OVERVIEW


The following Management's Discussion and Analysis ("MD&A") is intended to
assist in an understanding of our financial condition and results of operations.
This MD&A is provided as a supplement to, should be read in conjunction with,
and is qualified in its entirety by reference to, our Condensed Consolidated
Financial Statements (Unaudited) and accompanying Notes appearing elsewhere in
this Report (the "Notes"). In addition, reference should be made to our audited
Consolidated Financial Statements and accompanying Notes to Consolidated
Financial Statements and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in our Form 10-KT for
the Fiscal Transition Period from June 29, 2019 to January 3, 2020 (our "Fiscal
Transition Period Form 10-KT"). Except for the historical information contained
herein, the discussions in this MD&A contain forward-looking statements that
involve risks and uncertainties. Our future results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below in this MD&A
under "Forward-Looking Statements and Factors that May Affect Future Results."
COVID-19
The pandemic from the novel COVID-19 strain of coronavirus ("COVID-19") and
attempts to contain it, such as mandatory closures, "shelter-in-place" orders
and travel restrictions, have caused significant disruptions and adverse effects
on U.S. and global economies, such as impacts to supply chains, customer demand,
international trade and capital markets. In response, we have increased our
focus on keeping our employees safe while continuing to strive to meet customer
commitments and support suppliers. For example, we have instituted
work-from-home (for employees who are able to work remotely) and social
distancing arrangements; canceled travel and external events; procured personal
protective equipment ("PPE"); implemented health screening procedures at all
facilities; staggered work shifts, redesigned work stations and implemented
stringent cleaning protocols; maintained an active dialog with key suppliers and
developed plans to mitigate supply chain risks; and shifted the timing of share
repurchases, which bolstered liquidity in support of employees, suppliers and
customers. As part of maintaining our increased focus on those areas and seeking
to maintain continuity of operations, we have implemented more detailed safety
precautions and protocols for on-site work, such as daily health assessments and
mandatory face coverings. We also have allowed certain essential business travel
to resume, and we expect to utilize a phased approach based on local conditions
for transitioning employees from work-from-home arrangements to on site work.
The U.S. Government response has included identifying the Defense Industrial
Base as a Critical Infrastructure Sector and enhancing cash flow and liquidity
for the Defense Industrial Base, such as by increasing progress payments and
accelerating contract awards. As a part of the Defense Industrial Base, these
actions have enabled us to keep our U.S. production facilities largely
operational in support of national security commitments to U.S. Government
customers and to accelerate more than $235 million in payments to small business
suppliers in 45 states.
Although we believe that the large percentage of our revenue, earnings and cash
flows that is derived from sales to the U.S. Government, whether directly or
through prime contractors, will be relatively predictable, in part due to the
responsive actions taken by the U.S. Government described above, our commercial,
international and public safety businesses are at a higher risk of adverse
impacts related to the COVID-19 pandemic. For example, the severe decline in
global air traffic from travel restrictions and the resulting downturn in the
commercial aviation market and its impact on customer operations has
significantly reduced demand for flight training, flight simulators and
commercial avionics products in our Commercial Aviation Solutions sector within
our Aviation Systems segment. As a result, we temporarily closed some of our
flight training facilities, initiated restructuring and other actions to align
our resources with the outlook for the commercial aviation market (including
workforce reduction and facility consolidation) and also have recognized $69
million and $394 million of charges for impairment of goodwill and other assets
and other COVID-19-related impacts in the quarter and two quarters ended July 3,
2020, respectively.
The extent of these disruptions and impacts, including on our ability to perform
under U.S. Government contracts and other contracts within agreed timeframes and
ultimately on our results of operations and cash flows, will depend on future
developments, including the severity and duration of the pandemic and associated
containment actions taken by the U.S. Government, state and local government
officials and international governments, and consequences thereof, and global
air traffic demand, all of which are uncertain and unpredictable.
The impact of COVID-19 may also exacerbate other risks discussed in Item 1A.
"Risk Factors" of our Fiscal Transition Period Form 10-KT, any of which could
have a material effect on us. We continue to work with our customers, employees,
suppliers, subcontractors, distributors, resellers and communities to address
the impact of the pandemic. We continue to assess possible implications to our
business, supply chain and customers, and to take actions in an effort to
mitigate adverse consequences. For further information regarding the impact, and
the risks of the impact, of COVID-19 on the Company, see Part II, Item 1A. "Risk
Factors" in this Report.
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KEY DEVELOPMENTS
The following is a list of the remaining sections of this MD&A, together with
our perspective on their contents, which we hope will assist in reading these
pages:
•Results of Operations - an analysis of our consolidated results of operations
and the results in each of our business segments, to the extent the segment
results are helpful to an understanding of our business as a whole, on both an
"as reported" basis and a "pro forma basis" (as defined in "Results of
Operations" in this MD&A), for the periods presented in our Condensed
Consolidated Financial Statements (Unaudited).
•Liquidity, Capital Resources and Financial Strategies - an analysis of cash
flows, funding of pension plans, common stock repurchases, dividends, capital
structure and resources, off-balance sheet arrangements and commercial
commitments and contractual obligations.
•Critical Accounting Policies and Estimates - information about accounting
policies that require critical judgments and estimates and about accounting
standards that have been issued, but are not yet effective for us, and their
potential impact on our financial condition, results of operations and cash
flows.
•Forward-Looking Statements and Factors that May Affect Future
Results - cautionary information about forward-looking statements and a
description of certain risks and uncertainties that could cause our actual
results to differ materially from our historical results or our current
expectations or projections.
