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HARRIS CORP /DE/ - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) OVERVIEW The following Management's Discussion and Analysis ("MD&A") is intended to assist in an understanding of our financial condition and results of operations. This MD&A is provided as a supplement to, should be read in conjunction with, and is qualified in its entirety by reference to, our Consolidated Financial Statements and accompanying Notes appearing elsewhere in this Report. Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in this MD&A under "Forward-Looking Statements and Factors that May Affect Future Results." The following is a list of the sections of this MD&A, together with our perspective on their contents, which we hope will assist in reading these pages: Ÿ Business Considerations - a general description of our business; the value drivers of our business; fiscal 2014 results of operations and liquidity and capital resources key indicators; and industry-wide opportunities, challenges and risks that are relevant to us in the defense, government and commercial markets. In this section of this MD&A, "income from continuing operations" refers to income from continuing operations attributable to Harris Corporation common shareholders. Ÿ Operations Review - an analysis of our consolidated results of operations and of the results in each of our three business segments, to the extent the segment operating results are helpful to an understanding of our business as a whole, for the three years presented in our financial statements. In this section of this MD&A, "income from continuing operations" refers to income from continuing operations attributable to Harris Corporation common shareholders. Ÿ Liquidity, Capital Resources and Financial Strategies - an analysis of cash flows, common stock repurchases, dividends, capital structure and resources, contractual obligations, off-balance sheet arrangements, commercial commitments, financial risk management, impact of foreign exchange and impact of inflation. Ÿ Critical Accounting Policies and Estimates - a discussion of accounting policies and estimates that require the most judgment and a discussion of accounting pronouncements that have been issued but not yet implemented by us and their potential impact on our financial position, results of operations and cash flows. Ÿ Forward-Looking Statements and Factors that May Affect Future Results - cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections. BUSINESS CONSIDERATIONS General We are an international communications and information technology company serving government and commercial markets in more than 125 countries. We are dedicated to developing best-in-class 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 sell directly to our customers, the largest of which are U.S. Government customers and their prime contractors, and we utilize agents and intermediaries to sell and market some products and services, especially in international markets. We structure our operations primarily around the products and services we sell and the markets we serve, and we report the financial results of our continuing operations in the following three business segments: Ÿ RF Communications, serving (i) U.S. Department of Defense and International Tactical Communications ("Tactical Communications") and (ii) Public Safety and Professional Communications markets; Ÿ Integrated Network Solutions, serving (i) IT Services, (ii) Managed Satellite and Terrestrial Communications Solutions (which market is served by our Harris CapRock Communications business) and (iii) Commercial Healthcare Solutions markets; and Ÿ Government Communications Systems, serving (i) Civil, (ii) National Intelligence and (iii) Defense markets. In the third quarter of fiscal 2012, our Board of Directors approved a plan to exit CIS, which provided remote cloud hosting, and to dispose of the related assets, and we completed the sale of the remaining assets of CIS in the first 30 -------------------------------------------------------------------------------- Table of Contents quarter of fiscal 2014. In the fourth quarter of fiscal 2012, our Board of Directors approved a plan to divest Broadcast Communications, which provided digital media management solutions in support of broadcast customers, and we completed the sale of Broadcast Communications in the third quarter of fiscal 2013. Both CIS and Broadcast Communications were formerly part of our Integrated Network Solutions segment. For additional information regarding discontinued operations, see Note 3: Discontinued Operations in the Notes. Except for disclosures related to our cash flows, or unless otherwise specified, disclosures in this Report relate solely to our continuing operations. At the beginning of the first quarter of fiscal 2014, to leverage the breadth of our IT enterprise network and information assurance capabilities for the IT services market, we began managing our cyber security network testing operation as part of our Integrated Network Solutions segment rather than our Government Communications Systems segment. As a result, we reassigned $2.4 million of goodwill (determined on a relative fair value basis) to our Integrated Network Solutions segment from our Government Communications Systems segment. The historical results, discussion and presentation of our business segments as set forth in this Report have been adjusted to reflect the impact of this change to our business segment reporting structure for all periods presented in this Report. 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 the "Unallocated corporate expense" or "Non-operating income (loss)" line items in our Consolidated Financial Statements and accompanying Notes. Value Drivers of Our Business Our two core value drivers are excellence and innovation. Our Company-wide commitment to excellence is embodied in our Harris Business Excellence ("HBX") program, which provides the framework and tools that empower every employee to drive continuous improvement in business performance and customer satisfaction. HBX incorporates standardized, industry-proven processes and tools based on the principles of Lean and Six Sigma. Fiscal 2014 was the first full year of program implementation, and we made significant strides in three primary areas - customer satisfaction, productivity and asset velocity - through our efforts to optimize processes, eliminate waste, reduce costs and enhance quality across our Company, including in areas such as manufacturing and field operations, supply chain and overhead functions, and working capital initiatives. One method we use to drive continuous improvement is "value engineering" - continuously evaluating new materials, processes and technologies to insert into products already in production, helping to reduce costs and improve both quality and customer satisfaction. Innovation is at the very core of our success, and investment in research and development ("R&D") represents its foundation. Our R&D investments are focused on adding new features to existing products, tailoring offerings for international markets, and creating totally new-to-the-world solutions to address our customers' toughest communications challenges. Innovation also leads to natural extensions of our core capabilities for capturing new opportunities in adjacent markets. Innovation provides differentiation and a key competitive advantage for us. To ensure our investment in R&D is cost-effective and supports innovation across the entire Company, we have adopted a portfolio management approach, optimizing investment at the Company level rather than the business unit level. We have introduced standardized processes and common metrics to track progress and gauge success, and we have established Core Technology Centers to more fully leverage R&D investment across our Company. Innovation at Harris also includes introducing new business models to the marketplace to provide our customers with innovative solutions at lower costs. For example, in the tactical communications market, we provide a "commercial off-the-shelf" approach that entails investing our own R&D funds to provide new mission-critical communications at a much faster pace and lower cost compared to the lengthy development cycle of the traditional program-of-record approach. We also partnered with the FAA to provide a fully-managed service for the FAA FTI network that provides mission-critical network capabilities to connect controllers and pilots across more than 4,000 nodes, resulting in significantly higher bandwidth and uptime at half the cost of the traditional approach. We also are at the forefront of a unique piggyback approach of using commercially-hosted satellite payloads to provide multiple missions on satellites, speeding time-to-mission and lowering costs compared to the traditional model of building and launching separate exquisite satellites for each mission requirement. Key Indicators We believe our value drivers, when implemented, will improve our financial results, including: income from continuing operations and income from continuing operations per diluted common share; revenue; income from continuing operations as a percentage of revenue; net cash provided by operating activities; return on invested capital; and return on average equity. The measure of our success is reflected in our results of operations and liquidity and capital resources key indicators as discussed below. 