could have an adverse effect on the combined company’s business and operations.
Combining the businesses of us and L3 may be more difficult, costly or time-consuming than expected and the combined company may fail to realize the anticipated benefits of the merger, which may adversely affect the combined company’s business results and negatively affect the value of the common stock of the combined company following the merger.
The failure to integrate successfully the businesses and operations of us and L3 in the expected time frame may adversely affect the combined company’s future results.
Our and L3’s unaudited prospective financial information is inherently subject to uncertainties, the unaudited pro forma financial data included in our Form S-4 registration statement related to the nature of our business
proposed merger is preliminary and the industriescombined company’s actual financial position and results of operations after the merger may differ materially from those estimates and the unaudited pro forma financial data included in which we operate. Accordingly, wesuch registration statement. Specifically, the unaudited pro forma combined financial data does not reflect the effect of any divestitures that may be required in connection with the merger.
The revenue of the combined company will depend on our and L3’s ability to maintain certain levels of government business. The loss of contracts with U.S. and non-U.S. government agencies could adversely affect the combined company’s revenue.
Third parties may terminate or alter existing contracts or relationships with us or L3.
The combined company may be unable to anticipate these techniques orretain our and L3 personnel successfully after the merger is completed.
The combined company’s debt may limit its financial flexibility.
Declaration, payment and amounts of dividends, if any, distributed to implement adequate security barriers or other preventative measures. Thus, it is impossible for us to entirely mitigate this risk, and there canstockholders of the combined company will be no assurance that future cyber security incidents will not have a material negative impact on us. A security breach or other significant disruption involving these types of information and IT networks and related systems could:uncertain.
Disrupt the proper functioning of these networks and systems and, therefore, our operations and/or those of certain of our customers;
ResultThese risks are discussed more fully in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours, our customers or our employees, including trade secrets,registration statement on Form S-4 we filed with the SEC on December 14, 2018, which could be used to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
Compromise national security and other sensitive government functions;
Require significant management attention and resources to remedy the damages that result;
Subject us to claims for contract breach, damages, credits, penalties or termination; and
Damage our reputation with our customers (particularly agencies of the U.S. Government) and the public generally.
Any or all of the foregoing could have a negative impactSEC declared effective on our business, financial condition, results of operations and cash flows.February 20, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
During the third quarter of fiscal 2018,2019, we repurchased 312,902did not repurchase any shares of our common stock under our repurchase program for $47 million at an average price per share of $150.07.program. The level of our repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board of Directors may deem relevant. The timing, volume and nature of repurchases are subject to market conditions, applicable securities laws and other factors and are at our discretion and may be suspended or discontinued at any time. Shares repurchased by us are cancelled and retired. The following table sets forth information with respect to repurchases by us of our common stock during the third quarter of fiscal 2018:2019:
| | Period* | Period* | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (1) | | Maximum approximate dollar value of shares that may yet be purchased under the plans or programs (1) | Period* | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (1) | | Maximum approximate dollar value of shares that may yet be purchased under the plans or programs (1) |
Month No. 1 | Month No. 1 | | | | | | | | Month No. 1 | | | | | | | |
(December 30, 2017-January 26, 2018) | | | | | | | | |
(December 29, 2018-January 25, 2019) | | (December 29, 2018-January 25, 2019) | | | | | | | |
Repurchase program(1) | Repurchase program(1) | — |
| | $ | — |
| | — |
| | $ | 823,299,184 |
| Repurchase program(1) | — |
| | — |
| | — |
| | $ | 501,279,637 |
|
Employee transactions(2) | Employee transactions(2) | 9,501 |
| | $ | 145.50 |
| | — |
| | — |
| Employee transactions(2) | 9,802 |
| | $ | 139.56 |
| | — |
| | — |
|
Month No. 2 | Month No. 2 | | | | | | | | Month No. 2 | | | | | | | |
(January 27, 2018-February 23, 2018) | | | | | | | | |
(January 26, 2019-February 22, 2019) | | (January 26, 2019-February 22, 2019) | | | | | | | |
Repurchase program(1) | Repurchase program(1) | 312,902 |
| | $ | 150.07 |
| | 312,902 |
| | $ | 776,343,512 |
| Repurchase program(1) | — |
| | — |
| | — |
| | $ | 501,279,637 |
|
Employee transactions(2) | Employee transactions(2) | 4,561 |
| | $ | 158.65 |
| | — |
| | — |
| Employee transactions(2) | 1,218 |
| | $ | 157.64 |
| | — |
| | — |
|
Month No. 3 | Month No. 3 | | | | | | | | Month No. 3 | | | | | | | |
(February 24, 2018-March 30, 2018) | | | | | | | | |
(February 23, 2019-March 29, 2019) | | (February 23, 2019-March 29, 2019) | | | | | | | |
Repurchase program(1) | Repurchase program(1) | — |
| | $ | — |
| | — |
| | $ | 776,343,512 |
| Repurchase program(1) | — |
| | — |
| | — |
| | $ | 501,279,637 |
|
Employee transactions(2) | Employee transactions(2) | 1,805 |
| | $ | 158.28 |
| | — |
| | — |
| Employee transactions(2) | 29,995 |
| | $ | 160.51 |
| | — |
| | — |
|
Total | Total | 328,769 |
| | | | 312,902 |
| | $ | 776,343,512 |
| Total | 41,015 |
| | | | — |
| | $ | 501,279,637 |
|
| | | | | | | | | | | | | | | | |
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits.
The following exhibits are filed herewith or incorporated by reference to exhibits previously filed with the SEC:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.