Harris Corp. (HRS) declared its second quarter of fiscal 2011 results that beat our expectations. Quarterly adjusted (excluding special charges) EPS of $1.15 was above the Zacks Consensus Estimate of $1.11. In the after market trade in NYSE, stock price of Harris was up 2 cents (0.04%) to $48.80.
Reported GAAP net income for the quarter was $151.1 million or $1.18 per share compared with a net income of $139.5 million or $1.06 per share in the year-ago quarter. This was mainly attributed to the extension of the federal research and development tax credit facilities.
Consolidated revenue for the second quarter of 2011 was $1,438.5 million, which was slightly below the Zacks Consensus Estimate of $1,441.0 million but improved 18.1% year over year.
This was primarily attributed to strong contributions from RF communications, Government Communications Systems and Broadcast Communication segments. Total orders generated in the second quarter were $1.41 billion compared with $1.42 billion in the prior-year quarter.
Cost of sales for the second quarter of fiscal 2011 was $940.5 million compared with $778.6 million reported in the prior-year quarter. Engineering, selling & administrative expenses were $255.2 million compared with $215.7 million in the year-ago quarter.
During the first half of fiscal 2011, Harris generated $389.3 million of cash from operations compared with $321.4 million in the year-ago period. Free cash flow (cash flow from operations excluding capital expenditures) through the first two quarters of this fiscal year was $288.3 million compared with $282.9 million in the comparable period, the prior year.
At the end of the first half of fiscal 2011, Harris had cash & cash equivalents of $740.8 million compared with $455.2 million at the end of the second half of fiscal 2010. Total debt, at the end of the same time period, was $1,876.3 million compared with $1,176.6 million at the end of the second half of fiscal 2010. At second quarter end, debt-to-capitalization ratio was 0.44 compared with 0.35 in the prior-year quarter.
Government Communications System Segment
Quarterly revenue was $775.7 million, up 19.8% year over year. The recent acquisition of CapRock Communications, GOES-R GS weather program for NOAA and the Healthcare Solutions business were the prime drivers in this quarter. Major contract during the quarter included in the segment was a nine-year, $263 million contract provided by the Government of Canada for the CF-18 Avionics OWSS program.
Operating income was $85.6 million compared with $87.8 million in the year-ago quarter. Quarterly operating margin was 11.1% compared with 13.6% in the prior-year quarter.
RF Communications Segment
Revenue for the quarter was $544.7 million, up 17.7% year over year, with “Tactical Radio Communications” and “Public Safety and Professional Communications” accounting for around 78.2% and 21.8% of the total segment revenue, respectively.
Operating income was $189.3 million compared with $168.6 million in the year-ago quarter. Quarterly operating margin was 34.8% compared with 37.0% in the year-ago quarter.
In the reported quarter, Harris generated $391.0 million worth of new orders consisting of $300.0 million in the Tactical Radio Communications business and $91.0 million in the Public Safety and Professional Communications business.
Total order backlog in this segment at the end of the second quarter of fiscal 2011 was $1.52 billion that includes $1.06 billion in Tactical Radio Communications and $457 million in Public Safety and Professional Communications.
Broadcast Communications Segment
This segment generated revenue of $130.0 million, up 11.3% year over year. Sales declined in the traditional U.S. broadcast markets. Operating loss for the quarter was $0.8 million compared with an operating loss of $4.8 million in the year-ago quarter. New orders achieved by the segment during the quarter were $134 million compared with $139 million registered in the prior-year quarter.
Financial Outlook
Management has reported the financial forecasts for net full fiscal 2011. Management has provided guidance for full year 2011. Revenue guidance provided by management for fiscal 2011 is in the range of $5.9–$6.0 billion. Fiscal 2011 non-GAAP (adjusted) EPS is maintained in a band of $4.80–$4.90. On a GAAP basis, EPS is forecast in the range of $4.73–$4.83.
Our Recommendation
Harris operates in a highly competitive communication equipment industry and faces intense competition from Boeing Co. (BA), General Dynamics Corp. (GD) and Raytheon Co. (RTN). We maintain our long-term Neutral recommendation for Harris. Currently, Harris has a Zacks #3 Rank, implying a short-term Hold rating.
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