31-------------------------------------------------------------------------------- Table of Contents Fiscal 2014 Results of Operations Key Indicators: Income from continuing operations, income from continuing operations per diluted common share, revenue, and income from continuing operations as a percentage of revenue represent key measurements of our value drivers: Ÿ Income from continuing operations increased 15.7 percent to $539.8 million in fiscal 2014 from $466.4 million in fiscal 2013; Ÿ Income from continuing operations per diluted common share increased 20.2 percent to $5.00 in fiscal 2014 from $4.16 in fiscal 2013; Ÿ Revenue decreased 2.0 percent to $5.0 billion in fiscal 2014 from $5.1 billion in fiscal 2013; and Ÿ Income from continuing operations as a percentage of revenue increased to 10.8 percent in fiscal 2014 from 9.1 percent in fiscal 2013. Refer to MD&A heading "Operations Review" below in this Report for more information. Liquidity and Capital Resources Key Indicators: Net cash provided by operating activities, return on invested capital and return on average equity also represent key measurements of our value drivers: Ÿ Net cash provided by operating activities increased to $849.2 million in fiscal 2014 from $833.0 million in fiscal 2013; Ÿ Return on invested capital (defined as after-tax operating income from continuing operations divided by the two-point average of invested capital at the beginning and ending of the fiscal year, where invested capital equals equity plus debt, less cash and cash equivalents) increased to 20.4 percent in fiscal 2014 from 17.1 percent in fiscal 2013; and Ÿ Return on average equity (defined as income from continuing operations divided by the two-point average of equity at the beginning and ending of the fiscal year) increased to 31.9 percent in fiscal 2014 from 26.6 percent in fiscal 2013. Refer to MD&A heading "Liquidity, Capital Resources and Financial Strategies" below in this Report for more information on net cash provided by operating activities. Industry-Wide Opportunities, Challenges and Risks Department of Defense and Other U.S. Federal Markets: U.S. Government budgets remained constrained in fiscal 2014, and we anticipate a similarly constrained spending environment in fiscal 2015. Contributing to the slow spending environment and similar to U.S. Government Fiscal Year ("GFY") 2014, Congress has yet to pass the GFY 2015 appropriations bills. This means specific budget allocations by program have not been finalized, and if not passed by October 1, 2014, we expect the U.S. Government will operate under a continuing resolution. Deficit spending has caused U.S. Government budgets to come under significant pressure. In particular, the Budget Control Act of 2011 resulted in automatic spending reductions, known as sequestration, through budget caps for both defense and non-defense spending. In December 2013, Congress enacted the Bipartisan Budget Act of 2013, modifying the budget caps and increasing the limits on discretionary defense spending for GFY 2014 and GFY 2015 by approximately $22 billion and $9 billion, respectively, with similar spending relief for non-defense government spending. This resulted in a U.S. national defense spending cap of approximately $520 billion for GFY 2014 and approximately $521 billion for GFY 2015. Passing the 2-year, Bipartisan Budget Act of 2013 provided more certainty in the budget planning process for both GFY 2014 and 2015 and gave the DoD flexibility in deciding priorities. For GFYs 2016 through 2021, however, the Bipartisan Budget Act of 2013 retained the previous budget caps and across-the-board spending reduction methodology as provided under the Budget Control Act of 2011, and as a result of the return to full sequestration, there remains uncertainty regarding how sequester cuts would be applied in GFY 2016 and beyond. Even under full sequestration, though, the national defense spending cap would be approximately $523 billion for GFY 2016, which is higher than the cap for GFY 2015. Alternatively, under the President's budget request dated March 2014, which ignores spending caps, national defense spending for GFY 2016 would also be higher at approximately $535 billion. Government Oversight and Risk: 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. 32 -------------------------------------------------------------------------------- Table of Contents For a discussion of risks relating to U.S. Government contracts and subcontracts, see "Item 1. Business - Principal Customers; Government Contracts" and "Item 1A. Risk Factors" of this Report. We are also 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 in "Item 1A. Risk Factors" and "Item 3. Legal Proceedings" of this Report. State and Local: We also provide products to state and local government agencies that are committed to protecting our homeland and public safety. The public safety market weakened during fiscal 2014, having concluded an upgrade cycle primarily related to the Federal Communications Commission's narrow-banding mandate that drove higher-than-average market demand. Future market opportunities include upgrading aging analog infrastructure to new digital standards, as well as opportunities associated with next-generation LTE solutions for high data-rate applications, an emerging market in the early stages of development. International: We believe there is continuing international demand for tactical radio and public safety communications for military, government, and commercial customers, as well as for turnkey managed satellite communications solutions for government, energy and maritime markets. We believe we can leverage our domain expertise and proven technology provided in the U.S. for air traffic management, weather ground system technology and commercially hosted satellite payloads in pursuing international opportunities to further expand our international business. Commercial: We are leveraging proven technologies and capabilities for government applications into attractive commercial markets. After a long history of providing satellite antennas, space electronics, and payload technology to the government market, we are applying that same technology and capability in the commercial space market. Similarly, we provide turnkey managed satellite communications solutions not only to government customers in remote and harsh locations but also for commercial energy and maritime customers. After first addressing the government healthcare IT market, we began providing a full range of interoperability and business intelligence solutions to address the growing complexity in the commercial healthcare IT market. Also, an initiative is underway to leverage our success in providing weather ground system technology for the government market into commercial markets such as agriculture, which relies heavily on advanced forecasting capabilities and other weather information. We believe that our experience, technologies and capabilities are well aligned with the demand and requirements of the markets noted above in this Report. However, we remain subject to the spending levels, pace and priorities of the U.S. Government as well as international governments and commercial customers, and to general economic conditions that could adversely affect us, our customers and our suppliers. We also remain subject to other risks associated with these markets, including technological uncertainties, adoption of our new products and other risks that are discussed below in this Report under "Forward-Looking Statements and Factors that May Affect Future Results" and in "Item 1A. Risk Factors" of this Report. 33 -------------------------------------------------------------------------------- Table of Contents OPERATIONS REVIEW Consolidated Results of Operations Fiscal Years Ended 2014/2013 2013/2012 Percent Percent Increase/ Increase/ 2014 2013 (Decrease) 2012 (Decrease) (Dollars in millions, except per share amounts) Revenue: RF Communications $ 1,828.0 $ 1,849.0 (1.1 )% $ 2,144.1 (13.8 )% Integrated Network Solutions 1,462.9 1,575.8 (7.2 )% 1,609.9 (2.1 )% Government Communications Systems 1,801.2 1,783.8 1.0 % 1,786.0 (0.1 )% Corporate eliminations (80.1 ) (96.9 ) (17.3 )% (88.7 ) 9.2 % Total revenue 5,012.0 5,111.7 (2.0 )% 5,451.3 (6.2 )% Cost of product sales and services: Cost of product sales (1,857.1 ) (1,919.4 ) (3.2 )% (2,137.6 ) (10.2 )% % of revenue from product sales 58.2 % 59.9 % 59.4 % Cost of services (1,453.4 ) (1,465.6 ) (0.8 )% (1,431.7 ) 2.4 % % of revenue from services 79.7 % 76.8 % 77.2 % Total cost of product sales and services (3,310.5 ) (3,385.0 ) (2.2 )% (3,569.3 ) (5.2 )% % of total revenue 66.1 % 66.2 % 65.5 % Gross margin 1,701.5 1,726.7 (1.5 )% 1,882.0 (8.3 )% % of total revenue 33.9 % 33.8 % 34.5 % Engineering, selling and administrative expenses (819.6 ) (914.5 ) (10.4 )% (940.9 ) (2.8 )% % of total revenue 16.4 % 17.9 % 17.3 % Non-operating income (loss) 4.3 (40.7 ) * 11.5 * Net interest expense (90.8 ) (106.9 ) (15.1 )% (110.7 ) (3.4 )% Income from continuing operations before income taxes 795.4 664.6 19.7 % 841.9 (21.1 )% Income taxes (256.2 ) (202.7 ) 26.4 % (286.0 ) (29.1 )% Effective tax rate 32.2 % 30.5 % 34.0 % Income from continuing operations 539.2 461.9 16.7 % 555.9 (16.9 )% Noncontrolling interests, net of income taxes 0.6 4.5 (86.7 )% 2.8 60.7 % Income from continuing operations attributable to Harris Corporation common shareholders 539.8 466.4 15.7 % 558.7 (16.5 )% % of total revenue 10.8 % 9.1 % 10.2 % Discontinued operations, net of income taxes (5.0 ) (353.4 ) (98.6 )% (528.1 ) (33.1 )% Net income attributable to Harris Corporation common shareholders $ 534.8 $ 113.0 373.3 % $ 30.6 269.3 % Income from continuing operations per diluted common share attributable to Harris Corporation common shareholders $ 5.00 $ 4.16 20.2 % $ 4.80 (13.3 )% * Not meaningful Revenue Fiscal 2014 Compared With Fiscal 2013: The decrease in revenue in fiscal 2014 compared with fiscal 2013 was primarily due to lower revenue in our Integrated Network Solutions segment, while modestly lower revenue in our RF Communications segment offset modestly higher revenue in our Government Communications Systems segment. The $113 million decrease in revenue in our Integrated Network Solutions segment was primarily due to lower revenue from U.S. Government customers across the segment. 34 -------------------------------------------------------------------------------- Table of Contents Fiscal 2013 Compared With Fiscal 2012: The decrease in revenue in fiscal 2013 compared with fiscal 2012 was primarily due to lower revenue in our RF Communications and Integrated Network Solutions segments. The $295 million decrease in revenue in our RF Communications segment was primarily due to lower Tactical Communications revenue. The $34 million decrease in revenue in our Integrated Network Solutions segment was due to lower IT Services revenue, partially offset by moderate revenue growth in Harris CapRock Communications and our healthcare operations. See the "Discussion of Business Segment Results of Operations" discussion below in this MD&A for further information. Gross Margin Percentage Fiscal 2014 Compared With Fiscal 2013: Gross margin as a percentage of revenue ("gross margin percentage") in fiscal 2014 was essentially unchanged from fiscal 2013 and primarily reflects a 1.0 percentage point increase in gross margin percentage in our Government Communications Systems segment resulting from good program execution, partially offset by a 0.7 percentage point decrease in gross margin percentage in our RF Communications segment resulting from weakness at Public Safety and Professional Communications. Fiscal 2013 Compared With Fiscal 2012: The decrease in gross margin percentage in fiscal 2013 compared with fiscal 2012 was primarily due to a lower percentage of our overall sales generated by our higher-margin RF Communications segment and a 1.9 percentage point decrease in gross margin percentage in our Integrated Network Solutions segment, partially offset by a 1.4 percentage point increase in gross margin percentage in our RF Communications segment. See the "Discussion of Business Segment Results of Operations" discussion below in this MD&A for further information. Engineering, Selling and Administrative Expenses Fiscal 2014 Compared With Fiscal 2013: The decrease in engineering, selling and administrative ("ESA") expenses and ESA expenses as a percentage of revenue ("ESA percentage") in fiscal 2014 compared with fiscal 2013 was primarily due to $74.7 million of charges recorded in the fourth quarter of fiscal 2013 for company-wide restructuring and other actions and the benefit in fiscal 