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Harris Corporation Reports Strong Fiscal 2019 Third Quarter Results With Double-Digit Revenue Growth and Record EPS

Share:
  • 3Q19 revenue up 11% to $1.7 billion
  • 3Q19 GAAP EPS from continuing operations up 24% to $2.02; non-GAAP1
    up 30% to $2.11
  • 3Q19 operating cash flow of $405 million; adjusted free cash flow2
    of $379 million
  • YTD19 revenue up 10% to $4.9 billion; GAAP EPS from continuing
    operations up 39% to $5.67; non-GAAP
    1 up 26%
    to $5.85
  • YTD19 operating cash flow of $874 million; adjusted free cash flow2
    up 75% to $788 million
  • Increased revenue, EPS and adjusted free cash flow2
    guidance for fiscal 2019

Harris Corporation (NYSE:HRS) reported fiscal 2019 third quarter revenue
of $1.7 billion, up 11% compared with the prior year with a book-to-bill
of 1.03. GAAP earnings per diluted share (EPS) from continuing
operations increased 24% to $2.02, and non-GAAP EPS1
increased 30% to $2.11. Net income increased 24% to $243 million, and
adjusted earnings before interest and taxes (EBIT1) increased
15% to $341 million with margin expansion of 80 basis points (bps) to
19.7%.

"We achieved double-digit EPS growth for the sixth consecutive quarter
driven by our highest organic revenue growth and margin in the past
eight years," said William M. Brown, chairman, president and chief
executive officer. "These results, combined with another quarter of
strong free cash flow, continue our exceptional year-to-date performance
and position us well to deliver on increased revenue, EPS and free cash
flow guidance for the year."

"Alongside strong operating results, integration planning continues to
progress well with the teams developing detailed plans to deliver cost
and revenue synergies. The shareholder approvals for the L3 Harris
transaction and Harris signing a definitive agreement to divest the
Night Vision business, reaffirm our confidence in closing the merger in
mid-calendar 2019. This transformational merger, combined with a strong
addressable budget, will drive continued growth and create long-term
value for our shareholders."

                         

Summary Financial Results

 
($ millions, except per share data) Third Quarter Year to Date
FY 2019 FY 2018 Change FY 2019 FY 2018 Change
Revenue $ 1,728 $ 1,562 11% $ 4,936 $ 4,507 10%
 
(GAAP comparison)
Net income $ 243 $ 196 24% $ 681 $ 486 40%
Net income margin 14.1 % 12.5 % 160bps 13.8 % 10.8 % 300bps
Earnings per share $ 2.02 $ 1.63 24% $ 5.67 $ 4.07 39%
 
(Non-GAAP comparison)3
Adjusted EBIT $ 341 $ 296 15% $ 968 $ 843 15%
Adjusted EBIT margin 19.7 % 18.9 % 80bps 19.6 % 18.7 % 90bps
Earnings per share $ 2.11 $ 1.62 30% $ 5.85 $ 4.64 26%
 

Revenue increased 11% for the quarter and 10% year-to-date, with
continued strong growth across all three segments. GAAP and non-GAAP EPS3
grew more than 20% for the quarter and for the first three quarters from
higher volume, strong operational performance and a lower tax rate,
partially offset by product and program mix. In addition, third quarter
GAAP EPS growth was partially offset by L3 deal and integration costs.
Year-to-date adjusted EBIT3 margin expanded 90 bps to 19.6%
and book-to-bill was 1.12.

                         

Communication Systems

 
($ millions) Third Quarter Year to Date
FY 2019 FY 2018 Change FY 2019 FY 2018 Change
Revenue $ 568 $ 479 19% $ 1,577 $ 1,377 15%
Operating income $ 172 $ 144 19% $ 474 $ 404 17%
Operating margin

30.3

%

30.1 % 20bps 30.1 % 29.3 % 80bps
 

Revenue increased double digits for the fourth consecutive quarter, up
19%, from growth in Tactical Communications and Public Safety. Tactical
Communications revenue grew 19%, driven by 55% growth in DoD Tactical,
from a ramp in U.S. DoD modernization programs. Public Safety grew
double digits on increased demand from state and federal agencies.
Operating income increased 19% to $172 million.

U.S. DoD tactical radio modernization momentum continued in the third
quarter, with an initial production order from SOCOM for next generation
multi-channel handheld radios under the sole-source $390 million IDIQ
contract and an order from the Marine Corps for multi-channel manpack
radios. These orders follow the Army HMS Manpack and 2-Channel Leader
Radio LRIP awards received in prior quarters and expand multi-year
modernization efforts across the services.

