Business Context and Reporting Period
Harris Corporation’s unaudited Form 10-Q covers the quarter and first two quarters ended December 27, 2013, corresponding to fiscal 2014 second-quarter and year-to-date results. The company operated through RF Communications, Integrated Network Solutions, and Government Communications Systems. Historical segment results were recast to move the cyber security network testing operation into Integrated Network Solutions.
The filing is for Harris Corporation, the predecessor company to L3Harris Technologies. Results exclude the disposed Broadcast Communications and Cyber Integrated Solutions businesses except where specifically noted.
Financial Metrics
| Metric | Quarter Ended Dec. 27, 2013 | Prior Year Quarter | Two Quarters Ended Dec. 27, 2013 | Prior Year Period |
|---|---|---|---|---|
| Revenue | $1,223.2 million | $1,286.9 million | $2,415.1 million | $2,548.4 million |
| Gross margin | $427.8 million; 35.0% | $441.5 million; 34.3% | $845.2 million; 35.0% | $854.7 million; 33.5% |
| Income from continuing operations attributable to Harris | $137.2 million | $142.2 million | $264.7 million | $270.7 million |
| Diluted EPS from continuing operations | $1.27 | $1.25 | $2.45 | $2.40 |
| Net income attributable to Harris | $136.2 million | $48.5 million | $262.0 million | $(37.3) million |
| Operating cash flow | Not separately provided | Not separately provided | $279.5 million | $279.5 million |
- Quarterly revenue declined 4.9%; year-to-date revenue declined 5.2%.
- Quarterly income from continuing operations attributable to Harris declined 3.5%, while diluted EPS increased 1.6% because of lower average shares outstanding following repurchases.
- Gross margin improved to 35.0% from 34.3% for the quarter and to 35.0% from 33.5% year to date, reflecting program execution, operational improvements, restructuring benefits, and favorable mix.
- Quarterly income from continuing operations before taxes was $203.3 million, compared with $200.2 million; the effective tax rate increased to 32.6% from 30.8%. Year-to-date rates were 32.4% and 31.2%, respectively.
- Quarterly and year-to-date net interest expense decreased to $23.0 million and $46.1 million, respectively, primarily because the company redeemed its $300 million 5% notes due 2015 in May 2013.
Segment Performance
| Segment | Quarter Revenue | Quarter Operating Income | Year-to-Date Revenue | Year-to-Date Operating Income |
|---|---|---|---|---|
| RF Communications | $454.6 million, down 6.5% | $142.1 million, down 5.9% | $877.6 million, down 5.7% | $277.3 million, down 2.7% |
| Integrated Network Solutions | $365.9 million, down 9.2% | $32.7 million, down 0.6% | $741.5 million, down 6.0% | $62.4 million, down 5.5% |
| Government Communications Systems | $433.0 million, up 1.1% | $66.5 million, up 2.6% | $844.6 million, down 4.3% | $130.5 million, down 0.5% |
RF Communications was pressured by lower U.S. Department of Defense Tactical Communications revenue and weakness in state and local public safety markets. Integrated Network Solutions was affected by lower U.S. Government demand in Healthcare Solutions and Harris CapRock Communications, along with increased competition and tighter government funding. Government Communications Systems benefited from DataComm, MET, classified, and space programs, partly offset by lower GOES-R revenue.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Year-to-date operating cash flow was $279.5 million, unchanged from the prior-year period.
- Investing cash outflow was $58.0 million, including $85.0 million of capital expenditures and $27.0 million of proceeds from the sale of remaining CIS assets.
- Financing cash outflow was $206.9 million, including $156.8 million of share repurchases, $90.4 million of dividends, and $59.5 million of net debt repayments, partly offset by $99.8 million of employee stock-option exercise proceeds.
- Cash and cash equivalents were $334.4 million at December 27, 2013, versus $321.0 million at June 28, 2013.
- Short-term debt was $93.7 million and long-term debt, including the current portion, was $1,581.8 million. The company had no borrowings under its $1 billion revolving credit facility, although $85 million of commercial paper was outstanding and supported by the facility.
- Approximately $890 million of the revolving facility was available at quarter-end; no long-term debt matures until December 2017.
- The company repurchased $150.0 million of stock during the first two quarters and had approximately $983.5 million remaining under its new $1 billion repurchase authorization at quarter-end.
- The quarterly dividend increased from $0.37 to $0.42 per share, or an annualized $1.68 per share.
Material Changes, Outlook, Risks, and Unusual Items
- Discontinued operations contributed a $1.0 million after-tax loss in the quarter and a $2.7 million after-tax loss year to date, primarily from additional Broadcast Communications disposition contingencies. The prior-year periods included substantial noncash impairment charges, making net-income comparisons not meaningful.
- The sale of the remaining CIS assets generated $27 million of cash proceeds and a $1.9 million after-tax gain year to date.
- Net estimate-at-completion adjustments increased operating income by $8.2 million in the quarter and $20.5 million year to date. Management states that no individual adjustment was material on a consolidated or segment basis.
- Management expects fiscal 2014 capital expenditures of approximately $250 million and believes cash, operating cash generation, credit availability, and market access will fund anticipated working capital, capital expenditures, dividends, and repurchases for the next 12 months. No formal revenue or earnings guidance is provided in the filing.
- Liquidity risks include U.S. Government budget and funding uncertainty, potential disruption in credit markets, debt-rating downgrades, and reduced commercial-paper access.
- Key operating risks include dependence on U.S. Government customers and contracts, fixed-price contract cost overruns, contract funding or termination, cybersecurity incidents, international currency exposure, intellectual-property disputes, litigation, tax audits, supply-chain performance, regulatory changes, and potential impairment of goodwill or other long-lived assets.
- 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 period. Disclosure controls were deemed effective.
Important Facts for Investors to Verify
- Reconcile the filing’s fiscal 2014 second-quarter period ended December 27, 2013 with the requested “2013 Q2” designation.
- Assess whether revenue pressure in RF Communications and Integrated Network Solutions reflects temporary U.S. Government budget constraints or longer-term demand deterioration.
- Evaluate the sustainability of margin gains, including the contribution from restructuring actions and favorable contract estimate-at-completion adjustments.
- Review debt maturities, commercial-paper reliance, credit-facility availability, and compliance with the 0.60-to-1.00 consolidated debt-to-capital covenant.
- Monitor the remaining Broadcast Communications disposition dispute and other contingencies, including tax audits and legal matters.
- Consider the cash impact and financial flexibility implications of continued share repurchases and dividend payments.
- Review government contract funding, fixed-price program performance, GOES-R trends, and the execution of DataComm and MET programs.