2014 from prior-year restructuring actions, and an out-of-period adjustment in the third quarter of fiscal 2014 related to our post-employment benefit plan that reduced general and administrative expenses, partially offset by higher research and development expenses. Overall Company-sponsored research and development costs were $264.1 million in fiscal 2014 compared with $254.1 million in fiscal 2013 (including a $17.8 million write-off of capitalized software in our Integrated Network Solutions segment, as described below). Fiscal 2013 Compared With Fiscal 2012: The increase in ESA percentage in fiscal 2013 compared with fiscal 2012 was primarily due to a 3.0 percentage point increase in ESA percentage in our RF Communications segment, partially offset by a 2.5 percentage point decrease in ESA percentage in our Integrated Network Solutions segment. The increase in ESA percentage in our RF Communications segment was primarily driven by ESA expenses in fiscal 2013 that were essentially flat with fiscal 2012 relative to a 14 percent decrease in segment revenue. Although benefiting from operational excellence initiatives and restructuring actions, RF Communications segment ESA expenses in fiscal 2013 were higher primarily due to an 8 percent increase in spending on research and development compared with fiscal 2012 and also included a $9 million charge for restructuring actions in the fourth quarter of fiscal 2013. The decrease in ESA percentage in our Integrated Network Solutions segment was primarily due to lower general and administrative expenses, including the impact of ongoing cost-reduction efforts and $58 million of charges recorded in fiscal 2012 for integration and other costs associated with our acquisitions of CapRock, Schlumberger GCS and Carefx, partially offset by $44 million of charges recorded in fiscal 2013 for asset impairments and a $17.8 million write-off of capitalized software due to a change in accounting estimate. Overall Company-sponsored research and development costs were $254.1 million in fiscal 2013 (including the $17.8 million write-off of capitalized software in our Integrated Network Solutions segment noted above) compared with $218.9 million in fiscal 2012. See the "Discussion of Business Segment Results of Operations" discussion below in this MD&A for further information. Non-Operating Income (Loss) Fiscal 2014 Compared With Fiscal 2013: Non-operating income in fiscal 2014 was due to net income related to intellectual property matters. Non-operating loss in fiscal 2013 was primarily due to a $33.2 million charge associated with our optional redemption on May 28, 2013 of the entire outstanding $300 million principal amount of our 5% 35 -------------------------------------------------------------------------------- Table of Contents Notes due October 1, 2015, a $10.8 million impairment of a cost-method investment and a $6.4 million impairment of an investment in a joint venture, partially offset by a $9.0 million gain on the sale of securities available-for-sale. Fiscal 2013 Compared With Fiscal 2012: Non-operating loss in fiscal 2013 was primarily due to the items noted for fiscal 2013 in the discussion above regarding fiscal 2014 compared with fiscal 2013. Non-operating income in fiscal 2012 was primarily due to royalty income related to certain patents. See Note 20: Non-Operating Income (Loss) in the Notes for further information. Net Interest Expense Fiscal 2014 Compared With Fiscal 2013: Our net interest expense decreased in fiscal 2014 compared with fiscal 2013 primarily due to lower debt levels as a result of our optional redemption on May 28, 2013 of the entire outstanding $300 million principal amount of our 5% Notes due October 1, 2015. Fiscal 2013 Compared With Fiscal 2012: Our net interest expense decreased slightly in fiscal 2013 compared with fiscal 2012 primarily due to lower debt levels as a result of our redemption of our 5% Notes as noted above in the discussion regarding fiscal 2014 compared with fiscal 2013. See Note 17: Interest Expense in the Notes for further information. Income Taxes Fiscal 2014 Compared With Fiscal 2013: In fiscal 2014, our effective tax rate benefited from additional deductions (primarily related to manufacturing) and additional research credits claimed on our fiscal 2013 tax return compared with our recorded estimates at the end of fiscal 2013, the settlement of a state tax audit and additional permanent deductions based on recent tax litigation unrelated to us. In fiscal 2013, legislation was enacted that restored the U.S. Federal income tax credit for qualifying research and development expenses. This resulted in a benefit of approximately $8.4 million (approximately 1.3 percent of income from continuing operations before income taxes) in calculating our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes). In fiscal 2013, our effective tax rate also benefited from additional deductions (primarily related to manufacturing) claimed on our fiscal 2012 tax return compared with our recorded estimates at the end of fiscal 2012, favorable tax settlements, tax elections resulting in the deductibility of certain expenses, a reduction in estimated non-U.S. tax liabilities, a reduction in state taxes due to changes in certain state tax laws and confirmation of the availability of certain acquired tax attributes due to audit resolution. Fiscal 2013 Compared With Fiscal 2012: The major discrete items from which our fiscal 2013 effective tax rate benefited are those noted for fiscal 2013 in the discussion above regarding fiscal 2014 compared with fiscal 2013. In fiscal 2012, our effective tax rate benefited from additional tax credits and manufacturing deductions claimed on our fiscal 2011 tax return compared with our recorded estimates at the end of fiscal 2011, as well as from a reduction in state taxes due to changes in certain state tax laws and a reduction in estimated tax liabilities. See Note 21: Income Taxes in the Notes for further information. Discontinued Operations, Net of Income Taxes Fiscal 2014 Compared With Fiscal 2013: Discontinued operations in fiscal 2014 consisted of a $6.9 million after-tax increase in the loss on sale of Broadcast Communications from miscellaneous adjustments for contingencies related to the disposition, partially offset by a $1.9 million after-tax gain on sale of the remaining assets of CIS. Discontinued operations in fiscal 2013 included a loss of $32.7 million ($32.2 million after-tax) on the sale of Broadcast Communications in the third quarter of fiscal 2013, as well as non-cash impairment charges totaling $314.4 million ($297.3 million after-tax) recorded during the first two quarters of fiscal 2013 related to Broadcast Communications based on indicators of value, including financial performance, market conditions, indications of value from interested parties and our entering into a definitive Asset Sale Agreement relating to the sale of Broadcast Communications. Additionally, based on market indications during fiscal 2013, we recorded non-cash impairment charges totaling $16.5 million ($10.1 million after-tax) to write down assets of CIS to their estimated fair value, less estimated costs to sell. Fiscal 2013 Compared With Fiscal 2012: Discontinued operations in fiscal 2013 included the items noted for fiscal 2013 in the discussion above regarding fiscal 2014 compared with fiscal 2013. Discontinued operations in fiscal 2012 included non-cash impairment charges totaling $447.6 million ($417.0 million after-tax) related to Broadcast Communications and charges of $142.6 million ($90.2 million after-tax) for impairment of goodwill and other long-lived assets and for exit and disposal costs related to CIS. See Note 3: Discontinued Operations in the Notes for further information. 36-------------------------------------------------------------------------------- Table of Contents Income From Continuing Operations Per Diluted Common Share Attributable to Harris Corporation Common Shareholders Fiscal 2014 Compared With Fiscal 2013: The increase in income from continuing operations per diluted common share in fiscal 2014 compared with the fiscal 2013 was primarily due to the same reasons noted in the discussions above in this MD&A regarding fiscal 2014 compared with fiscal 2013 and by the reduction in average common shares outstanding as a result of shares repurchased. Fiscal 2013 Compared With Fiscal 2012: The decrease in income from continuing operations per diluted common share in fiscal 2013 compared with the fiscal 2012 was primarily due to the same reasons noted in the discussions above in this MD&A regarding fiscal 2013 compared with fiscal 2012, partially offset by the reduction in average common shares outstanding as a result of shares repurchased. See the "Common Stock Repurchases" discussion below in this MD&A for further information. Discussion of Business Segment Results of Operations RF Communications Segment 2014/2013 2013/2012 Percent Percent Increase/ Increase/ 2014 2013 (Decrease) 2012 (Decrease) (Dollars in millions) Revenue $ 1,828.0 $ 1,849.0 (1.1 )% $ 2,144.1 (13.8 )% Cost of product sales and services (889.0 ) (886.0 ) 0.3 % (1,057.0 ) (16.2 )% Gross margin 939.0 963.0 (2.5 )% 1,087.1 (11.4 )% % of revenue 51.4 % 52.1 % 50.7 % ESA expenses (377.5 ) (386.1 ) (2.2 )% (383.4 ) 0.7 % % of revenue 20.7 % 20.9 % 17.9 % Segment operating income $ 561.5 $ 576.9 (2.7 )% $ 703.7 (18.0 )% % of revenue 30.7 % 31.2 % 32.8 % Fiscal 2014 Compared With Fiscal 2013: Segment revenue in fiscal 2014 included Tactical Communications revenue of $1,307.2 million, a 4 percent increase from $1,255.5 million in fiscal 2013; and Public Safety and Professional Communications revenue of $520.8 million, a 12 percent decrease from $593.5 million in fiscal 2013. The increase in Tactical Communications revenue was primarily due to higher revenue in international markets, mostly offset by lower revenue from DoD customers. The decrease in Public Safety and Professional Communications revenue was primarily due to continued market weakness. The decrease in segment gross margin percentage in fiscal 2014 compared with fiscal 2013 was primarily due to weakness in Public Safety and Professional Communications and a $7 million benefit from the cumulative effect of a correction made in the fourth quarter of fiscal 2013 in the timing of cost recognition on tactical radio programs. The decrease in segment ESA percentage in fiscal 2014 compared with fiscal 2013 was primarily driven by a $9 million charge for restructuring actions in the fourth quarter of fiscal 2013 and an out-of-period adjustment in the third quarter of fiscal 2014 related to our post-employment benefit plan that reduced segment general and administrative expenses, partially offset by an 8 percent increase in spending on research and development and the impact of accruals in the first quarter of fiscal 2014 for legal matters related to a Public Safety and Professional Communications program. The decrease in segment operating income and operating income as a percentage of revenue ("operating margin percentage") in fiscal 2014 compared with fiscal 2013 reflected the items discussed above regarding this segment. Segment orders were $1.63 billion for fiscal 2014, including $1.13 billion in Tactical Communications and $497 million in Public Safety and Professional Communications, compared with $1.90 billion for fiscal 2013, including $1.34 billion in Tactical Communications and $562 million in Public Safety and Professional Communications. Segment funded backlog was $1.13 billion at the end of fiscal 2014, including $564 million in Tactical Communications and $570 million in Public Safety and Professional Communications, compared with $1.34 billion at the end of fiscal 2013, including $743 million in Tactical Communications and $598 million in Public Safety and Professional Communications. The percentage of this segment's revenue that was derived from sales to U.S. Government customers, including the DoD and intelligence and civilian agencies, as well as foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 46 percent in fiscal 2014 and 43 percent in fiscal 2013. 