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Harris Corp. Beats on Bottom Line

HRS MSI GD

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Harris Corp.’s (HRS - Analyst Report) first-quarter of fiscal 2013 adjusted earnings per share (excluding acquisition related cost) came in at $1.14, beating the Zacks Consensus Estimate of $1.12. GAAP net loss in the quarter was $85.8 million or $1.14 per share compared with $121.6 million or $1.09 per share in the year-ago quarter.

Consolidated revenue in the reported quarter stood at $1,261.5 million, down 5.58% year over year. Revenue also missed the Zacks Consensus Estimate of $1,297 million.

Cost of sales in the quarter was $848.3 million compared with $893.9 million in the prior-year quarter. Engineering, selling & administrative expenses were $198.2 million versus $223.4 million in the year-ago quarter.

At the end of the quarter, Harris generated $120.5 million in cash from operations compared with $78.7 million in the prior-year quarter. Free cash flow (cash flow from operations excluding capital expenditures) for the period was $80.6 million compared with $1.3 million in the year-ago quarter.

At the end of the reported quarter, Harris had cash and cash equivalents of $328.6 million compared with $356.0 million at the end of fiscal 2012. Total debt at the end of the quarter was $1,882.9 million compared with $1,883.0 million at the end of fiscal 2012. Debt-to-capitalization ratio was 0.50 compared with 0.49 at the end of fiscal 2012.

Government Communications System Segment

Quarterly revenue for the segment improved 4.9% year over year to $465.5 million. Operating income in the quarter was $67.1 million versus $63.1 million in the prior-year quarter. Quarterly operating margin was 14.41% compared with 14.43% in the year-ago quarter.

RF Communications Segment

Revenue in the quarter was $444.7 million, down 10.54% year over year. “Tactical Radio Communications” and “Public Safety and Professional Communications” contributed roughly 69% and 31%, respectively. Operating income was $134.1 million compared with $154.0 million in the year-ago quarter. Quarterly operating margin was 30.2% as against 31.0% in the year-ago quarter.

In the reported quarter, the segment generated new orders worth $363 million with $254 million in the Tactical Radio Communications business and $109 million in the Public Safety and Professional Communications business. Total order backlog in the Tactical Radio Communications segment was $612 million and $623 million in Public Safety and Professional Communications.

Integrated Network Solutions

The segment generated revenues of $375.7 million, down 10.2% year over year. Operating income in the quarter was $32.4 million compared with $21.8 million in the year-ago quarter. Quarterly operating margin was 8.62% compared with 5.21% in the year-ago quarter.

Financial Outlook

Management kept earnings guidance unchanged for fiscal 2013 between $5.10 and $5.30 per share. The revenue growth is expected in between 0% to 2%.

Our Viewpoint

Huge order backlog, strong demand for Harris’ next-generation Falcon III tactical radio coupled with significant order wins in the international markets are expected to drive top-line growth going forward.

However, slowdown in international as well as domestic defense expenditures, coupled with intense competition from the likes of General Dynamics Corp. (GD - Analyst Report) and Motorola Solutions, Inc. (MSI - Analyst Report) are expected to be headwinds. We thus maintain our long-term Neutral recommendation on the company.

Harris also has a Zacks #4 Rank, implying a short-term Sell rating.

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