Harris Corporation — Fiscal 2011 First Quarter Form 10-Q
Reporting period: Quarter ended October 1, 2010, compared with the quarter ended October 2, 2009. The filing identifies the registrant as Harris Corporation, the predecessor company to L3Harris Technologies. Financial statements are unaudited and should be read with the fiscal 2010 Form 10-K.
Business Context
Harris operated through three segments: RF Communications, Government Communications Systems, and Broadcast Communications. The quarter included approximately two months of results from CapRock Holdings, acquired July 30, 2010, a managed satellite communications provider serving government, energy, and maritime customers.
Key Financial Metrics
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $1,405.4 million | $1,203.0 million | Up 16.8% |
| Gross margin | $524.3 million; 37.3% | $390.9 million; 32.5% | Margin up 480 basis points |
| Income before taxes | $251.5 million | $160.8 million | Up 56.5% |
| Net income | $163.9 million | $104.5 million | Up 56.8% |
| Diluted EPS | $1.27 | $0.79 | Up 60.8% |
| Net margin | 11.7% | 8.7% | Up 300 basis points |
| Operating cash flow | $294.9 million | $134.5 million | Up 119.3% |
Segment Performance
| Segment | Revenue | Year-over-year change | Operating income | Operating margin |
|---|---|---|---|---|
| RF Communications | $566.5 million | Up 33.7% | $228.5 million | 40.3% |
| Government Communications Systems | $735.5 million | Up 10.2% | $78.3 million | 10.6% |
| Broadcast Communications | $121.6 million | Up 2.4% | $(8.6) million | (7.1%) |
Engineering, selling and administrative expenses increased 20.3% to $255.2 million, or 18.2% of revenue, from 17.6%. The effective tax rate was 34.8%, compared with 35.0% in the prior-year quarter. Interest expense was $17.8 million, slightly below $18.2 million.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $341.4 million at October 1, 2010, down from $455.2 million at July 2, 2010.
- Investing cash outflow was $569.4 million, including $518.0 million paid for acquired businesses, $37.1 million of property, plant and equipment additions, and $10.0 million for a cost-method investment.
- Financing cash flow was positive $159.0 million, primarily reflecting $244.1 million of borrowings used partly to fund the CapRock acquisition, offset by $55.5 million of share repurchases and $32.2 million of dividends.
- Total debt was approximately $1.45 billion, consisting of $275.0 million of commercial paper, $0.7 million of current long-term debt, and $1,176.4 million of long-term debt.
- The company had $475.0 million available under its $750 million revolving credit facility and the full $300 million available under a new 364-day revolving credit facility. No borrowings were outstanding under either facility at October 1, 2010; commercial paper was supported by the $750 million facility.
- Management stated that it expected existing cash, operating cash flow, credit facilities, and capital-market access to support anticipated needs for the next 12 months, while noting that future liquidity is not assured.
Material Changes and Unusual Items
- CapRock acquisition: Estimated net purchase price was $528.3 million. CapRock contributed $64.6 million of revenue and a $0.4 million pretax loss, including $2.0 million of acquisition-related charges, for the post-acquisition period included in the quarter. Goodwill increased by $356.5 million.
- RF Communications: Results benefited from deliveries for U.S. Department of Defense MRAP and M-ATV programs, favorable product mix, and operating efficiencies. Segment backlog was $1.67 billion at quarter-end.
- Government Communications Systems: Revenue benefited from GOES-R program ramp-up and CapRock, while operating income declined because the prior-year period included favorable FAA FTI award fees and because of CapRock-related charges.
- Broadcast Communications: The segment moved to an $8.6 million operating loss from $0.3 million of operating income. Results included a $1.0 million cost-reduction charge; management expected approximately $5 million of total cost-reduction charges for fiscal 2011.
- Capital allocation: Harris repurchased 1,173,900 shares for approximately $50.0 million under its repurchase program and had approximately $400.5 million of authorization remaining. The quarterly dividend increased from $0.22 to $0.25 per share, or an annualized $1.00.
- Fiscal 2011 capital expenditures, including capitalized software, were expected to be between $250 million and $275 million. Management also indicated that additional strategic acquisitions were possible.
Outlook and Principal Risks
No formal consolidated revenue or earnings guidance was provided in the filing. Management described liquidity as adequate and cited strong operating cash flow, segment backlog, and anticipated program activity. The filing cautions that results may be affected by U.S. Government funding priorities, contract termination or partial funding, fixed-price contract cost overruns, international and currency exposure, acquisition integration, satellite bandwidth availability, cybersecurity events, litigation, export restrictions, customer and supplier concentration, and potential goodwill or investment impairments.
The company reported compliance with its revolving-credit covenants and stated that no material changes had occurred to previously disclosed risk factors. A securities class-action lawsuit involving Harris, Harris-related officers, and former Harris Stratex Networks entities remained pending; management stated that defendants had meritorious defenses and intended to defend the matter vigorously.
Investor Verification Checklist
- Verify the impact, integration progress, and subsequent performance of the CapRock acquisition, including the preliminary purchase-price allocation and goodwill.
- Assess whether RF Communications growth and unusually high margins were sustainable after MRAP and M-ATV program deliveries.
- Monitor Government Communications Systems margins, GOES-R ramp-up, FDCA wind-down, classified-program activity, and CapRock profitability.
- Track the Broadcast Communications turnaround, cost-reduction charges, orders, and book-to-bill performance.
- Reconcile cash use for acquisitions, capital expenditures, dividends, and share repurchases with debt levels and available liquidity.
- Review fixed-price contract estimates, government funding and termination exposure, satellite bandwidth commitments, litigation developments, and potential impairment risks.