37-------------------------------------------------------------------------------- Table of Contents Fiscal 2013 Compared With Fiscal 2012: Segment revenue in fiscal 2013 included Tactical Communications revenue of $1,255.5 million, a 20 percent decrease from $1,570.4 million in fiscal 2012; and Public Safety and Professional Communications revenue of $593.5 million, a 3 percent increase from $573.7 million in fiscal 2012. The decrease in Tactical Communications revenue reflects the impact of U.S. and international tactical radio procurement delays due to the slowdown in spending resulting from U.S. Government funding constraints experienced under the continuing resolution and magnified when sequestration was triggered, as well as key order delays in the international market. The increase in segment gross margin percentage in fiscal 2013 compared with fiscal 2012 was primarily driven by a favorable product mix within Tactical Communications and a $7 million benefit from the cumulative effect of a correction made in the fourth quarter of fiscal 2013 in the timing of cost recognition on tactical radio programs. The increase in segment ESA percentage in fiscal 2013 compared with fiscal 2012 was primarily driven by segment ESA expenses that were only slightly higher compared with fiscal 2012 relative to a 14 percent decrease in segment revenue. Although benefiting from operational excellence initiatives and restructuring actions, segment ESA expenses in fiscal 2013 were slightly higher primarily due to an 8 percent increase in spending on research and development compared with fiscal 2012 and also included a $9 million charge for restructuring actions in the fourth quarter of fiscal 2013. The decrease in segment operating margin percentage in fiscal 2013 compared with fiscal 2012 reflected the items discussed above regarding this segment for fiscal 2013 compared with fiscal 2012 and was primarily due to the decrease in revenue in Tactical Communications. Segment orders were $1.90 billion for fiscal 2013, including $1.34 billion in Tactical Communications and $562 million in Public Safety and Professional Communications, compared with $1.94 billion for fiscal 2012, including $1.47 billion in Tactical Communications and $468 million in Public Safety and Professional Communications. Segment funded backlog was $1.34 billion at the end of fiscal 2013, including $743 million in Tactical Communications and $598 million in Public Safety and Professional Communications, compared with $1.30 billion at the end of fiscal 2012, including $665 million in Tactical Communications and $635 million in Public Safety and Professional Communications. The percentage of this segment's revenue that was derived from sales to U.S. Government customers, including the DoD and intelligence and civilian agencies, as well as foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 43 percent in fiscal 2013 and 46 percent in fiscal 2012. Integrated Network Solutions Segment 2014/2013 2013/2012 Percent Percent Increase/ Increase/ 2014 2013 (Decrease) 2012 (Decrease) (Dollars in millions) Revenue $ 1,462.9 $ 1,575.8 (7.2 )% $ 1,609.9 (2.1 )% Cost of product sales and services (1,180.4 ) (1,269.1 ) (7.0 )% (1,265.3 ) 0.3 % Gross margin 282.5 306.7 (7.9 )% 344.6 (11.0 )% % of revenue 19.3 % 19.5 % 21.4 % ESA expenses (166.1 ) (226.9 ) (26.8 )% (272.2 ) (16.6 )% % of revenue 11.4 % 14.4 % 16.9 % Segment operating income $ 116.4 $ 79.8 45.9 % $ 72.4 10.2 % % of revenue 8.0 % 5.1 % 4.5 % Fiscal 2014 Compared With Fiscal 2013: The $113 million decrease in segment revenue in fiscal 2014 compared with fiscal 2013 was primarily due to lower revenue from U.S. Government customers in both IT Services and Harris CapRock Communications, partially offset by higher revenue from commercial customers in Harris CapRock Communications and our healthcare operations. The slight decrease in segment gross margin percentage in fiscal 2014 compared with fiscal 2013 was primarily attributable to an out-of-period adjustment made to revenue and cost of sales for satellite and terrestrial communications services and margin pressure from a competitive market environment, mostly offset by increases in gross margin percentage on satellite and terrestrial communications services due to operational excellence improvements. The decrease in segment ESA percentage in fiscal 2014 compared with fiscal 2013 was primarily due to $44 million of charges recorded in the fourth quarter of fiscal 2013 for asset impairments and a write-off of capitalized 38-------------------------------------------------------------------------------- Table of Contents software due to a change in accounting estimate, and an out-of-period adjustment in the third quarter of fiscal 2014 related to our post-employment benefit plan that reduced segment general and administrative expenses, as well as operational excellence improvements, including the benefit of restructuring actions in fiscal 2013. The increases in segment operating income and operating margin percentage in fiscal 2014 compared with fiscal 2013 were attributable to the decrease in segment ESA percentage, partially offset by the decrease in segment gross margin percentage, as discussed above regarding this segment. Segment orders were $1.53 billion for fiscal 2014 compared with $1.57 billion for fiscal 2013. The percentage of this segment's revenue that was derived from sales to U.S. Government customers, including the DoD and intelligence and civilian agencies, as well as foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 60 percent in fiscal 2014 and 62 percent in fiscal 2013. Fiscal 2013 Compared With Fiscal 2012: The decrease in segment revenue in fiscal 2013 compared with fiscal 2012 was primarily due to an 11 percent decrease in IT Services revenue, primarily from the loss of the Patriot program, partially offset by revenue growth in Harris CapRock Communications and our healthcare operations of 8 percent and 7 percent, respectively. The decrease in segment gross margin and gross margin percentage in fiscal 2013 compared with fiscal 2012 was primarily attributable to a decrease in gross margin percentage on satellite and terrestrial communications services, increased costs associated with delivering software products and increased costs on a service contract with a government healthcare customer. The decreases in segment ESA expenses and ESA percentage in fiscal 2013 compared with fiscal 2012 were primarily due to lower general and administrative expenses, including the impact of ongoing cost-reduction efforts and $58 million of charges recorded in fiscal 2012 for integration and other costs associated with our acquisitions of CapRock, Schlumberger GCS and Carefx, partially offset by $44 million of charges recorded in fiscal 2013 for asset impairments and a write-off of capitalized software due to a change in accounting estimate. The increases in segment operating income and operating margin percentage in fiscal 2013 compared with fiscal 2012 were attributable to the decreases in segment ESA expenses and ESA percentage, partially offset by the decrease in segment gross margin percentage, as discussed above regarding this segment for fiscal 2013 compared with fiscal 2012. Segment orders were $1.57 billion for fiscal 2013 compared with $1.78 billion for fiscal 2012. The percentage of this segment's revenue that was derived from sales to U.S. Government customers, including the DoD and intelligence and civilian agencies, as well as foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 62 percent in fiscal 2013 and 66 percent in fiscal 2012. Government Communications Systems Segment 2014/2013 2013/2012 Percent Percent Increase/ Increase/ 2014 2013 (Decrease) 2012 (Decrease) (Dollars in millions) Revenue $ 1,801.2 $ 1,783.8 1.0 % $ 1,786.0 (0.1 )% Cost of product sales and services (1,321.2 ) (1,327.2 ) (0.5 )% (1,336.1 ) (0.7 )% Gross margin 480.0 456.6 5.1 % 449.9 1.5 % % of revenue 26.6 % 25.6 % 25.2 % ESA expenses (203.1 ) (204.6 ) (0.7 )% (196.6 ) 4.1 % % of revenue 11.3 % 11.5 % 11.0 % Segment operating income $ 276.9 $ 252.0 9.9 % $ 253.3 (0.5 )% % of revenue 15.4 % 14.1 % 14.2 % Fiscal 2014 Compared With Fiscal 2013: The $17 million increase in segment revenue in fiscal 2014 compared with fiscal 2013 was primarily due to higher revenue from classified customers, the FAA NextGen DataComm program, the U.S. Army MET program, the F-35 program and the wireless products business, partially offset by lower revenue from the NOAA GOES-R weather program. The 1.0 percentage point increase in segment gross margin percentage in fiscal 2014 compared with fiscal 2013 was primarily due to continued strong program performance, including retirement of risk on certain space programs. The slight decrease in segment ESA percentage in fiscal 2014 compared with fiscal 2013 was primarily driven by an out-of-period adjustment in the third quarter of fiscal 2014 related to our post-employment benefit plan that reduced segment general and administrative expenses, as well as operational excellence improvements and the benefit of 39 -------------------------------------------------------------------------------- Table of Contents restructuring actions in fiscal 2013, partially offset by higher spending on research and development. The increases in segment operating income and operating margin percentage in fiscal 2014 compared with fiscal 2013 reflected the items discussed above regarding this segment. Segment orders were $1.78 billion for fiscal 2014 and $1.90 billion for fiscal 2013. The percentage of this segment's revenue that was derived from sales to U.S. Government customers, including the DoD and intelligence and civilian agencies, as well as foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 93 percent in fiscal 2014 and approximately 93 percent in fiscal 2013. Fiscal 2013 Compared With Fiscal 2012: Segment revenue in fiscal 2013 compared with fiscal 2012 decreased slightly, primarily due to lower revenue from DoD customers