Harris Beats by a Penny

Harris Corp. ( HRS - Analyst Report ) declared third quarter 2012 financial results, with both EPS and revenue surpassing the Zacks Consensus Estimates.

Reported GAAP net loss in the quarter was $256.3 million or $2.27 per share compared with $139.5 million or $1.12 per share in the year-ago quarter. The company’s decision of divesting its Broadcast Communications assets in the quarter adversely affected results. Quarterly adjusted (excluding acquisition related cost) earnings per share (EPS) of $1.35 surpassed the Zacks Consensus Estimate by a penny.

Consolidated revenue in the reported quarter stood at $1,476 million, up 4.47% year over year and was also above the Zacks Consensus Estimate of $1,474 million.

Cost of sales in the third quarter was $937.9 million compared with $896.6 million in the prior-year quarter. Engineering, selling, & administrative expenses were $297.6 million versus $281 million in the year-ago quarter.

At the end of the third quarter of fiscal 2012, Harris generated $483.2 million in cash from operations compared with $556.8 million in the prior-year quarter. Free cash flow (cash flow from operations excluding capital expenditures) for the period was $325.8 million compared with $370.7 million in the year-ago quarter.

At the end of the reported quarter, Harris had cash & cash equivalents of $299 million compared with $366.9 million at the end of fiscal 2011. Total debt at the end of the third quarter was $1,883.2 million compared with $1,887.2 million at the end of fiscal 2011. Debt-to-capitalization ratio was 0.49 compared with 0.43 at the end of 2011.

Government Communications System Segment

Quarterly revenue from the segment spiked 9.1% year over year to $470.5 million. Operating income in the quarter was $64.1 million compared with $59.8 million in the prior-year quarter. Quarterly operating margin was 13.6% compared with 13.9% in the year-ago quarter.

RF Communications Segment

Revenue in the quarter was $537.7 million, down 2.2% year over year. “Tactical Radio Communications” and “Public Safety and Professional Communications” contributed roughly 85% and 15%, respectively. Operating income was $181.6 million compared with $178.5 million in the year-ago quarter. Quarterly operating margin was 33.8% compared with 32.5% in the year-ago quarter.

In the reported quarter, the segment generated new orders worth $629 million with $534 million in the Tactical Radio Communications business and $95 million in the Public Safety and Professional Communications business. Total order backlog in the Tactical Radio Communications segment was $717 million and $635 million in Public Safety and Professional Communications.

Integrated Network Solutions

The segment generated revenues of $499.6 million, up 8% year over year. Operating loss in the quarter was $406 million compared with an operating income of $24.5 million in the year-ago quarter.

Financial Outlook

Management provided its financial outlook for full-year 2012 and 2013. The company raised its GAAP EPS estimate for fiscal 2012 in the $5.15–$5.25 rangewhile the same for fiscal 2013 is projected in the $5.10–$5.30 range.

Our Recommendation

Continuous order wins, huge order backlog coupled with strong demand of Harris’ next-generation Falcon III tactical radio in the International markets will drive the company’s top-line growth going forward.

However, a slowdown in international as well as national defense expenditures, coupled with intense competition from the likes of Boeing Co. ( BA - Analyst Report ) , General Dynamics Corp. ( GD - Analyst Report ) and Raytheon Co. ( RTN - Analyst Report ) will create headwinds. We thus maintain our long-term Neutral recommendation on Harris Corp.

Currently, Harris Corporation has a Zacks #3 Rank, implying a short-term Hold rating on the stock.