UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

 

Commission File Number 1-3863

 

HARRIS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (321) 727-9100

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ü   No    

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes      No ü 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ü   No   

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ü 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No ü 

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant was $8,420,370,971 (based upon the quoted closing sale price per share of the stock on the New York Stock Exchange) on the last business day of the registrant’s most recently completed second fiscal quarter (December 28, 2007). For purposes of this calculation, the registrant has assumed that its directors and executive officers as of December 28, 2007 are affiliates.

 

The number of outstanding shares of the registrant’s common stock as of August 22, 2008 was 134,196,472.

 

Documents Incorporated by Reference:

 

Portions of the registrant’s definitive Proxy Statement for the 2008 Annual Meeting of Shareholders scheduled to be held on October 24, 2008, which will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended June 27, 2008, are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent described therein.

 

 

HARRIS CORPORATION

 

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 27, 2008

 

TABLE OF CONTENTS

 

 

Exhibits

 

This Annual Report on Form 10-K contains trademarks, service marks and registered marks of Harris Corporation and its subsidiaries. HD Radio^® is a registered trademark of iBiquity Digital Corporation. Iridium^® is a registered trademark of Iridium Satellite LLC.

Cautionary Statement Regarding Forward-Looking Statements

This Annual Report on Form 10-K, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements concerning: our plans, strategies and objectives for future operations; new products, services or developments; future economic conditions, performance or outlook; the outcome of contingencies; the value of our contract awards and programs; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects” and similar words or expressions. You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of the filing of this Annual Report on Form 10-K and are not guarantees of future performance or actual results. Factors that might cause our results to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, those discussed in “Item 1A. Risk Factors” of this Annual Report on Form 10-K. All forward-looking statements are qualified by, and should be read in conjunction, with those risk factors. Forward-looking statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we undertake no obligation, other than imposed by law, to update forward-looking statements to reflect further developments or information obtained after the date of filing of this Annual Report on Form 10-K or, in the case of any document incorporated by reference, the date of that document, and disclaim any obligation to do so.

 

 

HARRIS

Harris Corporation, together with its subsidiaries, is an international communications and information technology company that applies a solutions approach to serving government and commercial markets in more than 150 countries. Our mission is to be the best-in-class global provider of mission critical assured communications^® products, systems and services for global markets, including defense communications and electronics, government communications, broadcast communications and wireless transmission network solutions.

 

Harris was incorporated in Delaware in 1926 as the successor to three companies founded in the 1890s. Our principal executive offices are located at 1025 West NASA Boulevard, Melbourne, Florida 32919, and our telephone number is (321) 727-9100. Our common stock is listed on the New York Stock Exchange under the symbol “HRS.” On August 22, 2008, we employed approximately 16,300 people. Unless the context otherwise requires, the terms “we,” “our,” “us,” “Company” and “Harris” as used in this Annual Report on Form 10-K refer to Harris Corporation and its subsidiaries.

 

General

We report our financial results for fiscal 2008 in the following four business segments:

 

 

As discussed further in Note 23: Business Segments in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K (the “Notes”), effective for fiscal 2008 (which began June 30, 2007), our Defense Programs business (part of our Government Communications Systems segment for fiscal 2007) was combined with our RF Communications business, and the combined business is reported as our Defense Communications and Electronics segment for fiscal 2008. Our Broadcast Communications and Harris Stratex Networks segments did not

change as a result of these adjustments to our organizational structure. The historical results, discussion and presentation of our business segments as set forth in this Annual Report on Form 10-K reflect the impact of these adjustments to our organizational structure for all periods presented in this Annual Report on Form 10-K. As described in greater detail below under “Item 1. Business — Description of Business by Segment for Fiscal 2008 — Harris Stratex Networks,” in the third quarter of fiscal 2007, we combined our former Microwave Communications Division with Stratex Networks, Inc. (“Stratex”), a publicly-traded provider of high-speed wireless transmission systems, to form a new company named Harris Stratex Networks, Inc. As of June 27, 2008, we owned approximately 56 percent of Harris Stratex Networks’ outstanding stock. Following the combination, our business segment formerly referred to as Microwave Communications is referred to as Harris Stratex Networks and includes the results of the combined businesses for periods following the combination. Financial information with respect to all of our other activities, including corporate costs not allocated to the operating segments or discontinued operations, is reported as part of Headquarters Expense or Non-Operating Income (Loss).

 

Each of our business segments has been organized on the basis of specific communications markets. Each business segment has its own marketing, engineering and product service and maintenance organizations. Broadcast Communications and Harris Stratex Networks have their own separate manufacturing operations. Defense Communications and Electronics and Government Communications Systems have both separate and shared manufacturing operations. We manufacture most of the finished products we sell.

 

On August 5, 2008, we announced that we would report our financial results for fiscal 2009 (which began June 28, 2008) in the following four business segments:

 

 

Our segment reporting structure for fiscal 2009 reflects that our RF Communications business (part of our Defense Communications and Electronics segment for fiscal 2008) will be reported as its own separate segment for fiscal 2009, and that our Defense Programs business (the other part of our Defense Communications and Electronics segment for fiscal 2008) will be reported as part of our Government Communications Systems segment for fiscal 2009, together with that segment’s existing businesses (National Intelligence Programs, Civil Programs and IT Services). Our Broadcast Communications and Harris Stratex Networks segments will not change as a result of the adjustments to our segment reporting structure. These adjustments to our segment reporting take effect in fiscal 2009 and therefore do not affect the historical results, discussion or presentation of our business segments as set forth in this Annual Report on Form 10-K. We will begin to report our financial results consistent with this new segment reporting structure beginning with the first quarter of fiscal 2009 and we will conform our historical segment reporting accordingly.

 

Our total revenue was approximately $5.3 billion in fiscal 2008 compared with approximately $4.2 billion in fiscal 2007. Total revenue in the United States increased 23 percent from fiscal 2007 while international revenue, amounting to 24 percent of our total revenue in fiscal 2008, increased 33 percent from fiscal 2007. Our net income was $444.2 million in fiscal 2008 compared with $480.4 million in fiscal 2007.

 

Financial Information About Our Business Segments

Financial information with respect to our business segments, including revenue, operating income or loss and total assets, and with respect to our operations outside the United States, is contained in Note 23: Business Segments in the Notes and is incorporated herein by reference.

 

Description of Business by Segment for Fiscal 2008

 

Defense Communications and Electronics

For fiscal 2008, Defense Communications and Electronics was comprised of our RF Communications and Defense Programs businesses. These two businesses have developed significant technology-based capabilities that are directly targeted to a diverse base of U.S. and international defense customers and their continuing needs for more complex, secure communications and information technology networks.

RF Communications:  We offer to the global tactical radio market a comprehensive line of highly secure software-defined radio products and systems for manpack, handheld, vehicular, strategic fixed-site and shipboard applications, supporting our customers’ critical missions. These radio systems are highly flexible, interoperable and capable of supporting diverse mission requirements. Our Falcon^® family of tactical radios includes the Falcon II^® secure high-frequency, very high-frequency, ultra high-frequency and multiband handheld, manpack and vehicular radio systems; the Falcon III^® multiband, multimode, multimission handheld, manpack, vehicular and high-capacity data radios; and the Secure Personal Radio. These radios are built on a platform that is reprogrammable to add features or software upgrades, addressing the increasing need for an integrated high-frequency, very high-frequency and ultra high-frequency communications system. The platform also provides interconnectivity among land-based and wireless communications media. These radios also have military-strength embedded encryption and can be linked to computers, providing network capabilities on the battlefield. Our Falcon II and Falcon III radios are being installed on new Mine Resistant Ambush Protected (“MRAP”) vehicles for the U.S. Army, Navy, Marine Corps and Air Force. In fiscal 2008, we received an order from the U.S. Army to supply Falcon II high-frequency vehicular radio systems for High Mobility Multipurpose Wheeled Vehicles (“HMMWVs”) and other vehicles. We also announced in fiscal 2008 that the U.S. Army is installing Joint Tactical Radio System (“JTRS”)-approved Falcon III handheld radios in Shadow 200 Unmanned Aerial Vehicles (“UAVs”) to serve as critical links in a relay system to extend significantly the communications capabilities of ground forces operating in obstructed line-of-sight environments.

 

The Falcon III is the next-generation family of software-defined tactical radios which have been developed to address the JTRS requirements. Falcon III radios provide multimode capability, including secure, ultra high-frequency ground-to-ground line-of-sight communications, close-air support, and long-range tactical satellite communications, as well as programmable encryption. Falcon III radios offer operational flexibility by addressing a full range of evolving mission requirements, including backwards compatibility and interoperability with legacy systems, such as Single Channel Ground and Airborne Systems (“SINCGARS”), and are software upgradeable to incorporate new waveforms as they are developed. The AN/PRC-152 Falcon III multiband handheld is the first widely fielded tactical radio to be certified without waivers by the Joint Program Executive Office (“JPEO”) as fully compliant with the JTRS Software Communications Architecture (“SCA”). The Falcon III handheld radio also has been certified by the National Security Agency (“NSA”) for the protection of voice and data traffic up through the TOP SECRET/SCI level. In fiscal 2007, we introduced the Falcon III multiband, multimission, manpack tactical radio, which combines traditional multiband radio features with new capabilities such as extended frequency range to 2 gigahertz, commercial L-Band satellite communications (“SATCOM”) and wideband mobile ad hoc networking, and we received certification from the NSA for the Falcon III manpack in fiscal 2008. The Falcon III manpack is the first wideband networking radio to utilize the JTRS SCA and receive NSA Type 1 certification for the protection of voice and data traffic up through the TOP SECRET level. In July 2008, the Falcon III manpack became the first manpack radio with wideband networking capability to be certified as SCA-compliant by the JTRS JPEO. In fiscal 2007, we also introduced the very small Secure Personal Radio that delivers secure, tactical digital communications to individual soldiers, and a high-capacity, line-of-site (“HCLOS”) data radio. The HCLOS data radio is a lightweight broadband Ethernet system that can securely transmit encrypted Internet Protocol (“IP”) traffic over distances greater than 50 kilometers under clear line-of-sight conditions in fixed point-to-point and 20 kilometers in point-to-multipoint configurations, and can support throughput in excess of 80 megabits per second in a military application of 802.16 WiMax technology for high-speed IP data communications, providing ground troops the ability to send secure, high-bandwidth data between command posts and forward-operating bases.

 

We are a leader in multiband frequency radios, which allow operators to perform multiple functions on different frequency bands, eliminating the need and inconvenience of carrying multiple radios. This capability has become increasingly important to global military and peacekeeping forces as they upgrade communications for joint missions. This capability is also important for different Federal, state and local authorities confronting difficulty in communicating directly with one another during emergency operations, due to the large number of frequency bands and technologies used in today’s two-way land mobile radio communications systems, without relying on additional infrastructure or radio gateway equipment. Introduced in fiscal 2008, our new RF-1033M Multiband Multimode Land Mobile Radio delivers true real-time interoperable communications to address this difficulty by providing direct, secure multi-agency communications across multiple frequency bands (very high-frequency and ultra high-frequency bands) in a single portable radio for the growing public safety, homeland security and first responder markets. The RF-1033M Multiband Multimode Land Mobile Radio is a rugged, mission-critical communications platform for joint operations, built to the same standards as our proven military tactical radio products, and features true software-defined radio architecture, which provides flexibility and capacity for future growth while protecting our customers’ investments with software-enabled technology migrations. In July 2008, we introduced the Unity^tm XG-100 land mobile radio, the newest product in a family of multiband software-defined radios that will give

Federal, state and local public safety responders the ability to communicate using a single radio across multiple frequencies with virtually any agency responding to an emergency. The Unity XG-100 expands on the capabilities of the RF-1033M and extends the covered frequency range to include the 700/800 megahertz bands.

 

We also develop cryptographic solutions for markets with demanding communications security requirements, utilizing security algorithms that meet a wide range of applications and/or country needs to address unique privacy requirements of customers (whether a government agency or supplier or a commercial manufacturer) and providing NSA-certified products and systems that range from single integrated circuits to major communications systems. Our Sierra^tm II cryptographic subsystem is a miniaturized programmable module that can be integrated into radios and other voice and data communications devices to encrypt classified information prior to transmission and storage. Our encryption modules currently meet or exceed the highest security standards established by the U.S. Government. Sierra II can be used for tactical radios, wireless local area networks (“WLANs”), remote sensors, guided munitions and UAVs. We also offer the Citadel^® cryptographic engine, which provides military-grade, Type IV encryption, enabling low-cost, exportable encryption for our family of Falcon II radios. Our secure WLAN (“SWLAN”) solution, SecNet 11^® Plus, is certified by the NSA’s Commercial COMSEC Endorsement Program (“CCEP”) and enables military and government users to communicate multimedia information, including data, voice and video, through a secure wireless network at 11 megabits per second. Our SecNet 54^tm family of IP communications encryption products, designed to keep data, voice and video communications secure, is comprised of a modular architecture that includes a cryptographic module that provides all security-critical functions and companion modules that provide both wired and wireless communications of encrypted data over specific protocols. In fiscal 2007, we received Type 1 certification from the NSA for the SecNet 54 SWLAN product line, which enables very high data rate transmission of sensitive defense communications over wireless infrastructures in applications such as tactical operations centers. In fiscal 2008, we received certification of the SecNet 54 Ethernet module (“EMOD”) which enables secure transmission of sensitive communications over wired Ethernet connections.

 

We also provide unmanned ground sensor systems, which are a force-multiplier solution with a network of easily deployable, remotely located products that detect movement of personnel and vehicles. Our Falcon Watch^tm remote intrusion detection and surveillance systems are fully integrated with our Falcon radios and are designed for surveillance and monitoring of high-value assets such as troop encampments, airfields, base installations, supply routes and depots. In larger networks these systems also can be used to monitor and protect national borders, regional boundaries and assets in homeland defense and peacekeeping operations. These sensor systems can be comprised of remote, battery-operated, wireless sensors using seismic, magnetic and/or passive infra-red detectors; relays; Falcon tactical radios; and sensor management application software.

 

Global market demand for our advanced tactical radio solutions continued to increase at strong growth rates in fiscal 2008, driving positive results for this segment. Deployment of advanced communications capabilities continues to be a top priority in the U.S. and globally, driven by modernization programs, force expansion, force restructuring and modularity, interoperability required in the growing number of NATO-led peacekeeping and disaster-relief missions, and the increasing desire for network-centric communications that will significantly improve situational awareness and force effectiveness through communications superiority. In fiscal 2008, we responded to requirements for our Falcon family of radios from a broad base of U.S. Government customers, including the U.S. Army, Marine Corps, Navy and Air Force. Internationally, our radios are the standard of NATO and Partnership for Peace countries. In fiscal 2008, we received orders from, and/or made deliveries to, a wide range of international customers in countries including Albania, Algeria, Armenia, Brunei, Bulgaria, Chad, Denmark, Estonia, Ethiopia, Georgia, Iraq, Jamaica, Kazakhstan, Kenya, Malaysia, Norway, Pakistan, the Philippines, the Republic of Niger, Romania, Saudi Arabia, Singapore, Spain, Tajikistan, Thailand, the United Arab Emirates and the United Kingdom.

 

In May 2007, we were awarded an Indefinite Delivery, Indefinite Quantity (“IDIQ”) contract with a maximum value of $422 million from the U.S. Army for Falcon II high-frequency manpack tactical radios and related vehicular and base station systems. We received an initial $104 million order against the contract in the fourth quarter of fiscal 2007. In June 2007, we were awarded the Consolidated Interim Single Channel Handheld Radio (“CISCHR”) IDIQ contract by the JTRS JPEO to supply the U.S. Department of Defense (“DoD”) with JTRS-approved Falcon III multiband handheld tactical radios and vehicular systems. The CISCHR contract has a one-year maximum value of $2.7 billion and a five-year maximum value of approximately $7 billion (including additional options that may be exercised over a five-year period). Under the CISCHR contract, orders are awarded based on competitive bidding between us and another supplier, and we received orders under the CISCHR contract in fiscal 2008 for the U.S. Marine Corps and Air Force. In fiscal 2008, we also received orders under the $212 million Tactical Handheld Radio (“THHR”) IDIQ contract awarded in July 2007 by the U.S. Marine Corps to support MRAP and other tactical vehicles. In June 2008, we were awarded $118 million in orders to supply the U.S. Marine Corps with Falcon II multiband manpack radios under a new $350 million IDIQ contract that is part of the Marine

Corps’ Strategic Radio Plan, which will transition the Marine Corps from legacy single-band radios to multiband, multimission software-defined radios.

 

Defense Programs:  We develop, supply and integrate communications and information processing products, systems and networks for diverse aerospace, terrestrial and maritime applications, in support of the ongoing transformation of communications for U.S. and international customers to network-centric architectures that support real-time situational awareness in combat conditions. Our technologies are providing advanced battlespace networking capabilities to assure timely and secure network-centric capabilities across strategic, operational and tactical boundaries in support of the DoD’s full spectrum of war fighting, intelligence and business missions. Our major technology areas include satellite communications terminals for mobile ground, fixed-site and shipboard applications; large, deployable satellite antenna reflectors; flat-panel, phased-array and single-mission antennas; aviation electronics for military jets and helicopters, including radios, digital maps, modems, sensors, data buses, fiber optics and microelectronics; and high-speed data links and data networks for wireless communications and smart weapons. For example, our high-speed digital Common Data Link (“CDL”) system called Hawklink, which is designed for the U.S. Navy’s Light Airborne Multi-Purpose System (“LAMPS”) helicopters, transmits tactical video, radar, acoustic and other sensor data from the helicopters to their host surface ships at distances greater than 100 nautical miles and at data rates exceeding 21 megabits per second.

 

We also provide high-speed secure wireless network solutions and phased-array capabilities for wireless transmission systems and are developing network-centric communications system architectures and technologies that will link sensors, platforms, weapons and soldiers using open architectures and mobile ad hoc networking capabilities. Our mobile ad hoc networking capability allows the military to take its communications infrastructure with it, creating mobile, self-forming and self-healing communications links across the battlefield. For example, our Highband Networking Radio (“HNR”), released in fiscal 2007, provides the military with fully mobile, wireless, long-range, high-bandwidth communications on-the-move by establishing line-of-sight connectivity between users of widely dispersed local area networks (“LANs”) using a Harris-developed waveform that automatically selects the best communications path available.

 

Major ongoing previously awarded programs include the F-35 Joint Strike Fighter, F-22 Raptor and F/A-18E/F Super Hornet aircraft platform programs, for which we provide high-performance, advanced avionics such as high-speed fiber optic networking and switching, intra-flight data links, image processing, digital map software and other electronic components; the Warfighter Information Network-Tactical (“WIN-T”) program for the U.S. Army, for which we are designing and testing the wireless transmission system architecture, applying our proven enabling technologies for wireless on-the-move communications, including phased arrays and high-speed secure wireless network solutions; the JTRS Ground Mobile Radio (“GMR”) program, for which we design, test and integrate the crypto subsystem, ground vehicle adaptor, ground vehicle adaptor mount, high-frequency power amplifier and high-frequency coupler; the Multifunctional Information Distribution System (“MIDS”) terminals program for DoD aircraft, which provides U.S. military forces with secure, jam-resistant, digital tactical communications; the Multiple Launch Rocket System (“MLRS”) Improved Fire Control System (“IFCS”) program for the U.S. Army, for which we provide the launcher interface unit, power switching unit and weapon interface unit; the Large Aperture Multiband Deployable Antenna (“LAMDA”) program, for which we provide rugged, highly-mobile, user-friendly, large-aperture tactical antennas supporting tri-band operations by utilizing interchangeable antenna feeds that can be rapidly installed by operators in the field; the CDL Hawklink program for U.S. Navy LAMPS helicopters, for which we are performing pre-production and testing of the Ku-band tactical CDL; the Multiband Shipboard Satellite Communications Terminal (“MSSCT”) program for the U.S. Navy, for which we are providing wideband satellite communications terminal systems; the Global Positioning System Next Generation Ground Control Segment (“OCX”) program, for which we provide design and engineering services for hardware, software and network infrastructure, including advanced ground antennas, advanced monitoring stations and interfaces to existing ground antennas; and the Lightweight Multiband Satellite Terminal (“LMST”) program for the U.S. Marine Corps, for which we provide mobile satellite communications terminals.

 

Significant new contract awards during fiscal 2008 included a five-year IDIQ contract, potentially worth $85 million, for the U.S. Navy’s Commercial Broadband Satellite Program (“CBSP”) Force Level Variant, for which we supply, for aircraft carriers and amphibious assault ships, broadband multiband satellite communications terminals that support essential mission requirements and provide high-speed Internet access for as many as 5,000 military personnel onboard each aircraft carrier; and a five-year IDIQ contract, potentially worth $77 million, for the U.S. Navy’s CBSP Unit Level Variant, for which we supply, for frigates, cruisers and destroyers, broadband multiband satellite communications terminals that provide enhanced morale-related communications services such as high-speed Internet access and video communications.

