ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an understanding of our financial condition and results of operations for fiscal 2025 compared with fiscal 2024. A discussion of fiscal 2024 compared to fiscal 2023 can be found in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2025 (our “Fiscal 2024 Form 10-K”) . This MD&A is provided as a supplement to, should be read in conjunction with and is qualified in its entirety by reference to, our Consolidated Financial Statements and accompanying Notes appearing elsewhere in this Report. Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I. Item 1A. Risk Factors of this Report. For additional information, see Part I. Item 1. Business - Cautionary Statement Regarding Forward-Looking Statements of this Report.
OVERVIEW
We are the Trusted Disruptor in the defense industry. With customers’ mission-critical needs in mind, we deliver end-to-end technology solutions connecting the space, air, land, sea and cyber domains in the interest of national security. We support customers in more than 100 countries, with our largest customers being various departments and agencies of the U.S. Government, their prime contractors and international allies. Our capabilities have defense
and civil government applications, as well as commercial applications. As of January 2, 2026, we had approximately 45,000 employees, including approximately 18,000 engineers and scientists.
We structure our operations primarily around the capabilities we provide and we report our financial results in four business segments: CS, SAS, IMS, and AR. Revenue is disaggregated at the segment level into categories that the Chief Operating Decision Maker (“CODM”) believes best depict the nature, amount, timing, and uncertainty of revenue and cash flows. These categories do not distinguish between product and service revenue because management evaluates the business on a combined, consolidated revenue and cost of revenue basis. The CODM, as well as segment management, are not provided with and do not review revenue or cost of revenue disaggregated between products and services at the segment or sector level; accordingly, this information is not used in resource allocation decisions. Accordingly, and because we do not believe such disaggregation assists in an understanding of our financial condition and results of operations, product and service revenue and the related cost of revenue are not disaggregated herein. See Note 14: Business Segments in the Notes for further information regarding our business segments.
U.S. and International Budget Environment
The percentage of our revenue that was derived from sales to U.S. Government customers, whether directly or through prime contractors, including foreign military sales funded through the U.S. Government, was 75%, 76% and 76%, in fiscal 2025, 2024 and 2023, respectively.
On March 15, 2025, the President signed into law a full-year CR for GFY 2025, funding the government through September 30, 2025, with $893 billion for defense funding, including $851 billion for the DoW. This was in line with the 1% increase permitted by the caps under the Fiscal Responsibility Act of 2023 for GFY 2025. Notably, the CR provided funding at the account level, not the program level, allowing federal agencies more discretion with how they prioritize funding for programs.
On May 2, 2025, the White House released a preliminary GFY 2026 budget that included a flat national defense topline of $893 billion (including $849 billion for DoW) and included an additional $119 billion from reconciliation funding in 2026 for a total of approximately $1 trillion. The administration requested $557 billion for non-defense funding, down from $721 billion in GFY 2025, resulting in material funding declines for some agencies, including a $6 billion cut to NASA.
On July 4, 2025, the President signed Congress’ reconciliation package which included $155 billion for national defense spending to fund DoW priorities, including priorities closely aligned with L3Harris interests and opportunities, such as Golden Dome, munitions, and shipbuilding, $165 billion for Department of Homeland Security priorities, $12.5 billion for the Federal Aviation Administration (“FAA”) for air traffic control modernization efforts and $10 billion for NASA. The administration has stated that it expects departments and agencies will be able to access significant amounts of this additional funding in GFY 2026, specifically noting the expectation that the DoW will access $113 billion in GFY 2026. The reconciliation package also raises the debt ceiling by $5 trillion and enacts key changes to the federal tax code, further discussed under the “U.S. Federal Tax Reform” heading below.
On October 1, 2025, after Congress failed to reach an agreement on a short-term spending deal or full-year appropriation, the federal government experienced its longest shutdown on record, lasting 43 days. It was resolved with a CR lasting until January 30 th for agencies that did not yet have full-year appropriations.
The Commerce-Justice-Science appropriations bill, which provides funding for NASA and National Oceanic and Atmospheric Administration (“NOAA”), was signed into law on January 23, 2026. The bill provides $6 billion above the Administration’s GFY 2026 budget request for NASA and rejects the proposed termination of the Space Launch System (“SLS”) and Orion following the Artemis III mission and directs the inclusion of an SLS-based option in any competition for future Artemis launch services. The bill also provides $6 billion for NOAA, an increase of more than $1.5 billion above the Administration’s GFY 2026 request.
The final GFY 2027 National Defense Authorization Act (“NDAA”) was signed into law in December 2025. The NDAA provides authorization of appropriations for the DoW, nuclear weapons programs of the Department of Energy, and other defense-related activities. In addition to serving as an authorization of appropriations, the NDAA establishes defense policies and restrictions, and addresses organizational administrative matters related to the DoW.
Congress passed the Defense Appropriations bill on February 3, 2026, providing $859 billion for DoW programs, an increase of 1% or ~$9 billion over the President’s Budget Request. In addition, Congress provided just over $22 billion for the FAA via the Transportation-Housing and Urban Development bill, more than $1 billion above the GFY 2025 enacted level. This includes $4 billion in resources for facilities and equipment, nearly $1 billion more than the prior year.
Internationally, almost all NATO allies have committed to spend 5% of GDP annually over the next decade on defense and security-related expenditures, with 3.5% on core defense articles and another 1.5% on critical infrastructure, cyber and other key areas.
The overall defense spending environment, both in the U.S. and internationally, reflects the continued impacts of global conflicts and geopolitical tensions, and changes to U.S. Government or international spending priorities have and could in the future impact our business.
