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| HRS > SEC Filings for HRS > Form 10-Q on 28-Oct-2009 | All Recent SEC Filings |
28-Oct-2009
Quarterly Report
OVERVIEW
The following Management's Discussion and Analysis ("MD&A") is intended to
assist in an understanding of Harris. MD&A is provided as a supplement to,
should be read in conjunction with, and is qualified in its entirety by
reference to, our Condensed Consolidated Financial Statements (Unaudited) and
accompanying Notes appearing elsewhere in this Report. In addition, reference
should be made to our audited Consolidated Financial Statements and accompanying
Notes to Consolidated Financial Statements and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in our
Fiscal 2009 Form 10-K. Except for the historical information contained herein,
the discussions in MD&A contain forward-looking statements that involve risks
and uncertainties. Our future results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below in MD&A under
"Forward-Looking Statements and Factors that May Affect Future Results."
The following is a list of the sections of MD&A, together with our
perspective on the contents of these sections of MD&A, which we hope will assist
in reading these pages:
• Results of Operations - an analysis of our consolidated results of operations
and of the results in each of our three operating segments, to the extent the
operating segment results are helpful to an understanding of our business as
a whole, for the periods presented in our Condensed Consolidated Financial
Statements (Unaudited).
• Liquidity and Capital Resources - an analysis of cash flows, common stock repurchases, dividends, capital structure and resources, off-balance sheet arrangements and commercial commitments and contractual obligations.
• Critical Accounting Policies and Estimates - information about accounting policies that require critical judgments and estimates and about accounting standards that have been issued but not yet implemented by us and their potential impact.
• Forward-Looking Statements and Factors that May Affect Future Results - cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.
RESULTS OF OPERATIONS
Highlights
Operations results for the first quarter of fiscal 2010 include:
• Income from continuing operations decreased to $104.5 million, or $.79 per
diluted share, in the first quarter of fiscal 2010 from $119.4 million, or
$.89 per diluted share, in the first quarter of fiscal 2009;
• Revenue increased 2.6 percent to $1,203.0 million in the first quarter of fiscal 2010 from $1,172.6 million in the first quarter of fiscal 2009;
• Our RF Communications segment revenue increased 2.0 percent to $423.7 million while operating income decreased 19.8 percent to $114.0 million in the first quarter of fiscal 2010 compared with the first quarter of fiscal 2009. Fiscal 2010 results benefited from the acquisition of Wireless Systems in the fourth quarter of fiscal 2009, and operating income in the first quarter of fiscal 2010 included $6.5 million of acquisition-related charges;
• Our Government Communications Systems segment revenue increased 9.6 percent to $667.7 million and operating income increased 29.3 percent to $85.7 million in the first quarter of fiscal 2010 compared with the first quarter of fiscal 2009;
• Our Broadcast Communications segment revenue decreased 25.0 percent to $118.7 million and operating income decreased 94.3 percent to $0.3 million in the first quarter of fiscal 2010 compared with the first quarter of fiscal 2009; and
• Net cash provided by operating activities was $134.5 million in the first quarter of fiscal 2010 compared with $37.5 million in the first quarter of fiscal 2009.
Consolidated Results of Operations
Revenue and Income From Continuing Operations
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions, except per share amounts)
Revenue $ 1,203.0 $ 1,172.6 2.6 %
Income from continuing operations $ 104.5 $ 119.4 (12.5 %)
% of revenue 8.7 % 10.2 %
Income from continuing operations per diluted
common share $ .79 $ .89 (11.2 %)
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Our revenue in the first quarter of fiscal 2010 was $1,203.0 million, an
increase of 2.6 percent compared with the first quarter of fiscal 2009. Revenue
increased by 9.6 percent and 2.0 percent in our Government Communications
Systems and RF Communications segments, respectively, and decreased by
25.0 percent in our Broadcast Communications segment. Our Government
Communications Systems segment revenue benefited from ongoing strength in legacy
programs as well as recent program wins and our acquisitions of Crucial
Security, Inc. ("Crucial") and the Air Traffic Control business unit of SolaCom
Technologies Inc. ("SolaCom ATC") in the fourth quarter of fiscal 2009. RF
Communications segment revenue benefited from our acquisition of Wireless
Systems in the fourth quarter of fiscal 2009. The increase in revenue as a
result of our acquisition of Wireless Systems was offset by a decline in
tactical radio sales, both domestically and internationally. Revenue in our
Broadcast Communications segment was negatively impacted by the continuing
effects of lower demand due to the global recession and delays in capital
spending by customers.
