Business Context and Reporting Period
This filing is Harris Corporation’s unaudited Form 10-Q for the quarter and first three quarters ended April 2, 2010, with comparisons to April 3, 2009. The provided request metadata identifies “2009 Q3,” but the filing itself clearly reports fiscal 2010 third-quarter results. The company reported three continuing-operation segments: RF Communications, Government Communications Systems and Broadcast Communications. Harris Stratex Networks was spun off in May 2009 and is presented as discontinued operations.
Financial Performance and Position
| Metric | Quarter ended Apr. 2, 2010 | Quarter ended Apr. 3, 2009 | First three quarters 2010 | First three quarters 2009 |
|---|---|---|---|---|
| Revenue | $1,329.5 million | $1,205.1 million | $3,750.2 million | $3,710.9 million |
| Income from continuing operations | $166.2 million | $135.9 million | $410.2 million | $395.9 million |
| Diluted EPS from continuing operations | $1.27 | $1.02 | $3.12 | $2.96 |
| Gross margin | 38.3% | 32.5% | 35.7% | 31.8% |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $635.3 million | $404.5 million |
- Quarterly revenue increased 10.3%, while income from continuing operations increased 22.3%. First-three-quarter revenue increased 1.1% and income from continuing operations increased 3.6%.
- Engineering, selling and administrative expense increased 30.0% to $245.0 million in the quarter and 18.1% to $672.8 million for the first three quarters. The increase was primarily associated with the Wireless Systems acquisition and related costs.
- Interest expense increased 43.7% to $18.1 million in the quarter and 40.5% to $54.5 million for the first three quarters, primarily due to acquisition-related borrowings.
- Cash and cash equivalents were $405.7 million at April 2, 2010, compared with $281.2 million at July 3, 2009. Current assets were $1,911.9 million and current liabilities were $1,013.1 million.
- Total debt, including current and long-term portions, was approximately $1,177.5 million. Short-term debt was zero, and the company had no borrowings under its $750 million revolving credit facility.
- Shareholders’ equity increased to $2,116.9 million from $1,869.1 million at July 3, 2009.
- Investing cash outflows were $176.4 million, including $129.9 million of property, plant and equipment additions, $6.3 million of capitalized software and $40.2 million for acquired businesses.
- Financing cash outflows were $336.6 million, including $106.6 million of debt repayments, $155.7 million of share repurchases and $86.4 million of dividends.
Material Changes Versus the Prior Comparable Period
- RF Communications revenue rose 25.4% to $550.7 million and operating income rose 35.3% to $204.7 million in the quarter. Results benefited from the Wireless Systems acquisition, favorable product mix, cost reductions and operating efficiencies.
- Government Communications Systems revenue increased 2.6% to $665.7 million and operating income increased 22.3% to $90.4 million. Performance benefited from new programs and award fees, while the Census Bureau FDCA program was winding down.
- Broadcast Communications revenue declined 7.0% to $123.0 million and operating results shifted to a $5.2 million loss from $1.9 million of income. For the first three quarters, revenue fell 20.9% and the segment reported a $9.7 million operating loss versus $19.2 million of income.
- Gross margin improved primarily because of RF Communications’ favorable mix and operational efficiencies, together with a greater contribution from that higher-margin segment.
- Quarterly net income attributable to Harris Corporation increased to $166.2 million from $114.2 million. The prior-year period included a $21.7 million loss attributable to Harris from discontinued operations; fiscal 2009 first-three-quarter results included a $201.6 million discontinued-operation loss attributable to Harris.
- The effective tax rate increased to 32.5% from 31.4% for the quarter and to 33.0% from 30.8% for the first three quarters. Prior-year results benefited from tax audit settlements and other discrete tax items.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2010 capital expenditures, including capitalized software, of approximately $200 million to $210 million and indicated that additional strategic acquisitions could occur.
- Management stated that existing cash, operating cash flow, credit facilities and market access were expected to fund working capital, capital expenditures and planned repurchases for the next 12 months and the foreseeable future, while acknowledging no assurance of future liquidity.
- The $750 million revolving credit facility was fully available at April 2, 2010, expires in September 2013, and the company reported compliance with its debt covenants.
- Management expected additional Broadcast Communications cost reductions in the fourth quarter of fiscal 2010. It viewed recent orders as suggesting that the broadcaster market might be bottoming, but noted weak U.S. broadcaster demand and longer international project lead times.
- RF Communications backlog was $1.50 billion at quarter-end. Third-quarter orders totaled $656 million, including $488 million in tactical radios and $168 million in public safety and professional communications.
- The company had approximately $500.5 million remaining under its share-repurchase authorization and increased its quarterly dividend from $0.20 to $0.22 per share.
- Unusual items included $3.7 million of third-quarter and $12.9 million of first-three-quarter acquisition-related charges and inventory step-up costs associated with Wireless Systems. The prior-year first-three-quarter Government Communications Systems results included $17.6 million of commercial satellite reflector program overrun charges.
- Key risks include dependence on U.S. Government funding and contracts, fixed-price contract overruns, international and foreign-exchange exposure, acquisition integration, supply-chain and subcontractor performance, intellectual-property claims, litigation, changing tax rates, economic weakness, impairment of goodwill and investments, and retention of key personnel.
- A securities class-action lawsuit involving Harris, Harris Stratex Networks and other defendants remained pending. The company stated that it believed it had meritorious defenses and intended to defend the litigation vigorously.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm that the applicable period is fiscal 2010 third quarter ended April 2, 2010, rather than “2009 Q3” in the request metadata.
- Assess whether Wireless Systems acquisition benefits, acquisition-related charges and inventory step-up costs are affecting the sustainability of RF Communications’ margins.
- Monitor Broadcast Communications’ continuing losses, expected cost reductions and evidence of market recovery.
- Review debt maturities, fixed-rate obligations, covenant compliance and the availability of the revolving credit facility.
- Reconcile operating cash flow growth with working-capital movements, capital expenditures, acquisitions, repurchases and dividends.
- Evaluate exposure to U.S. Government funding decisions, contract termination or reprioritization, fixed-price overruns and the pending litigation.