Harris Corporation Form 10-Q Summary
Reporting period: Quarter ended October 2, 2009, the first quarter of fiscal 2010. The filing is by Harris Corporation, the predecessor entity associated with the company identified in the request as L3Harris Technologies. Financial statements are unaudited and compare with the quarter ended September 26, 2008. Harris Stratex Networks was spun off on May 27, 2009 and is presented as discontinued operations.
Financial Performance and Position
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Revenue | $1,203.0 million | $1,172.6 million | +2.6% |
| Gross margin | $390.9 million; 32.5% | $380.7 million; 32.5% | Margin flat |
| Income from continuing operations | $104.5 million | $119.4 million | -12.5% |
| Diluted EPS from continuing operations | $0.79 | $0.89 | -11.2% |
| Net income attributable to Harris | $104.5 million | $118.7 million | 下降 |
| Operating cash flow | $134.5 million | $37.5 million | + $97.0 million |
| Cash and cash equivalents | $231.1 million | $342.2 million at quarter-end | Not directly comparable due to discontinued operations |
- Engineering, selling and administrative expense increased 11.9% to $212.1 million, or 17.6% of revenue, from 16.2%.
- Income before taxes was $160.8 million versus $171.6 million. The effective tax rate increased to 35.0% from 30.4%.
- Interest expense increased to $18.2 million from $12.4 million, primarily because of acquisition-related borrowings.
- Capital expenditures and capitalized software totaled $20.6 million in the quarter. Management expects fiscal 2010 capital expenditures, including capitalized software, of $150 million to $160 million.
- Total debt was approximately $1.20 billion, consisting principally of $1,177.1 million of long-term debt, $25.0 million of commercial paper and $0.8 million of current long-term debt.
- The company had $725 million available under its $750 million revolving credit facility and reported compliance with applicable debt covenants.
- Quarterly dividends increased to $0.22 per share from $0.20 per share. Harris repurchased $55.3 million of common stock, including $50 million under authorized repurchase programs.
Material Changes Versus Prior Comparable Period
- Revenue growth was driven by Government Communications Systems, up 9.6% to $667.7 million, and RF Communications, up 2.0% to $423.7 million. Broadcast Communications declined 25.0% to $118.7 million.
- Government Communications Systems operating income increased 29.3% to $85.7 million, benefiting from favorable FAA Telecommunications Infrastructure program performance and new program activity.
- RF Communications operating income declined 19.8% to $114.0 million. Results included $6.5 million of integration and inventory step-up charges related to the Wireless Systems acquisition and reflected lower tactical-radio revenue.
- Broadcast Communications operating income fell 94.3% to $0.3 million because of recession-related demand weakness and delayed customer capital spending.
- Gross margin remained 32.5%, but ESA expense pressure and lower operating income reduced the continuing-operations margin to 8.7% from 10.2%.
- Operating cash flow improved substantially, primarily because of working-capital management and favorable changes in receivables, inventories and taxes.
- Non-operating loss improved to $0.2 million from $8.1 million; the prior-year amount included a $7.6 million other-than-temporary impairment of an investment.
Outlook, Commentary, Risks and Unusual Items
- Management stated that cash, operating cash generation, credit facilities and capital-market access were expected to cover working capital, capital expenditures and planned repurchases for the next 12 months and the foreseeable future, while acknowledging that future liquidity is not assured.
- Management anticipated possible strategic acquisitions during fiscal 2010 and no other significant cash outlays beyond identified capital expenditures, acquisitions and repurchases.
- RF Communications orders were $709 million in the quarter, including a $165 million U.S. Army order under a $419 million Basic Purchasing Agreement and $180 million of orders for MRAP-ATV radios. Segment backlog increased to $1.23 billion from $920 million at fiscal year-end.
- Government Communications Systems benefited from the start-up of the potentially $736 million GOES-R Ground Segment program and the potentially $600 million Modernization of Enterprise Terminals program. These figures represent potential contract values, not recognized revenue.
- Broadcast Communications remained exposed to the global recession and delayed customer spending. Orders of $124 million modestly exceeded quarterly revenue.
- Key risks include dependence on U.S. Government funding and contracts, fixed-price contract cost overruns, international and foreign-exchange exposure, acquisition integration, recession-related demand weakness, supplier and subcontractor performance, intellectual-property disputes, litigation, tax-rate changes, impairment of goodwill, and geopolitical or regulatory developments.
- The company reported investment-grade ratings of BBB+ from Standard & Poor’s and Baa1 from Moody’s. A downgrade below investment grade could increase borrowing costs and restrict commercial-paper access.
- Foreign-exchange contracts had $61.4 million of notional value at quarter-end. Management estimated that a 10% adverse currency movement would affect the fair value of these instruments by approximately $4.5 million, before offsets from related exposures.
- A securities class action involving Harris, Harris Stratex Networks personnel and other defendants remained pending. Management stated that it believed the defendants had meritorious defenses and intended to defend the matter vigorously.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the applicable corporate history and presentation of discontinued operations following the Harris Stratex Networks spin-off.
- Assess whether Government Communications Systems growth and RF backlog conversion can offset continued weakness in Broadcast Communications.
- Evaluate the sustainability of the higher operating cash flow, particularly changes in receivables, inventories, accrued expenses and advance payments.
- Monitor acquisition integration costs, Wireless Systems margins and the effect of acquisition-related debt on interest expense.
- Review total debt maturities, revolving-credit availability, commercial-paper access and compliance with leverage and interest-coverage covenants.
- Verify the status and potential exposure of the pending securities litigation, contract contingencies and fixed-price program risks.
- Consider that the interim results are not necessarily indicative of full-year performance and that management’s outlook is subject to the forward-looking risks disclosed in the filing.