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 July 3, 2009. Harris is an international communications and information technology company serving government and commercial markets in over 150 countries. The company operates through three primary segments: RF Communications, Government Communications Systems, and Broadcast Communications.

Significant corporate events during the period included the spin-off of Harris Stratex Networks, Inc. (HSTX) in May 2009, which is reported as discontinued operations, and the acquisition of the Tyco Electronics Wireless Systems business (Wireless Systems) for $665 million in cash.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 8.9% to $5.0 billion, driven by a 16.8% increase in the RF Communications segment and a 9.3% increase in Government Communications Systems. The Broadcast Communications segment declined 9.3% due to the global recession.
• Profitability Decline: Income from continuing operations dropped 31.1% to $312.4 million. This was primarily due to a $255.5 million non-cash impairment charge in the Broadcast Communications segment (goodwill and long-lived assets) and $28.6 million in company-wide cost-reduction charges.
• Net Income Volatility: Net income plummeted to $37.9 million from $444.2 million. This sharp decline was exacerbated by a $274.5 million loss from discontinued operations related to the HSTX spin-off, which included a $62.6 million loss on disposition.
• Debt Increase: Long-term debt increased by approximately $350 million, largely due to the issuance of $350 million in 6.375% Notes in June 2009 to fund acquisitions and general corporate purposes.

Guidance, Outlook, and Risks

Management Commentary: Management expects the U.S. Government to remain committed to funding intelligence and warfighter support, though the global economic crisis may slow near-term procurement. The company initiated cost-reduction actions expected to yield $70–$75 million in annualized savings. The Broadcast Communications segment faces continued weakness due to postponed capital spending by customers.

Key Risks and Contingencies:

• Government Dependence: Approximately 79% of revenue is derived from U.S. Government customers, creating exposure to budget shifts and funding delays.
• Impairment Risk: Goodwill represents 34% of total assets. Further declines in market conditions could trigger additional impairment charges, particularly in the Broadcast segment.
• Acquisition Integration: Risks associated with integrating the newly acquired Wireless Systems business and realizing expected synergies.
• Legal Proceedings: The company is a defendant in securities litigation related to the former HSTX segment and faces ongoing environmental and intellectual property claims, though management believes these will not have a material adverse effect.

Investor Verification Checklist

• Impairment Details: Verify the specific assumptions used in the $255.5 million goodwill impairment test for the Broadcast Communications segment.
• Discontinued Operations: Confirm the final tax implications and cash flow impacts of the HSTX spin-off, which significantly reduced net income.
• Acquisition Synergies: Monitor the integration progress and revenue contribution of the Wireless Systems acquisition (Public Safety and Professional Communications business).
• Government Contract Funding: Track U.S. Department of Defense budget allocations and potential impacts on the RF Communications and Government Communications Systems segments.
• Debt Covenants: Review compliance with the 2008 Credit Agreement covenants, specifically the debt-to-capital and EBITDA-to-interest ratios.