Business Context and Reporting Period
Harris Corporation filed this unaudited Form 10-Q for the quarter and first three quarters ended March 30, 2012, comparing results with April 1, 2011. The supplied request metadata identifies “2011 Q3,” but the filing itself is for fiscal 2012 third quarter. The company reported three continuing-operation segments: RF Communications, Integrated Network Solutions, and Government Communications Systems.
During the quarter, Harris approved plans to exit its cyber integrated solutions remote-cloud-hosting operation, reported as discontinued operations. Subsequent to quarter-end, the Board approved a plan to divest Broadcast Communications.
Financial Performance and Position
| Metric | Q3 FY2012 | Q3 FY2011 | First 3 Quarters FY2012 | First 3 Quarters FY2011 |
|---|---|---|---|---|
| Revenue | $1,476.0 million | $1,412.8 million | $4,372.3 million | $4,255.4 million |
| Gross margin | $538.1 million; 36.5% | $516.2 million; 36.5% | $1,549.0 million; 35.4% | $1,539.3 million; 36.2% |
| Income from continuing operations attributable to Harris | $(255.4) million | $141.9 million | $8.2 million | $461.7 million |
| Diluted EPS from continuing operations | $(2.27) | $1.11 | $0.07 | $3.59 |
| Net income attributable to Harris | $(353.2) million | $139.5 million | $(98.5) million | $454.5 million |
| Operating cash flow | Not separately provided for the quarter in the financial statements; MD&A reports $205.2 million | $167.5 million | $483.2 million | $556.8 million |
- Revenue increased 4.5% in the quarter and 2.7% year to date. Gross margin percentage was unchanged in the quarter but declined year to date, primarily because of less favorable RF Communications product mix.
- Quarterly results included a preliminary $424.0 million non-cash impairment charge related to Broadcast Communications, or $406.5 million after tax. The charge included $379.0 million of goodwill impairment and $45.0 million of other long-lived-asset impairment.
- Discontinued operations produced a quarterly after-tax loss of $97.8 million and a year-to-date loss of $106.7 million, including $138.0 million of asset impairment, employee termination costs, and other exit costs.
- Engineering, selling and administrative expense rose to $297.6 million in the quarter from $281.0 million and to $864.1 million year to date from $784.1 million.
- Interest expense increased 5.9% in the quarter and 29.4% year to date, principally because of higher borrowings supporting acquisitions and share repurchases.
- Cash and cash equivalents were $299.0 million at March 30, 2012, compared with $366.9 million at July 1, 2011. Total current assets were $2,208.6 million and total current liabilities were $1,503.9 million.
- Short-term debt was $348.9 million and long-term debt, including the current portion, was approximately $1,888.4 million. The company stated that no long-term debt matured until fiscal 2016.
- The company had $414 million available under its $750 million revolving credit facility after commercial paper borrowings and the full $250 million 364-day facility available through September 26, 2012. Management stated that it remained in compliance with debt covenants.
- Capital expenditures and capitalized software additions totaled $175.3 million through three quarters. Fiscal 2012 capital expenditures, including capitalized software, were expected to be $240 million to $250 million.
- The company repurchased $448.4 million of common stock through three quarters and paid $102.2 million of dividends. The quarterly dividend was increased to $0.33 per share, and approximately $558.3 million remained authorized for repurchases.
Material Changes Versus the Prior Comparable Period
- Integrated Network Solutions revenue increased 8.0% in the quarter and 12.2% year to date, aided by the Schlumberger GCS and Carefx acquisitions, but operating results deteriorated to a $406.0 million quarterly loss from $24.5 million of operating income, primarily because of the Broadcast Communications impairment.
- RF Communications revenue declined 2.2% in the quarter and 6.1% year to date. Quarterly operating income increased 1.7%, but year-to-date operating income declined 14.8%, partly because the prior year benefited from $80 million of expedited tactical-radio shipments for MRAP vehicles.
- Government Communications Systems revenue increased 9.1% in the quarter and 4.7% year to date, while operating income increased 7.2% and 16.1%, respectively, supported by GOES-R, classified programs, and other program performance.
- Year-to-date operating cash flow declined 13.2%, while investing cash usage fell substantially because the prior-year period included $548.4 million of acquisition payments.
- Average diluted shares declined to 112.3 million in the quarter from 126.0 million, primarily reflecting share repurchases, partially offsetting the effect of lower earnings on per-share results.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to complete the CIS exit and disposal activities by the end of calendar 2012. The filing does not provide clear consolidated revenue or earnings guidance.
- On April 27, 2012, the Board approved a plan to divest Broadcast Communications. Harris expected the business to be classified as discontinued operations beginning in the fourth quarter of fiscal 2012 and expected to complete the divestiture during fiscal 2013.
- The Broadcast Communications impairment analysis was preliminary and subject to adjustment before fiscal fourth-quarter reporting. Management stated that the impairment was non-cash, was not expected to affect debt-covenant compliance, and did not require current or future cash expenditures.
- Management stated that existing cash, operating cash flow, credit facilities, and capital-market access should fund working capital, capital expenditures, acquisitions, and share repurchases for the next 12 months and the reasonably foreseeable future, while acknowledging potential liquidity risks from weaker cash generation or disrupted credit markets.
- Key disclosed risks include dependence on U.S. Government funding and contracts, fixed-price contract cost overruns, defense-budget pressure, cybersecurity incidents, international and foreign-exchange exposure, acquisition integration, supply-chain and subcontractor performance, litigation, tax-rate changes, regulatory changes, and further impairment of goodwill or long-lived assets.
- The company stated that no material changes had occurred in contractual obligations or commercial commitments compared with the fiscal 2011 Form 10-K. Management reported that disclosure controls were effective.
Important Facts for Investors to Verify
- Verify the final valuation and any adjustment to the preliminary $424.0 million Broadcast Communications impairment charge.
- Track the planned Broadcast Communications divestiture, its classification as discontinued operations, transaction proceeds, and any additional restructuring or impairment costs.
- Assess whether Integrated Network Solutions can return to profitability after impairment, acquisition-integration costs, Broadcast Communications losses, and healthcare-initiative losses.
- Monitor commercial paper balances, refinancing needs, facility maturities, debt ratings, and compliance with the 0.60 debt-to-capital and 3.00 EBITDA-to-interest covenant thresholds.
- Evaluate sustainability of operating cash flow amid lower RF Communications sales, higher receivables and inventories, capital spending, dividends, and continued share repurchases.
- Reconcile future reported results for discontinued operations and compare them with the restated historical periods.