10-Q 1 hrsq3fy1810-q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

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

or

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

Commission File Number: 1-3863
HARRIS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware |  | 34-0276860
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
1025 West NASA Boulevard Melbourne, Florida |  | 329l9
(Address of principal executive offices) |  | (Zip Code)
(321) 727-9l00
(Registrant’s telephone number, including area code)
No changes
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes p No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes p No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. p
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). p Yes þ No
The number of shares outstanding of the registrant’s common stock as of April 27, 2018 was 118,728,914 shares.

HARRIS CORPORATION
FORM 10-Q
For the Quarter Ended March 30, 2018
INDEX

| 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 and March 31, 2017 | 1
Condensed Consolidated Statement of Comprehensive Income for the Quarter and Three Quarters Ended March 30, 2018 and March 31, 2017 | 2
Condensed Consolidated Balance Sheet at March 30, 2018 and June 30, 2017 | 3
Condensed Consolidated Statement of Cash Flows for the Three Quarters Ended March 30, 2018 and March 31, 2017 | 4
Notes to Condensed Consolidated Financial Statements | 5
Review Report of Independent Registered Public Accounting Firm | 21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 36
Item 4. Controls and Procedures | 37
Part II. Other Information: |
Item 1. Legal Proceedings | 38
Item 1A. Risk Factors | 38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 39
Item 3. Defaults Upon Senior Securities | 40
Item 4. Mine Safety Disclosures | 40
Item 5. Other Information | 40
Item 6. Exhibits | 40
Signature | 41

This Quarterly Report on Form 10-Q contains trademarks, service marks and registered marks of Harris Corporation and its subsidiaries.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

| Quarter Ended |  | Three Quarters Ended
| March 30, 2018 |  | March 31, 2017 |  | March 30, 2018 |  | March 31, 2017
| (In millions, except per share amounts)
Revenue from product sales and services | $ | 1,568 |  |  | $ | 1,489 |  |  | $ | 4,516 |  |  | $ | 4,358 |
Cost of product sales and services | (1,007 | ) |  | (958 | ) |  | (2,904 | ) |  | (2,775 | )
Engineering, selling and administrative expenses | (305 | ) |  | (256 | ) |  | (812 | ) |  | (785 | )
Operating income | 256 |  |  | 275 |  |  | 800 |  |  | 798 |
Non-operating income (loss) | — |  |  | — |  |  | (2 | ) |  | 2 |
Interest income | — |  |  | — |  |  | 1 |  |  | 1 |
Interest expense | (41 | ) |  | (42 | ) |  | (124 | ) |  | (130 | )
Income from continuing operations before income taxes | 215 |  |  | 233 |  |  | 675 |  |  | 671 |
Income taxes | (12 | ) |  | (69 | ) |  | (166 | ) |  | (199 | )
Income from continuing operations | 203 |  |  | 164 |  |  | 509 |  |  | 472 |
Discontinued operations, net of income taxes | (2 | ) |  | (79 | ) |  | (8 | ) |  | (50 | )
Net income | $ | 201 |  |  | $ | 85 |  |  | $ | 501 |  |  | $ | 422 |
Net income per common share |  |  |  |  |  |  |
Basic |  |  |  |  |  |  |
Continuing operations | $ | 1.71 |  |  | $ | 1.33 |  |  | $ | 4.28 |  |  | $ | 3.82 |
Discontinued operations | (0.01 | ) |  | (0.63 | ) |  | (0.07 | ) |  | (0.41 | )
| $ | 1.70 |  |  | $ | 0.70 |  |  | $ | 4.21 |  |  | $ | 3.41 |
Diluted |  |  |  |  |  |  |
Continuing operations | $ | 1.67 |  |  | $ | 1.31 |  |  | $ | 4.19 |  |  | $ | 3.77 |
Discontinued operations | (0.01 | ) |  | (0.62 | ) |  | (0.06 | ) |  | (0.40 | )
| $ | 1.66 |  |  | $ | 0.69 |  |  | $ | 4.13 |  |  | $ | 3.37 |
Cash dividends paid per common share | $ | 0.57 |  |  | $ | 0.53 |  |  | $ | 1.71 |  |  | $ | 1.59 |
Basic weighted average common shares outstanding | 118.4 |  |  | 122.6 |  |  | 118.7 |  |  | 123.3 |
Diluted weighted average common shares outstanding | 121.0 |  |  | 124.5 |  |  | 121.1 |  |  | 125.0 |

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
1

HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)

| Quarter Ended |  | Three Quarters Ended
| March 30, 2018 |  | March 31, 2017 |  | March 30, 2018 |  | March 31, 2017
| (In millions)
Net income | $ | 201 |  |  | $ | 85 |  |  | $ | 501 |  |  | $ | 422 |
Other comprehensive income (loss): |  |  |  |  |  |  |
Foreign currency translation gain (loss), net of income taxes | 5 |  |  | 10 |  |  | 26 |  |  | (19 | )
Net unrealized gain on hedging derivatives, net of income taxes | — |  |  | 1 |  |  | 1 |  |  | — |
Net unrecognized gain on postretirement obligations, net of income taxes | — |  |  | — |  |  | — |  |  | 2 |
Other comprehensive income (loss), net of income taxes | 5 |  |  | 11 |  |  | 27 |  |  | (17 | )
Total comprehensive income | $ | 206 |  |  | $ | 96 |  |  | $ | 528 |  |  | $ | 405 |

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
2

HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)

| March 30, 2018 |  | June 30, 2017
| (In millions, except shares)
Assets |  |  |
Current Assets |  |  |
Cash and cash equivalents | $ | 443 |  |  | $ | 484 |
Receivables | 743 |  |  | 623 |
Inventories | 963 |  |  | 841 |
Income taxes receivable | 149 |  |  | 24 |
Other current assets | 116 |  |  | 101 |
Total current assets | 2,414 |  |  | 2,073 |
Non-current Assets |  |  |
Property, plant and equipment | 879 |  |  | 904 |
Goodwill | 5,377 |  |  | 5,366 |
Other intangible assets | 1,019 |  |  | 1,104 |
Non-current deferred income taxes | 149 |  |  | 409 |
Other non-current assets | 232 |  |  | 234 |
Total non-current assets | 7,656 |  |  | 8,017 |
| $ | 10,070 |  |  | $ | 10,090 |
Liabilities and Equity |  |  |
Current Liabilities |  |  |
Short-term debt | $ | 5 |  |  | $ | 80 |
Accounts payable | 494 |  |  | 540 |
Compensation and benefits | 152 |  |  | 140 |
Other accrued items | 354 |  |  | 329 |
Advance payments and unearned income | 296 |  |  | 252 |
Income taxes payable | 22 |  |  | 31 |
Current portion of long-term debt | 823 |  |  | 554 |
Total current liabilities | 2,146 |  |  | 1,926 |
Non-current Liabilities |  |  |
Defined benefit plans | 868 |  |  | 1,278 |
Long-term debt, net | 3,391 |  |  | 3,396 |
Non-current deferred income taxes | 49 |  |  | 34 |
Other long-term liabilities | 479 |  |  | 528 |
Total non-current liabilities | 4,787 |  |  | 5,236 |
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 |
Other capital | 1,724 |  |  | 1,741 |
Retained earnings | 1,543 |  |  | 1,343 |
Accumulated other comprehensive loss | (249 | ) |  | (276 | )
Total shareholders’ equity | 3,137 |  |  | 2,928 |
| $ | 10,070 |  |  | $ | 10,090 |

