Harris Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011, the first quarter of fiscal 2012. The filing identifies the registrant as Harris Corporation, the predecessor company to the company identified in the request metadata as L3Harris Technologies, Inc. Financial statements are unaudited and should be read with the fiscal 2011 Form 10-K.
Business context
Harris reported three operating segments: RF Communications, Integrated Network Solutions, and Government Communications Systems. Operations serve military, government, public safety, communications, information technology, healthcare, and commercial customers, with significant dependence on U.S. Government programs.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $1,460.3 million | $1,405.4 million | 3.9% increase |
| Gross margin | $493.6 million; 33.8% | $524.3 million; 37.3% | Margin down 350 basis points |
| Income before taxes | $176.3 million | $251.5 million | 29.9% decrease |
| Net income attributable to Harris | $121.6 million | $163.9 million | 25.8% decrease |
| Diluted EPS | $1.01 | $1.27 | 20.5% decrease |
| Net income margin | 8.3% | 11.7% | Down 340 basis points |
| Operating cash flow | $78.7 million | $294.9 million | 73.3% decrease |
| Capital expenditures and capitalized software | $81.9 million | $41.4 million | Higher investment |
Liquidity and balance sheet: Cash and cash equivalents were $305.4 million at September 30, 2011, compared with $366.9 million at July 1, 2011. Receivables were $920.7 million and inventories were $690.5 million. Short-term debt increased to $561.0 million from $180.0 million, primarily because commercial paper funded share repurchases. Current portion of long-term debt was $4.4 million and long-term debt was $1,886.8 million, for reported debt of approximately $2.45 billion including short-term debt and the current portion.
The company had $190.0 million of availability under its $750 million senior unsecured revolving facility and the full $250 million available under its amended 364-day facility. No borrowings were outstanding under either revolving facility at quarter-end, although commercial paper of approximately $560.0 million was supported by the $750 million facility. Management stated that it was in compliance with applicable debt covenants and did not expect material liquidity issues over the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Integrated Network Solutions acquisitions, including CapRock and Schlumberger GCS, partly offset by lower RF Communications revenue.
- RF Communications revenue declined 12.3% to $497.1 million and operating income declined 32.6% to $154.0 million. The prior-year period benefited from expedited tactical-radio shipments for MRAP vehicles and unusually favorable product mix.
- Integrated Network Solutions revenue increased 25.5% to $554.2 million, but operating income fell 65.4% to $9.2 million. Results included $9.6 million of acquisition integration and other costs and $15.7 million of expected losses from new cyber and commercial healthcare initiatives.
- Government Communications Systems revenue increased 4.6% to $443.7 million, while operating income increased 41.5% to $63.1 million, reflecting strong program performance and favorable product mix.
- Engineering, selling and administrative expenses increased 14.0% to $290.9 million, primarily due to acquired businesses and integration costs.
- Interest expense increased 57.3% to $28.0 million because of higher borrowings used for acquisitions and share repurchases.
- The effective tax rate declined to 31.3% from 34.8%, benefiting from lower state taxes and reduced estimated tax liabilities.
- Weighted-average diluted shares declined to 119.4 million from 127.7 million because of share repurchases, partially offsetting the earnings decline on a per-share basis.
Cash deployment, outlook, and unusual items
- The company repurchased 10.6 million shares for approximately $400.0 million under a new $1 billion authorization. Approximately $600.2 million remained authorized at September 30, 2011.
- The quarterly dividend increased to $0.28 per share from $0.25, resulting in $32.6 million of cash dividends during the quarter. Future dividends and repurchases remained discretionary.
- Management expected fiscal 2012 capital expenditures, including capitalized software, of $265 million to $285 million and indicated that strategic acquisitions could require additional cash outlays.
- RF Communications backlog was $1.5 billion at quarter-end. First-quarter orders totaled $514 million, and Tactical Communications book-to-bill exceeded one.
- Government Communications Systems received several notable awards, including potential contract values of $85 million, $51 million, and $125 million in aggregate classified awards. Integrated Network Solutions also reported several multiyear awards, but stated values were potential contract ceilings and not guaranteed revenue.
- Comprehensive income attributable to Harris was $84.3 million, compared with $173.4 million in the prior-year quarter, primarily reflecting a $39.4 million foreign-currency translation loss.
- The HSTX Securities Litigation settlement was approved after quarter-end and did not materially affect results, financial condition, or cash flows.
Risks and contingencies
- Revenue depends significantly on U.S. Government customers and contracts that may be partially funded, audited, regulated, or terminated; changes in defense budgets and government priorities could materially affect results.
- Fixed-price contracts expose the company to cost overruns and inflation risk, while acquisitions create integration, execution, and impairment risks.
- New cyber and healthcare initiatives were generating expected losses, and the company carried substantial goodwill and intangible assets subject to potential impairment.
- Higher commercial-paper borrowings increase refinancing and interest-rate exposure. A downgrade below investment grade could restrict commercial-paper access, increase borrowing costs, require collateral, and affect contract awards.
- Other risks included cybersecurity incidents, foreign-currency movements, export restrictions, geopolitical events, supplier and subcontractor performance, litigation, intellectual-property claims, tax audits, and natural disasters.
- Management reported no material changes to previously disclosed risk factors and stated that existing litigation was either reserved, insured, or not expected to have a material adverse effect.
Investor verification checklist
- Verify the corporate identity and successor relationship between Harris Corporation in this filing and L3Harris Technologies, Inc.
- Assess whether the earnings decline reflects primarily the nonrecurrence of MRAP-related shipments and whether RF Communications margins normalize.
- Review the sustainability and profitability of the CapRock, Schlumberger GCS, and Carefx acquisitions, including the $9.6 million integration charges and cyber and healthcare losses.
- Reconcile cash generation with the $400.0 million share repurchase, increased commercial-paper balance, planned capital expenditures, dividends, and potential acquisitions.
- Monitor debt maturities, covenant compliance, commercial-paper access, credit ratings, and available revolver capacity.
- Evaluate the durability of Government Communications Systems program performance and the conversion of reported contract awards and backlog into funded revenue.
- Review subsequent filings for updated guidance, additional acquisitions or repurchases, litigation developments, and changes in U.S. Government funding.