Business Context and Reporting Period
Registrant: Harris Corporation, now known as L3Harris Technologies, Inc. The supplied filing is a Form 10-K for the fiscal year ended July 1, 2011, not a 2010 fourth-quarter filing. Fiscal 2011 and fiscal 2010 each included 52 weeks. Results are presented on a continuing-operations basis, with Harris Stratex Networks reported as discontinued operations following the 2009 spin-off.
Harris operated in more than 150 countries across three reportable segments: RF Communications, Integrated Network Solutions, and Government Communications Systems. Approximately 16,900 employees were employed at fiscal year-end, and approximately 72% of fiscal 2011 revenue came from U.S. Government customers, including foreign military sales through the U.S. Government.
Key Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $5,924.6 million | $5,206.1 million | 13.8% increase |
| Gross margin | $2,114.1 million; 35.7% | $1,871.7 million; 36.0% | Margin down 0.3 percentage points |
| Income from continuing operations | $588.0 million | $561.6 million | 4.7% increase |
| Diluted continuing-operations EPS | $4.60 | $4.28 | 7.5% increase |
| Operating cash flow | $833.1 million | $802.7 million | 3.8% increase |
| Cash and cash equivalents | $366.9 million | $455.2 million | Down $88.3 million |
| Total debt, including current portion | $2,072.1 million | $1,207.3 million | Increased primarily to fund acquisitions |
| Long-term debt | $1,887.2 million | $1,176.6 million | Increase of $710.6 million |
| Total assets | $6,172.8 million | $4,743.6 million | Increase of $1,429.2 million |
The effective tax rate was 33.3%, compared with 33.2% in fiscal 2010. Return on average assets declined to 10.8% from 12.2%, and return on average equity declined to 25.0% from 27.7%.
Segment Performance
| Segment | Fiscal 2011 Revenue | Revenue Change | Fiscal 2011 Operating Income | Operating Margin |
|---|---|---|---|---|
| RF Communications | $2,289.2 million | 10.7% increase | $787.0 million | 34.4% |
| Integrated Network Solutions | $1,985.8 million | 33.7% increase | $70.2 million | 3.5% |
| Government Communications Systems | $1,776.5 million | 1.7% increase | $227.0 million | 12.8% |
RF Communications benefited from international tactical communications sales and Falcon III adoption, partly offset by lower MRAP-related radio shipments. Integrated Network Solutions revenue benefited from acquisitions and broadcast growth, but profitability declined because of acquisition integration costs, accelerated cyber investments, and lower pricing on an NMCI contract extension. Government Communications Systems remained broadly stable, with growth in GOES-R, HNR, and space communications programs offset by classified-program declines and the wind-down of the 2010 Census FDCA program.
Material Changes Versus the Prior Comparable Period
- Revenue increased $718.5 million, while continuing-operations income increased $26.4 million. The slower earnings growth than revenue growth reflected lower margins, higher selling and administrative expenses, acquisition integration costs, and higher interest expense.
- Gross margin declined to 35.7% from 36.0%, primarily because of a less favorable RF Communications product mix and the inclusion of CapRock, which had lower margins than the company average.
- Engineering, selling and administrative expenses rose 19.3% to $1,143.9 million, or 19.3% of revenue, from 18.4% of revenue.
- Interest expense increased 25.4% to $90.4 million, primarily because of borrowings used for acquisitions.
- Cash paid for acquisitions was $1,082.6 million, compared with $52.1 million in fiscal 2010. Fiscal 2011 acquisitions included CapRock for $517.5 million, Schlumberger GCS for $380.6 million, and Carefx for $152.6 million.
- Fiscal 2011 capital expenditures and capitalized software additions totaled $324.9 million, including spending on a new RF Communications manufacturing facility and the Cyber Integration Center.
- Goodwill increased to $2,381.4 million from $1,576.2 million, primarily from acquisitions. Goodwill represented approximately 39% of total assets. No goodwill impairment was recorded in fiscal 2011 or fiscal 2010.