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
3

HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

| Three Quarters Ended
| March 30, 2018 |  | March 31, 2017
| (In millions)
Operating Activities |  |  |
Net income | $ | 501 |  |  | $ | 422 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Depreciation and amortization | 117 |  |  | 140 |
Amortization of intangible assets from Exelis Inc. acquisition | 75 |  |  | 99 |
Share-based compensation | 50 |  |  | 33 |
Qualified pension plan contributions | (301 | ) |  | (143 | )
Pension income | (101 | ) |  | (73 | )
Impairment of goodwill and other assets | — |  |  | 240 |
Gain on sale of business | — |  |  | (23 | )
(Increase) decrease in: |  |  |
Accounts receivable | (120 | ) |  | 14 |
Inventories | (122 | ) |  | (26 | )
Increase (decrease) in: |  |  |
Accounts payable | (46 | ) |  | (100 | )
Advance payments and unearned income | 45 |  |  | (62 | )
Income taxes | 146 |  |  | (19 | )
Other | (14 | ) |  | (13 | )
Net cash provided by operating activities | 230 |  |  | 489 |
Investing Activities |  |  |
Additions of property, plant and equipment | (79 | ) |  | (79 | )
Proceeds from sale of business, net | — |  |  | 375 |
Adjustment to proceeds from sale of business | (2 | ) |  | (25 | )
Net cash provided by (used in) investing activities | (81 | ) |  | 271 |
Financing Activities |  |  |
Net proceeds from borrowings | 552 |  |  | 235 |
Repayments of borrowings | (367 | ) |  | (548 | )
Proceeds from exercises of employee stock options | 31 |  |  | 50 |
Repurchases of common stock | (197 | ) |  | (460 | )
Cash dividends | (205 | ) |  | (199 | )
Other financing activities | (10 | ) |  | (20 | )
Net cash used in financing activities | (196 | ) |  | (942 | )
Effect of exchange rate changes on cash and cash equivalents | 6 |  |  | (3 | )
Net decrease in cash and cash equivalents | (41 | ) |  | (185 | )
Cash and cash equivalents, beginning of year | 484 |  |  | 487 |
Cash and cash equivalents, end of quarter | $ | 443 |  |  | $ | 302 |

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A — Significant Accounting Policies and Recent Accounting Standards
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) include the accounts of Harris Corporation and its consolidated subsidiaries. As used in these Notes to Condensed Consolidated Financial Statements (Unaudited) (these “Notes”), the terms “Harris,” “Company,” “we,” “our” and “us” refer to Harris Corporation and its consolidated subsidiaries. Intracompany transactions and accounts have been eliminated in consolidation. The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared by Harris, without an audit, in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP for annual financial statements. In the opinion of management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial position, results of operations and cash flows for the periods presented therein. The results for the third quarter and first three quarters of fiscal 2018 are not necessarily indicative of the results that may be expected for the full fiscal year or any subsequent period. The balance sheet at June 30, 2017 has been derived from our audited financial statements, but does not include all of the information and footnotes required by GAAP for annual financial statements. We provide complete, audited financial statements in our Annual Report on Form 10-K, which includes information and footnotes required by the rules and regulations of the SEC. The information included in this Quarterly Report on Form 10-Q (this “Report”) should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (our “Fiscal 2017 Form 10-K”).
In connection with our divestitures in fiscal 2017 of two significant businesses that were part of our former Critical Networks segment, our remaining operations that had been part of our former Critical Networks segment were integrated with our Electronic Systems segment effective for the third quarter of fiscal 2017, and our Critical Networks segment was eliminated. 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 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. See Note B — Discontinued Operations in these Notes and Note 3: “Discontinued Operations and Divestitures” in the Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K for additional information. Except for disclosures related to our cash flows, or unless otherwise specified, disclosures in our Condensed Consolidated Financial Statements (Unaudited) and these Notes relate solely to our continuing operations.
Amounts contained in this Report may not always add to totals due to rounding.
Reclassifications
Certain prior-year amounts have been reclassified in our Condensed Consolidated Financial Statements (Unaudited) to conform with current-year classifications. Reclassifications include certain human resources and information technology (“IT”) costs from the “Cost of product sales and services” line item to the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited) and in these Notes.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes and related disclosures. These estimates and assumptions are based on experience and other information available prior to issuance of the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes. Materially different results can occur as circumstances change and additional information becomes known.
Adoption of New Accounting Standards
In the first quarter of fiscal 2018, we adopted an accounting standards update issued by the Financial Accounting Standards Board (“FASB”) that requires recognition of the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. Consequently, this update eliminates the exception to the recognition of current and deferred income taxes for intra-entity transfers of assets other than for inventory until the assets have been sold to an outside party. This update requires entities to apply a modified retrospective approach with a cumulative catch-up adjustment to
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beginning retained earnings in the period of adoption. In addition, entities are required to record deferred tax balances with an offset to retained earnings for unrecognized amounts that will be recognized under this update. We applied all changes required by this update using the modified retrospective approach from the beginning of fiscal 2018. Adopting this update resulted in a $27 million reduction of prepaid income tax assets from the “Other current assets” and “Other non-current assets” line items and a $27 million increase in the “Non-current deferred income taxes” line item in our Condensed Consolidated Balance Sheet (Unaudited) as of September 29, 2017.
Accounting Standards Issued But Not Yet Effective
In May 2014, the FASB issued a comprehensive 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. The guidance in this standard is principles-based and, consequently, entities will be required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to separate performance obligations. The core principle of this standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To help financial statement users better understand the nature, amount, timing and potential uncertainty of the revenue that is recognized, this standard requires significantly more interim and annual disclosures. This standard allows for either “full retrospective” adoption (application to all periods presented) or “modified retrospective” adoption (application to only the most current period presented in the financial statements, with certain additional required footnote disclosures). In August 2015, the FASB issued an accounting standards update that deferred the effective date of the standard by one year, while continuing to permit entities to elect to adopt the standard as early as the original effective date. As a result, this standard is now effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, which for us is our fiscal 2019.
In preparation for the adoption of this standard, the project team we formed has made progress against the detailed implementation plan we developed, including in the following areas:

• | Completing an accounting guidance gap analysis, consisting of a review of significant revenue streams and representative contracts to determine potential changes to our existing accounting policies and potential impacts to our consolidated financial statements;

•Completing an inventory of our outstanding contracts and revenue streams;

• | Drafting a Company-wide revenue recognition policy reflecting the requirements of this standard and tailored to our businesses;

• | Providing Company-wide training to affected employees, including in the areas of accounting, finance, contracts, tax and segment management;

• | Applying the five-step model of this standard to our contracts and revenue streams to evaluate the quantitative and qualitative impacts this standard will have on our consolidated financial statements, accounting and operating policies, accounting systems, internal control structure and business practices; and

• | Initiating the process of reviewing the additional disclosure requirements of this standard and the potential impact on our accounting systems and internal control structure.