International adoption of multi-channel radios continued to expand with
an order from the Canadian Army as part of their modernization program.
In addition, Harris received an order from New Zealand to integrate,
modernize and upgrade their command and control network, advancing the
company's strategy of expanding into integrated network systems.

Segment revenue in the first three quarters increased 15% from strong
growth in all three businesses with a book-to-bill of 1.1 and operating
margin expanding 80 bps to 30.1%.

                         

Electronic Systems

 
($ millions) Third Quarter Year to Date
FY 2019 FY 2018 Change FY 2019 FY 2018 Change
Revenue $ 649 $ 606 7% $ 1,855 $ 1,729 7%
Operating income $ 123 $ 108 14% $ 355 $ 314 13%
Operating margin 19.0 % 17.8 % 120bps 19.1 % 18.2 % 90bps
 

Third quarter revenue increased 7% from sustained strong growth on
long-term platforms – F-35, F/A-18 and F-16 – and from increased volume
in release systems, partially offset by the United Arab Emirates (UAE)
program transition timing. Operating income grew 14% to $123 million,
and margin expanded 120 bps to 19.0%, driven by higher volume and strong
operational performance.

Strong bookings on long-term platforms continued in the quarter with a
$212 million contract to upgrade electronic countermeasure capabilities
on U.S. Navy and Kuwaiti F/A-18 aircraft, increasing the
inception-to-date IDECM production awards to $2 billion. The company
also received a $129 million development contract for the open systems
mission processor on the F-35, a key milestone supporting platform
modernization under the Technology Refresh 3 program.

In addition, Harris strengthened its position in the UAE with the award
of a $46 million contract to provide technical support and training to
the UAE Armed Forces, as the Emirates Land Tactical System (ELTS)
transitions to full operations. This award follows the company's
successful completion of the $192 million UAE ELTS Initial Operational
Capability program.

Segment revenue in the first three quarters increased 7% with a
book-to-bill of 1.2 and operating margin expanding 90 bps to 19.1%.

                         

Space and Intelligence Systems

 
($ millions) Third Quarter Year to Date
FY 2019 FY 2018 Change FY 2019 FY 2018 Change
Revenue $ 514 $ 482 7% $ 1,515 $ 1,410 7%
Operating income $ 87 $ 83 5% $ 265 $ 250 6%
Operating margin 16.9 % 17.2 % (30)bps 17.5 % 17.7 % (20)bps
 

Third quarter revenue increased 7%, as double-digit growth from
classified programs, driven by small satellites, exquisite systems and
next-generation technology programs, was partially offset by lower
revenue from environmental programs. Operating income increased 5% to
$87 million from higher volume and strong program execution, partially
offset by higher investments.

Order momentum remained strong on classified programs, as the company
leveraged its investments in innovation and strong customer
relationships to secure a $185 million follow-on sustainment and
modernization award from the U.S. Air Force for counter-communication,
$154 million of increased scope from an existing classified customer to
enhance and deploy mission-critical capabilities and $84 million of
additional funding for exquisite space systems from a long-standing
customer.

Investments in technology have strengthened the company's position as
the partner-of-choice on long-standing Civil programs. Harris received a
$243 million award as part of the GPS IIIF SV11-32 contract to provide
fully-digital navigation payloads for the first two GPS IIIF satellites.
This award follows the company's success on the current GPS III SV1-10
contract. Harris also received a 3-year, $293 million award to expand
capabilities on the GOES-R ground system, increasing the total contract
value to $1.7 billion.

Segment revenue in the first three quarters increased 7% with a
book-to-bill of 1.1. Operating income increased 6% and operating margin
remained strong at 17.5%.

                         

Cash and Capital Deployment

 
($ millions) Third Quarter Year to Date
FY 2019 FY 2018 Change FY 2019 FY 2018 Change
Operating cash flow $ 405 $ (143 ) $ 548 $ 874 $ 230 $ 644
Free cash flow4 $ 368 $ (179 ) $ 547 $ 770 $ 151 $ 619
Adjusted free cash flow5 $ 379 $ 121 $ 258 $ 788 $ 451 $ 337
 

In the first three quarters of fiscal 2019, the company generated $788
million in adjusted free cash flow5, up 75%, and returned
$444 million to shareholders through dividends and share repurchases
and, in the third quarter, paid down $300 million of debt.

