Note G — Inventories

Inventories are summarized below:



	March 29, 2019		June 29, 2018

	(In millions)
Finished products	$	89	$	91
Work in process	113		121
Raw materials and supplies	231		199
	433		$	411

March 30, 2018 June 30, 2017

(In millions)
Unbilled costs and accrued earnings on fixed-price contracts $ 544
$ 454
Finished products 101
96
Work in process 113
96
Raw materials and supplies 205
195
$ 963
$ 841

~~Unbilled costs and accrued earnings on fixed-price contracts were net of progress payments of $89 million and $90 million at March 30, 2018 and June 30, 2017, respectively.~~

Note H — Property, Plant and Equipment

Property, plant and equipment are summarized below:



	March 29, 2019			June 29, 2018

	(In millions)
Land	$	43		$	43
Software capitalized for internal use	182			171
Buildings	630			620
Machinery and equipment	1,425			1,349
	2,280			2,183
Less accumulated depreciation and amortization	(1,376		)	(1,283		)
	$	904		$	900

March 30, 2018 June 30, 2017

(In millions)
Land $ 43
$ 43
Software capitalized for internal use 168
155
Buildings 617
617
Machinery and equipment 1,311
1,256
2,139
2,071
Less accumulated depreciation and amortization (1,260 ) (1,167 )
$ 879
$ 904

Depreciation and amortization expense related to property, plant and equipment was $34 million and $102 million for the quarter and three quarters ended March 29, 2019, respectively, and $33 million and $106 million for the quarter and three quarters ended March 30, 2018, ~~respectively, and $35 million and $109 million for the quarter and three quarters ended March 31, 2017,~~ respectively.

Note I — Accrued Warranties

Changes in our liability for standard product warranties, which is included as a component of the “Other accrued items” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited), during the three quarters ended March ~~30, 2018~~29, 2019 were as follows:



	(In millions)
Balance at June 29, 2018	$	24
Warranty provision for sales	11
Settlements	(8		)
Other, including adjustments for foreign currency translation	(1		)
Balance at March 29, 2019	$	26

(In millions)
Balance at June 30, 2017 $ 26
Warranty provision for sales 10
Settlements (10 )
Other, including adjustments for foreign currency translation 1
Balance at March 30, 2018 $ 27

We also sell extended product warranties and recognize revenue from these arrangements over the warranty period. Costs of warranty services under these arrangements are recognized as ~~incurred. Deferred revenue associated with extended product warranties was $19 million at March 30, 2018~~incurred and ~~$23 million at June 30, 2017 and is~~are included as a component of the ~~“Advance payments and unearned income”~~“Contract liabilities” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited).

~~Note J — Long-Term Debt~~

~~Long-term debt is summarized below:~~

March 30, 2018 June 30, 2017

(In millions)
Variable-rate debt:
Term loan, 3-year tranche, due May 29, 2018 $ 20
$ 36
Term loan, 5-year tranche, due May 29, 2020 —
269
Floating rate notes, due April 30, 2020 250
—
Floating rate notes, due February 27, 2019 300
—
Total variable-rate debt 570
305
Fixed-rate debt:
1.999% notes, due April 27, 2018 500
500
2.7% notes, due April 27, 2020 400
400
4.4% notes, due December 15, 2020 400
400
5.55% notes, due October 1, 2021 400
400
3.832% notes, due April 27, 2025 600
600
7.0% debentures, due January 15, 2026 100
100
6.35% debentures, due February 1, 2028 26
26
4.854% notes, due April 27, 2035 400
400
6.15% notes, due December 15, 2040 300
300
5.054% notes, due April 27, 2045 500
500
Other 16
14
Total fixed-rate debt 3,642
3,640
Total debt 4,212
3,945
Plus: unamortized bond premium 25
29
Less: unamortized discounts and issuance costs (23 ) (24 )
Total debt, net 4,214
3,950
Less: current portion of long-term debt (823 ) (554 )
Total long-term debt, net $ 3,391
$ 3,396

~~On February 27, 2018, we completed the issuance and sale of $300~~ Deferred revenue associated with extended product warranties was $24 million in aggregate principal amount of floating rate notes due February 27, 2019 (“Floating Rate Notes 2019”). We incurred $2 million of debt issuance costs related to the issuance of the Floating Rate Notes 2019, which are being amortized using the effective interest rate method over the life of the Floating Rate Notesat March 29, 2019 and ~~such amortization is reflected as a portion of interest expense in our Condensed Consolidated Statement of Income (Unaudited). The Floating Rate Notes 2019 will bear interest~~$16 million at a floating rate, reset quarterly, equal to three-month LIBOR plus 0.475% per year. Interest is payable quarterly in arrears on May 27, 2018, August 27, 2018, November 27, 2018 and February 27, 2019, commencing May 27, 2018. The Floating Rate Notes 2019 are not redeemable at our option prior to maturity. Upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the Floating Rate Notes 2019 at a price equal to 101 percent of the aggregate principal amount of the Floating Rate Notes 2019 being repurchased, plus accrued interest on the Floating Rate Notes 2019 being repurchased to, but not including, the date of repurchase. We used the net proceeds from the sale of the Floating Rate Notes 2019 to make a voluntary contribution to our U.S. qualified pension plans during the quarter ended March 30,June 29, 2018.

On November 6, 2017, we completed the issuance and sale of $250 million in aggregate principal amount of floating rate notes due April 30, 2020 (“Floating Rate Notes 2020”). We incurred $2 million of debt issuance costs related to the issuance of the Floating Rate Notes 2020, which are being amortized using the effective interest rate method over the life of the Floating Rate Notes 2020, and such amortization is reflected as a portion of interest expense in our Condensed Consolidated Statement of Income (Unaudited). The Floating Rate Notes 2020 will bear interest at a floating rate, reset quarterly, equal to three-month LIBOR plus 0.48% per year. Interest is payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year, commencing January 30, 2018. The Floating Rate Notes 2020 are not redeemable at our option prior to maturity. Upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the Floating Rate Notes 2020 at a price equal to 101 percent of the aggregate principal amount of the Floating Rate Notes 2020 being repurchased, plus accrued interest on the Floating Rate Notes 2020 being repurchased to, but not including, the date of repurchase.

In connection with the closing of the sale of the Floating Rate Notes 2020, we 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, and recognized a $1 million extinguishment loss, which is included as a component of the “Non-operating income (loss)” line item in our Condensed Consolidated Statement of Income (Unaudited), as a result of associated unamortized debt issuance costs.

~~For additional information on our long-term debt, see Note 13: “Long-Term Debt” in the Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K.~~

Note KJ — Postretirement Benefit Plans

~~Defined Contribution Plan~~

We sponsor a defined contribution savings plan, which allows our eligible employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. The plan includes several match contribution formulas which require us to match a percentage of the employee contributions up to certain limits, generally totaling between 2 percent and 6 percent of employee eligible pay. Matching contributions charged to expense were $62 million in the three quarters ended March 30, 2018 and included the issuance of 81,329 shares of our common stock in the quarter ended March 30, 2018.

~~Defined Benefit Plans~~

The following tables provide the components of our net periodic benefit income for our defined benefit plans, including defined benefit pension plans and other postretirement defined benefit plans:



	Quarter Ended March 29, 2019						Three Quarters Ended March 29, 2019
	Pension			Other Benefits			Pension			Other Benefits

	(In millions)
Net periodic benefit income
Service cost	$	9		$	1		$	27		$	1
Interest cost	52			2			157			6
Expected return on plan assets	(95		)	(4		)	(286		)	(12		)
Amortization of net actuarial gain	—			(2		)	—			(5		)
Total net periodic benefit income	$	(34	)	$	(3	)	$	(102	)	$	(10	)


		Quarter Ended March 30, 2018									Three Quarters Ended March 30, 2018									Quarter Ended March 30, 2018						Three Quarters Ended March 30, 2018
		Pension			Other Benefits			Total			Pension			Other Benefits			Total			Pension			Other Benefits			Pension			Other Benefits

		(In millions)																		(In millions)
Net periodic benefit income	Net periodic benefit income
Service cost	Service cost	$	10		$	—		$	10		$	29		$	1		$	30		$	10		$	—		$	29		$	1
Interest cost	Interest cost	49			1			50			146			5			151			49			1			146			5
Expected return on plan assets	Expected return on plan assets	(92		)	(4		)	(96		)	(276		)	(12		)	(288		)	(92		)	(4		)	(276		)	(12		)
Amortization of net actuarial gain	Amortization of net actuarial gain	—			—			—			—			(1		)	(1		)	—			—			—			(1		)
Total net periodic benefit income	Total net periodic benefit income	$	(33	)	$	(3	)	$	(36	)	$	(101	)	$	(7	)	$	(108	)	$	(33	)	$	(3	)	$	(101	)	$	(7	)

		Quarter Ended March 31, 2017									Three Quarters Ended March 31, 2017
		Pension			Other Benefits			Total			Pension			Other Benefits			Total

		(In millions)
Net periodic benefit income
Service cost⁽¹⁾		$	15		$	1		$	16		$	44		$	1		$	45
Interest cost		46			2			48			138			6			144
Expected return on plan assets		(85		)	(5		)	(90		)	(255		)	(13		)	(268		)
Total net periodic benefit income		$	(24	)	$	(2	)	$	(26	)	$	(73	)	$	(6	)	$	(79	)


~~(1)~~	$1 million and $2 million of the service cost component of net periodic benefit income are included as a component of the “Discontinued operations, net of income taxes” line item in our Condensed Consolidated Statement of Income (Unaudited) for the quarter and three quarters ended March 31, 2017, respectively.