Income from continuing operations in the first quarter of fiscal 2010 was
$104.5 million, or $.79 per diluted share, compared with $119.4 million, or $.89
per diluted share, in the first quarter of fiscal 2009. The decrease in income
from continuing operations was primarily due to lower overall segment operating
income. Operating income decreased by $28.1 million, or 19.8 percent, in our RF
Communications segment and decreased by $5.0 million in our Broadcast
Communications segment. These decreases in operating income were partially
offset by a $19.4 million, or 29.3 percent, increase in operating income in our
Government Communications Systems segment.
Our non-operating loss in the first quarter of fiscal 2010 was $0.2 million
compared with $8.1 million in the first quarter of fiscal 2009. Interest expense
in the first quarter of fiscal 2010 was $18.2 million compared with
$12.4 million in the first quarter of fiscal 2009. Our effective tax rate
(income taxes as a percentage of income from continuing operations before income
taxes) was 35.0 percent in the first quarter of fiscal 2010 compared with
30.4 percent in the first quarter of fiscal 2009.
See the "Discussion of Business Segment Results of Operations,"
"Non-Operating Loss," "Interest Income and Interest Expense" and "Income Taxes"
discussions below in this MD&A for further information.
Gross Margin
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions)
Revenue $ 1,203.0 $ 1,172.6 2.6 %
Cost of product sales and services (812.1 ) (791.9 ) 2.6 %
Gross margin $ 390.9 $ 380.7 2.7 %
% of revenue 32.5 % 32.5 %
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Our gross margin (revenue less cost of product sales and services) as a
percentage of revenue in the first quarter of fiscal 2010 was flat at
32.5 percent compared with the first quarter of fiscal 2009. In the first
quarter of fiscal 2010, an increase in gross margin as a percentage of revenue
in our Government Communications Systems segment was essentially offset by lower
sales in our higher-margin Broadcast Communications segment, while gross margin
as a percentage of revenue in our RF Communications segment was essentially
unchanged.
See the "Discussion of Business Segment Results of Operations" discussion
below in this MD&A for further information.
Engineering, Selling and Administrative Expenses
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions)
Engineering, selling and administrative expenses $ 212.1 $ 189.6 11.9 %
% of revenue 17.6 % 16.2 %
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Our engineering, selling and administrative ("ESA") expenses increased to
$212.1 million in the first quarter of fiscal 2010 from $189.6 million in the
first quarter of fiscal 2009. The increase in total ESA expenses is due to the
acquisition of Wireless Systems, including $2.9 million of acquisition-related
costs, partially offset by the benefit of cost-reduction actions taken in fiscal
2009. As a percentage of revenue, ESA expenses were 17.6 percent in the first
quarter of fiscal 2010 compared with 16.2 percent in the first quarter of fiscal
2009. The increase in ESA expenses as a percentage of revenue was primarily due
to the acquisition of Wireless Systems which has higher ESA expenses as a
percentage of revenue compared with our other businesses.
See the "Discussion of Business Segment Results of Operations" discussion
below in this MD&A for further information.