Revenue and Backlog:  Revenue for the Defense Communications and Electronics segment increased 19 percent to $1,975 million in fiscal 2008 compared with $1,661 million in fiscal 2007, and was $1,293 million in fiscal 2006. Segment operating income increased 23 percent to $599.8 million in fiscal 2008 compared with $487.1 million in fiscal 2007, and was $354.1 million in fiscal 2006. The Defense Communications and Electronics segment contributed 37 percent of our total revenue in fiscal 2008 compared with 39 percent in fiscal 2007 and 37 percent in fiscal 2006. The percentage of this segment’s revenue that was derived outside of the United States was approximately 21 percent in fiscal 2008 compared with 21 percent in fiscal 2007 and 24 percent in fiscal 2006. U.S. Government customers, whether directly or through prime contractors, accounted for approximately 86 percent of this segment’s total revenue in fiscal 2008 compared with approximately 83 percent in fiscal 2007 and in fiscal 2006. For a general description of our U.S. Government contracts and subcontracts, including a discussion of revenue generated from cost-reimbursement versus fixed-price contracts, see “Item 1. Business — Principal Customers; Government Contracts” of this Annual Report on Form 10-K.

 

In general, this segment’s domestic products are sold and serviced directly to customers through its sales organization and through established distribution channels. Internationally, this segment markets and sells its products and services through regional sales offices and established distribution channels. See “Item 1. Business — International Business” of this Annual Report on Form 10-K.

 

The funded backlog of unfilled orders for this segment was $1,160 million at July 25, 2008 compared with $1,016 million at July 27, 2007 and $933 million at July 28, 2006. We expect to fill approximately 90 percent of this funded backlog during fiscal 2009, but we can give no assurance of such fulfillment. Unfunded backlog for this segment was $223 million at July 25, 2008 compared with $148 million at July 27, 2007 and $278 million at July 28, 2006. Additional information regarding this segment’s funded and unfunded backlog is provided under “Item 1. Business — Funded and Unfunded Backlog” of this Annual Report on Form 10-K. For a discussion of certain risks affecting this segment, including risks relating to our U.S. Government contracts and subcontracts, see “Item 1. Business — Principal Customers; Government Contracts,” “Item 1A. Risk Factors” and “Item 3. Legal Proceedings” of this Annual Report on Form 10-K.

 

Government Communications Systems

In fiscal 2008, Government Communications Systems was comprised of our Civil Programs, National Intelligence Programs and IT Services businesses.

 

Civil Programs:  Serving primarily U.S. Government civilian agencies, including the Federal Aviation Administration (“FAA”), Census Bureau, National Oceanic and Atmospheric Administration (“NOAA”), Department of Homeland Security (“DHS”) and Government Printing Office (“GPO”), we use our ability to implement and manage large, complex programs that integrate secure, advanced communications and information processing technologies in order to provide precise, highly reliable, secure high-speed communications and information networks that improve productivity and information processing for our customers. Our networks and information systems for large-scale, geographically-dispersed enterprises offer advanced capabilities for collecting, processing, analyzing, interpreting, displaying, distributing, storing and retrieving data. Our custom networks, systems and solutions include meteorological data processing systems; electronic archival systems; graphic information systems; telecommunications services systems; maritime communications systems, including worldwide turnkey broadband satellite and terrestrial network systems and managed services for the maritime community, remote land-based installations and autonomous (buoy) systems; and healthcare IT enterprise intelligence solutions and services, including systems integration and collaboration, intelligent infrastructure, advanced visualization and display, and enterprise digital content management.

 

For example, we are the prime contractor on the 15-year, $2.2 billion contract for the FAA Telecommunications Infrastructure (“FTI”) program to integrate and modernize the U.S. air traffic control system and infrastructure. FTI is a modern, secure and efficient network that is providing voice, data and radar communications to 50,000 FAA employees at more than 4,000 FAA sites across the U.S., while reducing operating costs, enhancing network efficiency, reliability and security and improving service. We designed and deployed the new FTI network, have successfully transitioned more than 90 percent of the FAA’s legacy networks to the new FTI network, and are providing on-going mission operations and support services. We are also working with the FAA on other programs, including the Voice Switching and Control System (“VSCS”) program that allows air traffic controllers to establish critical ground-to-air and ground-to-ground communications links with pilots and other air traffic controllers, respectively; the Weather and Radar Processor (“WARP”) program that provides air traffic controllers with high-resolution graphical displays of integrated real-time next generation weather radar data; and the Operational and Supportability Implementation System (“OASIS”) program that provides integrated real-time weather and flight planning data for preflight weather briefings and in-flight updates.

We are also the prime contractor to the U.S. Census Bureau on two of its major programs. Under the Master Address File/Topologically Integrated Geographic Encoding and Referencing Accuracy Improvement Project (“MTAIP”), we have modernized two key census databases containing 175 million addresses for all U.S. residences and businesses and a database linking U.S. streets, rivers, railroads and other geographic features to Global Positioning System (“GPS”) coordinates. For the Field Data Collection Automation (“FDCA”) program awarded to us during fiscal 2006, we are integrating multiple automated systems and have developed a new wireless handheld device with integrated GPS and secure communication capabilities that together are designed to enable census takers to input data in real time and securely transmit the information back to the Census Bureau in support of the 2010 census.

 

We are also working with the GPO on its digital catalog database conversion project to develop its Federal Digital System, an IT system in which content — text, graphics, video, audio and other formats — will be entered, authenticated, and catalogued according to GPO-selected metadata and standards, in order to digitally preserve and make publicly accessible in a one-stop online site a vast quantity of Federal documents and information from all three branches of the U.S. Government.

 

In a new market for us — healthcare IT solutions — the Department of Health and Human Services (“HHS”) awarded us a $6 million contract in the third quarter of fiscal 2008 to develop and integrate an open-source National Health Information Exchange Gateway solution that will enable Federal healthcare agencies and healthcare providers to share patient information more quickly and easily, improving the quality of care and reducing costs. In the fourth quarter of fiscal 2008, we were selected for award of a seven-year contract, potentially worth $58 million, to provide the communications/navigation system for the next-generation space suit supporting the National Aeronautics and Space Administration (“NASA”) Constellation program.

 

National Intelligence Programs:  A significant portion of this business involves classified programs. While classified programs generally are not discussed in this Annual Report on Form 10-K, the operating results relating to classified programs are included in our consolidated financial statements. We believe that the business risks associated with such programs do not differ materially from those of other U.S. Government programs.

 

Serving primarily national intelligence and security agency customers, including NSA, the National Reconnaissance Office (“NRO”) and the National Geospatial-Intelligence Agency (“NGA”), we provide integrated intelligence, surveillance and reconnaissance (“ISR”) solutions that improve situational awareness, data collection accuracy and product analysis by correlating near real-time mission data and intelligence reference data for display and analysis by strategic and tactical planners and decision makers. Our ISR systems help to integrate information across the analyst workflow, accelerating the movement of information that has been collected and processed. We strive to produce innovative and cost-effective ISR solutions that provide our customers with information dominance for battle-space superiority.

 

For example, our image processing capabilities extend from algorithm development through delivery of operations systems, and we are providing advanced image exploitation and dissemination solutions for ISR applications by advancing image processing, image data fusion, display technologies and digital product generation techniques. These technologies range from new techniques for merging and displaying imagery to automated techniques for image screening, cueing and remote visualization. Also, our mapping and visualization capabilities provide complete, accurate and timely knowledge about the threat, the terrain, the status and the location of single or multiple foe and friendly forces and their support by utilizing data, pictures, voice and video drawn from vast storage banks or from real-time input which can be transmitted around the world in fractions of a second. In addition, we have industry-leading capabilities in the architecture, design and development of highly-specialized satellite antennas, structures, phased arrays and on-board processors, which are used to enable next-generation satellite systems to provide the U.S. military and intelligence communities with strategic and tactical advantage. We are also a leader in the design and development of antenna and reflector technologies for commercial space telecommunications applications. Further, our wireless products capabilities include developing and supplying state-of-the-art wireless surveillance and tracking equipment to the U.S. Government and law enforcement communities for vehicular, man-portable, airborne, remote/unattended and system-level solutions for both passive and active missions.

 

During fiscal 2008, we were awarded several new classified programs and follow-on contracts. During fiscal 2008, we also were awarded several non-classified contracts. We were awarded a two-year contract in the third quarter of fiscal 2008 to provide satellite reflector antennas for the Sirius Satellite Radio FM 6 satellite expected to be launched in the fourth quarter of calendar 2010. In the fourth quarter of fiscal 2008, we were awarded a ten-year contract (one base year with nine option years) valued at more than $40 million to supply support and engineering services for multiple space-related ground systems for a U.S. Air Force base. Ongoing previously awarded programs

include a contract with Space Systems/Loral to design and construct unfurlable mesh reflectors for commercial satellites; a contract to develop mission management software for security analysts; and a contract under the Global Geospatial Intelligence program to provide imagery intelligence and photogrammetry, mapping and charting information, and three-dimensional high-resolution image models of harbors, cities, airfields and other terrain.

 

IT Services:  We provide IT and communications services, products, enterprise solutions and advanced systems to U.S. Government defense, intelligence, homeland security and civil customers; state and local governments; and healthcare organizations and institutions. We significantly expanded our IT Services business area through our acquisition of Multimax Incorporated (“Multimax”) in the fourth quarter of fiscal 2007, broadening our customer base and providing new growth opportunities through Multimax’s key positions on major contracts such as the Navy/Marine Corps Intranet (“NMCI”) program and certain Government-Wide Acquisition Contracts (“GWACs”), including Network Centric Solutions (“NETCENTS”), EAGLE, ITES-2S and FirstSource, which are IT procurement vehicles broadly accessible to U.S. Government agencies. With approximately 3,000 professionals currently operating at locations worldwide, we support large-scale, mission-critical networks with technical expertise and strong customer commitment through the full technology lifecycle, including network design, deployment, operations and ongoing support. Our services include IT outsourcing (data entry, network administration, system operations and maintenance, and procurement and logistics support); enterprise management (systems engineering and integration, network design, capacity expansions and information assurance and security); and enterprise-wide IT planning and architecture services. We also offer customized IT support, operations and management services that reflect rigorous service-level requirements and performance-based incentives and disincentives, allowing public-sector organizations to focus on their core mission responsibilities while maximizing the return on their IT and communications infrastructure investments. In addition, we develop products and technologies that support advanced, network-centric communications, including the OS/COMET^® satellite telemetry tracking and control software that is the command and control product of choice for Iridium^®, GPS, multiple government geosynchronous (“GEO”) and Low Earth Orbit (“LEO”) satellites.

 

As examples, we are a Tier One subcontractor on the NMCI program, the largest IT outsourcing contract ever issued by the U.S. Government, which will eventually provide voice, data and video communications to more than 500,000 Navy and Marine Corps users. We provide operations, maintenance and support services for NRO’s global communications and information systems network (the “Patriot” program) in space and on the ground under a ten-year contract, potentially worth $1 billion, in support of NRO’s global analyst community. We provide technical support services and IT systems and service modernization in support of more than 230 U.S. embassies and consulates around the world under a contract awarded by the U.S. Department of State, Bureau of Consular Affairs (the “State 6” program). We provide system maintenance and engineering for the Defense Information Systems Agency’s (“DISA”) Crisis Management System, and we staff the U.S. Postal Service Maintenance Technical Support Center in Oklahoma. We are also making it easier for DHS to purchase IT products through the FirstSource GWAC vehicle.

 

Additionally, we operate and maintain the communications functions for the U.S. Air Force 50^th Space Wing’s Satellite Control Network (“AFSCN”), a global, continuously operational network of ground stations, operational control nodes and communications links that support launch and command and control of various space programs managed by the DoD and other national security space organizations. The AFSCN is responsible for providing readiness, launch, early orbit/on-orbit support, and anomaly resolution for a variety of military satellite constellations, including more than 140 deployed satellites and other space vehicles such as ballistic missiles and the space shuttle. In calendar 2000, we were awarded a contract under the Operational Space Services and Support (“OSSS”) program, for which we have been providing operations, maintenance and support services to the AFSCN and GPS ground networks, including organizational level maintenance at all ground stations assigned to the AFSCN and GPS networks. In calendar 2002, we were awarded a contract under the Mission Communications Operations and Maintenance (“MCOM”) program, for which we have been providing operations and maintenance services for the AFSCN’s communications functions at Schriever AFB in Colorado and Onizuka AFS in California. In January 2008, we were awarded a 6.5-year contract, which could be worth as much as $410 million, under the Network and Space Operations and Maintenance (“NSOM”) program with the U.S. Air Force 50^th Space Wing in Colorado Springs to provide operations and maintenance support to the AFSCN at locations around the world. The NSOM program includes a majority of the OSSS and MCOM programs and supersedes those programs.

 

During the first quarter of fiscal 2008, we were among a number of companies awarded the five-year ALLIANT GWAC by the General Services Administration (“GSA”), which allows us to provide integrated IT product and service solutions to support a number of U.S. Government agencies. We received a six-month, $22 million follow-on order in the third quarter of fiscal 2008 from the Department of State to modernize IT architecture for the Bureau of Consular Affairs. In the fourth quarter of fiscal 2008, we were awarded a three-year,

$20 million IT services contract for a next-generation Tactical Video Capture System (“TVCS”) that will support training at various U.S. Marine Corps locations across the U.S. and abroad, and we were also awarded our second contract for healthcare IT solutions, a new market for us. This is a $12 million contract for the U.S. Army Dental Command Information Management & Technology Division, for which we will provide local operations and support to the U.S. Army Dental Command at Ft. Sam Houston, Texas and other Army dental clinics at locations around the world.

 

Revenue and Backlog:  Revenue for the Government Communications Systems segment increased 32 percent to $2,000 million in fiscal 2008 compared with $1,513 million in fiscal 2007, and was $1,328 million in fiscal 2006. Segment operating income increased 7 percent to $149.8 million in fiscal 2008 compared with $140.0 million in fiscal 2007, and was $141.4 million in fiscal 2006. This segment contributed 38 percent of our total revenue in fiscal 2008 compared with 36 percent in fiscal 2007 and 38 percent in fiscal 2006. In fiscal 2008, approximately 12 percent of the revenue for this segment was under contracts with prime contractors and approximately 88 percent was under direct contracts with customers, compared with approximately 19 percent of revenue under contracts with prime contractors and approximately 81 percent of revenue under direct contracts with customers in fiscal 2007. Some of this segment’s more significant programs in fiscal 2008 included the FTI program, the FDCA program, the Patriot program, the NETCENTS program, the NMCI program and various classified programs. The largest program by revenue represented approximately 11 percent of this segment’s revenue in fiscal 2008, compared with approximately 16 percent in fiscal 2007. The 10 largest programs by revenue represented approximately 55 percent of this segment’s revenue in fiscal 2008, approximately 50 percent in fiscal 2007 and approximately 46 percent in fiscal 2006. In fiscal 2008, this segment had a diverse portfolio of over 250 programs. Historically, this diversity has provided a stable backlog and reduced potential risks that come from reductions in funding or changes in customer priorities. In fiscal 2008, U.S. Government customers, whether directly or through prime contractors, accounted for approximately 96 percent of this segment’s total revenue compared with approximately 93 percent in fiscal 2007 and fiscal 2006, with the FAA accounting for 15 percent of this segment’s fiscal 2008 revenue. For a general description of our U.S. Government contracts and subcontracts, including a discussion of revenue generated from cost-reimbursement versus fixed-price contracts, see “Item 1. Business — Principal Customers; Government Contracts” of this Annual Report on Form 10-K.

 

The funded backlog of unfilled orders for this segment was $111 million at July 25, 2008 compared with $153 million at July 27, 2007 and $152 million at July 28, 2006. We expect to fill approximately 92 percent of this funded backlog during fiscal 2009, but we can give no assurance of such fulfillment. Unfunded backlog for this segment was $4,066 million at July 25, 2008 compared with $3,999 million at July 27, 2007 and $3,881 million at July 28, 2006. Additional information regarding funded and unfunded backlog for this segment is provided under “Item 1. Business — Funded and Unfunded Backlog” of this Annual Report on Form 10-K. For a discussion of certain risks affecting this segment, including risks relating to our U.S. Government contracts and subcontracts, see “Item 1. Business — Principal Customers; Government Contracts,” “Item 1A. Risk Factors” and “Item 3. Legal Proceedings” of this Annual Report on Form 10-K.

 

Broadcast Communications

Broadcast Communications’ hardware and software products, systems and services offer a comprehensive, single-source approach to delivering interoperable workflow capabilities and solutions spanning the entire broadcast value chain, including content creation, management, distribution and delivery, for broadcast, cable, satellite, telecommunications and other media content providers. This segment serves the global digital and analog media markets, providing infrastructure and networking products and solutions, media and workflow solutions, and television and radio transmission equipment and systems.

 

The current trend and future of broadcast media involves digitizing content and transporting it simultaneously over many different networks to many types of devices. The need to create, manage and ultimately deliver digital media content is driving an infrastructure upgrade cycle for the media industry. We are supporting customers as they expand services for high definition (“HD”) TV, IP TV, video-on-demand and interactive TV. Recent acquisitions and a series of new products have established Broadcast Communications as a provider of end-to-end solutions for the digital and HD infrastructure build-out worldwide. These acquisitions include Encoda Systems Holdings, Inc. (“Encoda”) in fiscal 2005; Leitch Technology Corporation (“Leitch”), Optimal Solutions, Inc. (“OSi”) and the Aastra Digital Video business (“Aastra Digital Video”) of Aastra Technologies in fiscal 2006; and Zandar Technologies plc (“Zandar”) in fiscal 2008. Zandar is a Dublin, Ireland-headquartered developer and provider of high-quality multi-image display processors for television broadcast and professional video markets. Zandar’s compact, scalable systems, such as the Predator II^tm and QS100^tm series, and our larger-format CENTRIO^tm systems are complementary product lines that collectively represent a complete platform for multi-image display processors,

or multiviewer products. New products and recent product advancements include the NEXIO AMP^tm system, a one-stop solution for creating, scheduling and airing complete TV channels in HD or standard definition (“SD”), which combines a high-quality playout server, animation, live video, video clips, audio, real-time external data feeds and master control branding functionality in a single turnkey system; the H-Class^tm media software suite, a unified system of interoperable broadcast and media applications based on open standards, with a network-, content- and service-agnostic approach, which support customers’ core services and business operations, make data exchange and workflow more efficient and facilitate adding services that can lead to new revenue streams; and a family of three gigabit per second (“3 Gb/s”) solutions comprised of a complete set of interoperable devices for creating a true 3 Gb/s infrastructure, which allows broadcasters to make infrastructure investments now and still migrate to the emerging 1080p HD format.

 

Infrastructure and Networking Solutions:  Our infrastructure and networking solutions offerings include SD and HD products and systems that enable media companies to streamline workflow from production through transmission. We provide a comprehensive, next-generation portfolio of signal processors, routers, master control and branding systems, network monitoring and control software, and test and measurement instruments that support content throughout the workflow application chain. We also provide advanced multi-image display processors and state-of-the-art broadcast graphics and digital signage systems that change the way broadcasters view and manage content and provide broadcasters with options for presenting their brands. We also provide highly differentiated network access and multiplex platforms, including the Harris Intraplex and NetVX^tm solutions, which offer customized integrated management and distribution applications for any content across any connection to support television, government video and public safety applications. Products also include the Platinum^tm large router for mixed video and audio signal routing; the IconMaster^tm digital master control system; the Videotek^® line of precision test and measurement instruments; the larger-format CENTRIO^tm multiviewer systems; the compact, scalable Predator II^tm and QS100^tm series of multiviewer systems; the Inscriber^® line of graphics and titling products; and the Infocaster line of digital signage systems.

 

Media and Workflow:  Our media and workflow solutions offerings enable customers to manage their digital media workflow through a portfolio of software solutions for advertising, media management (traffic, billing and program scheduling), broadband, digital asset management, and play-out automation, and to transition into an IT workflow by using servers to manage content flow, storage and other key facets of an increasingly important file-based broadcast world. We offer modular, standards-based solutions with open application programming interfaces (“APIs”) for ease of integration and future scalability. Products include the H-Class^tm Content Delivery Platform, OSi Traffic^tm software and the Invenio^tm Digital Asset Management solution. The H-Class^tm Content Delivery Platform represents an integrated approach to content management at the enterprise level — from ingest to distribution over a variety of devices or networks. H-Class provides broadcasters and other media, entertainment and content distribution customers with a means to integrate disparate processes from creation to consumption into a single, modular system. Products also include the NEXIO^tm family of scalable, interoperable video servers and Velocity^tm family of editing controllers that employ open standards to accelerate time-to-air and reduce the costs associated with content acquisition, production, distribution and media management.

