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STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION | 6 Months Ended
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Jan. 03, 2020
Share-based Payment Arrangement [Abstract] |
STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION | NOTE 16: STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION At January 3, 2020, we had options or other share-based compensation outstanding under two Harris 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”), as well as under employee stock incentive plans of L3 assumed by L3Harris (collectively, “L3Harris SIPs”). We believe that share-based awards more closely align the interests of participants with those of shareholders. Harris equity awards granted prior to October 12, 2018, in accordance with the terms and conditions that were applicable to such awards prior to the L3Harris Merger, generally automatically vested upon closing of the L3Harris Merger and settled in L3Harris Common Stock, except stock options which automatically vested and remained outstanding. Harris equity awards granted on or after October 12, 2018 did not automatically vest upon closing of the L3Harris Merger, and instead remained outstanding as an award with respect to L3Harris common stock in accordance with the terms that were applicable to such award prior to the L3Harris Merger. L3’s equity awards granted prior to October 12, 2018, in accordance with the terms and conditions that were applicable to such awards prior to the L3Harris Merger, generally automatically vested upon closing of the L3Harris Merger and settled in L3Harris common stock (except stock options automatically converted into stock options with respect to L3Harris common stock and remained outstanding), in each case, after giving effect to the Exchange Ratio and appropriate adjustments to reflect the consummation of the L3Harris Merger and the terms and conditions applicable to such awards prior to the L3Harris Merger. Any L3 restricted stock unit or L3 restricted stock award granted on or after October 12, 2018 was converted into a corresponding award with respect to L3Harris common stock, with the number of shares underlying such award adjusted based on the Exchange Ratio, and remained outstanding in accordance with the terms that were applicable to such award prior to the L3Harris Merger. Pursuant to the Merger Agreement, L3Harris assumed the converted L3 equity awards. Summary of Share-Based Compensation Expense The following table summarizes the amounts and classification of share-based compensation expense:
| Two Quarters Ended |  | Fiscal Years Ended
| January 3, 2020 |  | June 28, 2019 |  | June 29, 2018 |  | June 30, 2017
| (In millions)
Total expense | $ | 125 |  |  | $ | 58 |  |  | $ | 51 |  |  | $ | 42 |
Included in: |  |  |  |  |  |  |
Cost of product sales and services | $ | 5 |  |  | $ | 12 |  |  | $ | 8 |  |  | $ | 3 |
Engineering, selling and administrative expenses | 120 |  |  | 46 |  |  | 43 |  |  | 39 |
Income from continuing operations | 125 |  |  | 58 |  |  | 51 |  |  | 42 |
Tax effect on share-based compensation expense | (31 | ) |  | (14 | ) |  | (16 | ) |  | (16 | )
Total share-based compensation expense after-tax | $ | 94 |  |  | $ | 44 |  |  | $ | 35 |  |  | $ | 26 |
Compensation cost related to share-based compensation arrangements that was capitalized as part of inventory or fixed assets for the two quarters ended January 3, 2020 or fiscal 2019, 2018 or 2017 was not material. As of January 3, 2020, a total of 22,071,494 shares of common stock remained available under our 2015 EIP for future issuance (excluding shares to be issued in respect of outstanding options and other share-based awards, and with each full-value award (e.g., restricted stock and restricted stock unit awards and performance share and performances share unit awards) counting as 4.6 shares against the total remaining for future issuance). During the two quarters ended January 3, 2020, we issued an aggregate of 2,425,153 shares of common stock under the terms of our L3Harris SIPs, which is net of shares withheld for tax purposes. Stock Options The following information relates to stock options, including performance stock options, that have been granted under shareholder-approved L3Harris SIPs. Option exercise prices are equal to or greater than the fair market value of our common stock on the date the