Harris Corporation (now L3Harris Technologies) — Q1 Fiscal 2014 Summary
Reporting period: Quarterly period ended September 27, 2013, compared with the quarter ended September 28, 2012. The filing identifies the registrant as Harris Corporation; the company was subsequently renamed L3Harris Technologies.
Business Context
Harris reported three continuing operations segments: RF Communications, Integrated Network Solutions, and Government Communications Systems. The company changed its segment structure at the start of fiscal 2014 by moving its cyber security network testing operation from Government Communications Systems to Integrated Network Solutions; prior periods were recast.
Financial Performance and Liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $1,191.9 million | $1,261.5 million | Down 5.5% |
| Gross margin | $417.4 million; 35.0% | $413.2 million; 32.8% | Margin up 2.2 percentage points |
| Income from continuing operations | $127.5 million attributable to Harris | $128.5 million | Down 0.8% |
| Diluted EPS from continuing operations | $1.18 | $1.14 | Up 3.5% |
| Net income attributable to Harris | $125.8 million | $(85.8) million | Improved by $211.6 million |
| Operating cash flow | $172.6 million | $120.5 million | Up 43.2% |
| Cash and cash equivalents | $337.2 million | $326.8 million | Up $10.4 million year over year |
Gross margin was resilient despite lower revenue, supported by operational savings and favorable sales mix. Engineering, selling and administrative expense increased to $207.8 million from $198.2 million, or 17.4% of revenue versus 15.7%. The effective tax rate was 32.2%, compared with 31.6%.
Total debt at September 27, 2013 was approximately $1,670.6 million, including $88.6 million of short-term debt, $4.9 million of current long-term debt and $1,577.1 million of long-term debt. Net debt was approximately $1,333.4 million. The company had no borrowings under its $1 billion revolving credit facility, although $75 million of commercial paper was outstanding and approximately $770 million of facility capacity was available under covenant limits.
Operating cash flow was primarily supported by working-capital management. Investing cash use was $6.4 million, including $33.4 million of capital expenditures and $27.0 million of proceeds from the sale of remaining CIS assets. Financing cash use was $153.9 million, including $106.7 million of share repurchases, $45.3 million of dividends and $64.5 million of net debt repayments, partly offset by $62.6 million from employee stock-option exercises.
Segment Results
| Segment | Revenue | Revenue Change | Operating Income | Operating Income Change |
|---|---|---|---|---|
| RF Communications | $423.0 million | Down 4.9% | $135.2 million | Up 0.8% |
| Integrated Network Solutions | $375.6 million | Down 2.6% | $29.7 million | Down 10.3% |
| Government Communications Systems | $411.6 million | Down 9.4% | $64.0 million | Down 3.6% |
RF Communications was affected by weakness in public-safety and professional-communications markets, but benefited from cost reductions and product mix. Integrated Network Solutions faced lower U.S. government demand, budget uncertainty and sequestration, while higher research and development spending pressured profit. Government Communications Systems experienced lower revenue from the NOAA GOES-R program during its transition to integration and testing and lower Department of Defense revenue, partly offset by civil-agency and classified-customer activity.
Material Changes and Unusual Items
- Discontinued operations generated a $1.7 million after-tax loss in Q1 FY2014, consisting primarily of a $3.6 million after-tax increase in the Broadcast Communications disposal loss, partly offset by a $1.9 million after-tax gain on the CIS asset sale.
- The prior-year quarter included $222.3 million of pre-tax non-cash impairment charges related to discontinued Broadcast Communications and CIS operations, resulting in a $214.3 million after-tax loss from discontinued operations.
- The company completed the sale of the remaining CIS assets on August 27, 2013 for $35 million, including $28 million in cash and a $7 million subordinated promissory note.
- Net favorable estimate-at-completion adjustments contributed $12.3 million, or $0.07 per diluted share, to operating income in both comparable quarters.
- Harris repurchased 1.746 million shares for approximately $100 million under its 2011 program and approved an additional $1 billion share-repurchase authorization. The quarterly dividend increased from $0.37 to $0.42 per share.
- The effective tax rate benefited from settlement of a state tax audit.
Outlook, Risks and Contingencies
Management expected fiscal 2014 capital expenditures of approximately $250 million and stated that cash, operating cash flow, available credit and access to capital markets should support working capital, capital expenditures, dividends and planned repurchases for the next 12 months and the reasonably foreseeable future. No formal revenue or earnings guidance is provided in the filing text.
Key risks include U.S. government budget uncertainty, sequestration, partially funded or terminable government contracts, fixed-price contract cost overruns, dependence on government customers, cyberattacks, international and foreign-currency exposure, litigation and legal-matter accruals, tax audits, supplier and subcontractor performance, export restrictions, intellectual-property claims, and potential goodwill or asset impairments. The post-closing working-capital adjustment related to the Broadcast Communications sale remained disputed; management stated that an unfavorable outcome was not expected to materially affect the company.
Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements or guarantees, and no material changes in contractual obligations during the quarter. The filing states that disclosure controls were effective and that no material litigation outcome was expected to adversely affect financial condition, results of operations or cash flows.
Investor Verification Items
- Verify the company-name and period convention: the source filing is for Harris Corporation’s quarter ended September 27, 2013, not a filing issued under the L3Harris name.
- Assess whether revenue pressure from U.S. government budgets, sequestration, public-safety markets and the GOES-R program transition persisted in subsequent quarters.
- Reconcile reported cash generation with the pace of share repurchases, dividends, capital expenditures and debt reduction.
- Review the sustainability of the 35.0% gross margin and the $12.3 million favorable estimate-at-completion adjustment.
- Monitor the Broadcast Communications working-capital dispute, disposal contingencies and tax-audit exposures.
- Confirm available revolving-credit capacity, commercial-paper levels, debt maturities and compliance with leverage covenants.