 

Television and Radio Transmission Systems:  We develop, manufacture and supply digital and analog television and radio transmission systems for delivery of rich media over wireless broadcast terrestrial networks on a worldwide basis, including global broadcast and mobile TV applications. We can provide single products or end-to-end systems, including nationwide networks with hundreds of transmitters or large, international systems. Our television and radio transmission systems solutions are scalable to meet the needs of broadcasters of all sizes. We are a leader in television’s transition from analog to digital technology. We provided the nation’s first advanced digital television (“DTV”) transmitter as well as the first commercial DTV application and are a leader in technology for the U.S. digital standard known as “ATSC” and the European digital standard “DVB-T”. We continue to play a leading role in assisting local television broadcasters and network operators implement transmission solutions, including solutions based on ATSC and DVB-T and other digital standards and all major approaches to broadcast mobile TV. In fiscal 2007, we introduced with LG Electronics Inc. the jointly-developed MPH^tm in-band mobile DTV system (“Mobile-Pedestrian-Handheld” or “MPH”), a new technology capable of providing DTV signals and extending over-the-air broadcast TV signals beyond customary TV viewing at home to mobile, pedestrian and other handheld devices (such as mobile phones or laptop computers).

 

We are also a leader in the transition from analog to digital radio. Product offerings address the U.S. digital standard called “IBOC” (In-Band/On-Channel), which is referred to in the market as “HD Radio^®,” as well as international digital standards including “DAB” and “DRM”. The rollout of HD Radio in the U.S. continues to progress with approximately 1,700 stations currently on-air with HD Radio. Radio transmission products include the FLEXSTAR^tm family, which provides a bandwidth-efficient bitstream so broadcasters can offer supplemental audio

and data capability along with the main program stream. This enables broadcasters to develop new revenue-generating opportunities, including multiple programs on the same channel, 5.1 surround sound, on-demand traffic, weather and sports reports, store-and-play capabilities and real-time navigation.

 

Revenue and Backlog:  Revenue for the Broadcast Communications segment increased 7 percent to $643 million in fiscal 2008 compared with $600 million in fiscal 2007, and was $538 million in fiscal 2006. Segment operating income was $33.8 million in fiscal 2008 compared with $11.9 million in fiscal 2007 and $22.8 million in fiscal 2006. The Broadcast Communications segment contributed 12 percent of our total revenue in fiscal 2008 compared with 14 percent in fiscal 2007 and 15 percent in fiscal 2006. The percentage of this segment’s revenue that was derived outside of the United States was approximately 47 percent in fiscal 2008 compared with 46 percent in fiscal 2007 and 41 percent in fiscal 2006. Principal customers for Broadcast Communications’ products and services include domestic and international television and radio broadcast stations; cable and satellite networks and service providers; telecommunications providers; Federal agencies; public safety entities; advertising agencies; and content originators. No single customer accounted for more than 2 percent of fiscal 2008 revenue for the Broadcast Communications segment.

 

In general, this segment’s domestic products are sold and serviced directly to customers through its sales organization and through established distribution channels. Internationally, this segment markets and sells its products and services through regional sales offices and established distribution channels. See “Item 1. Business — International Business” of this Annual Report on Form 10-K.

 

The backlog of unfilled orders for this segment was $328 million at July 25, 2008 compared with $323 million at July 27, 2007 and $240 million at July 28, 2006. We expect to fill approximately 54 percent of this backlog during fiscal 2009, but we can give no assurance of such fulfillment. For a discussion of certain risks affecting this segment, see “Item 1A. Risk Factors” and “Item 3. Legal Proceedings” of this Annual Report on Form 10-K.

 

Harris Stratex Networks

In the third quarter of fiscal 2007, we combined our former Microwave Communications Division with Stratex, a publicly-traded provider of high-speed wireless transmission systems, to form Harris Stratex Networks. Harris Stratex Networks, our majority-owned, publicly-traded subsidiary listed on the NASDAQ Global Market under the symbol “HSTX,” is a global communications solutions company offering end-to-end wireless transmission solutions for mobile and fixed-wireless service providers and private networks. As of June 27, 2008, we owned approximately 56 percent of Harris Stratex Networks’ outstanding stock. Following the combination, our business segment formerly referred to as Microwave Communications is now referred to as Harris Stratex Networks and includes the results of the combined business for periods following the combination.

 

Harris Stratex Networks is a global independent supplier of turnkey wireless transmission network solutions. It offers reliable, flexible, scalable and cost-efficient wireless transmission network solutions, including microwave radio systems and network management software, which are backed by comprehensive services and support. Harris Stratex Networks designs, manufactures and sells a range of wireless transmission networking products, solutions and services to customers in more than 135 countries around the world, including mobile and fixed telephone service providers, private network operators, government agencies, transportation and utility companies, public safety agencies and broadcast system operators. Harris Stratex Networks’ product solutions offerings include point-to-point digital microwave radio systems for mobile system access, backhaul, trunking and license-exempt applications, supporting new network deployments, network expansion and capacity upgrades. Harris Stratex Networks provides its products and services principally to the North America microwave, international microwave and network operations markets.

 

North America Microwave:  Harris Stratex Networks serves the North America microwave market by offering microwave radio products and services to major national carriers and other cellular network operators, public safety operators and other government agencies, systems integrators, transportation and utility companies and other private network operators within North America. A large part of the North American microwave market is comprised of the cellular backhaul and public safety markets.

 

International Microwave:  Harris Stratex Networks serves the international microwave market by offering microwave radio products and services to regional and national carriers and other cellular network operators, public safety operators, government and defense agencies and other private network operators in every region outside of North America. Its wireless transmission systems deliver regional and country-wide backbone in developing nations, where microwave radio installations provide 21st-century communications rapidly and economically. Rural communities, areas with rugged terrain and regions with extreme temperatures benefit from the ability to build an advanced, affordable communications infrastructure despite these challenges.

Network Operations:  Harris Stratex Networks serves the network operations market by offering a wide range of software-based network management solutions for network operators worldwide, from element management to turnkey, end-to-end network management and service assurance solutions for virtually any type of communications or information network — including broadband, wireline, wireless and converged networks. Harris Stratex Networks develops, designs, produces, sells and services network management systems, including the NetBoss^® product line, for these applications.

 

In general, wireless transmission networks are constructed using microwave radios and other equipment to connect cell sites, switching systems, land mobile radio systems, wireline transmission systems and other fixed-access facilities and other communications systems. Wireless networks range in size from a single transmission link connecting two buildings to complex networks comprised of thousands of wireless connections. The architecture of a network is influenced by several factors, including the available radio frequency spectrum, coordination of frequencies with existing infrastructure, application requirements, environmental factors and local geography. For many applications, microwave systems offer a lower-cost, highly-reliable and more easily deployable alternative to competing wireline transmission media, such as fiber, copper or coaxial cable.

 

Harris Stratex Networks’ principal product families of licensed point-to-point microwave radios include Eclipse^tm, an IP-enabled platform for nodal wireless transmission systems, and TRuepoint^®, a platform for high-performance point-to-point wireless communications. The Eclipse product line combines wireless transmission functions with network processing node functions, including many functions that, for non-nodal products, would have to be purchased separately. System functions include voice, data and video transport, node management, multiplexing, routing and cross-connection. Eclipse is designed to simplify complex networks and lower the total cost of ownership over the product life. With frequency coverage from 5 to 38 gigahertz, low-to-high capacity operation and traditional time-division multiplexing and Ethernet transmission capabilities, Eclipse is designed to support a wide range of long- and short-haul applications. Eclipse is software-configurable, enabling easy capacity upgrades, and gives users the ability to plan and deploy networks and adapt to changing conditions at minimal cost and disruption. The TRuepoint product family offers full plug-and-play, software programmable microwave radio configuration. It delivers service from 4 to 180 megabits per second capacity at frequencies ranging from 6 to 38 gigahertz. TRuepoint is designed to meet the current and future needs of network operators, including mobile, private network, government and access service providers. The unique architecture of the core platform reduces both capital expenditures and life cycle costs, while meeting international and North American standards. The software-based architecture enables migration from traditional microwave access applications to higher-capacity transport interconnections. Harris Stratex Networks also offers license-exempt, point-to-point microwave radio product families.

 

Harris Stratex Networks’ network management product families, including NetBoss, offer a broad set of choices for all levels of network management, from enterprise-wide management and service assurance to element management. NetBoss is a family of network management and service assurance solutions for managing multi-vendor, multi-technology communications networks. NetBoss supports wireless and wireline networks of many types, offering fault management, performance management, service activation and assurance, billing mediation and operational support system integration. As a modular, off-the-shelf product, it enables customers to implement management systems immediately or gradually, as their needs dictate. NetBoss XE offers advanced element management. NetBoss products are optimized to work seamlessly with Harris Stratex Networks digital microwave radios, such as the TRuepoint family, but can also be customized to manage products based on any network or computing technology.

 

Revenue and Backlog:  Revenue for the Harris Stratex Networks segment increased 41 percent to $718 million in fiscal 2008 compared with $508 million in fiscal 2007, and was $349 million in fiscal 2006. This segment had an operating loss of $28.5 million in fiscal 2008 compared with operating income of $146.9 million in fiscal 2007 and an operating loss of $19.6 million in fiscal 2006. This segment contributed 14 percent of our total revenue in fiscal 2008 compared with 12 percent in fiscal 2007 and 10 percent in fiscal 2006. This segment had revenue from a single external customer that exceeded 10 percent of this segment’s total revenue during each of fiscal 2008 and fiscal 2006, but not during fiscal 2007. The percentage of this segment’s revenue that was derived outside of the United States was approximately 73 percent in fiscal 2008 compared with 66 percent in fiscal 2007 and 57 percent in fiscal 2006.

 

This segment generally sells its North American products and services directly to customers through its sales organization and through established distribution channels. In international markets, this segment markets and sells its products and services through regional sales offices and established distribution channels, using agents and distributors. See “Item 1. Business — International Business” of this Annual Report on Form 10-K.

The backlog of unfilled orders for this segment was $412 million at July 25, 2008 compared with $232 million at July 27, 2007 and $164 million at July 28, 2006. Harris Stratex Networks expects to fill substantially all of this backlog during fiscal 2009, but we can give no assurance of such fulfillment. For a discussion of certain risks affecting this segment, see “Item 1A. Risk Factors” and “Item 3. Legal Proceedings” of this Annual Report on Form 10-K.

 

International Business

Revenue from products exported from the United States (including foreign military sales) or manufactured abroad was $1,283.7 million (24 percent of our total revenue) in fiscal 2008 compared with $964.4 million (23 percent of our total revenue) in fiscal 2007 and $746.5 million (21 percent of our total revenue) in fiscal 2006. Our international sales include both direct exports from the United States and sales from foreign subsidiaries. Most of the international sales are derived from the Harris Stratex Networks, Defense Communications and Electronics and Broadcast Communications segments. Direct export sales are primarily denominated in U.S. dollars, whereas sales from foreign subsidiaries are generally denominated in the local currency of the subsidiary. Exports from the United States, principally to Europe, Africa, Canada, Latin America, the Middle East and Asia, totaled $594.1 million (approximately 46 percent of our international revenue) in fiscal 2008 compared with $613.9 million (64 percent of our international revenue) in fiscal 2007 and $418.0 million (56 percent of our international revenue) in fiscal 2006. The percentage of revenue represented by foreign operations was 13 percent in fiscal 2008 compared with 8 percent in fiscal 2007 and 9 percent in fiscal 2006. The percentage of long-lived assets represented by foreign operations was 26 percent as of June 27, 2008 compared with 28 percent as of June 29, 2007 and 24 percent as of June 30, 2006. Financial information regarding our domestic and international operations is contained in Note 23: Business Segments in the Notes and is incorporated herein by reference.

 

Our principal international manufacturing facilities are located in Canada and the United Kingdom. The majority of our international marketing activities are conducted through subsidiaries which operate in Canada, Europe, Central and South America and Asia. We have also established international marketing organizations and several regional sales offices. Reference is made to Exhibit 21 “Subsidiaries of the Registrant” of this Annual Report on Form 10-K for further information regarding our international subsidiaries.

 

We utilize indirect sales channels, including dealers, distributors and sales representatives, in the marketing and sale of some lines of products and equipment, both domestically and internationally. These independent representatives may buy for resale or, in some cases, solicit orders from commercial or governmental customers for direct sales by us. Prices to the ultimate customer in many instances may be recommended or established by the independent representative and may be above or below our list prices. Our dealers and distributors generally receive a discount from our list prices and may mark up those prices in setting the final sales prices paid by the customer. Revenue from indirect sales channels in fiscal 2008 represented 7 percent of our total revenue and approximately 28 percent of our international revenue, compared with revenue from indirect sales channels in fiscal 2007 representing 9 percent of our total revenue and 32 percent of our international revenue, and revenue from indirect sales channels in fiscal 2006 representing 6 percent of our total revenue and 23 percent of our international revenue.

 

Fiscal 2008 international revenue came from a large number of foreign countries, and no single country accounted for 3 percent or more of our total revenue. Some of our exports are paid for by letters of credit, with the balance carried either on an open account or installment note basis. Advance payments, progress payments or other similar payments received prior to, or upon shipment often cover most of the related costs incurred. Significant foreign government contracts generally require us to provide performance guarantees. In order to stay competitive in international markets, we also sometimes enter into recourse and vendor financing arrangements to facilitate sales to certain customers.

 

The particular economic, social and political conditions for business conducted outside the U.S. differ from those encountered by domestic businesses. Our management believes that the overall business risk for the international business as a whole is somewhat greater than that faced by our domestic operations as a whole. A description of the types of risks to which we are subject in international business is contained in “Item 1A. Risk Factors” of this Annual Report on Form 10-K. Nevertheless, in the opinion of our management, these risks are largely offset by the diversification of the international business and the protection provided by letters of credit and advance payments.

 

Competition

We operate in highly competitive markets that are sensitive to technological advances. Although successful product and systems development is not necessarily dependent on substantial financial resources, many of our competitors in each of our businesses are larger than we are and can maintain higher levels of expenditures for research and development. In each of our businesses we concentrate on the market opportunities that our

management believes are compatible with our resources, overall technological capabilities and objectives. Principal competitive factors in these businesses are cost-effectiveness; product quality and reliability; technological capabilities; service; past performance; ability to develop and implement complex, integrated solutions; ability to meet delivery schedules; and the effectiveness of third-party sales channels in international markets. Within the IT services market, there is intense competition among many companies, and this market is generally more labor intensive with competitive margin rates over contract periods of shorter duration. The ability to compete in the IT services market depends on a number of factors, including the capability to deploy skilled professionals at competitive prices across the diverse spectrum of the IT services market.

 

In the Defense Communications and Electronics segment, principal competitors include BAE Systems, Boeing, General Dynamics, ITT Industries, L-3 Communications, Lockheed Martin, Northrop Grumman, Raytheon, Rockwell Collins, Rohde & Schwarz, Tadiran and Thales.

 

In the Government Communications Systems segment, principal competitors include Accenture, BAE Systems, Boeing, Computer Sciences, General Dynamics, ITT Industries, L-3 Communications, Lockheed Martin, Northrop Grumman, Raytheon, Rockwell Collins and SAIC.

 

Consolidation among U.S. defense and aerospace companies has resulted in a reduction in the number of principal prime contractors. As a result of this consolidation, in our Defense Communications and Electronics and Government Communications Systems segments we frequently “partner” or are involved in subcontracting and teaming relationships with companies that are, from time to time, competitors on other programs.

 

In the Broadcast Communications segment, principal competitors include Avid, Broadcast Electronics, Chyron, Evertz, Harmonic, Microsystems, Miranda, Nautel, NEC, Omneon, Omnibus, Pilat Media, Rad Systems, Rohde & Schwarz, Sony Broadcast, Tandberg Television, Tektronix, Thomson/Grass Valley, Thomson/Thales, Vizrt and Wide Orbit, as well as other smaller companies and divisions of large companies. We believe that our broad product offering and total content delivery solutions are key competitive strengths for this segment.

 

In the Harris Stratex Networks segment, principal competitors include Ericsson, NEC, Alcatel-Lucent, Nokia-Siemens, Ceragon and Eltek-Nera, as well as other smaller companies. Several of this segment’s competitors are original equipment manufacturers or systems integrators through which the segment sometimes distributes and sells products and services to end-users. We believe that network and systems engineering support and service are key competitive strengths for this segment.

 

Principal Customers; Government Contracts

Sales to the U.S. Government, which is our only customer accounting for 2 percent or more of our total revenue, were 68 percent of our total revenue in fiscal 2008 compared with 66 percent in each of fiscal 2007 and fiscal 2006. Additional information regarding customers for each of our segments is provided under “Item 1. Business — Description of Business by Segment for Fiscal 2008” of this Annual Report on Form 10-K. Our U.S. Government sales are predominantly derived from contracts with agencies of, and prime contractors to, the U.S. Government. Most of the sales of the Government Communications Systems segment and of the Defense Programs area of the Defense Communications and Electronics segment are made directly or indirectly to the U.S. Government under contracts or subcontracts containing standard government contract clauses providing for redetermination of profits, if applicable, and for termination for the convenience of the U.S. Government or for default based upon performance.

 

These U.S. Government contracts and subcontracts include both cost-reimbursement and fixed-price contracts. Our cost-reimbursement contracts provide for the reimbursement of allowable costs plus the payment of a fee. Our cost-reimbursement contracts fall into three basic types: (i) cost-plus fixed-fee contracts, which provide for the payment of a fixed fee irrespective of the final cost of performance; (ii) cost-plus incentive-fee contracts, which provide for increases or decreases in the fee, within specified limits, based upon actual results compared with contractual targets relating to factors such as cost, performance and delivery schedule; and (iii) cost-plus award-fee contracts, which provide for the payment of an award fee determined at the discretion of the customer based upon the performance of the contractor against pre-established performance criteria. Under cost-reimbursement contracts, we are reimbursed periodically for allowable costs and are paid a portion of the fee based on contract progress. Some overhead costs have been made partially or wholly unallowable for reimbursement by statute or regulation. Examples are certain merger and acquisition costs, lobbying costs, charitable contributions and certain litigation defense costs.

 

Our fixed-price contracts are either firm fixed-price contracts or fixed-price incentive contracts. Under firm fixed-price contracts, we agree to perform a specific scope of work for a fixed price and, as a result, benefit from

cost savings and carry the burden of cost overruns. Under fixed-price incentive contracts, we share with the U.S. Government both savings accrued from contracts performed for less than target costs as well as costs incurred in excess of targets up to a negotiated ceiling price (which is higher than the target cost), but carry the entire burden of costs exceeding the negotiated ceiling price. Accordingly, under such incentive contracts, profit may also be adjusted up or down depending upon whether specified performance objectives are met. Under firm fixed-price and fixed-price incentive contracts, we usually receive either milestone payments equaling 100 percent of the contract price or monthly progress payments from the U.S. Government in amounts equaling 75 percent of costs incurred under the contract. The remaining amounts, including profits or incentive fees, are billed upon delivery and final acceptance of end items and deliverables under the contract. Fixed-price contracts generally have higher profit margins than cost-reimbursement contracts. Production contracts are mainly fixed-price contracts, and development contracts are generally cost-reimbursement contracts.

 

In fiscal 2008, fiscal 2007 and fiscal 2006, approximately 35 percent, 33 percent and 38 percent, respectively, of the total combined revenue of our Defense Communications and Electronics and Government Communications Systems segments was from fixed-price contracts. GWAC and IDIQ contracts, which can include task orders for each contract type, require us to compete both for the initial contract and then for individual task or delivery orders under such contracts.

 

As stated above, U.S. Government contracts are terminable for the convenience of the U.S. Government, as well as for default based on performance. Companies supplying goods and services to the U.S. Government are dependent on Congressional appropriations and administrative allotment of funds and may be affected by changes in U.S. Government policies resulting from various military, political and international developments. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable. Under contracts terminable for the convenience of the U.S. Government, a contractor is entitled to receive payments for its allowable costs and, in general, the proportionate share of fees or earnings for the work done. Contracts that are terminable for default generally provide that the U.S. Government pays only for the work it has accepted and may require the contractor to pay for the incremental cost of reprocurement and may hold the contractor liable for damages. In many cases, there is also uncertainty relating to the complexity of designs, necessity for design improvements and difficulty in forecasting costs and schedules when bidding on developmental and highly sophisticated technical work. Under many U.S. Government contracts, we are required to maintain facility and personnel security clearances complying with DoD and other Federal agency requirements. For further discussion of risks relating to U.S. Government contracts, see “Item 1A. Risk Factors” and “Item 3. Legal Proceedings” of this Annual Report on Form 10-K.