- Company-wide funded backlog increased to approximately $3.36 billion from $3.25 billion; total funded and unfunded backlog increased to approximately $7.79 billion from $6.53 billion.
- Shares repurchased increased to 5.3 million from 4.8 million, with approximately $250.0 million used for repurchases. Annual dividends increased to $1.00 per share from $0.88 per share.
Liquidity, Debt, Outlook, Risks, and Unusual Items
Operating cash flow was strong at $833.1 million, but acquisition spending, capital expenditures, share repurchases, and dividends caused cash to decline to $366.9 million. Management stated that existing cash, operating cash flow, credit facilities, and debt-market access were expected to fund working capital, capital expenditures, acquisitions, and planned repurchases for the next 12 months.
At July 1, 2011, the company had $180.0 million of commercial paper outstanding, a $750 million senior unsecured revolving credit facility with approximately $570 million available, and a $300 million 364-day revolving facility that was fully available. Long-term debt included newly issued $400 million of 4.4% notes due 2020 and $300 million of 6.15% notes due 2040. No long-term debt was scheduled to mature until fiscal 2016, although the $300 million 364-day facility matured on September 28, 2011.
Management expected fiscal 2012 capital expenditures, including capitalized software, of approximately $265 million to $285 million. The company expected to fill approximately 75% of total funded backlog during fiscal 2012, but stated that backlog may be delayed, cancelled, or not converted to revenue.
Management specifically expected Cyber Integrated Solutions to produce an operating loss of approximately $30 million in fiscal 2012 because selling cycles were materially longer than anticipated. The company also noted that the loss of the Patriot program recompete would reduce Integrated Network Solutions revenue in fiscal 2012.
On July 30, 2011, the board authorized a new $1 billion share-repurchase program, replacing the prior program, and increased the quarterly dividend from $0.25 to $0.28 per share. Management expected to repurchase up to $500 million of shares by the end of calendar 2011, funded with available cash and commercial paper.
- Key business risks include dependence on U.S. Government funding, appropriations, competitive bidding, contract termination rights, audits, and possible changes in defense priorities.
- Fixed-price contracts expose the company to cost overruns, inflation, supplier problems, schedule delays, and performance penalties.
- Cybersecurity breaches could disrupt company or customer systems, expose sensitive information, and trigger contractual or reputational liabilities.
- International operations expose the company to foreign-exchange, export-control, political, regulatory, corruption, and geopolitical risks.
- Acquisition integration, goodwill impairment, technology adoption, supply-chain disruptions, litigation, tax audits, and employee retention remain material areas of uncertainty.
- Commercial commitments totaled $740.3 million, primarily performance and bid bonds and standby letters of credit. Management did not believe these commitments were likely to have a material adverse effect.
- The filing identifies environmental liabilities at 14 sites and estimates a discounted environmental liability of approximately $4.5 million; management did not expect a material adverse effect.
- A preliminary settlement of HSTX securities litigation was approved in June 2011, and management did not expect a material financial impact.
Most Important Facts an Investor Should Verify
- Confirm the requested period: the supplied document is fiscal-year 2011 Form 10-K information, not 2010 Q4 information.
- Review whether the acquisition-driven revenue increase converts into sustainable operating income, particularly in Integrated Network Solutions.
- Assess the effect of $2.07 billion of total debt, commercial paper reliance, interest expense, and upcoming debt maturities on future cash allocation.
- Track the performance of Cyber Integrated Solutions, the Patriot program loss, and integration costs from CapRock, Schlumberger GCS, and Carefx.
- Evaluate exposure to U.S. Government budget reductions, continuing resolutions, contract protests, audits, terminations, and fixed-price cost overruns.
- Reconcile funded backlog conversion and the substantial unfunded backlog before treating backlog as expected revenue.
- Monitor goodwill of $2.38 billion, including the relatively narrow fiscal 2011 valuation cushion for the Broadcast and New Media Solutions reporting unit.
- Verify the execution and funding of the $1 billion repurchase authorization and the increased dividend against liquidity and leverage requirements.