LHX

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended January 2, 2009 (Fiscal Q2 2009) and the two quarters ended January 2, 2009, for Harris Corporation (Note: The filing lists the registrant as Harris Corporation; the request metadata references L3Harris, which is the result of a later merger). The company operates in four segments: RF Communications, Government Communications Systems, Broadcast Communications, and Harris Stratex Networks. The financial statements are unaudited.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss vs. Profit: The company reported a net loss of $38.6 million in Q2 2009, a significant decline from net income of $114.3 million in Q2 2008. This reversal was primarily driven by a $301.0 million non-cash impairment charge related to goodwill and intangible assets in the Harris Stratex Networks segment.
• Revenue Growth: Consolidated revenue increased 15.6% year-over-year to $1.52 billion, driven by strong performance in the RF Communications (+22.7%) and Government Communications Systems (+19.7%) segments.
• Segment Performance:
  • Harris Stratex Networks: Reported an operating loss of $291.5 million due to the impairment charge, compared to a negligible loss of $0.8 million in the prior year. Revenue grew 5.4%.
  • RF Communications: Operating income rose 16.0% to $144.1 million, fueled by international sales of tactical radio systems.
  • Government Communications Systems: Operating income increased 26.6% to $85.2 million, largely due to the U.S. Census Bureau's Field Data Collection Automation (FDCA) program.
• Effective Tax Rate: The effective tax rate was unfavorably impacted to 97.3% in Q2 2009 due to the non-deductible nature of the goodwill impairment and an increase in valuation allowances for deferred tax assets.

Guidance, Outlook, and Risks

• Strategic Review: On December 8, 2008, the company announced it is evaluating strategic alternatives for its Harris Stratex Networks segment. Further details were expected in Q3 2009.
• Capital Allocation: The company repurchased $75 million of common stock in the first two quarters of 2009. As of January 2, 2009, approximately $100 million remained authorized for repurchase. The quarterly dividend was increased to $0.20 per share.
• Liquidity: The company maintains a $750 million senior unsecured revolving credit facility with no borrowings outstanding as of the period end. Management believes existing cash and operating cash flows are sufficient for the next 12 months.
• Risks:
  • Economic Downturn: The filing highlights risks associated with the U.S. recession and global economic downturn, including potential delays in government funding and reduced commercial orders.
  • Government Dependence: A significant portion of revenue relies on U.S. Government contracts, which are subject to funding shifts and termination.
  • Subsidiary Restatement: Harris Stratex Networks restated its financial statements for prior periods due to accounting errors, though management concluded Harris Corporation's internal controls remained effective.

Investor Verification Checklist

• Impairment Details: Verify the methodology and assumptions used for the $301 million goodwill impairment in the Harris Stratex Networks segment.
• Stratex Strategic Alternatives: Monitor upcoming announcements regarding the potential sale, spin-off, or other strategic actions for the Harris Stratex Networks subsidiary.
• Government Contract Exposure: Assess the impact of the U.S. Census Bureau FDCA program on future revenue stability, given its significant contribution to the Government Communications Systems segment.
• Debt Covenants: Confirm continued compliance with debt covenants (Debt-to-Capital < 0.60; EBITDA-to-Interest > 3.00) despite the impairment charge.
• Subsidiary Controls: Review the remediation plan for the material weaknesses in internal controls identified at Harris Stratex Networks.