 

Funded and Unfunded Backlog

Our total company-wide funded and unfunded backlog was approximately $6,300 million at July 25, 2008 compared with $5,871 million at July 27, 2007 and $5,641 million at July 28, 2006. The funded portion of this backlog was approximately $2,011 million at July 25, 2008 compared with $1,724 million at July 27, 2007 and $1,482 million at July 28, 2006. The determination of backlog involves substantial estimating, particularly with respect to customer requirements contracts and development and production contracts of a cost-reimbursement or incentive nature.

 

We define funded backlog as unfilled firm orders for products and services for which funding has been authorized and, in the case of U.S. Government agencies, appropriated. Unfunded backlog is primarily unfilled firm and expected follow-on orders that have not yet met our established funding criteria. Our established funding criteria require both authorization by the customer as well as our management’s determination that there is little or no risk of the authorized funding being rescinded. We do not include potential task or delivery orders under IDIQ contracts in our backlog. In fiscal 2009, we expect to fill approximately 86 percent of our total funded backlog as of July 25, 2008. However, we can give no assurance of such fulfillment or that our funded backlog will become revenue in any particular period, if at all. Backlog is subject to delivery delays and program cancellations, which are beyond our control. Additional information with regard to the backlog of each of our segments is provided under “Item 1. Business — Description of Business by Segment for Fiscal 2008” of this Annual Report on Form 10-K.

 

Research, Development and Engineering

Research, development and engineering expenditures totaled approximately $1,007 million in fiscal 2008, $924 million in fiscal 2007 and $824 million in fiscal 2006. Company-sponsored research and product development costs, which included research and development for commercial products and independent research and development related to government products and services, as well as concept formulation studies and bid and proposal efforts, were approximately $275 million in fiscal 2008, $235 million in fiscal 2007 and $198 million in fiscal 2006. A

portion of our independent research and development costs are allocated among contracts and programs in process under U.S. Government contractual arrangements. Company-sponsored research and product development costs not otherwise allocable are charged to expense when incurred. The portion of total research, development and engineering expenditures that was not company-sponsored was funded by the U.S. Government and is included in our revenue. Customer-sponsored research and development was $732 million in fiscal 2008, $689 million in fiscal 2007 and $626 million in fiscal 2006. Company-sponsored research is directed to the development of new products and to building technological capability in selected communications and electronic systems markets. U.S. Government-funded research helps strengthen and broaden our technical capabilities. All of our segments maintain their own engineering and new product development departments, with scientific assistance provided by advanced-technology departments. As of June 27, 2008, we employed nearly 7,000 engineers and scientists and are continuing efforts to make the technologies developed in any of our business segments available for all other business segments.

 

Patents and Other Intellectual Property

We consider our patents and other intellectual property, in the aggregate, to constitute an important asset. We own a large and valuable portfolio of patents, trade secrets, know-how, confidential information, trademarks, copyrights and other intellectual property. We also license intellectual property to and from third parties. As of June 27, 2008, we held approximately 1,020 U.S. patents and 800 foreign patents, and had approximately 580 U.S. patent applications pending and 1,240 foreign patent applications pending. Unpatented research, development and engineering skills also make an important contribution to our business. While our intellectual property rights in the aggregate are important to our business and the operations of our business segments, we do not consider our business or any business segment to be materially dependent upon any single patent, license or other intellectual property right, or any group of related patents, licenses or other intellectual property rights. We are engaged in a proactive patent licensing program and have entered into a number of licenses and cross-license agreements, some of which generate royalty income. Although existing license agreements have generated income in past years and may do so in the future, there can be no assurances we will enter into additional income-producing license agreements. From time to time we engage in litigation to protect our patents and other intellectual property. Any of our patents, trade secrets, trademarks, copyrights and other proprietary rights could be challenged, invalidated or circumvented, or may not provide competitive advantages. With regard to patents relating to our Defense Communications and Electronics segment or our Government Communications Systems segment, the U.S. Government often has an irrevocable, non-exclusive, royalty-free license, pursuant to which the U.S. Government may use or authorize others to use the inventions covered by such patents. Pursuant to similar arrangements, the U.S. Government may consent to our use of inventions covered by patents owned by other persons. Numerous trademarks used on or in connection with our products are also considered to be a valuable asset.

 

Environmental and Other Regulations

Our facilities and operations are subject to numerous domestic and international laws and regulations designed to protect the environment, particularly with regard to wastes and emissions. The applicable environmental laws and regulations are common within the industries and markets in which we operate and serve. We believe that we have complied with these requirements and that such compliance has not had a material adverse effect on our results of operations, financial condition or cash flows. Based upon currently-available information, we do not expect expenditures to protect the environment and to comply with current environmental laws and regulations over the next several years to have a material impact on our competitive or financial position, but we can give no assurance that such expenditures will not exceed current expectations. If future laws and regulations contain more stringent requirements than presently anticipated, actual expenditures may be higher than our present estimates of those expenditures. We have installed waste treatment facilities and pollution control equipment to satisfy legal requirements and to achieve our waste minimization and prevention goals. We did not spend material amounts on environmental capital projects in fiscal 2008, fiscal 2007 or fiscal 2006. A portion of our environmental expenditures relates to discontinued operations for which we have retained certain environmental liabilities. We currently expect that amounts to be spent for environmental-related capital projects will not be material in fiscal 2009. These amounts may increase in future years. Additional information regarding environmental and regulatory matters is set forth in “Item 3. Legal Proceedings” of this Annual Report on Form 10-K and in Note 1: Significant Accounting Policies in the Notes.

 

Electronic products are subject to governmental environmental regulation in a number of jurisdictions. Equipment produced by our Broadcast Communications and Harris Stratex Networks segments, in particular, is subject to domestic and international requirements requiring end-of-life management and/or restricting materials in

products delivered to customers, including the European Union’s Directive 2002/96/EC on Waste Electrical and Electronic Equipment (“WEEE”) and Directive 2002/95/EC on the Restriction of the use of certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”). Other jurisdictions have adopted similar legislation. Such requirements typically are not applicable to most equipment produced by our Defense Communications and Electronics and Government Communications Systems segments. We believe that we have complied with such rules and regulations, where applicable, with respect to our existing products sold into such jurisdictions. We intend to comply with such rules and regulations with respect to our future products.

 

Broadcast and wireless communications (whether TV, radio or telecommunications) are also subject to governmental regulation. Equipment produced by our Broadcast Communications and Harris Stratex Networks segments, in particular, is subject to domestic and international requirements to avoid interference among users of radio and television frequencies and to permit interconnection of telecommunications equipment. We believe that we have complied with such rules and regulations with respect to our existing products, and we intend to comply with such rules and regulations with respect to our future products. Governmental reallocation of the frequency spectrum also could impact our business, financial condition and results of operations.

 

Raw Materials and Supplies

Because of the diversity of our products and services, as well as the wide geographic dispersion of our facilities, we use numerous sources for the wide array of raw materials (such as electronic components, printed circuit boards, metals and plastics) needed for our operations and for our products. We are dependent upon suppliers and subcontractors for a large number of components and subsystems and the ability of our suppliers and subcontractors to adhere to customer or regulatory materials restrictions and to meet performance and quality specifications and delivery schedules. In some instances, we are dependent upon one or a few sources, either because of the specialized nature of a particular item or because of local content preference requirements pursuant to which we operate on a given project. While we have been affected by financial and performance issues of some of our suppliers and subcontractors, we have not been materially adversely affected by the inability to obtain raw materials or products. In fiscal 2007, our Broadcast Communications segment experienced component shortages from vendors as a result of the new RoHS environmental regulations in the European Union, which became effective on July 1, 2006. These regulations caused a spike in demand for lead-free electronic components, resulting in industry-wide supply chain shortages. These component shortages did not have a material adverse effect on our business.

 

Seasonality

We do not consider any material portion of our business to be seasonal. Various factors can affect the distribution of our revenue between accounting periods, including the timing of U.S. Government budgets, supplemental budgets and contract awards, the availability of funding, product deliveries and customer acceptance.

 

Employees

We employed approximately 16,500 employees at the end of fiscal 2008 compared with approximately 16,000 employees at the end of fiscal 2007. Approximately 89 percent of our employees as of the end of fiscal 2008 are located in the United States. A significant number of employees in our Defense Communications and Electronics and Government Communications Systems segments possess a security clearance. We also utilize a number of independent contractors. None of our employees in the United States is represented by a labor union. In certain international subsidiaries, our employees are represented by workers’ councils or statutory labor unions. In general, we believe that our relations with our employees are good.

 

Website Access to Harris Reports; Available Information

General.  We maintain an Internet website at http://www.harris.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on our website as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). We also will provide the reports in electronic or paper form free of charge upon request. We also make available free of charge on our website our annual report to shareholders and proxy statement. Our website and the information posted thereon are not incorporated into this Annual Report on Form 10-K or any current or other periodic report that we file with or furnish to the SEC. All reports we file with or furnish to the SEC also are available free of charge via the SEC’s electronic data gathering and retrieval (“EDGAR”) system available through the SEC’s website at http://www.sec.gov.

Additional information relating to our businesses, including our operating segments, is set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.

 

Corporate Governance Principles and Committee Charters.  We previously adopted Corporate Governance Principles, which are available on the Corporate Governance section of our website at www.harris.com/harris/cg/. In addition, the charters of each of the committees of our Board, namely, the Audit Committee, Business Conduct and Corporate Responsibility Committee, Corporate Governance Committee, Finance Committee and Management Development and Compensation Committee, are also available on the Corporate Governance section of our website. A copy of the charters is also available free of charge upon written request to our Corporate Secretary at Harris Corporation, 1025 West NASA Boulevard, Melbourne, Florida 32919.

 

Certifications.  We have filed with the SEC the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to this Annual Report on Form 10-K. In addition, an annual CEO certification was submitted by our Chief Executive Officer to the New York Stock Exchange in November 2007 in accordance with the NYSE’s listing standards, which included a certification that he was not aware of any violation by Harris of the NYSE’s corporate governance listing standards.

 

 

We have described many of the trends and other factors that could impact our business and future results in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. In addition, our business, operating results, cash flows and financial condition are subject to various risks and uncertainties, including, without limitation, those set forth below, any one of which could cause our actual results to vary materially from recent results or our anticipated future results.

 

We participate in markets that are often subject to uncertain economic conditions, which makes it difficult to estimate growth in our markets and, as a result, future income and expenditures.

We participate in markets that are subject to uncertain economic conditions. As a result, it is difficult to estimate the level of growth in some of the markets in which we participate. Because all components of our budgeting and forecasting are dependent upon estimates of growth in the markets we serve, the uncertainty renders estimates of future income and expenditures even more difficult. As a result, we may make significant investments and expenditures but never realize the anticipated benefits, which could adversely affect our results of operations. The future direction of the overall domestic and global economies also will have a significant impact on our overall performance.

 

We depend on the U.S. Government for a significant portion of our revenue, and the loss of this relationship or a shift in U.S. Government funding could have adverse consequences on our future business.

We are highly dependent on sales to the U.S. Government. The percentage of our net revenue that was derived from sales to the U.S. Government was approximately 68 percent in fiscal 2008 and 66 percent in each of fiscal 2007 and fiscal 2006. Therefore, any significant disruption or deterioration of our relationship with the U.S. Government would significantly reduce our revenue. Our U.S. Government programs must compete with programs managed by other government contractors for limited resources and for uncertain levels of funding. Our competitors continuously engage in efforts to expand their business relationships with the U.S. Government and will continue these efforts in the future. The U.S. Government may choose to use other contractors for its limited number of programs. In addition, the funding of programs also competes with non-procurement spending of the U.S. Government. Budget decisions made by the U.S. Government are outside of our control and have long-term consequences for our business. A shift in U.S. Government spending to other programs in which we are not involved, an increase in non-procurement spending or a reduction in U.S. Government spending generally, could have material adverse consequences on our future business.

 

We depend significantly on our U.S. Government contracts, which often are only partially funded, subject to immediate termination, and heavily regulated and audited. The termination or failure to fund one or more of these contracts could have an adverse impact on our business.

Over its lifetime, a U.S. Government program may be implemented by the award of many different individual contracts and subcontracts. The funding of U.S. Government programs is subject to Congressional appropriations. Although multi-year contracts may be planned or authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs often receive only partial funding initially, and additional funds are committed only as

Congress authorizes further appropriations. The termination of funding for a U.S. Government program would result in a loss of anticipated future revenue attributable to that program, which could have an adverse impact on our operations. In addition, the termination of a program or the failure to commit additional funds to a program that already has been started could result in lost revenue and increase our overall costs of doing business.

 

Generally, U.S. Government contracts are subject to oversight audits by U.S. Government representatives. In addition, the contracts generally contain provisions permitting termination, in whole or in part, without prior notice at the U.S. Government’s convenience upon the payment only for work done and commitments made at the time of termination. We can give no assurance that one or more of our U.S. Government contracts will not be terminated under these circumstances. Also, we can give no assurance that we would be able to procure new contracts to offset the revenue or backlog lost as a result of any termination of our U.S. Government contracts. Because a significant portion of our revenue is dependent on our performance and payment under our U.S. Government contracts, the loss of one or more large contracts could have a material adverse impact on our financial condition.

 

Our government business also is subject to specific procurement regulations and a variety of socio-economic and other requirements. These requirements, although customary in U.S. Government contracts, increase our performance and compliance costs. These costs might increase in the future, thereby reducing our margins, which could have an adverse effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or debarment from U.S. Government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various laws, including those related to procurement integrity, export control, U.S. Government security regulations, employment practices, protection of the environment, accuracy of records, proper recording of costs and foreign corruption. The termination of a U.S. Government contract or relationship as a result of any of these acts would have an adverse impact on our operations and could have an adverse effect on our standing and eligibility for future U.S. Government contracts.

 

We enter into fixed-price contracts that could subject us to losses in the event of cost overruns or a significant increase in inflation.

We have a number of firm fixed-price contracts. In fiscal 2008 and fiscal 2007, approximately 35 percent and 33 percent, respectively, of the total combined revenue of our Defense Communications and Electronics and Government Communications Systems segments was from fixed-price contracts. These contracts allow us to benefit from cost savings, but they carry the risk of potential cost overruns because we assume all of the cost burden. If our initial estimates are incorrect, we can lose money on these contracts. U.S. Government contracts can expose us to potentially large losses because the U.S. Government can hold us responsible for completing a project or, in certain circumstances, paying the entire cost of its replacement by another provider regardless of the size or foreseeability of any cost overruns that occur over the life of the contract. Because many of these contracts involve new technologies and applications and can last for years, unforeseen events, such as technological difficulties, fluctuations in the price of raw materials, problems with our suppliers and cost overruns, can result in the contractual price becoming less favorable or even unprofitable to us over time. Recently, the United States has experienced a significant increase in inflation. A continued significant increase in inflation rates could also have a significant adverse impact on the profitability of these contracts. Furthermore, if we do not meet contract deadlines or specifications, we may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated damages or suffer major losses if the customer exercises its right to terminate. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts we may not realize their full benefits. Our results of operations are dependent on our ability to maximize our earnings from our contracts. Lower earnings caused by cost overruns and cost controls would have an adverse impact on our financial results. Furthermore, the potential impact of this risk on our financial results would be magnified by a shift in the mix of our contracts and programs toward a greater percentage of firm fixed-price contracts.

 

We derive a substantial portion of our revenue from international operations and are subject to the risks of doing business internationally, including fluctuations in currency exchange rates.

We are dependent on sales to customers outside the United States. In fiscal 2008, fiscal 2007 and fiscal 2006, revenue from products exported from the U.S. or manufactured abroad was 24 percent, 23 percent and 21 percent, respectively, of our total revenue. Approximately 54 percent of our international business in fiscal 2008 was transacted in local currency environments. Losses resulting from currency rate fluctuations can adversely affect our results. We expect that international revenue will continue to account for a significant portion of our total revenue.

Also, a significant portion of our international revenue is in less-developed countries. We are subject to risks of doing business internationally, including:

 

 

While these factors and the impacts of these factors are difficult to predict, any one or more of them could adversely affect our business, financial condition and results of operations in the future.

 

We may not be successful in obtaining the necessary export licenses to conduct certain operations abroad, and Congress may prevent proposed sales to certain foreign governments.

We must first obtain export and other licenses and authorizations from various U.S. Government agencies before we are permitted to sell certain products and technologies outside of the United States. For example, the U.S. Department of State must notify Congress at least 15-60 days, depending on the size and location of the sale, prior to authorizing certain sales of defense equipment and services to foreign governments. During that time, Congress may take action to block the proposed sale. We can give no assurance that we will continue to be successful in obtaining the necessary licenses or authorizations or that Congress will not prevent or delay certain sales. Any significant impairment of our ability to sell products or technologies outside of the United States could negatively impact our results of operations and financial condition.

 

Our future success will depend on our ability to develop new products and technologies that achieve market acceptance in our current and future markets.

Both our commercial and government businesses are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our future performance depends on a number of factors, including our ability to:

 

 

We believe that, in order to remain competitive in the future, we will need to continue to develop new products and technologies, requiring the investment of significant financial resources. The need to make these expenditures could divert our attention and resources from other projects, and we cannot be sure that these expenditures ultimately will lead to the timely development of new products or technologies. Due to the design complexity of some of our products and technologies, we may experience delays in completing development and introducing new products or technologies in the future. Any delays could result in increased costs of development or redirect resources from other projects. In addition, we cannot provide assurances that the markets for our products or technologies will develop as we currently anticipate. The failure of our products or technologies to gain market acceptance could significantly reduce our revenue and harm our business. Furthermore, we cannot be sure that our competitors will not develop competing products or technologies that gain market acceptance in advance of our products or technologies, or that our competitors will not develop new products or technologies that cause our existing products or technologies to become obsolete. If we fail in our new product and technology development efforts, or our products or technologies fail to achieve market acceptance more rapidly than those of our

competitors, our revenue will decline and our business, financial condition and results of operations will be adversely affected.

 

We cannot predict the consequences of future geo-political events, but they may affect adversely the markets in which we operate, our ability to insure against risks, our operations or our profitability.

The terrorist attacks in the United States on September 11, 2001, the subsequent U.S.-led military response, current conflicts in the Middle East and the potential for future terrorist activities and other recent geo-political events have created economic and political uncertainties that could have a material adverse effect on our business and the prices of our securities. These matters have caused uncertainty in the world’s financial and insurance markets and may increase significantly the political, economic and social instability in the geographic areas in which we operate. These matters also have caused the premiums charged for our insurance coverages to increase and may cause some coverages to be unavailable altogether. While our government businesses have benefited from homeland defense initiatives and the Global War on Terror, these developments may affect adversely our business and profitability and the prices of our securities in ways that we cannot predict at this time.

 

We have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties.

We have made, and we may continue to make, strategic acquisitions that involve significant risks and uncertainties. These risks and uncertainties include:

 

 

The inability of our subcontractors to perform, or our key suppliers to timely deliver our components or parts, could cause our products to be produced in an untimely or unsatisfactory manner.

On many of our contracts, we engage subcontractors. In addition, there are certain parts or components for many of our products which we source from other manufacturers or vendors. Some of our suppliers, from time to time, experience financial and operational difficulties, which may impact their ability to supply the materials, components and subsystems that we require. Any inability to develop alternative sources of supply on a cost-effective and timely basis could materially impair our ability to manufacture and deliver products to our customers. We can give no assurances that we will be free from material supply problems or component or subsystems problems in the future. Also, our subcontractors and other suppliers may not be able to maintain the quality of the materials, components and subsystems they supply, which might result in greater product returns and warranty claims and could harm our business, financial condition and results of operations.

 

Third parties have claimed in the past and may claim in the future that we are infringing directly or indirectly upon their intellectual property rights, and third parties may infringe upon our intellectual property rights.

Many of the markets we serve are characterized by vigorous protection and pursuit of intellectual property rights, which often has resulted in protracted and expensive litigation. Third parties have claimed in the past and may claim in the future that we are infringing directly or indirectly upon their intellectual property rights, and we may be found to be infringing or to have infringed directly or indirectly upon those intellectual property rights. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. Moreover, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of certain of our products. Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, know-how, confidentiality provisions and licensing arrangements to establish and protect our intellectual property rights. If we fail to successfully protect and enforce these rights, our competitive position could suffer. Our pending patent and trademark registration applications may not be allowed, or competitors may challenge the validity or scope of our patents or trademark registrations. In addition, our patents may not provide us a significant competitive advantage. We may be required to spend significant resources to monitor and police our intellectual property rights. We may not be able to detect infringement and our competitive position may be harmed before we do so. In addition, competitors may design around our technology or develop competing technologies.

The outcome of litigation or arbitration in which we are involved is unpredictable and an adverse decision in any such matter could have a material adverse affect on our financial position and results of operations.

