Harris Corporation Reports Fiscal 2012 Third Quarter Results

Non-GAAP income from continuing operations in the third quarter was $159 million, or $1.39 per diluted share, compared with $151 million, or $1.18 per diluted share, in the prior year. Non-GAAP income from continuing operations excludes acquisition-related costs in both quarters, as well as the non-cash charge recorded in the third quarter related to Broadcast Communications. A reconciliation of GAAP to non-GAAP financial measures is provided in Tables 5 through 8, along with accompanying notes. Orders in the third quarter were $1.60 billion compared with $1.54 billion in the prior-year quarter.

“Orders, revenue, and non-GAAP earnings per share from continuing operations were all higher compared to the prior year,” said William M. Brown, president and chief executive officer. “The company continues to generate strong cash flow, and as a result, in the third quarter we increased the dividend by 18 percent and the target payout ratio from 20 to 25 percent.”

“Operating performance in both RF Communications and Government Communications Systems was excellent and drove higher non-GAAP operating income. In Integrated Network Solutions, we are exiting the Cyber Integrated Solutions business and selling the underutilized facility in Virginia, as previously announced in the quarter. In addition, we are announcing plans to divest Broadcast Communications. The decision to divest Broadcast Communications resulted from a thorough review of our business portfolio, which determined that the business is no longer aligned with the company’s long-term strategy. The plan to sell these assets supports our disciplined approach to capital allocation, and we intend to use the proceeds to return cash to shareholders and invest in growing our core businesses.”

RF Communications

Revenue for the RF Communications segment was $538 million compared with $550 million in the prior year. Tactical Communications revenue was $398 million and declined 8 percent from the prior year. Public Safety and Professional Communications revenue was $140 million and increased 18 percent over the prior year. Operating income for the RF Communications segment was $182 million compared with $179 million in the prior year, and operating margin was 33.8 percent compared with 32.5 percent in the prior year.

Orders for the segment totaled $629 million, including $534 million in Tactical Communications and $95 million in Public Safety and Professional Communications. Book-to-bill was 1.17 for the segment. At the end of the third quarter, backlog was $717 million in Tactical Communications and $635 million in Public Safety and Professional Communications.

Orders in the quarter included $250 million from the Australian Department of Defence for Falcon II^® and Falcon III^® radios, bringing orders to date to $362 million for this multi-year modernization program that has a potential value of $500 million. Orders also included $64 million from the U.S. Marine Corps, $51 million from the Government of Iraq, $26 million from the Kingdom of Jordan, and $25 million from two countries in the Middle East. Harris was also awarded a $49 million IDIQ contract to provide Unity^® Multiband Land Mobile Radios to the U.S. Marine Corps for first-responder communications at facilities worldwide.

Following the close of the quarter, Harris was awarded a five-year IDIQ contract with a potential value of $400 million to provide Falcon III tactical radios and support to the U.S. Special Operations Command and received an initial order for $39 million for wideband networking radios.

Integrated Network Solutions

Revenue for the Integrated Network Solutions segment was $500 million, an increase of 8 percent compared with $462 million in the prior year. On an organic basis, revenue was essentially flat. Strong organic growth in Harris CapRock Communications and Healthcare Solutions was offset by declining revenue in IT Services from the loss of the Patriot program and in Broadcast Communications as a result of weaker demand in North America and longer international sales lead times.

As a result of the non-cash charge related to Broadcast Communications, operating loss for the segment was $406 million. Operating income in the prior year was $25 million. Non-GAAP operating income was $29 million compared with $35 million in the prior year and was impacted by weak operating results in Healthcare Solutions and Broadcast Communications. Non-GAAP operating income excludes acquisition-related costs in both quarters, as well as the non-cash charge recorded in the third quarter related to Broadcast Communications.

Harris was awarded a two-year, $19 million contract to design and install a wireless network for Department of Veterans Affairs (VA) medical centers and a five-year, $80 million contract to provide electronic health record interoperability to enhance continuity of care between the Department of Defense and the VA. Orders in the quarter for managed satellite communications solutions included $15 million under the Future Commercial Satellite Communications Services Acquisition (FCSA) contract, $32 million from customers in Brazil, and $40 million from two global oil drilling customers in Europe.

Following the close of the quarter, Harris achieved a significant new win in the maritime market, a five-year contract award with Royal Caribbean Cruises Ltd. to provide global communications services onboard 34 of its ships.

In connection with exiting the Cyber Integrated Solutions operation in Harrisonburg, Virginia and the planned sale of the related assets, the company reported an after-tax loss from discontinued operations of $98 million in the third quarter.

Government Communications Systems

Revenue for the Government Communications Systems segment was $471 million, an increase of 9 percent compared with $431 million in the prior year. Operating income was $64 million compared with $60 million in the prior year. Operating margin was a strong 13.6 percent.

Major awards during the quarter included four awards from various classified customers totaling $183 million and a $51 million follow-on contract from the National Oceanic and Atmospheric Administration for the Geostationary Operational Environmental Satellite – Series R (GOES-R) Ground and Antenna Segment weather program.

Earnings Guidance

The company revised its previous guidance for fiscal 2012 from a range of $5.10 to $5.30 for non-GAAP net income per diluted share ($4.92 to $5.12 per diluted share on a GAAP basis), which included Broadcast Communications, to a range of $5.15 to $5.25 for non-GAAP income from continuing operations per diluted share ($1.41 to $1.51 per diluted share on a GAAP basis), excluding Broadcast Communications. Fiscal 2012 revenue excluding Broadcast Communications is now expected to be about $5.45 billion. Fiscal 2012 guidance for non-GAAP income from continuing operations excludes acquisition-related costs.

Initial GAAP guidance for fiscal 2013 for income from continuing operations is a range of $5.10 to $5.30 per diluted share. Revenue for fiscal 2013 is expected to be about flat to 2 percent growth compared with fiscal 2012. Fiscal 2013 guidance excludes Broadcast Communications.