Harris Corporation Form 10-Q Summary
Reporting period: Fiscal third quarter and first three quarters ended March 28, 2014, compared with March 29, 2013. The request metadata identifies “2013 Q3,” but the filing is for fiscal 2014 Q3. Harris Corporation reported three continuing-operations segments: RF Communications, Integrated Network Solutions, and Government Communications Systems.
Financial Results and Metrics
| Metric | Q3 FY2014 | Q3 FY2013 | First 3 Quarters FY2014 | First 3 Quarters FY2013 |
|---|
| Revenue | $1,267.5 million | $1,203.7 million | $3,682.6 million | $3,752.1 million |
| Gross margin | $426.5 million; 33.6% | $400.2 million; 33.2% | $1,271.7 million; 34.5% | $1,254.9 million; 33.4% |
| Income from continuing operations attributable to Harris | $137.3 million | $125.1 million | $402.0 million | $395.8 million |
| Diluted EPS from continuing operations | $1.27 | $1.12 | $3.72 | $3.50 |
| Net income attributable to Harris | $141.4 million | $94.8 million | $403.4 million | $57.5 million |
| Net cash provided by operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $454.0 million | $513.2 million |
- Q3 revenue increased 5.3%, while first-nine-month revenue declined 1.9%.
- Q3 income from continuing operations attributable to Harris increased 9.8%; diluted continuing-operations EPS increased 13.4%, aided partly by lower average shares outstanding from repurchases.
- Q3 net income attributable to Harris increased 49.2%, primarily because the prior-year period included a substantial loss from discontinued operations.
- Q3 net interest expense declined to $22.5 million from $26.8 million, primarily because of lower debt following redemption of $300 million of 5% notes in May 2013.
- Effective tax rate increased to 31.8% from 26.9% in Q3 and to 32.2% from 29.9% for the first nine months. Both periods included discrete tax items.
Segment Performance
| Segment | Q3 FY2014 Revenue | Q3 Revenue Change | Q3 Operating Income | Q3 Operating Margin |
|---|
| RF Communications | $457.2 million | Up 9.5% | $143.7 million | 31.4% |
| Integrated Network Solutions | $348.0 million | Down 7.2% | $21.4 million | 6.1% |
| Government Communications Systems | $476.6 million | Up 10.7% | $77.4 million | 16.2% |
- RF Communications: Growth was driven by international Tactical Communications revenue, partly offset by lower U.S. Department of Defense and public-safety revenue. Operating margin improved from 27.8% to 31.4%.
- Integrated Network Solutions: Revenue declined because of lower U.S. Government business. Operating income fell 30.3%, reflecting an out-of-period adjustment, competitive margin pressure, and higher expenses.
- Government Communications Systems: Revenue benefited from the Aireon hosted payload, DataComm, MET, and F-35 programs. Operating income increased 16.4%, although gross margin percentage declined because of mix.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $349.6 million at March 28, 2014, versus $321.0 million at June 28, 2013. The balance included $175 million held by foreign subsidiaries; $127 million was available for U.S. use without additional U.S. income tax, while repatriation of the remaining $48 million would have generated approximately $13 million of U.S. tax.
- Short-term debt was $81.3 million, down from $144.6 million at fiscal year-end. Long-term debt, including the current portion, was $1,577.2 million; the filing states that no long-term debt matures until December 1, 2017.
- The company had no borrowings under its $1 billion senior unsecured revolving credit facility, although $75 million of commercial paper was outstanding and supported by the facility. The facility was fully available as of March 28, 2014, and the company was in compliance with its covenants.
- First-nine-month investing cash flow was an outflow of $116.0 million, including $139.7 million of capital expenditures and $27.0 million of proceeds from the sale of remaining CIS assets.
- First-nine-month financing cash flow was an outflow of $300.5 million, including $222.1 million of common-stock repurchases, $135.5 million of dividends, and $76.8 million of net debt repayments, partly offset by $133.9 million from employee stock-option exercises.
- Capital expenditures for fiscal 2014 were expected to be approximately $230 million.
- The quarterly dividend was increased to $0.42 per share, or an annualized $1.68 per share. The company stated that future dividends and repurchases remain subject to financial condition, cash flow, capital requirements, and board discretion.
- The company had approximately $919 million remaining under its $1 billion 2013 share-repurchase authorization as of March 28, 2014.
Material Changes and Unusual Items
- Discontinued operations contributed $4.1 million in Q3 FY2014 versus a $30.3 million loss in the prior-year quarter. For the first nine months, discontinued operations contributed $1.4 million versus a $338.3 million loss in the prior-year period.
- The prior-year discontinued-operations loss included non-cash impairment charges of $314.4 million for Broadcast Communications and $6.3 million for CIS. The remaining CIS assets were sold in August 2013.
- Q3 FY2014 discontinued operations included a $4.8 million tax benefit, partly offset by a $1.0 million increase in the Broadcast Communications disposal loss related to contingencies.
- Favorable estimate-at-completion adjustments increased operating income by $18.4 million in Q3 and $38.9 million for the first nine months, compared with $16.2 million and $41.9 million, respectively, in the prior-year periods.
- Management cited out-of-period adjustments affecting satellite and terrestrial communications revenue and cost of sales, post-employment benefit expenses, and certain corporate and segment expenses.
- The company reassigned $2.4 million of goodwill and related cyber-security network testing activities from Government Communications Systems to Integrated Network Solutions; prior periods were recast for comparability.
Outlook, Risks and Contingencies
- Management expected existing cash, operating cash flow, available credit, and access to debt and equity markets to fund working capital, capital expenditures, dividends, and authorized repurchases for the next 12 months and the foreseeable future.
- Management cautioned that liquidity could be affected by U.S. Government budget uncertainty, global economic conditions, future cash-flow performance, borrowing costs, and capital-market access.
- Key risks include dependence on U.S. Government funding and contracts, contract termination or audit exposure, fixed-price contract cost overruns, cybersecurity incidents, international and foreign-currency exposure, export controls, litigation, intellectual-property claims, supplier and subcontractor performance, tax-rate changes, impairments, and retention of key employees.
- The company reported no material changes to the risk factors in its fiscal 2013 Form 10-K.
- A post-closing working-capital adjustment dispute related to the Broadcast Communications sale remained in litigation. Management believed an unfavorable outcome would not materially affect financial condition, results of operations, or cash flows.
- Management stated that probable litigation matters were reserved or were not expected to have a material adverse effect, but acknowledged that actual outcomes could differ from recorded accruals.
- Management concluded that disclosure controls were effective as of March 28, 2014 and reported no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify that the intended period is fiscal Q3 2014, ended March 28, 2014, rather than calendar or fiscal Q3 2013.
- Assess whether favorable contract estimate-at-completion adjustments and tax benefits are recurring or nonrecurring.
- Monitor Integrated Network Solutions revenue, margins, and exposure to U.S. Government customers.
- Reconcile debt maturities, commercial-paper usage, credit-facility availability, and covenant compliance.
- Evaluate the sustainability of the $1 billion repurchase authorization and $0.42 quarterly dividend against operating cash flow and capital expenditures.
- Review U.S. Government budget and contract-funding developments, fixed-price contract performance, and potential claims or audits.
- Follow the Broadcast Communications working-capital litigation and remaining divestiture-related indemnity or tax contingencies.