The service cost component of net periodic benefit income is included in the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Condensed Consolidated Statement of Income (Unaudited). The non-service cost components of net periodic pension income are included in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited).

We contributed $301 million to our qualified defined benefit ~~pension~~pensions plans during the quarter and three quarters ended March 30, 2018, including a $300 million voluntary contribution to our U.S. qualified defined benefit pension ~~plans.~~plans in the quarter ended March 30, 2018. As a result of this voluntary contribution as well as ~~the~~a $400 million voluntary contribution made during ~~the quarter ended June 30,~~fiscal 2017, we ~~currently anticipate making~~ made no contributions to our U.S. qualified defined benefit pension plans during the quarter and three quarters ended March 29, 2019, and we currently anticipate making no contributions to our U.S. qualified defined benefit pension plans and minor contributions to ~~our~~a non-U.S. pension plan during the remainder of fiscal ~~2018. We contributed$40 million and $143 million to our qualified defined benefit pension plans during~~ ~~the quarter and three quarters ended March 31, 2017, respectively.~~2019.

The U.S. Salaried Retirement Plan (“U.S. SRP”), a U.S. qualified pension plan, is our largest defined benefit pension plan, with assets valued at ~~$4.4~~$4.6 billion and a projected benefit obligation of ~~$5.6~~$5.2 billion as of June ~~30, 2017.~~29, 2018. Effective December 31, 2016, ~~future benefit~~ accruals under the U.S. SRP benefit formula were frozen for all employees and replaced with a 1% cash balance ~~defined~~ benefit formula for certain ~~non-highly~~employees who were not highly compensated ~~employees.~~on December 31, 2016.

Note LK — Income From Continuing Operations Per ~~Common~~ Share

The computations of income from continuing operations per common share are as follows:



	Quarter Ended						Three Quarters Ended
	March 29, 2019			March 30, 2018			March 29, 2019			March 30, 2018

	(In millions, except per share amounts)
Income from continuing operations	$	243		$	198		$	684		$	494
Adjustments for participating securities outstanding	(1		)	(1		)	(1		)	(2		)
Income from continuing operations used in per basic and diluted common share calculations (A)	$	242		$	197		$	683		$	492

Basic weighted average common shares outstanding (B)	117.9			118.4			117.9			118.7
Impact of dilutive share-based awards	2.4			2.6			2.4			2.4
Diluted weighted average common shares outstanding (C)	120.3			121.0			120.3			121.1
Income from continuing operations per basic common share (A)/(B)	$	2.06		$	1.66		$	5.79		$	4.15
Income from continuing operations per diluted common share (A)/(C)	$	2.02		$	1.63		$	5.67		$	4.07

Quarter Ended Three Quarters Ended
March 30, 2018 March 31, 2017 March 30, 2018 March 31, 2017

(In millions, except per share amounts)
Income from continuing operations $ 203
$ 164
$ 509
$ 472
Adjustments for participating securities outstanding (1 ) (1 ) (1 ) (1 )
Income from continuing operations used in per basic and diluted common share calculations (A) $ 202
$ 163
$ 508
$ 471
Basic weighted average common shares outstanding (B) 118.4
122.6
118.7
123.3
Impact of dilutive share-based awards 2.6
1.9
2.4
1.7
Diluted weighted average common shares outstanding (C) 121.0
124.5
121.1
125.0
Income from continuing operations per basic common share (A)/(B) $ 1.71
$ 1.33
$ 4.28
$ 3.82
Income from continuing operations per diluted common share (A)/(C) $ 1.67
$ 1.31
$ 4.19
$ 3.77

Potential dilutive common shares primarily consist of employee stock options and restricted and performance unit awards. Income from continuing operations per diluted common share excludes the antidilutive impact of 265,652 and 275,021 weighted average share-based awards outstanding for the quarter and three quarters ended March 29, 2019, respectively, and 30,670 and 64,554 weighted average share-based awards outstanding infor the quarter and three quarters ended March 30, 2018, ~~respectively, and 562,010 in the three quarters ended March 31, 2017.~~respectively.

Note ML — Income Taxes

~~Tax Reform~~

On December 22, 2017, H.R.1, also known as the “Tax Cuts and Jobs Act,” was signed into U.S. law (“Tax Act”). Among other provisions, the Tax Act ~~reduces~~reduced the U.S. statutory corporate income tax rate from a maximum 35 percent to a flat 21 percent, effective January 1, 2018. Based on our fiscal year end, our blended U.S. statutory corporate income tax rate for fiscal 2018 will be 28 percent. Our deferred tax assets, net of deferred tax liabilities, represent anticipated corporate tax benefits to be realized in the future, and the reduction in the U.S. statutory corporate income tax rate reduced these benefits. As a result, we recognized income tax expense forDuring the quarter ended December ~~29, 2017 to provisionally adjust~~28, 2018, we completed our ~~deferred tax balances to reflect~~accounting for the ~~lower U.S. statutory corporate~~ income tax ~~rate.~~

~~Income tax expense for the quarter ended December 29, 2017 included the following adjustments to reflect impacts from the Tax Act:~~

~~$52 million ($.43 per diluted share) from estimated write-down of existing net deferred tax asset balances based on the lower tax rate and other law changes; and~~

~~$26 million ($.21 per diluted share) of benefit from the~~ impact of ~~our lower estimated fiscal 2018 tax rate.~~

~~During the quarter ended March 30, 2018, we changed our estimated write-down~~enactment of ~~existing net deferred tax asset balances associated with~~ the Tax Act, based on prevailing regulations and available information as of December 28, 2018, and there were no material changes from the estimates reported in our Fiscal 2017-2018 Update 8-K. We will continue to ~~$19 million ($.15 per diluted share) and recognized an income tax benefit of $33 million ($.27 per diluted share) to adjust~~monitor additional guidance issued by the provisional amount recorded in connection with the preparation of our financial statements for the quarter ended December 29, 2017. This adjustment was primarily due to revaluing our deferred tax asset related to our $300 million voluntary pension contribution made during the quarter ended March 30, 2018.Internal Revenue Service.

Effective Tax Rate

Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was ~~5.6~~14.1 percent in the quarter ended March 29, 2019 compared with 4.8 percent in the quarter ended March 30, ~~2018 compared with 29.6 percent in~~2018. In the quarter ended March ~~31, 2017.~~29, 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 ~~addition~~the quarter ended March 30, 2018, our effective tax rate benefited from a $33 million ($.27 per diluted share) adjustment to the ~~$33 million income~~provisional amount recorded in the second quarter of fiscal 2018 to revalue our net deferred tax ~~benefit described above,~~balances as a result of the Tax Act. Additionally, our effective tax rate for the quarter ended March 30, 2018 benefited from the favorable impact of excess tax benefits related to equity-based compensation. In the quarter ended March 31, 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.

