LHX

Business Context and Reporting Period

This filing is a Form 10-Q for Harris Corporation (now L3Harris Technologies, Inc.) for the quarterly period ended September 26, 2003. The company operates in five primary segments: Government Communications Systems, RF Communications, Microwave Communications, Network Support, and Broadcast Communications. The results are unaudited but reflect all normal recurring adjustments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 24.2% year-over-year, driven primarily by the Government Communications Systems (+32.7%) and RF Communications (+39.8%) segments. This growth was partially offset by a 14.0% decline in the Broadcast Communications segment.
• Profitability: Net income rose 30.7% to $26.0 million. Income before taxes increased 28.5% to $38.8 million.
• Non-Operating Income: Non-operating income dropped to zero from $16.2 million in the prior year. The prior year figure included an $18.8 million gain from the sale of the LiveTV, LLC venture and $5.1 million in gains from securities sales.
• Segment Performance:
  • Government Communications Systems: Operating income increased 34.6% to $31.9 million, driven by classified programs and new strategic wins (e.g., Joint Strike Fighter, Space-Based Radar).
  • RF Communications: Operating income surged 68.9% to $25.0 million, fueled by demand for Falcon II tactical radios due to the War on Terrorism.
  • Microwave Communications: Operating loss narrowed significantly from $7.3 million to $2.2 million due to cost reductions and increased sales volume.
  • Network Support: Turned an operating loss of $2.7 million into a profit of $1.8 million.
• Cash Flow: Net cash provided by operating activities more than tripled to $81.5 million, attributed to improved collections in Broadcast Communications and higher profitability in Government and RF segments.

Guidance, Outlook, and Risks

• Outlook: Management expressed increased confidence in achieving fiscal year 2004 earnings per share guidance of $1.50 to $1.65 per diluted share, citing strong performance in Government and RF segments.
• Capital Structure: On October 15, 2003, the company entered a new $300 million revolving credit facility. Total long-term debt remains at $401.6 million, including $150 million in 3.5% convertible debentures due 2022 and $250 million in unsecured debt.
• Legal Proceedings:
  • Schwinger/Astuto/Bennet Matters: Plaintiffs in environmental litigation cases have stipulated to dismiss claims against Harris but reserved the right to reopen under certain circumstances. Management believes liability is not significant.
  • Ericsson Patent Case: Harris secured a judgment of approximately $43 million in compensatory damages plus enhanced damages and fees. Ericsson has appealed the judgment.
• Risks: Key risks include dependence on U.S. Government funding, the severe telecommunications slowdown affecting commercial segments, foreign currency fluctuations, and the potential for cost overruns on long-term fixed-price contracts.

Investor Verification Checklist

• Verify the sustainability of revenue growth in the Government Communications Systems segment, which now comprises 60% of total revenue.
• Monitor the outcome of the Ericsson patent appeal and the potential impact on future cash flows.
• Assess the timeline for recovery in the Broadcast Communications segment, specifically regarding Digital Television (DTV) equipment sales.
• Review the impact of the new intersegment sales policy on reported segment margins and headquarters expenses.
• Confirm the company's ability to maintain its "BBB" / "Baa2" credit rating given the mix of fixed and variable debt.