Jul 31, 2018   SOURCE: BusinessWire

Harris Corporation Reports Strong Fourth Quarter and Fiscal 2018 Results...Well Positioned to Accelerate Growth

Harris Corporation (NYSE:HRS) reported fiscal 2018 fourth quarter revenue of $1.7 billion, up 8% compared with the prior year. Earnings per diluted share (EPS) from continuing operations increased to $1.74 (GAAP) and $1.78 (non-GAAP1), up 29% and 19%, respectively, versus prior year. GAAP operating margin expanded 150 basis points to 19.3% and non-GAAP operating margin expanded 50 basis points to 19.6%.

"We ended the year on a high note with strong fourth quarter results capping a successful 2018," said William M. Brown, chairman, president and chief executive officer. "We achieved our highest revenue growth in the last seven years with all three segments up year over year, high teens EPS growth, record free cash flow and more than half a billion dollars returned to shareholders. With a well-funded budget, solid backlog growth, strong customer relationships and a culture of operational excellence, we are well positioned to accelerate growth, increase margins and generate free cash flow in excess of $1 billion."

 

Summary Financial Results

                       
($ millions, except per share data) Fourth Quarter Full Year
FY 2018 FY 2017 Change FY 2018 FY 2017 Change
Orders $ 1,861 $ 1,574 18 % $ 7,429 $ 6,026 23 %
Revenue $ 1,666 $ 1,542 8 % $ 6,182 $ 5,900 5 %
 
(GAAP comparison)
Operating income $ 322 $ 275 17 % $ 1,122 $ 1,073 5 %
Operating margin 19.3 % 17.8 % 150bps 18.1 % 18.2 % (10)bps
Earnings per share $ 1.74 $ 1.35 29 % $ 5.94 $ 5.12 16 %
 
(Non-GAAP comparison)
Operating income* $ 327 $ 295 11 % $ 1,186 $ 1,131 5 %
Operating margin* 19.6 % 19.1 % 50bps 19.2 % 19.2 % —bps
Earnings per share* $ 1.78 $ 1.49 19 % $ 6.50 $ 5.53 18 %
 
*Reconciliations of GAAP to non-GAAP financial measures are provided in the attached tables.
 

Revenue increased 8% for the quarter and 5% for the year, led by growth in Communication Systems and Electronic Systems. GAAP and non-GAAP EPS grew double digits for the quarter and the year driven by higher volume, operational excellence, higher pension income, lower share count and tax gains, partially offset for the year by a $36 million unfavorable impact from the ADS-B program transition in the first half of fiscal 2018. GAAP EPS growth also reflected, for the quarter, debt refinancing and other charges partially offset by adjustments related to tax reform, and for the year, other prior period items reconciled in the attached financial tables. Non-GAAP operating margin expanded 50 basis points to 19.6% for the quarter and remained strong at 19.2% for the year. Orders increased 18% for the quarter and 23% for the year, resulting in a book-to-bill of 1.1 and 1.2, respectively.

                       

Communication Systems

 
($ millions) Fourth Quarter Full Year
FY 2018 FY 2017 Change FY 2018 FY 2017 Change
Revenue $ 523 $ 449 16% $ 1,903 $ 1,753 9%
Operating income $ 162 $ 146 11% $ 571 $ 524 9%
Operating margin 31.0 % 32.5 % (150)bps 30.0 % 29.9 % 10bps

Fourth quarter segment revenue increased 16% from growth in all three businesses. Tactical Communications revenue grew 21%, with DoD up 46% on strong readiness and modernization demand and International up 10% from solid growth in the Middle East and Asia Pacific. Night Vision revenue grew double digits on increased U.S. Army demand. Operating income grew 11% to $162 million on increased volume and operational efficiencies.

Orders strength for the segment continued in the quarter, marking its eighth straight quarter of year-over-year orders growth.