and from certain classified programs that were impacted by sequestration, mostly offset by higher revenue from the SGSS program for NASA and ADS-B receiver payloads for Aireon, LLC. Segment operating margin percentage was essentially flat in fiscal 2013 compared with fiscal 2012. The slight increase in segment gross margin percentage, primarily driven by strong program performance, including the retirement of risk on certain space programs, was offset by slightly higher segment ESA percentage, primarily from a $10 million charge associated with Company-wide restructuring and other actions in the fourth quarter of fiscal 2013. Segment orders were $1.90 billion for fiscal 2013 and $1.87 billion for fiscal 2012. The percentage of this segment's revenue that was derived from sales to U.S. Government customers, including the DoD and intelligence and civilian agencies, as well as foreign military sales funded through the U.S. Government, whether directly or through prime contractors, was approximately 93 percent in fiscal 2013 and approximately 97 percent in fiscal 2012. Unallocated Corporate Expense and Corporate Eliminations 2014/2013 2013/2012 Percent Percent Increase/ Increase/ 2014 2013 (Decrease) 2012 (Decrease) (Dollars in millions) Unallocated corporate expense $ 60.2 $ 88.5 (32.0 )% $ 81.8 8.2 % Corporate eliminations 12.7 8.0 58.8 % 6.5 23.1 % Fiscal 2014 Compared With Fiscal 2013: The decrease in unallocated corporate expense in fiscal 2014 compared with fiscal 2013 was primarily due to a $21 million charge associated with Company-wide restructuring and other actions in the fourth quarter of fiscal 2013, as noted below regarding fiscal 2013 compared with fiscal 2012, and the benefit in fiscal 2014 from prior year restructuring actions. The increase in corporate eliminations in fiscal 2014 compared with fiscal 2013 was primarily due to higher intersegment eliminations for sales of services between our Integrated Network Solutions segment and our Government Communications Systems segment. Fiscal 2013 Compared With Fiscal 2012: The increase in unallocated corporate expense in fiscal 2013 from fiscal 2012 was primarily due to a $21 million charge associated with Company-wide restructuring and other actions in the fourth quarter of fiscal 2013, including facility consolidation, asset impairments, workforce reductions and other associated costs, partially offset by lower expenses resulting from cost-reduction actions in fiscal 2012 and savings from operational excellence initiatives in fiscal 2013. The increase in corporate eliminations in fiscal 2013 compared with fiscal 2012 was primarily due to higher intersegment sales between IT Services in our Integrated Network Solutions segment and our Government Communications Systems and RF Communications segments. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL STRATEGIES Cash Flows Fiscal Years Ended 2014 2013 2012 (Dollars in millions) Net cash provided by operating activities $ 849.2 $ 833.0 $ 852.9 Net cash used in investing activities (162.6 ) (19.7 ) (248.9 ) Net cash used in financing activities (448.1 ) (839.7 ) (609.8 ) Effect of exchange rate changes on cash and cash equivalents 1.5 (8.6 ) (5.1 ) Net increase (decrease) in cash and cash equivalents 240.0 (35.0 ) (10.9 ) Cash and cash equivalents, beginning of year 321.0 356.0 366.9 Cash and cash equivalents, end of year $ 561.0 $ 321.0 $ 356.0 40 -------------------------------------------------------------------------------- Table of Contents Cash and cash equivalents: Our Consolidated Statement of Cash Flows includes cash flows related to Broadcast Communications and CIS, and our Consolidated Balance Sheet as of the end of fiscal 2013 reflects CIS as discontinued operations. However, other than proceeds related to the sale of Broadcast Communications and CIS and net additions of property, plant and equipment and capitalized software related to Broadcast Communications and CIS disclosed at "Net cash used in investing activities" below, the impact of cash flows related to Broadcast Communications and CIS to our consolidated cash flows was not material. The $240.0 million increase in cash and cash equivalents from fiscal 2013 to fiscal 2014 was primarily due to $849.2 million of net cash provided by operating activities, $141.3 million of proceeds from exercises of employee stock options and $42.0 million of net proceeds from the sale of discontinued operations, partially offset by $309.4 million used to repurchase shares of our common stock, $201.3 million used for net additions of property, plant and equipment, $180.3 million used to pay cash dividends and $99.7 million used for net repayments of borrowings. The $35.0 million decrease in cash and cash equivalents from fiscal 2012 to fiscal 2013 was primarily due to $414.9 million used to repurchase shares of our common stock, $346.4 million used for net repayments of borrowings, $178.2 million used for net additions of property, plant and equipment and capitalized software and $164.7 million used to pay cash dividends, mostly offset by $833.0 million of net cash provided by operating activities, $147.4 million of net proceeds from the sale of discontinued operations and $97.9 million of proceeds from exercises of employee stock options. Our financial position remained strong at June 27, 2014. We ended the fiscal year with cash and cash equivalents of $561.0 million; we have no long-term debt maturing until December 1, 2017; we have a senior unsecured $1 billion revolving credit facility that expires in September 2017 (all of which was available to us as of June 27, 2014); and we do not have any material defined benefit pension plan obligations. Our $561.0 million of cash and cash equivalents at June 27, 2014 included $188 million held by our foreign subsidiaries, $134 million of which was available for use in the U.S. without incurring additional U.S. income taxes. We would be required to recognize U.S. income taxes of $16 million on the remaining $54 million if we were to repatriate such funds to the U.S., but we have no current plans to repatriate such funds. Given our current cash position, outlook for funds generated from operations, credit ratings, available credit facility, cash needs and debt structure, we have not experienced to date, and do not expect to experience, any material issues with liquidity, although we can give no assurances concerning our future liquidity, particularly in light of the U.S. Government budget uncertainties and the state of global commerce and financial uncertainty. We also currently believe that existing cash, funds generated from operations, our credit facility and access to the public and private debt and equity markets will be sufficient to provide for our anticipated working capital requirements, capital expenditures, dividend payments, repurchases under our share repurchase program and potential acquisitions for the next 12 months and for the reasonably foreseeable future thereafter. We anticipate tax payments over the next three years to be approximately equal to our tax expense for the same period. For additional information regarding our income taxes, see Note 21: Income Taxes in the Notes. Other than those cash outlays noted in the "Contractual Obligations" discussion below in this MD&A, capital expenditures, dividend payments, repurchases under our share repurchase program and potential acquisitions, no other significant cash outlays are anticipated in fiscal 2015. There can be no assurance, however, that our business will continue to generate cash flows at current levels or that the cost or availability of future borrowings, if any, under our commercial paper program or our credit facility or in the debt markets will not be impacted by any potential future credit and capital markets disruptions. 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 eliminate strategic acquisitions, reduce or terminate our share repurchases, 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 and integrated communications and information technology and services 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 consistently high in fiscal 2014, 2013 and 2012, reflecting solid earnings and good working capital management. Cash flow from operations was positive in all of our business segments in fiscal 2014, 2013 and 2012. Net cash used in investing activities: The $142.9 million increase in net cash used in investing activities in fiscal 2014 compared with fiscal 2013 was primarily due to $105.4 million less of proceeds from the sale of discontinued operations (consisting of, for fiscal 2014, $27.0 million of net proceeds from the sale of CIS and $15.0 million of proceeds from payment of a note receivable related to the sale of Broadcast Communications, compared 41-------------------------------------------------------------------------------- Table of Contents with $147.4 million of net proceeds from the sale of Broadcast Communications in fiscal 2013), as well as $23.1 million more used for net additions of property, plant and equipment and capitalized software that primarily reflected investments in new systems and infrastructure to support growth. The $229.2 million decrease in net cash used in investing activities in fiscal 2013 compared with fiscal 2012 was primarily due to $147.4 million more of proceeds from the sale of discontinued operations (consisting of the net proceeds from the sale of Broadcast Communications in fiscal 2013) and $55.6 million less used for net additions of property, plant and equipment and capitalized software that primarily reflected $37.2 million less used for net additions to property, plant and equipment and capitalized software related to Broadcast Communications and CIS. Our total capital expenditures in fiscal 2015 are expected to be approximately $200 million. Net cash used in financing activities: The $391.6 million decrease in net cash used in financing activities in fiscal 2014 compared with fiscal 2013 was primarily due to $246.7 million less of net repayments of borrowings (primarily reflecting $332.2 million used for our optional redemption on May 28, 2013 of the entire outstanding $300 million principal amount of our 5% Notes due October 1, 2015), $105.5 million less of repurchases of our common stock and $43.4 million more of proceeds from exercises of employee stock options, partially offset by $15.6 million more used to pay cash dividends. The $229.9 million increase in net cash used in financing activities in fiscal 2013 compared with fiscal 2012 was primarily due to $321.5 million more of net repayments of borrowings (primarily reflecting $332.2 million used for our redemption of our 5% Notes as noted above) and $25.1 million more used to pay cash dividends, partially offset by $69.7 million more of proceeds from exercises of employee stock options and $58.6 million less of repurchases of our common stock. Common Stock Repurchases During fiscal 2014, we used $300.0 million to repurchase 4,560,802 shares of our common stock under our repurchase program at an average price per share of $65.78, including