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 fromJune 29, 2019 toJanuary 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 onU.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. TheU.S. Government response has included identifying theDefense 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 ourU.S. production facilities largely operational in support of national security commitments toU.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 theU.S. Government , whether directly or through prime contractors, will be relatively predictable, in part due to the responsive actions taken by theU.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 endedJuly 3, 2020 , respectively. The extent of these disruptions and impacts, including on our ability to perform underU.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 theU.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. 34
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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 onJune 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. OnMay 4, 2020 , we completed the divestiture of our Security & Detection Systems andMacDonald Humfrey Automation solutions business ("airport security and automation business") toLeidos, 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. OnMay 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. OnMarch 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 ofJuly 3, 2020 . We completed the divestiture of the EOTech business onJuly 31, 2020 . During the quarter endedJuly 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 35
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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 endedJuly 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 onJune 29, 2019 . Because of the L3Harris Merger, the quarter and two quarters endedJuly 3, 2020 reflect the results of the combined company, while the quarter and two quarters endedJune 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 endedJuly 3, 2020 and the quarter and two quarters endedJune 28, 2019 generally are not comparable. Therefore, to assist with a discussion of the consolidated results of operations for the quarter and two quarters endedJuly 3, 2020 andJune 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 endedJuly 3, 2020 , in each case compared with the quarter endedJune 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 toL3Harris 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 toL3Harris Technologies, Inc. common shareholders decreased 29 percent to$1.30 from$1.82 . 36
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