Guidance

As a result of strong year-to-date performance, Harris updated its
guidance for fiscal 2019 to the following:

  • Revenue ~$6.72 billion, up ~9.0% from fiscal 2018 (increased from
    previous guidance of up 8.0 - 8.5%)
  • GAAP EPS from continuing operations ~$7.80 and non-GAAP6
    EPS ~$8.15 (increased from previous guidance of $7.50 - $7.60 GAAP and
    $7.90 - $8.00 non-GAAP6)
  • Operating cash flow ~$1,160 billion; adjusted free cash flow5
    ~$1.025 billion (increased from previous guidance of $1.000 - $1.025
    billion)
  • Tax rate of approximately 15.0% GAAP; 15.5% non-GAAP (a decrease from
    ~16.3% GAAP and ~16.5% non-GAAP previously)

Conference Call and Webcast

Harris will host a conference call today, May 1, at 8:30 a.m. Eastern
Time (ET) to discuss its fiscal 2019 third quarter financial results.
The dial-in numbers for the teleconference are (U.S.) (877) 407-6184 and
(International) (201) 389-0877, and participants will be directed to an
operator. Please allow at least 10 minutes before the scheduled start
time to connect to the teleconference. Participants are encouraged to
listen via live webcast and view management's supporting slide
presentation at https://www.harris.com/investors/financial-reports.
A recording of the call will be available on the Harris website
beginning at approximately 12 p.m. ET on May 1.

About Harris Corporation

Harris Corporation is a leading technology innovator, solving customers'
toughest mission-critical challenges by providing solutions that
connect, inform and protect. Harris supports government and commercial
customers in more than 100 countries and has approximately $6 billion in
annual revenue. The company is organized into three business segments:
Communication Systems, Electronic Systems and Space and Intelligence
Systems. Learn more at harris.com.

Non-GAAP Financial Measures

This press release contains non-GAAP financial measures within the
meaning of Regulation G promulgated by the Securities and Exchange
Commission ("SEC"), including earnings per diluted share from continuing
operations for the third quarter and first three quarters of fiscal 2019
and expected earnings per diluted share from continuing operations for
fiscal 2019, in each case excluding L3 deal and integration costs;
earnings per diluted share from continuing operations for the third
quarter and first three quarters of fiscal 2018, in each case excluding
the impact of non-cash adjustments related to tax reform and charges
related to a decision to transition and exit a commercial line of
business and other items, and in the case of the first three quarters of
fiscal 2018, also excluding a one-time non-cash charge from an
adjustment for deferred compensation; adjusted earnings before interest
and taxes ("EBIT") and adjusted EBIT margin for the third quarter and
first three quarters of fiscal 2019, in each case excluding net interest
expense, income taxes, discontinued operations net of income taxes and
L3 deal and integration costs; and adjusted EBIT and adjusted EBIT
margin for the third quarter and first three quarters of fiscal 2018, in
each case excluding, as applicable, net interest expense, income taxes,
discontinued operations net of income taxes, charges related to a
decision to transition and exit a commercial line of business and other
items and a one-time non-cash charge from an adjustment for deferred
compensation; free cash flow for the third quarter and first three
quarters of fiscal 2019 and third quarter and first three quarters of
fiscal 2018, in each case excluding cash flow for capital expenditures;
adjusted free cash flow for the third quarter and first three quarters
of fiscal 2019 and expected adjusted free cash flow for fiscal 2019, in
each case excluding cash flow for capital expenditures and L3 deal and
integration costs; adjusted free cash flow for the third quarter and
first three quarters of fiscal 2018, in each case excluding cash flow
for capital expenditures and adjusted for the voluntary contribution to
qualified pension plans in the third quarter of fiscal 2018; and
expected effective tax rate for fiscal 2019, excluding the impact of L3
deal and integration costs. A "non-GAAP financial measure" is generally
defined as a numerical measure of a company's historical or future
performance that excludes or includes amounts, or is subject to
adjustments, so as to be different from the most directly comparable
measure calculated and presented in accordance with generally accepted
accounting principles ("GAAP"). Harris management believes that these
non-GAAP financial measures, when considered together with the GAAP
financial measures, provide information that is useful to investors in
understanding period-over-period operating results separate and apart
from items that may, or could, have a disproportionately positive or
negative impact on results in any particular period. Harris management
also believes that these non-GAAP financial measures enhance the ability
of investors to analyze Harris business trends and to understand Harris
performance. In addition, Harris may utilize non-GAAP financial measures
as guides in forecasting, budgeting and long-term planning processes and
to measure operating performance for some management compensation
purposes. Non-GAAP financial measures should be considered in addition
to, and not as a substitute for, or superior to, financial measures
presented in accordance with GAAP.

