Filing Summary
Source-period clarification: The provided filing is Harris Corporation’s Form 10-K for the fiscal year ended July 2, 2010, filed August 30, 2010. It is not a 2009 Q4 filing and does not identify L3Harris Technologies, Inc.; L3Harris was formed later through the Harris-L3 combination.
Business Context and Reporting Period
Harris was an international communications and information technology company serving government and commercial customers in more than 150 countries. Continuing operations comprised RF Communications, Government Communications Systems and Broadcast Communications. Historical results were restated to present the former Harris Stratex Networks business as discontinued operations following its May 2009 spin-off.
Fiscal 2010 included 52 weeks; fiscal 2009 included 53 weeks. The company employed approximately 15,800 people at July 2, 2010. U.S. Government customers, including foreign military sales through the U.S. Government, represented approximately 76% of fiscal 2010 revenue.
Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Revenue | $5,206.1 million | $5,005.0 million | Up 4.0% |
| Gross margin | $1,871.7 million; 36.0% | $1,584.8 million; 31.7% | Margin up 430 bps |
| Income from continuing operations | $561.6 million | $312.4 million | Up 79.8% |
| Diluted continuing-operations EPS | $4.28 | $2.33 | Up 83.7% |
| Operating cash flow | $802.7 million | $666.8 million | Up $135.9 million |
| Cash and equivalents | $455.2 million | $281.2 million | Up $174.0 million |
| Total debt | $1,207.3 million, including $30.0 million short-term debt | $1,283.7 million, including $105.7 million short-term debt | Down $76.4 million |
| Equity | $2,190.1 million | $1,869.1 million | Up $321.0 million |
Fiscal 2010 net cash used in investing activities was $250.1 million, including $189.9 million of property, plant and equipment additions, $8.1 million of capitalized software and $52.1 million for acquired businesses. Financing activities used $380.9 million, including $208.0 million for share repurchases, $115.0 million for dividends and $76.8 million for net debt repayment.
Segment Performance and Material Changes
- RF Communications: Revenue rose 17.4% to $2,067.2 million and operating income rose 23.8% to $707.4 million. The segment benefited from the full-year contribution of the Wireless Systems acquisition, favorable tactical-radio mix, MRAP and M-ATV programs, and operational efficiencies. Funded backlog increased to $1.764 billion from $922 million.
- Government Communications Systems: Revenue declined 0.8% to $2,688.0 million, primarily because the Census Bureau FDCA program was winding down. Operating income increased 11.3% to $337.0 million, supported by award fees and program execution. Funded backlog was $1.238 billion and unfunded backlog was $3.276 billion.
- Broadcast Communications: Revenue fell 16.7% to $486.2 million. The segment reported a $30.8 million operating loss, compared with a $238.0 million loss in fiscal 2009. Fiscal 2009 included a $255.5 million non-cash impairment charge; fiscal 2010 included approximately $10 million of cost-reduction charges and $6 million of inventory write-downs.
Company-wide funded and unfunded backlog totaled approximately $6.526 billion at July 2, 2010, including $3.250 billion of funded backlog. Management expected to convert approximately 75% of funded backlog to revenue in fiscal 2011, subject to delays, cancellations and funding risks.
Liquidity, Debt and Capital Allocation
Management described liquidity as strong, citing $455.2 million of unrestricted cash, $802.7 million of operating cash flow and a $750 million revolving credit facility, of which $720 million was available at year-end. The company had no long-term debt maturity until fiscal 2016 and was in compliance with credit-facility covenants. Fiscal 2011 capital expenditures were expected to be $250 million to $275 million.
Harris repurchased 4.779 million shares for approximately $199.9 million during fiscal 2010. The remaining share-repurchase authorization was approximately $450 million. The quarterly dividend was increased after year-end from $0.22 to $0.25 per share, or an annualized $1.00.
Outlook, Risks and Unusual Items
- Management expected continued opportunities in secure tactical communications, cybersecurity, healthcare IT, intelligence, information superiority and government services, but emphasized dependence on U.S. Government appropriations and changing defense priorities.
- Broadcast Communications remained exposed to weak broadcaster capital spending, delayed projects, international economic conditions and technology-transition risks. Additional fiscal 2011 cost-reduction charges of approximately $7 million were expected.
- On July 30, 2010, after year-end, Harris acquired CapRock for $525 million in cash, funded with $205 million of cash and $320 million of commercial paper. CapRock reported calendar 2009 revenue of $359 million and operating income of $28 million.
- Key risks included government contract termination or audit adjustments, fixed-price contract overruns, competitive bidding, export controls, foreign currency, cybersecurity incidents, supply-chain disruption, litigation, tax audits, goodwill impairment and natural disasters.
- Broadcast Communications goodwill exceeded its fiscal 2010 estimated adjusted fair value cushion by approximately 8%; no impairment was recorded, but the filing identified prolonged recession, weaker demand or unsuccessful growth initiatives as potential impairment triggers.
- The filing reported $468.4 million of commercial commitments, $3.108 billion of contractual cash obligations, $33.2 million of unrecognized tax benefits and environmental liabilities estimated at $4.5 million on a discounted basis.
Most Important Facts to Verify
- Confirm the requested issuer and period: the source is Harris Corporation fiscal 2010, not L3Harris or 2009 Q4.
- Reconcile continuing-operations results with fiscal 2009 discontinued-operations effects and the Harris Stratex spin-off.
- Assess whether the strong earnings and margin improvement was sustainable apart from the fiscal 2009 Broadcast Communications impairment charge.
- Review the effect of the CapRock acquisition and the additional $320 million of commercial paper borrowed after year-end.
- Evaluate exposure to U.S. Government funding, contract audits, fixed-price overruns and backlog conversion.
- Monitor Broadcast Communications performance and the relatively narrow goodwill valuation cushion.
- Review the complete debt maturity schedule, credit covenants, performance bonds and tax-audit contingencies.
- Verify the company’s subsequent corporate history before applying this filing to L3Harris investment analysis.