HRS Harris Corp.

Harris Corp. (HRS) declared its fourth quarter 2011 financial results yesterday, after the closing bell. Quarterly adjusted (excluding special charges) earnings per share (EPS) of $1.24 surpassed the Zacks Consensus Estimate by a penny. In after-market trade on NYSE, Harris’ shares jumped $3.02 (7.95%) to $41.00 mainly fueled by the increase in the dividend rate and a new share repurchase authorization worth $1 billion.

Reported GAAP net income in the quarter was $133.5 million or $1.06 per share compared with $151.4 million or $1.16 per share in the year-ago quarter. This was mainly due to higher cost of production and the slowdown in the U.S. defense expenditure.

Consolidated revenue in the reported quarter was $1,667.4 million, up 14.5% year over year and was also above the Zacks Consensus Estimate of $1,632 million. This was primarily driven by strong contribution from the Integrated Network Solution segment, slightly offset by the slowdown in the U.S. defense expenditure. Total orders generated in the fourth quarter were $1.35 billion compared with $1.72 billion in the prior-year quarter.

Cost of sales in the fourth quarter of 2011 was $1,092.6 million compared with $923.7 million reported in the prior-year quarter. Engineering, selling, & administrative expenses were $347.9 million versus $286.1 million in the year-ago quarter.

At the end of the fourth quarter of 2011, Harris generated $833.1 million in cash from operations compared with $802.7 million in the prior-year quarter. Free cash flow (cash flow from operations excluding capital expenditures) during the reported quarter was $521.8 million compared with $612.8 million in the fourth quarter of 2010.

At the end of fiscal 2011, Harris had cash & cash equivalents of $366.9 million compared with $455.2 million at the end of fiscal 2010. Total debt during fiscal 2011 was $1,887.2 million compared with $1,176.6 million at the end of fiscal 2010. At the end of fiscal 2011, debt-to-capitalization ratio was 0.43 compared with 0.35 at the end of 2010.

Government Communications System Segment

Quarterly revenue from the segment increased 11.1% year over year to $499.5 million, primarily attributable to the GOES-R GS weather program for the NOAA and HNR’s for the U.S. army.

Operating income in the quarter was $63.2 million compared with $60.3 million in the prior-year quarter. Quarterly operating margin was 12.7% compared with 13.4% in the year-ago quarter.

RF Communications Segment

Revenue in the quarter was $628 million, slipping 0.3% year over year, with “Tactical Radio Communications” and “Public Safety and Professional Communications” contributing roughly 75.2% and 24.8%, respectively. Operating income was $190.7 million compared with $220.1 million in the year-ago quarter. Quarterly operating margin was 30.4% compared with 34.9% in the year-ago quarter.

In the reported quarter, the segment generated new orders worth $447 million with $257 million in the Tactical Radio Communications business and $190 million in the Public Safety and Professional Communications business. Total order backlog in the segment at the end of the fourth quarter of 2011 was $1.50 billion including $766 million in Tactical Radio Communications and $737 million in Public Safety and Professional Communications.

Integrated Network Solutions

The segment generated revenue of $585.4 million, up 44.7% year over year. Operating income in the quarter was $2.4 million compared with a loss of $5.3 million in the year-ago quarter.

Major contracts secured in the quarter included a $58 million order from Offshore Communications Backbone (OCB).

Financial Outlook

Management has reported its financial outlook for full-year 2012. Revenue guidance provided by management ranges from $6.15 to $6.30 billion for 2012. For fiscal 2012, non-GAAP (adjusted) EPS is anticipated in the $5.10–$5.30 range. On a GAAP basis, EPS is projected in the $4.92–$5.12 range.

Share Repurchase & Dividend Hike

In order to improve shareholders’ wealth, Harris has authorized a new share repurchase plan worth $1 billion and replaced its earlier repurchase program. Under this new authorization, the company plans to repurchase shares worth $500 million for the current year 2011.

Moreover, the company has also raised its dividend rate by 12% to 28 cents per share payable on September 16, 2011 to shareholders of record as of September 7, 2011.

Our Recommendation

An accretive share repurchase plan coupled with recent dividend hikes will act as positive catalysts for the stock going forward. Moreover, contract wins and huge order backlogs will support future growth. However, competition from companies like The Boeing Co. (BA), General Dynamics Corp. (GD) and Raytheon Co. (RTN) will put Harris on the back foot.

We thus maintain our long-term Neutral recommendation on Harris Corporation. Currently, Harris Corporation has a Zacks #4 Rank, implying a short-term Sell rating on the stock.

 
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