Business Context and Reporting Period
The filing is Harris Corporation’s unaudited Form 10-Q for the quarter and first three quarters ended March 29, 2013. The source identifies the registrant as Harris Corporation, not L3Harris Technologies, Inc.; investors should verify the company mapping in the request metadata.
Continuing operations comprised RF Communications, Integrated Network Solutions, and Government Communications Systems. Results were restated to present Cyber Integrated Solutions and Broadcast Communications as discontinued operations.
Financial Results and Key Metrics
| Metric | Q3 FY2013 | Q3 FY2012 | First 3 Quarters FY2013 | First 3 Quarters FY2012 |
|---|---|---|---|---|
| Revenue | $1,203.7 million | $1,368.8 million | $3,752.1 million | $4,015.1 million |
| Gross margin | $400.2 million; 33.2% | $489.0 million; 35.7% | $1,254.9 million; 33.4% | $1,385.4 million; 34.5% |
| Income from continuing operations attributable to Harris | $125.1 million | $155.3 million | $395.8 million | $422.0 million |
| Diluted continuing-operations EPS | $1.12 | $1.38 | $3.50 | $3.66 |
| Net income attributable to Harris | $94.8 million | $(353.2) million | $57.5 million | $(98.5) million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $513.2 million | $483.2 million |
- Q3 revenue declined 12.1%, continuing-operations income declined 19.4%, and diluted continuing-operations EPS declined 18.8%.
- Q3 engineering, selling and administrative expense was $202.5 million, or 16.8% of revenue, versus $242.0 million, or 17.7%, in the prior-year quarter.
- The effective tax rate was 26.9% in Q3 and 29.9% for the first three quarters, compared with 32.2% and 32.9%, respectively, in the comparable periods.
- Cash and cash equivalents were $459.0 million at March 29, 2013, compared with $356.0 million at June 29, 2012.
- Total debt was approximately $1.925 billion, consisting of $33.8 million of short-term debt, $315.1 million of current long-term debt, and $1,576.1 million of long-term debt.
- The company had no borrowings under its $1.0 billion revolving credit facility, although $25.0 million of commercial paper was outstanding and supported by the facility. Approximately $600 million of facility capacity was available based on covenant limitations.
- First-three-quarter investing cash flow was positive $27.0 million, including $147.4 million of proceeds from the Broadcast Communications sale, partly offset by $131.5 million of property, plant and capitalized software expenditures.
- First-three-quarter financing cash use was $438.3 million, including $274.6 million of share repurchases, $124.6 million of dividends, and $123.8 million of net debt repayments.
Segment Performance and Material Changes
- RF Communications: Q3 revenue declined 22.3% to $417.7 million and operating income declined 36.1% to $116.1 million. Tactical Communications revenue fell 31%, reflecting U.S. and international procurement delays, government funding constraints, sequestration, and delayed international orders. Segment book-to-bill was 1.16, with reported backlog of $1.201 billion.
- Integrated Network Solutions: Q3 revenue declined 6.1% to $364.5 million, while operating income increased 35.9% to $30.3 million. Lower IT Services revenue was partly offset by growth in Harris CapRock Communications and Healthcare Solutions. Prior-year operating expenses included acquisition-related charges.
- Government Communications Systems: Q3 revenue declined 6.0% to $442.4 million, but operating income increased 4.7% to $67.1 million, primarily due to strong program performance and retirement of risk on certain space programs. First-three-quarter revenue increased 0.8% to $1,346.7 million.
- On February 4, 2013, the company completed the sale of Broadcast Communications for $225 million, including $160 million in cash, a $15 million subordinated note, and a potential earnout of up to $50 million. The transaction generated a $23.6 million after-tax loss in discontinued operations.
- Discontinued operations also included $314.4 million of non-cash impairment charges related to Broadcast Communications during the first two quarters of fiscal 2013.
- Net estimate-at-completion adjustments favorably affected operating income by $16.2 million in Q3 and $41.9 million for the first three quarters.
- Shares outstanding declined from 112.1 million at June 29, 2012 to 109.2 million at March 29, 2013. The company expected to use an additional $140 million for repurchases in Q4, subject to conditions.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fiscal 2013 capital expenditures, including capitalized software, of $185 million to $195 million.
- Following quarter-end, management announced company-wide restructuring actions, including workforce reductions, facility consolidation, and debt prepayment. Estimated pre-tax charges were $65 million to $115 million, or $41 million to $72 million after tax, principally in Q4 fiscal 2013. Approximately $65 million to $75 million was expected to require future cash expenditures, with completion targeted by the end of fiscal 2014.
- The company announced redemption of its $300 million 5% notes due October 1, 2015, at a make-whole price, with redemption scheduled for May 28, 2013. The notes were reclassified as current debt at March 29, 2013.
- Management stated that existing cash, operating cash flow, credit availability, and capital-market access were expected to support working capital, capital expenditures, repurchases, dividends, debt redemption, and potential acquisitions for the next 12 months, while acknowledging uncertainty from government budgets and financial markets.
- Key risks include U.S. Government budget uncertainty, continuing resolutions and sequestration; partially funded or terminable government contracts; fixed-price contract cost overruns; cybersecurity incidents; international and foreign-exchange exposure; export controls; litigation and intellectual-property claims; supplier and subcontractor performance; tax-rate changes; impairment of goodwill or other assets; and employee retention.
- The SEC and Department of Justice were investigating potential Foreign Corrupt Practices Act matters involving the former Carefx China operations. The company stated that it could not predict the duration, scope, or outcome but did not believe the matter would materially affect its financial condition, results, or cash flows.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor Verification Priorities
- Confirm the registrant identity and whether this Harris Corporation filing is the intended source for L3Harris Technologies.
- Reconcile continuing-operations performance with discontinued operations, including the Broadcast Communications sale loss and impairment charges.
- Assess the sustainability of cash flow and liquidity after share repurchases, dividends, capital expenditures, restructuring cash costs, and the $300 million note redemption.
- Review RF Communications’ procurement delays, backlog conversion, book-to-bill, and exposure to U.S. Government funding and sequestration.
- Evaluate the assumptions behind percentage-of-completion accounting and the favorable estimate-at-completion adjustments.
- Monitor the restructuring charges, execution timetable, and potential impact on future margins and cash flow.
- Review developments in the SEC and DOJ investigation and any related legal, compliance, or financial consequences.