Harris Corporation Form 10-Q Summary
Reporting period: Third quarter and first three quarters of fiscal 2015 ended April 3, 2015, compared with March 28, 2014. The request metadata identifies “2014 Q3,” but the filing itself is a fiscal 2015 Form 10-Q filed May 6, 2015. Results are unaudited and presented under U.S. GAAP.
Business context
Harris operated through three segments: RF Communications, Government Communications Systems, and Integrated Network Solutions. Its businesses serve defense, government, public safety, commercial, energy, maritime and healthcare customers. The company announced a pending acquisition of Exelis in February 2015.
Key financial metrics
| Metric | Q3 FY2015 | Q3 FY2014 | First 3 Quarters FY2015 | First 3 Quarters FY2014 |
|---|---|---|---|---|
| Revenue | $1,186.6 million | $1,267.5 million | $3,548.3 million | $3,682.6 million |
| Gross margin | $433.2 million; 36.5% | $426.5 million; 33.6% | $1,224.5 million; 34.5% | $1,271.7 million; 34.5% |
| Income from continuing operations | $125.7 million | $137.3 million | $390.3 million | $402.0 million |
| Diluted continuing-operations EPS | $1.20 | $1.27 | $3.69 | $3.72 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $395.2 million | $454.0 million |
- Q3 revenue declined 6.4%, income from continuing operations declined 8.4%, and diluted EPS declined 5.5% year over year.
- First-three-quarter revenue declined 3.6%, continuing-operations income declined 2.9%, and diluted EPS declined 0.8%.
- Q3 gross margin improved to 36.5%, primarily because of stronger margins in Government Communications Systems and RF Communications.
- Engineering, selling and administrative expense was $220.8 million in Q3, or 18.6% of revenue, versus $203.2 million, or 16.0%, in the prior-year quarter.
- Effective tax rate was 29.8% in Q3 and 28.2% for the first three quarters, versus 31.8% and 32.2%, respectively, in the comparable periods.
- Cash and cash equivalents were $487.7 million at April 3, 2015, compared with $561.0 million at June 27, 2014.
- Long-term debt was $1,575.8 million and short-term debt was $27.3 million at April 3, 2015. The $1 billion revolving credit facility was undrawn and fully available.
- Cash uses during the first three quarters included $164.8 million for share repurchases, $148.7 million for dividends, and $102.3 million for capital expenditures. The quarterly dividend was $0.47 per share.
Segment performance and material changes
| Segment | Q3 FY2015 revenue | Year-over-year change | Q3 FY2015 operating income | Year-over-year change |
|---|---|---|---|---|
| RF Communications | $450.8 million | (1.4%) | $151.0 million | 5.1% |
| Government Communications Systems | $455.1 million | (4.5%) | $74.6 million | (3.6%) |
| Integrated Network Solutions | $298.8 million | (14.1%) | $11.8 million | (44.9%) |
- RF Communications benefited from higher Tactical Communications revenue and mix, but Public Safety and Professional Communications declined 22% because of market weakness and competitive pressure.
- Government Communications Systems revenue declined in the quarter because of lower space-related and GOES-R weather-program revenue, although first-nine-month revenue increased 3.7% and margins improved.
- Integrated Network Solutions was pressured by lower U.S. government revenue, including the NMCI and Air Force Network Centric Solutions programs. The segment also recorded a $7 million prior-period telecommunications-tax accrual during the first three quarters.
- Net favorable estimate-at-completion adjustments increased operating income by $10.7 million in Q3 and $49.1 million for the first three quarters, compared with $18.4 million and $38.9 million, respectively, in the prior-year periods.
- Q3 results included $8.5 million of Exelis acquisition-related costs, $8.7 million of debt issuance costs, and a $1.6 million unrealized loss on interest-rate swaps.
Outlook, liquidity, risks and unusual items
- Management expected fiscal 2015 capital expenditures of approximately $160 million and stated that cash, operating cash flow, credit facilities and market access should support working capital, dividends, repurchases, capital expenditures and the pending Exelis acquisition.
- The Exelis transaction was valued at approximately $4.75 billion enterprise value. Exelis shareholders were to receive $16.625 in cash plus 0.1025 Harris shares per Exelis share. Closing was expected in June 2015, subject to shareholder, regulatory and other conditions.
- After quarter-end, Harris issued $2.4 billion of new debt and gave notice to redeem $400 million of 5.95% notes and $350 million of 6.375% notes at estimated make-whole prices of $451 million and $419 million, respectively. The additional borrowing resulted in a downgrade of Harris debt ratings.
- The Department of Justice issued a second request for information regarding the Exelis transaction, extending the antitrust review period. Acquisition-related litigation was also pending.
- The company identified risks from U.S. government funding and budget priorities, partially funded or terminable contracts, fixed-price contract cost overruns, international operations and currency movements, cybersecurity, competition, supply-chain performance, litigation, tax audits, impairment, and acquisition integration and leverage.
- An arbitration concerning the Broadcast Communications divestiture could result in no additional adjustment or an additional purchase-price reduction of up to $72 million; management considered the buyer’s claim overstated.
- Accumulated other comprehensive loss increased to $139.1 million, primarily due to foreign currency translation losses and interest-rate swap losses.
Investor verification checklist
- Confirm the actual closing, financing structure, debt ratings, redemption costs and integration results of the Exelis acquisition.
- Assess whether weakness in Public Safety and Professional Communications and Integrated Network Solutions persisted or improved.
- Monitor government funding, sequestration, contract awards, program execution and potential fixed-price contract losses.
- Reconcile reported earnings with favorable estimate-at-completion adjustments and other unusual items.
- Track cash conversion, working-capital movements, capital expenditures, dividends, share repurchases and post-acquisition leverage.
- Review the outcome of the Broadcast Communications arbitration and pending Exelis-related litigation and regulatory proceedings.