L3HARRIS TECHNOLOGIES, INC. /DE/
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | ||
| þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended October 1, 2010
or
| o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 1-3863
HARRIS CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 34-0276860 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) | ||
| 1025 West NASA Boulevard | ||
| Melbourne, Florida | 329l9 | |
| (Address of principal executive offices) | (Zip Code) |
(321) 727-9l00
(Registrant’s telephone number, including area code)
No changes
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
þ
Non-accelerated filer o (Do not check if a smaller reporting company) |
Accelerated filer
o
Smaller reporting company o |
|||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
The number
of shares outstanding of the registrant’s common stock as of
October 22, 2010 was 128,279,277
shares.
HARRIS CORPORATION
FORM 10-Q
For the Quarter Ended October 1, 2010
INDEX
This Quarterly Report on Form 10-Q contains trademarks, service marks and registered marks of
Harris Corporation and its subsidiaries.
Table of Contents
HARRIS CORPORATION AND SUBSIDIARIES
(Unaudited)
| Quarter Ended | ||||||||
| October 1, | October 2, | |||||||
| 2010 | 2009 | |||||||
| (In millions, except per share amounts) | ||||||||
|
Revenue from product sales and services
|
$ | 1,405.4 | $ | 1,203.0 | ||||
|
|
||||||||
|
Cost of product sales and services
|
(881.1 | ) | (812.1 | ) | ||||
|
Engineering, selling and administrative expenses
|
(255.2 | ) | (212.1 | ) | ||||
|
Non-operating loss
|
(0.4 | ) | (0.2 | ) | ||||
|
Interest income
|
0.6 | 0.4 | ||||||
|
Interest expense
|
(17.8 | ) | (18.2 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Income before income taxes
|
251.5 | 160.8 | ||||||
|
Income taxes
|
(87.6 | ) | (56.3 | ) | ||||
|
|
||||||||
|
Net income
|
$ | 163.9 | $ | 104.5 | ||||
|
|
||||||||
|
|
||||||||
|
Net income per common share
|
||||||||
|
Basic
|
$ | 1.28 | $ | 0.79 | ||||
|
Diluted
|
$ | 1.27 | $ | 0.79 | ||||
|
|
||||||||
|
Cash dividends paid per common share
|
$ | 0.25 | $ | 0.22 | ||||
|
|
||||||||
|
Basic weighted average shares outstanding
|
126.8 | 130.8 | ||||||
|
Diluted weighted average shares outstanding
|
127.7 | 131.4 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
1
Table of Contents
HARRIS CORPORATION AND SUBSIDIARIES
(Unaudited)
| October 1, | July 2, | |||||||
| 2010 | 2010 | |||||||
| (In millions, except shares) | ||||||||
|
Assets
|
||||||||
|
Current Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 341.4 | $ | 455.2 | ||||
|
Receivables
|
705.6 | 736.0 | ||||||
|
Inventories
|
670.8 | 615.3 | ||||||
|
Income taxes receivable
|
3.7 | 15.3 | ||||||
|
Current deferred income taxes
|
148.5 | 145.3 | ||||||
|
Other current assets
|
63.3 | 37.5 | ||||||
|
|
||||||||
|
Total current assets
|
1,933.3 | 2,004.6 | ||||||
|
Non-current Assets
|
||||||||
|
Property, plant and equipment
|
672.2 | 609.7 | ||||||
|
Goodwill
|
1,936.2 | 1,576.2 | ||||||
|
Intangible assets
|
412.9 | 297.8 | ||||||
|
Non-current deferred income taxes
|
64.2 | 107.7 | ||||||
|
Other non-current assets
|
187.9 | 147.6 | ||||||
|
|
||||||||
|
Total non-current assets
|
3,273.4 | 2,739.0 | ||||||
|
|
||||||||
|
|
$ | 5,206.7 | $ | 4,743.6 | ||||
|
|
||||||||
|
Liabilities and Equity
|
||||||||
|
Current Liabilities
|
||||||||
|
Short-term debt
|
$ | 275.0 | $ | 30.0 | ||||
|
Accounts payable
|
390.7 | 329.4 | ||||||
|
Compensation and benefits
|
190.4 | 239.7 | ||||||
|
Other accrued items
|
298.1 | 267.5 | ||||||
|
Advance payments and unearned income
|
189.8 | 175.6 | ||||||
|
Income taxes payable
|
73.6 | 8.9 | ||||||
|
Current portion of long-term debt
|
0.7 | 0.7 | ||||||
|
|
||||||||
|
Total current liabilities
|
1,418.3 | 1,051.8 | ||||||
|
Non-current Liabilities
|
||||||||
|
Long-term debt
|
1,176.4 | 1,176.6 | ||||||
|
Long-term contract liability
|
129.5 | 132.4 | ||||||
|
Other long-term liabilities
|
188.2 | 192.7 | ||||||
|
|
||||||||
|
Total non-current liabilities
|
1,494.1 | 1,501.7 | ||||||
|
Equity
|
||||||||
|
Shareholders’ Equity:
|
||||||||
|
Preferred stock, without par value; 1,000,000 shares authorized; none issued
|
— | — | ||||||
|
Common stock, $1.00 par value; 500,000,000 shares authorized; issued and outstanding
126,631,098 shares at October 1, 2010 and 127,460,307 shares at July 2, 2010
|
126.6 | 127.5 | ||||||
|
Other capital
|
462.9 | 461.1 | ||||||
|
Retained earnings
|
1,715.1 | 1,621.4 | ||||||
|
Accumulated other comprehensive loss
|
(10.9 | ) | (20.4 | ) | ||||
|
|
||||||||
|
Total shareholders’ equity
|
2,293.7 | 2,189.6 | ||||||
|
Noncontrolling interests
|
0.6 | 0.5 | ||||||
|
|
||||||||
|
Total equity
|
2,294.3 | 2,190.1 | ||||||
|
|
||||||||
|
|
$ | 5,206.7 | $ | 4,743.6 | ||||
|
|
||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
2
Table of Contents
HARRIS CORPORATION AND SUBSIDIARIES
(Unaudited)
| Quarter Ended | ||||||||
| October 1, | October 2, | |||||||
| 2010 | 2009 | |||||||
| (In millions) | ||||||||
|
Operating Activities
|
||||||||
|
Net income
|
$ | 163.9 | $ | 104.5 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
46.8 | 42.1 | ||||||
|
Share-based compensation
|
16.0 | 11.1 | ||||||
|
Non-current deferred income taxes
|
1.3 | 6.4 | ||||||
|
(Increase) decrease in:
|
||||||||
|
Accounts and notes receivable
|
68.2 | 29.2 | ||||||
|
Inventories
|
(20.3 | ) | (29.8 | ) | ||||
|
Increase (decrease) in:
|
||||||||
|
Accounts payable and accrued expenses
|
(55.9 | ) | (106.0 | ) | ||||
|
Advance payments and unearned income
|
11.7 | 34.1 | ||||||
|
Income taxes
|
76.7 | 45.1 | ||||||
|
Other
|
(13.5 | ) | (2.2 | ) | ||||
|
|
||||||||
|
Net cash provided by operating activities
|
294.9 | 134.5 | ||||||
|
|
||||||||
|
|
||||||||
|
Investing Activities
|
||||||||
|
Net cash paid for acquired businesses
|
(518.0 | ) | 1.0 | |||||
|
Cash paid for cost-method investment
|
(10.0 | ) | — | |||||
|
Additions of property, plant and equipment
|
(37.1 | ) | (18.6 | ) | ||||
|
Additions of capitalized software
|
(4.3 | ) | (2.0 | ) | ||||
|
|
||||||||
|
Net cash used in investing activities
|
(569.4 | ) | (19.6 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Financing Activities
|
||||||||
|
Proceeds from borrowings
|
244.1 | — | ||||||
|
Repayments of borrowings
|
— | (81.1 | ) | |||||
|
Proceeds from exercise of employee stock options
|
2.6 | 0.1 | ||||||
|
Repurchases of common stock
|
(55.5 | ) | (55.3 | ) | ||||
|
Cash dividends
|
(32.2 | ) | (29.0 | ) | ||||
|
|
||||||||
|
Net cash provided by (used in) financing activities
|
159.0 | (165.3 | ) | |||||
|
|
||||||||
|
|
||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
1.7 | 0.3 | ||||||
|
|
||||||||
|
|
||||||||
|
Net decrease in cash and cash equivalents
|
(113.8 | ) | (50.1 | ) | ||||
|
|
||||||||
|
Cash and cash equivalents, beginning of year
|
455.2 | 281.2 | ||||||
|
|
||||||||
|
|
||||||||
|
Cash and cash equivalents, end of quarter
|
$ | 341.4 | $ | 231.1 | ||||
|
|
||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
3
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 1, 2010
Note A — Significant Accounting Policies and Recent Accounting Standards
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Harris
Corporation and its subsidiaries. As used in these Notes to Condensed Consolidated Financial
Statements (Unaudited) (these “Notes”), the terms “Harris,” “Company,” “we,” “our,” and “us” refer
to Harris Corporation and its consolidated subsidiaries. Significant intercompany transactions and
accounts have been eliminated. The accompanying condensed consolidated financial statements have
been prepared by Harris, without an audit, in accordance with U.S. generally accepted accounting
principles for interim financial information and with the rules and regulations of the Securities
and Exchange Commission (“SEC”). Accordingly, they do not include all information and footnotes
necessary for a complete presentation of financial position, results of operations and cash flows
in conformity with U.S. generally accepted accounting principles. In the opinion of management,
such interim financial statements reflect all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial position, results of
operations and cash flows for such periods. The results for the quarter ended October 1, 2010 are
not necessarily indicative of the results that may be expected for the full fiscal year or any
subsequent period. The balance sheet at July 2, 2010 has been derived from the audited financial
statements but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for annual financial statements. We provide complete financial
statements in our Annual Report on Form 10-K, which includes information and footnotes required by
the rules and regulations of the SEC. The information included in this Quarterly Report on Form
10-Q (this “Report”) should be read in conjunction with the Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and the Consolidated Financial Statements and
accompanying Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K
for the fiscal year ended July 2, 2010 (the “Fiscal 2010 Form 10-K”).
The preparation of financial statements in accordance with U.S. generally accepted accounting
principles requires us to make estimates and assumptions that affect the amounts reported in the
accompanying condensed consolidated financial statements and these Notes. Actual results could
differ from those estimates and assumptions.
Adoption of New Accounting Standards
In the first quarter of fiscal 2011, we adopted the following accounting standards, neither of
which had a material impact on our financial position, results of operations or cash flows:
| • | The accounting standard that revises accounting and reporting requirements for arrangements with multiple deliverables. This standard allows the use of an estimated selling price to determine the selling price of a deliverable in cases where neither vendor-specific objective evidence nor third-party evidence is available, which is expected to increase the ability for entities to separate deliverables in multiple-deliverable arrangements and, accordingly, to decrease the amount of revenue deferred in these cases. Additionally, this standard requires the total selling price of a multiple-deliverable arrangement to be allocated at the inception of the arrangement to all deliverables based on relative selling prices. | ||
| • | The accounting standard that clarifies which revenue allocation and measurement guidance should be used for arrangements that contain both tangible products and software, in cases where the software is more than incidental to the tangible product as a whole. More specifically, if the software sold with or embedded within the tangible product is essential to the functionality of the tangible product, then this software as well as undelivered software elements that relate to this software are excluded from the scope of existing software revenue guidance, which is expected to decrease the amount of revenue deferred in these cases. |
Reclassifications
Certain prior-year amounts have been reclassified in the accompanying condensed consolidated
financial statements to conform with current-year classifications.
4
Table of Contents
Note B — Stock Options and Other Share-Based Compensation
As of October 1, 2010, we had three shareholder-approved employee stock incentive plans
(“SIPs”) under which options or other
share-based compensation was outstanding, and we had the following types of share-based awards
outstanding under our SIPs: stock options, performance share awards, performance share unit awards,
restricted stock awards and restricted stock unit awards. We believe that such awards more closely
align the interests of employees with those of shareholders. Certain share-based awards provide for
accelerated vesting if there is a change in control (as defined under our SIPs). The compensation
cost related to our share-based awards that was charged against income was $16.0 million for the
quarter ended October 1, 2010 and $11.1 million for the quarter ended October 2, 2009.
