Business Context and Reporting Period
This Form 10-Q was filed by Harris Corporation, the predecessor company to L3Harris Technologies, Inc. It covers the quarter and first two quarters of fiscal 2012 ended December 30, 2011, compared with the corresponding periods ended December 31, 2010. The company operated through RF Communications, Integrated Network Solutions, and Government Communications Systems.
Financial Performance and Position
| Metric | Quarter Ended Dec. 30, 2011 | Quarter Ended Dec. 31, 2010 | First Two Quarters 2012 | First Two Quarters 2011 |
|---|---|---|---|---|
| Revenue | $1,446.4 million | $1,438.5 million | $2,906.7 million | $2,843.9 million |
| Net income attributable to Harris | $133.1 million | $151.1 million | $254.7 million | $315.0 million |
| Diluted EPS | $1.16 | $1.18 | $2.16 | $2.44 |
| Gross margin | 35.4% | 34.6% | 34.6% | 35.9% |
| Net margin | 9.2% | 10.5% | 8.8% | 11.1% |
| Operating cash flow | Not separately stated in the financial statements | Not separately stated in the financial statements | $278.0 million | $389.3 million |
- Second-quarter revenue increased 0.5%, while revenue for the first two quarters increased 2.2%.
- Second-quarter net income declined 11.9%; first-half net income declined 19.1%. Higher interest expense, acquisition integration costs, initiative losses, and the absence of prior-year expedited tactical-radio shipments reduced earnings.
- Cash and cash equivalents were $387.0 million at December 30, 2011, versus $366.9 million at July 1, 2011.
- Total debt was approximately $2.43 billion, consisting primarily of $544.9 million of short-term debt and $1.888 billion of long-term debt, including the current portion. Short-term debt was primarily commercial paper.
- Available liquidity included $210.0 million under the $750 million revolving credit facility and the full $250 million under the 364-day facility. Management reported compliance with applicable debt covenants.
- First-half investing cash outflows were $136.5 million, including $111.3 million of capital expenditures, $14.0 million for acquired businesses, and $11.2 million of capitalized software.
- First-half financing cash outflows were $120.3 million, including $423.2 million of share repurchases and $64.5 million of dividends, partly offset by $361.2 million of net borrowings.
Material Changes Versus the Prior Comparable Period
- RF Communications revenue declined 3.5% in the quarter and 8.0% for the first half. Operating income declined 8.9% and 21.9%, respectively, largely because the prior-year period included approximately $80 million of expedited MRAP tactical-radio shipments.
- Integrated Network Solutions revenue increased 6.2% in the quarter and 15.3% for the first half, benefiting from the Schlumberger GCS and CapRock acquisitions. Operating income fell 23.9% in the quarter and 47.3% for the first half.
- Integrated Network Solutions results included $9.7 million of second-quarter acquisition integration and other charges, $19.3 million of such charges for the first half, and combined losses of $8.2 million in the quarter and $23.9 million in the first half from cyber and healthcare initiatives.
- Government Communications Systems revenue increased 0.2% in the quarter and 2.4% for the first half, while operating income increased 5.9% and 21.2%, respectively, driven by product mix and performance on fixed-price programs.
- Engineering, selling and administrative expense increased 12.2% in the quarter and 13.1% for the first half, principally reflecting acquired businesses and integration costs.
- Interest expense increased 38.2% in the quarter and 47.1% for the first half, primarily due to acquisition financing and borrowings used for share repurchases.
- Average diluted shares declined to 112.8 million from 126.8 million in the quarter and to 116.5 million from 127.3 million for the first half, partly offsetting the earnings decline on a per-share basis.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected fiscal 2012 capital expenditures, including capitalized software, of approximately $265 million to $285 million.
- Management stated that existing cash, operating cash flow, credit facilities, and access to debt and equity markets were expected to fund working capital, capital expenditures, potential acquisitions, and share repurchases for the next 12 months and the foreseeable future.
- The company expected no other significant cash outlays during the remainder of fiscal 2012 beyond disclosed capital expenditures, share repurchases, contractual obligations, and dividends.
- A $1 billion share-repurchase authorization approved July 30, 2011 had approximately $583.2 million remaining at December 30, 2011. First-half repurchases totaled $417.0 million for 11.1 million shares.
- The quarterly dividend increased from $0.25 to $0.28 per share, although future dividends and repurchases remained subject to board discretion and financial conditions.
- Orders and backlog provided positive program indicators, including a $235 million Australian defense order received after quarter-end and a second-quarter RF Communications backlog of $1.252 billion.
- Key risks include dependence on U.S. Government funding and contracts, fixed-price contract cost overruns, defense-budget pressure, acquisition integration, cybersecurity incidents, international and foreign-exchange exposure, export controls, litigation, supply-chain performance, impairment of goodwill or investments, and access to commercial-paper and capital markets.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no material contractual-obligation changes during the first half.
- The HSTX securities litigation settlement was approved and dismissed in October 2011 and did not materially affect financial results.
Important Facts for Investors to Verify
- Confirm the fiscal-period labeling: the filing describes the period ended December 30, 2011 as the second quarter of fiscal 2012, despite the request metadata identifying 2011 Q2.
- Assess the sustainability of earnings after the prior-year MRAP shipment benefit, acquisition integration charges, and cyber and healthcare initiative losses.
- Review commercial-paper balances, debt maturities, refinancing requirements, covenant compliance, and the availability of revolving facilities.
- Evaluate whether the Integrated Network Solutions acquisitions can achieve targeted operating improvements and whether initiative losses continue.
- Monitor the pace and funding of share repurchases relative to operating cash flow, leverage, capital expenditures, and dividends.
- Review contract funding, backlog conversion, fixed-price program performance, and exposure to U.S. defense and government budget changes.
- Note that the interim financial statements were unaudited and that management stated quarterly results were not necessarily indicative of full-year results.