Harris Corporation (HRS, Financial), operating through three broad segments –Â RF Communications, Integrated Network Solutions, and Government Communications Systems, functions globally as an international communications and information technology company. The company has been delivering impressive positive earnings surprise in the last four quarters, with an average outperformance of 6.9%. Let’s take a look at the results and what it holds for investors.
Looking back
The communications equipment and services company posted third quarter fiscal 2015 numbers this month, and the results turned out to be a mixed bag.
Revenues declined 6.4% year over year to clock $1.19 billion as a result of weak performance in all the segments of the company. Experts had pegged this number at $1.22 billion, and hence Harris failed to live up to expectations on revenue. The weakness in public safety and a significant decline in integrated network solution more than wiped off all the gains in Tactical Communications revenue growth.
Orders in the quarter moved up 9% year over year and sequentially in the government communication systems segment to clock $1.2 billion. Tactical Communications revenue also moved up 6% on the back of continued strength in international market and some improvement in the U.S. market.
However, on lower-than-expected revenues, Harris reported better-than-expected earnings of $1.32 per share, easily trumping consensus estimates of $1.23 per share. EPS grew 3.9% over the comparable period in the prior fiscal.
Harris exited the third quarter with cash and cash equivalents of $487.7 million versus $561 million at the end of fiscal 2014. Total debt and debt-to-capitalization ratio remained flat versus the figures of fiscal 2014 and came in at $1,575.8 million and 0.46, respectively.
Looking ahead
Energy and forex concerns weighed in heavily on Harris’s revenue as the company’s international business account for nearly 31%. Middle East countries account for nearly half of its radio pipeline. So, going forward, these concerns can be a drag on top line. However, the international market is healthy and opportunity pipeline remains solid at $2.5 billion.
The momentum for U.S. tactical modernization is on the move. Harris was awarded a 10-year, $3.9 billion IDIQ contract for the rifleman radio with an $800,000 initial order for qualification and test units. This will be a growth driver, going forward.
The army also kicked off the much awaited procurement for the Manpack. Preliminary update from the army hints at a 10-year multi-award IDIQ contract with the ceiling value between $12 billion and $12.7 billion, with product slated in fourth quarter of fiscal 2017. This is a huge opportunity, going forward.
Harris is also on an aggressive Merger & Acquisition, or M&A, strategy to bolster growth in the long run. As a part of this strategy, the company announced acquisition of Exelis Inc. (XLS, Financial), a McLean, Virginia-based company that manufactures communications gear, sensors, surveillance equipment and other electronics for defense and civil agencies. This deal will allow cost cutting to the extent of $100 million and $120 million in annual synergies. This deal is expected to close around June this year, and William M. Brown, chairman, president and CEO of Harris, said:
"The combination of the two companies' highly complementary core franchises creates a competitively stronger company with significantly greater scale. We are expanding in a market, where we have decades of success and a workforce dedicated to providing our customers with innovative and cost-effective solutions for some of their most complex challenges."
Harris has raised the bar for fiscal 2015 earnings numbers. EPS is now expected to be in the range of $5.00 to $5.10, up from the earlier guided range of $4.95 to $5.05. However, revenues are expected to decline by around 4%, versus the earlier guided range of 1 to 3%. These numbers do not include any accretive component from the impending Exelis acquisition.
Conclusion
On the back of these long-term opportunities and acquisition of Exelis, I would say that this is a stock for the long-term gains.
