Filing Overview
Registrant: Harris Corporation, now part of L3Harris Technologies. The supplied filing is a Form 10-Q for the quarter ended March 30, 2018, representing the third quarter and first three quarters of fiscal 2018. The request metadata identifies “2017 Q3,” but the filing text clearly reports fiscal 2018 results.
Continuing operations comprise Communication Systems, Electronic Systems, and Space and Intelligence Systems. IT Services and CapRock are presented as discontinued operations following fiscal 2017 divestitures.
Financial Performance
| Metric | Q3 FY2018 | Q3 FY2017 | First 3 Quarters FY2018 | First 3 Quarters FY2017 |
|---|---|---|---|---|
| Revenue | $1.568 billion | $1.489 billion | $4.516 billion | $4.358 billion |
| Gross margin | $561 million | $531 million | $1.612 billion | $1.583 billion |
| Operating income | $256 million | $275 million | $800 million | $798 million |
| Operating margin | 16% | 18% | 18% | 18% |
| Income from continuing operations | $203 million | $164 million | $509 million | $472 million |
| Diluted EPS from continuing operations | $1.67 | $1.31 | $4.19 | $3.77 |
| Net income | $201 million | $85 million | $501 million | $422 million |
| Operating cash flow | Not separately provided | Not separately provided | $230 million | $489 million |
- Q3 revenue increased 5%, while gross margin increased 6%. Operating income declined 7% because of higher engineering, selling and administrative costs.
- Q3 diluted EPS from continuing operations increased 27%, aided by higher continuing-operations income, a lower effective tax rate, and fewer diluted shares outstanding.
- Q3 effective tax rate was 5.6%, compared with 29.6% in the prior-year quarter. The quarter included a $33 million favorable tax adjustment related primarily to the Tax Cuts and Jobs Act and the $300 million pension contribution.
- First-three-quarter operating cash flow decreased 53%, primarily because of the $300 million voluntary pension contribution, higher receivables and inventories, and the absence of cash flows from divested businesses.
Segment Results
| Segment | Q3 Revenue | Q3 Revenue Change | Q3 Operating Income | Q3 Margin |
|---|---|---|---|---|
| Communication Systems | $481 million | +4% | $147 million | 31% |
| Electronic Systems | $609 million | +10% | $112 million | 18% |
| Space and Intelligence Systems | $482 million | +1% | $82 million | 17% |
- Communication Systems benefited from higher U.S. Department of Defense tactical radio and Army night-vision demand, partially offset by lower international tactical communications revenue.
- Electronic Systems revenue grew through Avionics, C4ISR, Mission Networks, and Electronic Warfare, but profitability declined because of mix, higher research and development costs, and other expense timing. First-three-quarter results also reflected a $36 million unfavorable impact from the ADS-B program.
- Space and Intelligence Systems benefited from higher classified-program revenue, including small satellite, space surveillance, and ground-processing programs, partially offset by lower civil and environmental revenue.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $443 million at March 30, 2018, compared with $484 million at June 30, 2017.
- Total debt, net, was $4.214 billion, including $823 million classified as current; long-term debt, net, was $3.391 billion.
- The company had a fully available $1 billion senior unsecured revolving credit facility expiring in July 2020 and was in compliance with its debt covenants.
- During the period, Harris issued $250 million of floating-rate notes due 2020 and $300 million of floating-rate notes due 2019. Proceeds were used to refinance term debt and fund the voluntary pension contribution.
- The company paid $205 million in dividends and repurchased $197 million of common stock during the first three quarters. Approximately $776 million remained available under the repurchase authorization at March 30, 2018.
- The quarterly dividend was increased to $0.57 per share, or an annualized $2.28 per share.
- Fiscal 2018 capital expenditures were expected to be approximately $130 million. Management expected no further U.S. qualified pension contributions and only minor non-U.S. contributions for the remainder of fiscal 2018.
Material Changes, Unusual Items and Outlook
- Harris recorded $45 million of charges in Q3 related to transitioning and exiting a commercial air-to-ground LTE radio-access-network business. A $21 million liability remained for this activity and was expected to be paid within 12 months.
- The first three quarters included a $12 million deferred-compensation adjustment. Prior-year periods included Exelis acquisition-related charges that did not recur in fiscal 2018.
- Net estimate-at-completion adjustments increased operating income by $5 million in Q3 and $6 million for the first three quarters, versus $11 million and $30 million, respectively, in the comparable prior-year periods.
- Management stated that existing cash, operating cash generation, the revolving facility, and access to debt and equity markets were expected to support working capital, capital expenditures, dividends, repurchases, and debt maturities for the next 12 months and the reasonably foreseeable future. The filing does not provide formal revenue or earnings guidance.
- The company was preparing for adoption of the new revenue-recognition standard in fiscal 2019 and expected to recognize revenue earlier on certain contracts. Management was evaluating whether to use full retrospective or modified retrospective adoption, with no final determination reported.
- The new lease standard was expected to become effective in fiscal 2020; its financial impact remained under evaluation.
- Legal and environmental matters were described as routine or reasonably possible, with probable losses accrued when estimable. Management stated that existing matters were not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
Key Risks and Contingencies
- Dependence on U.S. Government funding and contracts that may be partially funded, audited, or terminated.
- Fixed-price contract cost overruns, subcontractor performance, schedule delays, and changes in estimate-at-completion assumptions.
- High leverage and unfunded defined-benefit obligations; the defined-benefit liability was $868 million at March 30, 2018.
- Cybersecurity breaches affecting Harris or customer networks, including systems involving classified or sensitive information.
- Tax uncertainty related to provisional Tax Cuts and Jobs Act calculations, foreign earnings, and potential future tax audits.
- Future pension funding requirements, interest rates, asset returns, foreign exchange movements, environmental claims, litigation, and potential asset impairments.
Investor Verification Checklist
- Confirm that the applicable period is Q3 fiscal 2018 ended March 30, 2018, rather than the “2017 Q3” period stated in the request metadata.
- Assess the sustainability of earnings given the unusually low 5.6% quarterly effective tax rate and the $33 million favorable tax adjustment.
- Reconcile operating cash flow with reported earnings, particularly the impact of pension contributions, working-capital growth, and discontinued operations.
- Review near-term debt maturities, including the $500 million notes due April 27, 2018 and other current debt shown in the filing.
- Evaluate the effect of the $45 million LTE business exit charge and the remaining $21 million liability.
- Monitor Electronic Systems margins and the ADS-B program transition, as well as future contract estimate revisions.
- Track the final accounting conclusions and comparative-period effects from the fiscal 2019 revenue-recognition adoption.