Business Context and Reporting Period
Harris Corporation, now part of L3Harris Technologies, filed this unaudited Form 10-Q for the quarter ended December 28, 2012, representing the second quarter of fiscal 2013. Results are reported for continuing operations unless otherwise noted and have been restated for the discontinued operations of Cyber Integrated Solutions and Broadcast Communications.
The continuing business comprised RF Communications, Integrated Network Solutions, and Government Communications Systems.
Key Financial Metrics
| Metric | Quarter ended Dec. 28, 2012 | Prior comparable quarter | Two quarters ended Dec. 28, 2012 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $1,286.9 million | $1,310.2 million | $2,548.4 million | $2,646.3 million |
| Gross margin | 34.3% | 34.7% | 33.5% | 33.9% |
| Income from continuing operations attributable to Harris | $142.2 million | $135.6 million | $270.7 million | $266.7 million |
| Diluted EPS from continuing operations | $1.25 | $1.18 | $2.40 | $2.26 |
| Net income attributable to Harris | $48.5 million | $133.1 million | $(37.3) million | $254.7 million |
| Operating cash flow | Not separately provided | Not separately provided | $279.5 million | $278.0 million |
- Income before taxes was $200.2 million for the quarter and $387.8 million for the first two quarters. Effective tax rates were 30.8% and 31.2%, respectively, versus 34.5% and 33.4% in the comparable periods.
- Cash and cash equivalents were $328.1 million at December 28, 2012, compared with $356.0 million at June 29, 2012.
- Total reported debt was approximately $1.93 billion, consisting primarily of $1.879 billion of long-term debt, $12.6 million of current long-term debt, and $38.1 million of short-term debt.
- The company had a $1.0 billion senior unsecured revolving credit facility, with $970 million available after $30 million of commercial paper borrowings. No borrowings were outstanding directly under the facility.
- Capital expenditures and capitalized software totaled $82.7 million year to date. Fiscal 2013 capital expenditures were expected to be $200 million to $210 million.
- Cash dividends were $0.37 per common share for the quarter; $84.0 million was paid during the first two quarters.
Material Changes Versus Prior Comparable Period
- Quarterly revenue declined 1.8%, while year-to-date revenue declined 3.7%, primarily because of lower RF Communications revenue and, year to date, lower Integrated Network Solutions revenue.
- Quarterly income from continuing operations attributable to Harris increased 4.9%, and diluted continuing-operations EPS increased 5.9% to $1.25. Year-to-date diluted EPS increased 6.2% to $2.40, helped in part by fewer shares outstanding following prior repurchases.
- RF Communications revenue declined 7.6% for the quarter and 9.0% year to date; operating income declined 12.4% and 12.7%, respectively. Tactical Communications revenue was particularly weak, while Public Safety and Professional Communications grew.
- Integrated Network Solutions quarterly revenue increased 2.8%, and operating income increased 66.2% to $32.4 million. The improvement benefited from lower acquisition and integration costs compared with the prior year, although IT Services was pressured by the loss of the Patriot program.
- Government Communications Systems revenue increased 3.9% for the quarter and 4.4% year to date, with operating income increasing 4.1% and 5.2%, respectively. Growth was driven by GOES-R, NASA SGSS, and classified programs, partly offset by lower Department of Defense spending.
- Gross margin declined 40 basis points for the quarter and 40 basis points year to date. Engineering, selling and administrative expenses declined 4.1% for the quarter and 7.7% year to date.
- Financing cash use increased to $238.8 million year to date, including $114.2 million of debt repayments and share repurchases and $84.0 million of dividends. This compared with $120.3 million of financing cash use in the prior period, which included substantially higher share repurchases funded partly with borrowings.
Outlook, Commentary, Risks and Unusual Items
- Discontinued operations generated a $93.7 million after-tax loss in the quarter and a $308.0 million after-tax loss year to date. These results included a $97.9 million non-cash impairment charge in the quarter and a $314.4 million charge year to date related to Broadcast Communications.
- Harris entered into an agreement to sell Broadcast Communications to Gores Broadcast Solutions and expected the transaction to close in early calendar 2013. Management stated that the impairment did not affect credit covenant compliance or expected ongoing operating performance.
- Management expected liquidity to remain adequate based on cash, operating cash flow, anticipated proceeds from the Broadcast Communications sale, the revolving facility, and access to debt and equity markets. Management also intended, subject to the sale closing, to repurchase an additional $200 million of shares.
- The company had approximately $433.3 million remaining under its share repurchase authorization at December 28, 2012. Repurchases may be suspended or discontinued at management’s discretion.
- Favorable estimate-at-completion adjustments increased operating income by $13.4 million in the quarter and $25.7 million year to date, compared with $11.0 million and $14.0 million, respectively, in the prior periods.
- Subsequent legislation restoring the federal research and development tax credit was expected to provide approximately $7 million of tax benefit in the third quarter and $1 million in the fourth quarter of fiscal 2013.
- Key risks include dependence on U.S. government funding and contracts, potential defense-budget reductions or sequestration, fixed-price contract cost overruns, cybersecurity incidents, international and foreign-exchange exposure, supply-chain and subcontractor performance, litigation, export controls, tax-rate changes, and impairment of goodwill or other assets.
- The company disclosed an ongoing internal investigation involving potential Foreign Corrupt Practices Act issues at Carefx China and voluntary cooperation with the Department of Justice and SEC. Management did not believe the matter would materially affect financial condition, results, or cash flows based on information available at the filing date.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the accounting impact, closing status, proceeds, and final results of the Broadcast Communications divestiture.
- Separate continuing-operations performance from the substantial discontinued-operations losses and impairment charges.
- Assess the sustainability of earnings in light of favorable contract estimate adjustments, lower tax rates, and prior-year acquisition charges.
- Review RF Communications order intake, backlog, and Tactical Communications demand, including the reported quarterly book-to-bill ratio of 0.83.
- Monitor U.S. government budget decisions, DoD spending, contract funding, fixed-price program execution, and potential sequestration effects.
- Reconcile debt maturities, commercial paper usage, credit-facility availability, share repurchases, dividends, and projected capital expenditures against operating cash flow.
- Track developments in the Carefx China investigation and any resulting regulatory, legal, compliance, or financial consequences.