Although we are still in the process of evaluating and quantifying the impact of this standard as described above, we have identified certain changes we expect this standard to have on our consolidated financial statements. A significant portion of our revenue is derived from contracts with the U.S. Government, with revenue recognized using the percentage-of-completion (“POC”) method. We expect to recognize revenue on an “over time” basis for most of these contracts by using cost inputs to measure progress toward the completion of our performance obligations, which is similar to the POC cost-to-cost method currently used on the majority of these contracts. Consequently, we expect the adoption of this standard to impact certain of these contracts that recognize revenue using the POC units-of-delivery, milestone or other methods, resulting in recognition of revenue (and costs) earlier in the performance period as costs are incurred. We also are continuing to evaluate the potential impact of this standard in other areas, including:
•The number of distinct performance obligations within our contractual arrangements;
•Contract modifications;

• | The timing of revenue recognition based on the more prescriptive guidance for recognizing revenue on an “over time” basis, especially for certain non-U.S. Government contracts based on existing contractual language;

• | Incremental costs of obtaining a contract; and

•Estimation and recognition of variable consideration for contracts to provide services.
Because of the broad scope of this standard, it could impact revenue and cost recognition across all of our business segments as well as related business processes and IT systems. As a result, our evaluation of the impact of this standard will continue over the next quarter. Based on our current evaluation, we expect to apply this standard using the full retrospective
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approach, effective as of the beginning of fiscal 2019. The full retrospective approach would require us to apply this standard to each subsequent period presented and to recognize the cumulative effect of adopting this standard as of the beginning of our fiscal 2017 - the earliest comparative period to be presented subsequent to adoption. However, a final determination on whether we will adopt this standard using the full retrospective or the modified retrospective approach has not yet been made as we will continue our evaluation of the impact of this standard over the next quarter.
In February 2016, the FASB issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to existing lease guidance under GAAP. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with the option to use certain relief. Full retrospective application is prohibited. This standard is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018, which for us is our fiscal 2020. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows.
In March 2017, the FASB issued an accounting standards update to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This update requires that entities present components of net periodic pension cost and net periodic postretirement benefit cost other than the service cost component separately from the service cost component and outside the subtotal of income from operations. This update must be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, which for us is our fiscal 2019. Adopting this update will result in a decrease in operating income and an increase in the net non-operating components of income from continuing operations of $164 million and $183 million for fiscal 2017 and 2018, respectively. Adopting this update will not have a material impact on our financial position or cash flows.
Note B — Discontinued Operations
We completed two significant divestitures during fiscal 2017, the divestiture of our government IT services business (“IT Services”) and the divestiture of our Harris CapRock Communications commercial business (“CapRock”), which are described in more detail below. These divestitures individually and collectively represented a strategic shift away from non-core markets (for example, energy, maritime and government IT services). The decision to divest these businesses was part of our strategy to simplify our operating model to focus on technology-differentiated, high-margin businesses, and had a major effect on our operations and financial results.
As a result, IT Services and CapRock are reported as discontinued operations in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes. Except for disclosures related to our cash flows, or unless otherwise specified, disclosures in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes relate solely to our continuing operations.
The major components of discontinued operations in our Condensed Consolidated Statement of Income (Unaudited) included the following:

|  | Quarter Ended |  | Three Quarters Ended
|  | March 30, 2018 |  | March 31, 2017 |  | March 30, 2018 |  | March 31, 2017
|  | (In millions)
Revenue from product sales and services | $ | — |  |  | $ | 276 |  |  | $ | — |  |  | $ | 963 |
Cost of product sales and services | — |  |  | (236 | ) |  | — |  |  | (806 | )
Engineering, selling and administrative expenses | — |  |  | (23 | ) |  | — |  |  | (95 | )
Impairment of goodwill and other assets | — |  |  | (238 | ) |  | — |  |  | (240 | )
Non-operating income (loss) | (2 | ) |  | (4 | ) |  | (5 | ) |  | 3 |
Loss before income taxes | (2 | ) |  | (225 | ) |  | (5 | ) |  | (175 | )
Gain (loss) on sale of discontinued operations, net (1) | — |  |  | 5 |  |  | — |  |  | (2 | )
Income tax benefit (expense) | — |  |  | 141 |  |  | (3 | ) |  | 127 |
Discontinued operations, net of income taxes | $ | (2 | ) |  | $ | (79 | ) |  | $ | (8 | ) |  | $ | (50 | )

(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.

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Depreciation and amortization, capital expenditures and significant noncash items of discontinued operations in our Condensed Consolidated Statement of Income (Unaudited) included the following:

| Quarter Ended |  | Three Quarters Ended
| March 31, 2017 |  | March 31, 2017
| (In millions)
Depreciation and amortization | $ | 10 |  |  | $ | 39 |
Capital expenditures | — |  |  | 5 |
Significant noncash items: |  |  |
Impairment of goodwill and other assets | 238 |  |  | 240 |
Gain on sale of CapRock commercial business | 23 |  |  | 23 |

IT Services
On April 28, 2017, we completed the divestiture to an affiliate of Veritas Capital Fund Management, L.L.C. (“Veritas”) of IT Services, which primarily provided IT and engineering managed services to U.S. Government customers, for net cash proceeds of $646 million, and recognized a pre-tax loss of $28 million (a gain of $55 million after certain tax benefits related to the transaction or $.44 per diluted share) on the sale after transaction expenses. The decision to divest IT Services was part of our strategy to simplify our operating model to focus on technology-differentiated, high-margin businesses. IT Services was part of our former Critical Networks segment and in connection with the definitive agreement to sell IT Services, as described above, the remaining operations that had been part of the Critical Networks segment, including our air traffic management (“ATM”) business, primarily serving the Federal Aviation Administration (“FAA”), were integrated with our Electronic Systems segment effective for the third quarter of fiscal 2017, and our Critical Networks segment was eliminated. We agreed to provide various transition services to Veritas for a period of up to 18 months following the closing of the transaction pursuant to a separate agreement.
The following table presents the key financial results of IT Services included in “Discontinued operations, net of income taxes” in our Condensed Consolidated Statement of Income (Unaudited):

| Quarter Ended |  | Three Quarters Ended
| March 30, 2018 |  | March 31, 2017 |  | March 30, 2018 |  | March 31, 2017
| (In millions)
Revenue from product sales and services | $ | — |  |  | $ | 276 |  |  | $ | — |  |  | $ | 819 |
Cost of product sales and services | — |  |  | (236 | ) |  | — |  |  | (698 | )
Engineering, selling and administrative expenses | — |  |  | (23 | ) |  | — |  |  | (72 | )
Impairment of goodwill and other assets | — |  |  | (238 | ) |  | — |  |  | (240 | )
Non-operating loss | (1 | ) |  | (4 | ) |  | (3 | ) |  | (4 | )
Loss before income taxes | (1 | ) |  | (225 | ) |  | (3 | ) |  | (195 | )
Loss on sale of discontinued operation | — |  |  | (21 | ) |  | — |  |  | (28 | )
Income tax benefit (expense) | — |  |  | 94 |  |  | (3 | ) |  | 84 |
Discontinued operations, net of income taxes | $ | (1 | ) |  | $ | (152 | ) |  | $ | (6 | ) |  | $ | (139 | )

