LHX

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended December 29, 2000, and the two quarters ended on that date, for Harris Corporation (now L3Harris Technologies, Inc.). The company operates in two primary segments: Government Communications and Commercial Communications. The reporting period includes the impact of the August 2000 acquisition of Wavtrace, Inc., and the ongoing exit from the telephone switching and alarm management product lines.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 10.4% for the quarter and 12.8% for the two-quarter period compared to the prior year, driven by growth in both Government (8.1%) and Commercial (12.2%) segments.
• Operating Income Volatility: While quarterly operating income rose 61.8% to $30.9 million, the two-quarter operating income fell 38.5% to $20.8 million. This decline was primarily due to a $73.5 million one-time charge for purchased in-process research and development (IPR&D) related to the Wavtrace acquisition.
• Net Loss for Two Quarters: The company reported a net loss of $18.8 million for the first two quarters, compared to a net income of $15.9 million in the prior year, largely attributable to the IPR&D write-off.
• Liquidity Decline: Cash and cash equivalents decreased 71.2% to $109.0 million, and marketable securities dropped 57.9% to $182.0 million. This was driven by the Wavtrace acquisition ($125.9 million cash paid), stock repurchases ($92.1 million), and debt reduction.
• Restructuring: A $41 million restructuring charge was recorded in the prior fiscal year for exiting telephone switching and alarm management lines. No further cash outlays for these specific actions are expected.

Guidance, Outlook, and Risks

Management Commentary: Management views the company as well-positioned in its selected markets. Strong growth is expected in point-to-point microwave business, with new point-to-multipoint products anticipated to launch in calendar year 2001. The Government Communications segment continues to benefit from increased defense spending.

Outlook: Harris anticipates that existing cash, funds from operations, and a $500 million credit facility will be sufficient for working capital and capital expenditures for the next twelve months. The company plans to continue stock repurchases under an authorized program.

Risks and Contingencies:

• Economic Conditions: Concerns regarding deteriorating economic indicators and potential negative GDP growth.
• Market Specifics: Softness in the rollout of competitive local exchange carrier digital subscriber line services and stability of key markets in Asia and Brazil.
• Acquisition Integration: Risks associated with the successful management and integration of acquired businesses, specifically Wavtrace.
• Market Risk: Exposure to foreign currency exchange rates and fluctuations in the market value of equity securities available for sale.

Investor Verification Checklist

• Wavtrace Acquisition Impact: Verify the timeline for the completion of the ClearBurst 2000 product development and the expected $8.4 million in remaining R&D costs.
• Commercial Segment Margins: Monitor the recovery of operating margins in the Commercial Communications segment, specifically regarding the line test products which faced a slowdown due to financing shortfalls in the competitive local exchange carrier market.
• Liquidity Position: Confirm the utilization of the $500 million syndicated credit facility and the status of the planned new credit facility.
• Stock Repurchase Program: Track the remaining authorization of 1.7 million shares under the current repurchase program.
• Discontinued Operations: Review the final gains or losses from the sale of the international activities of the switch product line, expected in fiscal 2001.