Our effective tax rate was ~~24.6~~15.7 percent in the three quarters ended March 29, 2019 compared with 25.3 percent in the three quarters ended March 30, ~~2018 compared with 29.7 percent in~~2018. In addition to the items noted above for the quarter ended March 29, 2019, our effective tax rate for the three quarters ended March ~~31, 2017. In addition~~29, 2019 benefited from a reduction in the deferred tax liability maintained on the basis differences related to the ~~impact of~~unremitted foreign earnings and an increase in the ~~Tax Act described above, our~~research and development (“R&D”) credit. Our effective tax rate for the three quarters ended March 30, 2018 ~~benefited~~was impacted by a $25 million ($.20 per diluted share) write-down of existing net deferred tax asset balances based on the lower tax rates and other tax law changes from athe Tax Act, $26 million ($.21 per diluted share) of benefit from the associated impact of our lower estimated fiscal 2018 tax rate, $22 million ($($.18 per diluted share) 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. ~~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.~~

We have not fully completed our accounting for the income tax impact from the Tax Act enactment. For certain items, we have made a reasonable estimate of the impact on our existing net deferred income tax balances as of March 30, 2018, which is represented by the $19 million estimated adjustment from the revaluation of net deferred tax asset balances described above. For other items, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under Accounting Standards Codification 740, ~~Income Taxes~~ ~~(“ASC 740”) and the provisions of the tax laws that were in effect immediately prior to Tax Act enactment.~~

~~Provisional Amounts~~

We remeasured certain deferred income tax assets and liabilities based on the rate at which we expect them to reverse in the future, which generally is 28 percent for reversals in fiscal 2018 or 21 percent for reversals after fiscal 2018. However, we are still evaluating certain aspects of the Tax Act and refining our calculations, which potentially affects our current estimated valuation of our net deferred income tax assets and could give rise to new deferred tax amounts.

Although the Tax Act affects the tax treatment of foreign earnings and profits (“E&P”) and results in a one-time transition tax on our post-1986 foreign E&P that we have previously deferred from U.S. income tax expense, we have provisionally determined that we will not owe any transition tax. However, we are still refining our calculations, which include estimates for our fiscal 2017 and 2018 layers for foreign E&P, and they could change and therefore change the amount of transition tax we will owe.

Because of the potential impact of deficit allocations on the tax basis for netted foreign E&P of related foreign subsidiaries, we are maintaining a deferred tax liability of approximately $25 million in respect of potential cumulative tax basis differences of $116 million. New statutory or regulatory guidance and further analysis may result in a change in our conclusion as to the need for a deferred tax liability in respect of these cumulative tax basis differences. Other than this deferred tax liability, we have provided for no additional income taxes on any remaining undistributed foreign E&P not subject to the transition tax, or any outside tax basis differences inherent in our foreign subsidiaries, because all other amounts continue to be reinvested indefinitely.

We anticipate future impacts at a U.S. state and local tax level related to the Tax Act; however, statutory and interpretive guidance is not available from applicable state and local tax authorities to reasonably estimate the impact. Consequently, we have not recorded provisional amounts and continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to Tax Act enactment.

Note NM — Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed using the best information available in the circumstances.

In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the external pricing services, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value, including net asset value (“NAV”). Additionally, in certain circumstances, the NAV reported by an asset manager may be adjusted when sufficient evidence indicates NAV is not representative of fair value.

The following table presents assets and liabilities measured at fair value on a recurring basis (at least annually) ~~as of~~at March ~~30, 2018~~29, 2019 and June ~~30, 2017:~~29, 2018:


		March 30, 2018				June 30, 2017				March 29, 2019						June 29, 2018
		Total		Level 1		Total		Level 1		Total		Level 1		Level 2		Total		Level 1		Level 2

		(In millions)								(In millions)
Assets	Assets
Deferred compensation plan assets:⁽¹⁾	Deferred compensation plan assets:⁽¹⁾
Equity and fixed income securities	Equity and fixed income securities	$	47	$	47	$	37	$	37	$	39	$	39	$	—	$	46	$	46	$	—
Investments measured at NAV:	Investments measured at NAV:
Equity and fixed income funds	Equity and fixed income funds	62				50				61						63
Corporate-owned life insurance	Corporate-owned life insurance	26				25				27						27
Total investments measured at NAV		88				75
Total fair value of deferred compensation plan assets	Total fair value of deferred compensation plan assets	$	135			$	112			$	127					$	136

Liabilities	Liabilities
Deferred compensation plan liabilities:⁽²⁾	Deferred compensation plan liabilities:⁽²⁾
Equity securities and mutual funds	Equity securities and mutual funds	$	45	$	45	$	46	$	46	$	22	$	22	$	—	$	38	$	38	$	—
Investments measured at NAV:	Investments measured at NAV:
Common/collective trusts and guaranteed investment contracts	Common/collective trusts and guaranteed investment contracts	105				80				130						111
Total fair value of deferred compensation plan liabilities	Total fair value of deferred compensation plan liabilities	$	150			$	126			$	152					$	149

Derivative instruments:⁽³⁾
Yield-based treasury lock										$	11	$	—	$	11	$	—	$	—	$	—

_______________


(1)	Represents diversified assets held in a “rabbi trust” associated with our non-qualified deferred compensation plans, which we include in the “Other current assets” and “Other non-current assets” line items in our Condensed Consolidated Balance Sheet (Unaudited), and which are measured at fair value.

(2)

Primarily represents obligations to pay benefits under certain non-qualified deferred compensation plans, which we include in the “Compensation and benefits” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited). Under these plans, participants designate investment options (including stock and fixed-income funds), which serve as the basis for measurement of the notional value of their accounts.


(3)	See Note N — Derivative Instruments and Hedging Activities in these Notes for additional information.

The following table presents the carrying amounts and estimated fair values of our significant financial instruments that were not measured at fair value (carrying amounts of other financial instruments not listed in the table below approximate fair value due to the short-term nature of those items):

March 30, 2018 June 30, 2017

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

(In millions)
Long-term debt (including current portion)⁽¹⁾
$ 4,214
$ 4,433
$ 3,950
$ 4,252



	March 29, 2019				June 29, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

	(In millions)
Long-term debt (including current portion)⁽¹⁾	$	3,418	$	3,673	$	3,712	$	3,848

_______________


(1)	Fair value was estimated using a market approach based on quoted market prices for our debt traded in the secondary market. If our long-term debt in our balance sheet were measured at fair value, it would be categorized in Level 2 of the fair value hierarchy.

Note ON — Derivative Instruments and Hedging Activities

In the normal course of business, we are exposed to global market risks, including the effect of changes in foreign currency exchange rates. Additionally, during January 2019, we entered into a yield-based treasury lock agreement with a third-party financial institution counterparty (“treasury lock”) to hedge against fluctuations in interest payments due to changes in the benchmark interest rate (10-year U.S. Treasury rate) associated with our anticipated issuance of long-term fixed-rate notes (“New Notes”) to redeem or repay at maturity the entire $400 million outstanding principal amount of our 2.7% Notes due April 27, 2020 (“2020 Notes”). We use derivative instruments to manage our exposure to such risks and formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting. We recognize all derivatives in our Condensed Consolidated Balance Sheet (Unaudited) at fair value. We do not hold or issue derivatives for speculative trading purposes.

At March ~~30, 2018,~~29, 2019, we had open foreign currency forward contracts with an aggregate notional amount of ~~$28~~$9 million, of which ~~$4 million were classified as fair value hedges and $24~~$5 million were classified as cash flow ~~hedges.~~hedges and $4 million was classified as a fair value hedge. This compares with open foreign currency forward contracts with an aggregate notional amount of ~~$33~~$39 million at June ~~30, 2017,~~29, 2018, of which ~~$2 million were classified as fair value hedges and $31~~$35 million were classified as cash flow ~~hedges.~~hedges and $4 million was classified as a fair value hedge. At March ~~30, 2018,~~29, 2019, contract expiration dates ranged from 1117 days to approximately 3 months with a weighted average contract life of 2 months.

At March 29, 2019, we also had an open treasury lock agreement with a notional amount of $400 million that was classified as a cash flow hedge.

Exchange-Rate Risk — Fair Value Hedges

We use foreign currency forward contracts and options to hedge certain balance sheet items, including foreign currency denominated accounts receivable and inventory. AsChanges in the value of the derivatives and the related hedged items are reflected in earnings, in the “Cost of product sales and services” line item in our Condensed Consolidated Statement of Income (Unaudited). At March ~~30, 2018,~~29, 2019, we had an outstanding foreign currency forward contract denominated in the Canadian Dollar to hedge a certain balance sheet ~~items.~~item. The net gains or losses on foreign currency forward contracts designated as fair value hedges were not material in the quarter ~~and~~or three quarters ended March 29, 2019 or in the quarter or three quarters ended March 30, ~~2018 or in the quarter and three quarters ended March 31, 2017.~~2018. In addition, no amounts were recognized in earnings in the quarter ~~and~~or three quarters ended March 29, 2019 or in the quarter or three quarters ended March 30, 2018 ~~or in the quarter and three quarters ended March 31, 2017~~ related to hedged firm commitments that no longer qualify as fair value hedges.