For a discussion of U.S. Government funding risks and international business risks see “Item 1. Business - International Business,” “Item 1A. Risk Factors” and Note 15: Legal Proceedings, Commitments and Contingencies in the Notes of this Report.
U.S. Federal Tax Reform
In third quarter 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, introducing amendments to the U.S. federal income tax code, including permanent reinstatement of immediate expensing for domestic research expenditures, a reduction in the benefit of the R&D credit, restoration of full expensing for qualified machinery, equipment and other short-lived assets, and several modifications to existing international tax provisions. Certain provisions are effective for 2025, the effects of which have been recognized in third quarter 2025 and are reflected in the Consolidated Financial Statements and the Notes. Certain other provisions are effective in future fiscal years.
Economic Environment
The ongoing uncertainty related to the impacts of inflation, as well as the interest rate environment and ongoing federal deficits could in the future impact U.S. Government spending priorities for our products and services. For a discussion of inflation-related risks, see “Item 1A. Risk Factors” of this Report.
We continue to monitor and evaluate the potential impact of current and proposed changes in trade policies and in particular, tariffs. In response to enacted tariffs, we are seeking exemptions, evaluating alternative sources of materials and subcontracted components, as well as engaging in supplier negotiations to help manage cost impacts and are considering price adjustments and other strategies to support profitability. There was no material impact on our 2025 results.
Operating Environment, Strategic Priorities and Key Performance Measures
As a proven alternative to traditional primes and new entrants, our flexible business model allows us to operate as either a prime, merchant supplier, or subcontractor, offering both commercial pricing and traditional government acquisition approaches. Our products are used across many customer platforms and this platform-agnostic approach gives us a unique advantage in rapidly adapting to the changing threat environment while effectively partnering with new entrants and non-traditional contractors. Customer demand for our solutions remains robust, and we ended fiscal 2025 with contractual backlog of $38.7 billion, a 13% increase over the prior year. Also in fiscal 2025, we invested $536 million (2% of total revenue) in company-funded R&D focused on technologies that expand our capabilities across our domains.
In fiscal 2025, we continued to make progress with our LHX NeXt initiative, our targeted program designed to enhance organizational agility and performance by leveraging our scale and relationships across segments, driving operational efficiency and competitiveness for the enterprise. We are investing in enterprise tools and optimized, revamped processes to unlock further opportunities for margin expansion and create additional value for our shareholders. Beginning fiscal 2026, LHX NeXt will be fully integrated within our operations as standard practice, with ongoing cost savings measured as operational improvement, which we refer to as e3 (excellence, everywhere, everyday).
Our strategic priorities continue to be performance, growth and innovation. We plan to continue to invest, consistent with profitable growth opportunities, and sustain our culture of innovation, while delivering on our commitments to investors, our customers and on every contract we are awarded. We intend to accomplish this by:
• Building upon our solid foundation and operational rigor to execute for our customers;
• Focusing on profitable growth while securing strategic positions as a prime or subcontractor; and
• Leveraging innovation as a competitive advantage to develop rapid solutions.
We use the following key financial performance measures to manage our business, which are discussed in detail below in the “Operations Review” and “Liquidity and Capital Resources” sections of this MD&A:
• Revenue;
• Operating income and margin; and
• Net cash provided by operating activities.
We use these measures, along with other performance measures that are not defined by U.S. Generally Accepted Accounting Principles (“GAAP”), to assess the success of our business and our ability to create shareholder value. We believe these measures are balanced among long-term and short-term performance, growth and innovation. We also use these and other performance metrics for executive compensation purposes.
OPERATIONS REVIEW
Consolidated Results of Operations
Fiscal Year
(Dollars in millions, except per share amounts)
Revenue
Cost of revenue
Gross margin
General and administrative expenses
Impairment of goodwill and other assets
Operating income
Non-service FAS pension income and other, net (1)
Interest expense, net
Income before income taxes
Income taxes
Effective Tax Rate
Net income
Noncontrolling interests, net of tax
Net income attributable to L3Harris
Diluted EPS (2)
(1) “FAS” is defined as Financial Accounting Standards.
(2) “EPS” is defined as Earnings Per Share.
Revenue. Revenue increased $540 million, or 3%, for fiscal 2025 compared to fiscal 2024 due to higher revenues across all of our segments excluding the impact of the CAS disposal group divestiture, primarily from higher volumes, including new program ramps, and increased international deliveries.
Gross Margin. Gross margin for fiscal 2025 increased compared to fiscal 2024, largely due to higher volumes, primarily in our AR and CS segments, partially offset by a $204 million decrease reflecting the absence of the CAS disposal group as a result of the March 2025 divestiture. Gross margin as a percentage of revenue remained flat compared to fiscal 2024. For discussion of operating income by segment see “Business Segment Results of Operations” below in this MD&A for further information.
General and Administrative (“G&A”) Expenses. The following table presents the components of G&A expenses:
Fiscal Year
(In millions)
Corporate:
Acquisition-related intangibles
LHX NeXt implementation costs (1)
Change in fair value of deferred compensation plan liabilities
Merger, acquisition, and divestiture-related expenses
Business divestiture-related losses (2)
Other unallocated corporate items (3)
Segment:
Company-funded R&D costs
Selling and marketing
Monetization of certain legacy end-of-life assets
Other (4)
G&A expenses
(1) Includes costs associated with transforming multiple functions, systems and processes to increase agility and competitiveness, including third-party consulting, workforce optimization and incremental IT expenses for implementation of new systems. See Note 14: Business Segments in the Notes and the “Operating Environment, Strategic Priorities and Key Performance Measures” section for more detail on our LHX NeXt initiative and implementation costs.
