Filing Overview
Registrant: Harris Corporation, now identified in the request metadata as L3Harris Technologies, Inc. The supplied filing is a Form 10-K for the fiscal year ended July 3, 2015, not a 2014 fourth-quarter filing. Fiscal 2015 included 53 weeks; fiscal 2014 included 52 weeks.
Harris provided secure communications, aerospace, defense, information technology, surveillance, navigation, air-traffic-management and managed network solutions. Fiscal 2015 reporting included RF Communications, Government Communications Systems, Integrated Network Solutions and Exelis. The company acquired Exelis on May 29, 2015 and divested its Commercial Healthcare Solutions operation on July 1, 2015.
Key Financial Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $5.083 billion | $5.012 billion | 1.4% increase |
| Gross margin | $1.721 billion; 33.9% | $1.702 billion; 34.0% | Margin broadly stable |
| Income from continuing operations | $334 million | $539 million | 38.1% decrease |
| Diluted continuing-operations EPS | $3.11 | $5.00 | 37.8% decrease |
| Net income attributable to Harris | $334 million | $535 million | 37.6% decrease |
| Operating cash flow | $854 million | $849 million | $5 million increase |
| Capital expenditures | $148 million | $209 million | Decrease |
| Cash and cash equivalents | $481 million | $561 million | $80 million decrease |
| Total debt | $5.168 billion | $1.577 billion | Increase primarily from Exelis financing |
| Unfunded defined-benefit obligations | $2.181 billion | Not comparable after Exelis acquisition | Material increase from acquired plans |
Segment Performance
| Segment | 2015 Revenue | 2015 Operating Income | Year-over-Year Change |
|---|---|---|---|
| RF Communications | $1.775 billion | $549 million; 30.9% margin | Revenue down 2.9%; operating income down 2.3% |
| Government Communications Systems | $1.855 billion | $292 million; 15.7% margin | Revenue up 3.0%; operating income up 5.4% |
| Integrated Network Solutions | $1.253 billion | $42 million; 3.4% margin | Revenue down 14.4%; operating income down 63.8% |
| Exelis | $279 million | $37 million; 13.3% margin | Included only from May 29, 2015 |
Material Changes Versus the Prior Comparable Period
- Exelis was acquired for approximately $4.7 billion, consisting of approximately $3.2 billion of cash and $1.5 billion of Harris stock. Exelis contributed $279 million of revenue and $37 million of operating income during the partial fiscal-year period.
- Fiscal 2015 earnings were reduced by $217 million after tax, or $2.03 per diluted share, in transaction, financing, integration, restructuring and other acquisition-related charges. Total pretax charges related to Exelis were approximately $313 million.
- Harris issued $2.4 billion of new fixed-rate debt and borrowed $1.3 billion under variable-rate term loans to finance the acquisition and related transactions. It also redeemed $750 million of older notes for approximately $863 million, recording a $118 million pretax loss on debt prepayment.
- Integrated Network Solutions weakened materially because of lower U.S. Government revenue, particularly from the Navy/Marine Corps Intranet and U.S. Air Force Network Centric Solutions programs. The company recorded a $19 million impairment related to the NMCI program and other long-lived-asset impairments.
- Company-wide funded and unfunded backlog increased to approximately $12.2 billion from $7.2 billion, primarily because of the Exelis acquisition. Funded backlog increased to approximately $5.3 billion from $3.0 billion; management expected to convert approximately 68% of funded backlog to revenue in fiscal 2016, subject to delays and cancellations.
- Fiscal 2015 goodwill increased to $6.348 billion from $1.711 billion, largely due to Exelis. No goodwill impairment was recorded.
- The company adopted new balance-sheet presentation rules for debt issuance costs, presenting them as a deduction from debt. The change did not materially affect results or cash flows.
Liquidity, Debt and Capital Allocation
- Operating cash flow was $854 million, while investing cash flow was negative $3.284 billion, primarily reflecting $3.186 billion of net cash paid for Exelis.