CapRock
On January 1, 2017, we completed the divestiture to SpeedCast International Ltd. (“SpeedCast”) of CapRock, which provided wireless, terrestrial and satellite communications services to energy and maritime customers, for net cash proceeds of $368 million, and recognized a pre-tax gain of $14 million ($61 million after certain tax benefits related to the transaction, including reversal of valuation allowances on capital losses and net operating losses, or $.49 per diluted share) on the sale after transaction expenses and purchase adjustments in respect of net cash and net working capital as set forth in the definitive sales agreement entered into November 1, 2016.
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The following table presents the key financial results of CapRock included in “Discontinued operations, net of income taxes” in our Condensed Consolidated Statement of Income (Unaudited):

| Quarter Ended |  | Three Quarters Ended
| March 30, 2018 |  | March 31, 2017 |  | March 30, 2018 |  | March 31, 2017
| (In millions)
Revenue from product sales and services | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 144 |
Cost of product sales and services | — |  |  | — |  |  | — |  |  | (108 | )
Engineering, selling and administrative expenses | — |  |  | — |  |  | — |  |  | (23 | )
Non-operating income (loss) | (1 | ) |  | — |  |  | (2 | ) |  | 8 |
Income (loss) before income taxes | (1 | ) |  | — |  |  | (2 | ) |  | 21 |
Gain on sale of discontinued operation | — |  |  | 23 |  |  | — |  |  | 23 |
Income tax benefit | — |  |  | 47 |  |  | — |  |  | 43 |
Discontinued operations, net of income taxes | $ | (1 | ) |  | $ | 70 |  |  | $ | (2 | ) |  | $ | 87 |

Note C — Stock Options and Other Share-Based Compensation
During the three quarters ended March 30, 2018, we had options or other share-based compensation outstanding under two shareholder-approved employee stock incentive plans (“SIPs”), the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010) and the Harris Corporation 2015 Equity Incentive Plan (the “2015 EIP”). Grants of share-based awards after October 23, 2015 were made under our 2015 EIP. We believe that share-based awards more closely align the interests of participants with those of shareholders. Certain share-based awards provide for accelerated vesting if there is a change in control (as defined under our SIPs). The compensation cost related to our share-based awards that was charged against income was $13 million and $37 million for the quarter and three quarters ended March 30, 2018, respectively, and $12 million and $32 million for the quarter and three quarters ended March 31, 2017, respectively.
The aggregate number of shares of our common stock that we issued under the terms of our SIPs, net of shares withheld for tax purposes and inclusive of both continuing and discontinued operations, was 207,506 and 606,438 for the quarter and three quarters ended March 30, 2018, respectively, and 493,916 and 1,227,869 for the quarter and three quarters ended March 31, 2017, respectively. Awards granted to participants under our 2015 EIP during the quarter ended March 30, 2018 consisted of 166,362 restricted shares and restricted units. There were no stock options and no performance units granted to participants under our 2015 EIP during the quarter ended March 30, 2018. Awards granted to participants under our 2015 EIP during the three quarters ended March 30, 2018 consisted of 412,285 stock options, 296,427 restricted shares and restricted units and 173,635 performance units. The fair value as of the grant date of each stock option award was determined using the Black-Scholes-Merton option-pricing model and the following assumptions: expected dividend yield of 1.82 percent; expected volatility of 19.32 percent; risk-free interest rates averaging 1.77 percent; and expected term of 5.00 years. The fair value as of the grant date of each restricted share award and restricted unit award was based on the closing price of our common stock on the grant date. The fair value as of the grant date of each performance unit award was determined based on the fair value from a multifactor Monte Carlo valuation model that simulates our stock price and total shareholder return (“TSR”) relative to companies in our TSR peer group, less a discount to reflect the delay in payments of cash dividend-equivalents that are made only upon vesting.
Note D — Restructuring and Other Exit Costs
We record charges for restructuring and other exit activities related to sales or terminations of product lines, closures or relocations of business activities, changes in management structure, and fundamental reorganizations that affect the nature and focus of operations. Such charges include termination benefits, contract termination costs and costs to consolidate facilities or relocate employees. We record these charges at their fair value when incurred. In cases where employees are required to render service until they are terminated in order to receive the termination benefits and will be retained beyond the minimum retention period, we record the expense ratably over the future service period. These charges are included as a component of the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Condensed Consolidated Statement of Income (Unaudited).
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Restructuring, Exelis Acquisition-Related Integration and Other Charges
In fiscal 2017, we recorded $58 million of charges for integration and other costs in connection with our acquisition of Exelis Inc. (collectively with its subsidiaries, “Exelis”), substantially all of which were included as a component of the “Engineering, selling and administrative expenses” line item in our Consolidated Statement of Income in our Fiscal 2017 Form 10-K. We had liabilities of $26 million at March 30, 2018 and $43 million at June 30, 2017 associated with this integration activity and with previous restructuring actions. The majority of the remaining liabilities as of March 30, 2018 will be paid within the next twelve months.
Other Exit-Related Charges
During the quarter ended March 30, 2018, we recorded $45 million of charges in connection with our decision to transition and exit a commercial line of business that had been developing an air-to-ground radio access network for the business aviation market based on the Long Term Evolution (“LTE”) standard operating in the unlicensed spectrum. These charges are included as a component of “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited). We had a liability of $21 million at March 30, 2018 associated with this exit activity which we expect will be paid within the next twelve months.
Note E — Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are summarized below:

| 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.

Note F — Receivables
Receivables are summarized below:

| March 30, 2018 |  | June 30, 2017
| (In millions)
Accounts receivable | $ | 463 |  |  | $ | 368 |
Unbilled costs and accrued earnings on cost-plus contracts | 284 |  |  | 258 |
| 747 |  |  | 626 |
Less allowances for collection losses | (4 | ) |  | (3 | )
| $ | 743 |  |  | $ | 623 |

We have a receivables sale agreement (“RSA”) with a third-party financial institution that permits us to sell, on a non-recourse basis, up to $50 million of outstanding receivables at any given time. From time to time, we have sold certain customer receivables under the RSA, which we continue to service and collect on behalf of the third-party financial institution. Receivables sold pursuant to the RSA meet the requirements for sales accounting under ASC 860, Transfers and Servicing, and accordingly, are derecognized from our Condensed Consolidated Balance Sheet (Unaudited) at the time of sale. Outstanding accounts receivable sold pursuant to the RSA were not material as of March 30, 2018 and June 30, 2017.
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Note G — Inventories
Inventories are summarized below:

| 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 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 $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 were as follows:

| (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 and $23 million at June 30, 2017 and is included as a component of the “Advance payments and unearned income” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet (Unaudited).
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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 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 Notes 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 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, 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.
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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 K — 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 30, 2018 |  | Three Quarters Ended March 30, 2018
|  | Pension |  | Other Benefits |  | Total |  | Pension |  | Other Benefits |  | Total
|  | (In millions)
Net periodic benefit income |  |  |  |  |  |  |  |  |  |  |
Service cost | $ | 10 |  |  | $ | — |  |  | $ | 10 |  |  | $ | 29 |  |  | $ | 1 |  |  | $ | 30 |
Interest cost | 49 |  |  | 1 |  |  | 50 |  |  | 146 |  |  | 5 |  |  | 151 |
Expected return on plan assets | (92 | ) |  | (4 | ) |  | (96 | ) |  | (276 | ) |  | (12 | ) |  | (288 | )
Amortization of net actuarial gain | — |  |  | — |  |  | — |  |  | — |  |  | (1 | ) |  | (1 | )
Total net periodic benefit income | $ | (33 | ) |  | $ | (3 | ) |  | $ | (36 | ) |  | $ | (101 | ) |  | $ | (7 | ) |  | $ | (108 | )
|  | 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.

