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 27, 2002. The company operates in five 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 1.5% year-over-year, driven by a 16.7% increase in Government Communications Systems and a 20.2% increase in RF Communications. These gains were partially offset by declines in Microwave Communications (-29.8%) and Broadcast Communications (-17.5%).
• Profitability: Net income rose 16.4% to $19.9 million. Income before taxes increased 16.6% to $30.2 million, aided by improved operating margins in government segments and lower interest expense.
• Non-Operating Items: Non-operating income included an $18.8 million gain from the sale of the company's minority interest in LiveTV, LLC. This compares to a $10.3 million gain from the sale of GE Harris Energy Systems in the prior year.
• Debt Structure: Total debt increased significantly due to the private placement of $150 million in 3.5% Convertible Debentures due 2022, partially offset by the retirement of $30.5 million in notes.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Government Segments: Performance is described as "exceptionally well" due to increased government spending and strong contract wins, including a 15-year, $1.7 billion contract to modernize the FAA's telecommunications infrastructure.
• Telecom Segments: The outlook for the rest of fiscal 2003 has "dampened" due to the continuing decline in international telecom spending. The company is implementing cost-cutting measures in the Microwave and Network Support segments, targeting a quarterly breakeven sales level of approximately $65 million for Microwave Communications.
• Broadcast: While Q1 results were weaker than expected due to broadcasters delaying purchases to meet minimum FCC digital conversion mandates, management believes fundamentals remain strong with the digital conversion schedule holding firm.

Risks and Contingencies

• Legal Proceedings: The company is a defendant in the "Schwinger" environmental litigation in New York, where amended complaints have increased the number of plaintiffs to 184 and doubled the claimed damages (originally exceeding $360 million). Additionally, a Nigerian customer (Bourdex) has increased an arbitration damage demand from $22.3 million to $130.0 million regarding microwave products.
• Market Risks: Significant exposure to foreign currency exchange rates (hedged with $92.3 million in notional contracts) and volatility in the fair value of marketable securities ($34.5 million).
• Forward-Looking Statements: Results could differ materially due to uncertain economic conditions, the severe telecommunications slow-down, and potential changes in government priorities or funding.

Investor Verification Checklist

• Verify the sustainability of the $18.8 million non-operating gain from the LiveTV sale and its impact on recurring earnings.
• Monitor the execution of cost-cutting plans in the Microwave Communications segment to achieve the targeted $65 million breakeven sales level.
• Assess the potential financial impact of the Schwinger environmental litigation and the Bourdex arbitration claim ($130 million).
• Review the terms and conversion triggers of the new $150 million Convertible Debentures issued in August 2002.
• Track the recovery of international wireless telecom markets, which currently show no signs of near-term improvement.