Harris Corporation — Q1 Fiscal 2013 Form 10-Q Summary
Business context and reporting period
The filing is Harris Corporation’s unaudited quarterly report for the quarter ended September 28, 2012, filed October 31, 2012. The company operated through RF Communications, Integrated Network Solutions, and Government Communications Systems. Historical results were restated to classify Cyber Integrated Solutions and Broadcast Communications as discontinued operations. The filing provided for L3Harris Technologies relates to the legacy Harris Corporation entity.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $1,261.5 million | $1,336.1 million | Down 5.6% |
| Gross margin | 32.8% | 33.1% | Down 0.3 points |
| Income from continuing operations attributable to Harris | $128.5 million | $131.1 million | Down 2.0% |
| Diluted EPS from continuing operations | $1.14 | $1.09 | Up 4.6% |
| Net income attributable to Harris | $(85.8) million | $121.6 million | Not meaningful |
| Operating cash flow | $120.5 million | $78.7 million | Up 53.1% |
| Cash and equivalents at quarter-end | $326.8 million | $305.4 million | Prior-year comparison |
Gross profit was $413.2 million. Engineering, selling and administrative expense was $198.2 million, or 15.7% of revenue, compared with 16.7% in the prior-year quarter. The effective tax rate on continuing operations was 31.6%, compared with 32.1%.
Quarter-end debt included $82.4 million of short-term debt, $12.8 million of current long-term debt, and $1,882.9 million of long-term debt. Harris established a new $1.0 billion five-year senior unsecured revolving credit facility, with $930 million available at quarter-end after $70 million of commercial paper borrowings. The company was in compliance with its debt covenants and reported no borrowings under the revolving facility.
Investing cash outflows were $36.6 million, including $39.9 million of capital expenditures and $3.8 million of capitalized software. Financing cash outflows were $116.1 million, including $70.8 million of net debt repayments, $63.9 million of share repurchases, and $41.9 million of dividends, partially offset by $60.5 million from employee stock-option exercises.
Material changes versus the prior comparable period
- RF Communications revenue declined 10.5% to $444.7 million and operating income declined 12.9% to $134.1 million, primarily because Tactical Communications revenue fell 18%.
- Integrated Network Solutions revenue declined 10.2% to $375.7 million, principally from the loss of the Patriot program, while operating income increased 48.6% to $32.4 million as prior-year acquisition and integration costs did not recur.
- Government Communications Systems revenue increased 4.9% to $465.5 million and operating income increased 6.3% to $67.1 million, driven largely by GOES-R and NASA SGSS programs.
- Continuing-operations diluted EPS increased despite lower earnings because average diluted shares fell to 112.6 million from 119.4 million, following substantial prior-year repurchases.
- Net loss included a $214.3 million after-tax loss from discontinued operations, including $222.3 million of additional non-cash impairment charges: $216.5 million for Broadcast Communications and $5.8 million for CIS.
- Cash flow from operations improved primarily because of increased collections in RF Communications.
- The quarterly dividend increased from $0.33 to $0.37 per share, and the company repurchased 1.078 million shares for approximately $50.0 million under its repurchase program. Remaining authorization was approximately $483 million.
Guidance, outlook, commentary, and risks
Management expected fiscal 2013 capital expenditures, including capitalized software, of $210 million to $230 million. Management stated that cash, operating cash flow, the revolving facility, and access to debt and equity markets were expected to support working capital, capital expenditures, repurchases, and potential acquisitions for the foreseeable future, while noting that future liquidity could be affected by market conditions and operating performance.
Management expected to complete the CIS asset disposition and Broadcast Communications divestiture during fiscal 2013 and intended to use expected net proceeds to return cash to shareholders and invest in core businesses. The impairment charges were non-cash and did not affect debt-covenant compliance, although the company could not assure that future effects would be immaterial.
Key risks included dependence on U.S. Government funding and contracts, potential sequestration and defense-budget pressure, fixed-price contract cost overruns, cybersecurity incidents, international and foreign-exchange exposure, export controls, supply-chain and subcontractor performance, litigation, tax-rate changes, goodwill or asset impairments, and the ability to retain key personnel. Harris also disclosed an ongoing investigation concerning possible improper gifts and payments by Carefx China employees and voluntary contact with the Department of Justice and SEC. The company stated that it could not predict regulatory consequences.
The filing reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no material changes to contractual obligations during the quarter. Management concluded that disclosure controls and procedures were effective as of September 28, 2012.
Investor verification checklist
- Verify the status, timing, and proceeds of the Broadcast Communications divestiture and CIS asset disposition.
- Assess whether the $222.3 million impairment accurately reflects remaining sale values and potential additional write-down risk.
- Track RF Communications orders, backlog, Tactical Communications recovery, and the reported 0.82 book-to-bill ratio.
- Monitor U.S. Government funding, sequestration or defense-budget changes, and progress on major FAA, NASA, NOAA, and defense contracts.
- Reconcile debt maturities, commercial paper usage, covenant compliance, and availability under the $1.0 billion revolving facility.
- Review the Carefx China investigation and any subsequent DOJ or SEC action.
- Compare actual capital expenditures, operating cash flow, share repurchases, dividends, and disposal proceeds with management’s stated plans.