options are granted, using the closing stock price of our common stock. Options may be exercised for a period of ten years after the date of grant, and options, other than performance stock options, generally become exercisable in installments, which are typically 33.3 percent one year from the grant date, 33.3 percent two years from the grant date and 33.3 percent three years from the grant date. In certain instances, vesting and exercisability are also subject to performance criteria. The fair value as of the grant date of each option award was determined using the Black-Scholes-Merton option-pricing model which uses assumptions noted in the following table. Expected volatility over the expected term of the options is based on implied volatility from traded options on our common stock and the historical volatility of our stock price. The expected term of the options is based on historical observations of our common stock, considering average years to exercise for all options exercised and average years to cancellation for all options canceled, as well as average years remaining for vested outstanding options, which is calculated based on the weighted-average of these three inputs. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. A summary of the significant assumptions used in determining the fair value of stock option grants under our L3Harris SIPs is as follows:
| Two Quarters Ended |  | Fiscal Years Ended
| January 3, 2020 |  | June 28, 2019 |  | June 29, 2018 |  | June 30, 2017
Expected dividends | 1.70 | % |  | 1.61 | % |  | 1.80 | % |  | 2.36 | %
Expected volatility | 22.18 | % |  | 19.87 | % |  | 19.30 | % |  | 21.78 | %
Risk-free interest rates | 1.68 | % |  | 2.72 | % |  | 1.80 | % |  | 1.23 | %
Expected term (years) | 5.65 |  |  | 5.03 |  |  | 5.00 |  |  | 5.03 |
A summary of stock option activity under our L3 Harris SIPs as of January 3, 2020 and changes during the two quarters ended January 3, 2020 is as follows:
| Shares |  | Weighted Average Exercise Price Per Share |  | Weighted Average Remaining Contractual Term |  | Aggregate Intrinsic Value
|  |  |  |  | (In years) |  | (In millions)
Stock options outstanding June 28, 2019 | 4,195,201 |  |  | $ | 80.86 |  |  |  |  |
Granted | 738,956 |  |  | $ | 204.85 |  |  |  |  |
Exercised | (1,654,558 | ) |  | $ | 79.35 |  |  |  |  |
Other — L3Harris Merger(1) | 1,266,379 |  |  | $ | 112.83 |  |  |  |  |
Stock options outstanding January 3, 2020 | 4,545,978 |  |  | $ | 110.48 |  |  | 6.26 |  | $ | 454.57 |
Stock options exercisable January 3, 2020 | 3,807,022 |  |  | $ | 92.16 |  |  | 5.61 |  | $ | 450.42 |
_______________
(1) | Represents L3 stock options converted to L3Harris stock options in accordance with the Merger Agreement.
The weighted-average grant-date fair value was $38.61 per share for options granted during the two quarters ended January 3, 2020 and $30.05 per share, $18.60 per share and $13.82 per share for options granted during fiscal 2019, 2018, and 2017, respectively. The total intrinsic value of options exercised during the two quarters ended January 3, 2020 was $212 million at the time of exercise. The total intrinsic value of options exercised during fiscal 2019, 2018 and 2017 was $75 million, $39 million and $47 million, respectively, at the time of exercise. A summary of the status of our nonvested stock options at January 3, 2020 and changes during the two quarters ended January 3, 2020 is as follows:
| Shares |  | Weighted-Average Grant-Date Fair Value Per Share
Nonvested stock options June 28, 2019 | 856,753 |  |  | $ | 20.28 |
Granted | 738,956 |  |  | $ | 38.61 |
Vested | (856,753 | ) |  | $ | 20.28 |
Nonvested stock options January 3, 2020 | 738,956 |  |  | $ | 38.61 |
As of January 3, 2020, there was $24 million of total unrecognized compensation expense related to nonvested stock options granted under our L3Harris SIPs. This expense is expected to be recognized over a weighted-average period of 2.49 years. The total fair value of stock options that vested during the two quarters ended January 3, 2020 was approximately $17 million. The total fair value of stock options that vested during fiscal 2019, 2018 and 2017 was $14 million, $18 million and $17 million, respectively. Restricted Stock and Restricted Stock Unit Awards The following information relates to awards of restricted stock and restricted stock units that have been granted to employees and non-employee