Harris Corporation Form 10-Q Summary
Business context and reporting period
This filing covers Harris Corporation’s second quarter and first two quarters of fiscal 2018, ended December 29, 2017, compared with the periods ended December 30, 2016. The company reported three continuing-operation segments: Communication Systems, Electronic Systems, and Space and Intelligence Systems. IT Services and CapRock were divested in fiscal 2017 and are presented as discontinued operations. The filing predates the company’s later rebranding as L3Harris Technologies.
Key financial metrics
| Metric | Quarter ended Dec. 29, 2017 | Quarter ended Dec. 30, 2016 | First two quarters 2018 | First two quarters 2017 |
|---|
| Revenue | $1,535 million | $1,449 million | $2,948 million | $2,869 million |
| Operating income | $272 million | $277 million | $544 million | $523 million |
| Operating margin | 18% | 19% | 18% | 18% |
| Income from continuing operations | $139 million | $163 million | $306 million | $308 million |
| Diluted continuing-operations EPS | $1.15 | $1.30 | $2.52 | $2.45 |
| Net cash from operating activities | Not separately provided | Not separately provided | $373 million | $295 million |
- Quarterly revenue increased 6%, while operating income declined 2% and diluted continuing-operations EPS declined 12%.
- Gross margin was $536 million, or 35% of revenue, versus $529 million, or 37%, in the prior-year quarter.
- The effective tax rate rose to 39.3% from 30.6% in the quarter and to 33.5% from 29.7% for the first two quarters.
- Total net income was $139 million for the quarter and $300 million for the first two quarters. Prior-year net income included $14 million and $29 million, respectively, from discontinued operations.
- Cash and equivalents were $422 million at December 29, 2017, down from $484 million at June 30, 2017.
- Total debt was approximately $3.9 billion, including $523 million classified as current debt. The company had no borrowings under its $1 billion revolving credit facility, which was fully available.
- Defined benefit plan liabilities were $1.2 billion. Management expected approximately $300 million of voluntary U.S. pension contributions during the remainder of fiscal 2018.
- Fiscal 2018 capital expenditures were expected to be approximately $130 million.
Segment performance and changes versus the prior period
| Segment | Quarter revenue | Year-over-year change | Quarter operating income | Year-over-year change |
|---|
| Communication Systems | $489 million | +18% | $144 million | +19% |
| Electronic Systems | $584 million | +2% | $101 million | -25% |
| Space and Intelligence Systems | $465 million | -1% | $81 million | +7% |
- Communication Systems benefited from higher U.S. Department of Defense tactical communications sales and stronger international tactical communications demand, particularly in the Middle East.
- Electronic Systems profitability was pressured by the absence of a $22 million favorable ADS-B contract settlement recorded in the prior-year quarter, reduced estimate-at-completion benefits, and higher research and development costs. A mission-networks program also recorded a $15 million unfavorable estimate-at-completion adjustment in the quarter.
- Space and Intelligence Systems operating income improved primarily because of higher pension income and productivity savings, despite slightly lower quarterly revenue.
- Quarterly net estimate-at-completion adjustments reduced operating income by $10 million, compared with a $6 million benefit in the prior-year quarter. For the first two quarters, the net impact was a $1 million benefit versus a $19 million benefit in the prior-year period.
- Operating results benefited from the absence of Exelis acquisition-related charges incurred in the prior-year period, although this benefit was partly offset in the current quarter by a $12 million deferred-compensation adjustment.
Cash flow, capital allocation, debt and liquidity
- Operating cash flow increased to $373 million from $295 million, primarily due to lower cash tax payments and the absence of comparable pension contributions following a $400 million contribution in fiscal 2017.
- Investing activities used $45 million, including $43 million of capital expenditures. Financing activities used $394 million, including $150 million of share repurchases and $137 million of dividends.
- The company issued $250 million of floating-rate notes due April 2020 and used the proceeds and cash on hand to repay the remaining $253 million of its five-year term-loan tranche. Variable-rate debt totaled $270 million.
- The quarterly dividend increased from $0.53 to $0.57 per share, or an annualized rate of $2.28 per share.
- The company repurchased 1.15 million shares for $150 million during the first two quarters and had approximately $823 million remaining under its repurchase authorization.
- Management stated that existing cash, operating cash flow, available credit and market access were expected to support working capital, capital expenditures, dividends, repurchases, debt maturities and anticipated pension contributions for the next 12 months and the reasonably foreseeable future.
Guidance, outlook, unusual items and risks
- The filing does not provide a comprehensive revenue or earnings-per-share outlook. It provides expectations for approximately $130 million of fiscal 2018 capital expenditures, approximately $300 million of remaining fiscal 2018 voluntary U.S. pension contributions, and tax payments approximately equal to or marginally below tax expense.
- The Tax Cuts and Jobs Act produced a $52 million estimated write-down of deferred tax assets, partly offset by a $26 million benefit from the lower estimated fiscal 2018 tax rate and a $22 million benefit from releasing uncertain-tax-position provisions. Tax accounting remained provisional, and additional changes were possible.
- The company expected to adopt the new revenue-recognition standard in fiscal 2019. Management anticipated earlier recognition of revenue and costs on certain contracts, but had not determined the adoption method or quantified the full impact.
- Major risks include dependence on U.S. Government funding and contracts, contract termination or audit exposure, fixed-price contract cost overruns, estimate-at-completion changes, cyber and information-security events, international and foreign-exchange risks, pension funding requirements, high indebtedness, credit-rating changes, litigation, environmental liabilities, and potential tax or indemnification obligations related to prior spin-offs.
- Probable litigation accruals were not material, and management believed existing legal and environmental matters would not have a material adverse effect, although unfavorable outcomes exceeding accrued amounts remained reasonably possible.
Investor verification points
- Verify the effect of the Tax Cuts and Jobs Act adjustments and the final treatment of provisional deferred-tax and foreign-earnings amounts.
- Monitor Electronic Systems margins, ADS-B program performance, and future estimate-at-completion adjustments.
- Assess the company’s ability to fund approximately $300 million of pension contributions while meeting the April 2018 $500 million note maturity and maintaining dividends and repurchases.
- Reconcile reported continuing-operations trends with discontinued-operations treatment and the fiscal 2017 segment restatements.
- Review the future impact of the revenue-recognition and lease accounting standards, including contract timing and balance-sheet changes.
- Evaluate leverage, refinancing needs, variable-rate exposure, U.S. Government budget uncertainty, and the availability of the revolving credit facility.