Grants to employees under our SIPs during the quarter ended October 1, 2010 consisted of
1,337,250 stock options, 160,850 performance share awards and 370,800 restricted stock awards. The
fair value of each option award was estimated on the date of grant using the Black-Scholes-Merton
option-pricing model which used the following assumptions: expected volatility of 35.58 percent;
expected dividend yield of 2.0 percent; and expected life in years of 4.94.
Note C — Business Combinations
On July 30, 2010, we acquired privately held CapRock Holdings, Inc. and its subsidiaries,
including CapRock Communications, Inc. (collectively, “CapRock”), a global provider of
mission-critical, managed satellite communications services for the government, energy and maritime
industries. CapRock’s highly reliable solutions include broadband Internet access, voice over
Internet Protocol (“VOIP”) telephony, wideband networking and real-time video, delivered to nearly
2,000 customer sites around the world. The acquisition of CapRock increased the breadth of our
assured communications
®
capabilities, while enabling us to enter new vertical markets
and increase our international presence. The total estimated net purchase price for CapRock is
$528.3 million. The purchase price remains subject to post-closing adjustments and the purchase
price allocation is preliminary. Our first quarter of fiscal 2011 results of operations include
revenue of $64.6 million and a pre-tax loss of $0.4 million (including $2.0 million of
acquisition-related charges) associated with CapRock for the two-month period during the quarter
following the date of acquisition. We report CapRock within our Government Communications Systems
segment.
The following tables provide further detail of the acquisition of CapRock in fiscal 2011:
| CapRock | ||||
| (In millions) | ||||
|
Date of acquisition
|
7/30/2010 | |||
|
Reporting business segment
|
Government
Comm. Systems |
|||
|
Cash consideration paid to former owners
|
$ | 540.2 | ||
|
Less cash acquired
|
(22.2 | ) | ||
|
|
||||
|
Total net purchase price paid as of October 1, 2010
|
518.0 | |||
|
Estimated post-closing acquired cash true-up
|
10.3 | |||
|
|
||||
|
Total estimated net purchase price
|
$ | 528.3 | ||
|
|
||||
|
|
||||
|
Balance Sheet of CapRock as of the acquisition date:
|
||||
|
Accounts and notes receivable
|
$ | 37.5 | ||
|
Inventories
|
35.2 | |||
|
Other current assets
|
4.2 | |||
|
Current deferred income taxes
|
3.0 | |||
|
Identifiable intangible assets
|
131.5 | |||
|
Goodwill
|
356.5 | |||
|
Property, plant and equipment
|
62.9 | |||
|
Other assets
|
23.0 | |||
|
|
||||
|
Total assets acquired
|
653.8 | |||
|
|
||||
|
Accounts payable and accrued expenses
|
71.3 | |||
|
Advance payments and unearned income
|
2.4 | |||
|
Non-current deferred tax liabilities
|
42.1 | |||
|
Other liabilities
|
9.7 | |||
|
|
||||
|
Total liabilities acquired
|
125.5 | |||
|
|
||||
|
Net assets acquired
|
$ | 528.3 | ||
|
|
||||
5
Table of Contents
| CapRock | ||||||||
| Weighted | ||||||||
| Average | ||||||||
| Amortization | ||||||||
| Period | Total | |||||||
| (In years) | (In millions) | |||||||
|
Identifiable Intangible Assets:
|
||||||||
|
Customer relationships
|
16.0 | $ | 70.0 | |||||
|
Contract backlog
|
5.0 | 47.0 | ||||||
|
Tradenames
|
5.0 | 14.0 | ||||||
|
Other
|
15.0 | 0.5 | ||||||
|
|
||||||||
|
Weighted average amortization period and total
|
10.9 | $ | 131.5 | |||||
|
|
||||||||
The goodwill resulting from this business combination was associated primarily with CapRock’s
market presence and leading position, growth opportunities in the markets in which it operates,
experienced work force and established operating infrastructure. The goodwill resulting from this
business combination is nondeductible for tax purposes.
Pro Forma Results (Unaudited)
The following summary, prepared on a pro forma basis, presents our unaudited consolidated
results of operations as if the acquisition of CapRock had been completed as of the beginning of
fiscal 2010, after including the impact of adjustments such as amortization of intangible assets,
interest expense on related borrowings, and the related income tax effects. This pro forma
presentation does not include any impact of transaction synergies.
| Quarter Ended | ||||||||
| October 1, | October 2, | |||||||
| 2010 | 2009 | |||||||
| (In millions, except per | ||||||||
| share amounts) | ||||||||
|
Revenue from product sales and services — as reported
|
$ | 1,405.4 | $ | 1,203.0 | ||||
|
Revenue from product sales and services — pro forma
|
$ | 1,437.7 | $ | 1,296.3 | ||||
|
Net income — as reported
|
$ | 163.9 | $ | 104.5 | ||||
|
Net income — pro forma
|
$ | 163.6 | $ | 108.6 | ||||
|
Net income per diluted common share — as reported
|
$ | 1.27 | $ | 0.79 | ||||
|
Net income per diluted common share — pro forma
|
$ | 1.27 | $ | 0.82 | ||||
The pro forma results are not necessarily indicative of our results of operations had we owned
CapRock for the entire periods presented.
Note D — Comprehensive Income and Accumulated Other Comprehensive Loss
Comprehensive income for the quarters ended October 1, 2010 and October 2, 2009 was comprised
of the following:
| Quarter Ended | ||||||||
| October 1, | October 2, | |||||||
| 2010 | 2009 | |||||||
| (In millions) | ||||||||
|
Net income
|
$ | 163.9 | $ | 104.5 | ||||
|
Other comprehensive income (loss):
|
||||||||
|
Foreign currency translation
|
10.5 | 18.1 | ||||||
|
Net unrealized gain (loss) on securities available-for-sale, net of income taxes
|
(0.9 | ) | 1.0 | |||||
|
Net unrealized loss on hedging derivatives, net of income taxes
|
(0.4 | ) | (0.4 | ) | ||||
|
Amortization of loss on treasury lock, net of income taxes
|
0.2 | 0.1 | ||||||
|
Recognition of pension actuarial losses in net income, net of income taxes
|
0.1 | 1.6 | ||||||
|
|
||||||||
|
Total comprehensive income
|
$ | 173.4 | $ | 124.9 | ||||
|
|
||||||||
6
Table of Contents
The components of accumulated other comprehensive loss at October 1, 2010 and July 2, 2010
were as follows:
| October 1, | July 2, | |||||||
| 2010 | 2010 | |||||||
| (In millions) | ||||||||
|
Foreign currency translation
|
$ | 24.8 | $ | 14.3 | ||||
|
Net unrealized gain (loss) on securities available-for-sale, net of income taxes
|
(0.3 | ) | 0.6 | |||||
|
Net unrealized gain on hedging derivatives, net of income taxes
|
0.1 | 0.5 | ||||||
|
Unamortized loss on treasury lock, net of income taxes
|
(3.9 | ) | (4.1 | ) | ||||
|
Unrecognized pension obligations, net of income taxes
|
(31.6 | ) | (31.7 | ) | ||||
|
|
||||||||
|
|
$ | (10.9 | ) | $ | (20.4 | ) | ||
|
|
||||||||
Note E — Receivables
Receivables are summarized below:
| October 1, | July 2, | |||||||
| 2010 | 2010 | |||||||
| (In millions) | ||||||||
|
Accounts receivable
|
$ | 565.1 | $ | 613.0 | ||||
|
Unbilled costs on cost-plus contracts
|
144.8 | 125.1 | ||||||
|
Notes receivable due within one year, net
|
7.4 | 7.9 | ||||||
|
|
||||||||
|
|
717.3 | 746.0 | ||||||
|
Less allowances for collection losses
|
(11.7 | ) | (10.0 | ) | ||||
|
|
||||||||
|
|
$ | 705.6 | $ | 736.0 | ||||
|
|
||||||||
Note F — Inventories
Inventories are summarized below:
| October 1, | July 2, | |||||||
| 2010 | 2010 | |||||||
| (In millions) | ||||||||
|
Unbilled costs and accrued earnings on fixed-price contracts
|
$ | 318.5 | $ | 295.3 | ||||
|
Finished products
|
156.0 | 134.6 | ||||||
|
Work in process
|
67.1 | 59.7 | ||||||
|
Raw materials and supplies
|
129.2 | 125.7 | ||||||
|
|
||||||||
|
|
$ | 670.8 | $ | 615.3 | ||||
|
|
||||||||
Unbilled costs and accrued earnings on fixed-price contracts were net of progress payments of
$37.2 million at October 1, 2010 and $35.8 million at July 2, 2010.
Note G — Property, Plant and Equipment
Property, plant and equipment are summarized below:
| October 1, | July 2, | |||||||
| 2010 | 2010 | |||||||
| (In millions) | ||||||||
|
Land
|
$ | 12.1 | $ | 13.1 | ||||
|
Software capitalized for internal use
|
87.2 | 85.7 | ||||||
|
Buildings
|
407.0 | 396.6 | ||||||
|
Machinery and equipment
|
918.5 | 860.2 | ||||||
|
|
||||||||
|
|
1,424.8 | 1,355.6 | ||||||
|
Less allowances for depreciation and amortization
|
(752.6 | ) | (745.9 | ) | ||||
|
|
||||||||
|
|
$ | 672.2 | $ | 609.7 | ||||
|
|
||||||||
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Depreciation and amortization expense related to property, plant and equipment for the
quarters ended October 1, 2010 and October 2, 2009 was $29.9 million and $26.3 million,
respectively.
Note H — Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the quarter ended October 1, 2010 by business
segment are as follows:
| Government | ||||||||||||||||
| RF | Communications | Broadcast | ||||||||||||||
| Communications | Systems | Communications | Total | |||||||||||||
| (In millions) | ||||||||||||||||
|
Balance at July 2, 2010 — net of impairment losses
|
$ | 422.6 | $ | 492.4 | $ | 661.2 | $ | 1,576.2 | ||||||||
|
Goodwill acquired during the period
|
— | 356.5 | — | 356.5 | ||||||||||||
|
Currency translation adjustments
|
0.2 | 0.1 | 3.2 | 3.5 | ||||||||||||
|
|
||||||||||||||||
|
Balance at October 1, 2010 — net of impairment losses
|
$ | 422.8 | $ | 849.0 | $ | 664.4 | $ | 1,936.2 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Balance at October 1, 2010 — before impairment losses
|
$ | 422.8 | $ | 849.0 | $ | 825.3 | $ | 2,097.1 | ||||||||
|
Accumulated impairment losses
|
— | — | (160.9 | ) | (160.9 | ) | ||||||||||
|
|
||||||||||||||||
|
Balance at October 1, 2010 — net of impairment losses
|
$ | 422.8 | $ | 849.0 | $ | 664.4 | $ | 1,936.2 | ||||||||
|
|
||||||||||||||||
The
goodwill resulting from the acquisition of CapRock was associated
primarily with their
market presence and leading position, growth opportunities in the market in which the
acquired company operated, experienced work force and established operating infrastructure.
In
the table above, the accumulated impairment losses in our Broadcast
Communications segment were recorded in the fourth quarter of fiscal
2009.
We have identifiable intangible assets related primarily to customer relationships and
technology acquired through acquisitions. The unamortized balance of identifiable intangible assets
on our accompanying Condensed Consolidated Balance Sheet was $412.9 million and $297.8 million at
October 1, 2010 and July 2, 2010, respectively. Amortization expense related to identifiable
intangible assets for the quarters ended October 1, 2010 and October 2, 2009 was $15.3 million and
$14.2 million, respectively. The estimated amortization expense related to identifiable intangible
assets for the remaining three quarters of fiscal 2011 is $47.8 million and for the five fiscal
years following fiscal 2011 and, in total, thereafter is: $63.5 million in fiscal 2012,
$60.2 million in fiscal 2013, $50.3 million in fiscal 2014, $48.5 million in fiscal 2015, $35.6
million in fiscal 2016 and $107.0 million thereafter.