We are defendants in a number of litigation matters and are involved in a number of arbitrations. These actions may divert financial and management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these or new matters will be favorable to us. An adverse resolution of lawsuits or arbitrations could have a material adverse affect on our financial condition and results of operations.

 

We are subject to customer credit risk.

We sometimes provide medium-term and long-term customer financing. Customer financing arrangements may include all or a portion of the purchase price for our products and services, as well as working capital. We also may assist customers in obtaining financing from banks and other sources on a recourse or non-recourse basis. While we generally have been able to place a portion of our customer financings with third-party lenders, or to otherwise insure a portion of this risk, a portion of these financings is provided directly by us. There can be higher risks associated with some of these financings, particularly when provided to start-up operations such as local network providers, to customers in developing countries or to customers in specific financing-intensive areas of the telecommunications industry. If customers fail to meet their obligations, losses could be incurred and such losses could have an adverse effect on us. Our losses could be much greater if it becomes more difficult to place or insure against these risks with third parties. These risks may increase when the availability of credit decreases.

 

We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or indemnity.

We are exposed to liabilities that are unique to the products and services we provide. A significant portion of our business relates to designing, developing and manufacturing advanced defense and technology systems and products. New technologies associated with these systems and products may be untested or unproven. Components of certain of the defense systems and products we develop are inherently dangerous. Failures of satellites, missile systems, air-traffic control systems, homeland security applications and aircraft have the potential to cause loss of life and extensive property damage. In most circumstances, we may receive indemnification from the U.S. Government. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs from an accident or incident. It also is not possible to obtain insurance to protect against all operational risks and liabilities. Substantial claims resulting from an incident in excess of U.S. Government indemnity and our insurance coverage could harm our financial condition, operating results and cash flows. Moreover, any accident or incident for which we are liable, even if fully insured, could negatively affect our standing among our customers and the public, thereby making it more difficult for us to compete effectively, and could significantly impact the cost and availability of adequate insurance in the future.

 

Changes in our effective tax rate may have an adverse effect on our results of operations.

Our future effective tax rate may be adversely affected by a number of factors including:

 

 

Any significant increase in our future effective tax rates could adversely impact our results of operations for future periods.

 

Our consolidated financial results may be impacted by Harris Stratex Networks’ financial results, which may vary significantly and be difficult to forecast.

We consolidate Harris Stratex Networks’ financial results in our results of operations. Harris Stratex Networks’ financial results may vary significantly in the future and may be affected by a number of factors (many of which are outside of our and Harris Stratex Networks’ control), and accordingly are expected to be difficult to forecast. Delays in product delivery or closing of a sale can cause quarterly revenues and quarterly net income to fluctuate significantly from anticipated levels. In addition, Harris Stratex Networks may increase spending in response to

competition or in pursuit of new market opportunities. Accordingly, we cannot provide assurances that Harris Stratex Networks will be able to achieve profitability in the future or, if profitability is attained, that Harris Stratex Networks will be able to sustain profitability, particularly on a quarter-to-quarter basis.

 

Because we consolidate Harris Stratex Networks’ financial results in our results of operations, fluctuations in and difficulty in forecasting Harris Stratex Networks’ financial results will result in fluctuations in and likely greater difficulty in forecasting our consolidated results of operations. As a result, such fluctuations and forecasting difficulty may impact our consolidated financial results. Additionally, we rely on Harris Stratex Networks to timely provide its financial information for us to use in preparing and filing with the SEC our consolidated financial statements. Delays or other difficulties in Harris Stratex Networks’ ability to provide on a timely basis financial information that accurately reflects its financial results may result in delays or other difficulties in our ability to prepare and file with the SEC on a timely basis our consolidated financial statements that accurately reflect our consolidated results of operations.

 

We have significant operations in Florida, California and other locations that could be materially and adversely impacted in the event of a natural disaster or other significant disruption.

Our corporate headquarters and significant operations of our Government Communications Systems segment are located in Florida, where major hurricanes have occurred. In addition, our Broadcast Communications and Harris Stratex Networks segments have locations near major earthquake fault lines in California. Our worldwide operations could be subject to natural disasters or other significant disruptions, including hurricanes, typhoons, tsunamis, floods, earthquakes, fires, water shortages, other extreme weather conditions, medical epidemics, acts of terrorism, power shortages and blackouts, telecommunications failures, and other natural and manmade disasters or disruptions. In the event of such a natural disaster or other disruption, we could experience disruptions or interruptions to our operations or the operations of our suppliers, distributors, resellers or customers; destruction of facilities; and/or loss of life, all of which could materially increase our costs and expenses and materially adversely affect our business, revenue and financial condition.

 

Changes in future business conditions could cause business investments and/or recorded goodwill to become impaired, resulting in substantial losses and write-downs that would reduce our results of operations.

As part of our overall strategy, we will, from time to time, acquire a minority or majority interest in a business. These investments are made upon careful target analysis and due diligence procedures designed to achieve a desired return or strategic objective. These procedures often involve certain assumptions and judgment in determining acquisition price. After acquisition, unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual operating results may vary significantly from initial estimates. Goodwill accounts for approximately 34 percent of our recorded total assets as of June 27, 2008. We evaluate the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists. The annual impairment test is based on several factors requiring judgment. Principally, a decrease in expected reporting segment cash flows or changes in market conditions may indicate potential impairment of recorded goodwill. For additional information on accounting policies we have in place for goodwill impairment, see our discussion under “Critical Accounting Policies and Estimates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K and Note 1: Significant Accounting Policies in the Notes.

 

In order to be successful, we must attract and retain key employees, and failure to do so could seriously harm us.

Our business has a continuing need to attract significant numbers of skilled personnel, including personnel holding security clearances, to support our growth and to replace individuals who have terminated employment due to retirement or for other reasons. To the extent that the demand for qualified personnel exceeds supply, as has been the case in recent years, we could experience higher labor, recruiting or training costs in order to attract and retain such employees, or could experience difficulties in performing under our contracts if our needs for such employees were unmet.

 

 

We have no unresolved comments from the SEC.

 

 

Our principal executive offices are located at owned facilities in Melbourne, Florida. As of June 27, 2008, we operated approximately 124 locations in the United States, Canada, Europe, Central and South America and Asia,

consisting of about 6.8 million square feet of manufacturing, administrative, research and development, warehousing, engineering and office space, of which approximately 4.4 million square feet are owned and approximately 2.4 million square feet are leased. There are no material encumbrances on any of our facilities. Our leased facilities are, for the most part, occupied under leases for remaining terms ranging from one month to 11 years, a majority of which can be terminated or renewed at no longer than five-year intervals at our option. As of June 27, 2008, we had major operations at the following locations:

 

Defense Communications and Electronics — Rochester, New York; Palm Bay, Florida; Columbia, Maryland; and the United Kingdom.

 

Government Communications Systems — Palm Bay, Florida; Melbourne, Florida; Malabar, Florida; Chantilly, Virginia; Herndon, Virginia; Largo, Maryland; Falls Church, Virginia; Dulles, Virginia; Alexandria, Virginia; Colorado Springs, Colorado; Annapolis Junction, Maryland; Bellevue, Nebraska; and Calgary, Canada.

 

Broadcast Communications — Quincy, Illinois; Mason, Ohio; Toronto, Canada; Englewood, Colorado; Pottstown, Pennsylvania; and the United Kingdom.

 

Harris Stratex Networks — San Antonio, Texas; San Jose, California; Milpitas, California; Morrisville, North Carolina; Montreal, Canada; Melbourne, Florida; Redwood Shores, California; New Zealand; Scotland; France; the Philippines; China; Singapore; Mexico; South Africa and Poland.

 

Corporate — Melbourne, Florida.

 

The following is a summary of the approximate floor space of our offices and facilities in productive use, by segment, at June 27, 2008 (in millions):

 

 

In the opinion of management, our facilities, whether owned or leased, are suitable and adequate for their intended purposes and have capacities adequate for current and projected needs. While we have some unused or under-utilized facilities, they are not considered significant. We continuously review our anticipated requirements for facilities and will, from time to time, acquire additional facilities, expand existing facilities, and dispose of existing facilities or parts thereof, as management deems necessary. For more information about our lease obligations, see Note 18: Lease Commitments in the Notes. Our facilities and other properties are generally maintained in good operating condition.

 

 

General.  From time to time, as a normal incident of the nature and kind of businesses in which we are, and were, engaged, various claims or charges are asserted and litigation commenced by or against us arising from or related to: product liability; personal injury; patents, trademarks, trade secrets or other intellectual property; labor and employee disputes; commercial or contractual disputes; the sale or use of products containing asbestos or other restricted materials; breach of warranty; or environmental matters. Claimed amounts against us may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitral awards. We typically record accruals for losses related to those matters against us that we consider to be probable and that can be reasonably estimated. Gain contingencies, if any, typically are recognized when they are realized and legal costs generally are expensed when incurred. While it is not feasible to predict the outcome of these matters with certainty, and some lawsuits, claims or proceedings may be disposed of or decided unfavorably to us, based upon available information, in the opinion of management, settlements and final judgments, if any, which are considered probable of being rendered against us in litigation or arbitration in existence at June 27, 2008 are reserved against, covered by insurance or would not have a material adverse effect on our financial position, results of operations or cash flows.

U.S. Government Business.  U.S. Government contractors, such as us, are engaged in supplying goods and services to the U.S. Government and its various agencies. We are therefore dependent on Congressional appropriations and administrative allotment of funds and may be affected by changes in U.S. Government policies. U.S. Government contracts typically involve long lead times for design and development, are subject to significant changes in contract scheduling and may be unilaterally modified or cancelled by the U.S. Government. Often these contracts call for successful design and production of complex and technologically advanced products or systems. We may participate in supplying goods and services to the U.S. Government as either a prime contractor or as a subcontractor to a prime contractor. Disputes may arise between the prime contractor and the U.S. Government and the prime contractor and its subcontractors and may result in litigation between the contracting parties.

 

Generally, U.S. Government contracts are subject to procurement laws and regulations, including the Federal Acquisition Regulation (“FAR”), which outline uniform policies and procedures for acquiring goods and services by the U.S. Government, and specific agency acquisition regulations that implement or supplement the FAR, such as the Defense Federal Acquisition Regulations. As a U.S. Government contractor, our contract costs are audited and reviewed on a continuing basis by the Defense Contract Audit Agency (“DCAA”). The DCAA also reviews the adequacy of, and a U.S. Government contractor’s compliance with, the contractor’s internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. In addition to these routine audits, from time to time, we may, either individually or in conjunction with other U.S. Government contractors, be the subject of audits and investigations by other agencies of the U.S. Government. These audits and investigations are conducted to determine if our performance and administration of our U.S. Government contracts are compliant with applicable contractual requirements and procurement and other applicable Federal laws and regulations. These investigations may be conducted without our knowledge. We are unable to predict the outcome of such investigations or to estimate the amounts of resulting claims or other actions that could be instituted against us, our officers or employees. Under present U.S. Government procurement laws and regulations, if indicted or adjudged in violation of procurement or other Federal laws, a contractor, such as us, or one or more of our operating divisions or subdivisions, could be subject to fines, penalties, repayments, or compensatory or treble damages. U.S. Government regulations also provide that certain findings against a contractor may lead to suspension or debarment from eligibility for awards of new U.S. Government contracts for up to three years. Suspension or debarment would have a material adverse effect on us because of our reliance on U.S. Government contracts. In addition, our export privileges could be suspended or revoked. Suspension or revocation of our export privileges also would have a material adverse effect on us.

 

International.  As an international company, we are, from time to time, the subject of investigations relating to our international operations, including under the U.S. export control laws, the U.S. Foreign Corrupt Practices Act and similar U.S. and international laws.

 

Environmental.  We are subject to numerous U.S. Federal, state and international environmental laws and regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental issues concerning activities at our facilities or former facilities or remediation as a result of past activities (including past activities of companies we have acquired). From time to time, we receive notices from the U.S. Environmental Protection Agency or equivalent state or international environmental agencies that we are a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent laws. Such notices assert potential liability for cleanup costs at various sites, which include sites owned by us, sites we previously owned and treatment or disposal sites not owned by us, allegedly containing hazardous substances attributable to us from past operations. We own, previously owned or have been named as a potentially responsible party at 17 such sites, excluding sites as to which our records disclose no involvement or as to which our liability has been finally determined. While it is not feasible to predict the outcome of many of these proceedings, in the opinion of our management, any payments we may be required to make as a result of such claims in existence at June 27, 2008 will not have a material adverse effect on our financial condition, results of operations or cash flows. Additional information regarding environmental matters is set forth in Note 1: Significant Accounting Policies in the Notes, which Note is incorporated herein by reference.

 

 

No matters were submitted by us to a vote of our security holders during the fourth quarter of fiscal 2008.

 

The name, age, position held with us, and principal occupation and employment during at least the past 5 years for each of our executive officers as of August 22, 2008, are as follows:

 

 

There is no family relationship between any of our executive officers or directors, and there are no arrangements or understandings between any of our executive officers or directors and any other person pursuant to which any of them was appointed or elected as an officer or director, other than arrangements or understandings with our directors or officers acting solely in their capacities as such. All of our executive officers are elected annually and serve at the pleasure of our Board of Directors.

 

 

Market Information and Price Range of Common Stock

Our common stock, par value $1.00 per share, is listed and traded on the New York Stock Exchange (“NYSE”), under the ticker symbol “HRS.” According to the records of our transfer agent, as of August 22, 2008, there were approximately 6,535 holders of record of our common stock. On February 25, 2005 our Board of Directors approved a two-for-one stock split of our common stock. The stock split was effected in the form of a 100 percent stock dividend distributed on March 30, 2005 to shareholders of record on March 14, 2005. All share and per share amounts and information presented in this Annual Report on Form 10-K for periods prior to the stock split have been retroactively restated to reflect the effect of this stock split. The high and low sales prices of our common stock as reported on the NYSE composite transactions reporting system and the dividends paid on our common stock for each quarterly period in our last two fiscal years are reported below:

 

 

On August 22, 2008, the last sale price of our common stock as reported in the NYSE composite transactions reporting system was $51.75 per share.

 

Dividends

The dividends paid on our common stock for each quarter in our last two fiscal years are set forth in the tables above. On August 23, 2008, our Board of Directors increased our annual dividend rate from $.60 per share to $.80 per share and declared a quarterly cash dividend of $.20 per share, which will be paid on September 17, 2008 to holders of record on September 4, 2008. Our annual common stock dividend rate was $.60 per share, $.44 per

share and $.32 per share in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Quarterly cash dividends are typically paid in March, June, September and December. We have paid cash dividends every year since 1941, and we currently expect that cash dividends will continue to be paid in the near future, but we can give no assurance. The declaration of dividends and the amount thereof will depend on a number of factors, including our financial condition, capital requirements, results of operations, future business prospects and other factors that our Board of Directors may deem relevant.

 

Harris Stock Performance Graph

The following performance graph and table do not constitute soliciting material and the performance graph and table should not be deemed filed or incorporated by reference into any other previous or future filings by us under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate the performance graph and table by reference therein.

 

The performance graph and table below compare the five-year cumulative total return of our common stock with the comparable five-year cumulative total returns of the Standard & Poor’s 500 Information Technology Section Index (“S&P 500 Information Technology”) and the Standard & Poor’s 500 Composite Stock Index (“S&P 500”). The figures assume an initial investment of $100 at the close of business on June 30, 2003 in Harris, the S&P 500 Information Technology and the S&P 500, and the reinvestment of all dividends.

 

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG HARRIS, S&P 500 INFORMATION TECHNOLOGY AND S&P 500

 

 

Sales of Unregistered Securities

 

During fiscal 2008, we did not issue or sell any unregistered securities.

 

Issuer Repurchases of Equity Securities

 

During fiscal 2008, we repurchased 3,945,136 shares of our common stock at an average price per share of $56.99, excluding commissions. During fiscal 2007, we repurchased 4,959,499 shares of our common stock at an average price per share of $49.78, excluding commissions. The level of our repurchases depends on a number of factors, including our financial condition, capital requirements, results of operations, future business prospects and other factors that our Board of Directors may deem relevant. The timing, volume and nature of share repurchases are subject to market conditions, applicable securities laws and other factors and are at the discretion of management and may be suspended or discontinued at any time. Shares repurchased by us are cancelled and retired.

 

The following table sets forth information with respect to repurchases by us of our common stock during the fiscal quarter ended June 27, 2008:

 

 

 

 

See Note 14: Stock Options and Share-Based Compensation in the Notes for a general description of our stock and equity incentive plans.

 

The following table summarizes our selected historical financial information for each of the last five fiscal years. All amounts presented have been restated on a continuing operations basis. The selected financial information shown below has been derived from our audited consolidated financial statements, which for data presented for fiscal years 2008 and 2007 are included elsewhere in this Annual Report on Form 10-K. This table should be read in conjunction with our other financial information, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related Notes, included elsewhere in this Annual Report on Form 10-K.

 

 

 

 

 

 

OVERVIEW

 

The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an understanding of Harris. MD&A is provided as a supplement to, should be read in conjunction with, and is qualified in its entirety by reference to, our Consolidated Financial Statements and related Notes appearing elsewhere in this Annual Report on Form 10-K. Except for the historical information contained herein, the discussions in 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 MD&A under “Forward-Looking Statements and Factors that May Affect Future Results.”

 

The following is a list of the sections of MD&A, together with our perspective on the contents of these sections of MD&A, which we hope will make reading these pages more productive:

 

 

BUSINESS CONSIDERATIONS

 

General

We are an international communications and information technology company that applies a solutions approach to serving government and commercial markets in more than 150 countries. Our mission is to be the best-in-class global provider of mission critical assured communications^® products, systems and services for global markets. Our company generates revenue, income and cash flows by developing, manufacturing and selling communications products and software as well as providing related services. We generally sell directly to our customers, the largest of which is the U.S. Government and its prime contractors. We also utilize agents and intermediaries to sell and market some products and services, especially in international markets.

 

As discussed further in Note 23: Business Segments in the Notes, effective for fiscal 2008 (which began June 30, 2007), our Defense Programs business (part of our Government Communications Systems segment for fiscal 2007) was combined with our RF Communications business, and the combined business is reported as our Defense Communications and Electronics segment for fiscal 2008. Our Broadcast Communications and Harris Stratex Networks segments did not change as a result of these adjustments to our organizational structure. The historical results, discussion and presentation of our business segments as set forth in this Annual Report on Form 10-K reflect the impact of these adjustments to our organizational structure for all periods presented in this Annual Report on Form 10-K.

We report our financial results for fiscal 2008 in the following four business segments:

 

 

As described in greater detail in “Item 1.  Business — Description of Business by Segment for Fiscal 2008 — Harris Stratex Networks,” in the third quarter of fiscal 2007, we combined our former Microwave Communications Division with Stratex, a publicly-traded provider of high-speed wireless transmission systems, to form a new company named Harris Stratex Networks, Inc. As of June 27, 2008, we owned approximately 56 percent of Harris Stratex Networks’ outstanding stock. Following the combination, our business segment formerly referred to as Microwave Communications is referred to as Harris Stratex Networks and reflects the results of the combined businesses for periods following the combination. Financial information with respect to all of our other activities, including corporate costs not allocated to the business segments, is reported as part of Headquarters Expense or Non-Operating Income (Loss).

 

On August 5, 2008, we announced that we would report our financial results for fiscal 2009 (which began June 28, 2008) in the following four business segments:

 

 

Our segment reporting structure for fiscal 2009 reflects that our RF Communications business (part of our Defense Communications and Electronics segment for fiscal 2008) will be reported as its own separate segment for fiscal 2009, and that our Defense Programs business (the other part of our Defense Communications and Electronics segment for fiscal 2008) will be reported as part of our Government Communications Systems segment for fiscal 2009, together with that segment’s existing businesses (National Intelligence Programs, Civil Programs and IT Services). Our Broadcast Communications and Harris Stratex Networks segments will not change as a result of the adjustments to our segment reporting structure. These adjustments to our segment reporting take effect in fiscal 2009 and therefore do not affect the historical results, discussion or presentation of our business segments as set forth in this Annual Report on Form 10-K. We will begin to report our financial results consistent with this new segment reporting structure beginning with the first quarter of fiscal 2009 and we will conform our historical segment reporting accordingly.

 

Value Drivers of Our Businesses and Our Strategy for Achieving Value

We are committed to our mission statement, and we believe that executing our mission statement creates value. Consistent with this commitment to effective execution, we currently focus on these key value drivers:

 

 

Continuing profitable revenue growth in all segments:  We plan to focus on continued profitable revenue growth by implementing the following strategies in each segment:

 

Defense Communications and Electronics:  Continue to leverage reputation and position as a leading provider of tactical radios offered by our RF Communications business in the areas of high-frequency (“HF”), multiband and cryptographic sub-systems; and expand market reach with new products such as the Falcon III JTRS-compliant multiband handheld, manpack and vehicular and secure personal radios as well as high-capacity line-of-site radios, COMSEC terminals, unmanned ground sensor products and international systems. Expand addressable markets such as avionics, electronics and data links; space and ground SATCOM systems, including antennas and space-hardened electronics; and defense communications and information networks. Leverage synergies across RF Communications and Defense Programs business units. Develop, promote and sell Defense Programs products and systems into certain global markets.

