Business Context and Reporting Period
This summary covers the Form 10-Q filed by Harris Corporation (now L3Harris Technologies, Inc.) for the quarterly period ended December 29, 2006. The company operates in four primary segments: Government Communications Systems, RF Communications, Microwave Communications, and Broadcast Communications. The financial statements are unaudited.
Key Financial Metrics
| Metric | Quarter Ended Dec 29, 2006 | Two Quarters Ended Dec 29, 2006 | Quarter Ended Dec 30, 2005 | Two Quarters Ended Dec 30, 2005 |
|---|---|---|---|---|
| Revenue | $1,016.2 million | $1,963.0 million | $841.6 million | $1,601.3 million |
| Net Income | $94.0 million | $177.9 million | $30.0 million | $80.3 million |
| Diluted EPS | $0.67 | $1.27 | $0.22 | $0.58 |
| Gross Margin % | 32.7% | 32.5% | 28.0% | 28.7% |
| Operating Cash Flow (2Q) | $182.3 million (vs. $112.0 million prior year) | |||
| Cash & Equivalents | $367.9 million (as of Dec 29, 2006) | |||
| Total Debt | $699.1 million ($149.1M current + $550.0M long-term) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 20.7% year-over-year for the quarter and 22.6% for the two-quarter period. Growth was driven by all four segments, with RF Communications leading at 57.9% growth due to strong demand for tactical radios.
- Profitability Surge: Net income increased 213.3% for the quarter. This was significantly aided by the absence of large charges in the current period that impacted the prior year, specifically $35.5 million in product discontinuance charges in the Microwave segment and $11.7 million in acquisition/cost-reduction charges in the Broadcast segment.
- Investment Impairment: A $19.8 million pre-tax impairment was recorded in the first quarter of fiscal 2007 related to the investment in Terion, Inc., due to a loss of a major customer. This reduced non-operating income for the two-quarter period.
- Tax Rate Improvement: The effective tax rate dropped to 34.5% for the quarter (from 50.8% prior year) and 30.0% for the two quarters (from 42.9% prior year). This was due to a favorable $12 million IRS settlement regarding prior years and the re-enactment of the R&D credit.
Guidance, Outlook, and Risks
- Subsequent Event (Stratex Combination): On January 26, 2007, Harris completed a combination of its Microwave Communications Division with Stratex Networks, Inc. to form Harris Stratex Networks, Inc. Harris owns 56% of the new entity. A gain of approximately $131 million is expected to be recorded in the third quarter of fiscal 2007.
- Cost Reductions: The Broadcast Communications segment expects to incur approximately $5 million in charges in the second half of fiscal 2007 for severance and facility exit costs, aiming for $10 million in annual savings by fiscal 2008.
- Cash Flow Outlook: Management expects operating cash flow for fiscal 2007 to be in the range of $400 million to $450 million. Capital expenditures are expected to be between $140 million and $150 million.
- Risks: Key risks include dependence on U.S. Government funding, foreign currency fluctuations, and the integration of acquired businesses. The company maintains a "BBB" credit rating from S&P and "Baa2" from Moody's.
Investor Verification Checklist
- Stratex Integration: Verify the accounting treatment and timing of the $131 million gain from the Stratex Networks combination in Q3 2007 results.
- Terion Investment: Confirm the final proceeds from the Terion asset sale and whether the $19.8 million impairment was fully realized or if additional losses/gains are possible.
- Broadcast Segment Turnaround: Monitor the execution of the $5 million cost-reduction plan in the Broadcast segment and its impact on future margins.
- Convertible Debentures: Note that $150 million in 3.5% Convertible Debentures are convertible into common stock during the quarter ending March 31, 2007, which could impact share count and EPS.
- Off-Balance Sheet Guarantees: Review the $20 million bond indemnity provided for a Broadcast Communications customer, though management deems the risk of loss remote.