Tactical Communications received several significant awards to meet U.S. DoD readiness demand, support U.S Army modernization, extend Harris ground-based radio expertise into adjacent markets and combat evolving international threats:

  • 1,129 HMS Manpack initial production radios for the U.S. Army, a key milestone in a multi-year modernization
  • 1,014 handheld radios for the U.S. Air Force Special Operations Command
  • $31 million from the U.S. Marine Corps for 117G Manpack radios with MUOS capability and MUOS software upgrades
  • $130 million, 5-year, sole source IDIQ contract from the U.S. Air Force to develop and deliver Handheld Video Data Link radios that enable information to be distributed from airborne assets to ground warfighters
  • More than $150 million from countries in Europe, Asia Pacific and the Middle East supporting counter-terrorism, border control programs and security force modernization

Public Safety was awarded $26 million in contracts from U.S. Customs and Border Protection for advanced digital handheld radios, as it continues to diversify its customer base from state and local governments to federal agencies and public utilities.

Full year segment revenue increased 9% from 35% growth in DoD Tactical and double-digit growth in Night Vision. Operating margins expanded 10 basis points to 30.0%. Orders grew 28%, resulting in a book-to-bill of 1.25 and greater than 1.0 in all three businesses. Tactical Communications backlog increased more than 80% compared with the prior year.

             

Electronic Systems

 
($ millions) Fourth Quarter Full Year
FY 2018 FY 2017 Change FY 2018 FY 2017 Change
Revenue $ 640 $ 591 8 % $ 2,373 $ 2,251 5 %
Operating income $ 119 $ 104 14 % $ 441 $ 464 (5 )%
Operating margin 18.6 % 17.6 % 100bps 18.6 % 20.6 % (200)bps
 

Fourth quarter segment revenue increased 8% from growth in Avionics on increased F-35 production, in Electronic Warfare (EW) from F-16 and F/A-18 platforms and in C4ISR from the ramp of the U.K. robotics and UAE battle management programs. Operating income grew 14% to $119 million and margin expanded 100 basis points on higher volume and productivity.

Segment orders grew double digits for the fifth consecutive quarter led by strength in EW and Mission Networks. New awards continued to strengthen Harris' strategic position in EW on long-term platforms and included a $400 million, multi-year, sole source IDIQ contract to support international F-16s, with an initial order of $58 million from Turkey. In addition, Harris received a $44 million, follow-on development contract from the U.S. Air Force supporting B-52 countermeasure systems.

Harris also leveraged its highly successful FAA managed services model to capture a 15-year, $141 million systems integration contract to modernize India's air traffic management communications infrastructure, supporting growth in one of the world's largest aviation markets.

Full year segment revenue was up 5% with strong operating margin of 18.6% despite the unfavorable impact of ADS-B in the first half of the year. Orders were up 33% to $3.1 billion, including $1.1 billion on F-35, F/A-18 and F-16 platforms, resulting in a book-to-bill of 1.3.

                     

Space and Intelligence Systems

 
 
($ millions) Fourth Quarter Full Year
FY 2018 FY 2017 Change FY 2018 FY 2017 Change
Revenue $ 508 $ 506 — % $ 1,921 $ 1,902 1 %
Operating income $ 86 $ 80 8 % $ 336 $ 311 8 %
Operating margin 16.9 % 15.8 % 110bps 17.5 % 16.4 % 110bps
 

Fourth quarter segment revenue was flat, as higher volume in Classified programs, driven by small satellites and space superiority programs, was offset by expected lower revenue from environmental programs. Operating income grew 8% to $86 million and margin expanded 110 basis points from strong program execution and incremental pension income.

In Classified programs, order momentum remained strong, with funding received for an exquisite space system program award announced in the third quarter and for U.S. missile warning, missile defense and space surveillance missions under the SENSOR program.

In addition, extending a 20-year partnership with the National Geospatial-Intelligence Agency, Harris received three, 10-year, multi-award IDIQ contracts totaling $1.5 billion to create, manage and disseminate high-quality geospatial-intelligence information.