Note I — Credit Arrangements
On
September 29, 2010, we entered into a $300 million senior unsecured 364-day revolving credit
agreement (the “364-Day Revolving Credit Agreement”) with a syndicate of lenders. The 364-Day
Revolving Credit Agreement provides for the extension of credit to us in the form of revolving
loans at any time and from time to time during the term of the 364-Day Revolving Credit Agreement,
in an aggregate principal amount at any time outstanding not to exceed $300 million. Borrowings
under the 364-Day Revolving Credit Agreement will be denominated in U.S. Dollars. The 364-Day
Revolving Credit Agreement may be used for working capital and other general corporate purposes
(excluding hostile acquisitions) and may also be used to support any commercial paper that we may
issue.
At our election, borrowings under the 364-Day Revolving Credit Agreement will bear interest
either at LIBOR plus an applicable margin or at the base rate plus an applicable margin. The
interest rate margin over LIBOR, initially set at 1.75 percent, may increase (to a maximum amount
of 2.25 percent) or decrease (to a minimum amount of 1.25 percent) based on changes in the ratings
of our senior unsecured long-term debt securities (“Senior Debt Ratings”). The base rate is a
fluctuating rate equal to the highest of (i) the federal funds rate plus 0.50 percent, (ii)
SunTrust Bank’s publicly announced prime lending rate for U.S. Dollars or (iii) LIBOR for an
interest period of one month plus 1.00 percent. The interest rate margin over the base rate,
initially set at 0.75 percent, may increase (to a maximum amount of 1.25 percent) or decrease (to a
minimum amount of 0.25 percent) based on our Senior Debt Ratings.
The
364-Day Revolving Credit Agreement contains certain customary covenants, including covenants
limiting: certain liens on our assets; certain mergers, consolidations or sales of assets; certain
sale and leaseback transactions; certain vendor financing investments; and certain investments in
unrestricted subsidiaries. The 364-Day Revolving Credit Agreement also requires that we not permit
our ratio of consolidated total indebtedness to total capital, each as defined, to be greater than
0.60:1.00 and not permit our ratio of consolidated EBITDA to consolidated net interest expense,
each as defined, to be less than 3.00:1.00 (measured on the last day of each fiscal quarter for
the rolling four-quarter period then ending). We were in compliance with the covenants in the
364-Day Revolving Credit Agreement in the first quarter of fiscal 2011. The 364-Day Revolving
Credit Agreement contains certain events of
8
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default, including: failure to make payments; failure to perform or observe terms, covenants
and agreements; material inaccuracy of any representation or warranty; payment default under other
indebtedness with a principal amount in excess of $75 million, other default under such other
indebtedness that permits acceleration of such indebtedness, or acceleration of such other
indebtedness; occurrence of one or more final judgments or orders for the payment of money in
excess of $75 million that remain unsatisfied; incurrence of certain ERISA liability in excess of
$75 million; any bankruptcy or insolvency; or a change of control, including if a person or group
becomes the beneficial owner of 25 percent or more of our voting stock. If an event of default
occurs the lenders may, among other things, terminate their commitments and declare all outstanding
borrowings to be immediately due and payable together with accrued interest and fees. All amounts
borrowed or outstanding under the 364-Day Revolving Credit Agreement are due and mature on
September 28, 2011, unless the commitments are terminated earlier either at our request or if
certain events of default occur. At October 1, 2010, we had no borrowings outstanding under the
364-Day Revolving Credit Agreement.
For a description of our other credit arrangements, see the “Capital Structure and Resources”
discussion in Part I. Item 2 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this Report.
Note J — Accrued Warranties
Changes in our warranty liability, which is included as a component of the “Other accrued
items” and “Other long-term liabilities” line items in the accompanying Condensed Consolidated
Balance Sheet (Unaudited), during the quarter ended October 1, 2010 were as follows:
| (In millions) | ||||
|
Balance at July 2, 2010
|
$ | 73.1 | ||
|
Warranty provision for sales made during the quarter ended October 1, 2010
|
5.7 | |||
|
Settlements made during the quarter ended October 1, 2010
|
(17.0 | ) | ||
|
Other adjustments to the warranty liability, including those for acquisitions and foreign
currency translation, during the quarter ended October 1, 2010
|
0.1 | |||
|
|
||||
|
Balance at October 1, 2010
|
$ | 61.9 | ||
|
|
||||
Note K — Net Income Per Share
The calculations of net income per share are as follows:
| Quarter Ended | ||||||||
| October 1, | October 2, | |||||||
| 2010 | 2009 | |||||||
| (In millions, except per share | ||||||||
| amounts) | ||||||||
|
Net income
|
$ | 163.9 | $ | 104.5 | ||||
|
Adjustments for participating securities outstanding
|
(2.0 | ) | (1.0 | ) | ||||
|
|
||||||||
|
Net income used in basic and diluted common share calculations (A)
|
$ | 161.9 | $ | 103.5 | ||||
|
|
||||||||
|
|
||||||||
|
Basic weighted average common shares outstanding (B)
|
126.8 | 130.8 | ||||||
|
Impact of dilutive stock options
|
0.9 | 0.6 | ||||||
|
|
||||||||
|
Diluted weighted average common shares outstanding (C)
|
127.7 | 131.4 | ||||||
|
|
||||||||
|
|
||||||||
|
Net income per basic share (A)/(B)
|
$ | 1.28 | $ | 0.79 | ||||
|
Net income per diluted share (A)/(C)
|
$ | 1.27 | $ | 0.79 | ||||
Employee stock options to purchase approximately 2,806,312 and 4,696,082 shares of our common
stock were outstanding at October 1, 2010 and October 2, 2009, respectively, but were not included
in the calculations of net income per diluted share because the effect would have been antidilutive
as the options’ exercise prices exceeded the average market price.
Note L — Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in the principal market (or most advantageous market, in the absence of a principal
market) for the asset or liability in an orderly transaction between market
9
Table of Contents
participants at the measurement date. Further, entities are required to maximize the use of
observable inputs and minimize the use of unobservable inputs in measuring fair value, and to
utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value.
The three levels of inputs used to measure fair value are as follows:
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. | ||
| • | Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means. | ||
| • | Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. |
The following table represents the fair value hierarchy of our assets and liabilities measured
at fair value on a recurring basis (at least annually) as of October 1, 2010:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In millions) | ||||||||||||||||
|
Assets
|
||||||||||||||||
|
Marketable equity securities (1)
|
$ | 3.3 | $ | — | $ | — | $ | 3.3 | ||||||||
|
Deferred compensation plan investments: (2)
|
||||||||||||||||
|
Money market fund
|
27.6 | — | — | 27.6 | ||||||||||||
|
Stock fund
|
34.4 | — | — | 34.4 | ||||||||||||
|
Equity security
|
14.9 | — | — | 14.9 | ||||||||||||
|
Foreign currency forward contracts (3)
|
— | 1.3 | — | 1.3 | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
Deferred compensation plans (4)
|
73.4 | — | — | 73.4 | ||||||||||||
|
Foreign currency forward contracts (5)
|
— | 1.8 | — | 1.8 | ||||||||||||
| (1) | Represents investments classified as securities available-for-sale, which we include in the “Other current assets” line item in the accompanying Condensed Consolidated Balance Sheet (Unaudited). | |
| (2) | Represents investments held in a Rabbi Trust associated with our non-qualified deferred compensation plans, which we include in the “Other current assets” and “Other non-current assets” line items in the accompanying Condensed Consolidated Balance Sheet (Unaudited). | |
| (3) | Includes derivatives designated as hedging instruments, which we include in the “Other current assets” line item in the accompanying Condensed Consolidated Balance Sheet (Unaudited). The fair value of these contracts was measured using a market approach based on quoted foreign currency forward exchange rates for contracts with similar maturities. | |
| (4) | Primarily represents obligations to pay benefits under certain non-qualified deferred compensation plans, which we include in the “Compensation and benefits” and “Other long-term liabilities” line items in the accompanying Condensed Consolidated Balance Sheet (Unaudited). Under these plans, participants designate investment options (including money market, stock and fixed-income funds), which serve as the basis for measurement of the notional value of their accounts. | |
| (5) | Includes derivatives designated as hedging instruments, which we include in the “Other accrued items” line item in the accompanying Condensed Consolidated Balance Sheet (Unaudited). The fair value of these contracts was measured using a market approach based on quoted foreign currency forward exchange rates for contracts with similar maturities. |
Assets and liabilities that were measured at fair value on a nonrecurring basis were not
material during the quarters ended October 1, 2010 or October 2, 2009.
10
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The following table represents the carrying amounts and estimated fair values of our
significant financial instruments that are not measured at fair value (carrying amounts of other
financial instruments not listed in the table below approximate fair value due to the short-term
nature of those items):
| October 1, 2010 | July 2, 2010 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| (In millions) | ||||||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Long-term debt (including current portion) (1)
|
$ | 1,177.1 | $ | 1,363.6 | $ | 1,177.3 | $ | 1,301.8 | ||||||||
| (1) | The estimated fair value was measured using a market approach based on quoted market prices for our debt traded in the secondary market. |
Note M — Derivative Instruments and Hedging Activities
In the normal course of doing business, we are exposed to global market risks, including the
effect of changes in foreign currency exchange rates. We use derivative instruments to manage our
exposure to such risks and formally document all relationships between hedging instruments and
hedged items, as well as the risk-management objective and strategy for undertaking hedge
transactions. We recognize all derivatives in the accompanying Condensed Consolidated Balance Sheet
(Unaudited) at fair value. We do not hold or issue derivatives for trading purposes.
At October 1, 2010, we had open foreign currency forward contracts with a notional amount of
$79.9 million, of which $43.8 million were classified as cash flow hedges and $36.1 million were
classified as fair value hedges. This compares with open foreign currency forward contracts with a
notional amount of $46.5 million at July 2, 2010, of which $16.2 million were classified as cash
flow hedges and $30.3 million were classified as fair value hedges. At October 1, 2010, contract
expiration dates ranged from less than 1 month to 9 months with a weighted average contract life of
4 months.
Balance Sheet Hedges
To manage the exposure in our balance sheet to risks from changes in foreign currency exchange
rates, we implement fair value hedges. More specifically, we use foreign currency forward contracts
and options to hedge certain balance sheet items, including foreign currency denominated accounts
receivable and inventory. Changes in the value of the derivatives and the related hedged items are
reflected in earnings, in the “Cost of product sales and services” line item in the accompanying
Condensed Consolidated Statement of Income (Unaudited). As of October 1, 2010, we had outstanding
foreign currency forward contracts denominated in the Euro, British Pound and Canadian Dollar to
hedge certain balance sheet items. The net gains or losses on foreign currency forward contracts
designated as fair value hedges for the quarter ended October 1, 2010 were not material. In
addition, no amounts were recognized in earnings in the quarter ended October 1, 2010 related to
hedged firm commitments that no longer qualify as fair value hedges.
Cash Flow Hedges
To manage our exposure to currency risk and market fluctuation risk associated with
anticipated cash flows that are probable of occurring in the future, we implement cash flow hedges.
More specifically, we use foreign currency forward contracts and options to hedge off-balance sheet
future foreign currency commitments, including purchase commitments from suppliers, future
committed sales to customers and intercompany transactions. These derivatives are primarily being
used to hedge currency exposures from cash flows anticipated in our RF Communications segment
related to programs in the U.K. We also have hedged U.S. dollar payments to suppliers to maintain
our anticipated profit margins in our international operations. As of October 1, 2010, we had
outstanding foreign currency forward contracts denominated in the Euro, British Pound and Canadian
Dollar to hedge certain forecasted transactions.
These derivatives have only nominal intrinsic value at the time of purchase and have a high
degree of correlation to the anticipated cash flows they are designated to hedge. Hedge
effectiveness is determined by the correlation of the anticipated cash flows and the maturity dates
of the derivatives used to hedge these cash flows. These financial instruments are marked-to-market
using forward prices and fair value quotes with the offset to other comprehensive income, net of
hedge ineffectiveness. Gains and losses from other comprehensive income are reclassified to
earnings when the related hedged item is recognized in earnings. The ineffective portion of a
derivative’s change in fair value is immediately recognized in earnings. The cash flow impact of
our derivatives is included in the same category in the accompanying Condensed Consolidated
Statement of Cash Flows (Unaudited) as the cash flows of the item being hedged.