(2) See Note 13: Acquisitions and Divestitures in the Notes for further information.
(3) Includes a portion of management and administration, legal, environmental, compensation, retiree benefits, the FAS/Cost Accounting Standards (“CAS”) operating adjustment (as defined in Note 1: Significant Accounting Policies), eliminations and other.
(4) Includes other segment G&A expenses, primarily payroll and benefits, outside services, facilities and insurance.
G&A expenses decreased $138 million, or 4%, for fiscal 2025 compared with fiscal 2024 primarily due to an increase in gains recognized in connection with the monetization of certain legacy end-of-life assets, lower LHX NeXt implementation costs, including lower third-party consulting expenses of $59 million, lower amortization of acquisition-related intangibles and merger, acquisition, and divestiture-related expenses, partially offset by an increase in business divestiture-related losses.
Impairment of Goodwill and Other Assets. In fiscal 2025, we recognized a $85 million non-cash charge for impairment of goodwill in connection with execution of the agreement to sell a newly established technology company, consisting of certain product lines of our SPPS sector (“SPPS business”), reported in our AR segment, and our Space Avionics & Communications division (“SA&C business”), reported in our IMS segment (collectively, the “Space Technology disposal group”), as discussed in Note 13: Acquisitions and Divestitures . In fiscal 2024, we recognized a $14 million non-cash charge for impairment of goodwill in connection with the divestiture of our antenna and related businesses (“Antenna disposal group”) and a $24 million non-cash charge for impairment of other assets in our CS segment associated with the Tactical Data Links (“TDL”) acquisition.
Non-service FAS Pension Income and Other, Net. The following table presents the components of non-service FAS pension income and other, net:
Fiscal Year
(In millions)
Non-service FAS pension income (1)
Change in fair value of deferred compensation plan assets
Other, net (2)
Non-service FAS pension income and other, net
(1) Includes the non-service cost components of net periodic benefit income under our defined benefit pension and other postretirement benefit plans (collectively, “defined benefit plans”). See Note 9: Retirement Benefits in the Notes for further information.
(2) Primarily includes gains and losses on our equity investments in nonconsolidated affiliates and royalty income.
Interest Expense, Net. Our net interest expense decreased $78 million, or 12%, in fiscal 2025 compared with fiscal 2024 primarily due to lower average outstanding notes under our commercial paper program (“CP Program”)
during 2025. See the “Liquidity and Capital Resources” discussion below in this MD&A and Note 8: Debt and Credit Arrangements in the Notes for further information.
Income Taxes. Our effective tax rate increased to 16.9% in fiscal 2025 compared with 5.3% in fiscal 2024. The increase in effective tax rate (“ETR”) for fiscal 2025 was primarily due to a state legislative change that required us to establish a valuation allowance on state R&D credit carryforwards, the CAS disposal group divestiture, and the enactment of the OBBBA, representing unfavorable impacts of 3.9%, 2.4% and 1.8%, respectively. Our ETR for both years benefited from favorable impacts of R&D credits, favorable resolution of audit uncertainties, and tax deductions for foreign derived intangible income (“FDII”). See Note 7: Income Taxes in the Notes for further information.
Diluted EPS. Diluted EPS increased 8% in fiscal 2025 compared with fiscal 2024 primarily due to higher net income from the combined effects of reasons noted in the sections above.
Business Segment Results of Operations
See “Item 1. Business” of this Report for a description of the sectors in each segment.
CS. Our CS segment includes software defined communication products and waveforms for domestic and international customers; broadband communications; integrated vision solutions; and public safety radios, system applications and equipment.
Fiscal Year
(Dollars in millions)
% Inc/(Dec)
Revenue
Operating income
Operating margin
Ending contractual backlog
CS revenue increased in fiscal 2025 compared with fiscal 2024 primarily due to higher revenue of $179 million in Tactical Communications associated with increased international deliveries for our software-defined resilient communications equipment, partially offset by lower DoW demand, and higher revenue of $82 million in Broadband Communications from program ramps, including the Next Generation Jammer Electronic Warfare program. Such increases were partially offset by lower revenue of $40 million in PSPC from lower volume on civil communication products.
CS segment operating income increased in fiscal 2025 compared with fiscal 2024 primarily due to LHX NeXt driven cost savings realized during fiscal 2025 and the absence of a $24 million non-cash charge for impairment of other assets at Broadband Communications that occurred in fiscal 2024 related to the TDL acquisition, partially offset by unfavorable mix associated with a higher proportion of domestic development volume.
IMS. Our IMS segment includes multi-mission ISR systems; passive sensing and targeting; electronic attack platforms; autonomy; power and communications; networks; and the CAS disposal group, which includes aviation products and pilot training operations and was divested on March 28, 2025.
Fiscal Year
(Dollars in millions)
% Inc/(Dec)
Revenue
Operating income
Operating margin
Ending contractual backlog
IMS revenue remained flat in fiscal 2025 compared with fiscal 2024 primarily due to lower revenue of $459 million from the CAS disposal group divestiture in first quarter 2025. Excluding the divestiture impact, IMS revenue increased $471 million, primarily due to higher revenues of $359 million in ISR from ramp on multiple classified programs and Airborne Early Warning and Control aircrafts for the Republic of Korea Air Force, $61 million in Maritime from new program ramp and $41 million in Targeting and Sensor Systems.