Non-Operating Loss
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions)
Non-operating loss $ (0.2 ) $ (8.1 ) (97.5 %)
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We had a non-operating loss of $0.2 million in the first quarter of fiscal
2010 compared with a non-operating loss of $8.1 million in the first quarter of
fiscal 2009. The non-operating loss in the first quarter of fiscal 2009 was
primarily due to a $7.6 million write-down of our investment in AuthenTec, Inc.
due to an other-than-temporary impairment. See Note J - Non-Operating Loss in
the Notes for further information.
Interest Income and Interest Expense
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions)
Interest income $ 0.4 $ 1.0 (60.0 %)
Interest expense (18.2 ) (12.4 ) 46.8 %
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Our interest income decreased to $0.4 million in the first quarter of fiscal
2010 from $1.0 million in the first quarter of fiscal 2009, primarily due to
lower interest rates applicable to our invested funds. Our interest expense
increased to $18.2 million in the first quarter of fiscal 2010 from
$12.4 million in the first quarter of fiscal 2009, primarily due to increased
borrowings related to our acquisition of Wireless Systems in the fourth quarter
of fiscal 2009.
Income Taxes
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions)
Income taxes $ 56.3 $ 52.2 7.9 %
Effective tax rate 35.0 % 30.4 %
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Our effective tax rate (income taxes as a percentage of income from continuing operations before income taxes) was 35.0 percent for the first quarter of fiscal 2010 compared with 30.4 percent for the first quarter of fiscal 2009. Our effective tax rate for the first quarter of fiscal 2009 was lower than the U.S. statutory tax rate, primarily due to the recognition of state tax credits resulting from growth in our RF Communications segment.
Discussion of Business Segment Results of Operations
RF Communications Segment
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions)
Revenue $ 423.7 $ 415.2 2.0 %
Segment operating income 114.0 142.1 (19.8 %)
% of revenue 26.9 % 34.2 %
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RF Communications segment revenue in the first quarter of fiscal 2010 was
$423.7 million, including $302.5 million in our Tactical Radio Communications
business and $121.2 million in our Public Safety and Professional Communications
business. As we expected, revenue in our Tactical Radio Communications business
declined compared with first quarter of fiscal 2009 revenue of $415.2 million,
primarily as a result of procurement delays by the U.S. Government and the Iraq
Ministry of Defense.
Operating income was $114.0 million in the first quarter of fiscal 2010
compared with $142.1 million in the first quarter of fiscal 2009. The decline in
operating income compared with the prior-year quarter was a result of reduced
tactical radio revenue offset by the benefit of cost-reduction actions
implemented in the second half of fiscal 2009. Additionally, we incurred
$6.5 million in charges for integration costs and the impact of a step up in
inventory in the first quarter of fiscal 2010 related to our acquisition of
Wireless Systems in the fourth quarter of fiscal 2009. Operating income as a
percentage of revenue was 26.9 percent in the first quarter of fiscal 2010
compared with 34.2 percent in the first quarter of fiscal 2009. The decrease in
operating income as a percentage of revenue was primarily due to the acquisition
of Wireless Systems.
RF Communications segment orders in the first quarter of fiscal 2010 were
$709 million, including $586 million in our Tactical Radio Communications
business. The significant increase in tactical radio orders compared with the
first quarter of fiscal 2009 and the fourth quarter of fiscal 2009 was driven
primarily by the rebound in U.S. Department of Defense procurements that began
in the fourth quarter of fiscal 2009 and by accelerating customer adoption of
the Joint Tactical Radio System ("JTRS")-approved Falcon III® AN/PRC-117G
multiband manpack tactical radio (the "117G").
During the first quarter of fiscal 2010, we received a $165 million order
from the U.S. Army as part of a $419 million Basic Purchasing Agreement to
provide 117G radios and vehicular power-amplifier systems. Additional 117G
orders in the first quarter of fiscal 2010 were received from a broad base of
other customers. The 117G is being used in a wide variety of ground, vehicular
and airborne applications, including intelligence, surveillance and
reconnaissance.
