Harris Corporation Form 10-Q Summary
Reporting period: Fiscal third quarter and first three quarters ended April 1, 2011, compared with the corresponding periods ended April 2, 2010. The request metadata identifies “2010 Q3,” but the filing is for fiscal 2011 third quarter. The filing was signed May 4, 2011. Financial statements are unaudited.
Business Context
Harris reported three segments: RF Communications, Government Communications Systems, and the newly formed Integrated Network Solutions segment. The realignment moved Harris IT Services, Harris CapRock Communications, Healthcare Solutions, Cyber Integrated Solutions, and Broadcast Communications into Integrated Network Solutions. Comparative segment results were recast accordingly.
The company provides secure tactical communications, government and defense communications systems, managed satellite and terrestrial communications, IT services, healthcare interoperability solutions, cyber solutions, and broadcast communications.
Financial Performance and Liquidity
| Metric | Q3 FY2011 | Q3 FY2010 | First 3 Quarters FY2011 | First 3 Quarters FY2010 |
|---|---|---|---|---|
| Revenue | $1,413.3 million | $1,329.5 million | $4,257.2 million | $3,750.2 million |
| Gross margin | $517.0 million; 36.6% | $509.5 million; 38.3% | $1,539.3 million; 36.2% | $1,339.5 million; 35.7% |
| Net income attributable to Harris | $139.5 million | $166.2 million | $454.5 million | $410.2 million |
| Diluted EPS | $1.09 | $1.26 | $3.54 | $3.11 |
| Operating cash flow | Not separately provided | Not separately provided | $556.8 million | $635.3 million |
- Q3 revenue increased 6.3%, while net income declined 16.1% and diluted EPS declined 13.5%.
- First-three-quarter revenue increased 13.5%, net income increased 10.8%, and diluted EPS increased 13.8%.
- Q3 net margin decreased to 9.9% from 12.5%; first-three-quarter net margin was 10.7% versus 10.9%.
- Engineering, selling and administrative expenses increased 16.6% in Q3 and 18.3% year to date, principally due to CapRock integration costs and investments in growth opportunities.
- Interest expense increased to $26.0 million in Q3 from $18.1 million and to $64.2 million year to date from $54.5 million.
- Cash and cash equivalents were $885.1 million at April 1, 2011, compared with $455.2 million at July 2, 2010.
- Year-to-date investing cash outflows were $754.6 million, including $548.4 million for acquisitions and $186.1 million for property, plant and equipment.
- Year-to-date financing cash inflow was $622.6 million, including $855.7 million of borrowings, offset by $156.0 million of share repurchases and $95.7 million of dividends.
- Total debt was $1,893.4 million, including $180.0 million of short-term debt and $1,886.8 million of long-term debt. No long-term debt matures until fiscal 2016.
- The company had $570.0 million available under its $750 million revolving credit facility and the full $300 million 364-day facility available; it reported compliance with debt covenants.
Segment Results and Material Changes
| Segment | Q3 FY2011 Revenue | Change | Q3 FY2011 Operating Income | Change |
|---|---|---|---|---|
| RF Communications | $550.0 million | Down 0.1% | $178.5 million; 32.5% margin | Down 12.8% |
| Government Communications Systems | $431.2 million | Up 1.0% | $59.8 million; 13.9% margin | Up 2.4% |
| Integrated Network Solutions | $462.9 million | Up 23.2% | $20.7 million; 4.5% margin | Down 26.9% |
- RF Communications results were affected by the comparison with unusually strong Q3 FY2010 shipments of tactical radios for Afghanistan MRAP vehicles. MRAP-related DoD radio sales declined $206 million year over year, partly offset by international demand and Falcon product adoption.
- Government Communications Systems benefited from GOES-R weather programs and the F-35 program, while classified program spending and the 2010 Census FDCA program declined.
- Integrated Network Solutions revenue benefited from CapRock, but operating income was reduced by acquisition and integration costs, accelerated cyber investments, and lower pricing on a Navy Marine Corps Intranet contract extension.
- CapRock, acquired July 30, 2010 for a net purchase price of $517.4 million, contributed $255.9 million of revenue and an $8.2 million pretax loss for the post-acquisition period, including $11.6 million of acquisition-related charges.
- Goodwill increased to $1,963.4 million from $1,576.2 million, primarily from acquisitions and currency translation. The balance included $160.9 million of accumulated impairment losses related to Broadcast Communications.
Outlook, Unusual Items, and Risks
- Management expected fiscal 2011 capital expenditures, including capitalized software, of $325 million to $345 million.
- Management stated that existing cash, operating cash flow, credit facilities, and capital-market access were expected to fund working capital, capital expenditures, and planned share repurchases for the next 12 months, while noting that future liquidity is not assured.
- On April 4, 2011, after quarter-end, Harris completed the $397.5 million cash acquisition of Schlumberger Global Connectivity Services and the $155 million cash acquisition of Carefx. The company used $552.5 million of cash for these transactions.
- Acquisition-related charges reduced Integrated Network Solutions operating income by $10.8 million in Q3 and $17.0 million year to date.
- The effective tax rate was 32.6% in Q3 and 33.2% year to date. Year-to-date results included a $5.9 million tax benefit related to restoration of the U.S. federal research and development tax credit.
- Key risks include dependence on U.S. Government funding and contracts, fixed-price contract cost overruns, international and foreign-currency exposure, acquisition integration, cybersecurity incidents, satellite bandwidth availability, intellectual-property claims, litigation, impairment of goodwill, export restrictions, and potential changes in debt ratings.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no material changes in internal control over financial reporting. Management concluded disclosure controls were effective.
- A securities class-action lawsuit involving Harris and former Harris-related officers remains pending; the company stated that it believes the defendants have meritorious defenses.
Investor Verification Checklist
- Verify the period designation: this filing covers fiscal Q3 2011, not calendar or fiscal Q3 2010.
- Assess whether the decline in quarterly margins and earnings reflects a temporary comparison against MRAP-related shipments or a more persistent product-mix and integration issue.
- Reconcile the post-quarter-end Schlumberger GCS and Carefx acquisitions, including purchase-price allocations, incremental debt or cash usage, and subsequent operating results.
- Monitor leverage, commercial-paper usage, interest expense, debt maturities, covenant compliance, and the September 2011 maturity of the 364-day revolving facility.
- Evaluate Integrated Network Solutions profitability after CapRock and other acquisitions, including the effect of acquisition charges and lower-margin managed services.
- Review government contract funding, backlog conversion, fixed-price contract performance, and exposure to U.S. Government budget changes.
- Confirm the remaining share-repurchase authorization of approximately $300.6 million and the sustainability of the $1.00 annualized dividend rate.