We contributed $301 million to our qualified defined benefit pension plans during the quarter and three quarters ended March 30, 2018, including a $300 million voluntary contribution to our U.S. qualified pension plans. As a result of this voluntary contribution as well as the $400 million voluntary contribution made during the quarter ended June 30, 2017, we currently 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. 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.
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 billion and a projected benefit obligation of $5.6 billion as of June 30, 2017. 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 compensated employees.
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Note L — 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 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 30,670 and 64,554 weighted average share-based awards outstanding in the quarter and three quarters ended March 30, 2018, respectively, and 562,010 in the three quarters ended March 31, 2017.
Note M — 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 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 for the quarter ended December 29, 2017 to provisionally adjust our deferred tax balances to reflect 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 of existing net deferred tax asset balances associated with the Tax Act to $19 million ($.15 per diluted share) and recognized an income tax benefit of $33 million ($.27 per diluted share) to adjust 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.
Effective Tax Rate
Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 5.6 percent in the quarter ended March 30, 2018 compared with 29.6 percent in the quarter ended March 31, 2017. In addition to the $33 million income tax benefit described above, 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.
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Our effective tax rate was 24.6 percent in the three quarters ended March 30, 2018 compared with 29.7 percent in the three quarters ended March 31, 2017. In addition to the impact of the Tax Act described above, our effective tax rate for the three quarters ended March 30, 2018 benefited from a $22 million ($.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 N — 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.
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The following table presents assets and liabilities measured at fair value on a recurring basis (at least annually) as of March 30, 2018 and June 30, 2017:

|  | March 30, 2018 |  | June 30, 2017
|  | Total |  | Level 1 |  | Total |  | Level 1
|  | (In millions)
Assets |  |  |  |  |  |  |
Deferred compensation plan assets:(1) |  |  |  |  |  |  |
Equity and fixed income securities | $ | 47 |  |  | $ | 47 |  |  | $ | 37 |  |  | $ | 37 |
Investments measured at NAV: |  |  |  |  |  |  |
Equity and fixed income funds | 62 |  |  |  |  | 50 |  |  |
Corporate-owned life insurance | 26 |  |  |  |  | 25 |  |  |
Total investments measured at NAV | 88 |  |  |  |  | 75 |  |  |
Total fair value of deferred compensation plan assets | $ | 135 |  |  |  |  | $ | 112 |  |  |
Liabilities |  |  |  |  |  |  |
Deferred compensation plan liabilities:(2) |  |  |  |  |  |  |
Equity securities and mutual funds | $ | 45 |  |  | $ | 45 |  |  | $ | 46 |  |  | $ | 46 |
Investments measured at NAV: |  |  |  |  |  |  |
Common/collective trusts and guaranteed investment contracts | 105 |  |  |  |  | 80 |  |  |
Total fair value of deferred compensation plan liabilities | $ | 150 |  |  |  |  |  | $ | 126 |  |  |  |

(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.

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 |

(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 O — Derivative Instruments and Hedging Activities
In the normal course of business, we are exposed to global market risks, including the effect of changes in foreign currency exchange rates. We use derivative instruments to manage our exposure to such risks and formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions. We recognize all derivatives in our Condensed Consolidated Balance Sheet (Unaudited) at fair value. We do not hold or issue derivatives for speculative purposes.
At March 30, 2018, we had open foreign currency forward contracts with an aggregate notional amount of $28 million, of which $4 million were classified as fair value hedges and $24 million were classified as cash flow hedges. This compares with open foreign currency forward contracts with an aggregate notional amount of $33 million at June 30, 2017, of which $2 million were classified as fair value hedges and $31 million were classified as cash flow hedges. At March 30, 2018, contract expiration dates ranged from 11 days to approximately 3 months with a weighted average contract life of 2 months.
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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. As of March 30, 2018, we had an outstanding foreign currency forward contract denominated in the Canadian Dollar to hedge certain balance sheet items. The net gains or losses on foreign currency forward contracts designated as fair value hedges were not material in the quarter and three quarters ended March 30, 2018 or in the quarter and three quarters ended March 31, 2017. In addition, no amounts were recognized in earnings in the quarter and 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.
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 March 30, 2018, we had outstanding foreign currency forward contracts denominated in the Euro, British Pound and 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 three quarters ended March 30, 2018 or in the quarter and three quarters ended March 31, 2017.
Note P — Changes in Estimates
Estimate at Completion Adjustments
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 method of accounting, a single estimated total profit margin is used to recognize profit for each development and production contract 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 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 completion. Due to the long-term nature of many of our programs, developing the estimated total cost at completion 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 risk and impact of delayed performance, availability and timing of funding from the customer and the recoverability of any claims outside the original development or production contract included in the estimate to complete. 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, at 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-
17

reimbursable contract progresses, our estimates of total contract value may increase or decrease if, for example, we receive higher or lower than expected award fees. When adjustments in estimated total costs at completion or in estimated total contract value are determined, the related impact to 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 losses on development and production contracts or programs in progress are charged to operating income when identified. Net EAC adjustments resulting from changes in estimates impacted our operating income favorably by $5 million ($4 million after-tax or $.03 per diluted share) and $6 million ($4 million after-tax or $.04 per diluted share) in the quarter and three quarters ended March 30, 2018, respectively, and favorably by $11 million ($6 million after-tax or $.05 per diluted share) and $30 million ($19 million after-tax or $.14 per diluted share) in the quarter and three quarters ended March 31, 2017, respectively.
Income Taxes
See Note M — Income Taxes in these Notes for changes in estimates disclosures associated with our accounting for income taxes.
Note Q — Business Segments
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 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 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, in connection with our divestiture 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. 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 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. We evaluate each segment’s performance based on its operating income or loss, which we define as profit or loss from operations before income taxes 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 elimination of intersegment profits.
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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
|  | March 30, 2018 |  | March 31, 2017 |  | March 30, 2018 |  | March 31, 2017
|  | (In millions)
Revenue |  |  |  |  |  |  |
Communication Systems | $ | 481 |  |  | $ | 461 |  |  | $ | 1,380 |  |  | $ | 1,304 |
Electronic Systems | 609 |  |  | 553 |  |  | 1,733 |  |  | 1,660 |
Space and Intelligence Systems | 482 |  |  | 475 |  |  | 1,413 |  |  | 1,396 |
Corporate eliminations | (4 | ) |  | — |  |  | (10 | ) |  | (2 | )
| $ | 1,568 |  |  | $ | 1,489 |  |  | $ | 4,516 |  |  | $ | 4,358 |
Income From Continuing Operations Before Income Taxes
Segment Operating Income:(1) |  |  |  |  |  |  |
Communication Systems | $ | 147 |  |  | $ | 140 |  |  | $ | 409 |  |  | $ | 379 |
Electronic Systems | 112 |  |  | 115 |  |  | 322 |  |  | 360 |
Space and Intelligence Systems | 82 |  |  | 76 |  |  | 250 |  |  | 231 |
Unallocated corporate expense and corporate eliminations(2) | (85 | ) |  | (56 | ) |  | (181 | ) |  | (172 | )
Non-operating income (loss) | — |  |  | — |  |  | (2 | ) |  | 2 |
Net interest expense | (41 | ) |  | (42 | ) |  | (123 | ) |  | (129 | )
| $ | 215 |  |  | $ | 233 |  |  | $ | 675 |  |  | $ | 671 |

(1) | Segment operating income for the quarter and three quarters ended March 31, 2017 included stranded costs and Financial Accounting Standards (“FAS”) pension income previously reported as part of our former Critical Networks segment but now re-allocated to our remaining three segments.