 

Government Communications Systems:  Expand capabilities based on strong national intelligence credentials core to national security and the Global War on Terror. Leverage core capabilities for expanded opportunities in civil markets. Utilize IT Services business scale to address the growing government and commercial service markets. Identify and implement growth initiatives in new markets.

 

Broadcast Communications:  Grow core business through aggressive new product introductions aimed at high-definition and digital-infrastructure build-outs, new channel additions, and expansion into new markets such as digital signage, government, news and sports. Focus on expanding profit and return on capital. Leverage interoperability initiative based on open industry standards by delivering high-value, highly reliable solutions. Drive a customer-centric culture, with strong strategic account management. Focus on geographic expansion in international growth markets. Leverage the Harris brand.

 

Harris Stratex Networks:  Continue to win opportunities with public telecommunications providers as well as Federal, state and other private network operators to meet increasing demand for capacity requirements and the demand for high-reliability, high-bandwidth networks that are more secure and better protected against natural and man-made disasters. Offer innovative new products and expand regional sales channels to capture greenfield network opportunities and penetrate major regional mobile telecom operators to participate in network opportunities. Offer a broad range of engineering and other professional services for network planning, systems architecture design and project management as a global competitive advantage. Expand our network operations offerings in microwave and non-microwave opportunities to create items that differentiate our total solutions offerings.

 

Focusing on operating efficiencies and cost reductions:  Our principal focus areas for operating efficiencies and cost management are: reducing procurement costs through an emphasis on coordinated supply chain management; reducing product costs through dedicated engineering resources focused on product design; improving manufacturing efficiencies across all segments; and optimizing facility utilization.

 

Leveraging various corporate initiatives across business segments:  One of our strengths is our ability to transfer technology among segments and focus our research and development projects in ways that benefit Harris as a whole. Another area of focus is cross-selling through segment sales channels and joint pursuits by multiple segments. Other corporate initiatives include joint international market channel development, such as shared distributors and coordinated “go-to-market” strategies.

 

Making strategic acquisitions:  Another key value driver is effective capital allocation by making effective acquisitions and investments to build or complement the strengths in our base businesses. We believe acquisitions may also serve to balance and enhance our portfolio of businesses. No material acquisitions were completed in fiscal 2008. In the third quarter of fiscal 2007, we combined our Microwave Communications Division with Stratex to form Harris Stratex Networks, the largest independent provider of wireless transmission network solutions, of which we own 56 percent. In the fourth quarter of fiscal 2007, we acquired Multimax, a leading provider of information technology and network services for the U.S. Government, which is being operated as part of our Government Communications Systems segment. The acquisition of Multimax provided us greater scale, a broader customer base and new growth opportunities through key positions on GWACs. In recent years, we have also made several acquisitions in our Broadcast Communications segment including Encoda, Leitch, OSi, Aastra Digital Video and Zandar. These acquisitions helped us expand our product and service portfolio so we can offer end-to-end content delivery, transport and asset management solutions to our customers.

 

Maintaining an efficient capital structure:  Our capital structure is intended to optimize our cost of capital. We believe our strong capital position, access to key financial markets, ability to raise funds at a low effective cost and overall low cost of borrowing provide a competitive advantage. We had $373.1 million in cash, cash equivalents and short-term investments as of June 27, 2008 and had $550.3 million of cash flows provided by operating

activities during fiscal 2008. Our cash is not restricted and can be used to invest in capital expenditures, make strategic acquisitions, repurchase our common stock or pay dividends to our shareholders. During fiscal 2008, we repurchased $225 million in shares of our common stock under a $600 million share repurchase program approved by our Board of Directors during fiscal 2007, for a total of $425 million in shares of our common stock repurchased under this program since it was approved. While this program does not have a stated expiration date, we expect to repurchase during fiscal 2009 the remaining $175 million in shares of our common stock authorized to be repurchased under this program. We currently expect that these repurchases will more than offset the dilutive effect of shares to be issued under our share-based incentive plans.

 

Key Indicators

 

We believe our value drivers, when implemented, will improve our key indicators of value such as: (1) net income and net income per diluted share, (2) revenue, (3) gross margin, (4) net income as a percentage of revenue, (5) operating cash flows, (6) return on average assets and (7) return on average equity. The measure of our success is reflected in our results of operations and liquidity and capital resources key indicators:

 

Fiscal 2008 Results of Operations Key Indicators:  Net income, net income per diluted share, revenue, gross margin, and net income as a percentage of revenue represent key measurements of our value drivers:

 

Refer to MD&A heading “Operations Review” below in this Annual Report on Form 10-K for more information.

 

Liquidity and Capital Resources Key Indicators:  Net cash provided by operating activities, return on average assets and return on average equity also represent key measurements of our value drivers:

 

Refer to MD&A heading “Liquidity, Capital Resources and Financial Strategies” below in this Annual Report on Form 10-K for more information.

 

Industry-Wide Opportunities, Challenges and Risks

 

Defense Markets:  The DoD’s budget proposal for the U.S. Government fiscal years 2009 to 2013 supports military readiness, with a continued focus on modernizing the country’s military infrastructure and addressing the evolving requirements of modern-day warfare. As a result, we expect the U.S. Government to remain committed to funding intelligence, information superiority, special operations and warfighter support. Requirements to upgrade and modernize tactical radio communications capabilities and provide more secure, interoperable and reliable communications should remain a funding priority. International defense forces continue to drive toward tactical communications upgrades and interoperability with the systems and equipment used by the U.S. Government.

 

The $515.4 billion DoD U.S. Government Fiscal Year (“GFY”) 2009 budget request is approximately 7 percent above GFY 2008 levels. This base budget excludes emergency supplemental funding, such as the $189 billion for

GFY 2008 ($87 billion of which has been appropriated) and $70 billion requested for GFY 2009, primarily to support the Global War on Terror.

 

The DoD Operations and Maintenance account (“O&M”), which contains the bulk of funding for training, logistics, services and other logistical support, is a major account of importance to the defense industry. The budget for GFY 2009 is approximately $179.8 billion, an increase of $15.6 billion, or 10% over GFY 2008 enacted levels.

 

While the DoD’s overall budget increase may be a positive indicator of growth for the defense industry, we believe that the level of growth and budget amounts allocated to DoD procurement accounts (“Procurement”), along with research, development, test and evaluation (“RDT&E”) components of the DoD budget, are a better indicator of DoD spending. These accounts are applicable to defense contractors because they generally represent the amounts that are expended for military hardware and technology.

 

While there is no assurance that the requested DoD budget increases will continue to be approved by Congress, the current outlook appears to be one of increased DoD spending, which we believe will continue to positively affect our future orders, sales, income and cash flows. Conversely, a decline in the DoD budget may have a negative effect on future orders, sales, income and cash flows of defense contractors, including us, depending on the weapons platforms and programs affected by such budget reductions.

 

International governments are also expected to continue to increase their defense spending on national security and combatting the Global War on Terror, which we believe will continue to positively affect our future orders, sales, income and cash flows.

 

Government Markets Other Than Defense:  A funding priority for the U.S. Government is the security of the U.S., which includes better communications interplay among law enforcement, civil government agencies, intelligence agencies and our military services. Funding for investments in secure tactical communications, information technology, information processing and additional communications assets and upgrades remains solid. Another priority of the U.S. Government is investments in productivity, cost reductions and outsourcing. As a result, programs that promote these initiatives are also expected to receive funding. We provide products and services to a number of U.S. Government agencies including the FAA, NRO, NGA, Census Bureau, Department of State, NSA, NOAA and others. Recent trends continue to indicate an increase in demand from these agencies to outsource their requirements for better, more efficient and less costly information technology and communications.

 

As a U.S. Government contractor, we are subject to U.S. Government oversight. The U.S. Government may investigate our business practices and audit our compliance with applicable rules and regulations. Depending on the results of those investigations and audits, the U.S. Government could make claims against us. Under U.S. Government procurement regulations and practices, an indictment or conviction of a government contractor could result in that contractor being fined and/or suspended from being able to bid on, or from being awarded, new U.S. Government contracts for a period of time. Similar government oversight exists in most other countries where we conduct business. We are currently not aware of any compliance audits or investigations that could result in a significant adverse impact to our financial condition, results of operations or cash flows.

 

While recent developments in the defense and government industry have had a positive impact on our Defense Communications and Electronics and Government Communications Systems segments, we remain subject to other risks associated with U.S. Government business, including technological uncertainties, dependence on annual appropriations and allotment of funds, extensive regulations and other risks, which are discussed under “Item 1A. Risk Factors” and under “Item 3. Legal Proceedings” in this Annual Report on Form 10-K.

 

Commercial Broadcast Communications and Wireless Transmission Markets:  Global economic growth rates continue at modest levels in the broadcast and wireless transmission markets.

 

Global trends and developments in the broadcast communications market include:

 

 

Global trends and developments in the wireless transmission market include:

 

 

Our management believes that our experience and capabilities are well aligned with, and that we are positioned to capitalize on, the market trends noted above in this Annual Report on Form 10-K. While we believe that these developments generally will have a positive impact on us, we remain subject to general economic conditions that could adversely affect our customers. We also remain subject to other risks associated with these markets, including technological uncertainties, changes in the FCC’s regulations, slow market adoption of digital radio and DTV or any of our new products and other risks which are discussed below under “Forward-Looking Statements and Factors that May Affect Future Results” and in “Item 1A. Risk Factors” in this Annual Report on Form 10-K.

 

OPERATIONS REVIEW

 

Revenue and Net Income

 

 

Fiscal 2008 Compared With Fiscal 2007:  Our revenue for fiscal 2008 was $5,311.0 million, an increase of 25.2 percent compared with fiscal 2007. Net income for fiscal 2008 was $444.2 million, a decrease of 7.5 percent compared with fiscal 2007 net income of $480.4 million. Fiscal 2008 revenue increased as compared with fiscal 2007 in all four of our business segments. Fiscal 2008 revenue increased by 41.4 percent in our Harris Stratex Networks segment, 32.2 percent in our Government Communications Systems segment, primarily as a result of the June 2007 acquisition of Multimax, 18.9 percent in our Defense Communications and Electronics segment and 7.3 percent in our Broadcast Communications segment. While fiscal 2008 revenue increases benefited from the acquisitions of Multimax and Zandar and the combination with Stratex, we also had strong organic revenue growth in fiscal 2008 compared with fiscal 2007.

 

Fiscal 2008 net income decreased from fiscal 2007, primarily due to a $163.4 million gain ($143.1 million after-tax) recorded in fiscal 2007 in our Harris Stratex Networks segment as a result of the combination with Stratex. Integration and transaction-related costs associated with the Stratex combination were $46.0 million in fiscal 2007 and $38.7 million in fiscal 2008. Additionally, Harris Stratex Networks fiscal 2008 operating income was negatively impacted by non-cash accounting adjustments and higher operating costs including orders-based sales compensation expense, an increase in the allowance for doubtful accounts and outside consultant fees. Our Defense Communications and Electronics segment continued its strong operating income trends in fiscal 2008 with a 23.1 percent increase over fiscal 2007 operating income. Operating income in our Government Communications Systems segment increased 7.0 percent over fiscal 2007 operating income, primarily due to the acquisition of Multimax partially offset by $75.9 million of charges recorded in fiscal 2008 for schedule and cost overruns on several fixed-price commercial satellite reflector programs. Operating income in our Broadcast Communications

segment improved significantly, from $11.9 million in fiscal 2007 to $33.8 million in fiscal 2008. Fiscal 2007 operating income in this segment was adversely impacted by $7.5 million of charges associated with cost-reduction actions and an $18.9 million write-down of capitalized software associated with management’s decision to discontinue an automation software development effort.

 

Net interest expense increased from $27.6 million in fiscal 2007 to $48.4 million in fiscal 2008, mainly due to increased borrowings related to the acquisition of Multimax in June 2007, as well as lower average cash balances and lower interest rates on invested cash. Fiscal 2008 non-operating income was $11.4 million, which included $9.8 million in gains related to the sale of marketable equity securities. Fiscal 2007 non-operating loss was $16.2 million, which included a $19.8 million write-down of our investment in Terion due to an other-than-temporary impairment.

 

In fiscal 2008 our effective tax rate (income taxes as a percentage of income before income taxes and minority interest) was 31.6 percent compared with an effective tax rate of 28.9 percent in fiscal 2007. In fiscal 2008, our effective tax rate was lower than the U.S. statutory rate because of an $11 million favorable impact from the settlement of U.S. Federal income tax audits for fiscal years 2004 through 2006. Additionally, in the third quarter of fiscal 2008, we began recording state income taxes in our Consolidated Statement of Income as engineering, selling and administrative expenses to the extent these taxes are reimbursed under government contracts, which totaled $9.9 million for fiscal 2008. Under U.S. Government regulations, these state income taxes are allowable in establishing prices for the products and services we sell to the U.S. Government. Prior to the third quarter of fiscal 2008, these state income taxes were recorded in our Consolidated Statement of Income as income taxes. The reimbursement of these state income taxes is recorded in our Consolidated Statement of Income as revenue for all periods presented. As a result of this change, we reduced total income tax expense by approximately $6.4 million in fiscal 2008. This change will also lower our effective tax rate in future quarters.

 

In fiscal 2007, our effective tax rate was lower than the U.S. statutory tax rate because of the tax-free nature of the combination with Stratex, and a $12 million favorable impact from the settlement concerning the tax audit for fiscal years 2001, 2002 and 2003. These favorable impacts to our effective tax rate were partially offset by transaction-related costs incurred in our Harris Stratex Networks segment and cost-reduction initiatives in our Broadcast Communications segment in foreign jurisdictions where we have significant net operating losses and where we were unable to realize a tax benefit associated with these charges.

 

See the “Discussion of Business Segments” discussion below in this MD&A for further information.

 

Fiscal 2007 Compared With Fiscal 2006:  Our revenue for fiscal 2007 was $4,243.0 million, an increase of 22.1 percent compared with fiscal 2006. Net income for fiscal 2007 was $480.4 million, an increase of 101.9 percent compared with fiscal 2006 net income of $237.9 million. Fiscal 2007 revenue increased as compared to fiscal 2006 in all four of our business segments and was led by the increase in our Harris Stratex Networks segment, which increased 45.7 percent, and our Defense Communications and Electronics segment, which increased 28.5 percent. Our Harris Stratex Networks segment’s fiscal 2007 revenue increase was primarily due to the impact of the combination of our former Microwave Communications segment with Stratex in the third quarter of fiscal 2007.

 

The fiscal 2007 increase in net income was led by a $166.5 million increase in operating income in our Harris Stratex Networks segment as a result of the combination with Stratex in fiscal 2007, including a $163.4 million gain ($143.1 million after-tax) as a result of the transaction, partially offset by $46.0 million of transaction-related and integration costs. Our Defense Communications and Electronics segment also had significant improvement in fiscal 2007 operating income with a 37.6 percent increase over fiscal 2006. Our Broadcast Communications segment operating income was adversely impacted by $7.5 million of costs associated with cost-reduction actions in fiscal 2007 and the impact of an $18.9 million write-down of capitalized software associated with management’s decision to discontinue an automation software development effort. Headquarters expense decreased in fiscal 2007 to $69.6 million compared with $75.4 million in fiscal 2006, primarily due to a $5.4 million charge related to our arbitration with Bourdex in fiscal 2006.

 

Net interest expense increased slightly from $24.7 million in fiscal 2006 to $27.6 million in fiscal 2007 mainly due to a full-year impact of our September 2005 issuance of $300 million aggregate principal amount of 5% Notes due 2015. Our non-operating loss in fiscal 2007 increased to $16.2 million in fiscal 2007, compared with $1.2 million in fiscal 2006, and included a $19.8 million write-down of our investment in Terion due to an other-than-temporary impairment. Our effective tax rate decreased from 37.5 percent in fiscal 2006 to 28.9 percent in fiscal 2007, primarily due to the tax-free nature of the combination with Stratex and a favorable settlement that was approved by the United States Joint Committee on Taxation and related matters between us and the Internal Revenue Service concerning the tax audit for fiscal years 2001, 2002 and 2003.

See the “Discussion of Business Segments” discussion below in this MD&A for further information.

 

Gross Margin

 

 

Fiscal 2008 Compared With Fiscal 2007:  Our gross margin (revenue less cost of product sales and services) as a percentage of revenue was 30.7 percent in fiscal 2008, compared with 32.3 percent in fiscal 2007. Our overall blended fiscal 2008 gross margin as a percentage of revenue was negatively impacted by a larger mix of sales coming from our lower-margin Government Communications Systems segment’s products and services in fiscal 2008 compared with fiscal 2007, primarily as a result of our acquisition of Multimax in the fourth quarter of fiscal 2007. Government Communications Systems gross margin as a percentage of revenue in fiscal 2008 was essentially flat compared with fiscal 2007, reflecting the positive impact from the acquisition of Multimax, offset by the negative impact from $75.9 million of charges for schedule and cost overruns on commercial satellite reflector programs. Gross margin in our Harris Stratex Networks segment was impacted in fiscal 2008 and fiscal 2007 by $16.9 million and $8.7 million, respectively, due to integration-related activities associated with the Stratex combination, including the impact of a step up in inventory and fixed assets recorded as of the combination date in both years and an $11 million inventory write-down in fiscal 2008 related to an accelerated technology transition to IP-based products and other integration-related costs. Harris Stratex Networks fiscal 2008 gross margin was also negatively impacted by approximately $12 million of accounting adjustments related to reconciling inventory work-in-process accounts within a cost accounting system at one location primarily due to project cost variances that were not recorded to cost of sales in a timely manner. See the “Discussion of Business Segments” discussion below in this MD&A for further information.

 

Fiscal 2007 Compared With Fiscal 2006:  Our gross margin (revenue less cost of product sales and services) as a percentage of revenue was 32.3 percent in fiscal 2007 compared with 31.3 percent in fiscal 2006. Gross margin as a percentage of revenue increased in fiscal 2007 as compared to fiscal 2006 in our Defense Communications and Electronics, Broadcast Communications and Harris Stratex Networks segments and decreased in our Government Communications Systems segment. Our overall blended fiscal 2007 gross margin as a percentage of revenue was positively impacted by a larger mix of sales coming from our higher-margin Defense Communications and Electronics segment’s products in fiscal 2007 compared with fiscal 2006 and the impact of the Leitch, Aastra Digital Video and OSi acquisitions in fiscal 2006 in our Broadcast Communications segment. Gross margin decreased in our Government Communications Systems segment as a result of schedule and cost overruns on a commercial satellite reflector program absorbed during fiscal 2007. Gross margin in our Harris Stratex Networks segment was adversely impacted in fiscal 2006 by $35.0 million of inventory write-downs and other charges associated with product discontinuances and the shut down of manufacturing activities in our Montreal, Canada plant. Gross margin in our Harris Stratex Networks segment was impacted in fiscal 2007 by $8.7 million of lower margins being recognized subsequent to our combination with Stratex due to a step up in inventory and fixed assets recorded as of the combination date. The gross margin in our Broadcast Communications segment was adversely impacted in fiscal 2006 by $11.3 million of inventory write-downs associated with cost-reduction actions, including the transfer of European manufacturing operations to the United States and outsourcing of other manufacturing activity and $2.7 million of lower margin being recognized subsequent to our acquisition of Leitch due to a step up in inventory recorded as of the acquisition date. See the “Discussion of Business Segments” discussion below in this MD&A for further information.

 

Engineering, Selling and Administrative Expenses

 

Fiscal 2008 Compared With Fiscal 2007:  Our engineering, selling and administrative expenses increased from $830.7 million in fiscal 2007 to $953.8 million in fiscal 2008. As a percentage of revenue, these expenses decreased to 18.0 percent in fiscal 2008 from 19.6 percent in fiscal 2007. Our Defense Communications and Electronics segment engineering, selling and administrative expenses increased in fiscal 2008 primarily due to research and development costs associated with our Falcon III radio. Our Government Communications Systems segment engineering, selling and administrative expenses increased primarily due to the acquisition of Multimax in the fourth quarter of fiscal 2007 and the impact of recording state income taxes allocated to government contracts. Our Harris Stratex Networks segment engineering, selling and administrative expenses increased primarily due to the combination with Stratex in the third quarter of fiscal 2007 including transaction-related and integration costs of $21.8 million and $37.3 million, in fiscal 2008 and fiscal 2007, respectively. Engineering, selling and administrative expenses also increased in our Harris Stratex Networks segment in fiscal 2008 as a result of higher orders-based sales compensation expense, an increase in the allowance for doubtful accounts and outside consultant fees. Fiscal 2007 engineering, selling and administrative expenses in our Broadcast Communications segment reflected $26.4 million of costs incurred related to a write-down of capitalized software and cost-reduction actions. See the “Discussion of Business Segments” discussion below in this MD&A for further information.