Also in the first quarter of fiscal 2010, we received $180 million in radio
orders for the U.S. military's new mine resistant ambush protected all-terrain
vehicle ("MRAP-ATVs") being shipped to Afghanistan to counter increased use of
improvised explosive devices ("IEDs"). International orders in the first quarter
of fiscal 2010 included radios for military forces in Mexico, Yemen, Ethiopia,
Pakistan and Australia.
Orders in the first quarter of fiscal 2010 in our new Public Safety and
Professional Communications business (which includes Wireless Systems) were $123
million. New orders were driven by continuing trends for frequency re-banding,
new systems and system upgrades requiring both infrastructure systems and radio
equipment. Customers included the State of Florida, Ericsson Australia, and the
Royal Canadian Mounted Police. Also in the first quarter of fiscal 2010, we
received orders for more than 1,000 of our new UnityTM XG-100 radios from a
variety of customers. The software-defined, multiband, handheld radio provides
full-spectrum interoperability among Federal, state and local agencies.
Total backlog in our RF Communications segment at the end of the first
quarter of fiscal 2010 was $1.23 billion, including $760 million in our Tactical
Radio Communications business and $470 million in our Public Safety and
Professional Communications business. RF Communications backlog at the end of
fiscal 2009 was $920 million, including $470 million in our Tactical Radio
Communications business and $450 million in our Public Safety and Professional
Communications business.
Government Communications Systems Segment
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions)
Revenue $ 667.7 $ 609.1 9.6 %
Segment operating income 85.7 66.3 29.3 %
% of revenue 12.8 % 10.9 %
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Government Communications Systems segment revenue in the first quarter of
fiscal 2010 increased 9.6 percent to $667.7 million compared with $609.1 million
in the first quarter of fiscal 2009. Operating income was $85.7 million in the
first quarter of fiscal 2010 compared with $66.3 million in the first quarter of
fiscal 2009. Operating income as a percentage of revenue in the first quarter of
fiscal 2010 was 12.8 percent compared with 10.9 percent in the first quarter of
fiscal 2009, primarily reflecting excellent performance and favorable award fees
for the FAA Telecommunications Infrastructure ("FTI") program. The FTI program
has completed its equipment build-out phase and now is transitioning to its
telecommunication services and maintenance phase.
Revenue growth in the first quarter of fiscal 2010 compared with the first
quarter of fiscal 2009 was driven by a broad base of programs including the FTI
program, the Warfighter Information Network-Tactical ("WIN-T") program, the
Commercial Broadband Satellite program for the U.S. Navy, several classified
programs for national intelligence customers, the Patriot IT services program
for the National Reconnaissance Office ("NRO") and the Network Centric Solutions
("NETCENTS") IT services program for the U.S. Air Force.
Revenue in the first quarter of fiscal 2010 benefited from the start-up of
new programs including the ten-year Geostationary Operational Environmental
Satellite-Series R Ground Segment ("GOES-R GS") program for the National Oceanic
and Atmospheric Administration ("NOAA"), potentially worth $736 million, and the
ten-year Modernization of Enterprise Terminals ("MET") program for the U.S.
Army, potentially worth $600 million.
Also contributing to higher revenue in the first quarter of fiscal 2010 was
growth in our Healthcare Solutions business and our recent acquisitions of
Crucial and Solacom ATC in the fourth quarter of fiscal 2009. New contract wins
in the first quarter of fiscal 2010 included several IT Services programs with a
combined potential value of more than $400 million and new national intelligence
programs with a combined potential value of $120 million.
Broadcast Communications Segment
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions)
Revenue $ 118.7 $ 158.2 (25.0 )%
Segment operating income 0.3 5.3 (94.3 )%
% of revenue 0.3 % 3.4 %
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Broadcast Communications segment orders in the first quarter of fiscal 2010
were $124 million and were greater than revenue and about even with orders in
the fourth quarter of fiscal 2009. Revenue in the first quarter of fiscal 2010
was $118.7 million compared with $130.2 million in the fourth quarter of fiscal
2009 and $158.2 million in the first quarter of fiscal 2009. Continued weakness
in the first quarter of fiscal 2010 was expected and primarily reflects the
global economy and delayed capital spending by broadcast and media customers.
