Business Context and Reporting Period
This filing is Harris Corporation’s Form 10-K for the fiscal year ended June 29, 2012, not a 2011 fourth-quarter filing. Harris was an international communications and information technology company serving government and commercial customers in more than 125 countries, with approximately 15,200 employees. Its continuing operations comprised RF Communications, Integrated Network Solutions and Government Communications Systems.
Fiscal 2012 results were presented on a continuing-operations basis. The company classified Cyber Integrated Solutions and Broadcast Communications as discontinued operations and restated prior-period operating results accordingly. The filing was signed August 27, 2012.
Financial Performance and Position
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $5,451.3 million | $5,418.4 million | +0.6% |
| Income from continuing operations | $558.7 million | $599.6 million | -6.8% |
| Diluted continuing-operations EPS | $4.80 | $4.69 | +2.3% |
| Continuing-operations margin | 10.2% | 11.1% | -0.9 percentage points |
| Gross margin | 34.5% | 34.8% | -0.3 percentage points |
| Net income attributable to Harris | $30.6 million | $588.0 million | Significant decrease |
| Operating cash flow | $852.9 million | $833.1 million | +2.4% |
| Capital expenditures and capitalized software | $233.8 million | $324.9 million | Lower year over year |
| Cash and cash equivalents | $356.0 million | $366.9 million | -$10.9 million |
| Long-term debt | $1,883.0 million | $1,887.2 million | Broadly stable |
Net income was heavily affected by discontinued operations, which produced a $528.1 million after-tax loss, including impairment and exit charges. The continuing-operations effective tax rate was 34.0%, compared with 33.9% in fiscal 2011. Interest expense increased to $113.2 million from $90.4 million.
At year-end, total assets were $5,592.8 million, total equity was $1,946.1 million and net working capital was $689.5 million. The company reported $159.4 million of short-term debt, primarily commercial paper, and $1,887.8 million of total debt including the current portion.
Segment Results
| Segment | Fiscal 2012 Revenue | Change | Operating Income | Operating Margin |
|---|---|---|---|---|
| RF Communications | $2,144.1 million | -6.3% | $703.7 million | 32.8% |
| Integrated Network Solutions | $1,571.2 million | +8.7% | $69.9 million | 4.4% |
| Government Communications Systems | $1,833.8 million | +3.2% | $256.2 million | 14.0% |
Government customers, including foreign military sales funded through the U.S. Government, represented approximately 70% of total revenue, down from 78% in fiscal 2011. International revenue from exports or foreign operations was $1,330.1 million, or 24% of total revenue, compared with 19% in fiscal 2011.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat because growth in Integrated Network Solutions and Government Communications Systems offset lower RF Communications revenue.
- RF Communications declined because fiscal 2011 benefited from approximately $80 million of expedited tactical-radio shipments for Mine Resistant Ambush Protected vehicles and a favorable product mix.
- Integrated Network Solutions revenue grew through the full-year contribution of the CapRock, Schlumberger Global Connectivity Services and Carefx acquisitions, but operating income declined because of Healthcare Solutions losses, weaker IT Services performance and acquisition integration costs.
- Government Communications Systems improved on favorable product mix and strong program performance.
- Interest expense rose 25.2%, primarily because of acquisition-related borrowings and debt used to support early fiscal 2012 share repurchases.
- Share count declined materially as Harris repurchased 12.2 million shares for approximately $473.5 million, compared with 5.3 million shares for $256.1 million in fiscal 2011.
- Total funded and unfunded backlog declined to approximately $6,993 million from $7,523 million. Funded backlog increased modestly to approximately $3,056 million from $3,035 million.
Cash Flow, Liquidity and Capital Allocation
- Operating cash flow was $852.9 million. Investing cash outflow was $248.9 million, including $209.9 million of property, plant and equipment additions, $23.9 million of capitalized software and $14.1 million of net cash paid for acquired businesses.
- Financing cash outflow was $609.8 million, primarily reflecting share repurchases of $473.5 million and dividends of $139.6 million.
- Harris had $356.0 million of cash, $600.0 million available under its $750 million revolving credit facility and the full $250 million available under its 364-day facility at year-end. It had $150.0 million of commercial paper outstanding.
- No long-term debt was scheduled to mature until fiscal 2016, when $300.0 million was due. Management stated that existing cash, operating cash flow, credit facilities and market access were expected to support anticipated needs for at least the next 12 months.
- Fiscal 2013 capital expenditures, including capitalized software, were expected to be $210 million to $230 million. The company expected to replace its existing revolving credit facilities with a single five-year $1 billion facility in the first quarter of fiscal 2013.
- The quarterly dividend was increased from $0.33 to $0.37 per share on August 25, 2012, producing an annualized rate of $1.48 per share.
Outlook, Risks, Contingencies and Unusual Items
Management emphasized growth opportunities in managed satellite communications, public safety communications, healthcare information technology and international markets, particularly Brazil and the Middle East. It also planned to pursue productivity, supply-chain and working-capital improvements while maintaining dividends, repurchases and selective acquisitions.
The company expected to fill approximately 67% of total funded backlog during fiscal 2013, including approximately 48% of RF Communications funded backlog, 78% of Integrated Network Solutions funded backlog and 83% of Government Communications Systems funded backlog. Backlog is subject to delays, cancellations, funding limitations and changes in customer requirements.
- Discontinued-operations charges totaled $528.1 million after tax. CIS generated $142.6 million of pretax exit charges, while Broadcast Communications incurred a $447.6 million non-cash impairment charge, including $395.6 million of goodwill impairment. The company expected to complete the related dispositions during fiscal 2013.
- The company’s largest structural risk was dependence on U.S. Government funding, appropriations and procurement priorities. Management specifically identified potential sequestration and defense-budget reductions as risks to orders, revenue, margins and cash flow.
- Fixed-price contracts expose Harris to cost overruns, inflation, supplier problems and schedule delays. Government contracts may also be terminated for convenience, audited or subject to funding interruptions.
- Other material risks included cyberattacks, export-license restrictions, international currency and political risks, competition, intellectual-property disputes, supplier and subcontractor failures, regulatory changes, natural disasters and goodwill impairment.
- Harris disclosed an internal investigation involving potentially improper gifts and payments by the Carefx China operations. The company voluntarily disclosed the matter to the Department of Justice and SEC, stated that the investigation was incomplete and said it did not then expect a material financial impact.
- Management stated that existing litigation and environmental matters were reserved, insured or not expected to have a material adverse effect. The company was associated with 14 environmental sites and estimated a discounted environmental liability of approximately $4.9 million.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective.
Investor Verification Checklist
- Verify that fiscal 2012 continuing-operations results exclude CIS and Broadcast Communications and reconcile the $528.1 million discontinued-operations loss and related impairment charges.
- Assess whether Integrated Network Solutions can restore margins after the Healthcare Solutions loss, acquisition integration costs and IT Services program changes.
- Track RF Communications orders, backlog conversion and the transition from wartime tactical-radio demand to wideband modernization.
- Review U.S. Government budget, appropriation and sequestration developments, including their effect on the company’s 70% government-linked revenue base.
- Monitor commercial paper usage, the planned replacement credit facility, debt maturities and compliance with leverage and interest-coverage covenants.
- Follow the Carefx China FCPA investigation and any resulting regulatory, legal or compliance costs.
- Evaluate the quality and collectability of contract assets, including $403.1 million of unbilled costs and accrued earnings on fixed-price contracts.
- Confirm execution of the announced fiscal 2013 capital-expenditure, backlog-conversion, divestiture and shareholder-return plans.