directors under our L3Harris SIPs. These awards are not transferable until vested and the restrictions generally lapse upon the achievement of continued employment [or board membership] over a specified time period. The fair value as of the grant date of these awards was based on the closing price of our common stock on the grant date and is amortized to compensation expense over the vesting period. At January 3, 2020, there were 34,869 shares of restricted stock and 500,898 restricted stock units outstanding which were payable in shares. A summary of the status of these awards at January 3, 2020 and changes during the two quarters ended January 3, 2020 is as follows:
| Shares or Units |  | Weighted-Average Grant Price Per Share or Unit
Restricted stock and restricted stock units outstanding at June 28, 2019 | 365,998 |  |  | $ | 134.06 |
Granted | 260,167 |  |  | $ | 204.62 |
Vested | (503,069 | ) |  | $ | 149.39 |
Forfeited | (16,916 | ) |  | $ | 193.20 |
Other — L3Harris Merger(1) | 429,587 |  |  | $ | 189.13 |
Restricted stock and restricted stock units outstanding at January 3, 2020 | 535,767 |  |  | $ | 196.22 |
_______________
(1) | Represents L3 share-based awards converted to L3Harris restricted stock units in accordance with the Merger Agreement.
As of January 3, 2020, there was $74 million of total unrecognized compensation expense related to these awards under our L3Harris SIPs. This expense is expected to be recognized over a weighted-average period of 2.11 years. The weighted-average grant date price per share or per unit was $204.62 for awards granted during the two quarters ended January 3, 2020 and $160.05, $141.46 and $94.60 for awards granted during fiscal 2019, 2018 and 2017, respectively. The total fair value of these awards was approximately $75 million for awards that vested during the two quarters ended January 3, 2020 and $16 million, $11 million and $14 million for awards that vested during fiscal 2019, 2018 and 2017, respectively. Performance Share Unit Awards The following information relates to awards of performance share units that have been granted to employees under our L3Harris SIPs. Generally, these awards are subject to performance criteria, such as meeting predetermined operating income or earnings per share and return on invested capital targets for a 3-year performance period. These awards also generally vest at the expiration of the same 3-year period. The final determination of the number of shares to be issued in respect of an award is made by our Board of Directors or a committee of our Board of Directors. The fair value as of the grant date of these awards was based on the closing price of our common stock on the grant date and is amortized to compensation expense over the vesting period if achievement of the performance measures is considered probable. At January 3, 2020, there were 55,020 performance share units outstanding which were payable in shares. A summary of the status of these awards at January 3, 2020 and changes during the two quarters ended January 3, 2020 is as follows:
| Shares or Units |  | Weighted-Average Grant Price Per Share or Unit
Performance share units outstanding at June 28, 2019 | 509,749 |  |  | $ | 126.73 |
Granted | 55,020 |  |  | $ | 204.85 |
Performance based adjustment(1) | 326,656 |  |  | $ | 129.84 |
Vested | (836,405 | ) |  | $ | 127.94 |
Performance share units outstanding at January 3, 2020 | 55,020 |  |  | $ | 204.85 |
_______________
(1) | Represents adjustments for performance conditions that impact the number of shares that vest. All awards with such criteria automatically vested upon the closing of the L3Harris Merger.
As of January 3, 2020, there was $9 million of total unrecognized compensation expense related to these awards under our L3Harris SIPs. This expense is expected to be recognized over a weighted-average period of 2.41 years. The weighted-average grant date price per unit was $204.85 for awards granted during the two quarters ended January 3, 2020 and $155.12, $123.13 and $84.40 for awards granted during fiscal 2019, 2018 and 2017, respectively. The total fair value of these awards was approximately $107 million for awards that vested during the two quarters ended January 3, 2020 and $21 million, $12 million and $21 million for awards that vested during fiscal 2019, 2018 and 2017, respectively.

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