- Financing activities provided $2.373 billion, including $3.683 billion of net borrowing proceeds and $954 million of debt repayments.
- The company had a new $1 billion senior unsecured revolving credit facility, expiring July 2020, with no borrowings outstanding at July 3, 2015.
- The consolidated total-indebtedness-to-total-capital ratio was 60%, below the 67.5% covenant limit applicable at fiscal year-end. The covenant limit declines to 65% after February 29, 2016.
- Fiscal 2015 dividends totaled $198 million, or $1.88 per share. On August 28, 2015, the quarterly dividend was increased from $0.47 to $0.50 per share, or $2.00 annualized.
- The company repurchased 2.1 million shares for approximately $150 million during fiscal 2015 and had approximately $684 million remaining under its repurchase authorization.
- Fiscal 2016 capital expenditures were expected to be approximately $200 million. Expected fiscal 2016 contributions to U.S. qualified pension plans were $170 million to $180 million.
- Management stated that available cash, operating cash flow, the credit facility and access to capital markets were expected to satisfy anticipated liquidity needs, while cautioning that increased debt, government-budget uncertainty and market conditions could affect future liquidity.
Outlook, Risks and Unusual Items
- Management expected a constrained U.S. Government spending environment in fiscal 2016, with potential reliance on a continuing resolution and renewed sequestration-related uncertainty.
- The company reorganized its reporting structure for fiscal 2016 into Communication Systems, Critical Networks, Electronic Systems, and Space and Intelligence Systems. Historical fiscal 2015 segment results were not recast in the supplied filing.
- Key risks include dependence on U.S. Government customers, annual appropriations, contract termination and audit risk, competitive bidding and bid protests, fixed-price contract cost overruns, cyberattacks, export restrictions, foreign-exchange exposure, supplier disruptions, technological obsolescence and acquisition integration.
- Exelis brought substantial defined-benefit obligations. Total defined-benefit plans were underfunded by approximately $2.181 billion at year-end, and updated mortality assumptions increased projected obligations and expected future pension cost.
- The company disclosed an ongoing SEC and Department of Justice investigation related to possible improper payments and expenses associated with the former Carefx China operations. Management stated that it did not believe the matter would have a material adverse effect based on information then available.
- Environmental liabilities were estimated at approximately $47 million across 62 potentially responsible-party sites. Management stated that existing legal and environmental matters were not expected to be material, but noted that outcomes could differ from recorded amounts.
- A pending arbitration related to the prior Broadcast Communications divestiture had a potential purchase-price adjustment ranging from no additional adjustment to a $67 million downward adjustment; the company disputed the buyer’s claim.
- Management reported effective disclosure controls and internal control over financial reporting. However, Exelis, representing 63% of total assets, 39% of total liabilities and 5% of revenue, was excluded from the fiscal 2015 internal-control assessment and was to be included in fiscal 2016.
Important Facts for Investors to Verify
- Confirm the applicable period: the source is a fiscal 2015 10-K, not a 2014 Q4 filing, and the registrant name in the source is Harris Corporation.
- Reconcile reported earnings with and without the $217 million after-tax Exelis-related charge and assess the recurring earnings base after integration.
- Review Exelis purchase-accounting estimates, including approximately $4.690 billion of goodwill, $1.606 billion of identifiable intangible assets and $2.311 billion of assumed defined-benefit obligations.
- Evaluate leverage, debt maturities, variable-rate exposure, covenant headroom and pension funding requirements after the acquisition.
- Assess whether the decline in Integrated Network Solutions revenue and margin, including the NMCI loss, is stabilizing or represents continuing structural pressure.
- Validate backlog quality, funding status, expected conversion timing and exposure to contract cancellations, options and annual appropriations.
- Monitor the Carefx China investigation, tax audits, environmental matters, Broadcast Communications arbitration and potential indemnification obligations related to the Vectrus and prior Exelis spin-offs.