IMS operating income decreased in fiscal 2025 compared with fiscal 2024 primarily due to a $104 million decrease from the CAS disposal group divestiture in first quarter 2025 and unfavorable program performance, including negative estimate at completion (“EAC”) adjustments of $38 million on a classified Maritime program and $25 million from the resolution of a contract matter related to lower utilization on the Canadian Maritime Helicopter Program as it nears completion. Such decreases were largely offset by a $75 million gain recognized in the second quarter of fiscal 2025 in connection with monetization of legacy end-of-life assets, aligned with our transformation and value creation priorities, higher volume, favorable mix impact from higher airborne electro-optical sensors volume and LHX NeXt driven cost savings.
SAS. Our SAS segment includes satellites and space payloads, sensors and full-mission solutions; classified intelligence and cyber; airborne combat systems, and mission networks for air traffic management operations.
Fiscal Year
(Dollars in millions)
% Inc/(Dec)
Revenue
Operating income
Operating margin
Ending contractual backlog
SAS revenue increased in fiscal 2025 compared with fiscal 2024 due to higher revenue of $375 million in Mission Networks from higher FAA volume, offset by lower revenues of $166 million in Space Systems from lower volume associated with program timing, $129 million in Intel & Cyber from lower classified program volume and $76 million in Airborne Combat Systems from the May 2024 Antenna disposal group divestiture.
SAS operating income increased in fiscal 2025 compared with fiscal 2024 primarily due to stabilized program performance, an increase in gains of $23 million recognized in connection with the monetization of legacy end-of-life assets aligned with our transformation and value creation priorities and LHX NeXt driven cost savings, partially offset by unfavorable mix.
AR. Our AR segment includes missile solutions with propulsion technologies for strategic defense, missile defense, hypersonic, tactical and fuzing systems; and space propulsion and power systems for national security space and exploration missions.
Fiscal Year
(Dollars in millions)
% Inc/(Dec)
Revenue
Operating income
Operating margin
Ending contractual backlog
AR revenue increased in fiscal 2025 compared with fiscal 2024 primarily due to higher revenues of $235 million in Missile Solutions from increased production volume on key missile and munitions programs and new program ramp and $56 million in Space Propulsion & Power Solutions from higher volume on a NASA program.
AR operating income decreased primarily due to a $85 million non-cash charge for impairment of goodwill in connection with the Space Technology disposal group, partially offset by higher volume and LHX NeXt driven cost savings.
Unallocated Corporate Items. Unallocated corporate items include income and expenses not included in management’s evaluation of segment operating performance.
Fiscal Year
(In millions)
Amortization of acquisition-related intangibles (1)
LHX NeXt implementation costs (2)
Business divestiture-related (losses) gains and impairment of goodwill (3)
Change in fair value of deferred compensation plan liabilities
Merger, acquisition, and divestiture-related expenses
Other (4)
Total unallocated corporate items
(1) Includes amortization of intangible assets acquired in connection with business combinations. Because our acquisitions benefit the entire Company, the amortization was not allocated to any segment.
(2) Includes costs associated with transforming multiple functions, systems and processes to increase agility and competitiveness, including third-party consulting, workforce optimization and incremental IT expenses for implementation of new systems. For further information on our LHX NeXt initiative and implementation costs see Note 14: Business Segments in the Notes and the “General and Administrative Expenses” discussion above in this MD&A.
(3) See Note 13: Acquisitions and Divestitures in the Notes for further information.
(4) Includes a portion of management and administration, legal, environmental, compensation, retiree benefits, the FAS/CAS operating adjustment (as defined in Note 1: Significant Accounting Policies) , eliminations and other.
LIQUIDITY AND CAPITAL RESOURCES
We prioritize cash flow generation through our commitment to operational excellence, efficient balance sheet management and continuous cost reduction efforts. We consistently assess various capital deployment options, considering both our long-term outlook and the evolving market conditions, recognizing the importance of adaptability as market dynamics change over time.
Our primary capital deployment priorities involve a focus on funding the business through capital expenditures, including investing in training, facilities and digital infrastructure, debt repayment and returning cash to our shareholders through dividends and share repurchases.
Capital Resources
As of January 2, 2026, we had cash and cash equivalents of $1,069 million, of which $356 million was held by our foreign subsidiaries, a significant portion of which we believe can be repatriated to the U.S. with minimal tax impact.
CP Program. As of January 2, 2026, we had no outstanding notes under our CP Program. Our CP Program serves as a source of short-term financing under which we may issue unsecured commercial paper notes up to a maximum aggregate amount of $3.0 billion, supported by amounts available under our credit facilities, discussed below. From time to time, we use borrowings under the CP Program for general corporate purposes and working capital management, including the funding of acquisitions, debt repayment, dividend payments and repurchases of our common stock. See the “Financing Activities” discussion below in this MD&A for further information about our CP Program.
Credit Facilities . As of January 2, 2026, we had no outstanding borrowings under our credit facilities, had available borrowing capacity of $3.0 billion, net of outstanding borrowings under our CP Program, and were in compliance with all covenants under both of the following:
2025 Five-Year Credit Facility. On February 18, 2025, we established a new $2.5 billion, five-year senior unsecured revolving credit facility (the “2025 Five-Year Credit Facility”) by entering into a Revolving Credit Agreement (“2025 Five-Year Credit Agreement”). The 2025 Five-Year Credit Agreement replaces the prior $2.0 billion Revolving Credit Agreement, dated July 29, 2022 (“2022 Credit Agreement”).
2025 364-Day Credit Facility. On February 18, 2025, we established a new $500 million 364-day senior unsecured revolving credit facility (“2025 364-Day Credit Facility”) by entering into a 364-day Credit Agreement (“2025 364-Day Credit Agreement”). The 2025 364-Day Credit Agreement replaces the prior $1.5 billion 364-day credit agreement (“2024 Credit Agreement”), which matured on January 24, 2025.