11
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The amount of gains or losses from cash flow hedges recognized in earnings or recorded in
other comprehensive income, including
gains or losses related to hedge ineffectiveness, was not material in the quarters ended
October 1, 2010 or October 2, 2009. We do not expect the amount of gains or losses recognized in
the “Accumulated other comprehensive loss” line item in the accompanying Condensed Consolidated
Balance Sheet (Unaudited) as of October 1, 2010 that will be reclassified to earnings from other
comprehensive income within the next 12 months to be material.
Credit Risk
We are exposed to credit losses in the event of non-performance by counterparties to these
financial instruments, but we do not expect any of the counterparties to fail to meet their
obligations. To manage credit risks, we select counterparties based on credit ratings, limit our
exposure to any single counterparty under defined guidelines and monitor the market position with
each counterparty.
See
Note L — Fair Value Measurements
in these Notes for the amount of the assets and
liabilities related to these foreign currency forward contracts in the accompanying Condensed
Consolidated Balance Sheet (Unaudited) as of October 1, 2010, and see
Note D — Comprehensive Income
and Accumulated Other Comprehensive Loss
in these Notes for additional information on changes in
accumulated other comprehensive loss for the quarter ended October 1, 2010.
Note N — Business Segments
We structure our operations primarily around the products and services we sell and the markets
we serve, and we report the financial results of our operations in the following three business
segments — RF Communications, Government Communications Systems and Broadcast Communications. Our
RF Communications segment is a global supplier of secure tactical radio communications and embedded
high-grade encryption solutions for military and government organizations and also of secure
communications systems and equipment for public safety, utility and transportation markets. Our
Government Communications Systems segment conducts advanced research studies and produces,
integrates and supports highly reliable, net-centric communications and information technology that
solve the mission-critical challenges of our defense, intelligence and civilian U.S. Government
customers, as well as those in the energy and maritime industries. Our Broadcast Communications
segment serves the global digital and analog media markets, providing workflow, infrastructure and
networking products and solutions; media solutions; and television and radio transmission equipment
and systems. Within each of our business segments, there are multiple program areas and product
lines that aggregate into our three business segments described above.
The accounting policies of our business segments are the same as those described in Note 1:
“Significant Accounting Policies” in our Fiscal 2010 Form 10-K. We evaluate each segment’s
performance based on its “operating income (loss),” which we define as profit or loss from
operations before income taxes excluding interest income and expense, royalties and related
intellectual property expenses, equity income and gains or losses from securities and other
investments. Intersegment sales among our segments are transferred at cost to the buying segment
and the sourcing segment recognizes a normal profit that is eliminated. The “Corporate
eliminations” line item in the tables below represents the elimination of intersegment sales and
their related profits. The “Unallocated corporate expense” line item in the tables below represents
the portion of corporate expenses not allocated to the business segments.
Total assets by business segment are summarized below:
| October 1, | July 2, | |||||||
| 2010 | 2010 | |||||||
| (In millions) | ||||||||
|
Total Assets
|
||||||||
|
RF Communications
|
$ | 1,404.2 | $ | 1,468.5 | ||||
|
Government Communications Systems
|
2,124.3 | 1,537.7 | ||||||
|
Broadcast Communications
|
1,050.3 | 1,057.0 | ||||||
|
Corporate
|
627.9 | 680.4 | ||||||
|
|
||||||||
|
|
$ | 5,206.7 | $ | 4,743.6 | ||||
|
|
||||||||
12
Table of Contents
Segment revenue, segment operating income (loss) and a reconciliation of segment operating
income (loss) to total income before income taxes follow:
| Quarter Ended | ||||||||
| October 1, | October 2, | |||||||
| 2010 | 2009 | |||||||
| (In millions) | ||||||||
|
Revenue
|
||||||||
|
RF Communications
|
$ | 566.5 | $ | 423.7 | ||||
|
Government Communications Systems
|
735.5 | 667.7 | ||||||
|
Broadcast Communications
|
121.6 | 118.7 | ||||||
|
Corporate eliminations
|
(18.2 | ) | (7.1 | ) | ||||
|
|
||||||||
|
|
$ | 1,405.4 | $ | 1,203.0 | ||||
|
|
||||||||
|
|
||||||||
|
Income Before Income Taxes
|
||||||||
|
Segment Operating Income (Loss):
|
||||||||
|
RF Communications (1)
|
$ | 228.5 | $ | 114.0 | ||||
|
Government Communications Systems (2)
|
78.3 | 85.7 | ||||||
|
Broadcast Communications
|
(8.6 | ) | 0.3 | |||||
|
Unallocated corporate expense
|
(25.7 | ) | (19.2 | ) | ||||
|
Corporate eliminations
|
(3.4 | ) | (2.0 | ) | ||||
|
Non-operating loss (3)
|
(0.4 | ) | (0.2 | ) | ||||
|
Net interest expense
|
(17.2 | ) | (17.8 | ) | ||||
|
|
||||||||
|
|
$ | 251.5 | $ | 160.8 | ||||
|
|
||||||||
| (1) | The operating income in our RF Communications segment in the quarter ended October 2, 2009 included charges of $6.5 million for integration costs and the impact of a step up in inventory associated with our acquisition of the Tyco Electronics wireless systems business, formerly known as M/A-COM (“Wireless Systems”). | |
| (2) | The operating income in our Government Communications Systems segment in the quarter ended October 1, 2010 included charges of $2.0 million for integration and other costs associated with our acquisition of CapRock. | |
| (3) | “Non-operating loss” includes equity investment income (loss), royalties and related intellectual property expenses, gains and losses on sales of investments and securities available-for-sale, and impairments of investments and securities available-for-sale. |
13
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Harris Corporation
We have reviewed the condensed consolidated balance sheet of Harris Corporation as of October
1, 2010, and the related condensed consolidated statements of income for the quarters ended October
1, 2010 and October 2, 2009, and the condensed consolidated statements of cash flows for the
quarters ended October 1, 2010 and October 2, 2009. These financial statements are the
responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
condensed consolidated financial statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Harris Corporation as of July 2,
2010, and the related consolidated statements of income, cash flows, and comprehensive income and
equity for the year then ended, not presented herein, and in our report dated August 30, 2010, we
expressed an unqualified opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet as of July 2, 2010,
is fairly stated, in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Ernst & Young LLP
Certified Public Accountants
Certified Public Accountants
Boca Raton, Florida
October 28, 2010
October 28, 2010
14
Table of Contents
OVERVIEW
The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an
understanding of Harris. MD&A is provided as a supplement to, should be read in conjunction with,
and is qualified in its entirety by reference to, our Condensed Consolidated Financial Statements
(Unaudited) and accompanying Notes appearing elsewhere in this Report. In addition, reference
should be made to our audited Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements and Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in our Fiscal 2010 Form 10-K. Except for the
historical information contained herein, the discussions in MD&A contain forward-looking statements
that involve risks and uncertainties. Our future results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below in MD&A under “Forward-Looking Statements and Factors that May
Affect Future Results.”
The following is a list of the sections of MD&A, together with our perspective on the contents
of these sections of MD&A, which we hope will assist in reading these pages:
| • | Results of Operations - an analysis of our consolidated results of operations and of the results in each of our three business segments, to the extent the business segment operating results are helpful to an understanding of our business as a whole, for the periods presented in our Condensed Consolidated Financial Statements (Unaudited). | ||
| • | Liquidity and Capital Resources - an analysis of cash flows, common stock repurchases, dividends, capital structure and resources, off-balance sheet arrangements and commercial commitments and contractual obligations. | ||
| • | Critical Accounting Policies and Estimates - information about accounting policies that require critical judgments and estimates and about accounting standards that have been issued but are not yet effective for us and their potential impact. | ||
| • | Forward-Looking Statements and Factors that May Affect Future Results - cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections. |
RESULTS OF OPERATIONS
Highlights
Operations results for the first quarter of fiscal 2011 include:
| • | Revenue increased 16.8 percent to $1,405.4 million in the first quarter of fiscal 2011 from $1,203.0 million in the first quarter of fiscal 2010; | ||
| • | Net income increased to $163.9 million, or $1.27 per diluted share, in the first quarter of fiscal 2011 from $104.5 million, or $0.79 per diluted share, in the first quarter of fiscal 2010; | ||
| • | Our RF Communications segment revenue increased 33.7 percent to $566.5 million and operating income increased 100.4 percent to $228.5 million in the first quarter of fiscal 2011 compared with the first quarter of fiscal 2010; | ||
| • | Our Government Communications Systems segment revenue increased 10.2 percent to $735.5 million and operating income decreased 8.6 percent to $78.3 million in the first quarter of fiscal 2011 compared with the first quarter of fiscal 2010. Fiscal 2011 results benefited from our acquisition of CapRock in the first quarter of fiscal 2011, and operating income in the first quarter of fiscal 2011 included $2.0 million of acquisition-related charges; | ||
| • | Our Broadcast Communications segment revenue increased 2.4 percent to $121.6 million in the first quarter of fiscal 2011 compared with the first quarter of fiscal 2010, and there was an operating loss of $8.6 million in the first quarter of fiscal 2011 compared with operating income of $0.3 million in the first quarter of fiscal 2010; and | ||
| • | Net cash provided by operating activities was $294.9 million in the first quarter of fiscal 2011 compared with $134.5 million in the first quarter of fiscal 2010, an increase of 119.3 percent. |
15
Table of Contents
Consolidated Results of Operations
Revenue and Net Income
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions, except per share amounts) | ||||||||||||
|
Revenue
|
$ | 1,405.4 | $ | 1,203.0 | 16.8 | % | ||||||
|
Net income
|
$ | 163.9 | $ | 104.5 | 56.8 | % | ||||||
|
% of revenue
|
11.7 | % | 8.7 | % | ||||||||
|
Net income per diluted common share
|
$ | 1.27 | $ | 0.79 | 60.8 | % | ||||||
Our revenue in the first quarter of fiscal 2011 was $1,405.4 million, an increase of 16.8
percent compared with the first quarter of fiscal 2010. Revenue increased by 33.7 percent, 10.2
percent and 2.4 percent in our RF Communications, Government Communications Systems and Broadcast
Communications segments, respectively. RF Communications segment revenue was driven primarily by
deliveries for the U.S. Department of Defense’s mine resistant ambush protected vehicle
(“MRAP”)
and mine resistant ambush protected all-terrain vehicle
(“M-ATV”) programs. Government Communications Systems segment revenue benefited from the ramp-up on the recently awarded Geostationary Operational Environmental Satellite — Series R (“GOES-R”) Ground and Antenna Segment weather programs for the National Oceanic and Atmospheric Administration (“NOAA”) and from our acquisition of CapRock, partially offset by the continued winding down of the Field Data Collection Automation (“FDCA”) program for the U.S. Census Bureau, as expected, and lower revenue on several classified programs.
(“M-ATV”) programs. Government Communications Systems segment revenue benefited from the ramp-up on the recently awarded Geostationary Operational Environmental Satellite — Series R (“GOES-R”) Ground and Antenna Segment weather programs for the National Oceanic and Atmospheric Administration (“NOAA”) and from our acquisition of CapRock, partially offset by the continued winding down of the Field Data Collection Automation (“FDCA”) program for the U.S. Census Bureau, as expected, and lower revenue on several classified programs.
Net income in the first quarter of fiscal 2011 was $163.9 million, or $1.27 per diluted common
share, compared with $104.5 million, or $0.79 per diluted common share, in the first quarter of
fiscal 2010. The increase in net income was primarily due to significantly higher operating income
in our RF Communications segment. RF Communications segment operating income increased by $114.5
million, or 100.4 percent, in the first quarter of fiscal 2011 compared with the first quarter of
fiscal 2010, while our Government Communications Systems segment operating income decreased by $7.4
million, or 8.6 percent, and our Broadcast Communications segment had an operating loss of $8.6
million.
Unallocated corporate expense in the first quarter of fiscal 2011 was $25.7 million compared
with $19.2 million in the first quarter of fiscal 2010.
