LHX

Business Context and Reporting Period

This summary covers the Annual Report on Form 10-K for Harris Corporation (now L3Harris Technologies, Inc.) for the fiscal year ended June 29, 2007. Harris is an international communications and information technology company serving government and commercial markets in over 150 countries. The company operates through four primary segments: Government Communications Systems, RF Communications, Broadcast Communications, and Harris Stratex Networks (formed via a combination with Stratex Networks, Inc. in Q3 2007).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 22.1% year-over-year, driven by strong performance in the RF Communications segment (+45.8%) and the Harris Stratex Networks segment (+45.7%).
• Profitability Surge: Net income more than doubled (101.9% increase). This was significantly aided by a $163.4 million pre-tax gain ($143.1 million after-tax) resulting from the combination with Stratex Networks, Inc.
• Segment Performance:
  • RF Communications: Operating income rose 44.6% to $403.2 million, fueled by demand for Falcon III tactical radios.
  • Harris Stratex Networks: Turned an operating loss of $19.6 million in 2006 into an operating income of $146.9 million in 2007, largely due to the Stratex combination gain.
  • Broadcast Communications: Operating income declined 47.8% to $11.9 million due to an $18.9 million write-down of capitalized software and $7.5 million in cost-reduction charges.
• Acquisitions: Completed the acquisition of Multimax Incorporated for $402 million in Q4 2007 to expand IT services for the U.S. Government.

Guidance, Outlook, and Risks

• Outlook: Management expects net cash from operating activities in fiscal 2008 to range between $550 million and $600 million. Capital expenditures are expected to be in the $140 million to $150 million range.
• Capital Allocation: The Board approved a new share repurchase program authorizing up to $600 million. Approximately $200 million was repurchased in Q4 2007, with the remaining $400 million expected to be repurchased over the following eight quarters. The quarterly dividend was increased to $0.15 per share (annualized $0.60).
• Key Risks:
  • Government Dependence: Approximately 66% of revenue is derived from the U.S. Government, making the company sensitive to budget changes and contract terminations.
  • Fixed-Price Contracts: Exposure to cost overruns on firm fixed-price contracts.
  • International Operations: Risks related to currency fluctuations, as 23% of revenue is international.
  • Goodwill Impairment: Goodwill represents approximately 35% of total assets; future changes in market conditions could trigger impairment charges.

Investor Verification Checklist

• Stratex Gain Sustainability: Verify the extent to which the 2007 net income increase is driven by the one-time $143.1 million after-tax gain from the Stratex combination versus organic operational growth.
• Broadcast Segment Turnaround: Monitor the Broadcast Communications segment for recovery following the $18.9 million software write-down and cost-reduction charges.
• Convertible Debentures: Confirm the status of the 3.5% Convertible Debentures due 2022, which were largely converted to common stock in August 2007 (a subsequent event).
• Backlog Funding: Review the funded vs. unfunded backlog ($1.7 billion funded vs. $4.1 billion unfunded) to assess revenue visibility, noting that unfunded backlog is subject to congressional appropriations.
• Debt Structure: Note the significant reduction in long-term debt from $699.5 million to $408.9 million, partially due to the conversion of debentures and the issuance of $400 million in commercial paper to fund the Multimax acquisition.