(2) | Unallocated corporate expense and corporate eliminations included: (i) $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 and three quarters ended March 30, 2018 (see Note D — Restructuring and Other Exit Costs in these Notes for additional information), (ii) a $12 million adjustment for deferred compensation in the three quarters ended March 30, 2018, (iii) $8 million and $38 million of Exelis acquisition-related charges in the quarter and three quarters ended March 31, 2017, respectively, and (iv) $25 million and $75 million of expense in the quarter and three quarters ended March 30, 2018, respectively, compared with $27 million and $82 million of expense in the quarter and three quarters ended March 31, 2017, respectively, for amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis. Because the acquisition of Exelis benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired in the Exelis acquisition was recorded as unallocated corporate expense. Corporate eliminations of intersegment profits were not material in the quarter and three quarters ended March 30, 2018 or in the quarter and three quarters ended March 31, 2017.

Total assets by business segment are summarized below:

|  | March 30, 2018 |  | June 30, 2017
|  | (In millions)
Total Assets |  |  |
Communication Systems | $ | 1,592 |  |  | $ | 1,534 |
Electronic Systems | 4,177 |  |  | 4,094 |
Space and Intelligence Systems | 2,190 |  |  | 2,117 |
Corporate(1) | 2,111 |  |  | 2,345 |
|  | $ | 10,070 |  |  | $ | 10,090 |

(1) | Identifiable intangible assets acquired in connection with our acquisition of Exelis in the fourth quarter of fiscal 2015 were recorded as Corporate assets because they benefit the entire Company as opposed to any individual segment. Exelis identifiable intangible asset balances recorded as Corporate assets were approximately $1 billion as of March 30, 2018 and June 30, 2017. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan assets and buildings and equipment.

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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, 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 are considered probable of being rendered against us in litigation or arbitration in existence at March 30, 2018 are reserved against or would not have a material adverse effect on our financial position, results of operations or cash flows.
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 are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of multiple sites, including as a result of our acquisition of Exelis. These sites are in various stages of investigation and/or remediation and in some of these proceedings our liability is considered de minimis. We have received notices from the U.S. Environmental Protection Agency (“EPA”) or equivalent state or international environmental agencies 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 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, Environment and Natural Resources Division, that it may be potentially responsible for contribution to the environmental investigation and remediation of multiple locations in Alaska. In addition, the EPA issued on 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 the cleanup project but their 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, based on available information, in the opinion of management, any payments we may be required to make as a result of environmental claims in existence at March 30, 2018 are reserved against, covered by insurance or would not have a material adverse effect on our financial position, results of operations or cash flows.
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REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Harris Corporation
We have reviewed the unaudited condensed consolidated balance sheet of Harris Corporation as of March 30, 2018, and the related unaudited condensed consolidated statements of income and comprehensive income for the quarter and three quarters ended March 30, 2018 and March 31, 2017, and the unaudited condensed consolidated statements of cash flows for the three quarters ended March 30, 2018 and March 31, 2017. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information 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), 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
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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. 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. 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.

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 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 and payloads, as well as ground processing and information analytics.

As described in more detail in “Basis of Presentation” in Note A — Significant Accounting Policies and Recent Accounting Standards and Note B — Discontinued Operations in the Notes, in connection with our divestiture 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. The 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 these changes 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.
Certain prior-year amounts have been reclassified in our Condensed Consolidated Financial Statements (Unaudited) to conform with current-year classifications. Reclassifications include certain human resources and IT 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.
Amounts contained in this Report may not always add to totals due to rounding.
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RESULTS OF OPERATIONS
Highlights
Operations results for the third quarter of fiscal 2018, in each case compared with the third quarter of fiscal 2017, included:

• | Revenue increased 5 percent to $1.57 billion from $1.49 billion;

• | Gross margin increased 6 percent to $561 million from $531 million;

• | Operating income decreased 7 percent to $256 million from $275 million;

• | Income from continuing operations increased 24 percent to $203 million from $164 million;

• | Income from continuing operations per diluted common share increased 27 percent to $1.67 from $1.31;

• | Communication Systems revenue increased 4 percent to $481 million from $461 million and operating income increased 5 percent to $147 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 million.

Net cash provided by operating activities decreased 53 percent to $230 million, reflecting our $300 million voluntary pension contribution, in the first three quarters of fiscal 2018 from $489 million in the first three quarters of fiscal 2017.
Consolidated Results of Operations

|  | Quarter Ended |  | Three Quarters Ended
|  | March 30, 2018 |  | March 31, 2017 |  | % Inc/(Dec) |  | March 30, 2018 |  | March 31, 2017 |  | % Inc/(Dec)
|  | (Dollars in millions, except per share amounts)
Revenue: |  |  |  |  |  |  |  |  |  |  |
Communication Systems | $ | 481 |  |  | $ | 461 |  |  | 4 | % |  | $ | 1,380 |  |  | $ | 1,304 |  |  | 6 | %
Electronic Systems | 609 |  |  | 553 |  |  | 10 | % |  | 1,733 |  |  | 1,660 |  |  | 4 | %
Space and Intelligence Systems | 482 |  |  | 475 |  |  | 1 | % |  | 1,413 |  |  | 1,396 |  |  | 1 | %
Corporate eliminations | (4 | ) |  | — |  |  | * |  |  | (10 | ) |  | (2 | ) |  | * |
Total revenue | 1,568 |  |  | 1,489 |  |  | 5 | % |  | 4,516 |  |  | 4,358 |  |  | 4 | %
Cost of product sales and services | (1,007 | ) |  | (958 | ) |  | 5 | % |  | (2,904 | ) |  | (2,775 | ) |  | 5 | %
Gross margin | 561 |  |  | 531 |  |  | 6 | % |  | 1,612 |  |  | 1,583 |  |  | 2 | %
% of total revenue | 36 | % |  | 36 | % |  |  |  | 36 | % |  | 36 | % |  |
Engineering, selling and administrative expenses | (305 | ) |  | (256 | ) |  | 19 | % |  | (812 | ) |  | (785 | ) |  | 3 | %
% of total revenue | 19 | % |  | 17 | % |  |  |  | 18 | % |  | 18 | % |  |
Operating income | 256 |  |  | 275 |  |  | (7 | )% |  | 800 |  |  | 798 |  |  | — |
% of total revenue | 16 | % |  | 18 | % |  |  |  | 18 | % |  | 18 | % |  |
Non-operating income (loss) | — |  |  | — |  |  | * |  |  | (2 | ) |  | 2 |  |  | * |
Net interest expense | (41 | ) |  | (42 | ) |  | (2 | )% |  | (123 | ) |  | (129 | ) |  | (5 | )%
Income from continuing operations before income taxes | 215 |  |  | 233 |  |  | (8 | )% |  | 675 |  |  | 671 |  |  | 1 | %
Income taxes | (12 | ) |  | (69 | ) |  | (83 | )% |  | (166 | ) |  | (199 | ) |  | (17 | )%
Effective tax rate | 6 | % |  | 30 | % |  |  |  | 25 | % |  | 30 | % |  |
Income from continuing operations | $ | 203 |  |  | $ | 164 |  |  | 24 | % |  | $ | 509 |  |  | $ | 472 |  |  | 8 | %
% of total revenue | 13 | % |  | 11 | % |  |  |  | 11 | % |  | 11 | % |  |
Income from continuing operations per diluted common share | $ | 1.67 |  |  | $ | 1.31 |  |  | 27 | % |  | $ | 4.19 |  |  | $ | 3.77 |  |  | 11 | %
* Not meaningful |  |  |  |  |  |  |  |  |  |  |

