HRS Harris Corp.

Harris Corp.(HRS) declared its third quarter 2011 financial results yesterday after the closing bell. Quarterly adjusted (excluding special charges) earnings per share (EPS) of $1.16 beats the Zacks Consensus Estimate by a penny. In the after-market trade in NYSE, Harris’ shares rose $1.02 (1.93%) to $53.99.

Reported GAAP net income in the quarter was $140 million or $1.09 per share compared with a net income of $166 million or $1.26 per share in the year-ago quarter. This was mainly due to rising cost of production and slowdown in the U.S. defense expenditure.

Consolidated revenue for the third quarter of 2011 was $1,413.3 million, which failed to beat the Zacks Consensus Estimate of $1,514.0 million but improved 6.3% year over year. This was primarily due to strong contribution from the Integrated Network Solution segment, slightly offset by the slowdown in the U.S. defense expenditure. Total orders generated in the third quarter were $1.55 billion compared with $1.45 billion in the prior-year quarter.

Cost of sales for the third quarter of 2011 was $896.3 million compared with $820 million reported in the prior-year quarter. Engineering, selling, & administrative expenses were $285.6 million versus $245 million in the year-ago quarter.

At the end of the third quarter of 2011, Harris generated $556.8 million of cash from operations compared with $635.3 million in the prior-year quarter. Free cash flow (cash flow from operations excluding capital expenditures) during the reported quarter was $360.6 million compared with $499.1 million in the third quarter of 2010.

At the end of third quarter of 2011, Harris had cash & cash equivalents of $885.1 million compared with $455.2 million at the end of fiscal 2010. Total debt, at the end of the same time period was $1,886.8 million compared with $1,176.6 million at the end of fiscal 2010. At the end of the third quarter of 2011, debt-to-capitalization ratio was 0.43 compared with 0.35 at the end of 2010.

Government Communications System Segment

Quarterly revenue of the segment inched up 1.0% year over year to $431.2 million primarily attributable to the GOES-R GS weather program for the NOAA, partially offset by the sluggish defense expenditure by the U.S. government.

Operating income was $59.8 million compared with $58.4 million in the year-ago quarter. Quarterly operating margin was 13.9% compared with 13.7% in the prior-year quarter.

RF Communications Segment

Revenue in the quarter was $550 million, down 0.2% year over year, with “Tactical Radio Communications” and “Public Safety and Professional Communications” contributing around 78.4% and 21.6%, respectively. Operating income was $178.5 million compared with $204.7 million in the year-ago quarter. Quarterly operating margin was 32.5% compared with 37.2% in the year-ago quarter.

In the reported quarter, this segment generated new orders worth $722.0 million with $351.0 million in the Tactical Radio Communications business and $371.0 million in the Public Safety and Professional Communications business. Total order backlog in the segment at the end of the third quarter of 2011 was $1.70 billion including $981 million in Tactical Radio Communications and $715 million in Public Safety and Professional Communications.

Integrated Network Solutions

This segment generated revenue of $463 million, up 23.2% year over year. Operating income in the quarter was $20.7 million compared with $28.3 million in the year-ago quarter.

Major contracts generated during the quarter included 14 task orders on the DISN Satellite Transmission Services – Global (DSTS-G) and Future Commercial SATCOM Acquisition (FCSA) orders worth $150 million.

Financial Outlook

Management has reported the financial forecasts for full-year 2011. Revenue guidance provided by management for 2011 is pegged at $5.9 billion. For fiscal 2011, non-GAAP (adjusted) EPS is maintained in the range of $4.80–$4.90. On a GAAP basis, EPS is projected in the $4.56–$4.66 range.

Management has also presented financial forecasts for 2012. Revenue guidance provided by management for 2012 is in the range of $6.3 billion to $6.5 billion. For 2012, non-GAAP (adjusted) EPS is anticipated in the range of $5.10–$5.20. On a GAAP basis, EPS is estimated in the band of $4.94 - $5.04.

Our Recommendation

With huge cash availability, the company is focusing on inorganic growth. Recently, the company completed the acquisition of Global Connectivity Services (GCS) business from Schlumberger Ltd. It has also acquired Carefx Corporation, a leading provider of interoperability workflow solutions. The acquisition of Carefx Corporation will give Harris a strong foothold in the commercial healthcare market. However, competition from companies like Boeing Co. (BA), General Dynamics Corp. (GD) and Raytheon Co. (RTN) is expected to put Harris on the back foot.

We thus maintain our long-term Neutral recommendation for Harris Corporation. Currently, Harris Corporation has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

 
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