Attachments: Financial
statements (8 tables)

Forward-Looking Statements

Statements in this press release that are not historical facts are
forward-looking statements that reflect management's current
expectations, assumptions and estimates of future performance and
economic conditions. Such statements are made in reliance on the safe
harbor provisions of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements in this press release include but are not limited to:
earnings, revenue, adjusted free cash flow and tax rate guidance for
fiscal 2019; potential contract opportunities and awards; the potential
value and timing of contract awards; statements regarding being well
positioned to deliver on increased guidance; statements about the
proposed transformational L3 Harris merger and the anticipated timing of
the closing thereof and anticipated benefits therefrom; statements
regarding a strong addressable budget, continued growth and creation of
long-term shareholder value; and other statements regarding outlook or
that are not historical facts. The company cautions investors that any
forward-looking statements are subject to risks and uncertainties that
may cause actual results and future trends to differ materially from
those matters expressed in or implied by such forward-looking
statements. The company's consolidated results, future trends and
forward-looking statements could be affected by many factors, risks and
uncertainties, including but not limited to: the loss of the company's
relationship with the U.S. Government or a change or reduction in U.S.
Government funding; potential changes in U.S. Government or customer
priorities and requirements (including potential deferrals of awards,
terminations, reductions of expenditures, changes to respond to the
priorities of Congress and the Administration, budgetary constraints,
debt ceiling implications, sequestration, and cost-cutting initiatives);
a security breach, through cyber attack or otherwise, or other
significant disruptions of the company's IT networks and systems or
those the company operates for customers; the level of returns on
defined benefit plan assets and changes in interest rates; risks
inherent with large long-term fixed-price contracts, particularly the
ability to contain cost overruns; changes in estimates used in
accounting for the company's programs; financial and government and
regulatory risks relating to international sales and operations; effects
of any non-compliance with laws; the company's ability to continue to
develop new products that achieve market acceptance; the consequences of
uncertain economic conditions and future geo-political events; strategic
acquisitions and divestitures and the risks and uncertainties related
thereto, including the company's ability to manage and integrate
acquired businesses and realize expected benefits and the potential
disruption to relationships with employees, suppliers and customers,
including the U.S. Government, and to the company's business generally;
performance of the company's subcontractors and suppliers; potential
claims related to infringement of intellectual property rights or
environmental remediation or other contingencies, litigation and legal
matters and the ultimate outcome thereof; risks inherent in developing
new and complex technologies and/or that may not be covered adequately
by insurance or indemnity; changes in the company's effective tax rate;
significant indebtedness and unfunded pension liability and potential
downgrades in the company's credit ratings; unforeseen environmental
matters; natural disasters or other disruptions affecting the company's
operations; changes in future business or other market conditions that
could cause business investments and/or recorded goodwill or other
long-term assets to become impaired; the company's ability to attract
and retain key employees, maintain reasonable relationships with
unionized employees and manage escalating costs of providing employee
health care; or potential tax, indemnification and other liabilities and
exposures related to Exelis' spin-off of Vectrus, Inc. and Exelis'
spin-off from ITT Corporation; the occurrence of any event, change or
other circumstances that could give rise to the termination of the L3
Harris merger agreement; the risk that the parties may not be able to
obtain (or may be required to make divestitures in order to obtain) the
necessary regulatory approvals or to satisfy any of the other conditions
to the proposed combination in a timely manner or at all; risks related
to disruption of management time from ongoing business operations due to
the proposed combination; risks related to the inability to realize
benefits or to implement integration plans and other consequences
associated with the proposed combination; the risk that any
announcements relating to the proposed combination could have adverse
effects on the market price of the common stock of either or both
parties to the combination; and the risk that the proposed combination
and its announcement could have an adverse effect on either or both
parties' ability to retain customers and retain and hire key personnel
and maintain relationships with suppliers and customers, including the
U.S. Government and other governments, and on their operating results
and businesses generally. Further information relating to these and
other factors that may impact the company's results, future trends and
forward-looking statements are disclosed in the company's filings with
the SEC. The forward-looking statements contained in this press release
are made as of the date of this press release, and the company disclaims
any intention or obligation, other than imposed by law, to update or
revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.

     

1

 

Excludes discontinued operations and L3 deal and integration
costs; reconciliations of GAAP to non-GAAP financial measures are
provided in the attached tables.

2

Excludes L3 deal and integration costs; reconciliations of
GAAP to non-GAAP financial measures are provided in the attached
tables.

3

Excludes discontinued operations and L3 deal and integration
costs; reconciliations of GAAP to non-GAAP financial measures are
provided in the attached tables.

4

Reconciliations of GAAP to non-GAAP financial measures are
provided in the attached tables.

5

Excludes L3 deal and integration costs; reconciliations of
GAAP to non-GAAP financial measures are provided in the attached
tables.

6

Excludes discontinued operations and L3 deal and integration
costs; reconciliations of GAAP to non-GAAP financial measures are
provided in the attached tables.

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