Harris Corporation Form 10-Q Summary
Reporting period: Quarter and first two quarters ended December 31, 2010, corresponding to fiscal 2011. The filing identifies the registrant as Harris Corporation, the predecessor company to L3Harris Technologies. Financial statements are unaudited; the interim results are not necessarily indicative of full-year results.
Business Context
Harris operated through three segments: RF Communications, Government Communications Systems, and Broadcast Communications. Its businesses served defense, government, public safety, satellite communications, energy, maritime, and broadcast markets.
Financial Performance
| Metric | Quarter ended Dec. 31, 2010 | Quarter ended Jan. 1, 2010 | Change |
|---|---|---|---|
| Revenue | $1,438.5 million | $1,217.7 million | 18.1% increase |
| Gross margin | $498.0 million; 34.6% | $439.1 million; 36.1% | 13.4% increase; margin down 150 basis points |
| Income before taxes | $221.9 million | $205.2 million | 8.1% increase |
| Net income | $151.1 million | $139.5 million | 8.3% increase |
| Diluted EPS | $1.18 | $1.06 | 11.3% increase |
| Net margin | 10.5% | 11.5% | Down 100 basis points |
For the first two quarters, revenue increased 17.5% to $2,843.9 million, net income increased 29.1% to $315.0 million, and diluted EPS increased 32.6% to $2.44. The six-month net margin was 11.1%, versus 10.1% in the prior comparable period.
Segment Results
| Segment | Quarter revenue | Quarter operating income | Year-over-year change |
|---|---|---|---|
| RF Communications | $544.7 million | $189.3 million | Revenue +17.7%; operating income +12.3% |
| Government Communications Systems | $775.7 million | $81.4 million | Revenue +19.8%; operating income down 6.4% |
| Broadcast Communications | $130.0 million | $(0.8) million | Revenue +11.3%; loss improved from $(4.8) million |
RF Communications benefited from international tactical-radio sales and increased adoption of Falcon III radios, partly offset by lower MRAP and M-ATV radio demand. Government Communications Systems benefited from CapRock, NOAA GOES-R programs, and Healthcare Solutions, but margins were reduced by CapRock-related costs and lower activity on certain programs. Broadcast Communications included a $0.7 million cost-reduction charge.
Cash Flow, Liquidity, Debt and Capital Allocation
- Six-month operating cash flow was $389.3 million, up from $321.4 million.
- Investing cash flow was $(636.2) million, including $518.0 million for CapRock, $101.0 million of property and equipment additions, $10.0 million for a cost-method investment, and $7.2 million of capitalized software.
- Financing cash flow was $529.5 million, primarily reflecting $689.0 million of borrowings, partly offset by $105.7 million of share repurchases and $64.0 million of dividends.
- Cash and cash equivalents increased to $740.8 million from $455.2 million at July 2, 2010.
- Total debt was $1,877.0 million, including $30.0 million of short-term debt and $1,876.3 million of long-term debt. Debt increased from $1,177.3 million at July 2, 2010.
- On December 3, 2010, Harris issued $400 million of 4.40% notes due 2020 and $300 million of 6.15% notes due 2040.
- The company had $720.0 million available under its $750 million revolving credit facility and the full $300 million available under its 364-day revolving facility. No borrowings were outstanding under either facility, apart from $30.0 million of commercial paper supported by the longer-term facility.
- Management stated that it expected existing cash, operating cash flow, credit facilities, and market access to fund anticipated needs for the next 12 months, while noting that future liquidity is not assured.
- Fiscal 2011 capital expenditures, including capitalized software, were expected to be $320 million to $340 million.
- The quarterly dividend increased to $0.25 per share, or a stated annualized rate of $1.00. Approximately $350.6 million remained authorized for share repurchases at December 31, 2010.
Material Changes and Unusual Items
- Harris acquired CapRock on July 30, 2010, for an estimated net purchase price of $528.3 million. CapRock contributed $161.0 million of revenue and a $3.7 million pretax loss for the five months following acquisition, including $6.2 million of acquisition-related charges.
- Goodwill increased to $1,935.3 million from $1,576.2 million, primarily due to $351.4 million of CapRock goodwill. Identifiable intangible assets increased to $396.3 million from $297.8 million.
- Harris agreed to acquire Schlumberger GCS for $397.5 million in cash, subject to post-closing adjustments, with closing expected in the third quarter of fiscal 2011.
- Interest expense increased to $20.4 million for the quarter from $18.2 million, primarily due to borrowings related to CapRock and the pending Schlumberger GCS acquisition.
- The second-quarter effective tax rate was 31.9%, including a $5.9 million benefit from restoration of the federal research and development tax credit. The prior-year quarter included a $3.5 million state tax benefit.
- Management reported no material changes to previously disclosed risk factors and stated that disclosure controls and procedures were effective.
Outlook, Risks and Contingencies
- Management expected continued investment in the Harris Cyber Integration Center and other growth initiatives, along with possible strategic acquisitions and continued share repurchases.
- Management expected approximately $5 million of Broadcast Communications cost-reduction charges for fiscal 2011, although future charges were not assured.
- Key risks include dependence on U.S. Government funding and contracts, partially funded or terminable contracts, fixed-price contract cost overruns, international and foreign-currency exposure, acquisition and integration risk, satellite bandwidth availability, cybersecurity threats, export restrictions, intellectual-property disputes, litigation, supply-chain and subcontractor performance, and potential goodwill impairment.
- The company was in compliance with its revolving-credit covenants. The principal covenants included a maximum consolidated debt-to-capital ratio of 0.60:1.00 and a minimum EBITDA-to-net-interest-expense ratio of 3.00:1.00.
- A federal securities class action involving Harris and former Harris officers related to Harris Stratex Networks remained pending; management stated that it believed the defendants had meritorious defenses.
- The filing states that no material off-balance-sheet arrangements or guarantees were expected to adversely affect results, financial condition, or cash flows.
Most Important Facts to Verify
- Whether CapRock and the proposed Schlumberger GCS acquisition deliver the expected revenue growth and strategic diversification without sustained margin dilution.
- The sustainability of RF Communications growth following the decline in MRAP and M-ATV demand and the company’s reliance on international and U.S. Government programs.
- Execution against the $320 million to $340 million fiscal 2011 capital-expenditure plan and the expected $5 million Broadcast Communications restructuring charges.
- Debt levels, interest expense, covenant compliance, and liquidity after the CapRock acquisition, debt issuance, and expected Schlumberger GCS purchase.
- Progress in improving Government Communications Systems margins and returning Broadcast Communications to profitability.
- Potential effects of contract funding changes, fixed-price contract performance, export controls, cybersecurity events, litigation, foreign-exchange movements, and goodwill impairment.