Business Context and Reporting Period
This filing is a Form 10-Q for Harris Corporation, not L3Harris Technologies, Inc. It covers the quarter and first two quarters of fiscal 2010 ended January 1, 2010, with comparisons to January 2, 2009. The financial statements are unaudited. Harris reported three continuing segments: RF Communications, Government Communications Systems, and Broadcast Communications. Harris Stratex Networks was spun off on May 27, 2009 and is presented as discontinued operations.
Key Financial Metrics
| Metric | Quarter ended Jan. 1, 2010 | Prior-year quarter | First two quarters 2010 | First two quarters 2009 |
|---|---|---|---|---|
| Revenue | $1,217.7 million | $1,333.2 million | $2,420.7 million | $2,505.8 million |
| Gross margin | $439.1 million; 36.1% | $407.9 million; 30.6% | $830.0 million; 34.3% | $788.6 million; 31.5% |
| Income from continuing operations | $139.5 million | $140.6 million | $244.0 million | $260.0 million |
| Continuing-operations diluted EPS | $1.06 | $1.06 | $1.85 | $1.94 |
| Net income attributable to Harris | $139.5 million | $(38.6) million | $244.0 million | $80.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $321.4 million | $189.3 million |
Second-quarter revenue decreased 8.7%, while first-half revenue decreased 3.4%. Second-quarter income from continuing operations was essentially flat, and first-half income declined 6.2%. Gross margin improved substantially, but engineering, selling and administrative expense increased 12.5% in the quarter to $215.7 million and represented 17.7% of revenue.
- RF Communications: Second-quarter revenue increased 5.6% to $462.9 million and operating income increased 17.0% to $168.6 million. First-half revenue increased 3.9%, but operating income decreased 1.3% because of acquisition-related charges and lower tactical radio sales.
- Government Communications Systems: Second-quarter revenue decreased 13.5% to $647.3 million, while operating income increased 2.1% to $87.0 million. First-half operating income increased 14.0% to $172.7 million.
- Broadcast Communications: Second-quarter revenue decreased 28.3% to $116.8 million and the segment reported a $4.8 million operating loss, compared with $12.0 million of operating income in the prior-year quarter.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $310.2 million at January 1, 2010, up from $281.2 million at July 3, 2009.
- Total assets were $4.53 billion and shareholders’ equity was $2.01 billion.
- Short-term debt was $45.0 million, current long-term debt was $0.7 million, and long-term debt was $1.177 billion. No long-term debt matures until fiscal 2016.
- The company had a $750 million senior unsecured revolving credit facility expiring in September 2013, with $705 million available at January 1, 2010. Harris had no borrowings outstanding under the facility, although its commercial paper program had $45 million outstanding.
- Management stated that liquidity was strong and expected existing cash, operating cash flow, credit facilities and capital-market access to fund working capital, capital expenditures and share repurchases for the next 12 months and the foreseeable future.
- Debt ratings were BBB+ from Standard & Poor’s and Baa1 from Moody’s. Harris was in compliance with its credit agreement covenants.
Cash Flow and Capital Allocation
- First-half operating cash flow was $321.4 million, compared with $189.3 million in the prior-year period, primarily reflecting working-capital management in RF Communications.
- Investing cash use was $76.1 million, including $38.5 million of capital expenditures, $3.9 million of capitalized software and $33.7 million for acquired businesses.
- Financing cash use was $218.7 million, including $105.5 million for share repurchases, $57.8 million of dividends and $61.4 million of debt repayments.
- Fiscal 2010 capital expenditures were expected to be $150 million to $160 million.
- The quarterly dividend increased from $0.20 to $0.22 per share, or an annualized $0.88 per share.
- During the first two quarters, Harris repurchased 2.6 million shares for $100 million. Approximately $550.4 million remained available under the 2009 repurchase authorization at January 1, 2010.
Material Changes and Unusual Items
- The prior-year quarter and first half included Harris Stratex Networks discontinued-operations losses attributable to Harris of $179.2 million and $179.9 million, respectively. Current-period results contain no discontinued-operations loss.
- Prior-year first-half results included a $7.6 million impairment of an investment and $17.6 million of commercial satellite reflector program cost-overrun charges, compared with no comparable impairment and lower related charges in the current period.
- Current-period RF Communications results included $2.7 million of acquisition integration and inventory step-up charges in the quarter and $9.2 million for the first half, related to the Wireless Systems acquisition.
- Interest expense increased to $18.2 million in the quarter and $36.4 million in the first half, primarily because of acquisition-related borrowings.
- The effective tax rate increased to 32.0% in the quarter and 33.3% in the first half, compared with 30.6% and 30.5%, respectively, in the comparable periods. Current-period tax benefits included a $3.5 million state tax benefit.
- Harris acquired Patriot Technologies during the quarter and anticipated additional strategic acquisitions during fiscal 2010.
Outlook, Risks and Contingencies
Management cited encouraging RF Communications demand and backlog, including $1.4 billion of RF Communications backlog at quarter-end, and described second-quarter Broadcast orders of $139 million as an encouraging sign of market improvement. No formal consolidated revenue or earnings guidance is provided in the filing.
- Broadcast Communications remained exposed to recession-related demand weakness and delayed customer capital spending.
- Government contracts may be partially funded, terminated immediately, heavily regulated or subject to audit. Fixed-price contracts expose Harris to cost overruns.
- Results depend significantly on U.S. Government funding priorities and defense-market conditions.
- International operations create foreign-exchange, export-license and geopolitical risks. A 10% adverse currency move was estimated to affect derivative fair value by approximately $5.3 million, before offsets.
- Management warned that weaker operating cash flow, reduced credit availability or lower debt ratings could require reductions in capital expenditures, repurchases or dividends, asset sales or refinancing.
- A federal securities class action related to historical Harris Stratex disclosures names HSTX, Harris and other defendants. The company stated that it believes it has meritorious defenses and intends to defend the litigation vigorously; potential damages are unspecified.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no material changes to contractual obligations during the quarter.
Investor Verification Items
- Confirm the issuer and period: the supplied filing is Harris Corporation’s fiscal second-quarter 2010 Form 10-Q, not a 2009 Q2 filing for L3Harris Technologies.
- Reconcile continuing-operations performance with reported net income after the Harris Stratex spin-off and discontinued-operations presentation.
- Assess whether Broadcast Communications weakness and the segment operating loss persist.
- Monitor RF Communications backlog conversion, tactical-radio demand and the effects of Wireless Systems integration charges.
- Review debt maturities, credit-facility availability, covenant compliance and exposure to a potential investment-grade downgrade.
- Evaluate the sustainability of operating cash flow alongside substantial share repurchases, dividends and potential acquisitions.
- Review the Harris Stratex securities litigation and any subsequent developments or potential liabilities.