 

Overall company-sponsored research and product development costs, which are included in engineering, selling and administrative expenses, were $275.0 million in fiscal 2008 compared with $234.6 million in fiscal 2007. The increase was primarily due to spending on the development of our Falcon III radio in our Defense Communications and Electronics segment and Eclipse products in our Harris Stratex Networks segment.

 

Fiscal 2007 Compared With Fiscal 2006:  Our engineering, selling and administrative expenses increased from $682.3 million in fiscal 2006 to $830.7 million in fiscal 2007. As a percentage of revenue, these expenses remained unchanged at 19.6 percent in fiscal 2007 and fiscal 2006. The increase in the amount of our engineering, selling and administrative expenses was primarily related to the following in fiscal 2007: increased research and development costs associated with our Falcon III radio development; our combination with Stratex, including $37.3 million of transaction-related and integration costs; and $26.4 million of costs incurred related to a write-down of capitalized software and cost-reduction actions taken in our Broadcast Communications segment. See the “Discussion of Business Segments” discussion below in this MD&A for further information.

 

Overall company-sponsored research and product development costs, which are included in engineering, selling and administrative expenses, were $234.6 million in fiscal 2007, compared with $197.8 million in fiscal 2006. The increase was primarily due to increased spending on the development of our Falcon III radio and the increased research and product development costs resulting from our acquisitions of Leitch in fiscal 2006 and Encoda in fiscal 2005.

 

Non-Operating Income (Loss)

 

 

 

 

Fiscal 2008 Compared With Fiscal 2007:  Our non-operating income was $11.4 million for fiscal 2008, compared with a non-operating loss of $16.2 million for fiscal 2007. Fiscal 2008 non-operating income primarily resulted from a $5.6 million gain related to mark-to-market adjustments on warrants we held to acquire shares of AuthenTec, Inc. (“AuthenTec”), which were classified as derivatives, and gains of $9.8 million on the sale of a portion of our investment in AuthenTec, which is classified as marketable equity securities available-for-sale. The fiscal 2007 non-operating loss includes a $19.8 million write-down of our investment in Terion. See Note 20: Non-Operating Income (Loss) in the Notes for further information.

 

Fiscal 2007 Compared With Fiscal 2006:  Our non-operating loss was $16.2 million for fiscal 2007, compared with a non-operating loss of $1.2 million for fiscal 2006. The fiscal 2007 non-operating loss includes a $19.8 million write-down of our investment in Terion. See Note 20: Non-Operating Income (Loss) in the Notes for further information.

Interest Income and Interest Expense

 

 

Fiscal 2008 Compared With Fiscal 2007:  Our interest income decreased from $13.5 million in fiscal 2007 to $7.3 million in fiscal 2008. Our interest expense increased from $41.1 million in fiscal 2007 to $55.7 million in fiscal 2008. The decrease in our interest income and increase in our interest expense in fiscal 2008 was primarily due to increased borrowings related to the acquisition of Multimax in June 2007, as well as lower average cash balances and lower interest rates on invested cash.

 

Fiscal 2007 Compared With Fiscal 2006:  Our interest income increased from $11.8 million in fiscal 2006 to $13.5 million in fiscal 2007 due to a higher average balance of cash and cash equivalents and short-term investments. Our interest expense increased from $36.5 million in fiscal 2006 to $41.1 million in fiscal 2007 primarily due to the full-year impact of the $300 million in aggregate principal amount of 5% Notes due October 1, 2015 issued on September 20, 2005.

 

Income Taxes

 

 

Fiscal 2008 Compared With Fiscal 2007:  Our effective tax rate (income taxes as a percentage of income before income taxes and minority interest) was 31.6 percent for fiscal 2008, compared with 28.9 percent in fiscal 2007. In fiscal 2008, our effective tax rate was lower than the U.S. statutory income tax rate because of an $11 million favorable impact from the settlement of U.S. Federal income tax audits for fiscal years 2004 through 2006. Additionally, in the third quarter of fiscal 2008, we began recording state income taxes in our Consolidated Statement of Income as engineering, selling and administrative expenses to the extent these taxes are reimbursed under government contracts, which totaled $9.9 million for fiscal 2008. Under U.S. Government regulations, these state income taxes are allowable in establishing prices for the products and services we sell to the U.S. Government. Prior to the third quarter of fiscal 2008, these state income taxes were recorded in our Consolidated Statement of Income as income taxes. The reimbursement of these state income taxes is recorded in our Consolidated Statement of Income as revenue. As a result of this change, we reduced total income tax expense by approximately $6.4 million in fiscal 2008. This change will also lower our effective tax rate in future years. In fiscal 2007, our effective tax rate was lower than the U.S. statutory income tax rate because of several items, including a $12 million favorable impact from the settlement between us and the Internal Revenue Service concerning the tax audit for fiscal years 2001, 2002 and 2003. The remaining decrease in the effective tax rate was primarily due to the tax-free nature of the combination with Stratex, which resulted in a $163.4 million pre-tax gain ($143.1 million after-tax), partially offset by transaction-related costs incurred in our Harris Stratex Networks segment and by cost-reduction initiatives in our Broadcast Communications segment in foreign jurisdictions where we have significant net operating losses and where we were unable to recognize a tax benefit associated with these charges due to uncertainty about their realization. See Note 22: Income Taxes in the Notes for further information.

 

Fiscal 2007 Compared With Fiscal 2006:  Our effective tax rate decreased from 37.5 percent in fiscal 2006 to 28.9 percent in fiscal 2007. Our effective tax rate for fiscal 2007 was lower than the U.S. statutory income tax rate because of several items. The United States Joint Committee on Taxation approved a favorable settlement between us and the Internal Revenue Service concerning the tax audit for fiscal years 2001, 2002 and 2003. The settlement, together with related matters, reduced tax expense in an aggregate amount of $12 million. The remaining decrease in the provision for income taxes was primarily due to the tax-free nature of the combination with Stratex in fiscal 2007, which resulted in a $163.4 million pre-tax gain ($143.1 million after-tax), partially offset by

transaction-related costs incurred in our Harris Stratex Networks segment and by cost-reduction initiatives in our Broadcast Communications segment in foreign jurisdictions where we have significant net operating losses and where we were unable to recognize a tax benefit associated with these charges due to uncertainty about their realization. See Note 22: Income Taxes in the Notes for further information.

 

Discussion of Business Segments

 

As discussed further in Note 23: Business Segments in the Notes, effective for fiscal 2008 (which began June 30, 2007), our Defense Programs business unit (part of our Government Communications Systems segment for fiscal 2007) was combined with our RF Communications business, and the combined business is reported as our Defense Communications and Electronics segment for fiscal 2008. Our Broadcast Communications and Harris Stratex Networks segments did not change as a result of these adjustments to our organizational structure. The historical results, discussion and presentation of our business segments as set forth in this Annual Report on Form 10-K reflect the impact of these adjustments to our organizational structure for all periods presented in this Annual Report on Form 10-K.

 

Defense Communications and Electronics Segment

 

 

Fiscal 2008 Compared With Fiscal 2007:  Defense Communications and Electronics segment revenue increased 18.9 percent and operating income increased 23.1 percent from fiscal 2007 to fiscal 2008. Revenue growth was driven by a 27.8 percent increase in our RF Communications business primarily as a result of continuing strong market demand, and also, we believe, because of customer preference in both U.S. and international markets for Harris Falcon tactical radios. Worldwide demand for Harris software-defined tactical radios was driven by multiple factors, including modernization programs, force expansion, force restructuring, interoperability requirements and requirements for network-centric communications. Our customers’ priorities continue to evolve across the defense, homeland security, public safety and peacekeeping landscape. Their communications systems need to be versatile and adaptable in order to be effective in multiple operating environments and missions. We expect that demand will continue to increase for network-centric communications systems that can significantly improve situational awareness and force effectiveness through communications superiority. Harris Falcon radios embrace these changing mission priorities and we believe offer superior multimission performance.

 

In our Defense Programs business, revenue decreased 1.2 percent in fiscal 2008, compared with fiscal 2007. Fiscal 2007 benefited from higher levels of production on the F/A-18 and F-22 aircraft programs. Programs in fiscal 2008 in our Defense Programs business with higher revenue included the CDL Hawklink program for the U.S. Navy, the WIN-T program for the U.S. Army, the MIDS terminals program for the DoD and tactical SATCOM.

 

The fiscal 2008 operating income increase over fiscal 2007 in our Defense Communications and Electronics segment was primarily driven by higher sales volume from increased sales of our Falcon III handheld radio units. Engineering, selling and administrative expense as a percentage of revenue decreased from fiscal 2007 to fiscal 2008 in our Defense Communications and Electronics segment as our expenses increased at a lower rate than revenue. This segment continued, however, to increase its investment in research and development associated with our Falcon III product family.

 

Orders for fiscal 2008 were $2.2 billion for this segment compared with $1.8 billion for fiscal 2007. During fiscal 2008 this segment derived 86 percent of its revenue from the U.S. Government compared with 83 percent in fiscal 2007.

 

Fiscal 2007 Compared With Fiscal 2006:  Defense Communications and Electronics segment revenue increased 28.5 percent and operating income increased 37.6 percent from fiscal 2006 to fiscal 2007. Strong revenue growth came from both U.S. and international markets, fueled by ongoing tactical radio modernization programs, and also by the CDL Hawklink program for the U.S. Navy, the MIDS terminals program for the DoD, and aircraft avionics for the F-22A Raptor. Demand for our Falcon II and Falcon III tactical radios was driven by their advanced

features and strong performance in the field. Significant programs in fiscal 2007 for our Defense Programs area included the F/A-18E/F Super Hornet and F-35 Joint Strike Fighter.

 

By the end of fiscal 2007, we delivered over 17,000 units of our next-generation Falcon III multiband handheld radio. The Falcon III handheld radio is the first widely-fielded tactical radio to receive certification from the JTRS JPEO and the NSA. Customers for the Falcon III handheld and vehicular radio systems include the U.S. Army, U.S. Navy and U.S. Air Force, as well as other U.S. Government agencies. The Falcon III has been well received by the market and is providing true multimode operational capabilities, including ground-to-ground, ground-to-air and long-range tactical satellite communications. The Falcon III multiband manpack radio, released in September 2007, is the first NSA-certified radio to provide wideband secure networking for data-intensive applications, such as video transmission in mobile battlefield conditions.

 

The fiscal 2007 operating income increase in our Defense Communications and Electronics segment was driven primarily by higher sales volume from increased sales of our Falcon III handheld radio units. As a percentage of sales, engineering, selling and administrative expense decreased from fiscal 2006 to 2007 in our Defense Communications and Electronics segment primarily due to the 28.5 percent increase in revenue. This segment continued, however, to invest in research and development costs associated with the development of our Falcon III product family. To continue to meet strong demand across all RF Communications product lines in this segment, in fiscal 2007 we significantly expanded our radio manufacturing capacity.

 

Orders for fiscal 2007 were $1.8 billion for this segment compared with $1.6 billion for fiscal 2006. This segment derived 83 percent of its revenue from the U.S. Government in fiscal 2007 and fiscal 2006.

 

Government Communications Systems Segment

 

 

Fiscal 2008 Compared With Fiscal 2007:  Government Communications Systems segment revenue increased 32.2 percent and operating income increased 7.0 percent from fiscal 2007 to fiscal 2008. Organic revenue, excluding the impact of the acquisition of Multimax, increased in fiscal 2008 compared with fiscal 2007, and was primarily driven by the ramping up of the FDCA program for the U.S. Census Bureau and from classified programs for our national intelligence customers. Significant contributions to increased revenue in fiscal 2008 came from the FDCA program, the Patriot technical services program for the NRO, our classified programs, the VSCS program for the FAA, and the NSOM, NMCI and NETCENTS programs in our IT Services business unit.

 

The increase in operating income in fiscal 2008 was primarily due to the acquisition of Multimax and approximately $10.0 million of income related to the renegotiation of pricing on an IT services contract, partially offset by $75.9 million of charges for schedule and cost overruns on several fixed-price commercial satellite reflector programs, encompassing ten commercial reflectors in various stages of development, assembly, test and delivery. Due to technical difficulties experienced on these reflector programs, which necessitated design changes and associated cost increases, we also fell behind schedule. To mitigate the impact of these schedule changes, we began performing these programs in parallel rather than in series. This further adversely impacted costs, as costs from rework activities associated with further design changes were multiplied through all the reflectors in the factory. Additionally, engineering, selling and administrative expenses in this segment increased in fiscal 2008 when compared with fiscal 2007, partly due to a gain recorded on the sale of our STAT network security product line in fiscal 2007.

 

Orders for fiscal 2008 were $2.0 billion for this segment compared with $1.5 billion for fiscal 2007. During fiscal 2008 this segment derived 96 percent of its revenue from the U.S. Government, including 15 percent from the FAA, compared with 93 percent in fiscal 2007, including 20 percent from the FAA.

 

Fiscal 2007 Compared With Fiscal 2006:  Government Communications Systems segment revenue increased 13.9 percent and operating income decreased 1.0 percent from fiscal 2006 to fiscal 2007. The increase in revenue primarily came from the FDCA program for the U.S. Census Bureau, the FTI program for the FAA, the Patriot technical services program for the NRO, several new programs from our national intelligence customers and the acquisition of Multimax on June 15, 2007. Significant programs in fiscal 2007 included FTI, Patriot, FDCA,

MCOM, MTAIP, OSSS, State 6 program for the U.S. Department of State Bureau of Consular Affairs and various classified programs.

 

Government Communications Systems segment operating income decreased slightly during fiscal 2007 when compared with fiscal 2006, primarily due to schedule and cost overruns on a satellite reflector program absorbed during fiscal 2007, which were partially offset by favorable program profit margin mix. Engineering, selling and administrative expenses in this segment decreased in fiscal 2007 when compared with fiscal 2006, primarily due to a gain recorded on the sale of our STAT network security product line in fiscal 2007.

 

During the fourth quarter of fiscal 2007, we completed our acquisition of Multimax, a leading provider of information technology and network services for the U.S. Government. With this acquisition, we nearly doubled our IT services revenue, added a number of new customers across the DoD and civilian agencies for our IT Services business unit, and gained positions on long-term U.S. Government IT services contracts. For further information related to the acquisition of Multimax, including the allocation of the purchase price and pro forma results as if the acquisition of Multimax had taken place as of the beginning of the periods presented, see Note 3: Business Combinations in the Notes.

 

Orders for fiscal 2007 were $1.5 billion for this segment. During fiscal 2007 this segment derived 93 percent of its revenue from the U.S. Government, including 20 percent from the FAA, compared with 93 percent in fiscal 2006, including 18 percent from the FAA.

 

Broadcast Communications Segment

 

 

Fiscal 2008 Compared With Fiscal 2007:  Broadcast Communications segment revenue increased 7.3 percent in fiscal 2008 from fiscal 2007, and operating income was $33.8 million in fiscal 2008, compared with $11.9 million is fiscal 2007. Revenue growth in fiscal 2008 as compared with fiscal 2007 was across all business areas in this segment. The Infrastructure and Networking Solutions businesses, including routers, graphics equipment and multiviewers had double-digit revenue growth in fiscal 2008, compared with fiscal 2007. Fiscal 2008 sales of traffic and billing software solutions also improved, particularly in international markets, compared with fiscal 2007. Sales of transmission systems grew in fiscal 2008, compared with fiscal 2007, as a result of strong shipments in the U.S. market for the over-the-air digital transmission build-out.

 

Increasingly, large media customers are selecting the Harris ONE^tm approach for workflow solutions across the entire broadcast delivery chain, tying workflow and signal flow together to improve productivity and responsiveness. Recent examples include projects with Chunghwa Telecom in Taiwan; Brazilian broadcaster, TV Anhanguera; the Saudi Arabia Ministry of Culture and Information for Saudi Television; Kuwait Television; RTV, the national public broadcaster in Slovenia; HD suisse, the first HD television channel in Switzerland; Sezmi, a new U.S. entertainment services company; and SBS, an Australian broadcaster.

 

Fiscal 2008 operating income in this segment was adversely impacted by $2.0 million of costs associated with our acquisition of Zandar and a decrease in margins due to our transition to lead-free products. Fiscal 2007 operating income was adversely impacted by $7.5 million of costs associated with cost-reduction actions and an $18.9 million write-down of capitalized software associated with management’s decision to discontinue an automation software development effort.

 

Orders in our Broadcast Communications segment were $660 million in fiscal 2008, compared with $666 million in fiscal 2007.

 

Fiscal 2007 Compared With Fiscal 2006:  Broadcast Communications segment revenue increased 11.3 percent and operating income decreased 47.8 percent from fiscal 2006 to fiscal 2007. The increase in revenue was primarily attributable to the full-year benefit in fiscal 2007 of the acquisitions of Leitch and Aastra Digital Video made during fiscal 2006 and increased demand for our Infrastructure and Networking Solutions (formerly Video Infrastructure & Digital Media) products. Investments in analog-to-digital and HD systems are enabling content providers and broadcasters to create, manage and deliver additional channels and video streams to

consumers. Radio Transmission systems revenue also increased as a result of further penetration of the new Harris Flexstar^tm exciter. Revenue was lower in fiscal 2007 compared with fiscal 2006 in U.S. DTV transmission and software solutions products. During the fourth quarter of fiscal 2007, we exited our radio resale distribution channel, which involved sales of non-Harris OEM radio products at low gross margins, sold primarily through a telemarketing group.

 

Operating income in fiscal 2007 was adversely impacted by an $18.9 million write-down of capitalized software and a $7.5 million charge related to cost-reduction actions. The write-down of capitalized software was a result of management’s decision to discontinue a software development effort. Operating income was also negatively impacted by the significant decline in U.S. DTV transmission and software solutions revenue, and by increased expenses associated with the investment and deployment of new software products including OSi Traffic, H-Class Total Content Delivery, and Invenio Digital Asset Management.

 

Orders in our Broadcast Communications segment increased 30.3 percent from $511 million in fiscal 2006 to $666 million in fiscal 2007.

 

Harris Stratex Networks Segment

 

 

 

 

On January 26, 2007 we combined our former Microwave Communications Division with Stratex to create Harris Stratex Networks. We owned approximately 57 percent of the outstanding shares of Harris Stratex Networks at the time of the combination and approximately 56 percent as of June 27, 2008. Following the combination, our business segment formerly referred to as Microwave Communications is referred to as Harris Stratex Networks and includes the results of the combined business for periods following the combination. Accordingly, our fiscal 2008 financial results include a full year of Harris Stratex Networks (on a fully consolidated basis, with an elimination of the minority interest), compared with our fiscal 2007 financial results, which included five months of Harris Stratex Networks.

 

Fiscal 2008 Compared With Fiscal 2007:  Harris Stratex Networks segment revenue increased 41.4 percent from fiscal 2007 to fiscal 2008. We also had organic revenue growth in fiscal 2008, excluding the impact of the combination with Stratex, when compared with fiscal 2007. This segment had an operating loss of $28.5 million in fiscal 2008 compared with operating income of $146.9 million in fiscal 2007.

 

All three of the Harris Stratex Networks business units — North America Microwave, International Microwave and Network Operations — generated increased revenue in fiscal 2008, compared with fiscal 2007. Harris Stratex Networks continued to benefit in fiscal 2008 from the transition to IP-based products, the evolution to 4G technologies, and the wireless network infrastructure expansion in emerging regions. Demand for the Eclipse product line was particularly strong late in fiscal 2008.

 

The decrease in operating income in fiscal 2008 from fiscal 2007 was primarily due to the $163.4 million pre-tax gain recorded in fiscal 2007 on the combination with Stratex, which was partially offset by $46.0 million of related transaction and integration costs. Operating income in fiscal 2008 was adversely impacted by $38.7 million of transaction and integration costs associated with the Stratex combination, including a step up in fixed assets recorded as of the combination date, an $11 million inventory write-down related to an accelerated technology transition to IP-based products and other integration-related costs. Operating income was also negatively impacted by higher costs relating to orders-based sales compensation, an increase in the allowance for doubtful accounts and outside consulting fees as well as non-cash accounting adjustments. The majority of the accounting adjustments related to reconciling inventory work-in-process accounts within a cost accounting system at one location primarily due to project cost variances that were not recorded to cost of sales in a timely manner. In addition, the accounting adjustments included the correction of errors in balancing intercompany accounts that had resulted in an overstatement of accounts receivable.