See Note 8: Debt and Credit Arrangements in the Notes for further information regarding our credit facilities.
Cash Flow
The following table provides a summary of our cash flow information:
Fiscal Year
(In millions)
Cash and cash equivalents, beginning of period
Operating Activities:
Net income
Non-cash adjustments
Changes in working capital
Other, net
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, end of period
Operating Activities. The $547 million increase in net cash provided by operating activities in fiscal 2025 compared with fiscal 2024 was primarily due to favorable impacts of tax planning strategies and tax reform and less cash used for merger, acquisition and severance related payments and CP program interest as a result of lower average outstanding CP notes in fiscal 2025. Such amounts were partially offset by $73 million more cash used to fund working capital (i.e., receivables, contract assets, inventories, accounts payable and contract liabilities), largely due to timing of billing and collection activity and cash used for settlement of a longstanding legal matter.
Cash flow from operations was positive in all of our business segments in fiscal 2025.
Investing Activities. Our primary investing activities include capital expenditures and cash proceeds from sales of businesses.
The $670 million change in net cash provided by investing activities in fiscal 2025 compared with net cash used in investing activities in fiscal 2024 was primarily due to a $547 million increase in proceeds from the sale of businesses in fiscal 2025 (see “Divestitures” section below), net of cash divested, and the absence of a $100 million contribution to our rabbi trust assets made in fiscal 2024.
Divestitures. During fiscal 2025, we completed the divestiture of our CAS disposal group for net cash proceeds of $820 million. During fiscal 2024, we completed the divestitures of our Antenna disposal group and Aerojet Ordnance Tennessee, Inc. (“AOT disposal group”) for net cash proceeds of $170 million and $103 million, respectively. See Note 13: Acquisitions and Divestitures in the Notes for further information .
Financing Activities. Our primary financing activities include issuing and repaying long-term debt and commercial paper, exercising employee stock options, paying dividends and repurchasing common stock.
The $858 million increase in net cash used in financing activities in fiscal 2025 compared with fiscal 2024 was primarily due to increases in repayments of long-term debt, net of issuances of $825 million, cash used to repurchase common stock of $600 million and a decrease in net repayments of commercial paper of $569 million in fiscal 2025. Our primary financing activities are further discussed below.
Common stock repurchases. During fiscal 2025, we repurchased 5.1 million shares of our common stock under our share repurchase program for $1.2 billion. During fiscal 2024, we repurchased 2.5 million shares of our common stock under our share repurchase program for $554 million.
The level and timing of our repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board and management may deem relevant. The timing, volume and nature of repurchases are also subject to market conditions, applicable securities laws and other factors and are at our discretion and may be suspended or discontinued at any time. Additional information regarding our repurchase program is set forth above under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Report.
Long-term debt. During fiscal 2025, we repaid the entire outstanding $600 million aggregate principal amount of our 3.832% notes, due April 27, 2025 with proceeds from the issuance and sale of the $600 million 5.50% notes, due August 15, 2054 (“5.50% 2054 Notes”) issued in fiscal 2024.
During fiscal 2024, we closed the issuance and sale of $2.25 billion aggregate principal amount of long-term fixed-rate debt consisting of 5.05% notes, due June 2029, 5.25% notes, due June 2031 and 5.35% notes, due June 2034 and used the proceeds to repay the entire outstanding $2.25 billion, variable rate-term loan facility utilized to finance the fiscal 2023 acquisition of TDL. Additionally, we closed the issuance and sale of the $600 million 5.50% 2054 Notes and repaid the $350 million of our 3.950% notes, due May 28, 2024.
As of January 2, 2026, we had $10.4 billion of outstanding long-term debt, net of current portion of $673 million.
CP Program. During fiscal 2025, our CP Program had a maximum outstanding balance of $1.8 billion and a daily average outstanding balance of $1.2 billion. During fiscal 2024, our CP Program had a maximum outstanding balance of $2.8 billion and daily average outstanding balance of $2.1 billion.
Dividends. During fiscal 2025 and fiscal 2024 we paid in $903 million and $886 million dividends, respectively. Information concerning our dividends is set forth above under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Report.
Cash Requirements
Total Fixed-Rate Debt. As of January 2, 2026, we had fixed-rate debt of $10.9 billion, reflecting our total long-term debt, including current portion but excluding finance leases, of which $650 million is due within the next 12 months. In addition, cash interest on fixed-rate debt of $520 million is due within the next 12 months. The majority of our fixed-rate debt has been incurred in connection with merger and acquisition activity. See Note 8: Debt and Credit Arrangements in the Notes for further information regarding our fixed-rate debt.
Purchase Obligations. As of January 2, 2026, we had purchase obligations of approximately $10.2 billion, of which approximately 60% are due within the next 12 months. Our purchase obligations mainly consist of outstanding commitments on open purchase orders made to suppliers, subcontractors and other outsourcing partners under U.S. Government contracts and managed service agreements. Our risk associated with these purchase obligations is generally limited to the termination liability provisions within such contracts. As such, we do not believe there to be a material liquidity risk associated with outstanding purchase obligations.
Operating and finance lease commitments. As of January 2, 2026, we had operating and finance lease commitments of $1.3 billion, of which $193 million is due within the next 12 months. See Note 11: Leases in the Notes for further information regarding our lease commitments.
Defined Benefit Pension Contributions. With respect to our U.S. qualified defined benefit pension plans, we intend to contribute annually no less than the required minimum funding thresholds. In fiscal 2025, we made approximately $23 million of contributions to our U.S. qualified defined benefit pension plans. We expect to make approximately $18 million of contributions to these plans in fiscal 2026 and may consider voluntary contributions thereafter.
Future required contributions primarily will depend on the actual annual return on plan assets and the discount rate used to measure the benefit obligation at the end of each year. Depending on these factors, and the resulting funded status of our pension plans, the level of future statutory required minimum contributions could be material. We had net defined benefit plan assets of $1.2 billion as of January 2, 2026 compared with $789 million as of January 3, 2025. The improvement in funded status as of January 2, 2026 is primarily due to more favorable than expected return on plan assets.
We strategically manage our pension obligations by pursuing opportunities, to reduce exposure to pension volatility while maintaining financial flexibility. During fiscal 2025, we executed transactions to purchase nonparticipating single premium group annuity contracts and transfer $1.4 billion of our benefit obligation associated with certain U.S. or Canadian pension plans to insurance providers. The contracts were funded with $1.4 billion of associated plan assets and did not require any additional cash contributions. We expect to continue evaluating opportunities to strategically manage our pension obligations, including the potential for additional pension de-risking transactions in the future, subject to market conditions and plan funding levels. These actions align with our long-term strategy to reduce exposure to pension volatility while maintaining financial flexibility.
See Note 9: Retirement Benefits in the Notes for further information regarding our pension plans.
Commercial Commitments
We have entered into commercial commitments in the normal course of business including surety bonds, standby letter of credit agreements and other arrangements with financial institutions and customers primarily relating to the guarantee of future performance on certain contracts to provide products and services to customers or to obtain insurance policies with our insurance carriers. See Note 15: Legal Proceedings, Commitments and Contingencies in the Notes for additional information.
Liquidity Assessment
Given our current cash position, outlook for funds generated from operations, credit ratings, available credit facilities, cash needs and debt structure, we have not experienced to date, and do not expect to experience, any material issues with liquidity for the next 12 months and in the longer term. Although we can give no assurances concerning our future liquidity, particularly in light of our overall level of debt, U.S. Government budget uncertainties and the state of global commerce and general political and global financial uncertainty.
Based on our current business plan and revenue prospects, we believe that our existing cash, funds generated from operations, availability under our senior unsecured credit facilities and our CP Program and access to the public and private debt and equity markets will be sufficient to provide for our anticipated working capital requirements, capital expenditures, dividend payments, repurchases under our share repurchase program, and repayments of our debt securities at maturity for the next 12 months and the reasonably foreseeable future thereafter. Our capital expenditures for fiscal 2026 are expected to be approximately $600 million.
CRITICAL ACCOUNTING ESTIMATES
Preparation of this Report in accordance with GAAP requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, expenses and contractual backlog as well as disclosure of contingent assets and liabilities. While the following is not intended to be a comprehensive list of our accounting estimates, we consider the estimates discussed below as critical to an understanding of our financial statements because their application places the most significant demands on our judgment, with financial reporting results dependent on estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Specific risks for these critical accounting estimates are described in the following paragraphs. The impact and any associated risks described in the following paragraphs related to these estimates on our business operations are discussed throughout this MD&A where such estimates affect our reported and expected financial results. Senior management has discussed the development and selection of the critical accounting estimates and the related disclosure included herein with the Audit Committee of our Board. Actual results may differ from those estimates.
Revenue Recognition
A significant portion of our business is derived from long-term development and production contracts. Revenue and profit related to development and production contracts are generally recognized over time, typically using the percentage of completion (“POC”) cost-to-cost method of revenue recognition, whereby we measure our progress towards completion of the performance obligation based on the ratio of costs incurred to date to estimated costs at completion under the contract. Because costs incurred represent work performed, we believe this method best depicts the transfer of control of the asset to the customer. Under the POC cost-to-cost method of revenue recognition, a single estimated profit margin is used to recognize profit for each performance obligation over its period of performance.
Recognition of profit on a contract requires estimates of the total cost at completion and transaction price and the measurement of progress towards completion. Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment. Factors that must be considered in estimating the cost of the work to be completed include: the nature and complexity of the work to be performed, subcontractor performance, the cost and availability of purchased materials and services, labor cost and availability and the risk and impact of delayed performance. Factors that must be considered in estimating the total transaction price include contractual cost or performance incentives (such as incentive fees, award fees and penalties) and other forms of variable consideration as well as our historical experience and our expectation for performance on the contract. These variable amounts generally are awarded upon achievement of certain negotiated performance metrics, program milestones or cost targets and can be based upon customer discretion. We include such estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at completion in line with these expectations. We follow a standard EAC process in which we review the progress
and performance on our ongoing contracts. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, there are many reasons estimated contract costs can increase, including: (i) supply chain disruptions, inflation and labor issues; (ii) design or other development challenges; and (iii) program execution challenges (including from technical or quality issues and other performance concerns). Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive incentive or award fees that are higher or lower than expected.
When changes in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized on a cumulative basis. Cumulative EAC adjustments represent the cumulative effect of the changes on current and prior periods; revenue and operating margins in future periods are recognized as if the revised estimates had been used since contract inception. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident. In fiscal 2025 and fiscal 2024, earnings were impacted by recognition of net favorable EAC adjustments of $47 million and $39 million, respectively.
For the impacts of changes in estimates on our Consolidated Financial Statements, see “Business Segment Results of Operations” in this MD&A and Note 1: Significant Accounting Policies in the Notes.
We recognize revenue from numerous contracts with multiple performance obligations. For these contracts, we allocate the transaction price to each performance obligation based on the relative standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount for which we would sell the product or service to a customer on a standalone basis (i.e., not sold as a bundled sale with any other products or services). The allocation of transaction price among separate performance obligations may impact the timing of revenue recognition but will not change the total revenue recognized on the contract.
A substantial majority of our revenue is derived from contracts with the U.S. Government, including foreign military sales contracts. These contracts are subject to the FAR and the prices of our contract deliverables are typically based on our estimated or actual costs plus margin. As a result, the standalone selling prices of the products and services in these contracts are typically equal to the selling prices stated in the contract, thereby eliminating the need to allocate (or reallocate) the transaction price to the multiple performance obligations. In our non-U.S. Government contracts, when standalone selling prices are not directly observable, we also generally use the expected cost plus margin approach to determine standalone selling price. In determining the appropriate margin under the cost plus margin approach, we consider historical margins on similar products sold to similar customers or within similar geographies where objective evidence is available. We may also consider our cost structure and profit objectives, the nature of the proposal, the effects of customization of pricing, our practices used to establish pricing of bundled products, the expected technological life of the product, margins earned on similar contracts with different customers and other factors to determine the appropriate margin.
Defined Benefit Plans
Certain of our current and former employees participate in defined benefit plans in the U.S., Canada and United Kingdom, which are sponsored by L3Harris. See Note 9: Retirement Benefits in the Notes for additional information related to our defined benefit plans.
Significant Assumptions
The determination of the projected benefit obligation (“PBO”) and recognition of net periodic benefit income related to defined benefit plans depend on various assumptions, including discount rates, expected return on plan assets, rate of future compensation increases, mortality, termination and other factors.
We develop assumptions using relevant experience, in conjunction with market-related data for each plan. Assumptions are reviewed annually with third-party experts and adjusted as appropriate. Actual results that differ from our assumptions are accumulated and generally amortized for each plan to the extent required over the estimated future life expectancy or, if applicable, the average remaining service period of the plan’s active participants.
The following table presents the significant assumptions used to determine the PBO:
January 2, 2026
January 3, 2025
Pension
Other
Benefits
Pension
Other
Benefits
Discount rate
The following table presents the significant assumptions used to determine net periodic benefit income:
Fiscal Year
Pension
Other
Benefits
Pension
Other
Benefits
Discount rate to determine service cost
Discount rate to determine interest cost
Expected return on plan assets
Discount Rate. The discount rate is used to calculate the present value of expected future benefit payments at the measurement date. An increase in the discount rate decreases the PBO and generally decreases our net periodic benefit income. A decrease in the discount rate increases the PBO and generally increases our net periodic benefit income. The discount rate assumption is based on current investment yields of high-quality fixed income investments during the retirement benefits maturity period. The pension discount rate is determined by considering an interest rate yield curve comprising AAA/AA bonds, with maturities between zero and thirty years, developed by the plan’s actuaries. Annual benefit payments are then discounted to present value using this yield curve to develop a single discount rate matching the plan’s characteristics.
Sensitivity Analysis. The sensitivity of the PBO to changes in the discount rate varies depending on the magnitude and direction of the change in the discount rate. We estimate that a 25 basis point change in the discount rate of our combined U.S. defined benefit pension plans would have the following impact on our PBO as of January 2, 2026 and net periodic benefit income for the next twelve months:
(In millions)
25 Basis
Point Increase
25 Basis
Point Decrease
PBO
Net periodic benefit income
Expected Return on Plan Assets. Substantially all of our plan assets are managed on a commingled basis in a master investment trust. We determine our expected return on plan assets by evaluating both historical returns and estimates of future returns. Specifically, we consider the plan’s actual historical annual return on assets over the past 15, 20 and 25 years and historical broad market returns over long-term timeframes based on our strategic allocation, which is detailed in Note 9: Retirement Benefits in the Notes. Future returns are based on independent estimates of long-term asset class returns. Based on this approach, the weighted average long-term annual rate of return on assets was estimated to be 7.46% for both fiscal 2025 and 2026.
Sensitivity Analysis. We estimate that a 25 basis point change in the expected return on plan assets of our combined U.S. defined benefit pension plans would have the following impact on net periodic benefit income for the next twelve months:
(In millions)
25 Basis
Point Increase
25 Basis
Point Decrease
Net periodic benefit income
Goodwill
We test our goodwill for impairment annually as of the first business day of our fourth fiscal quarter, which was October 6 in fiscal 2025, or under certain circumstances more frequently, such as when events or circumstances indicate there may be impairment or when we reorganize our reporting structure such that the composition of one or more of our reporting units is affected. We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is our business segment level or one level below the business segment. Some of our segments are comprised of multiple reporting units. Allocation of goodwill to multiple reporting units could make it more likely that we will have an impairment charge in the future. An impairment charge to any one of our reporting units could have a material impact on our financial condition and results of operations.
The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. To test goodwill for impairment, we may perform both qualitative and quantitative assessments. If we elect to perform a qualitative assessment for a certain reporting unit, we evaluate events and circumstances impacting the reporting unit to determine the probability that goodwill is impaired. If we determine it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative assessment.
Our qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. These factors include: (i) deterioration in the general economy; (ii) deterioration in the environment in which we operate; (iii) increase in materials, labor or other costs; (iv) negative or declining cash flows; (v) changes in management, changes in strategy or significant litigation; (vi) changes in the composition or carrying amount of net assets or an expectation of disposing all or a portion of the reporting unit; or (vii) a sustained decrease in share price.