As discussed in Note V - Business Segment Information in the Notes, we
implemented a new organizational structure effective on June 29, 2019, which
resulted in changes to our operating segments, which are also reportable
segments and referred to as our business segments. The historical results,
discussion and presentation of our business segments as set forth in this MD&A
reflect the impact of these changes for all periods presented in order to
present segment information on a comparable basis. There is no impact on our
previously reported consolidated statements of income, balance sheets,
statements of cash flows or statements of equity resulting from these changes.
We report the financial results of our continuing operations in the following
four segments, which are also referred to as
our business segments:
•Integrated Mission Systems, including multi-mission intelligence, surveillance
and reconnaissance and communication systems; integrated electrical and
electronic systems for maritime platforms; and advanced electro-optical and
infrared solutions;
•Space and Airborne Systems, including space payloads, sensors and full-mission
solutions; classified intelligence and cyber defense; avionics; and electronic
warfare;
•Communication Systems, including tactical communications; broadband
communications; integrated vision solutions; and public safety; and
•Aviation Systems, including defense aviation products; commercial aviation
products; commercial and military pilot training; and mission networks for air
traffic management.
On May 4, 2020, we completed the divestiture of our Security & Detection Systems
and MacDonald Humfrey Automation solutions business ("airport security and
automation business") to Leidos, Inc. for net cash proceeds of approximately $1
billion (net cash proceeds of $951 million after selling costs and estimated
purchase price adjustments), subject to post-closing finalization of those
adjustments as set forth in the definitive sale agreement. The airport security
and automation business provides solutions used by the aviation and
transportation industries, regulatory and customs authorities, government and
law enforcement agencies and commercial and other high-security facilities. The
operating results of the airport security and automation business through the
date of divestiture are reported as part of our Aviation Systems segment.
On May 15, 2020, we completed the divestiture of our Applied Kilovolts and
Analytical Instrumentation business for net cash proceeds of $12 million, after
selling costs and estimated purchase price adjustments, subject to final
customary purchase price adjustments as set forth in the definitive sale
agreement. The operating results of the Applied Kilovolts and Analytical
Instrumentation business are reported as part of our Space and Airborne Systems
segment.
On March 20, 2020, we entered into a definitive agreement to sell our EOTech
business for $42 million, subject to customary adjustments and closing
conditions as set forth in the definitive agreement. The EOTech business, which
is reported as part of our Communication Systems segment, manufactures
holographic sighting systems, magnified field optics and accessories for
military, law enforcement and commercial markets around the world. The assets
and liabilities of the EOTech business were classified as held for sale in our
Condensed Consolidated Balance Sheet (Unaudited) as of July 3, 2020. We
completed the divestiture of the EOTech business on July 31, 2020.
During the quarter ended July 3, 2020, we determined the criteria to be
classified as held for sale were met with respect to another business within our
Aviation Systems segment ("other AS disposal group"); consequently, the assets
and liabilities of our other AS disposal group were classified as held for sale
in our Condensed Consolidated Balance Sheet (Unaudited) at
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July 3, 2020. The income before income taxes of our other AS disposal group was
not material for the quarter or two quarters ended July 3, 2020. We expect to
complete the sale of the other AS disposal group by the end of 2020.
See Note C - Business Divestitures and Assets Sales in the Notes for additional
detail regarding recent divestitures.
Amounts contained in this Report may not always add to totals due to rounding.
RESULTS OF OPERATIONS
As discussed further in Note A - Significant Accounting Policies and Recent
Accounting Standards in the Notes, we completed the L3Harris Merger on June 29,
2019. Because of the L3Harris Merger, the quarter and two quarters ended July 3,
2020 reflect the results of the combined company, while the quarter and two
quarters ended June 28, 2019 reflect the results of only Harris operating
businesses. Due to the significance of the L3 operating businesses included in
the combined company results following the L3Harris Merger, the reported results
for the quarter and two quarters ended July 3, 2020 and the quarter and two
quarters ended June 28, 2019 generally are not comparable. Therefore, to assist
with a discussion of the consolidated results of operations for the quarter and
two quarters ended July 3, 2020 and June 28, 2019 on a more comparable basis,
certain supplemental unaudited pro forma combined income statement information
prepared in accordance with the requirements of Article 11 of Regulation S-X
(referred to in this MD&A as "pro forma") also is provided (see "Supplemental
Unaudited Pro Forma Condensed Combined Income Statement Information" below in
this MD&A).
Highlights
Consolidated operating results for the quarter ended July 3, 2020, in each case
compared with the quarter ended June 28, 2019 on both an "as reported" basis
(reflecting the results of only Harris operating businesses for the prior
period) and a "pro forma" basis (also reflecting the results of L3 operating
businesses for the prior period), included:
Consolidated - as reported
•Revenue increased 138 percent to $4.4 billion from $1.9 billion;
•Gross margin increased 98 percent to $1,270 million from $642 million;
•Income from continuing operations increased 3 percent to $278 million from $269
million; and
•Income from continuing operations per diluted common share attributable to
L3Harris Technologies, Inc. common shareholders decreased 41 percent to $1.30
from $2.21.
Consolidated - pro forma
•Revenue was flat at $4.4 billion;
•Gross margin decreased 8 percent to $1,270 million from $1,386 million;
•Income from continuing operations decreased 33 percent to $278 million from
$417 million; and
•Income from continuing operations per diluted common share attributable to
L3Harris Technologies, Inc. common shareholders decreased 29 percent to $1.30
from $1.82.
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