Harris Corporation Fiscal 2014 Form 10-K Summary
Reporting period: The supplied filing is Harris Corporation’s Form 10-K for the fiscal year ended June 27, 2014, not a 2013 Q4 filing. Fiscal 2014 contained 52 weeks. Harris was an international communications and information technology company serving government and commercial markets in more than 125 countries, with approximately 14,000 employees.
Business Context
Continuing operations comprised three segments: RF Communications, Integrated Network Solutions, and Government Communications Systems. Harris completed the sale of its remaining Cyber Integrated Solutions assets in the first quarter of fiscal 2014; Broadcast Communications had been sold in fiscal 2013. Historical segment results were adjusted for the transfer of the cyber security network testing operation from Government Communications Systems to Integrated Network Solutions.
Key Financial Metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Revenue | $5,012.0 million | $5,111.7 million | Down 2.0% |
| Gross margin | 33.9% | 33.8% | Up 0.1 percentage point |
| Income from continuing operations attributable to Harris | $539.8 million | $466.4 million | Up 15.7% |
| Diluted continuing-operations EPS | $5.00 | $4.16 | Up 20.2% |
| Net income attributable to Harris | $534.8 million | $113.0 million | Up 373.3% |
| Operating cash flow | $849.2 million | $833.0 million | Up $16.2 million |
| Cash and cash equivalents | $561.0 million | $321.0 million | Up $240.0 million |
| Long-term debt | $1,575.8 million | $1,577.1 million | Essentially unchanged |
Income from continuing operations represented 10.8% of revenue versus 9.1% in fiscal 2013. The effective tax rate increased to 32.2% from 30.5%. Net income benefited substantially from the reduction in discontinued-operation losses: discontinued operations produced a $5.0 million loss in fiscal 2014 compared with a $353.4 million loss in fiscal 2013.
Segment Performance
| Segment | Fiscal 2014 Revenue | Year-over-Year Change | Fiscal 2014 Operating Income | Operating Margin |
|---|---|---|---|---|
| RF Communications | $1,828.0 million | Down 1.1% | $561.5 million | 30.7% |
| Integrated Network Solutions | $1,462.9 million | Down 7.2% | $116.4 million | 8.0% |
| Government Communications Systems | $1,801.2 million | Up 1.0% | $276.9 million | 15.4% |
- RF Communications revenue was pressured by a 12% decline in Public Safety and Professional Communications, partly offset by 4% growth in Tactical Communications. Segment funded backlog declined to $1.134 billion from $1.341 billion.
- Integrated Network Solutions revenue declined primarily because of lower U.S. Government revenue, but operating income increased 45.9% due to lower restructuring, impairment, software write-off and other expenses, together with operational improvements.
- Government Communications Systems benefited from stronger classified, FAA NextGen DataComm, Army MET, F-35 and wireless-products activity, partially offset by lower NOAA GOES-R revenue. Program execution improved gross margin.
Cash Flow, Liquidity and Capital Allocation
- Operating cash flow was $849.2 million. Investing cash use was $162.6 million, including $209.3 million of capital expenditures and $42.0 million of proceeds from discontinued-operations sales.
- Financing cash use was $448.1 million, including $309.4 million of share repurchases, $180.3 million of dividends and $99.7 million of net debt repayments, partly offset by $141.3 million of employee stock-option proceeds.
- Short-term debt was $58.3 million and total debt, including the current portion of long-term debt, was $1.577 billion. No long-term debt matured until December 2017.
- Harris had a fully available $1.0 billion senior unsecured revolving credit facility expiring in September 2017 and reported compliance with its debt covenants.
- The company repurchased 4.56 million shares for approximately $300 million under its repurchase program and had approximately $834 million of remaining authorization at year-end.
- The quarterly dividend was $0.42 per share during fiscal 2014. On August 23, 2014, the board increased it to $0.47 per share, or an annualized $1.88.
Material Changes Versus Fiscal 2013
- Revenue declined modestly, but continuing-operations earnings and margins improved materially.
- ESA expenses fell 10.4%, primarily because fiscal 2013 included $74.7 million of restructuring and other charges and fiscal 2014 benefited from prior-year actions.
- Net interest expense declined to $90.8 million from $106.9 million after the 2013 redemption of $300 million of 5% notes.
- Fiscal 2013 included significant discontinued-operation impairments and sale losses, while fiscal 2014 reflected only a $5.0 million discontinued-operations loss, including a $6.9 million after-tax increase in the Broadcast Communications sale loss and a $1.9 million after-tax gain on the CIS sale.
- Company-wide funded and unfunded backlog increased to approximately $7.202 billion from $6.789 billion, although funded backlog declined to $3.018 billion from $3.179 billion. Approximately 59% of funded backlog was expected to be filled in fiscal 2015.
- International revenue increased to $1.482 billion, or 30% of total revenue, from $1.313 billion, or 26%, in fiscal 2013.
Guidance, Outlook, Risks and Unusual Items
- Management anticipated constrained U.S. Government spending in fiscal 2015. Fiscal 2015 appropriations had not been finalized, creating a risk of operating under a continuing resolution.
- Fiscal 2015 capital expenditures were expected to be approximately $200 million. Management stated that cash, operating cash flow, available credit and capital-market access were expected to fund working capital, capital expenditures, dividends, repurchases and potential acquisitions for the foreseeable future.
- Key risks include dependence on U.S. Government customers, appropriations and sequestration; competitive bidding and contract protests; termination or audit of government contracts; fixed-price contract cost overruns; cybersecurity incidents; export controls and international currency, political and compliance risks; supplier and subcontractor performance; litigation and intellectual-property claims; tax audits; impairment of goodwill and other assets; and extreme-weather or other operational disruptions.
- Harris disclosed continuing SEC and Department of Justice investigations concerning potentially improper payments and expenses associated with the former Carefx China operations. The company was cooperating and stated that it did not believe the matter would materially affect its financial condition, results or cash flows, but could not predict the scope or outcome.
- Environmental liabilities were estimated at approximately $5.1 million on a discounted basis, with the company named as a potentially responsible party at 14 sites. Management did not expect these matters to be material.
- Net estimate-at-completion adjustments favorably affected operating income by $53.3 million in fiscal 2014. No individual adjustment was material to consolidated or segment results.
Investor Verification Checklist
- Verify that the applicable comparison is fiscal 2014 versus fiscal 2013, since the supplied filing is not a 2013 Q4 report.
- Review the reconciliation of continuing operations to total net income and the discontinued-operations disclosures before assessing earnings growth.
- Assess the sustainability of margin improvement, particularly the Integrated Network Solutions turnaround and Government Communications Systems program execution.
- Monitor U.S. Government appropriations, continuing-resolution exposure, sequestration and the conversion of funded backlog into revenue.
- Review debt maturities, commercial-paper usage, the $1.0 billion revolving facility and approximately $727.4 million of performance and other commercial commitments.
- Follow developments in the Carefx China SEC/DOJ investigations, Broadcast Communications sale-related litigation and tax examinations.
- Evaluate the effect of share repurchases and dividend increases on leverage, liquidity and per-share earnings.