LHX

Business Context and Reporting Period

This Form 10-Q covers Harris Corporation (now L3Harris Technologies, Inc.) for the quarterly period ended March 29, 2002, and the three quarters ended March 29, 2002, compared to the same periods in fiscal 2001. The company operates in five segments: Government Communications, RF Communications, Microwave Communications, Network Support, and Broadcast Communications. The financial statements are unaudited but reflect all normal recurring adjustments.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income for the quarter doubled to $22.5 million, and for the three quarters, the company swung from a $7.7 million loss to a $56.0 million profit. This is largely due to the elimination of goodwill amortization following the adoption of FAS 142 and a $73.5 million write-off of purchased in-process R&D in the prior year.
• Segment Divergence:
  • Government, RF, and Broadcast: These segments drove growth. Government Communications revenue rose 13.5% (Q3); RF Communications rose 17.0% (Q3) due to strong sales of Falcon II radios; Broadcast Communications rose 19.9% (Q3) driven by digital TV transitions.
  • Microwave and Network Support: These segments faced significant declines. Microwave revenue fell 34.1% (Q3) due to weak international telecom markets. Network Support revenue dropped 45.8% (Q3) due to the collapse of the DSL build-out.
• Debt Reduction: Total debt decreased by approximately 26% to $310.5 million, reducing the debt-to-total-capital ratio from 27.3% to 21.5%.
• Accounting Change: The company ceased amortizing goodwill effective the first quarter of fiscal 2002, significantly boosting reported earnings compared to the prior year.

Outlook, Risks, and Management Commentary

• Outlook: Management expects continued growth in earnings driven by sustained U.S. government spending and the rollout of digital television. However, international telecom markets remain weak with a slow expected recovery.
• Liquidity: The company maintains strong liquidity with $130.9 million in cash and $78.2 million in marketable securities. It has $325.5 million in available credit facilities, none of which were drawn upon as of March 29, 2002.
• Risks: Key risks include continuing weakness in the telecom market, fluctuations in foreign currency exchange rates, and the stability of defense budgets. The company holds significant marketable securities ($78.2 million), exposing it to market value fluctuations.
• Unusual Items: The prior year included a $73.5 million charge for purchased in-process R&D related to the WavTrace acquisition. The current period includes a $10.3 million gain from the sale of the GE Harris Energy Control Systems, LLC joint venture.

Investor Verification Checklist

• Quality of Earnings: Verify the extent to which the reported profit increase is driven by the accounting change (FAS 142) eliminating goodwill amortization versus organic operational growth.
• Segment Sustainability: Assess the long-term viability of the declining Microwave and Network Support segments versus the growth in Government and Broadcast segments.
• Market Exposure: Review the concentration of revenue in government contracts and the specific risks associated with the digital TV transition timeline.
• Debt Covenants: Confirm compliance with credit facility covenants, specifically the tangible net worth requirement of $747 million and the debt-to-earnings ratio.
• Investment Portfolio: Evaluate the composition and risk profile of the $78.2 million marketable securities portfolio, particularly the exposure to Intersil Corporation.