Full year segment revenue was up 1% as growth in Classified programs was partially offset by the expected headwind from environmental programs. Operating income increased 8% and operating margin expanded 110 basis points on productivity and higher pension income. Orders increased 6%, resulting in a book-to-bill of greater than 1.0.

                       

Cash and Capital Deployment

 
($ millions) Fourth Quarter Full Year
FY 2018 FY 2017 Change FY 2018 FY 2017 Change
Operating cash flow $ 521 $ 80 $ 441 $ 751 $ 569 $ 182
Adjusted operating cash flow* $ 521 $ 480 $ 41 $ 1,051 $ 969 $ 82
Adjusted free cash flow* $ 464 $ 440 $ 24 $ 915 $ 850 $ 65
 
*Reconciliations of GAAP to non-GAAP financial measures are provided in the attached tables.
 

In fiscal 2018, Harris generated $915 million in adjusted free cash flow, excluding a $300 million voluntary pension contribution in the third quarter, and returned $544 million to shareholders through dividends and share repurchases.

Guidance

As a result of strong momentum and performance in fiscal 2018, Harris initiated the following guidance4 for fiscal 2019:

  • Revenue in a range of $6.53 - 6.65 billion, up 6 - 8% from fiscal 2018
  • EPS from continuing operations in a range of $7.65 - $7.85
  • Free cash flow ≥ $1 billion
  • Tax rate of ~17.0%

Conference Call and Webcast

Harris will host a conference call today, July 31, at 8:30 a.m. Eastern Time (ET) to discuss its fiscal 2018 fourth 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 July 31.

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 fourth quarter of fiscal 2018 and the full year fiscal 2018, in each case excluding the impact of losses and other costs related to debt refinancing, a non-cash charge related to consolidation of certain Exelis facilities initiated in fiscal 2017 and non-cash adjustments related to tax reform, and in the case of the full year fiscal 2018, also excluding charges related to a decision to transition and exit a commercial line of business and other items and a non-cash charge from an adjustment for deferred compensation; operating income and operating margin for the fourth quarter of fiscal 2018 and the full year fiscal 2018, in each case excluding a non-cash charge related to consolidation of certain Exelis facilities initiated in fiscal 2017, and in the case of the full year fiscal 2018, also excluding charges related to a decision to transition and exit a commercial line of business and other items and a non-cash charge from an adjustment for deferred compensation; operating income, operating margin and earnings per diluted share from continuing operations for the fourth quarter of fiscal 2017 and the full year fiscal 2017, in each case excluding Exelis acquisition-related and other charges; free cash flow for the fourth quarter of fiscal 2018, excluding cash flow for capital expenditures; operating cash flow and free cash flow for the full year fiscal 2018, in each case adjusted for the voluntary pension contribution in the third quarter of fiscal 2018, and in the case of free cash flow, also excluding cash flow for capital expenditures; and operating cash flow and free cash flow for the fourth quarter of fiscal 2017 and the full year fiscal 2017, in each case adjusted for the voluntary pension contribution in the fourth quarter of fiscal 2017, and in the case of free cash flow, also excluding cash flow for capital expenditures. 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 release include but are not limited to: earnings, revenue, free cash flow, and tax rate guidance for fiscal 2019; potential contract opportunities and awards; the potential value of contract awards; statements regarding being well positioned to accelerate growth, increase margins and generate free cash flow in excess of $1 billion 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 issues; 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. 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 release are made as of the date of this 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 event, or otherwise.

     

1

 

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

2

Excluding $300M voluntary pension contribution made in 3Q18.

3

Reflects adoption of new revenue recognition standard (ASC 606) - refer to guidance paragraph for more information.

4

Effective June 30, 2018 (the first day of fiscal 2019), Harris adopted the new revenue recognition standard, Accounting Standards Codification 606, Revenue from Contracts with Customers, using the full retrospective method. Fiscal 2019 guidance reflects adoption of the new revenue recognition standard, and Table 8 in the attached tables presents preliminary unaudited selected historical segment financial information on the basis of the new revenue recognition standard, as supplemental information for comparability purposes.