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 28, 2001. The company operates in two primary segments: Government Communications and Commercial Communications. The financial statements are unaudited but reflect all normal recurring adjustments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 3.7% year-over-year. This was driven by a 13.2% drop in the Commercial Communications segment due to weak global telecom demand, partially offset by an 8.9% increase in the Government Communications segment.
• Profitability Improvement: The company turned an operating loss of $5.6 million in the prior year into an operating income of $30.9 million. This improvement is largely attributable to the absence of a $73.5 million write-off for purchased in-process research and development that occurred in the prior year's Commercial segment.
• Segment Performance:
  • Government Communications: Revenue up 8.9% and operating income up 20.6% due to increased U.S. government procurement.
  • Commercial Communications: Revenue down 13.2%. Operating income improved to $6.2 million from a loss of $57.2 million, but excluding the prior year's one-time write-off, operating income actually declined 62.0% due to workforce reduction costs and lower revenue.
• Accounting Changes: The company adopted FASB Statement No. 142, discontinuing the amortization of goodwill effective the beginning of fiscal 2002. Consequently, there was no goodwill amortization expense in the current quarter, whereas the prior year included $2.9 million (net of tax).
• Cash Flow: Net cash provided by operating activities was $5.5 million, a significant improvement from a use of $31.3 million in the prior year. Investing activities provided $20.3 million, primarily from the sale of securities and the GE Harris Energy Systems joint venture.

Guidance, Outlook, and Risks

• Outlook: Management expects continued growth in Government Communications and secure tactical radio businesses, citing strong positioning for defense and peacekeeping efforts. The broadcast business is also expected to perform well due to the digital television transition.
• Post-September 11 Impact: Management noted that market conditions for commercial telecommunications worsened following the September 11 attacks, unfavorably impacting microwave and network support businesses. This adds risk to fiscal 2002 sales and income.
• Investment Impairment Risk: Harris anticipates that an impairment charge may be recognized before the end of fiscal 2002 regarding passive investments in start-up technology companies impacted by the economic climate.
• Liquidity: The company maintains $400 million in available credit facilities and believes existing cash and funds from operations are sufficient for the next twelve months. No shares were repurchased in the current quarter, though a program authorizing up to 15 million shares remains active.
• Market Risks: Key risks include foreign currency exchange fluctuations, volatility in the telecom market, and the stability of defense budgets. A 10% adverse change in currency rates could impact fair value by approximately $9.3 million.

Investor Verification Checklist

• Verify the sustainability of the Government Communications segment's growth trend amidst potential defense budget fluctuations.
• Monitor the Commercial Communications segment for signs of recovery in the global telecom market, specifically microwave and network support products.
• Watch for the anticipated impairment charge on start-up technology investments mentioned in the outlook.
• Confirm the final allocation of the purchase price for the Hirschmann Multimedia Communications Network acquisition.
• Review the impact of the new FASB Statement No. 142 on future goodwill impairment testing versus the previous amortization model.