commissions. During fiscal 2013, we used $400.0 million (including proceeds from our sale of Broadcast Communications) to repurchase 8,287,130 shares of our common stock under our repurchase program at an average price per share of $48.27, including commissions. In fiscal 2014 and fiscal 2013, $8.8 million and $14.9 million, respectively, in shares of our common stock were delivered to us or withheld by us to satisfy withholding taxes on employee share-based awards. Additionally, in fiscal 2014, we used $0.6 million to repurchase 8,000 shares of our common stock from our Rabbi Trust which is associated with our non-qualified deferred compensation plans. Shares repurchased by us are cancelled and retired. On August 23, 2013, our Board of Directors approved our new $1 billion 2013 Repurchase Program, which was in addition to our prior 2011 Repurchase Program. Our repurchases during the second quarter of fiscal 2014 used the remaining authorization under our 2011 Repurchase Program. As of June 27, 2014, we had a remaining, unused authorization of approximately $834 million under our 2013 Repurchase Program, which does not have a stated expiration date. Our repurchase programs have resulted, and our 2013 Repurchase Program is expected to continue to result, in repurchases in excess of the dilutive effect of shares issued under our share-based incentive plans. However, the level of our repurchases depends on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our Board of Directors may deem relevant. Repurchases are expected to be funded with available cash and commercial paper and 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 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 during fiscal 2014 and fiscal 2013 and our repurchase programs is set forth above under "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" of this Report. Dividends On August 23, 2014, our Board of Directors increased the quarterly cash dividend rate on our common stock from $.42 per share to $.47 per share, for an annualized cash dividend rate of $1.88 per share, which was our thirteenth consecutive annual increase in our quarterly cash dividend rate. Our annualized cash dividend rate was $1.68 per share in fiscal 2014 and $1.48 per share in fiscal 2013. Our annualized cash dividend rate was $1.32 per share for the last two quarters of fiscal 2012 and $1.12 per share for the first two quarters of fiscal 2012. There can be no assurances that our annualized cash dividend rate will continue to increase. Quarterly cash dividends are typically paid in March, June, September and December. We currently expect that cash dividends will continue to be paid in the near future, but we can give no assurances concerning payment of future dividends. The declaration of dividends and the amount thereof will depend on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors that our Board of Directors may deem relevant. Additional information concerning our dividends is set forth above under "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" of this Report. 42-------------------------------------------------------------------------------- Table of Contents Capital Structure and Resources 2012 Credit Agreement: As discussed in Note 11: Credit Arrangements in the Notes, on September 28, 2012, we established a new $1 billion 5-year senior unsecured revolving credit facility (the "2012 Credit Facility") by entering into a Revolving Credit Agreement (the "2012 Credit Agreement") with a syndicate of lenders. The 2012 Credit Facility replaced our prior revolving credit facilities. The description of the 2012 Credit Facility and the 2012 Credit Agreement set forth in Note 11: Credit Arrangements in the Notes is incorporated herein by reference. Short-Term Debt: Our short-term debt at June 27, 2014 and June 28, 2013 was $58.3 million and $144.6 million, respectively. Our short-term debt at June 27, 2014 and June 28, 2013 primarily consisted of commercial paper issued to partially fund our optional redemption on May 28, 2013 of the entire outstanding $300 million principal amount of our 5% Notes due October 1, 2015. Our commercial paper program was supported at June 27, 2014 and June 28, 2013 by the 2012 Credit Facility. Long-Term Debt: The description of our long-term debt set forth in Note 13: Long-Term Debt in the Notes is incorporated herein by reference. As discussed in Note 13: Long-Term Debt in the Notes, on May 28, 2013, we completed our optional redemption of the entire outstanding $300 million principal amount of our 5% Notes due October 1, 2015 at a "make-whole" redemption price of $332.2 million as set forth in the 5% Notes, which were terminated and cancelled. Other: We have an automatically effective, universal shelf registration statement, filed with the SEC on February 27, 2013, 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 depositary shares and warrants to purchase debt securities, preferred stock or common stock. We expect to maintain operating ratios, fixed-charge coverage ratios and balance sheet ratios sufficient for retention of, or improvement to, our current 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," we may not be able to issue short-term commercial paper, but may instead need to borrow under our credit facility or pursue other options. In addition, if our debt ratings are lowered to below "investment grade," we may also be required to provide collateral to support a portion of our outstanding performance bonds. For a discussion of such performance bonds, see the "Commercial Commitments" discussion below. We do not currently expect a downgrade of our current debt ratings, but no assurances can be given. If our debt ratings are downgraded, it could adversely impact, among other things, our future borrowing costs and access to capital markets and our ability to receive certain types of contract awards. Contractual Obligations At June 27, 2014, 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: Obligations Due by Fiscal Year 2016 2018 and and After Total 2015 2017 2019 2019 (Dollars in millions) Long-term debt $ 1,577.2 $ 1.4 $ - $ 750.0 $ 825.8 Purchase obligations (1),(2),(3) 1,196.9 785.5 190.7 90.4 130.3 Operating lease commitments 221.0 45.4 69.4 37.8 68.4 Interest on long-term debt 894.1 90.8 181.6 142.1 479.6 Total contractual cash obligations $ 3,889.2 $ 923.1 $ 441.7 $ 1,020.3 $ 1,504.1 (1) Amounts do not include pension contributions and payments for various welfare and benefit plans because such amounts had not been determined beyond fiscal 2014. (2) The purchase obligations of $1,196.9 million included (a) $344.9 million of purchase obligations related to our Government Communications Systems segment, which were fully funded under contracts with the U.S. Government, and $66.8 million of these purchase obligations related to cost-plus type contracts where our costs were fully reimbursable; and (b) the purchase of satellite bandwidth in our Integrated Network Solutions segment. (3) Amounts do not include unrecognized tax benefits of $71.9 million. 43 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements In accordance with the definition under SEC rules, any of the following qualify as off-balance sheet arrangements: Ÿ Any obligation under certain guarantee contracts; Ÿ A retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; Ÿ Any obligation, including a contingent obligation, under certain derivative instruments; and Ÿ Any obligation, including a contingent obligation, under a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant. Currently we are not participating in any material 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, 2014, we did not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect our results of operations, financial condition or cash flows. In addition, we are not currently a party to any related party transactions that materially affect our results of operations, financial condition or cash flows. 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 results of operations, financial condition 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 vacates 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 results of operations, financial condition 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, 2014, we had commercial commitments on outstanding surety bonds, standby letters of credit and other arrangements, as follows: Expiration of Commitments by Fiscal Year After Total 2015 2016 2017 2017 (Dollars in millions) Surety bonds used for: Bids $ 3.3 $ 3.3 $ - $ - $ - Performance 616.1 541.4 68.4 - 6.3 619.4 544.7 68.4 - 6.3 Standby letters of credit used for: Bids 4.2 4.2 - - - Down payments 7.2 1.0 0.1 - 6.1 Performance 92.2 50.9 5.6 0.1 35.6 Warranty 4.4 2.3 2.0 - 0.1 108.0 58.4 7.7 0.1 41.8 Total commitments $ 727.4 $ 603.1 $ 76.1 $ 0.1 $ 48.1 The surety bonds and standby letters of credit used for performance are primarily related to Public Safety and Professional Communications. As is customary in bidding for and completing network infrastructure projects for public safety systems, contractors are required to procure surety bonds and/or standby letters of credit for bids, performance, warranty and other purposes (collectively, "Performance Bonds"). Such Performance Bonds normally have maturities of up to three years and are standard in the industry as a way to provide customers a mechanism to seek 44-------------------------------------------------------------------------------- Table of Contents redress if a contractor does not satisfy performance requirements under a contract. Typically, a customer is permitted to draw on a Performance Bond if we do not fulfill all terms of a project contract. In such an event, we would be obligated to reimburse the financial institution that issued the Performance Bond for the amounts paid. It has been rare for our Public Safety and Professional Communications business to have a Performance Bond drawn upon. In addition, pursuant to the terms under which we procure Performance Bonds, if our credit ratings are lowered to below "investment grade," we may be required to provide collateral to support a portion of the outstanding amount of Performance Bonds. Such a downgrade could increase the cost of the issuance of Performance Bonds and could make it more difficult to procure Performance Bonds, which would adversely impact our ability to compete for contract awards. Such collateral requirements could also result in less liquidity for other operational needs or corporate purposes. In addition, any future disruptions, uncertainty or volatility in financial and insurance markets could also adversely affect our ability to obtain Performance Bonds and may result in higher funding costs. Financial Risk Management In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks. Foreign Exchange and Currency: We use foreign currency forward contracts and options to hedge both balance sheet and off-balance sheet future foreign currency commitments. Factors that could impact the effectiveness of our hedging programs for foreign currency include accuracy of sales