HRS Harris Corp.

Harris Corp. (HRS) declared its second quarter of fiscal 2012 financial results, where the EPS surpassed the Zacks Consensus Estimate but the revenue missed the same.

Reported GAAP net income in the quarter was $133.1 million or $1.16 per share compared with $151.1 million or $1.18 per share in the year-ago quarter. Quarterly adjusted (excluding acquisition related cost) earnings per share (EPS) of $1.22 surpassed the Zacks Consensus Estimate by 4 cents.

Consolidated revenue in the reported quarter was $1,446.4 million, up 0.55% year over year but below the Zacks Consensus Estimate of $1,509 million. Despite the slowdown in the government expenditure, the year-over-year increase in revenue was primarily driven by higher shipments of tactical radios in order to upgrade MRAP vehicles.

Cost of sales in the second quarter of fiscal 2012 was $933.9 million compared with $940.5 million in the prior-year quarter. Engineering, selling, & administrative expenses were $286.4 million versus $255.2 million in the year-ago quarter.

At the end of the first six months of fiscal 2012, Harris generated $278 million in cash from operations compared with $389.3 million in the prior-year quarter. Free cash flow (cash flow from operations excluding capital expenditures) during the last six months period was $166.7 million compared with $288.3 million in the year-ago quarter.

At the end of the second quarter of fiscal 2012, Harris had cash & cash equivalents of $387 million compared with $366.9 million at the end of fiscal 2011. Total debt at the end of the second quarter of fiscal 2012 was $1,883.2 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 0.46 compared with 0.43 at the end of 2011.

Government Communications System Segment

Quarterly revenue from the segment inched up 0.2% year over year to $422.4 million. Operating income in the quarter was $62.9 million compared with $59.4 million in the prior-year quarter. Quarterly operating margin was 14.9% compared with 14.1% in the year-ago quarter.

RF Communications Segment

Revenue in the quarter was $525.7 million, down 3.5% year over year. “Tactical Radio Communications” and “Public Safety and Professional Communications” contributed roughly 74% and 26%, respectively. Operating income was $172.4 million compared with $189.3 million in the year-ago quarter. Quarterly operating margin was 32.8% compared with 34.8% in the year-ago quarter.

In the reported quarter, the segment generated new orders worth $268 million, with $183 million in Tactical Radio Communications business and $85 million in Public Safety and Professional Communications business. Total order backlog in the segment at the end of the second quarter of fiscal 2012 was $1,252 million, including $581 million in Tactical Radio Communications and $671 million in Public Safety and Professional Communications.

Integrated Network Solutions

The segment generated revenue of $526.4 million, up 6.2% year over year. Operating income in the quarter was $15.6 million compared with $20.5 million in the year-ago quarter. Quarterly operating margin was 3% compared with 4.1% in the year-ago quarter.

Financial Outlook

Management has provided its financial outlook for full-year 2012. For 2012, management expects revenues of $6 billion. The company maintained its non-GAAP EPS estimate for fiscal 2012 in the $5.10–$5.30 range while 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 the likes of 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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