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Revenue
Third Quarter 2018 Compared With Third Quarter 2017: The increase in revenue in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was due to higher revenue in all three segments.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in revenue in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was due to the same reason as noted above regarding the third quarters of fiscal 2018 and 2017.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
Gross Margin
Third Quarter 2018 Compared With Third Quarter 2017: The increase in gross margin in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 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.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in gross margin 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 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.
See “Discussion of Business Segment Results of Operations” below in this MD&A for further information.
Engineering, Selling and Administrative Expenses
Third Quarter 2018 Compared With Third Quarter 2017: The increases in engineering, selling and administrative (“ESA”) expenses and ESA as a percentage of total revenue (“ESA percentage”) in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 were 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 in the third quarter of fiscal 2018 any Exelis acquisition-related charges, which totaled $8 million in the third quarter of fiscal 2017.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in ESA expenses and 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 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 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.
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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.
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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.
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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.
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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.
The increases in segment operating income and operating margin percentage in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 reflected the combined effects of the items discussed above regarding this segment for the first three quarters of fiscal 2018 and 2017.
Unallocated Corporate Expense

|  | Quarter Ended |  | Three Quarters Ended
|  | March 30, 2018 |  | March 31, 2017 |  | % Inc/(Dec) |  | March 30, 2018 |  | March 31, 2017 |  | % Inc/(Dec)
|  | (Dollars in millions)
Unallocated corporate expense and corporate eliminations | $ | 60 |  |  | $ | 29 |  |  | 107 | % |  | $ | 106 |  |  | $ | 90 |  |  | 18 | %
Amortization of intangible assets from Exelis acquisition | 25 |  |  | 27 |  |  | (7 | )% |  | 75 |  |  | 82 |  |  | (9 | )%

Third Quarter 2018 Compared With Third Quarter 2017: The increase in unallocated corporate expense in the third quarter of fiscal 2018 compared with the third quarter of fiscal 2017 was primarily due to $45 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of business, partially offset by the absence of Exelis acquisition-related charges, which totaled $8 million in the third quarter of fiscal 2017, and the timing of other expense accruals.
First Three Quarters 2018 Compared With First Three Quarters 2017: The increase in unallocated corporate expense in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was primarily due to $45 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of
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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 Operations in the Notes, IT Services and CapRock are reported as discontinued operations in this Report.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES
Cash Flows

| Three Quarters Ended
| March 30, 2018 |  | March 31, 2017
| (In millions)
Net cash provided by operating activities | $ | 230 |  |  | $ | 489 |
Net cash provided by (used in) investing activities | (81 | ) |  | 271 |
Net cash used in financing activities | (196 | ) |  | (942 | )
Effect of exchange rate changes on cash and cash equivalents | 6 |  |  | (3 | )
Net decrease in cash and cash equivalents | (41 | ) |  | (185 | )
Cash and cash equivalents, beginning of year | 484 |  |  | 487 |
Cash and cash equivalents, end of quarter | $ | 443 |  |  | $ | 302 |

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 $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.

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At March 30, 2018, we had cash and cash equivalents of $443 million, and we have a senior unsecured $1 billion revolving credit facility that expires in July 2020 (all of which was available to us as of March 30, 2018). Additionally, we had $4.2 billion of long-term debt outstanding at March 30, 2018, 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 Debt in the Notes and Note 13: “Long-Term Debt” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K. Our $443 million of cash and cash equivalents at March 30, 2018 included $137 million held by our foreign subsidiaries, of which $78 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.
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 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 are expected to be approximately $130 million. We anticipate tax payments in fiscal 2018 to be less than our tax expense for the same period, subject to adjustment for certain timing differences. 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) and “Commercial Commitments and Contractual Obligations” below in this MD&A, capital expenditures, dividend payments, and repurchases under our share repurchase program, no other significant cash outlays are anticipated during the remainder of fiscal 2018.
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 million decrease in net cash provided by operating activities in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 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 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.
Net cash used in investing activities: The $352 million decrease in net cash used in investing activities in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 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 in the first quarter of fiscal 2017 to the proceeds from the sale of Broadcast Communications.
Net cash used in financing activities: The $746 million decrease in net cash used in financing activities in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was primarily due to $317 million more proceeds from borrowings, $263 million less used to repurchase shares of our common stock under our share repurchase program and $181 million less used to repay borrowings.
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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 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 pension plans of $300 million and $400 million during the third quarter of fiscal 2018 and the fourth quarter of fiscal 2 017, 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.
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 million at March 30, 2018. See Note 14: “Pension and Other Postretirement Benefits” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K and Note K — Postretirement Benefit Plans in the Notes for further information regarding our pension plans.
Common Stock Repurchases
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 and fiscal 2017, $10 million and $20 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, we had a remaining, unused authorization of approximately $776 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. 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, our Board of Directors increased the quarterly cash dividend rate on our common stock from $.53 per share to $.57 per share, for an annualized cash dividend rate of $2.28 per share, which was our sixteenth consecutive annual increase in our quarterly cash dividend rate. Our annualized cash dividend rate in fiscal 2017 was $2.12 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 Credit Agreement: We have a $1 billion, 5-year senior unsecured revolving credit facility (the “2015 Credit Facility”) under a Revolving Credit Agreement (the “2015 Credit Agreement”) entered into on July 1, 2015 with a syndicate of lenders. For a description of the 2015 Credit Facility and the 2015 Credit Agreement, see Note 11: “Credit Arrangements” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K.
We were in compliance with the covenants in the 2015 Credit Agreement at March 30, 2018, including the covenant requiring that we not permit our ratio of consolidated total indebtedness to total capital, each as defined in the 2015 Credit
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Agreement, to be greater than 0.65 to 1.00. At March 30, 2018, we had no borrowings outstanding under the 2015 Credit Agreement.
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” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-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 and June 30, 2017 was $5 million and $80 million, respectively. Our short-term debt at March 30, 2018 consisted of 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 and June 30, 2017 by the 2015 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 and 2017.
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 services with the registrant.