estimates, volatility of currency markets and the cost and availability of hedging instruments. A 10 percent change in currency exchange rates for our foreign currency derivatives held at June 27, 2014 would not have had a material impact on the fair value of such instruments or our results of operations or cash flows. This quantification of exposure to the market risk associated with foreign currency financial instruments does not take into account the offsetting impact of changes in the fair value of our foreign denominated assets, liabilities and firm commitments. See Note 19: Derivative Instruments and Hedging Activities in the Notes for additional information. Interest Rates: As of June 27, 2014, we had long-term debt obligations. The fair value of our long-term debt obligations is impacted by changes in interest rates; however, a 10 percent change in interest rates for our long-term debt obligations at June 27, 2014 would not have had a material impact on the fair value of such long-term debt obligations. Additionally, there is no interest rate risk associated with our long-term debt obligations on our results of operations and cash flows, because the interest rates on our long-term debt obligations are fixed, and because our long-term debt is not putable (redeemable at the option of the holders of the debt prior to maturity). As of June 27, 2014, we also had short-term variable-rate debt outstanding, primarily under our commercial paper program, subject to interest rate risk. We utilize our commercial paper program to satisfy short-term cash requirements, including bridge financing for strategic acquisitions until longer-term financing arrangements are put in place, temporarily funding repurchases under our share repurchase programs and temporarily funding redemption of long-term debt. The interest rate risk associated with this short-term debt on our results of operations and cash flows is not material. We can give no assurances, however, that interest rates will not change significantly or have a material effect on the fair value of our long-term debt obligations or on our results of operations or cash flows over the next twelve months. Impact of Foreign Exchange Approximately 28 percent of our international business was transacted in local currency environments in fiscal 2014 compared with 32 percent in fiscal 2013. The impact of translating the assets and liabilities of these operations to U.S. dollars is included as a component of shareholders' equity. As of June 27, 2014, the cumulative foreign currency translation adjustment included in shareholders' equity was a $6.6 million gain compared with a $27.2 million loss at June 28, 2013. We utilize foreign currency hedging instruments to minimize the currency risk of international transactions. Gains and losses resulting from currency rate fluctuations did not have a material effect on our results in fiscal 2014, 2013 or 2012. Impact of Inflation To the extent feasible, we have consistently followed the practice of adjusting our prices to reflect the impact of inflation on salaries and fringe benefits for employees and the cost of purchased materials and services. Inflation and changing prices did not materially adversely impact our gross margin, revenue or operating income in fiscal 2014, 2013 or 2012. 45-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES The following is not intended to be a comprehensive list of all of our accounting policies or estimates. Our significant accounting policies are more fully described in Note 1: Significant Accounting Policies in the Notes. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes. We consider the policies and estimates discussed below as critical to an understanding of our financial statements because their application places the most significant demands on our judgment, with financial reporting results dependent on estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Specific risks for these critical accounting estimates are described in the following paragraphs. The impact and any associated risks related to these estimates on our business operations are discussed throughout this MD&A where such estimates affect our reported and expected financial results. Senior management has discussed the development and selection of the critical accounting policies and estimates and the related disclosure included herein with the Audit Committee of our Board of Directors. Preparation of this Report requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Besides estimates that meet the "critical" accounting estimate criteria, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenue and expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, including for estimates that we do not deem "critical." Revenue Recognition A significant portion of our business is derived from development and production contracts. Revenue and profits related to development and production contracts are recognized using the percentage-of-completion method, generally based on the ratio of costs incurred to estimated total costs at completion (i.e., the "cost-to-cost" method) with consideration given for risk of performance and estimated profit. The majority of the revenue in our Government Communications Systems segment (and to a certain extent, revenue in our Integrated Network Solutions segment) relates to development and production contracts, and the percentage-of-completion method of revenue recognition is primarily used for these contracts. Change orders, claims or other items that may change the scope of a development and production contract are included in contract value only when the value can be reliably estimated and realization is probable. Possible incentives or penalties and award fees applicable to performance on development and production contracts are considered in estimating contract value and profit rates and are recorded when there is sufficient information to assess anticipated contract performance. Incentive provisions that increase earnings based solely on a single significant event are generally not recognized until the event occurs. Under the percentage-of-completion method of accounting, a single estimated total profit margin is used to recognize profit for each development and production contract over its period of performance. Recognition of profit on development and production fixed-price contracts requires estimates of the total cost at completion and the measurement of progress toward completion. The estimated profit or loss on a development and production contract is equal to the difference between the estimated contract value and the estimated total cost at completion. Due to the long-term nature of many of our programs, developing the estimated total cost at completion often requires judgment. Factors that must be considered in estimating the cost of the work to be completed include the nature and complexity of the work to be performed, subcontractor performance, the risk and impact of delayed performance, availability and timing of funding from the customer and the recoverability of any claims outside the original development and production contract included in the estimate to complete. At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at completion in line with these expectations. After establishing the estimated total cost at completion, we follow a standard estimate at completion process in which management reviews the progress and performance on our ongoing development and production contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally, at the outset of a cost-reimbursable contract (for example, contracts containing award or incentive fees), we establish an estimate of total contract value, or revenue, based on our expectation of performance on the contract. As the cost-reimbursable contract progresses, our estimates of total contract value may increase or decrease if, for example, we receive higher or lower than expected award fees. When adjustments in estimated total costs at completion or in estimates of total contract value are determined, the related impact to operating income is recognized 46-------------------------------------------------------------------------------- Table of Contents using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Anticipated losses on development and production contracts or programs in progress are charged to operating income when identified. We have not made any material changes in the methodologies used to recognize revenue on development and production contracts or to estimate our costs related to development and production contracts in the past three fiscal years. Estimate at completion adjustments had the following impacts to operating income for the periods presented: 2014 2013 2012 (In millions) Favorable adjustments $ 91.3 $ 94.1 $ 77.6 Unfavorable adjustments (38.0 ) (47.0 ) (39.2 ) Net operating income adjustments $ 53.3 $ 47.1 $ 38.4 There were no individual impacts to operating income due to estimate at completion adjustments in fiscal 2014, 2013 or 2012 that were material to our results of operations on a consolidated or segment basis for such periods. We also recognize revenue from arrangements requiring the delivery or performance of multiple deliverables or elements under a bundled sale. In these arrangements, judgment is required to determine the appropriate accounting, including whether the individual deliverables represent separate units of accounting for revenue recognition purposes, and the timing of revenue recognition for each deliverable. If we determine that individual deliverables represent separate units of accounting, we recognize the revenue associated with each unit of accounting separately, and contract revenue is allocated among the separate units of accounting at the inception of the arrangement based on relative selling price. If options or change orders materially change the scope of work or price of the contract subsequent to inception, we reevaluate and adjust our prior conclusions regarding units of accounting and allocation of contract revenue as necessary. The allocation of selling price among the separate units of accounting may impact the timing of revenue recognition, but will not change the total revenue recognized on the arrangement. We establish the selling price used for each deliverable based on the vendor-specific objective evidence ("VSOE") of selling price, or third-party evidence ("TPE") of selling price if VSOE of selling price is not available, or best estimate of selling price ("BESP") if neither VSOE of selling price nor TPE of selling price is available. In determining VSOE of selling price, a substantial majority of the recent standalone sales of the deliverable must be priced within a relatively narrow range. In determining TPE of selling price, we evaluate competitor prices for similar deliverables when sold separately. Generally, comparable pricing of our products to those of our competitors with similar functionality cannot be obtained. In determining BESP, we consider both market data and entity-specific factors, including market conditions, the geographies in which our products are sold, our competitive position and strategy, and our profit objectives. Provisions for Excess and Obsolete Inventory Losses We value our inventory at the lower of cost or market. We balance the need to maintain prudent inventory levels to ensure competitive delivery performance with the risk of excess or obsolete inventory due to changing technology and customer requirements. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory primarily based on our estimated forecast of product demand, anticipated end of product life and production requirements. The review of excess and obsolete inventory applies to all of our business segments. Several factors may influence the sale and use of our inventories, including our decision to exit a product line, technological change and new product development. These factors could result in a change in the amount of obsolete inventory quantities on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory is overvalued, we would be required to recognize such costs in the "Cost of product sales" line item in our Consolidated Statement of Income at the time of such determination. In the case of goods which have been written down below cost, such reduced amount is to be considered the cost for subsequent accounting purposes. We have not made any material changes in the reserve methodology used to establish our inventory loss reserves during the past three fiscal years. As of June 27, 2014, our reserve for excess and obsolete inventory was $38.0 million, or 12 percent of our gross inventory balance, which compares with our reserve of $35.8 million, or 11 percent of our gross inventory balance, as of June 28, 2013. We recorded $4.8 million, $6.7 million and $10.8 million in inventory write-downs that either reduced our reserve for excess and obsolete inventory or our income from continuing operations before income taxes during fiscal 2014, 2013 and 2012, respectively. Although we make reasonable efforts to ensure the accuracy of our forecasts of future product demand, including the impact of planned future product launches, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. 47-------------------------------------------------------------------------------- Table of Contents Goodwill Goodwill in our Consolidated Balance Sheet as of June 27, 2014 and June 28, 2013 was $1,711.2 million and $1,692.0 million, respectively. Goodwill is not amortized. We perform annual (or under certain circumstances, more frequent) impairment tests of our goodwill using a two-step process. The first step is to identify potential impairment by comparing the fair value of each of our reporting units with its net book value, including goodwill, adjusted for allocations of corporate assets and liabilities as appropriate. If the fair value of a reporting unit exceeds its adjusted net book value, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the adjusted net book value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. We estimate fair values of our reporting units based on projected cash flows, and sales and/or earnings multiples applied to the latest twelve months' sales and earnings of our reporting units. Projected cash flows are based on our best estimate of future sales, operating costs and balance sheet metrics reflecting our view of the financial and market conditions of the underlying business; and the resulting cash flows are discounted using an appropriate discount rate that reflects the risk in the forecasted cash flows. The sales and earnings multiples applied to the sales and earnings of our reporting units are based on current multiples of sales and earnings for similar businesses, and based on sales and earnings multiples paid for recent acquisitions of similar businesses made in the marketplace. We then assess whether any implied control premium, based on a comparison of fair value based purely on our stock price and outstanding shares with fair value determined by using all of the above-described models, is reasonable. We have not made any material changes during the past three fiscal years in the methodology used in the assessment of whether or not goodwill is impaired. Fiscal 2012, 2013 and 2014 Impairment Tests In the fourth quarter of fiscal 2012, 2013 and 2014, we performed our annual impairment tests of our reporting units' goodwill. We completed these tests with no adjustment required to the goodwill of any of our reporting units. For all of our reporting units, the fair value determination resulted in an amount that exceeded the reporting unit's adjusted net book value by a substantial margin. See Note 3: Discontinued Operations in the Notes for information regarding impairments related to Broadcast Communications goodwill. Income Taxes and Tax Valuation Allowances We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in our Consolidated Balance Sheet, as well as operating loss and tax credit carryforwards. We follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as required. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. We have not made any material changes in the methodologies used to determine our tax valuation allowances during the past three fiscal years. Our Consolidated Balance Sheet as of June 27, 2014 included current deferred tax assets of $112.2 million, non-current deferred tax assets of $87.3 million and current deferred tax liabilities of $2.1 million. This compares with current deferred tax assets of $121.2 million, non-current deferred tax assets of $124.8 million and current deferred tax liabilities of $1.8 million as of June 28, 2013. For all jurisdictions for which we have net deferred tax assets, we expect that our existing levels of pre-tax earnings are sufficient to generate the amount of future taxable income needed to realize these tax assets. Our valuation allowance related to deferred income taxes, which is reflected in our Consolidated Balance Sheet, was $68.2 million as of June 27, 2014 and $74.1 million as of June 28, 2013. Although we make reasonable efforts to ensure the accuracy of our deferred tax assets, if we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, or if the potential impact of tax planning strategies changes, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results. 48 -------------------------------------------------------------------------------- Table of Contents Impact of Recently Issued Accounting Pronouncements Accounting pronouncements that have recently been issued but have not yet been implemented by us are described in Note 2: Accounting Changes or Recent Accounting Pronouncements in the Notes, which describes the potential impact that these pronouncements are expected to have on our financial position, results of operations and cash flows. FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS The following are some of the factors we believe could cause our actual results to differ materially from our historical results or our current expectations or projections. Other factors besides those listed here also could adversely affect us. See "Item 1A. Risk Factors" of this Report for more information regarding factors that might cause our results to differ materially from those expressed in or implied by the forward-looking statements contained in this Report. Ÿ We depend on U.S. Government customers for a significant portion of our revenue, and the loss of these relationships, a reduction in U.S. Government funding or a change in U.S. Government spending priorities could have an adverse impact on our business, financial condition, results of operations and cash flows. Ÿ We depend significantly on 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, or negative audit findings for, one or more of these contracts could have an adverse impact on our business, financial condition, results of operations and cash flows. Ÿ We could be negatively impacted by a security breach, through cyber attack, cyber intrusion or otherwise, or other significant disruption of our IT networks and related systems or of those we operate for certain of our customers. Ÿ We enter into fixed-price contracts that could subject us to losses in the event of cost overruns or a significant increase in inflation. Ÿ We derive a significant portion of our revenue from international operations and are subject to the risks of doing business internationally, including fluctuations in currency exchange rates. Ÿ Our reputation and ability to do business may be impacted by the improper conduct of our employees, agents or business partners. Ÿ 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. Ÿ The continued effects of the general weakness in the global economy and the U.S. Government's budget deficits and national debt and sequestration could have an adverse impact on our business, financial condition, results of operations and cash flows. Ÿ Our future success will depend on our ability to develop new products, systems, services and technologies that achieve market acceptance in our current and future markets. Ÿ 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. Ÿ We cannot predict the consequences of future geo-political events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our profitability. Ÿ We have made, and may continue to make, strategic acquisitions and divestitures that involve significant risks and uncertainties. Ÿ Disputes with our subcontractors and the inability of our subcontractors to perform, or our key suppliers to timely deliver our components, parts or services, could cause our products or services to be produced or delivered in an untimely or unsatisfactory manner. Ÿ 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. Ÿ 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 effect on our financial condition, results of operations and cash flows. Ÿ We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or indemnity. Ÿ Changes in our effective tax rate may have an adverse effect on our results of operations. Ÿ We have significant operations in locations that could be materially and adversely impacted in the event of a natural disaster or other significant disruption. Ÿ Changes in the regulatory framework under which our managed satellite and terrestrial communications solutions operations are operated could adversely affect our business, financial condition, results of operations and cash flows. 49 -------------------------------------------------------------------------------- Table of Contents Ÿ We rely on third parties to provide satellite bandwidth for our managed satellite and terrestrial communications solutions, and any bandwidth constraints could harm our business, financial condition, results of operations and cash flows. Ÿ Changes in future business or other market conditions could cause business investments and/or recorded goodwill or other long-term assets to become impaired, resulting in substantial losses and write-downs that would adversely affect our results of operations. Ÿ We must attract and retain key employees, and failure to do so could seriously harm us. |