HRS Harris Corp.

Harris Corp. (HRS) declared its first quarter of fiscal 2012 financial results yesterday, after the closing bell. Quarterly adjusted (excluding special charges) earnings per share (EPS) of $1.06 surpassed the Zacks Consensus Estimate by a penny. Reported GAAP net income in the quarter was $121.6 million or $1.01 per share compared with $163.9 million or $1.27 per share in the year-ago quarter. This was attributable to higher cost of production and Engineering, Selling, and Administrative expenses.

Consolidated revenue in the reported quarter was $1,460 million, up 3.9% year over year but slightly below the Zacks Consensus Estimate of $1,464 million. The year-over-year increase was primarily driven by strong contribution from the Integrated Network Solutionsegment and Government Communications Systems, slightly offset by the slowdown in the RF Communications. Total orders generated in the first quarter were $1.62 billion, up 23% year over year.

Cost of sales in the first quarter of fiscal 2012 was $966.7 million compared with $881.1 million reported in the prior-year quarter. Engineering, selling, & administrative expenses were $290.9 million versus $255.2 million in the year-ago quarter.

At the end of the first quarter of fiscal 2012, Harris generated $78.7 million of cash from operations compared with $294.9 million in the prior-year quarter. Free cash flow (cash flow from operations excluding capital expenditures) during the reported quarter was $1.3 million compared with $257.8 million in the year-ago quarter.

At the end of the first quarter of fiscal 2012, Harris had cash & cash equivalents of $305.4 million compared with $366.9 million at the end of fiscal 2011. Total debt at the end of the first quarter of fiscal 2012 was $2,452.2 million compared with $1,887.2 million at the end of fiscal 2011. At the end of the reported quarter, debt-to-capitalization ratio was 0.47 compared with 0.43 at the end of 2011.

Government Communications System Segment

Quarterly revenue from the segment increased 5% year over year to $443.7 million. Operating income in the quarter was $63.1 million compared with $44.6 million in the prior-year quarter. Quarterly operating margin was 14.2% compared with 10.5% in the year-ago quarter.

RF Communications Segment

Revenue in the quarter was $497.1 million, slipping 12.3% year over year, with “Tactical Radio Communications” and “Public Safety and Professional Communications” contributing roughly 75% and 25%, respectively. Operating income was $154 million compared with $228.5 million in the year-ago quarter. Quarterly operating margin was 31% compared with 40.3% in the year-ago quarter.

In the reported quarter, the segment generated new orders worth $514 million with $398 million in the Tactical Radio Communications business and $116 million in the Public Safety and Professional Communications business. Total order backlog in the segment at the end of the first quarter of fiscal 2012 was $1.50 billion including $796 million in Tactical Radio Communications and $712 million in Public Safety and Professional Communications.

Integrated Network Solutions

The segment generated revenue of $554.2 million, up 25.5% year over year. Operating income in the quarter was $9.2 million compared with $26.6 million in the year-ago quarter. Quarterly operating margin was 1.7% compared with 6% in the year-ago quarter.

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.

Our Recommendation

Accretive share repurchase plan coupled with huge order backlogs will act as positive catalysts for the stock going forward. However, intense competition from companies, such as 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 Corp. Currently, Harris Corporationhas a Zacks #4 Rank, implying a short-term Sell rating on the stock.

 
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