Operating income in the first quarter of fiscal 2010 was $0.3 million and was
achieved on substantially lower revenue, primarily as a result of significant
cost-reduction actions implemented during fiscal 2009.
Key program wins in the first quarter of fiscal 2010 included transmitters
for the rollout of digital TV ("DTV") networks in Rwanda and Mexico; complete
Harris ONE™ solutions for Meredith Corporation's central-casting hub in Phoenix,
Arizona and the Home Shopping Channel in South Korea; and multiple orders for
China Central Television ("CCTV").
Also during the first quarter of fiscal 2010, we were awarded a contract from
Lockheed Martin to provide the U.S. Joint Forces Command with systems that use
highly advanced broadcast technologies to help collect, manage, process, exploit
and disseminate full-motion video. Our system provides increased visibility into
the vast amounts of real-time and archived video that is collected from manned
and unmanned aircraft and ground-based sensors. Our system incorporates our
proprietary Full-Motion Video Asset Management Engine ("FAME™") technology,
which has broad applications in government and commercial markets.
Unallocated Corporate Expense and Corporate Eliminations
Quarter Ended
October 2, September 26, %
2009 2008 Inc/(Dec)
(Dollars in millions)
Unallocated corporate expense $ 19.2 $ 18.9 1.6 %
Corporate eliminations 2.0 3.7 (45.9 %)
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Unallocated corporate expense increased 1.6 percent to $19.2 million in the
first quarter of fiscal 2010 from $18.9 million in the first quarter of fiscal
2009. As a percentage of revenue, unallocated corporate expense was unchanged in
the first quarter of fiscal 2010 compared with the first quarter of fiscal 2009.
Corporate eliminations decreased to $2.0 million in the first quarter of fiscal
2010 from $3.7 million in the first quarter of fiscal 2009, primarily due to
reduced intersegment activity.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Quarter Ended
October 2, September 26,
2009 2008
(In millions)
Net cash provided by operating activities $ 134.5 $ 37.5
Net cash used in investing activities (19.6 ) (31.1 )
Net cash used in financing activities (165.3 ) (33.9 )
Effect of exchange rate changes on cash and cash
equivalents 0.3 (0.3 )
Net decrease in cash and cash equivalents (50.1 ) (27.8 )
Cash and cash equivalents, beginning of year 281.2 370.0
Cash and cash equivalents, end of quarter 231.1 342.2
Less cash and cash equivalents of discontinued
operations - (94.4 )
Cash and cash equivalents of continuing operations, end
of quarter $ 231.1 $ 247.8
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Cash and Cash Equivalents: Our Consolidated Statement of Cash Flows in our
Fiscal 2009 Form 10-K includes the results of HSTX through the May 27, 2009
Spin-off date. Accordingly, for the first quarter of fiscal 2009, our Condensed
Consolidated Statement of Cash Flows (Unaudited) and the following discussion
and analysis includes cash flows from HSTX, and HSTX cash and cash equivalents
are shown separately as cash and cash equivalents of discontinued operations.
Our cash and cash equivalents decreased $50.1 million to $231.1 million at
the end of the first quarter of fiscal 2010 from $281.2 million at the end of
fiscal 2009. The decrease was primarily due to $165.3 million of net cash used
in financing activities and $19.6 million of net cash used in investing
activities, partially offset by $134.5 million of net cash provided by operating
activities.
Our financial position remained strong at October 2, 2009. We ended the first
quarter of fiscal 2010 with cash and cash equivalents of $231.1 million; we have
no long-term debt maturing until fiscal 2016; we have a five-year, senior
unsecured $750 million revolving credit facility that expires in September 2013
. . .
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