Harris Corporation Form 10-Q Summary
Business context and reporting period
This filing covers Harris Corporation’s first quarter of fiscal 2018, ended September 29, 2017, with comparison to the quarter ended September 30, 2016. Continuing operations comprised Communication Systems, Electronic Systems, and Space and Intelligence Systems. The former Critical Networks segment was eliminated following the divestitures of IT Services and CapRock; historical segment information was recast for comparability. The filing was reviewed, but not audited, by Ernst & Young LLP.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $1,413 million | $1,420 million | Flat |
| Operating income | $272 million | $246 million | +11% |
| Operating margin | 19% | 17% | +2 percentage points |
| Income from continuing operations | $167 million | $145 million | +15% |
| Diluted continuing-operations EPS | $1.38 | $1.16 | +19% |
| Net income | $161 million | $160 million | Essentially flat |
| Cash flow from operations | $95 million | $43 million | +$52 million |
- Gross margin was $515 million, or 36% of revenue, versus $523 million, or 37%, in the prior-year quarter.
- Engineering, selling and administrative expense declined to $243 million from $277 million, primarily due to cost containment and the absence of $17 million of Exelis acquisition-related charges recorded in the prior-year quarter.
- The effective tax rate declined to 27.7% from 28.6%; both periods benefited from excess tax benefits related to equity compensation and certain investment-related tax differences.
- Segment revenue and operating income were: Communication Systems $410 million and $118 million; Electronic Systems $540 million and $109 million; and Space and Intelligence Systems $466 million and $87 million.
- Cash and cash equivalents were $388 million at September 29, 2017, down from $484 million at June 30, 2017. Total current assets were $2.1 billion and shareholders’ equity was $3.0 billion.
- Long-term debt, including the current portion, was approximately $3.9 billion; short-term debt was $80 million. The estimated fair value of long-term debt was $4.2 billion.
- The $1 billion revolving credit facility had $925 million available, after $75 million of commercial paper borrowings. Harris was in compliance with its debt covenants.
- Operating cash flow benefited from no required U.S. qualified pension contribution in the quarter, following a $400 million voluntary contribution in fiscal 2017. Net unfunded defined-benefit obligations were $1.2 billion.
- Capital expenditures were $23 million. Financing uses included $75 million of share repurchases, $69 million of dividends, and $35 million of net debt repayments.
Material changes versus the prior comparable period
- Revenue was broadly unchanged, with lower Communication Systems revenue offset by growth in Electronic Systems and Space and Intelligence Systems.
- Communication Systems revenue declined 5%, primarily from lower international tactical communications and lower Department of Defense and public-safety volumes; operating income was unchanged at $118 million.
- Electronic Systems revenue increased 1%, but operating income declined 2%. The ADS-B program transition from build-out to sustainment reduced gross margin by approximately $14 million and revenue by approximately $21 million.
- Space and Intelligence Systems revenue increased 3% and operating income increased 10%, supported by higher intelligence-community revenue and improved program performance.
- Net favorable estimate-at-completion adjustments contributed $11 million to operating income, compared with $13 million in the prior-year quarter.
- Diluted weighted-average shares declined to 121.2 million from 125.5 million, principally because of share repurchases, supporting the EPS increase.
- Discontinued operations contributed a $6 million after-tax loss in the current quarter versus $15 million of income in the prior-year quarter. The divested IT Services and CapRock businesses had no reported revenue in the current quarter.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2018 capital expenditures of approximately $130 million and no U.S. qualified pension contributions during fiscal 2018, subject to future plan returns, discount rates, and statutory requirements.
- Management stated that cash, operating cash generation, the credit facility, and capital-market access were expected to support working capital, capital expenditures, dividends, share repurchases, and debt maturities for the next 12 months and the foreseeable future.
- A $500 million, 1.999% note maturity in April 2018 was identified as a significant anticipated cash outlay.
- The quarterly dividend increased from $0.53 to $0.57 per share, the sixteenth consecutive annual increase. The company expected near-term dividend payments but provided no assurance of future increases or continued payments.
- Management identified U.S. Government funding, contract termination or audit exposure, fixed-price contract cost overruns, program estimates, cybersecurity, international operations and currency, export controls, supply-chain performance, litigation, environmental matters, pension funding, leverage, tax matters, and goodwill impairment as principal risks.
- Legal and environmental accruals for probable matters were not material, and management believed existing litigation and environmental matters would not materially affect financial position, results, or cash flows; outcomes remain uncertain.
- The company adopted new intra-entity transfer tax accounting guidance, reducing prepaid tax assets by $27 million and increasing non-current deferred tax liabilities by $27 million, with no reported operating impact.
- Revenue recognition, lease, and pension-cost presentation standards had not yet become effective. Management expected the future revenue standard to affect timing and disclosures for certain contracts, but had not quantified the full impact or selected an adoption method.
Most important facts for investors to verify
- Whether the ADS-B transition and other program-mix effects continue to pressure gross margin and Electronic Systems profitability.
- Progress toward servicing or refinancing approximately $3.9 billion of debt, including the $500 million April 2018 maturity.
- Operating cash conversion, working-capital requirements, inventory and receivables growth, and the sustainability of share repurchases and dividends.
- Actual fiscal 2018 capital expenditures and pension contributions versus management’s expectations.
- The effect of future revenue-recognition, lease, and pension-accounting standards on reported revenue, margins, earnings, and disclosures.
- Developments in U.S. Government budgets, contract funding, fixed-price program estimates, litigation, environmental claims, and indemnification obligations related to prior divestitures and spin-offs.