Exchange-Rate Risk — Cash Flow Hedges

We use foreign currency forward contracts and options to hedge off-balance sheet future foreign currency commitments and also have hedged U.S. Dollar payments to suppliers to maintain our anticipated profit margins in our international operations. ~~As of~~At March ~~30, 2018,~~29, 2019, we had outstanding foreign currency forward contracts denominated in ~~the Euro,~~ British ~~Pound~~Pounds and the Australian Dollar to hedge certain forecasted transactions. The net gains or losses from cash flow hedges recognized in earnings or recorded in other comprehensive income, including gains or losses related to hedge ineffectiveness, were not material in the quarter ~~and~~or three quarters ended March 29, 2019 or in the quarter or three quarters ended March 30, ~~2018~~2018.

Interest-Rate Risk — Cash Flow Hedges

As noted above, in anticipation of the issuance of the New Notes to redeem or repay at maturity the 2020 Notes, we entered into a treasury lock with a notional value of $400 million. We designated the treasury lock as a cash flow hedge against fluctuations in interest payments on the New Notes due to changes in the ~~quarter~~benchmark interest rate prior to issuance, which we expect to occur between August 2019 and ~~three quarters~~April 2020. If the benchmark interest rate increases during the period of the agreement, the treasury lock position will become an asset and we will receive a cash payment from the counterparty when we terminate the treasury lock upon issuance of the New Notes. Conversely, if the benchmark interest rate decreases, the treasury lock position will become a liability and we will make a cash payment to the counterparty when we terminate the treasury lock

upon issuance of the New Notes. The fair value of the treasury lock is measured using a pricing model that utilizes observable market data such as the benchmark interest rate. See Note M — Fair Value Measurements in these Notes for additional information.

At March 29, 2019, the fair value of the treasury lock was a liability of $11 million, which we recorded in the “Other accrued items” line item in our Condensed Consolidated Balance Sheet (Unaudited) with a corresponding unrealized after-tax loss of $8 million in the “Accumulated other comprehensive loss” line item in our Condensed Consolidated Balance Sheet (Unaudited) representing the effective portion of the treasury lock’s change in fair value during the quarter ended March ~~31, 2017.~~29, 2019. The ineffective portion of the treasury lock’s change in fair value was immaterial during the quarter ended March 29, 2019.

Note PO — Changes in Estimates

~~Estimate at Completion Adjustments~~Contract Estimates

Estimates and assumptions, and changes therein, are important in connection with, among others, our segments’ revenue recognition policies related to development and production contracts. Revenue and profit related to development and production contracts are recognized using the POC method, generally based on the ratio of costs incurred to estimated total costs at completion under the 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. Revenue and profit on cost-reimbursable development and production contracts are recognized as allowable costs are incurred on the contract and become billable to the customer, in an amount equal to the allowable costs plus the profit on those costs.

Development and production contracts are combined when specific aggregation criteria are met. Criteria generally include closely interrelated activities performed for a single customer within the same economic environment. Development and production contracts are generally not segmented. If development and production contracts are segmented, we have determined that they meet specific segmenting criteria. 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 cost-to-cost method of ~~accounting,~~revenue recognition, a single estimated ~~total~~ profit margin is used to recognize profit for each ~~development and production contract~~performance obligation over its period of performance. Recognition of profit on a ~~fixed-price development or production~~ 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 at~~towards 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 include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Factors that must be considered in estimating the total transaction price include contractual cost or performance ~~availability~~incentives (such as incentive fees, award fees and ~~timing~~penalties) and other forms of ~~funding from~~variable 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”) 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 value~~transaction 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 value~~transaction 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. ~~Anticipated~~Any anticipated losses on ~~development and production~~these contracts ~~or programs~~are fully recognized in ~~progress are charged to operating income when identified.~~ the period in which the losses become evident.

Net EAC adjustments resulting from changes in estimates impacted our operating income favorably by $6 million ($4 million after-tax or $.03 per diluted share) and $5 million ($4 million after-tax or $.03 per diluted share) for the quarter and $6three quarters ended March 29, 2019, respectively, and unfavorably by $4 million ($43 million after-tax or ~~$.04~~$.02 per diluted share) inand $15 million ($11 million after-tax or $.09 per diluted share) for the quarter and three quarters ended March 30, 2018, ~~respectively,~~respectively. Revenue recognized from performance obligations satisfied in prior periods was $18 million and ~~favorably by $11~~$34 million ~~($6 million after-tax or $.05 per diluted share) and $30 million ($19 million after-tax or $.14 per diluted share) in~~for the quarter and three quarters ended March ~~31, 2017,~~29, 2019, respectively, and $5 million and $35 million for the quarter and three quarters ended March 30, 2018, respectively.

Income Taxes

See Note ML — Income Taxesin these Notes for changes in estimates disclosures associated with our accounting for income taxes.

Note P — Backlog

Backlog, which is the equivalent of our remaining performance obligations, represents the future revenue we expect to recognize as we perform on our current contracts. Backlog comprises both funded backlog (i.e., firm orders for which funding is authorized and appropriated) and unfunded backlog. Backlog excludes unexercised contract options and potential orders under ordering-type contracts, such as indefinite delivery, indefinite quantity contracts.

At March 29, 2019, our ending backlog was $8.5 billion. We expect to recognize approximately half of the revenue associated with this backlog within the next twelve months and the substantial majority of the revenue associated with this backlog within the next 3 years.

Note Q — Business ~~Segments~~Segment Information

We structure our operations primarily around the products, systems and services we sell and the markets we serve, and we report the financial results of our continuing operations in the following three reportable segments, which are also referred to as our business segments:


•	Communication Systems, serving markets in tactical communications and defense products, including tactical ground and airborne radio communications solutions and night vision technology, and in public safety networks;


•	Electronic Systems, providing electronic warfare, avionics, and command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”) solutions for defense and classified customers and mission-critical communication systems for civil and military aviation and other customers; and


•	Space and Intelligence Systems, providing intelligence, space protection, geospatial, complete Earth observation, universe exploration, positioning, navigation and timing (“PNT”), and environmental solutions for national security, defense, civil and commercial customers, using advanced sensors, antennas and payloads, as well as ground processing and information analytics.

Communication Systems, serving markets in tactical communications and defense products, including tactical ground and airborne radio communications solutions and night vision technology, and in public safety networks;

Electronic Systems, providing electronic warfare, avionics, and command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”) solutions for the defense industry and ATM solutions for the civil aviation industry; and

Space and Intelligence Systems, providing intelligence, space protection, geospatial, complete Earth observation, universe exploration, positioning, navigation and timing (“PNT”), and environmental solutions for national security, defense, civil and commercial customers, using advanced sensors, antennas and payloads, as well as ground processing and information analytics.

As ~~described~~discussed in more detail in ~~“Basis of Presentation” in~~ Note A — Significant Accounting Policies and Recent Accounting Standards ~~and~~ ~~Note B — Discontinued Operations~~ in these Notes and in ~~connection with~~Note 1: “Significant Accounting Policies” and Note 2: “Accounting Changes or Recent Accounting Pronouncements” in our ~~divestiture of CapRock~~Notes to Consolidated Financial Statements in our Fiscal 2017-2018 Update 8-K, effective June 30, 2018, we adopted ASC 606 and ~~entering into~~ASU 2017-07 using 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.full retrospective method. The historical results, discussion and presentation of our business segments as set forth in our Condensed Consolidated Financial Statements (Unaudited) and these Notes reflect the impact of ~~these changes~~our adoption of ASC 606 and ASU 2017-07 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 of income, balance sheets or statements of cash flows resulting from these segment changes.~~

The accounting policies of our business segments are the same as those described in Note 1: “Significant Accounting Policies” in our Notes to Consolidated Financial Statements in our Fiscal ~~2017 Form 10-K.~~ 2017-2018 Update 8-K.

We evaluate each segment’s performance based on ~~its~~segment operating income or loss, which we define as profit or loss from operations before income taxes, including pension income and excluding interest income and expense, royalties and related intellectual property expenses, equity method investment income or loss and gains or losses from securities and other investments. Intersegment sales are generally transferred at cost to the buying segment, and the sourcing segment recognizes a profit that is eliminated. The “Corporate eliminations” line item in the table below represents the elimination of intersegment sales. The “Unallocated corporate expense and corporate eliminations” line item in the table below represents the portion of corporate expenses not allocated to our business segments and the elimination of intersegment profits. The “Pension adjustment” line item in the table below represents the reconciliation of the non-service components of net periodic pension and postretirement benefit costs, which are a component of segment operating income but are included in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited) as a result of our adoption of ASU 2017-07 as discussed in Note A — Significant Accounting Policies and Recent Accounting Standards in these Notes. The non-service components of net periodic pension and postretirement benefit costs include interest cost, expected return on plan assets and amortization of net actuarial gain.

Segment revenue, segment operating income and a reconciliation of segment operating income to total income from continuing operations before income taxes are as follows:


		Quarter Ended						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)
Revenue	Revenue
Communication Systems	Communication Systems	$	481		$	461		$	1,380		$	1,304		$	568			$	479			$	1,577			$	1,377
Electronic Systems	Electronic Systems	609			553			1,733			1,660			649				606				1,855				1,729
Space and Intelligence Systems	Space and Intelligence Systems	482			475			1,413			1,396			514				482				1,515				1,410
Corporate eliminations	Corporate eliminations	(4		)	—			(10		)	(2		)	(3		)		(5		)		(11		)		(9		)
		$	1,568		$	1,489		$	4,516		$	4,358		$	1,728			$	1,562			$	4,936			$	4,507
Income From Continuing Operations Before Income Taxes
Segment Operating Income:⁽¹⁾	Segment Operating Income:⁽¹⁾													Segment Operating Income:⁽¹⁾
Communication Systems	Communication Systems	$	147		$	140		$	409		$	379		$	172			$	144			$	474			$	404
Electronic Systems	Electronic Systems	112			115			322			360			123				108				355				314
Space and Intelligence Systems	Space and Intelligence Systems	82			76			250			231			87				83				265				250
Unallocated corporate expense and corporate eliminations⁽²⁾⁽¹⁾	Unallocated corporate expense and corporate eliminations⁽²⁾⁽¹⁾	(85		)	(56		)	(181		)	(172		)	Unallocated corporate expense and corporate eliminations⁽²⁾⁽¹⁾	(56		)		(86		)		(155		)		(182		)
Non-operating income (loss)		—			—			(2		)	2
Pension adjustment														(47		)		(46		)		(140		)		(138		)
Non-operating income														46				46				140				136
Net interest expense	Net interest expense	(41		)	(42		)	(123		)	(129		)	(42		)		(41		)		(128		)		(123		)
		$	215		$	233		$	675		$	671		$	283			$	208			$	811			$	661

Note R — Legal Proceedings and Contingencies

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, ~~which~~that are considered probable of being rendered against us in litigation or arbitration in existence at March ~~30, 2018~~29, 2019 are reserved against or would not have a material adverse effect on our financial ~~position,~~condition, results of operations or cash flows.

Merger Litigation

In connection with our pending merger with L3 (see Note S — Pending Merger in these Notes for additional information), two putative class action lawsuits and one individual lawsuit were filed against L3 and its directors (together, 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 Harris Corporation and its wholly owned subsidiary, Leopard Merger Sub Inc. (Harris Corporation and Leopard Merger Sub Inc., 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.

Environmental Matters

We are subject to numerous U.S. Federal, state, local and international environmental laws and regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental issues. We or companies we have acquired are responsible, or ~~are~~ alleged to be responsible, for ~~ongoing~~ environmental investigation ~~and~~and/or remediation of multiple ~~sites, including as a result of our acquisition of Exelis.~~sites. These sites are in various stages of investigation and/or remediation and in some ~~of these proceedings~~cases our liability is considered de minimis. ~~We have received notices~~Notices from the U.S. Environmental Protection Agency (“EPA”) or equivalent state or international environmental agencies allege that a number of sites formerly or currently owned and/or operated by us or companies we have acquired, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances ~~where we have been~~of being identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (commonly

known as the “Superfund Act”) and/or equivalent state and international laws. For example, ~~Exelis received notice~~ in June 2014, ~~from~~ the U.S. Department of Justice (the “DOJ”), Environment and Natural Resources Division, ~~that it may be~~notified several potentially responsible parties, including Exelis, of potential responsibility for contribution to the environmental investigation and remediation of multiple locations in Alaska. In addition, ~~the EPA issued on~~in March 4, 2016, a record of decision selecting a remedy for the lower 8.3 mile stretch of the Lower Passaic River. The EPA’s selected remedy included dredging the river bank to bank, installing an engineered cap and long-term monitoring. The EPA estimated the cost of the cleanup project will be $1.38 billion. On March 31, 2016, the EPA notified over 100 potentially responsible parties, including Exelis, of ~~their~~ potential liability for the cost of remediation for the ~~cleanup project~~8.3-mile stretch of the Lower Passaic River, estimated by the EPA to be $1.38 billion, but ~~their~~the parties’ respective allocations have not been determined. We have found no evidence that Exelis contributed any of the primary contaminants of concern to the Passaic River. We intend to vigorously defend ourselves in this matter and we believe our ultimate costs will not be material. Although it is not feasible to predict the outcome of these environmental claims made against us, based on available information, in the opinion of our management, any payments we may be required to make as a result of environmental claims made against us in existence at March ~~30, 2018~~29, 2019 are reserved against, covered by insurance or would not have a material adverse effect on our financial ~~position,~~condition, results of operations or cash flows.

~~REVIEW~~ Note S — Pending Merger

On October 14, 2018, we announced that on October 12, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with L3 and Leopard Merger Sub Inc., our wholly owned subsidiary (“Merger Sub”), pursuant to which we and L3 have agreed to combine in an all-stock merger of equals. Under the terms and subject to the conditions set forth in the Merger Agreement, L3 shareholders will receive a fixed exchange ratio of 1.30 shares of Harris common stock for each share of L3 common stock. Upon closing of the transactions contemplated by the Merger Agreement, Harris Corporation will be re-named “L3 Harris Technologies, Inc.” and Merger Sub will merge with and into L3, with L3 being the surviving corporation and becoming a wholly-owned subsidiary of L3 Harris Technologies, Inc. (“L3 Harris”), which will be owned on a fully diluted basis approximately 54 percent by Harris shareholders and 46 percent by L3 shareholders. Upon closing, the merger will be accounted for using the acquisition method of accounting, and Harris will be treated as the accounting acquirer. The Merger Agreement has been unanimously approved by the Board of Directors of each company.

The consummation of the merger is subject to the satisfaction or waiver of certain conditions, including, among others, the expiration or earlier termination of any applicable waiting period and the receipt of approvals under domestic and certain foreign antitrust and competition laws, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). In connection with the proposed merger, we and L3 each filed a Notification and Report Form under the HSR Act (an “HSR Notification”) with the U.S. Federal Trade Commission and the DOJ on November 9, 2018. We voluntarily withdrew our HSR Notification effective as of December 10, 2018 and re-filed our HSR Notification on December 11, 2018. As part of the DOJ’s review of the merger, we and L3 each received on January 10, 2019 a request for additional information and documentary materials (the “Second Request”) from the DOJ, which extends the waiting period under the HSR Act until 30 days after both we and L3 have complied with the Second Request or such later time as the parties may agree with the DOJ, unless the waiting period is terminated earlier. We and L3 continue to work cooperatively with the DOJ on its review of the merger. 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.

See Note T — Subsequent Events in these Notes for subsequent events disclosures associated with the merger.

L3 is a prime contractor in intelligence, surveillance and reconnaissance (“ISR”) systems, aircraft sustainment (including modifications and fleet management of special mission aircraft), simulation and training, night vision and image intensification equipment and security and detection systems headquartered in New York, New York. L3 is also a provider of a broad range of communication, electronic and sensor systems used on military, homeland security and commercial platforms. L3 employs approximately 31,000 employees and its customers include the U.S. Department of Defense and its prime contractors, U.S. government intelligence agencies, the U.S. Department of Homeland Security, foreign governments and domestic and commercial customers. L3 generated calendar 2018 revenue of approximately $10 billion.

The foregoing description of the Merger Agreement and the transactions contemplated thereby is not complete and is subject to, and qualified in its entirety by reference to, the Agreement and Plan of Merger, dated as of October 12, 2018, by and among L3, us, and Merger Sub, a copy of which was filed as an exhibit to our Current Report on Form 8-K filed with the SEC on October 16, 2018.

Note T — Subsequent Events

On April 4, 2019, at our and L3’s respective special meetings of stockholders to vote on the proposals identified in the definitive joint proxy statement/prospectus filed with the SEC on February 25, 2019 in connection with the Merger Agreement, our and L3’s respective stockholders voted to approve all proposals necessary to complete the transactions contemplated by the Merger Agreement.

Also on April 4, 2019, we entered into a definitive agreement under which we will sell our Night Vision business to Elbit Systems of America, LLC, a subsidiary of Elbit Systems Ltd., for $350 million in cash, subject to customary purchase price adjustments as set forth in the definitive agreement. The sale transaction is conditioned on completion of our pending merger with L3 pursuant to the Merger Agreement, as well as customary closing conditions, including receipt of regulatory approvals. We expect to use the proceeds from the sale of our Night Vision business to pre-fund L3 Harris pension plans and return cash to shareholders. Our Night Vision business is a global supplier of high-performance, vision-enhancing products for U.S. and allied military and security forces and commercial customers. Because the sale transaction is conditioned on completion of our pending merger with L3, the assets and liabilities of our Night Vision business were not classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at March 29, 2019.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

~~The~~

To the Shareholders and Board of Directors ~~and Shareholders~~ of Harris Corporation

Results of Review of Interim Financial Statements

We have reviewed the ~~unaudited~~accompanying condensed consolidated balance sheet of Harris Corporation (the Company) as of March ~~30, 2018, and~~29, 2019, the related ~~unaudited~~ condensed consolidated statements of income, ~~and~~ comprehensive income, and equity for the quarter and three quarters ended March 29, 2019 and March 30, 2018, ~~and March 31, 2017, and~~ the ~~unaudited~~ condensed consolidated statements of cash flows for the three quarters ended March 29, 2019 and March 30, 2018, and ~~March 31, 2017. These~~the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements ~~are the responsibility of the Company’s management.~~for them to be in conformity with U.S. generally accepted accounting principles.

We ~~conducted our review~~have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the consolidated balance sheet of the Company as of June 29, 2018, the related consolidated statements of income, comprehensive income, cash flows and equity for the year then ended, and the related notes and financial statement schedule (not presented herein); and in our report dated August 27, 2018, except for the retrospective changes for revenue and periodic pension and postretirement benefit costs described in Note 2 and the subsequent event described in Note 25 as to which the date is December 13, 2018, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 29, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial ~~information~~statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States),~~PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the unaudited condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Harris Corporation as of June 30, 2017, and the related consolidated statements of income, comprehensive income, cash flows, and equity for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated August 29, 2017. In our opinion, the accompanying condensed consolidated balance sheet of Harris Corporation as of June 30, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Orlando, Florida

May ~~3, 2018~~2, 2019

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

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

~~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 operating results are helpful to an understanding of our business as a whole, for the periods presented in our Condensed Consolidated Financial Statements (Unaudited).

~~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.

~~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 position, results of operations and cash flows.

~~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.


•	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).


•	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.


•	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.


•	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;

Electronic Systems, providing electronic warfare, avionics, and C4ISR solutions for ~~the~~ defense ~~industry~~ and ~~ATM solutions~~classified 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, antennas~~military aviation and ~~payloads, as well as ground processing~~other customers; and ~~information analytics.~~


•	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 ~~“Basis~~the Adoption of ~~Presentation”~~New Accounting Standards section in Note A — Significant Accounting Policies and Recent Accounting Standards~~and~~ ~~Note B — Discontinued Operations~~in 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 ~~divestiture~~Condensed 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 ~~changes~~new 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-year~~certain prior-period amounts ~~have~~has been ~~reclassified~~adjusted in our Condensed Consolidated Financial Statements (Unaudited) to conform with ~~current-year~~current-period classifications. Reclassifications include certain ~~human resources~~direct 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 increased~~6 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;


•	Income from continuing operations per diluted common share increased24 percent to $2.02 from $1.63;

~~Income from continuing operations per diluted common share~~Communication 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;

~~Communication~~Electronic 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 53~~increased 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 ~~2018~~2019 Compared With Third Quarter ~~2017:~~ 2018: The increase in revenue in the third quarter of fiscal ~~2018~~2019 compared with the third quarter of fiscal ~~2017~~2018 was due to higher revenue in all three of our segments.

First Three Quarters ~~2018~~2019 Compared With First Three Quarters ~~2017:~~ 2018: The increase in revenue in the first three quarters of fiscal ~~2018~~2019 compared with the first three quarters of fiscal ~~2017~~2018 was due to ~~the same reason as noted above regarding the third quarters~~higher 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 ~~2018~~2019 Compared With Third Quarter ~~2017:~~ 2018: The increase in gross margin in the third quarter of fiscal ~~2018~~2019 compared with the third quarter of fiscal ~~2017~~2018 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 ~~2018~~2019 Compared With First Three Quarters ~~2017:~~ 2018: The increase in gross margin in the first three quarters of fiscal ~~2018~~2019 compared with the first three quarters of fiscal ~~2017~~2018 was primarily due to ~~the same reasons as noted above regarding the third quarters~~higher 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 ~~2018~~2019 Compared With Third Quarter ~~2017:~~ 2018: The ~~increases~~decreases in engineering, selling and administrative (“ESA”) expenses and ESA expenses as a percentage of total revenue (“ESA percentage”) in the third quarter of fiscal ~~2018~~2019 compared with the third quarter of fiscal ~~2017~~2018 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.

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 ~~2018~~2019 Compared With First Three Quarters ~~2017:~~ 2018: The ~~increase~~decrease in ~~ESA expenses and comparability of ESA percentage~~unallocated corporate expense in the first three quarters of fiscal ~~2018~~2019 compared with the first three quarters of fiscal ~~2017 were~~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 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 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 Operations~~in 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 of~~June 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, 2018~~29, 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 ~~2018~~2019 are expected to be approximately ~~$130~~$170 million. We anticipate tax payments in fiscal ~~2018~~2019 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 other~~and 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 ~~decrease~~increase in net cash provided by operating activities in the first three quarters of fiscal ~~2018~~2019 compared with the first three quarters of fiscal ~~2017~~2018 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 ~~“Funding~~impact 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 ~~decrease~~increase in net cash used in investing activities in the first three quarters of fiscal ~~2018~~2019 compared with the first three quarters of fiscal ~~2017~~2018 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 ~~adjustment~~increase in ~~the first quarter~~cash 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 ~~decrease~~increase in net cash used in financing activities in the first three quarters of fiscal ~~2018~~2019 compared with the first three quarters of fiscal ~~2017~~2018 was primarily due to ~~$317~~$278 million ~~more~~of net repayments of borrowings in the first three quarters of fiscal 2019 compared with $185 million of net proceeds from borrowings ~~$263~~in the first three quarters of fiscal 2018 and a $39 million ~~less~~increase 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-K~~2017-2018 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 ~~2018~~2019 and fiscal ~~2017, $10~~2018, $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 ~~sixteenth~~seventeenth consecutive annual increase in our quarterly cash dividend rate. Our annualized cash dividend rate in fiscal ~~2017~~2018 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

~~2015~~2018 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, 2015~~June 26, 2018 with a syndicate of lenders. For a description of the ~~2015~~2018 Credit Facility and the ~~2015~~2018 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 ~~2015~~2018 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 ~~2015~~2018 Credit

Agreement, to be greater than 0.65 to 1.00. At March ~~30, 2018,~~29, 2019, we had no borrowings outstanding under the ~~2015~~2018 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, 2018~~29, 2019 and June ~~30, 2017~~29, 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, 2018~~29, 2019 and June ~~30, 2017~~29, 2018 by the ~~2015~~2018 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 ~~2018~~2019 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 development~~R&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-K~~2017-2018 Update 8-K include our contractual obligations and commercial commitments. Except for changes in our ~~long-term~~short-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 ~~2018~~2019 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 ~~expenses~~backlog 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 significant~~Effective 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 ~~policies~~for contracts where we previously recognized revenue as units were delivered has changed under ASC 606 such that we now recognize revenue as costs are ~~described~~incurred. 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 ~~generally~~of 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, and~~recognized 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 contract~~performance obligation over its period of performance. Recognition of profit on ~~fixed-price development and production contracts~~a 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 at~~towards 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 ~~include~~include: the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Factors that must be considered in estimating the total transaction price include contractual cost or performance ~~availability~~incentives (such as incentive fees, award fees and ~~timing~~penalties) and other forms of ~~funding from~~variable 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 value~~transaction 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 value~~transaction 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. ~~Anticipated~~Any anticipated losses on ~~development and production~~these contracts ~~or programs in progress~~ are ~~charged to operating income when identified. We have not made any material changes~~fully recognized in the ~~methodologies used to recognize revenue on development and production contracts or to estimate our costs related to development and production contracts~~period 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 ~~2018~~2019 Compared With Third Quarter ~~2017:~~ 2018: The ~~reduction in benefit~~net 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 ~~2018~~2019 Compared With First Three Quarters ~~2017:~~ 2018: The ~~reduction in benefit~~net 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 with~~was primarily due to the conclusion of certain Mission Networks programs that realized cost growth in first three quarters of fiscal ~~2017 was primarily due to~~2018, 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 networks~~fixed-price infrastructure development ~~program.~~contract.

We also recognize revenue from ~~arrangements requiring~~contracts with multiple performance obligations. For these contracts, we allocate the ~~delivery or~~transaction 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 subsequent~~good 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 revenue~~a customer on a standalone basis (i.e., not sold as ~~necessary.~~bundled sale with any other products or services). The allocation of ~~selling~~transaction price among ~~the~~ separate ~~units of accounting~~performance obligations may impact the timing of revenue recognition but will not change the total revenue recognized on the ~~arrangement. We establish~~contract. 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 ~~used~~to 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 deliverable~~certain contracts that are commercial in nature based on observable selling prices. In determining the ~~vendor-specific~~appropriate margin under the cost plus margin approach, we consider historical margins on similar products sold to similar customers or within similar geographies where objective evidence (“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 majority~~We may also consider our cost structure and pricing objectives, the nature of the ~~recent standalone sales~~proposal, 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 for~~product, margins earned on similar ~~deliverables when sold separately. Generally, comparable pricing of our products~~contracts 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 inability~~Government 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 ~~earnings~~financial 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, strategic~~Strategic 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 ~~and~~or 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 ~~2017~~2018 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 ~~2017~~2018 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, 2018~~29, 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, 2018~~29, 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 of~~At 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-K~~2017-2018 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 ~~2018~~2019 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 begun~~continuing 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. ~~There~~Other 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 ~~2018~~2019 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, 2018~~29, 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 ~~2017~~2018 Form 10-K. ~~Other than the updated risk factor~~Except 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 ~~2017~~2018 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 could~~In 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 impacted~~adjusted 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 intrusion~~factors different from, or ~~otherwise,~~in addition to, those that historically have affected or ~~other significant disruption~~currently affect the market prices of shares of our ~~IT networks~~common stock and ~~related systems~~L3 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 ~~those~~the merger agreement in accordance with its terms, we ~~operate for~~and 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 ~~face~~and 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 attack~~the merger, result in additional expenditures of money and resources or ~~cyber intrusion over~~reduce the ~~Internet, malware, computer viruses, attachments~~anticipated benefits of the merger.

Failure to ~~e-mails, persons inside~~attract, 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 ~~organization~~respective 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 ~~access~~its 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 ~~suppliers~~and L3 stockholders generally.

We or ~~subcontractors. We face an added risk of a security breach~~L3 may waive one or ~~other significant disruption~~more of the ~~IT networks~~closing 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, operate~~L3 each will incur significant transaction, merger-related and ~~maintain for certain of our customers, which may involve managing~~restructuring costs in connection with the merger.

Our stockholders and ~~protecting information relating~~L3 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 ~~case~~merger.

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 occur~~result 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 governments~~combined company, which could have an adverse effect on the combined company’s business and operations.

The combined company may be ~~behind such attacks due~~exposed 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 ~~industries~~combined 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, we~~such 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 or~~retain 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 can~~stockholders 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;~~

~~Result~~These 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 impact~~SEC 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 312,902~~did 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


*	Periods represent our fiscal months.

(1)

On February 2, 2017, we announced that on January 26, 2017, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $1 billion in shares of our common stock through open-market purchases, private transactions, transactions structured through investment banking institutions or any combination thereof. As of March ~~30, 2018, $776,343,512~~29, 2019, $501,279,637 (as reflected in the table above) was the approximate dollar amount of our common stock that may yet be purchased under our repurchase program, which does not have a stated expiration date.

(2)

Represents a combination ofof: (a) shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of performance units, restricted units or restricted shares that vested during the quarter and (b) performance units, restricted units or restricted shares returned to us upon retirement or employment termination of employees. Our equity incentive plans provide that the value of shares delivered to us to pay the exercise price of options or to cover tax withholding obligations shall be the closing price of our common stock on the date the relevant transaction occurs.

Sales of Unregistered Equity Securities

During the third quarter of fiscal ~~2018,~~2019, we did not issue or sell any unregistered equity securities.

Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

Not Applicable.

Item 6. Exhibits.

EXHIBIT INDEX

The following exhibits are filed herewith or incorporated by reference to exhibits previously filed with the SEC:



(2.1	)	Agreement and Plan of Merger, dated as of October 12, 2018, by and among Harris Corporation, L3 Technologies, Inc. and Leopard Merger Sub, Inc., incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 16, 2018. (Commission File Number 1-3863)
(3	)	(a) Restated Certificate of Incorporation of Harris Corporation (1995), as amended, incorporated herein by reference to Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 2012. (Commission File Number 1-3863)
		(b) By-Laws of Harris Corporation, as amended and restated effective ~~December 5, 2014,~~August 25, 2018, incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on ~~December 8, 2014.~~August 30, 2018. (Commission File Number 1-3863)
(10	)	~~(a) Harris Corporation 2015 Equity Incentive Plan Restricted Unit Award Agreement Terms and Conditions (March 14, 2018 Special Stock Grant to Eligible U. S. Employees).~~
		~~(b) Harris Corporation 2015 Equity Incentive Plan Restricted Unit Award Agreement Terms and Conditions (March 14, 2018 Special Stock Grant to Eligible Non-U.S. Employees).~~
		*~~(c)~~Fifth Amendment to the ~~Exelis Excess Pension Plans (Amended~~Harris Corporation Master Rabbi Trust Agreement, dated and ~~Restated October 31, 2011),~~ effective ~~April 1, 2018.~~as of February 28, 2019
(12	)	Computation of Ratio of Earnings to Fixed Charges.
(15	)	Letter Regarding Unaudited Interim Financial Information.
(31.1	)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
(31.2	)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
(32.1	)	Section 1350 Certification of Chief Executive Officer.
(32.2	)	Section 1350 Certification of Chief Financial Officer.
(101.INS)		The instance document does not appear in the interactive data file because its XBRL ~~Instance Document.~~tags are embedded within the inline XBRL document.
(101.SCH)		XBRL Taxonomy Extension Schema Document.
(101.CAL)		XBRL Taxonomy Extension Calculation Linkbase Document.
(101.LAB)		XBRL Taxonomy Extension Label Linkbase Document.
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_______________


*	Management contract or compensatory plan or ~~arrangement~~arrangement.

SIGNATURE

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.




	HARRIS CORPORATION
	(Registrant)

Date: May ~~3, 2018~~2, 2019	By:	/s/ Rahul Ghai
		Rahul Ghai
		Senior Vice President and Chief Financial Officer
		(principal financial officer and duly authorized officer)

4144



Delaware		34-0276860
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1025 West NASA Boulevard Melbourne, Florida		329l9
(Address of principal executive offices)		(Zip Code)

(321) 727-9l00
(Registrant’s telephone number, including area code)

No changes
(Former name, former address and former fiscal year, if changed since last report)



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00 per share	HRS	New York Stock Exchange



Large accelerated filer	þ		Accelerated filer	o
Non-accelerated filer	o	~~(Do not check if a smaller reporting company)~~	Smaller reporting company	o
Emerging growth company	o




	Page
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statement of Income for the Quarter and Three Quarters Ended March ~~30, 2018~~29, 2019 and March ~~31, 2017~~30, 2018	1
Condensed Consolidated Statement of Comprehensive Income for the Quarter and Three Quarters Ended March ~~30, 2018~~29, 2019 and March ~~31, 2017~~30, 2018	2
Condensed Consolidated Balance Sheet at March ~~30, 2018~~29, 2019 and June ~~30, 2017~~29, 2018	3
Condensed Consolidated Statement of Cash Flows for the Three Quarters Ended March ~~30, 2018~~29, 2019 and March ~~31, 2017~~30, 2018	4
Condensed Consolidated Statement of Equity for the Quarter and Three Quarters Ended March 29, 2019 and March 30, 2018	5
Notes to Condensed Consolidated Financial Statements	56
~~Review~~ Report of Independent Registered Public Accounting Firm	2124
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2225
Item 3. Quantitative and Qualitative Disclosures About Market Risk	3638
Item 4. Controls and Procedures	3739

Part II. Other Information:
Item 1. Legal Proceedings	3840
Item 1A. Risk Factors	3840
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3942
Item 3. Defaults Upon Senior Securities	4042
Item 4. Mine Safety Disclosures	4042
Item 5. Other Information	4042
Item 6. Exhibits	4043

Signature	4144


	March 30, 2018			June 30, 2017			March 29, 2019			June 29, 2018

	(In millions, except shares)						(In millions, except shares)
Assets
Current Assets
Cash and cash equivalents	$	443		$	484		$	334		$	288
Receivables	743			623			453			466
Contract assets							881			782
Inventories	963			841			433			411
Income taxes receivable	149			24			77			174
Other current assets	116			101			107			103
Total current assets	2,414			2,073			2,285			2,224
Non-current Assets
Property, plant and equipment	879			904			904			900
Goodwill	5,377			5,366			5,371			5,372
Other intangible assets	1,019			1,104			902			989
Non-current deferred income taxes	149			409			91			119
Other non-current assets	232			234			239			247
Total non-current assets	7,656			8,017			7,507			7,627
	$	10,070		$	10,090		$	9,792		$	9,851
Liabilities and Equity
Current Liabilities
Short-term debt	$	5		$	80		$	103		$	78
Accounts payable	494			540			523			622
Contract liabilities							466			372
Compensation and benefits	152			140			176			142
Other accrued items	354			329			316			317
Advance payments and unearned income	296			252
Income taxes payable	22			31			16			15
Current portion of long-term debt	823			554
Current portion of long-term debt, net							6			304
Total current liabilities	2,146			1,926			1,606			1,850
Non-current Liabilities
Defined benefit plans	868			1,278			601			714
Long-term debt, net	3,391			3,396			3,412			3,408
Non-current deferred income taxes	49			34			59			79
Other long-term liabilities	479			528			507			522
Total non-current liabilities	4,787			5,236			4,579			4,723
Equity
Shareholders’ Equity:
Preferred stock, without par value; 1,000,000 shares authorized; none issued	—			—			—			—
Common stock, $1.00 par value; 500,000,000 shares authorized; issued and outstanding 118,552,986 shares at March 30, 2018 and 119,628,884 shares at June 30, 2017	119			120
Common stock, $1.00 par value; 500,000,000 shares authorized; issued and outstanding 118,072,477 shares at March 29, 2019 and 118,280,120 shares at June 29, 2018							118			118
Other capital	1,724			1,741			1,720			1,714
Retained earnings	1,543			1,343			1,986			1,648
Accumulated other comprehensive loss	(249		)	(276		)	(217		)	(202		)
Total shareholders’ equity	3,137			2,928			3,607			3,278
	$	10,070		$	10,090		$	9,792		$	9,851



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March ~~30, 2018~~29, 2019



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to _



	Common Stock			Other Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Equity

	(In millions, except per share amounts)
Balance at June 29, 2018	$	118		$	1,714		$	1,648		$	(202	)	$	3,278
Net income	—			—			213			—			213
Shares issued under stock incentive plans	1			15			—			—			16
Shares issued under defined contribution plans	—			23			—			—			23
Share-based compensation expense	—			14			—			—			14
Repurchases and retirement of common stock	(1		)	(118		)	(99		)	—			(218		)
Cash dividends ($.685 per share)	—			—			(82		)	—			(82		)
Balance at September 28, 2018	118			1,648			1,680			(202		)	3,244
Net income	—			—			225			—			225
Other comprehensive income	—			—			—			(9		)	(9		)
Shares issued under stock incentive plans	—			2			—			—			2
Shares issued under defined contribution plans	—			17			—			—			17
Share-based compensation expense	—			15			—			—			15
Repurchases and retirement of common stock	—			(1		)	—			—			(1		)
Cash dividends ($.685 per share)	—			—			(81		)	—			(81		)
Balance at December 28, 2018	118			1,681			1,824			(211		)	3,412
Net income	—			—			243			—			243
Other comprehensive income	—			—			—			(6		)	(6		)
Shares issued under stock incentive plans	—			7			—			—			7
Shares issued under defined contribution plans	—			23			—			—			23
Share-based compensation expense	—			14			—			—			14
Repurchases and retirement of common stock	—			(5		)	—			—			(5		)
Cash dividends ($.685 per share)	—			—			(81		)	—			(81		)
Balance at March 29, 2019	$	118		$	1,720		$	1,986		$	(217	)	$	3,607

Balance at June 30, 2017	$	120		$	1,741		$	1,318		$	(276	)	$	2,903
Net income	—			—			159			—			159
Other comprehensive income	—			—			—			26			26
Shares issued under stock incentive plans	—			14			—			—			14
Share-based compensation expense	—			11			—			—			11
Repurchases and retirement of common stock	(1		)	(73		)	(48		)	—			(122		)
Forward contract component of accelerated share repurchase	—			38			—			—			38
Cash dividends ($.570 per share)	—			—			(69		)	—			(69		)
Balance at September 29, 2017	119			1,731			1,360			(250		)	2,960
Net income	—			—			131			—			131
Other comprehensive income	—			—			—			(4		)	(4		)
Shares issued under stock incentive plans	—			4			—			—			4
Share-based compensation expense	—			12			—			—			12
Repurchases and retirement of common stock	—			(42		)	(34		)	—			(76		)
Cash dividends ($.570 per share)	—			—			(68		)	—			(68		)
Balance at December 29, 2017	119			1,705			1,389			(254		)	2,959
Net income	—			—			196			—			196
Other comprehensive income	—			—			—			5			5
Shares issued under stock incentive plans	1			11			—			—			12
Shares issued under defined contribution plans	—			13			—			—			13
Share-based compensation expense	—			12			—			—			12
Repurchases and retirement of common stock	(1		)	(17		)	(14		)	—			(32		)
Cash dividends ($.570 per share)	—			—			(68		)	—			(68		)
Balance at March 30, 2018	$	119		$	1,724		$	1,503		$	(249	)	$	3,097



	Quarter Ended March 30, 2018
	Previously Reported			Effect of Adopting ASC 606			Effect of Adopting ASU 2017-07			Currently Reported

	(In millions, except per share amounts)
Revenue from product sales and services	$	1,568		$	(6	)	$	—		$	1,562
Cost of product sales and services	(994		)	3			(37		)	(1,028		)
Engineering, selling and administrative expenses	(318		)	(4		)	(9		)	(331		)
Non-operating income	—			—			46			46
Interest expense	(41		)	—			—			(41		)
Income from continuing operations before income taxes	215			(7		)	—			208
Income taxes	(12		)	2			—			(10		)
Income from continuing operations	203			(5		)	—			198
Discontinued operations, net of income taxes	(2		)	—			—			(2		)
Net income	$	201		$	(5	)	$	—		$	196

Net income per common share
Basic
Continuing operations	$	1.71		$	(0.05	)	$	—		$	1.66
Discontinued operations	(0.01		)	—			—			(0.01		)
	$	1.70		$	(0.05	)	$	—		$	1.65
Diluted
Continuing operations	$	1.67		$	(0.04	)	$	—		$	1.63
Discontinued operations	(0.01		)	—			—			(0.01		)
	$	1.66		$	(0.04	)	$	—		$	1.62


(1)	“Amortization of acquisition-related intangibles” includes amortization of non-Exelis Inc. acquisition-related intangibles, which was previously included in the “Depreciation and amortization�� line item in our Condensed Consolidated Statement of Cash Flows (Unaudited) in our Form 10-Q for the quarter ended March 30, 2018.


~~(1)~~	“Gain (loss) on sale of discontinued operations, net” in the quarter and three quarters ended March 31, 2017 included a $3 million reduction to the loss on sale of our former broadcast communications business.



	March 30, 2018			June 30, 2017⁽¹⁾

	(In millions)
Foreign currency translation, net of income taxes of $2 million and $1 million at March 30, 2018 and June 30, 2017, respectively	$	(87	)	$	(113	)
Net unrealized loss on hedging derivatives, net of income taxes of $10 million and$11 million at March 30, 2018 and June 30, 2017, respectively	(16		)	(17		)
Unrecognized postretirement obligations, net of income taxes of $89 million at March 30, 2018 and June 30, 2017	(146		)	(146		)
	$	(249	)	$	(276	)


~~(1)~~	Accumulated foreign currency translation losses of $52 million (net of income taxes of $14 million) were reclassified to earnings in fiscal 2017 as a result of the divestitures of IT Services and CapRock and are included in “Discontinued operations, net of income taxes” in our Consolidated Statement of Income in our Fiscal 2017 Form 10-K.


(1)	Represents the non-current portion of deferred revenue associated with extended product warranties, which is included as a component of the “Other long-term liabilities” line item in our Condensed Consolidated Balance Sheet (Unaudited).


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