LHX

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Harris Corporation (now L3Harris Technologies, Inc.) for the quarter ended September 26, 2008. The company operates in four primary segments: RF Communications, Government Communications Systems, Broadcast Communications, and Harris Stratex Networks. The report reflects a change in segment reporting structure effective for fiscal 2009, separating RF Communications into its own segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 11.1% year-over-year, driven primarily by a 31.2% increase in the RF Communications segment due to strong sales of Falcon tactical radio systems.
• Profitability: Net income rose 18.5% to $118.7 million. Gross margin improved to 32.1% from 31.0%, aided by the mix shift toward higher-margin RF products.
• Non-Operating Loss: The company recorded a non-operating loss of $8.1 million, compared to income of $1.7 million in the prior year. This was primarily due to a $7.6 million write-down of an investment in AuthenTec, Inc. classified as an other-than-temporary impairment.
• Segment Performance:
  • RF Communications: Operating income increased 28.2% to $142.1 million.
  • Broadcast Communications: Operating income declined to $5.3 million from $10.4 million, impacted by $4.0 million in cost-reduction charges.
  • Harris Stratex Networks: Turned an operating loss of $1.0 million into income of $7.9 million, though this included $3.3 million in cost-reduction charges.
• Cash Flow: Operating cash flow decreased to $37.5 million from $66.8 million, largely due to a temporary delay in invoicing within the Government Communications Systems segment.

Guidance, Outlook, and Risks

• Outlook: Management expects international revenue growth in RF Communications to remain strong. Orders are expected to exceed revenue for the full fiscal 2009. Fiscal 2009 operating cash flow is projected between $650 million and $700 million, and capital expenditures between $160 million and $170 million.
• Dividends: The quarterly cash dividend was increased from $0.15 to $0.20 per share.
• Share Repurchases: The company repurchased $75 million of common stock in the quarter, with approximately $100 million remaining under the current authorization.
• Legal Proceedings: Harris Stratex Networks and certain officers are defendants in a federal securities class action lawsuit related to the restatement of Harris Stratex Networks' financial statements due to accounting errors. The company intends to defend the litigation vigorously.
• Controls and Procedures: While Harris Stratex Networks identified material weaknesses in its internal controls, Harris Corporation management concluded that its own disclosure controls and procedures remained effective as of September 26, 2008.
• Market Risks: The company faces risks related to U.S. Government funding, fixed-price contract overruns, currency exchange fluctuations, and potential impairment of goodwill or business investments.

Investor Verification Checklist

• Verify the impact of the $7.6 million AuthenTec impairment on future investment strategies and non-operating income volatility.
• Monitor the resolution of the securities class action lawsuit involving Harris Stratex Networks and potential liability exposure.
• Assess the sustainability of the 31.2% revenue growth in the RF Communications segment and the timing of international defense modernization programs.
• Review the effectiveness of cost-reduction actions in the Broadcast Communications and Harris Stratex Networks segments in restoring margins.
• Confirm the timeline for the remediation of internal control weaknesses at the Harris Stratex Networks subsidiary.