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 28, 2007. The company operates in four primary segments: Defense Communications and Electronics, Government Communications Systems, Broadcast Communications, and Harris Stratex Networks. The reporting period reflects the first quarter of fiscal 2008, incorporating the results of the recent combination with Stratex Networks and the acquisition of Multimax.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 30.0% year-over-year, driven by a 43.4% increase in the Government Communications Systems segment (due to the Multimax acquisition) and an 84.1% increase in the Harris Stratex Networks segment (due to the Stratex combination). Organic revenue growth was 13%.
• Profitability: Net income rose 19.4% to $100.2 million. This increase was aided by the absence of a $19.8 million investment impairment recorded in the prior year and strong performance in the Defense Communications segment.
• Segment Performance:
  • Defense Communications: Operating income increased 21.0% to $131.8 million, driven by strong sales of Falcon tactical radios for MRAP vehicles.
  • Harris Stratex Networks: Reported an operating loss of $1.0 million compared to $7.9 million income in the prior year, primarily due to $8.3 million in integration costs.
• Tax Rate: The effective tax rate increased to 34.6% from 24.1%. The prior year's lower rate was due to a $12 million favorable IRS settlement regarding audits from 2001-2003.
• Debt Structure: The company converted approximately $149.1 million of 3.5% convertible debentures into common stock during the quarter, reducing long-term debt obligations.

Guidance, Outlook, and Risks

• Cash Flow Outlook: Management expects fiscal 2008 operating cash flow to be between $550 million and $600 million.
• Capital Expenditures: Total capital expenditures for fiscal 2008 are projected to be in the range of $140 million to $150 million.
• Share Repurchases: The company utilized $50.0 million to repurchase 882,358 shares in the quarter. Approximately $350 million remains authorized under the current repurchase program.
• Dividends: A quarterly dividend of $0.15 per share was declared, marking the sixth consecutive annual increase.
• Risks and Contingencies:
  • Government Dependence: Significant revenue reliance on U.S. Government contracts, which are subject to funding changes and termination.
  • Integration Costs: Ongoing costs associated with the Stratex and Multimax acquisitions.
  • Tax Examinations: The company is under examination by the IRS for fiscal years 2005 and 2006, and by various state and international authorities.
  • Off-Balance Sheet: A $20 million bond indemnity obligation exists related to a Broadcast Communications customer contract, though management views the risk as remote.

Investor Verification Checklist

• Verify the sustainability of the 30% revenue growth once the one-time impacts of the Multimax and Stratex acquisitions are fully integrated.
• Monitor the Harris Stratex Networks segment for a return to profitability as integration costs subside.
• Review the impact of the higher effective tax rate (34.6%) on future earnings compared to the anomalous low rate in the prior year.
• Assess the company's exposure to U.S. Government budget priorities, particularly regarding the MRAP vehicle programs driving Defense Communications growth.
• Confirm the status of ongoing IRS and international tax examinations and potential adjustments to unrecognized tax benefits.