Filing Scope and Business Context
This is Harris Corporation’s Form 10-K for the fiscal year ended June 28, 2013, not a 2012 fourth-quarter filing. The company operated through three continuing segments: RF Communications, Integrated Network Solutions, and Government Communications Systems. Harris served government and commercial customers in more than 125 countries and had approximately 14,000 employees.
Fiscal 2013 and prior periods were presented primarily on a continuing-operations basis after the discontinuation of Cyber Integrated Solutions and Broadcast Communications. Broadcast Communications was sold on February 4, 2013; CIS remained in discontinued operations and was expected to be disposed of in fiscal 2014.
Financial Performance and Position
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $5,111.7 million | $5,451.3 million | Down 6.2% |
| Gross profit | $1,726.7 million | $1,882.0 million | Down 8.3% |
| Gross margin | 33.8% | 34.5% | Down 0.7 percentage points |
| Income from continuing operations attributable to Harris | $466.4 million | $558.7 million | Down 16.5% |
| Diluted continuing-operations EPS | $4.16 | $4.80 | Down 13.3% |
| Net income attributable to Harris | $113.0 million | $30.6 million | Up 269.3% |
| Operating cash flow | $833.0 million | $852.9 million | Down $19.9 million |
| Cash and cash equivalents | $321.0 million | $356.0 million | Down $35.0 million |
| Long-term debt | $1,577.1 million | $1,883.0 million | Down $305.9 million |
- Income from continuing operations as a percentage of revenue declined to 9.1% from 10.2%.
- Fiscal 2013 included an $83.0 million after-tax charge for restructuring and other actions, or $0.74 per diluted share.
- Research and development expenditures were approximately $979 million, including $254 million of company-sponsored spending.
- Total company backlog was approximately $6.789 billion, consisting of $3.179 billion funded and approximately $3.610 billion unfunded.
- International revenue represented approximately 26% of total revenue, compared with 24% in fiscal 2012.
Segment Results
| Segment | Fiscal 2013 Revenue | Fiscal 2013 Operating Income | Change in Revenue |
|---|---|---|---|
| RF Communications | $1,849.0 million | $576.9 million | Down 13.8% |
| Integrated Network Solutions | $1,538.6 million | $77.5 million | Down 2.1% |
| Government Communications Systems | $1,828.1 million | $254.7 million | Down 0.3% |
- RF Communications was affected by delayed U.S. and international tactical-radio procurement, government funding constraints, and sequestration. Public Safety and Professional Communications revenue increased 3%, partially offsetting a 20% decline in Tactical Communications.
- Integrated Network Solutions operating income increased 10.9% despite lower revenue, reflecting lower general and administrative and acquisition-integration costs. IT Services revenue declined 11%, while Harris CapRock Communications and Healthcare Solutions grew 8% and 7%, respectively.
- Government Communications Systems remained relatively stable, with lower DoD and classified-program revenue offset by growth in NASA, NOAA, and Aireon-related programs.
Cash Flow, Debt, Liquidity and Capital Allocation
- Operating cash flow was $833.0 million. Investing cash flow was a use of $19.7 million, including $164.8 million of capital expenditures and $13.4 million of capitalized software spending, partly offset by $147.4 million of proceeds from the Broadcast Communications sale.
- Financing cash flow was a use of $839.7 million, including $414.9 million for share repurchases, $164.7 million for dividends, and $346.4 million for net debt repayment.
- Harris redeemed the entire $300 million principal amount of its 5% notes due 2015 for $332.2 million, recording a $33.2 million loss on debt prepayment. No long-term debt was scheduled to mature until fiscal 2018 after the redemption.
- Short-term debt was $144.6 million, primarily commercial paper. Harris had no borrowings under its $1 billion revolving credit facility and reported approximately $600 million of availability after covenant considerations.
- Fiscal 2013 share repurchases totaled 8.287 million shares at an average price of approximately $48.27 per share. The board subsequently authorized a new $1 billion repurchase program and raised the quarterly dividend from $0.37 to $0.42 per share.
- Management stated that cash, operating cash generation, the credit facility, and access to capital markets were expected to fund working capital, capital expenditures, share repurchases, dividends, and potential acquisitions for the foreseeable future, while noting that future liquidity was subject to government-budget and market risks.
Material Changes, Outlook and Unusual Items
- Reported net income improved to $113.0 million from $30.6 million because fiscal 2012 and fiscal 2013 both included substantial discontinued-operation charges. Fiscal 2013 discontinued operations included $353.4 million of after-tax losses, including impairment charges and a $32.2 million after-tax loss on the Broadcast Communications sale.
- Fiscal 2013 continuing-operations results were reduced by $126.7 million of pre-tax restructuring, asset impairment, software write-off, facility-consolidation, workforce-reduction, and debt-prepayment charges.
- Fiscal 2013 included $34.7 million of long-lived-asset impairments, principally related to Healthcare Solutions, an IT Services contract vehicle, and other assets, plus a $17.8 million write-off of capitalized Healthcare Solutions software.
- Management expected to fill approximately 66% of company-wide funded backlog during fiscal 2014, with segment expectations of approximately 60% for RF Communications, 65% for Integrated Network Solutions, and 76% for Government Communications Systems. Backlog conversion was not guaranteed.
- Management identified tactical-radio modernization, FAA NextGen programs, NOAA GOES-R, foreign military sales, national intelligence, public safety, healthcare IT, managed satellite communications, the Middle East, and Brazil as important opportunities.
- Key risks included U.S. Government budget reductions and sequestration, contract cancellations or audits, competitive bidding and pricing pressure, fixed-price contract overruns, cybersecurity incidents, international and currency exposure, export restrictions, supply-chain disruptions, litigation, tax audits, intellectual-property claims, and potential impairment of goodwill or other assets.
- The company reported an ongoing SEC and Department of Justice investigation concerning alleged improper gifts and payments associated with the former Carefx China operations. Harris stated that it intended to cooperate and did not believe the matter would materially affect its financial condition, results, or cash flows, but the duration, scope, outcome, and consequences were uncertain.
- Environmental liabilities were estimated at approximately $4.8 million on a discounted basis, and total commercial commitments, including performance guarantees, were $780.2 million. Management stated that probable litigation matters were reserved against or were not expected to be material.
Most Important Facts for Investors to Verify
- Confirm that the applicable reporting period is fiscal 2013 ended June 28, 2013, rather than 2012 Q4.
- Reconcile continuing-operations earnings of $466.4 million with total net income of $113.0 million and review the discontinued-operation impairment and sale charges.
- Assess whether the 6.2% revenue decline, particularly the 13.8% RF Communications decline, was temporary or indicative of sustained government-budget and procurement pressure.
- Review the $126.7 million of pre-tax restructuring and other charges and determine the extent to which expected savings recur in fiscal 2014.
- Evaluate liquidity after the $414.9 million of repurchases, $164.7 million of dividends, debt redemption, and planned fiscal 2014 capital expenditures of approximately $250 million.
- Examine funded versus unfunded backlog, program funding, expected conversion rates, and the effect of sequestration and continuing-resolution spending on future revenue.
- Monitor the Carefx China SEC and DOJ investigations, the disputed Broadcast Communications working-capital adjustment, tax examinations, environmental matters, and performance-bond exposure.
- Review the new $1 billion repurchase authorization and dividend increase against leverage, covenant capacity, and the company’s ability to sustain operating cash flow.