See the “Discussion of Business Segment Results of Operations” and “Unallocated Corporate
Expense and Corporate Eliminations” discussions below in this MD&A for further information.
Gross Margin
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Revenue
|
$ | 1,405.4 | $ | 1,203.0 | 16.8 | % | ||||||
|
Cost of product sales and services
|
(881.1 | ) | (812.1 | ) | 8.5 | % | ||||||
|
Gross margin
|
$ | 524.3 | $ | 390.9 | 34.1 | % | ||||||
|
% of revenue
|
37.3 | % | 32.5 | % | ||||||||
Our gross margin (revenue less cost of product sales and services) as a percentage of revenue
in the first quarter of fiscal 2011 was 37.3 percent compared with 32.5 percent in the first
quarter of fiscal 2010. The increase in gross margin as a percentage of revenue in the first
quarter of fiscal 2011 was primarily due to higher gross margins in our RF Communications segment
as well as a higher percentage of our overall sales that was generated by this higher-margin
segment.
See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A
for further information.
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Table of Contents
Engineering, Selling and Administrative Expenses
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Engineering, selling and administrative expenses
|
$ | 255.2 | $ | 212.1 | 20.3 | % | ||||||
|
% of revenue
|
18.2 | % | 17.6 | % | ||||||||
Our engineering, selling and administrative (“ESA”) expenses increased to $255.2 million in
the first quarter of fiscal 2011 from $212.1 million in the first quarter of fiscal 2010. As a
percentage of revenue, ESA expenses were 18.2 percent in the first quarter of fiscal 2011 compared
with 17.6 percent in the first quarter of fiscal 2010. The increase in ESA expenses and ESA
expenses as a percentage of revenue was primarily due to our acquisition of CapRock during the
first quarter of fiscal 2011 (including $2.0 million of acquisition-related charges) and continued
investment in product development and the pursuit of new growth opportunities.
See the “Discussion of Business Segment Results of Operations” discussion below in this MD&A
for further information.
Non-Operating Loss
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Non-operating loss
|
$ | (0.4 | ) | $ | (0.2 | ) | 100.0 | % | ||||
We had a non-operating loss of $0.4 million in the first quarter of fiscal 2011 compared with
a non-operating loss of $0.2 million in the first quarter of fiscal 2010.
Interest Income and Expense
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Interest income
|
$ | 0.6 | $ | 0.4 | 50.0 | % | ||||||
|
Interest expense
|
(17.8 | ) | (18.2 | ) | (2.2 | )% | ||||||
Our interest income increased to $0.6 million in the first quarter of fiscal 2011 from $0.4
million in the first quarter of fiscal 2010 due to higher balances of cash and cash equivalents.
Our interest expense decreased to $17.8 million in the first quarter of fiscal 2011 from $18.2
million in the first quarter of fiscal 2010 due to lower interest rates incurred on our short-term
borrowings, partially offset by higher levels of short-term borrowings related to our acquisition
of CapRock during the first quarter of fiscal 2011.
Income Taxes
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Income taxes
|
$ | 87.6 | $ | 56.3 | 55.6 | % | ||||||
|
Effective tax rate
|
34.8 | % | 35.0 | % | ||||||||
Our effective tax rate (income taxes as a percentage of income before income taxes) was 34.8
percent for the first quarter of fiscal 2011 compared with 35.0 percent for the first quarter of
fiscal 2010.
17
Table of Contents
Discussion of Business Segment Results of Operations
RF Communications Segment
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Revenue
|
$ | 566.5 | $ | 423.7 | 33.7 | % | ||||||
|
Segment operating income
|
228.5 | 114.0 | 100.4 | % | ||||||||
|
% of revenue
|
40.3 | % | 26.9 | % | ||||||||
RF Communications segment revenue in the first quarter of fiscal 2011 was $566.5 million,
including $446.1 million in our Tactical Radio Communications business and $120.4 million in our
Public Safety and Professional Communications business, compared with
$423.7 million in the first quarter of fiscal 2010. The increase in RF Communications segment revenue was
driven primarily by deliveries for the U.S. Department of Defense’s MRAP and M-ATV programs.
Operating income was $228.5 million in the first quarter of fiscal 2011 compared with $114.0
million in the first quarter of fiscal 2010. Operating income as a percentage of revenue was 40.3
percent in the first quarter of fiscal 2011 compared with 26.9 percent in the first quarter of
fiscal 2010. The increase in operating income and operating income as a percentage of revenue was
primarily due to a significant increase in revenue in the first quarter of fiscal 2011 compared
with the first quarter of fiscal 2010, a favorable product mix and operational efficiencies.
RF Communications segment orders in the first quarter of fiscal 2011 were $472 million,
including $394 million in our Tactical Radio Communications business and $78 million in our Public
Safety and Professional Communications business. At the end of the first quarter of fiscal 2011,
total backlog for our RF Communications segment was $1.67 billion, including $1.19 billion in our
Tactical Radio Communications business and $484 million in our Public Safety and Professional
Communications business.
During the first quarter of fiscal 2011, new orders in our Tactical Radio Communications
business were strong in the international market. This reflected continuing strong international
demand and a significant uptake in customer adoption of our new Falcon III
®
radios.
International orders in the first quarter of fiscal 2011 included three orders totaling $69 million
from an Asian country for the next phase of a comprehensive, multi-level Command, Control,
Communications, Computers and Intelligence (“C4I”) system.
Orders in our Tactical Radio Communications business in the U.S. market in the
first quarter of fiscal 2011 included orders for Falcon III and Falcon II
®
radios for
the U.S. Navy, AN/PRC-117G vehicular adaptor units for the U.S. Marine Corps, and several new
products including high-capacity line-of-sight Internet Protocol (“IP”) data radios, KGV-72 blue
force tracking encryption devices, and HF Loop antennas for improved communications on the move.
In our Public Safety and Professional Communications business, we received a $9 million
contract from Ontario County, New York, to upgrade its public safety radio communications system
with a Harris P25
IP
(Project 25 to the power of IP) solution. Our Unity
®
XG-100P portable full-spectrum multiband radio and its suite of advanced features will be used for
enhanced interoperability.
Following the close of the first quarter of fiscal 2011, we were selected by Alberta Solicitor
General and Public Security as the preferred vendor for the design, construction, implementation
and operation of the province-wide Alberta First Responders Radio Communications System. We have
been engaged in due diligence activities as defined in the Request for Proposals. Award of the
contract is subject to successful completion of due diligence activities, finalization of contract
documentation satisfactory to Alberta Solicitor General and Public Security and approval of the
finalized contract by the Alberta Treasury Board. This system, which will cover 256,000 square
miles, will be the critical communications link among Alberta’s
first responders.
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Table of Contents
Government Communications Systems Segment
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Revenue
|
$ | 735.5 | $ | 667.7 | 10.2 | % | ||||||
|
Segment operating income
|
78.3 | 85.7 | (8.6 | )% | ||||||||
|
% of revenue
|
10.6 | % | 12.8 | % | ||||||||
Government Communications Systems segment revenue in the first quarter of fiscal 2011
increased 10.2 percent to $735.5 million compared with $667.7 million in the first quarter of
fiscal 2010. Operating income was $78.3 million in the first quarter of fiscal 2011 compared with
$85.7 million in the first quarter of fiscal 2010. Operating income as a percentage of revenue in
the first quarter of fiscal 2011 was 10.6 percent compared with 12.8 percent in the first quarter
of fiscal 2010. Operating income in the first quarter of fiscal 2010
benefited from favorable award fees for the completion
of the equipment build-out phase on the FAA Telecommunications Infrastructure (“FTI”) program for
the Federal Aviation Administration (“FAA”).
Revenue growth in the first quarter of fiscal 2011 compared with the first quarter of fiscal
2010 was driven primarily by the ramp-up on the GOES-R Ground and Antenna Segment weather programs,
partially offset by the continued winding down of the FDCA program, as expected, and lower revenue on
several classified programs.
Revenue also benefited from the recent acquisition of CapRock, which was completed on July 30,
2010. As discussed further in
Note C — Business
Combinations
in the Notes, CapRock is a global provider of
managed satellite communications solutions serving remote and harsh
environments for the energy, government and maritime industries. Our
first quarter of fiscal 2011 results of operations include revenue of $64.6 million and a
pre-tax loss of $0.4 million (including $2.0 million of acquisition-related charges) associated
with CapRock for the two-month period during the quarter following the date of acquisition.
Major awards in the first quarter of fiscal 2011 in our Government Communications Systems
segment included a contract, potentially worth $130 million, to supply antennas and control systems
for NOAA’s GOES-R program; a contract, potentially worth $77 million, by the U.S. Army Materiel
Command (“AMC”) to provide Information Technology (“IT”) infrastructure and follow-on operations
and maintenance support for the relocation of AMC Headquarters building to Huntsville, Alabama; a
follow-on contract, potentially worth $64 million, for the U.S. Air Force Network and Space
Operations and Maintenance (“NSOM”) program; a follow-on production contract, potentially worth $55
million, to supply avionics systems for the U.S. Department of Defense F-35 Lightning II fighter
aircraft; a follow-on contract, potentially worth $40 million, for the Department of State Consular
Affairs Support Services (“CASS”) IT services program; and a contract, potentially worth $40
million, to produce telemetry modules supporting the U.S. Air Force Advanced Medium-Range
Air-to-Air Missile (“AMRAAM”).
Also during the first quarter of fiscal 2011, our Harris CapRock business was awarded four
contracts, potentially worth a total of $43 million, to provide managed network services and more
than 400 MHz of commercial satellite capacity to four separate U.S. Government agencies. The
services provided will be used to support a range of missions, including airborne intelligence,
surveillance and reconnaissance (“ISR”), tactical field-deployed communications and continuity of
operations.
Following the end of the first quarter of fiscal 2011, we were awarded a nine-year follow-on
contract, potentially worth CAD 273 million, by the Government of Canada for the CF-18 Avionics
Optimized Weapon System Support (“OWSS”) program. Under the contract, we will provide engineering
services to support the avionics systems on the CF-18 Hornet fighter aircraft.
Broadcast Communications Segment
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Revenue
|
$ | 121.6 | $ | 118.7 | 2.4 | % | ||||||
|
Segment operating income (loss)
|
(8.6 | ) | 0.3 | * | ||||||||
|
% of revenue
|
(7.1 | )% | 0.3 | % | ||||||||
| * | Not meaningful |
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Broadcast Communications segment revenue in the first quarter of fiscal 2011 was $121.6
million compared with $118.7 million in the first quarter of fiscal 2010. This segment had an
operating loss of $8.6 million in the first quarter of fiscal 2011 compared with operating income
of $0.3 million in the first quarter of fiscal 2010. The first quarter of fiscal 2011 included a
$1.0 million charge related to cost-reduction actions. We expect approximately $5 million of
cost-reduction charges in total for this segment in fiscal 2011, although we can give no assurances
concerning future cost-reduction charges.
Broadcast Communications segment orders in the first quarter of fiscal 2011 were $135.5
million compared with $110.8 million in the fourth quarter of fiscal 2010 and $124.2 million in the
first quarter of fiscal 2010. Orders in the first quarter of fiscal 2011 included an $8 million
order from Nine Network Australia for a new playout center built with our technology, including
servers, multiviewers, routers, digital asset management and automation solutions.
While operating results continued to reflect market weakness in the traditional U.S. broadcast
market and increased investment to address new media and international growth opportunities, the
book-to-bill ratio of 1.1:1 and year-over-year orders and revenue growth are encouraging signs for
our Broadcast Communications segment.