If we perform a quantitative assessment for a certain reporting unit, we calculate the fair value of that reporting unit and compare the fair value to the reporting unit’s net book value. We estimate fair values of our reporting units based on projected cash flows and review of revenue and/or earnings multiples applied to the latest twelve months’ revenue and earnings of our reporting units. Projected cash flows are based on our best estimate of future revenues, operating costs and balance sheet metrics reflecting our view of the financial and market conditions of the underlying business; and the resulting cash flows are discounted using an appropriate discount rate that reflects the risk in the forecasted cash flows. The revenues and earnings multiples applied to the revenues and earnings of our reporting units are based on current multiples of revenues and earnings for similar businesses, and based on revenues and earnings multiples paid for recent acquisitions of similar businesses made in the marketplace. We then assess whether any implied control premium, based on a comparison of fair value based purely on our stock price and outstanding shares with fair value determined by using all of the above-described models, is reasonable. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment is recognized in an amount equal to that excess.
Fiscal 2025 Impairment Tests. We completed our annual goodwill impairment assessment for all reporting units as of October 6, 2025 and concluded that no impairment existed for any of the reporting units.
Business realignment. Effective for fiscal 2025, to better align our businesses, we transferred our fuzing and ordnance (“FOS”) business from our IMS segment (within the TSS and DE reporting unit) to our AR segment (also a reporting unit) and adjusted our reporting accordingly. Immediately before and after the realignment, we performed quantitative impairment assessments under our former and new reporting unit structure. These assessments indicated no impairment existed either before or after the realignment.
Space Technology disposal group. For information related to the Space Technology disposal group pending divestiture, including goodwill allocation, impairment testing and resulting impairment see Note 6: Goodwill and Intangible Assets in the Notes.
See Note 6: Goodwill and Intangible Assets in these Notes for further information.
Fiscal 2024 Impairment Tests. We completed our annual goodwill impairment assessment for all reporting units as of September 30, 2024 and concluded that no impairment existed for any of the reporting units.
Business realignment. Effective for fiscal 2024, to better align our businesses, we adjusted our IMS segment by realigning our Electro Optical and Maritime sectors, which are also reporting units, splitting Electro Optical into two sectors, Global Optical Systems and Defense Electronics, and moving one Electro Optical business to the Maritime sector. Global Optical Systems and Defense Electronics represent one reporting unit. Immediately before and after the realignment, we performed a quantitative impairment assessment under our former and new reporting unit structure. These assessments indicated no impairment existed either before or after the realignment.
Antenna disposal group divestiture . For information related to the Antenna disposal group divestiture, including goodwill allocation, impairment testing and resulting impairment s ee Note 6: Goodwill and Intangible Assets in the Notes.
At-risk Goodwill. Based on the fiscal 2025 annual impairment testing, all of our reporting units had clearances above 30%. Based on the fiscal 2024 annual impairment testing, all of our reporting units had clearances above 25%.
An impairment of goodwill could result from a number of circumstances, including different assumptions used in determining the fair value of the reporting units; changes to U.S. Government spending priorities or ability to win competitively awarded contracts; an inability to meet our forecast; the rescission of significant contract awards as a result of competitors protesting or challenging contracts awarded to us; or an increase in interest rates without a corresponding increase in future revenue.
Goodwill-Related Fair Value Estimates. Fair value determinations described above under the heading “Goodwill” in this Critical Accounting Estimates section of this MD&A were determined based on a combination of market-based valuation techniques, utilizing quoted market prices and projected discounted cash flows. The
process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. Material changes in these estimates could occur and result in additional impairments in future periods.
Business Combinations
We account for business combinations using the acquisition method of accounting, whereby identifiable assets acquired and liabilities assumed are measured at their estimated fair value as of the date of acquisition and any excess of the fair value of consideration transferred over the fair values of identifiable assets and liabilities is recorded as goodwill. See Note 13: Acquisitions and Divestitures in the Notes for additional information.
Income Taxes
We record deferred tax assets and liabilities for differences between the tax basis of assets and liabilities and amounts reported in our Consolidated Balance Sheet, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the Consolidated Balance Sheet and provide necessary valuation allowances as required. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. We have not made any material changes in the methodologies used to determine our tax valuation allowances during fiscal 2025.
Our Consolidated Balance Sheet as of January 2, 2026 included deferred tax assets of $76 million and deferred tax liabilities of $1,114 million. For all jurisdictions in which we have net deferred tax assets, we expect that our existing levels of pre-tax earnings are sufficient to generate the amount of future taxable income needed to realize these tax assets. Our valuation allowance related to our deferred tax assets, which is reflected in our Consolidated Balance Sheet, was $260 million as of January 2, 2026. Although we make reasonable efforts to ensure the accuracy of our deferred tax assets, if we continue to operate at a loss in certain jurisdictions, or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, or if the potential impact of tax planning strategies changes, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
The evaluation of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, involves inherent uncertainty and requires the use of judgment. We evaluate our income tax positions and record tax benefits for all years subject to examination based on our assessment of the facts and circumstances as of the reporting date. For tax positions where it is more likely than not that a tax benefit will be realized, we record the largest amount of tax benefit with a greater than 50% probability of being realized upon ultimate settlement with the applicable taxing authority, assuming the taxing authority has full knowledge of all relevant information. For income tax positions where it is not more likely than not that a tax benefit will be realized, we do not recognize a tax benefit in our Consolidated Balance Sheet.
As of January 2, 2026, we had $754 million of unrecognized tax benefits, of which $635 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized. See Note 7: Income Taxes in the Notes for additional information.
Impact of Recently Adopted and Issued Accounting Pronouncements
See Note 1: Significant Accounting Policies in the Notes for information relating to the impact of recently adopted and issued accounting pronouncements.