As of March 30, 2018, 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, we did not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect our financial position, results of operations or cash flows, and we were not a party to any related party transactions that materially affect our financial position, 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, 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, results of operations or cash flows.
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Commercial Commitments and Contractual Obligations
The amounts disclosed in our Fiscal 2017 Form 10-K include our contractual obligations and commercial commitments. Except for changes in our long-term debt as described under “Capital Structure and Resources” in this MD&A, no material changes occurred during the first three quarters of fiscal 2018 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.
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 and expenses 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 accounting policies are described in Note 1: “Significant Accounting Policies” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K. 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.
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 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. The majority of the 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 the POC 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 over its period of performance. Recognition of profit on fixed-price development and production contracts requires estimates of the total cost at completion 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 completion. Due to the long-term nature of many of our programs, developing the estimated total cost at completion 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 risk and impact of delayed performance, availability and timing of funding from the customer and the recoverability of any claims outside the original development or production contract included in the estimate to complete. 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, at 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 may increase or decrease if, for example, we receive higher or lower than expected award fees. When adjustments in estimated total costs at completion or in estimated total contract value are determined, the related impact to 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 losses on development and production contracts or programs in progress are charged to operating income when identified. We have not made any material changes in the methodologies used to recognize revenue on development and production contracts or to estimate our costs related to development and production contracts in the past three fiscal years.
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EAC adjustments had the following impacts to operating income for the periods presented:

| Quarter Ended |  | Three Quarters Ended
| March 30, 2018 |  | March 31, 2017 |  | March 30, 2018 |  | March 31, 2017
| (In millions)
Favorable adjustments | $ | 26 |  |  | $ | 26 |  |  | $ | 90 |  |  | $ | 90 |
Unfavorable adjustments | (21 | ) |  | (15 | ) |  | (84 | ) |  | (60 | )
Net operating income adjustments | $ | 5 |  |  | $ | 11 |  |  | $ | 6 |  |  | $ | 30 |

Third Quarter 2018 Compared With Third Quarter 2017: The reduction in benefit to operating income from net 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.
First Three Quarters 2018 Compared With First Three Quarters 2017: The reduction in benefit to operating income from net EAC adjustments in the first three quarters of fiscal 2018 compared with the first three quarters of fiscal 2017 was primarily due to a $15 million adjustment for growth in EAC costs on a mission networks infrastructure development program.
We also recognize revenue from arrangements requiring the delivery or 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 arrangement based on relative selling price. If options or change orders materially change the scope of work or price of the contract subsequent to inception, we reevaluate and adjust our prior conclusions regarding units of accounting and allocation of contract revenue as necessary. The allocation of selling price among the separate units of accounting may impact the timing of revenue recognition, but will not change the total revenue recognized on the arrangement. We establish the selling price used for each deliverable based on the vendor-specific 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 of the recent standalone sales of the deliverable must be priced within a relatively narrow range. In determining TPE of selling price, we evaluate competitor prices for similar deliverables when sold separately. Generally, comparable pricing of our products 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, 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.
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 Standards in the Notes, which describes the potential impact that these standards are expected to have on our financial position, results of operations and cash flows.
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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 the U.S. Government’s inability to complete its budget process and consequently having to operate 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 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 acquisitions and divestitures that involve significant risks and uncertainties.

• | Disputes with our subcontractors and 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.

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• | 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 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 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 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.
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 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 O — Derivative Instruments and Hedging Activities in the Notes for additional information.
Interest Rates: As of March 30, 2018, 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
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obligations at March 30, 2018 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 March 30, 2018, we also had long-term variable-rate debt obligations of $570 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. 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 would not have had a material impact on our results of operations or cash flows. See Note J — Long-Term Debt in the Notes and Note 13: “Long-Term Debt” in our Notes to Consolidated Financial Statements in our Fiscal 2017 Form 10-K for further 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, 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 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 also have begun 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 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 ERP system in 2 business units. There have been no changes in our internal control over financial reporting that occurred during the third quarter of fiscal 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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, 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 are reserved against or would not have a material adverse effect on our financial condition, results of operations or cash flows.
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 Form 10-K. Other than the updated risk factor set forth below, we do not believe that there have been any material changes to the risk factors previously disclosed in our Fiscal 2017 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 be negatively impacted by a security breach, through cyber attack, cyber intrusion or otherwise, or other significant disruption of our IT networks and related systems or of those we operate for certain of our customers.
We face the risk, as does any company, of a security breach, whether through cyber attack or cyber intrusion over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or with access to systems inside our organization, or other significant disruption of our IT networks and related systems or those of our suppliers or subcontractors. We face an added risk of a security breach or other significant disruption of the IT networks and related systems that we develop, install, operate and maintain for certain of our customers, which may involve managing and protecting information relating 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 effective in the case 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, or disruptions will occur in the 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, may not be detected. In some cases, the resources of foreign governments may be behind such attacks due to the nature of our business
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and the industries in which we operate. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures. Thus, it is impossible for us to entirely mitigate this risk, and there can 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:

• | Disrupt the proper functioning of these networks and systems and, therefore, our operations and/or those of certain of our customers;

• | Result 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, 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 on our business, financial condition, results of operations and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
During the third quarter of fiscal 2018, we repurchased 312,902 shares of our common stock under our repurchase program for $47 million at an average price per share of $150.07. 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:

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 |  |  |  |  |  |  |
(December 30, 2017-January 26, 2018) |  |  |  |  |  |  |
Repurchase program(1) | — |  |  | $ | — |  |  | — |  |  | $ | 823,299,184 |
Employee transactions(2) | 9,501 |  |  | $ | 145.50 |  |  | — |  |  | — |
Month No. 2 |  |  |  |  |  |  |
(January 27, 2018-February 23, 2018) |  |  |  |  |  |  |
Repurchase program(1) | 312,902 |  |  | $ | 150.07 |  |  | 312,902 |  |  | $ | 776,343,512 |
Employee transactions(2) | 4,561 |  |  | $ | 158.65 |  |  | — |  |  | — |
Month No. 3 |  |  |  |  |  |  |
(February 24, 2018-March 30, 2018) |  |  |  |  |  |  |
Repurchase program(1) | — |  |  | $ | — |  |  | — |  |  | $ | 776,343,512 |
Employee transactions(2) | 1,805 |  |  | $ | 158.28 |  |  | — |  |  | — |
Total | 328,769 |  |  |  |  | 312,902 |  |  | $ | 776,343,512 |

* | 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 (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 of (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.

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Sales of Unregistered Equity Securities
During the third quarter of fiscal 2018, 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:

(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, 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. (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) Amendment to the Exelis Excess Pension Plans (Amended and Restated October 31, 2011), effective April 1, 2018.
(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) |  |  | XBRL Instance Document.
(101.SCH) |  |  | XBRL Taxonomy Extension Schema Document.
(101.CAL) |  |  | XBRL Taxonomy Extension Calculation Linkbase Document.
(101.LAB) |  |  | XBRL Taxonomy Extension Label Linkbase Document.
(101.PRE) |  |  | XBRL Taxonomy Extension Presentation Linkbase Document.
(101.DEF) |  |  | XBRL Taxonomy Extension Definition Linkbase Document.

* | Management contract or compensatory plan or arrangement

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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 |  |  |  | By: |  | /s/ Rahul Ghai
|  |  |  |  |  | Rahul Ghai
|  |  |  |  |  | Senior Vice President and Chief Financial Officer
|  |  |  |  |  | (principal financial officer and duly authorized officer)

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