Unallocated Corporate Expense and Corporate Eliminations
| Quarter Ended | ||||||||||||
| October 1, | October 2, | % | ||||||||||
| 2010 | 2009 | Inc/(Dec) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Unallocated corporate expense
|
$ | 25.7 | $ | 19.2 | 33.9 | % | ||||||
|
Corporate Eliminations
|
3.4 | 2.0 | 70.0 | % | ||||||||
Unallocated corporate expense increased 33.9 percent to $25.7 million in the first quarter of
fiscal 2011 from $19.2 million in the first quarter of fiscal 2010, primarily due to investments
made in pursuit of new growth opportunities and higher compensation and benefit plan expenses. As a
percentage of revenue, unallocated corporate expense was 1.8 percent in the first quarter of fiscal
2011 compared with 1.6 percent in the first quarter of fiscal 2010. Corporate eliminations
increased to $3.4 million in the first quarter of fiscal 2011 from $2.0 million in the first
quarter of fiscal 2010 due to increased intersegment activity.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
| Quarter Ended | ||||||||
| October 1, | October 2, | |||||||
| 2010 | 2009 | |||||||
| (In millions) | ||||||||
|
Net cash provided by operating activities
|
$ | 294.9 | $ | 134.5 | ||||
|
Net cash used in investing activities
|
(569.4 | ) | (19.6 | ) | ||||
|
Net cash provided by (used in) financing activities
|
159.0 | (165.3 | ) | |||||
|
Effect of exchange rate changes on cash and cash equivalents
|
1.7 | 0.3 | ||||||
|
|
||||||||
|
Net decrease in cash and cash equivalents
|
(113.8 | ) | (50.1 | ) | ||||
|
Cash and cash equivalents, beginning of year
|
455.2 | 281.2 | ||||||
|
|
||||||||
|
Cash and cash equivalents, end of quarter
|
$ | 341.4 | $ | 231.1 | ||||
|
|
||||||||
Cash and Cash Equivalents:
Our cash and cash equivalents decreased $113.8 million to $341.4
million at the end of the first quarter of fiscal 2011 from $455.2 million at the end of fiscal
2010. The decrease was primarily due to $518.0 million of cash paid for acquired businesses, $55.5
million used to repurchase shares of our common stock, $37.1 million of property, plant and
equipment additions and $32.2 million used to pay cash dividends, partially offset by $294.9
million of net cash provided by operating activities and $244.1 million of net proceeds from
borrowings to partially fund our acquisition of CapRock.
Our financial position remained strong at October 1, 2010. We ended the first quarter of
fiscal 2011 with cash and cash equivalents of $341.4 million; we have no long-term debt maturing
until fiscal 2016; we have a senior unsecured $750 million revolving credit facility that expires
in September 2013 ($475.0 million of which was available to us as of October 1, 2010 as a result of
$275.0 million of short-term debt outstanding under our
commercial paper program, which was supported by such senior
unsecured revolving credit facility); we have a senior unsecured $300 million
364-day revolving credit facility that expires on September 28,
2011 (all of which was available to us as of October 1, 2010); and we do not have any material defined benefit
pension plan obligations.
20
Table of Contents
Given our current cash position, outlook for funds generated from operations, credit ratings,
available credit facilities, cash needs and debt structure, we have not experienced to date, and do
not expect to experience, any material issues with liquidity, although we can give no assurances
concerning our future liquidity.
We also currently believe that existing cash, funds generated from operations, our credit
facilities and access to the public and private debt and equity markets will be sufficient to
provide for our anticipated working capital requirements, capital expenditures and repurchases
under our share repurchase program for the next 12 months. We anticipate tax payments over the next
three years to be approximately equal to our tax expense during the same period. We anticipate that
our fiscal 2011 cash outlays may include additional strategic acquisitions. Other than those cash
outlays noted in the “Commercial Commitments and Contractual Obligations” discussion below in this
MD&A, capital expenditures, potential acquisitions and repurchases under our share repurchase
program, no other significant cash outlays are anticipated during the remainder of fiscal 2011.
There can be no assurance, however, that our business will continue to generate cash flow at
current levels, that ongoing operational improvements will be achieved, or that the cost or
availability of future borrowings, if any, under our commercial paper program or our credit
facilities or in the debt markets will not be impacted by any potential future credit and capital
markets disruptions. If we are unable to maintain cash balances or generate sufficient cash flow
from operations to service our obligations, we may be required to sell assets, reduce capital
expenditures, reduce or eliminate strategic acquisitions, reduce or terminate our share repurchase
program, reduce or eliminate dividends, refinance all or a portion of our existing debt or obtain
additional financing. Our ability to make principal payments or pay interest on or refinance our
indebtedness depends on our future performance and financial results, which, to a certain extent,
are subject to general conditions in or affecting the defense, government and broadcast
communications markets and to general economic, political, financial, competitive, legislative and
regulatory factors beyond our control.
Net cash provided by operating activities:
Our net cash provided by operating activities was
$294.9 million in the first quarter of fiscal 2011 compared with $134.5 million in the first
quarter of fiscal 2010. All of our segments had positive cash flow in the first quarter of fiscal
2011, with significant contributions received from our RF Communications and Government
Communications Systems segments. The increase in net cash provided by operating activities was
primarily due to strong operating results in our RF Communications segment and good working capital
management in our Government Communications Systems segment in the first quarter of fiscal 2011
compared with the first quarter of fiscal 2010.
Net cash used in investing activities:
Our net cash used in investing activities was $569.4
million in the first quarter of fiscal 2011 compared with $19.6 million in the first quarter of
fiscal 2010. Net cash used in investing activities in the first quarter of fiscal 2011 consisted of
$518.0 million of cash paid for our acquisition of CapRock, $37.1 million of property, plant and
equipment additions, $10.0 million of cash paid for a cost-method investment and $4.3 million of
capitalized software additions. Net cash used in investing activities in the first quarter of
fiscal 2010 consisted of $18.6 million of property, plant and equipment additions and $2.0 million
of capitalized software additions, partially offset by $1.0 million of cash adjustments related to
acquired businesses. The increase in our capital expenditures in the first quarter of fiscal 2011
compared with the first quarter of fiscal 2010 was primarily due to the build-out of a newly
acquired facility for our new Harris Cyber Integration Center and our recently acquired RF
Communications manufacturing facility. Our total capital expenditures, including capitalized
software, in fiscal 2011 are expected to be between $250 million and $275 million.
Net cash provided by (used in) financing activities:
Our net cash provided by financing
activities was $159.0 million in the first quarter of fiscal 2011 compared with net cash used in
financing activities of $165.3 million in the first quarter of fiscal 2010. Net cash provided by
financing activities in the first quarter of fiscal 2011 primarily consisted of $244.1 million of
net proceeds from borrowings to partially fund our acquisition of CapRock, partially offset by
$55.5 million used to repurchase shares of our common stock and $32.2 million used to pay cash
dividends. Net cash used in financing activities in the first quarter of fiscal 2010 primarily
consisted of $81.1 million used for repayments of borrowings, $55.3 million used to repurchase
shares of our common stock and $29.0 million used to pay cash dividends.
Common Stock Repurchases
During the first quarter of fiscal 2011, we used $50.0 million to repurchase 1,173,900 shares
of our common stock under our repurchase program at an average price per share of $42.59, including
commissions. During the first quarter of fiscal 2010, we used $50.0 million to repurchase 1,443,072
shares of our common stock under our repurchase program at an average price per share of $34.64,
including commissions. In the first quarter of fiscal 2011 and first quarter of fiscal 2010, $5.5
million and $5.3 million, respectively, in shares of our common stock were delivered to us or withheld by us to satisfy
withholding taxes on employee share-based awards. Shares repurchased by us are cancelled and
retired.
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Table of Contents
As of October 1, 2010, we have a remaining authorization to repurchase approximately $400
million in shares of our common stock under our repurchase program, which does not have a stated
expiration date. Repurchases under our repurchase program may be made through open market
purchases, private transactions, transactions structured through investment banking institutions or
any combination thereof. Share repurchases are expected to be funded with available cash. The level
of our repurchases depends on a number of factors, including our financial condition, capital
requirements, results of operations, future business prospects and other factors that our Board of
Directors may deem relevant. The timing, volume and nature of share repurchases are subject to
market conditions, applicable securities laws and other factors and are at our discretion and may
be suspended or discontinued at any time.
Additional information regarding share repurchases during the first quarter of fiscal 2011 and
our repurchase program is set forth in this Report under Part II. Item 2. “Unregistered Sales of
Equity Securities and Use of Proceeds.”
Dividends
On August 28, 2010, our Board of Directors increased the quarterly cash dividend rate on our
common stock from $.22 per share to $.25 per share, for an annualized cash dividend rate of $1.00
per share, which was our ninth consecutive annual increase in our quarterly cash dividend rate. Our
annualized cash dividend rate was $.88 per share in fiscal 2010. There can be no assurances that
our annualized cash dividend rate will continue to increase. Quarterly cash dividends are typically
paid in March, June, September and December. We currently expect that cash dividends will continue
to be paid in the near future, but we can give no assurances concerning payment of future
dividends. The declaration of dividends and the amount thereof will depend on a number of factors,
including our financial condition, capital requirements, results of operations, future business
prospects and other factors that our Board of Directors may deem relevant.
Capital Structure and Resources
364-Day Revolving Credit Agreement:
As discussed in
Note I — Credit Arrangements
in the Notes,
on September 29, 2010, we entered into the $300 million senior unsecured 364-Day Revolving Credit
Agreement with a syndicate of lenders. The 364-Day Revolving Credit
Agreement provides for the extension of credit to us in the form of revolving loans at any time and from time to time during
the term of the 364-Day Revolving Credit Agreement, in an aggregate principal amount at any time
outstanding not to exceed $300 million. Borrowings under the 364-Day Revolving Credit Agreement
will be denominated in U.S. Dollars. The 364-Day Revolving Credit Agreement may be used for working
capital and other general corporate purposes (excluding hostile acquisitions) and may also be used
to support any commercial paper that we may issue.
At our election, borrowings under the 364-Day Revolving Credit Agreement will bear interest
either at LIBOR plus an applicable margin or at the base rate plus an applicable margin. The
interest rate margin over LIBOR, initially set at 1.75 percent, may increase (to a maximum amount
of 2.25 percent) or decrease (to a minimum amount of 1.25 percent) based on changes in our Senior
Debt Ratings. The base rate is a fluctuating rate equal to the highest of (i) the federal funds
rate plus 0.50 percent, (ii) SunTrust Bank’s publicly announced prime lending rate for U.S. Dollars
or (iii) LIBOR for an interest period of one month plus 1.00 percent. The interest rate margin over
the base rate, initially set at 0.75 percent, may increase (to a maximum amount of 1.25 percent) or
decrease (to a minimum amount of 0.25 percent) based on our Senior Debt Ratings.
The
364-Day Revolving Credit Agreement contains certain customary covenants similar to the 2008 Credit
Agreement discussed below. We were in compliance with the covenants in the 364-Day Revolving Credit
Agreement in the first quarter of fiscal 2011. The 364-Day Revolving Credit Agreement contains
certain events of default similar to the 2008 Credit Agreement discussed below. If an event of
default occurs the lenders may, among other things, terminate their commitments and declare all
outstanding borrowings to be immediately due and payable together with accrued interest and fees.
All amounts borrowed or outstanding under the 364-Day Revolving Credit Agreement are due and mature
on September 28, 2011, unless the commitments are terminated earlier either at our request or if
certain events of default occur. At October 1, 2010, we had no borrowings outstanding under the
364-Day Revolving Credit Agreement.
2008 Credit Agreement:
On September 10, 2008, we entered into a five-year, senior unsecured
revolving credit agreement (the “2008 Credit Agreement”) with a syndicate of lenders. The 2008
Credit Agreement provides for the extension of credit to us in the form of revolving loans,
including swingline loans, and letters of credit at any time and from time to time during the term
of the 2008 Credit Agreement, in an aggregate principal amount at any time outstanding not to
exceed $750 million for both revolving loans and letters of credit, with a sub-limit of $50 million
for swingline loans and $125 million for letters of credit. The 2008 Credit Agreement includes a
provision pursuant to which, from time to time, we may request that the lenders in their discretion
increase the maximum amount of commitments under the 2008 Credit
22
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Agreement by an amount not to exceed $500 million.