 

Fiscal 2007 Compared With Fiscal 2006:  Harris Stratex Networks segment revenue increased 45.7 percent from fiscal 2006 to fiscal 2007. The segment also had organic revenue growth in fiscal 2007, excluding the impact

of the combination with Stratex, when compared with fiscal 2006. This segment had operating income of $146.9 million in fiscal 2007 compared with an operating loss of $19.6 million in fiscal 2006.

 

North America Microwave revenue increased by $48 million, or 28 percent, from fiscal 2006 to fiscal 2007. Revenue for fiscal 2007 included $8 million of revenue related to the combination with Stratex. The remainder of the increase in North America Microwave was primarily due to increased demand for our products driven by mobile operators that are upgrading and expanding networks for high-bandwidth voice, data and video services and by private networks upgrading for increased reliability, survivability and interoperability. International Microwave revenue increased by $109 million, or 67 percent, from fiscal 2006 to fiscal 2007. Revenue in fiscal 2007 included $116 million of revenue related to the combination with Stratex. This increase in International Microwave revenue from the combination with Stratex was partially offset by lower revenue due to the timing of project awards.

 

We recorded a $163.4 million pre-tax gain on the transaction in fiscal 2007 that relates to the deemed sale for accounting purposes of 43 percent of the assets and liabilities of our former Microwave Communications business to the minority shareholders of Harris Stratex Networks. Additionally, we incurred $28.8 million of transaction-related costs such as the write-off of in-process research and development and the impact of a step up in inventory and fixed assets and $17.2 million of integration costs. For further information related to the combination with Stratex, including the allocation of the purchase price and pro forma results as if the combination with Stratex had taken place as of the beginning of the periods presented, see Note 3: Business Combinations and Note 4: Ownership in Harris Stratex Networks in the Notes.

 

These gains and charges were partially offset by income generated from the operations acquired from Stratex, and by the increased gross margin generated by the increased revenues from our North America microwave business.

 

Headquarters Expense and Corporate Eliminations

 

 

Fiscal 2008 Compared With Fiscal 2007:  Headquarters expense increased 6.3 percent from $69.6 million in fiscal 2007 to $74.0 million in fiscal 2008 primarily due to costs incurred related to IT systems upgrades. As a percentage of revenue, headquarters expense decreased from 1.6 percent in fiscal 2007 to 1.4 percent in fiscal 2008. Corporate eliminations decreased from $11.7 million in fiscal 2007 to $5.4 million in fiscal 2008 primarily due to less intersegment activity on our FTI program and with Harris Stratex Networks.

 

Fiscal 2007 Compared With Fiscal 2006:  Headquarters expense decreased 7.7 percent from $75.4 million in fiscal 2006 to $69.6 million in fiscal 2007. As a percentage of revenue, headquarters expense decreased from 2.2 percent in fiscal 2006 to 1.6 percent in fiscal 2007. The decrease in headquarters expense was primarily due to a $5.4 million charge recorded in fiscal 2006 associated with a decision we received in our arbitration with Bourdex. Corporate eliminations decreased from $16.6 million in fiscal 2006 to $11.7 million in fiscal 2007 primarily due to less intersegment activity on our FTI and Radiocommunicatii programs.

 

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES

 

Cash Flows

 

 

Cash and cash equivalents:  Our cash and cash equivalents increased $1.7 million from $368.3 million at the end of fiscal 2007 to $370.0 million at the end of fiscal 2008. The increase was primarily due to $550.3 million of cash flow generated from operating activities, mostly offset by $225.0 million of common stock repurchases,

$146.2 million of cash paid for property, plant, and equipment and capitalized software, and $138.9 million of net cash used to reduce borrowings. We own approximately 56 percent of Harris Stratex Networks, which had a cash balance of $95.5 million included in our consolidated cash and cash equivalents balance of $370.0 million as of June 27, 2008. The $95.5 million balance is available only for Harris Stratex Networks’ general corporate purposes.

 

We currently believe that existing cash, funds generated from operations, sales of marketable equity securities, our credit facilities and access to the public and private debt and equity markets will be sufficient to provide for our anticipated working capital requirements, capital expenditures and share repurchases under our current repurchase program for the next 12 months and the foreseeable future. We anticipate tax payments over the next three years to be approximately equal to our tax expense during the same period. We anticipate that our fiscal 2009 cash outlays may include strategic acquisitions. Other than those noted in the “Contractual Obligations” discussion below in this MD&A, capital expenditures, potential acquisitions and repurchases under our share repurchase program, no other significant cash outlays are anticipated in fiscal 2009 and thereafter.

 

There can be no assurance, however, that our business will continue to generate cash flow at current levels, or that anticipated operational improvements will be achieved. If we are unable to maintain cash balances or generate sufficient cash flow from operations to service our obligations, we may be required to sell assets, reduce capital expenditures, reduce or terminate our share repurchase program, reduce or eliminate dividends, refinance all or a portion of our existing debt or obtain additional financing. Our ability to make principal payments or pay interest on or refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the defense, government, broadcast communications and wireless transmission markets and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

 

Net cash provided by operating activities:  Our net cash provided by operating activities was $550.3 million in fiscal 2008 compared with $438.6 million in fiscal 2007. All of our segments had positive cash flow in fiscal 2008 and all four segments had improved cash flow in fiscal 2008 when compared with fiscal 2007. The improvement was led by our Defense Communications and Electronics segment, which primarily resulted from higher operating income. We expect cash flow provided by operating activities in fiscal 2009 to be between $650 million and $700 million.

 

Net cash used in investing activities:  Our net cash used in investing activities was $134.6 million in fiscal 2008 compared with $382.9 million in fiscal 2007. Net cash used in investing activities in fiscal 2008 was primarily due to $112.9 million of property, plant and equipment additions, $33.3 million of capitalized software additions and $19.4 million of cash paid for acquisitions. This was partially offset by the net proceeds from the sale of securities and short-term investments available-for-sale of $31.0 million. Net cash used in investing activities in fiscal 2007 was due to net $371.5 million cash paid for business acquisitions and combinations, $88.8 million for additions of property, plant and equipment and $40.3 million for additions of capitalized software offset by $117.7 million in net proceeds from the sale of short-term investments. Our total additions of capitalized software and property, plant and equipment in fiscal 2009 are expected to be in the $170 million to $180 million range.

 

Net cash provided by (used in) financing activities:  Our net cash used in financing activities in fiscal 2008 was $413.4 million compared with net cash provided by financing activities in fiscal 2007 of $133.3 million. Net cash used in financing activities in fiscal 2008 was primarily due to $225.0 million used for the repurchase of shares of common stock, net repayments of borrowings of $138.9 million and payment of $81.5 million of cash dividends, partially offset by proceeds from the exercise of employee stock options of $40.8 million. In fiscal 2008, we issued 1,367,588 shares of common stock to employees under the terms of our option and incentive plans.

 

The net cash provided by financing activities in fiscal 2007 was primarily from the issuance of $400.0 million in commercial paper issued in connection with the acquisition of Multimax and proceeds from the exercise of employee stock options of $35.7 million, partially offset by the payment of cash dividends totaling $58.2 million and the repurchase of shares of common stock of $246.9 million. In fiscal 2007, we issued 1,673,501 shares of common stock to employees under the terms of our option and incentive plans.

 

Common Stock Repurchases

During fiscal 2008, we used $225 million to repurchase 3,945,136 shares of our common stock at an average price per share of $57.02, including commissions. During fiscal 2007, we used $246.9 million to repurchase 4,959,499 shares of our common stock at an average price per share of $49.79, including commissions. During fiscal 2007, our Board of Directors approved a new share repurchase program authorizing the repurchase of up to $600 million in shares of our common stock. As of June 27, 2008, we have repurchased a total of approximately $425 million in shares of our common stock under this program since it was approved.

While this program does not have a stated expiration date, we expect to repurchase during fiscal 2009 the remaining approximately $175 million in shares of our common stock authorized to be repurchased under this program. We currently expect that these repurchases will more than offset the dilutive effect of shares to be issued under our share-based incentive plans. Share repurchases are expected to be funded with available cash. Repurchases under the program may be made through open market purchases, private transactions, transactions structured through investment banking institutions or any combination thereof. The timing, volume and nature of share repurchases are subject to market conditions, applicable securities laws and other factors and are at our discretion and may be suspended or discontinued at any time. Additional information regarding repurchases made during fiscal 2008 and our repurchase programs is set forth above in this Annual Report on Form 10-K under Part II, “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

 

Dividend Policy

On August 23, 2008, our Board of Directors authorized a quarterly common stock dividend of $0.20 per share, for an annualized rate of $0.80 per share, which was our seventh consecutive annual increase in our quarterly dividend rate. Our annual common stock dividend was $0.60, $0.44, and $0.32 per share in fiscal 2008, 2007 and 2006, respectively. Additional information concerning our dividends is set forth above in this Annual Report on Form 10-K under Part II, “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

 

Capital Structure and Resources

On March 31, 2005, we entered into a five-year, senior unsecured revolving credit agreement (the “Credit Agreement”) with a syndicate of lenders. The Credit Agreement provides for the extension of credit to us in the form of revolving loans and letters of credit issuances at any time and from time to time during the term of the Credit Agreement, in an aggregate principal amount at any time outstanding not to exceed $500 million (we may request an increase, not to exceed an additional $250 million). The Credit Agreement may be used for working capital and other general corporate purposes and to support any commercial paper that we may issue. At our election, borrowings under the Credit Agreement will bear interest either at LIBOR plus an applicable margin or at the base rate. The base rate is a fluctuating rate equal to the higher of the federal funds rate plus 0.50 percent or SunTrust Bank’s publicly announced prime lending rate. The Credit Agreement provides that the interest rate margin over LIBOR, currently set at 0.40 percent, will increase or decrease within certain limits based on changes in the ratings of our senior, unsecured long-term debt securities. We are also permitted to request borrowings with interest rates and terms that are to be set pursuant to competitive bid procedures or directly negotiated with a lender or lenders.

 

The Credit Agreement contains certain covenants, including covenants limiting: liens on our assets; certain mergers, consolidations or sales of assets; certain sale and leaseback transactions; certain vendor financing investments; and the use of proceeds for hostile acquisitions. The Credit Agreement also prohibits our consolidated ratio of total indebtedness to total capital from being greater than 0.60 to 1.00 and prohibits our consolidated ratio of adjusted EBITDA to net interest expense from being less than 3.00 to 1.00 for any rolling four-quarter period. The Credit Agreement contains certain events of default, including: payment defaults; failure to perform or observe terms and covenants; material inaccuracy of representations or warranties; default under other indebtedness with a principal amount in excess of $50 million; the occurrence of one or more judgments or orders for the payment of money in excess of $50 million that remain unsatisfied; incurrence of certain ERISA liabilities in excess of $50 million; failure to pay debts as they come due, or our bankruptcy; or a change of control, including if a person or group becomes the beneficial owner of 25 percent or more of our voting stock. If an event of default occurs the lenders may, among other things, terminate their commitments and declare all outstanding borrowings, together with accrued interest and fees, to be immediately due and payable. All amounts borrowed or outstanding under the Credit Agreement are due and mature on March 31, 2010, unless the commitments are terminated earlier, either at our request or if certain events of default occur. At June 27, 2008, no borrowings were outstanding under the Credit Agreement.

 

On December 5, 2007, we completed the issuance of $400 million in aggregate principal amount of 5.95% Notes due December 1, 2017. Interest on the notes is payable on June 1 and December 1 of each year. We may redeem the notes at any time in whole or, from time to time, in part at the “make-whole” redemption price. The “make-whole” redemption price is equal to the greater of 100 percent of the principal amount of the notes being redeemed or the sum of the present values of the remaining scheduled payments of the principal and interest (other than interest accruing to the date of redemption) on the notes being redeemed, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus 30 basis points. In each case, we will pay accrued interest on the principal amount of the notes being redeemed to the redemption date. In addition, upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the notes at a price equal to 101 percent of the

aggregate principal amount of the notes repurchased, plus accrued interest on the notes repurchased to the date of repurchase. In conjunction with the issuance of the notes, we entered into treasury lock agreements to protect against fluctuations in the forecasted interest payments resulting from the issuance of ten-year, fixed-rate debt due to changes in the benchmark U.S. Treasury rate. In accordance with Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“Statement 133”), these agreements were determined to be highly effective in offsetting changes in forecasted interest payments as a result of changes in the benchmark U.S. Treasury rate. Upon termination of these agreements on December 6, 2007, we recorded a loss of $5.5 million, net of income tax, in shareholders’ equity as a component of accumulated other comprehensive income. This loss, along with $5.0 million in debt issuance costs, will be amortized over the life of the notes on a straight-line basis, which approximates the effective interest rate method, and reflected as a portion of interest expense in our Consolidated Statement of Income.

 

On September 20, 2005, we completed the issuance of $300 million in aggregate principal amount of 5% Notes due October 1, 2015. Interest on the notes is payable on April 1 and October 1 of each year. We may redeem the notes in whole, or in part, at any time at the “make-whole” redemption price. The “make-whole” redemption price is equal to the greater of 100 percent of the principal amount of the notes being redeemed or the sum of the present values of the remaining scheduled payments of the principal and interest (other than interest accruing to the date of redemption) on the notes being redeemed, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus 15 basis points. In each case, we will pay accrued interest on the principal amount of the notes being redeemed to the redemption date. We incurred $4.1 million in debt issuance costs and discounts related to the issuance of the notes, which are being amortized on a straight-line basis over a ten-year period and reflected as a portion of interest expense in our Consolidated Statement of Income.

 

In fiscal 2003, we issued $150 million in aggregate principal amount of 3.5% Convertible Debentures due August 2022. On July 12, 2007, we initiated the steps necessary to redeem the debentures on August 20, 2007. However, prior to the date set for redemption, all of the debentures were converted by the holders into shares of our common stock at a conversion rate of 44.2404 shares of common stock for each $1,000 principal amount of debentures, with the exception of debentures in the principal amount of $3,000. This resulted in the issuance by us of 6,594,146 shares of common stock during the first quarter of fiscal 2008 in respect of the debentures converted. On August 20, 2007, we redeemed the remaining debentures in the principal amount of $3,000. Accordingly, no debentures remained outstanding as of August 20, 2007. We incurred $4.8 million in debt issuance costs related to the issuance of the convertible debentures, which costs were amortized on a straight-line basis over a five-year period and reflected as a portion of interest expense in our Consolidated Statement of Income.

 

In February 1998, we completed the issuance of $150 million in aggregate principal amount of 6.35% Debentures due February 1, 2028. On December 5, 2007, we repurchased and retired $25.0 million in aggregate principal amount of the debentures. On February 1, 2008, we redeemed $99.2 million aggregate principal amount of the debentures pursuant to the procedures for redemption at the option of the holders of the debentures. We may redeem the remaining $25.8 million aggregate principal amount of the debentures in whole, or in part, at any time at a pre-determined redemption price.

 

In January 1996, we completed the issuance of $100 million in aggregate principal amount of 7% Debentures due January 15, 2026. The debentures are not redeemable prior to maturity.

 

We have a universal shelf registration statement related to the potential future issuance of an indeterminate amount of securities, including debt securities, preferred stock, common stock, fractional interests in preferred stock represented by depository shares and warrants to purchase debt securities, preferred stock or common stock.

 

Prior to the combination with Stratex, Stratex was a party to a credit facility with Silicon Valley Bank, and following the combination, Stratex (now named “Harris Stratex Networks Operating Corporation” and a wholly-owned subsidiary of Harris Stratex Networks), remained a party to the credit facility with Silicon Valley Bank (the “Harris Stratex Networks Credit Facility”). As discussed below, the Harris Stratex Networks Credit Facility (the “Terminated Facility”) was terminated and replaced after the end of our fiscal 2008. Harris and its subsidiaries (other than Harris Stratex Networks Operating Corporation) are not and were not parties to, obligated under or guarantors of the Terminated Facility. Indebtedness under the Terminated Facility is reflected as of June 27, 2008 in our Consolidated Balance Sheet as a result of the consolidation of Harris Stratex Networks. The Terminated Facility allowed for revolving credit borrowings of up to $50 million. As of June 27, 2008, the balance of the term loan portion of the Terminated Facility was $8.7 million (of which $5.0 million is recorded in the current portion of long-term debt) and there was $8.6 million in outstanding standby letters of credit. The Terminated Facility agreement contained a minimum tangible net worth covenant and a liquidity ratio covenant.

On June 30, 2008, after the end of our fiscal 2008, the Terminated Facility was terminated and replaced with a new revolving credit facility as of that date with a syndicate of lenders, including Silicon Valley Bank (the “New Harris Stratex Networks Credit Facility”). Harris and its subsidiaries (other than Harris Stratex Networks and certain of its subsidiaries) are not parties to, obligated under or guarantors of the New Harris Stratex Networks Credit Facility. The balance of the term loan portion of the Terminated Facility of $8.7 million was repaid in full with the proceeds of a $10 million borrowing under the New Harris Stratex Networks Credit Facility. The standby letters of credit outstanding under the Terminated Facility as of the termination date remain as an obligation to Silicon Valley Bank. The New Harris Stratex Networks Credit Facility provides for an initial committed amount of $70 million with an uncommitted accordion option for an additional $50 million available with the same or additional lenders. The New Harris Stratex Networks Credit Facility has an initial term of three years and provides for (1) demand borrowings (with no stated maturity date) at the greater of Bank of America’s prime rate and the federal funds rate plus 0.5 percent, (2) fixed-term Eurodollar loans for six months or more as agreed with the lenders at LIBOR plus a spread of between 1.25 percent to 2.00 percent based on the current leverage ratio of Harris Stratex Networks and its consolidated subsidiaries and (3) the issuance of standby or commercial letters of credit. The New Harris Stratex Networks Credit Facility contains a minimum liquidity ratio covenant and a maximum leverage ratio covenant and is unsecured.

 

We have uncommitted short-term lines of credit aggregating $2.7 million from various international banks, $2.4 million of which was available on June 27, 2008. These lines provide for borrowings at various interest rates, typically may be terminated upon notice, may be used on such terms as mutually agreed to by the banks and us, and are reviewed annually for renewal or modification. These lines do not require compensating balances. We also have a short-term commercial paper program in place, which we may utilize to satisfy short-term cash requirements and which is supported by our Credit Agreement. No amounts were outstanding under the commercial paper program at June 27, 2008.

 

Our debt is currently rated “BBB+” by Standard and Poor’s Rating Group and “Baa1” by Moody’s Investors Service, which was upgraded by Moody’s Investors Service during the second quarter of fiscal 2008 from “Baa2.” We expect to maintain operating ratios, fixed-charge coverage ratios and balance sheet ratios sufficient for retention of, or improvement to, these debt ratings. There are no assurances that our debt ratings will not be reduced in the future. If our debt ratings are lowered below “investment grade,” then we may not be able to issue short-term commercial paper, but may instead need to borrow under our credit facilities or pursue other options. We do not currently foresee losing our investment-grade debt ratings, but no assurances can be given. If our debt ratings were downgraded, however, it could adversely impact, among other things, our future borrowing costs and access to capital markets.

 

Contractual Obligations

At June 27, 2008, we had contractual cash obligations to repay debt, to purchase goods and services and to make payments under operating leases. Payments due under these long-term obligations are as follows:

 

 

                                

 

 

Off-Balance Sheet Arrangements

In accordance with the definition under SEC rules, any of the following qualify as off-balance sheet arrangements:

 

 

Currently we are not participating in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities, and we do not have any material retained or contingent interest in assets as defined above. As of June 27, 2008, we did not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect our results of operations, cash flows or financial condition. In addition, we are not currently a party to any related party transactions that materially affect our results of operations, cash flows or financial condition.

 

We have, from time to time, divested certain of our businesses and assets. In connection with these divestitures, we often provide representations, warranties and/or indemnities to cover various risks and unknown liabilities, such as environmental liabilities and tax liabilities. We cannot estimate the potential liability from such representations, warranties and indemnities because they relate to unknown conditions. We do not believe, however, that the liabilities relating to these representations, warranties and indemnities will have a material adverse effect on our financial position, results of operations or cash flows.

 

Due to our downsizing of certain operations pursuant to acquisitions, restructuring plans or otherwise, certain properties leased by us have been sublet to third parties. In the event any of these third parties vacate any of these premises, we would be legally obligated under master lease arrangements. We believe that the financial risk of default by such sublessees is individually and in the aggregate not material to our financial position, results of operations or cash flows.

 

Commercial Commitments

We have entered into commercial commitments in the normal course of business including surety bonds, standby letter of credit agreements and other arrangements with financial institutions and customers primarily relating to the guarantee of future performance on certain contracts to provide products and services to customers or to obtain insurance policies with our insurance carriers. At June 27, 2008, we had commercial commitments on outstanding letters of credit, guarantees and other arrangements, as follows: