L3HARRIS TECHNOLOGIES INC DE
For the period ended Dec 29, 2023. Filed Feb 20, 2024.
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FY2023 · Filed Feb 20, 2024
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Report of Independent Registered Public Accounting Firm (PCAOB ID:) on the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of L3Harris Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of L3Harris Technologies, Inc. (the Company) as of December 29, 2023 and December 30, 2022, the related consolidated statements of operations, comprehensive income, cash flows and equity for each of the three years in the period ended December 29, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2023 and December 30, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 29, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 16, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are 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 Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Cost estimation for revenue recognition on development and production contracts | |
| Description of the Matter | As described in the consolidated financial statements, the Company recognized revenue for certain of its development and production contracts over time, typically using a percentage of completion cost-to-cost method, which required estimates of costs at completion for each contract. At the outset of each contract, the Company gauges its complexity and perceived risks and establishes an estimated total cost at completion with these expectations. After establishing the estimated total cost at completion, the Company reviews the progress and performance on its ongoing contracts at least quarterly and updates the estimated total cost at completion. Such estimates are subject to change during the performance of the contract and significant changes in estimates could have a material effect on the Company’s results of operations.Auditing the cost estimation for revenue recognition on development and production contracts where revenue is recognized over time using the POC cost-to-cost method involved subjective auditor judgment because the Company’s development of the estimated total cost at completion requires estimates of the cost of the work to be completed based on the Company’s underlying assumptions around achieving the technical, schedule and cost aspects of its contracts. In determining the estimates of the cost of the work to be completed, the Company considered the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Estimates of total cost at completion are also affected by management’s assessment of the current status of the contract and expectation for performance on the contract, as well as historical experience. |
|---|---|
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s accounting for cost estimation for development and production contracts. For example, we tested certain controls over management’s review of the estimate at completion analyses and the significant assumptions underlying the estimated total costs at completion. We also tested certain of management’s controls to validate that the data used in the estimate at completion analyses was complete and accurate.To test the cost estimation for development and production contracts, our audit procedures included, among others, obtaining an understanding of the contract, meeting with program management to confirm our understanding of the risks associated with the arrangement and the current contract performance, review of customer correspondence and contractual milestones and comparing cost estimates to historical cost experience with similar contracts, when applicable. Additionally, we obtained an understanding of the Company’s past performance of estimating total costs at completion by reviewing changes in the cost estimates from previous periods and reviewing the overall accuracy of management’s cost to completion estimations through lookback analyses. |
| Valuation of Goodwill | |
| Description of the Matter | At December 29, 2023, the Company’s goodwill was $20.0 billion. As more fully described in the consolidated financial statements, the Company tests goodwill for impairment annually (or under certain circumstances, more frequently) at the reporting unit level using either a qualitative or quantitative assessment. Under the quantitative assessment to test for goodwill impairment, the Company compares the fair value of a reporting unit to its carrying amount, including goodwill. The Company estimates the fair value of its reporting units using a combination of a discounted cash flows analysis and market-based valuation methodologies. Auditing the Company’s quantitative goodwill impairment tests involved subjective auditor judgment due to the significant estimation required in management’s determination of the fair value of the reporting units. The significant estimation is primarily due to the sensitivity of the respective fair values to underlying assumptions, particularly at the Electro Optical and Intelligence, Surveillance, and Reconnaissance reporting units, including changes in the weighted average cost of capital, projected revenue growth rates and projected EBITDA margins. These assumptions relate to the expected future operating performance of the Company’s reporting units, are forward-looking, and are sensitive to and affected by economic, industry and company-specific qualitative factors. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant internal controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions used in the valuation models. We also tested management’s controls to validate that the data used in the valuation models was complete and accurate. To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing the valuation methodologies used by the Company, involving our valuation specialists to assist in testing the significant assumptions discussed above, and testing the completeness and accuracy of the underlying data the Company used in its valuation analyses. For example, we compared the significant assumptions used by management to current industry, market and economic trends, the historical results of the reporting units and other relevant factors. We also assessed the historical accuracy of management’s valuation estimates and performed sensitivity analyses of significant assumptions used in the impairment tests to evaluate the change in the fair value of the reporting unit resulting from changes in the significant assumptions.In addition, we reviewed the reconciliation of the fair value of the reporting units based on the annual impairment test to the market capitalization of the Company. |
| Valuation of customer relationship intangible assets in the acquisition of Aerojet Rocketdyne | |
| Description of the Matter | As described in the consolidated financial statements, the Company completed its acquisition of Aerojet Rocketdyne Holdings, Inc. on July 28, 2023. The acquisition was accounted for using the acquisition method of accounting. The Company’s preliminary accounting for the acquisition included determining the fair value of the customer relationship intangible assets acquired of $2.8 billion. The acquired customer relationship intangible asset is significant, and the valuation is sensitive based on current and projected operating results.Auditing the Company’s accounting for the acquired customer relationship intangible assets involved subjective auditor judgment due to the significant assumptions required in management’s analysis. The significant estimations are primarily due to the sensitivity of the respective fair values to underlying assumptions including changes in the weighted average cost of capital and the projected revenue and EBITDA margins. These assumptions relate to the expected future operating performance of the Company’s reporting unit, are forward-looking, and are sensitive to and affected by economic, industry and company-specific qualitative factors. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding of the process for evaluating the valuation of acquired customer relationship intangible assets by performing a walkthrough of the fair value analysis process, focusing on key controls identified by the company. This included management’s review of the reasonableness of the assumptions used in the analysis. We also tested management’s controls to validate that the data used in the valuation models was complete and accurate.We used an EY valuation specialist to assist with our auditing of the Company’s analysis. In addition, we leveraged our audit team members with experience in complex areas to assist in performing the work, which included engagement executives.Our focus included evaluating the work of the management specialists used for the valuation, reviewing key assumptions included in the valuation with a focus on comparing these assumptions to current industry and economic trends, changes to the Company’s business model, customer base or product mix and other relevant factors. We also performed a sensitivity analysis of significant assumptions to evaluate the changes in the fair value of the acquired intangible assets that would result from changes in the assumptions. |
We have served as the Company’s auditor since at least 1932, but we are unable to determine the specific year.
/s/Ernst & Young LLP
Orlando, Florida
February 16, 2024
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of L3Harris Technologies, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited L3Harris Technologies, Inc.’s internal control over financial reporting as of December 29, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, L3Harris Technologies, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 29, 2023, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Tactical Data Links product line (“TDL”) and Aerojet Rocketdyne Holdings, Inc. (“AJRD”), which are included in the 2023 consolidated financial statements of the Company as of December 29, 2023 and constituted 1% and 5%, respectively, of total assets, excluding the preliminary value of goodwill and other intangible assets, as of December 29, 2023 and 2% and 5%, respectively, of total revenue for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of TDL and AJRD.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 29, 2023 and December 30, 2022, the related consolidated statements of operations, comprehensive income, cash flows and equity for each of the three years in the period ended December 29, 2023, and the related notes and our report dated February 16, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are 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 Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Orlando, Florida
February 16, 2024
CONSOLIDATED STATEMENT OF OPERATIONS
| Fiscal Year Ended | |||
|---|---|---|---|
| (In millions, except per share amounts) | December 29, 2023 | December 30, 2022 | December 31, 2021 |
| Revenue | |||
| Products | $13,694 | $12,097 | $13,156 |
| Services | 5,725 | 4,965 | 4,658 |
| Total revenue | 19,419 | 17,062 | 17,814 |
| Cost of revenue | |||
| Products | (9,711) | (8,355) | (9,007) |
| Services | (4,595) | (3,780) | (3,431) |
| Total cost of revenue | (14,306) | (12,135) | (12,438) |
| General and administrative expenses | (3,262) | (3,006) | (3,280) |
| Asset group and business divestiture-related (losses) gains, net | (51) | 8 | 220 |
| Impairment of goodwill and other assets | (374) | (802) | (207) |
| Operating income | 1,426 | 1,127 | 2,109 |
| Non-service FAS pension income and other, net | 338 | 425 | 439 |
| Interest expense, net | (543) | (279) | (265) |
| Income from continuing operations before income taxes | 1,221 | 1,273 | 2,283 |
| Income taxes | (23) | (212) | (440) |
| Income from continuing operations | 1,198 | 1,061 | 1,843 |
| Discontinued operations, net of income taxes | — | — | (1) |
| Net income | 1,198 | 1,061 | 1,842 |
| Noncontrolling interests, net of income taxes | 29 | 1 | 4 |
| Net income attributable to L3Harris Technologies, Inc. | $1,227 | $1,062 | $1,846 |
| Amount attributable to L3Harris Technologies, Inc. common shareholders | |||
| Income from continuing operations | $1,227 | $1,062 | $1,847 |
| Discontinued operations, net of income taxes | — | — | (1) |
| Net income | $1,227 | $1,062 | $1,846 |
| Net income per common share attributable to L3Harris Technologies, Inc. common shareholders | |||
| Basic | $6.47 | $5.54 | $9.17 |
| Diluted | $6.44 | $5.49 | $9.09 |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| Fiscal Year Ended | |||
|---|---|---|---|
| (In millions) | December 29, 2023 | December 30, 2022 | December 31, 2021 |
| Net income | $1,198 | $1,061 | $1,842 |
| Other comprehensive income (loss): | |||
| Foreign currency translation income (loss), net of income taxes | 36 | (119) | (63) |
| Net unrealized income (loss) on hedging derivatives, net of income taxes | 10 | (8) | (3) |
| Net unrecognized gains (losses) on postretirement obligations, net of income taxes | 71 | (26) | 758 |
| Other comprehensive income (loss), recognized during the period | 117 | (153) | 692 |
| Reclassification adjustments for (gains) losses included in net income | (27) | 11 | 1 |
| Other comprehensive income (loss), net of income taxes | 90 | (142) | 693 |
| Total comprehensive income | 1,288 | 919 | 2,535 |
| Comprehensive loss attributable to noncontrolling interest | 29 | 1 | 4 |
| Total comprehensive income attributable to L3Harris Technologies, Inc. | $1,317 | $920 | $2,539 |
CONSOLIDATED BALANCE SHEET
| (In millions, except shares) | December 29, 2023 | December 30, 2022 |
|---|---|---|
| Assets | ||
| Current assets | ||
| Cash and cash equivalents | $560 | $880 |
| Receivables, net of allowances for collection losses of $15 and $40, respectively | 1,230 | 1,251 |
| Contract assets | 3,196 | 2,987 |
| Inventories | 1,472 | 1,291 |
| Other current assets | 491 | 298 |
| Assets of business held for sale | 1,106 | 47 |
| Total current assets | 8,055 | 6,754 |
| Non-current assets | ||
| Property, plant and equipment, net | 2,862 | 2,104 |
| Goodwill | 19,979 | 17,283 |
| Other intangible assets, net | 8,540 | 6,001 |
| Deferred income taxes | 91 | 73 |
| Other non-current assets | 2,160 | 1,309 |
| Total assets | $41,687 | $33,524 |
| Liabilities and equity | ||
| Current liabilities | ||
| Short-term debt | $1,602 | $2 |
| Current portion of long-term debt, net | 363 | 818 |
| Accounts payable | 2,106 | 1,945 |
| Contract liabilities | 1,900 | 1,400 |
| Compensation and benefits | 544 | 398 |
| Other accrued items | 1,129 | 818 |
| Income taxes payable | 88 | 376 |
| Liabilities of business held for sale | 272 | 19 |
| Total current liabilities | 8,004 | 5,776 |
| Non-current liabilities | ||
| Long-term debt, net | 11,160 | 6,225 |
| Deferred income taxes | 815 | 719 |
| Other long-term liabilities | 2,879 | 2,180 |
| Total liabilities | 22,858 | 14,900 |
| 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 189,808,581 and 190,611,458 shares at December 29, 2023 and December 30, 2022, respectively | 190 | 191 |
| Paid-in capital | 15,553 | 15,677 |
| Retained earnings | 3,220 | 2,943 |
| Accumulated other comprehensive loss | (198) | (288) |
| Total shareholders’ equity | 18,765 | 18,523 |
| Noncontrolling interests | 64 | 101 |
| Total equity | 18,829 | 18,624 |
| Total liabilities and equity | $41,687 | $33,524 |
CONSOLIDATED STATEMENT OF CASH FLOWS
| Fiscal Year Ended | |||
|---|---|---|---|
| (In millions) | December 29, 2023 | December 30, 2022 | December 31, 2021 |
| Operating Activities | |||
| Net income | $1,198 | $1,061 | $1,842 |
| Adjustments to reconcile net income to net cash provided by operating activities: | |||
| Amortization of acquisition-related intangibles | 779 | 605 | 627 |
| Depreciation and other amortization | 387 | 333 | 340 |
| Share-based compensation | 89 | 109 | 129 |
| Share-based matching contributions under defined contribution plans | 231 | 216 | 219 |
| Pension and other postretirement benefit plan income | (275) | (395) | (375) |
| Impairment of goodwill and other assets | 374 | 802 | 244 |
| Asset group and business divestiture-related losses (gains), net | 51 | (8) | (220) |
| Deferred income taxes | (423) | (596) | (114) |
| (Increase) decrease in: | |||
| Receivables, net | 124 | (210) | 217 |
| Contract assets | 62 | 23 | (820) |
| Inventories | (182) | (310) | (68) |
| Other current assets | (55) | 13 | 23 |
| Increase (decrease) in: | |||
| Accounts payable | 87 | 180 | 430 |
| Contract liabilities | 195 | 121 | 178 |
| Compensation and benefits | 38 | (45) | (44) |
| Other accrued items | (88) | (181) | 20 |
| Income taxes | (333) | 499 | 190 |
| Other operating activities | (163) | (59) | (131) |
| Net cash provided by operating activities | 2,096 | 2,158 | 2,687 |
| Investing Activities | |||
| Net cash paid for acquired businesses | (6,688) | — | — |
| Additions to property, plant and equipment | (449) | (252) | (342) |
| Proceeds from sale of property, plant and equipment, net | 56 | 14 | 7 |
| Proceeds from sales of asset groups and businesses, net | 71 | 23 | 1,729 |
| Other investing activities | (11) | (35) | — |
| Net cash (used in) provided by investing activities | (7,021) | (250) | 1,394 |
| Financing Activities | |||
| Proceeds from borrowings, net of issuance cost | 7,568 | 4 | 6 |
| Repayments of borrowings | (3,170) | (14) | (13) |
| Change in commercial paper, net(1) | 1,599 | — | — |
| Proceeds from exercises of employee stock options | 24 | 57 | 97 |
| Repurchases of common stock | (518) | (1,083) | (3,675) |
| Cash dividends | (868) | (864) | (817) |
| Other financing activities | (41) | (51) | (11) |
| Net cash provided by (used in) financing activities | 4,594 | (1,951) | (4,413) |
| Effect of exchange rate changes on cash and cash equivalents | 11 | (18) | (3) |
| Net decrease in cash and cash equivalents | (320) | (61) | (335) |
| Cash and cash equivalents, beginning of period | 880 | 941 | 1,276 |
| Cash and cash equivalents, end of period | $560 | $880 | $941 |
(1)See Note 8: Debt and Credit Arrangementsin the Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF EQUITY
| (In millions, except per share amounts) | CommonStock | Paid-in capital | RetainedEarnings | AccumulatedOtherComprehensiveLoss | Non-controllingInterests | TotalEquity |
|---|---|---|---|---|---|---|
| Balance at January 1, 2021 | $208 | $19,008 | $2,347 | $(839) | $117 | $20,841 |
| Net income (loss) | — | — | 1,846 | — | (4) | 1,842 |
| Other comprehensive income, net of income taxes | — | — | — | 693 | — | 693 |
| Shares issued under stock incentive plans | 1 | 96 | — | — | — | 97 |
| Shares issued under defined contribution plans | 1 | 218 | — | — | — | 219 |
| Share-based compensation expense | — | 129 | — | — | — | 129 |
| Tax withholding payments on share-based awards | — | (5) | — | — | — | (5) |
| Repurchases and retirement of common stock | (17) | (3,199) | (459) | — | — | (3,675) |
| Cash dividends ($4.08 per share) | — | — | (817) | — | — | (817) |
| Other | 1 | 1 | — | — | (7) | (5) |
| Balance at December 31, 2021 | 194 | 16,248 | 2,917 | (146) | 106 | 19,319 |
| Net income (loss) | — | — | 1,062 | — | (1) | 1,061 |
| Other comprehensive loss, net of income taxes | — | — | — | (142) | — | (142) |
| Shares issued under stock incentive plans | 1 | 56 | — | — | — | 57 |
| Shares issued under defined contribution plans | 1 | 215 | — | — | — | 216 |
| Share-based compensation expense | — | 109 | — | — | — | 109 |
| Tax withholding payments on share-based awards | — | (45) | — | — | — | (45) |
| Repurchases and retirement of common stock | (5) | (907) | (171) | — | — | (1,083) |
| Cash dividends ($4.48 per share) | — | — | (864) | — | — | (864) |
| Other | — | 1 | (1) | — | (4) | (4) |
| Balance at December 30, 2022 | 191 | 15,677 | 2,943 | (288) | 101 | 18,624 |
| Net income (loss) | — | — | 1,227 | — | (29) | 1,198 |
| Other comprehensive income, net of income taxes | — | — | — | 90 | — | 90 |
| Shares issued under stock incentive plans | 1 | 23 | — | — | — | 24 |
| Shares issued under defined contribution plans | 1 | 230 | — | — | — | 231 |
| Share-based compensation expense | — | 89 | — | — | — | 89 |
| Tax withholding payments on share-based awards | — | (30) | — | — | — | (30) |
| Repurchases and retirement of common stock | (3) | (433) | (82) | — | — | (518) |
| Cash dividends ($4.56 per share) | — | — | (868) | — | — | (868) |
| Other | — | (3) | — | — | (8) | (11) |
| Balance at December 29, 2023 | $190 | $15,553 | $3,220 | $(198) | $64 | $18,829 |
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.