Only consenting lenders (including new lenders reasonably acceptable to the administrative agent)
will participate in any such increase. In no event will the maximum amount of credit extensions
available under the 2008 Credit Agreement exceed $1.25 billion. The 2008 Credit Agreement may be
used for working capital and other general corporate purposes (excluding hostile acquisitions) and
to support any commercial paper that we may issue. Borrowings under the 2008 Credit Agreement may
be denominated in U.S. Dollars, Euros, Sterling and any other currency acceptable to the
administrative agent and the lenders, with a non-U.S. currency sub-limit of $150 million. We may
designate certain wholly owned subsidiaries as borrowers under the 2008 Credit Agreement, and the
obligations of any such subsidiary borrower must be guaranteed by Harris Corporation. We also may
designate certain subsidiaries as unrestricted subsidiaries, which means certain of the covenants
and representations in the 2008 Credit Agreement do not apply to such subsidiaries.
At our election, borrowings under the 2008 Credit Agreement denominated in U.S. Dollars will
bear interest either at LIBOR plus an applicable margin or at the base rate plus an applicable
margin. The interest rate margin over LIBOR, initially set at 0.50 percent, may increase (to a
maximum amount of 1.725 percent) or decrease (to a minimum of 0.385 percent) based on our Senior
Debt Ratings and on the degree of utilization under the 2008 Credit Agreement (“Utilization”). The
base rate is a fluctuating rate equal to the higher of the federal funds rate plus 0.50 percent or
SunTrust Bank’s publicly announced prime lending rate for U.S. Dollars. The interest rate margin
over the base rate is 0.00 percent, but if our Senior Debt Ratings fall to “BB+/Ba1” or below, then
the interest rate margin over the base rate will increase to either 0.225 percent or 0.725 percent
based on Utilization. Borrowings under the 2008 Credit Agreement denominated in a currency other
than U.S. Dollars will bear interest at LIBOR plus the applicable interest rate margin over LIBOR
described above. Letter of credit fees are also determined based on our Senior Debt Ratings and
Utilization.
The
2008 Credit Agreement contains certain customary covenants, including covenants limiting: certain
liens on our assets; certain mergers, consolidations or sales of assets; certain sale and leaseback
transactions; certain vendor financing investments; and certain investments in unrestricted
subsidiaries. The 2008 Credit Agreement also requires that we not permit our ratio of consolidated
total indebtedness to total capital, each as defined, to be greater
than 0.60:1.00 and not permit our ratio of consolidated EBITDA to consolidated net interest expense, each as defined, to
be less than 3.00:1.00 (measured on the last day of each fiscal quarter for the rolling
four-quarter period then ending). We were in compliance with the covenants in the 2008 Credit
Agreement in the first quarter of fiscal 2011. The 2008 Credit Agreement contains certain events of
default, including: failure to make payments; failure to perform or observe terms, covenants and
agreements; material inaccuracy of any representation or warranty; payment default under other
indebtedness with a principal amount in excess of $75 million, other default under such other
indebtedness that permits acceleration of such indebtedness, or acceleration of such other
indebtedness; occurrence of one or more final judgments or orders for the payment of money in
excess of $75 million that remain unsatisfied; incurrence of certain ERISA liability in excess of
$75 million; any bankruptcy or insolvency; or a change of control, including if a person or group
becomes the beneficial owner of 25 percent or more of our voting stock. If an event of default
occurs the lenders may, among other things, terminate their commitments and declare all outstanding
borrowings to be immediately due and payable together with accrued interest and fees. All amounts
borrowed or outstanding under the 2008 Credit Agreement are due and mature on September 10, 2013,
unless the commitments are terminated earlier either at our request or if certain events of default
occur. At October 1, 2010, we had no borrowings outstanding under the 2008 Credit Agreement, but we
had $275.0 million of short-term debt outstanding under our
commercial paper program, which was supported by the 2008 Credit Agreement.
semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus 37.5 basis points. In each case, we will pay accrued interest on the principal amount of the notes being redeemed to the redemption date. In addition, upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the notes at a price equal to 101 percent of the aggregate principal amount of the notes repurchased, plus accrued interest on the notes repurchased to the date of repurchase. We incurred $4.1 million in debt issuance costs and discounts related to the issuance of the notes, which are being amortized on a straight-line basis over the life of the notes, which approximates the effective interest rate method, and are reflected as a portion of interest expense in the accompanying Condensed Consolidated Statement of Income (Unaudited).
On December 5, 2007, we completed the issuance of $400 million in aggregate principal amount
of 5.95% Notes due December 1, 2017. Interest on the notes is payable on June 1 and December 1 of
each year. We may redeem the notes at any time in whole or, from
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time to time, in part at the “make-whole” redemption price. The “make-whole” redemption price
is equal to the greater of 100 percent of the principal amount of the notes being redeemed or the
sum of the present values of the remaining scheduled payments of the principal and interest (other
than interest accruing to the date of redemption) on the notes being redeemed, discounted to the
redemption date on a
semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus 30 basis points. In each case, we will pay accrued interest on the principal amount of the notes being redeemed to the redemption date. In addition, upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the notes at a price equal to 101 percent of the aggregate principal amount of the notes repurchased, plus accrued interest on the notes repurchased to the date of repurchase. In conjunction with the issuance of the notes, we entered into treasury lock agreements to protect against fluctuations in forecasted interest payments resulting from the issuance of ten-year, fixed-rate debt due to changes in the benchmark U.S. Treasury rate. These agreements were determined to be highly effective in offsetting changes in forecasted interest payments as a result of changes in the benchmark U.S. Treasury rate. Upon termination of these agreements on December 6, 2007, we recorded a loss of $5.5 million, net of income tax, in shareholders’ equity as a component of accumulated other comprehensive income. This loss, along with $5.0 million in debt issuance costs, is being amortized on a straight-line basis over the life of the notes, which approximates the effective interest rate method, and is reflected as a portion of interest expense in the accompanying Condensed Consolidated Statement of Income (Unaudited).
semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus 30 basis points. In each case, we will pay accrued interest on the principal amount of the notes being redeemed to the redemption date. In addition, upon a change of control combined with a below-investment-grade rating event, we may be required to make an offer to repurchase the notes at a price equal to 101 percent of the aggregate principal amount of the notes repurchased, plus accrued interest on the notes repurchased to the date of repurchase. In conjunction with the issuance of the notes, we entered into treasury lock agreements to protect against fluctuations in forecasted interest payments resulting from the issuance of ten-year, fixed-rate debt due to changes in the benchmark U.S. Treasury rate. These agreements were determined to be highly effective in offsetting changes in forecasted interest payments as a result of changes in the benchmark U.S. Treasury rate. Upon termination of these agreements on December 6, 2007, we recorded a loss of $5.5 million, net of income tax, in shareholders’ equity as a component of accumulated other comprehensive income. This loss, along with $5.0 million in debt issuance costs, is being amortized on a straight-line basis over the life of the notes, which approximates the effective interest rate method, and is reflected as a portion of interest expense in the accompanying Condensed Consolidated Statement of Income (Unaudited).
On September 20, 2005, we completed the issuance of $300 million in aggregate principal amount
of 5% Notes due October 1, 2015. Interest on the notes is payable on April 1 and October 1 of each
year. We may redeem the notes in whole, or in part, at any time at the
“make-whole” redemption price. The “make-whole” redemption price is equal to the greater of 100 percent of the principal amount of the notes being redeemed or the sum of the present values of the remaining scheduled payments of the principal and interest (other than interest accruing to the date of redemption) on the notes being redeemed, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus 15 basis points. In each case, we will pay accrued interest on the principal amount of the notes being redeemed to the redemption date. We incurred $4.1 million in debt issuance costs and discounts related to the issuance of the notes, which are being amortized on a straight-line basis over a ten-year period and reflected as a portion of interest expense in the accompanying Condensed Consolidated Statement of Income (Unaudited).
“make-whole” redemption price. The “make-whole” redemption price is equal to the greater of 100 percent of the principal amount of the notes being redeemed or the sum of the present values of the remaining scheduled payments of the principal and interest (other than interest accruing to the date of redemption) on the notes being redeemed, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as defined, plus 15 basis points. In each case, we will pay accrued interest on the principal amount of the notes being redeemed to the redemption date. We incurred $4.1 million in debt issuance costs and discounts related to the issuance of the notes, which are being amortized on a straight-line basis over a ten-year period and reflected as a portion of interest expense in the accompanying Condensed Consolidated Statement of Income (Unaudited).
In February 1998, we completed the issuance of $150 million in aggregate principal amount of
6.35% Debentures due February 1, 2028. On December 5, 2007, we repurchased and retired $25.0
million in aggregate principal amount of the debentures. On February 1, 2008, we redeemed $99.2
million in aggregate principal amount of the debentures pursuant to the procedures for redemption
at the option of the holders of the debentures. We may redeem the remaining $25.8 million in
aggregate principal amount of the debentures in whole, or in part, at any time at a pre-determined
redemption price.
In January 1996, we completed the issuance of $100 million in aggregate principal amount of 7%
Debentures due January 15, 2026. The debentures are not redeemable prior to maturity.
Other:
We have an automatically effective, universal shelf registration statement, filed with
the SEC on June 3, 2009, related to the potential future issuance of an indeterminate amount of
securities, including debt securities, preferred stock, common stock, fractional interests in
preferred stock represented by depositary shares and warrants to purchase debt securities,
preferred stock or common stock.
We expect to maintain operating ratios, fixed-charge coverage ratios and balance sheet ratios
sufficient for retention of, or improvement to, our current debt ratings. There are no assurances
that our debt ratings will not be reduced in the future. If our debt ratings are lowered below
“investment grade,” then we may not be able to issue short-term commercial paper, but may instead
need to borrow under our credit facilities or pursue other options. In addition, if our debt
ratings are lowered below “investment grade,” then we may also be required to provide cash
collateral to support outstanding performance bonds. For a discussion of such performance bonds,
see the “Commercial Commitments” discussion in Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Fiscal 2010
Form 10-K. We do not currently foresee losing our investment-grade debt ratings, but no assurances can be given. If our debt ratings were downgraded, however, it could adversely impact, among other things, our future borrowing costs and access to capital markets and our ability to receive certain types of contract awards.
Form 10-K. We do not currently foresee losing our investment-grade debt ratings, but no assurances can be given. If our debt ratings were downgraded, however, it could adversely impact, among other things, our future borrowing costs and access to capital markets and our ability to receive certain types of contract awards.
Off-Balance Sheet Arrangements
In accordance with the definition under SEC rules, any of the following qualify as off-balance
sheet arrangements:
| • | Any obligation under certain guarantee contracts; | ||
| • | A retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that |
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| serves as credit, liquidity or market risk support to that entity for such assets; | |||
| • | Any obligation, including a contingent obligation, under certain derivative instruments; and | ||
| • | Any obligation, including a contingent obligation, under a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant. |
Currently we are not participating in transactions that generate relationships with
unconsolidated entities or financial partnerships, including variable interest entities, and we do
not have any material retained or contingent interest in assets as defined above. As of October 1,
2010, we did not have material financial guarantees or other contractual commitments that are
reasonably likely to adversely affect our results of operations, financial condition or cash flows.
In addition, we are not currently a party to any related party transactions that materially affect
our results of operations, financial condition or cash flows.
We have, from time to time, divested certain of our businesses and assets. In connection with
these divestitures, we often provide representations, warranties and/or indemnities to cover
various risks and unknown liabilities, such as environmental liabilities and tax liabilities. We
cannot estimate the potential liability from such representations, warranties and indemnities
because they relate to unknown conditions. We do not believe, however, that the liabilities
relating to these representations, warranties and indemnities will have a material adverse effect
on our results of operations, financial condition or cash flows.
Due to our downsizing of certain operations pursuant to acquisitions, restructuring plans or
otherwise, certain properties leased by us have been sublet to third parties. In the event any of
these third parties vacates any of these premises, we would be legally obligated under master lease
arrangements. We believe that the financial risk of default by such sublessees is individually and
in the aggregate not material to our results of operations, financial condition or cash flows.
Commercial Commitments and Contractual Obligations
The amounts disclosed in our Fiscal 2010 Form 10-K include our commercial commitments and
contractual obligations. During the quarter ended October 1, 2010, other than additional operating
lease commitments of approximately $137 million associated with our acquisition of CapRock,
primarily with respect to satellite bandwidth, no material changes occurred in our contractual cash
obligations to repay debt, to purchase goods and services and to make payments under operating
leases or our commercial commitments and contingent liabilities on outstanding surety bonds,
letters of credit, guarantees and other arrangements as disclosed in our Fiscal 2010 Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Condensed Consolidated Financial Statements (Unaudited) and accompanying Notes are
prepared in accordance with U.S. generally accepted accounting principles. Preparing financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the
application of our accounting policies. Our significant accounting policies are described in Note
1: “Significant Accounting Policies” in our Notes to Consolidated Financial Statements included in
our Fiscal 2010 Form 10-K. Critical accounting policies and estimates are those that require
application of management’s most difficult, subjective or complex judgments, often as a result of
matters that are inherently uncertain and may change in subsequent periods. Critical accounting
policies and estimates for us include: (i) revenue recognition on development and production
contracts and contract estimates, (ii) provisions for excess and obsolete inventory losses, (iii)
impairment testing of goodwill and other intangible assets, and (iv) income taxes and tax valuation
allowances. For additional discussion of our critical accounting policies and estimates, see the
“Critical Accounting Policies and Estimates” discussion in Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in our Fiscal 2010 Form 10-K.
Impact of Recently Issued Accounting Standards
Accounting standards issued but not effective for us until after October 1, 2010 are not
expected to have a material impact on our financial position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report contains forward-looking statements that involve risks and uncertainties, as well
as assumptions that, if they do not materialize or prove correct, could cause our results to differ
materially from those expressed in or implied by such forward-looking statements. All statements
other than statements of historical fact are statements that could be deemed forward-looking
statements, including, but not limited to, statements concerning: our plans, strategies and
objectives for future operations; new products, services or developments; future economic
conditions, performance or outlook; the outcome of contingencies; the potential level of share
repurchases; the value of our contract awards and programs; expected cash flows or capital
expenditures; our beliefs or expectations; activities, events or
developments that we intend, expect,
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project, believe or anticipate will
or may occur in the future; and assumptions underlying any of the foregoing. Forward-looking
statements may be identified by their use of forward-looking terminology, such as “believes,”
“expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,”
“projects” and similar words or expressions. You should not place undue reliance on these
forward-looking statements, which reflect our management’s opinions only as of the date of the
filing of this Report and are not guarantees of future performance or actual results.
Forward-looking statements are made in reliance upon the safe harbor provisions of Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). The following are some of the factors we
believe could cause our actual results to differ materially from our historical results or our
current expectations or projections:
| • | We depend on U.S. Government customers for a significant portion of our revenue, and the loss of this relationship or a shift in U.S. Government funding priorities could have adverse consequences on our future business. | ||
| • | We depend significantly on our U.S. Government contracts, which often are only partially funded, subject to immediate termination, and heavily regulated and audited. The termination or failure to fund one or more of these contracts could have an adverse impact on our business. | ||
| • | We enter into fixed-price contracts that could subject us to losses in the event of cost overruns or a significant increase in inflation. | ||
| • | We derive a significant portion of our revenue from international operations and are subject to the risks of doing business internationally, including fluctuations in currency exchange rates. | ||
| • | Our reputation and ability to do business may be impacted by the improper conduct of our employees, agents or business partners. | ||
| • | We may not be successful in obtaining the necessary export licenses to conduct certain operations abroad, and Congress may prevent proposed sales to certain foreign governments. | ||
| • | Our future success will depend on our ability to develop new products and technologies that achieve market acceptance in our current and future markets. | ||
| • | We participate in markets that are often subject to uncertain economic conditions, which makes it difficult to estimate growth in our markets and, as a result, future income and expenditures. | ||
| • | We cannot predict the consequences of future geo-political events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our profitability. | ||
| • | We have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties. | ||
| • | Disputes with our subcontractors and the inability of our subcontractors to perform, or our key suppliers to timely deliver our components, parts or services, could cause our products to be produced in an untimely or unsatisfactory manner. | ||
| • | Third parties have claimed in the past and may claim in the future that we are infringing directly or indirectly upon their intellectual property rights, and third parties may infringe upon our intellectual property rights. | ||
| • | The outcome of litigation or arbitration in which we are involved is unpredictable and an adverse decision in any such matter could have a material adverse effect on our financial condition and results of operations. | ||
| • | We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or indemnity. | ||
| • | Changes in our effective tax rate may have an adverse effect on our results of operations. | ||
| • | The effects of the recent recession in the United States and general downturn in the global economy could have an adverse impact on our business, operating results or financial condition. | ||
| • | We have significant operations in Florida and other locations that could be materially and adversely impacted in the event of a natural disaster or other significant disruption. | ||
| • | We could be negatively impacted by a security breach, through cyber attack, cyber intrusion or otherwise, or other significant disruption of our IT networks and related systems or of those we operate for certain of our customers. | ||
| • | We rely on third parties to provide satellite bandwidth for our managed satellite communications services, and any bandwidth constraints could harm our business, financial condition and results of operations. | ||
| • | Changes in future business conditions could cause business investments and/or recorded goodwill to become impaired, resulting in substantial losses and write-downs that would reduce our results of operations. | ||
| • | We must attract and retain key employees, and failure to do so could seriously harm us. |
Additional details and discussions concerning some of the factors that could affect our
forward-looking statements or future results are set forth in our Fiscal 2010 Form 10-K under Item
1A. “Risk Factors.” The foregoing list of factors and the factors set forth in Item 1A. “Risk
Factors” included in our Fiscal 2010 Form 10-K and in Part II. Item 1A. “Risk Factors” in this
Report are not exhaustive. Additional risks and uncertainties not known to us or that we currently
believe not to be material also may adversely impact our business, results of operations, financial
position and cash flows. Should any risks or uncertainties develop into actual events, these
developments could have a material adverse effect on our business, results of operations, financial
position and cash flows. The forward-looking statements contained in this Report are made as of the
date hereof and we disclaim any intention or obligation, other than
imposed by law, to update or revise any
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forward-looking statements or
to update the reasons actual results could differ materially from those projected in the
forward-looking statements, whether as a result of new information, future events or otherwise. For
further information concerning risk factors, see Part II. Item 1A. “Risk Factors” in this Report.
In the normal course of doing business, we are exposed to the risks associated with foreign
currency exchange rates and changes in interest rates. We employ established policies and
procedures governing the use of financial instruments to manage our exposure to such risks.
Foreign Exchange and Currency:
We use foreign currency forward contracts and options to hedge
both balance sheet and off-balance sheet future foreign currency commitments. Factors that could
impact the effectiveness of our hedging programs for foreign currency include accuracy of sales
estimates, volatility of currency markets and the cost and availability of hedging instruments. A
10 percent adverse change in currency exchange rates for our foreign currency derivatives held at
October 1, 2010 would not have had a material impact on the fair value of such instruments. This
quantification of exposure to the market risk associated with foreign currency financial
instruments does not take into account the offsetting impact of changes in the fair value of our
foreign denominated assets, liabilities and firm commitments. See
Note
M — Derivative Instruments and Hedging Activities in the Notes for additional information.
M — Derivative Instruments and Hedging Activities in the Notes for additional information.
Interest Rates:
As of October 1, 2010, we had long-term debt obligations and short-term debt
under our commercial paper program subject to interest rate risk. Because the interest rates on our
long-term debt obligations are fixed, and because our long-term debt is not putable (redeemable at
the option of the holders of the debt prior to maturity), the interest rate risk associated with
this debt on our results of operations is not material. We have a short-term variable-rate
commercial paper program in place, which we may utilize to satisfy short-term cash requirements. We
can give no assurances that interest rates will not change significantly or have a material effect
on our income or cash flows over the next twelve months.
(a)
Evaluation of disclosure controls and procedures:
We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms. Our disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosures. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the possibility of
human error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can provide only reasonable assurance of achieving
their control objectives, and management necessarily is required to use its judgment in evaluating
the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15 under
the Exchange Act, as of the end of the fiscal quarter ended October 1, 2010, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial Officer. Based upon this
work and other evaluation procedures, our management, including our Chief Executive Officer and our
Chief Financial Officer, has concluded that as of the end of the fiscal quarter ended October 1,
2010 our disclosure controls and procedures were effective.
(b)
Changes in internal control:
We periodically review our internal control over financial
reporting as part of our efforts to ensure compliance with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. In addition, we routinely review our system of internal control over
financial reporting to identify potential changes to our processes and systems that may improve
controls and increase efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new, more efficient systems,
consolidating the activities of business units, migrating certain processes to our shared services
organizations, formalizing policies and procedures, improving segregation of duties and adding
additional monitoring controls. In addition, when we acquire new businesses, we incorporate our
controls and procedures into the acquired business as part of our integration activities. There
have been no changes in our internal control over financial reporting that occurred during the
fiscal quarter ended October 1, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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Harris Stratex Networks, Inc. (now known as Aviat Networks, Inc.) (“HSTX”) and certain of its
current and former officers and directors, including certain current Harris officers, were named as
defendants in a federal securities class action complaint filed on September 15, 2008 in the United
States District Court for the District of Delaware by plaintiff Norfolk County Retirement System on
behalf of an alleged class of purchasers of HSTX securities from January 29, 2007 to July 30, 2008,
including shareholders of Stratex Networks, Inc. (“Stratex”) who exchanged shares of Stratex for
shares of HSTX as part of the combination between Stratex and our former Microwave Communications
Division to form HSTX. Similar complaints were filed in the United States District Court for the
District of Delaware on October 6, 2008 and October 30, 2008. The complaints were consolidated in a
slightly expanded complaint filed on July 29, 2009 that, among other things, added Harris
Corporation as a defendant. This action relates to public disclosures made by HSTX on January 30,
2007 and July 30, 2008, which included the restatement of HSTX’s financial statements for the first
three fiscal quarters of its fiscal 2008 (the quarters ended March 28, 2008, December 28, 2007 and
September 28, 2007) and for its fiscal years ended June 29, 2007, June 30, 2006 and July 1, 2005
due to accounting errors. The consolidated complaint alleged violations of Section 10(b) and
Section 20(a) of the Exchange Act and of Rule 10b-5 promulgated thereunder, as well as violations
of Section 11 and Section 15 of the Securities Act, and sought, among other relief, determinations
that the action is a proper class action, unspecified compensatory damages and reasonable
attorneys’ fees and costs. We believe that the defendants have meritorious defenses to these
actions and the defendants intend to defend the litigation vigorously.
Investors should carefully review and consider the information regarding certain factors which
could materially affect our business, results of operations, financial condition and cash flows and
set forth under Item 1A. “Risk Factors” in our Fiscal 2010 Form 10-K. We do not believe that there
have been any material changes to the risk factors previously disclosed in our Fiscal 2010 Form
10-K. We may disclose changes to such factors or disclose additional factors from time to time in
our future filings with the SEC. Additional risks and uncertainties not presently known to us or
that we currently believe not to be material may also adversely impact our business, results of
operations, financial position and cash flows.
Issuer Purchases of Equity Securities
During the first quarter of fiscal 2011, we repurchased 1,173,900 shares of our common stock
under our repurchase program at an average price per share of $42.57, excluding commissions. During
the first quarter of fiscal 2010, we repurchased 1,443,072 shares of our common stock under our
repurchase program at an average price per share of $34.62, excluding commissions. The level of our
repurchases depends on a number of factors, including our financial condition, capital
requirements, results of operations, future business prospects and other factors that our Board of
Directors may deem relevant. The timing, volume and nature of share repurchases are subject to
market conditions, applicable securities laws and other factors and are at our discretion and may
be suspended or discontinued at any time. Shares repurchased by us are cancelled and retired.
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The following table sets forth information with respect to repurchases by us of our common
stock during the fiscal quarter ended October 1, 2010:
| Maximum approximate | ||||||||||||||||
| dollar value of | ||||||||||||||||
| shares that | ||||||||||||||||
| Total number of shares | may yet be | |||||||||||||||
| purchased as part of | purchased under | |||||||||||||||
| Total number of | Average price paid | publicly announced | the plans or | |||||||||||||
| Period* | shares purchased | per share | plans or programs (1) | programs (1) | ||||||||||||
|
Month No. 1
|
||||||||||||||||
|
(July 3, 2010-July 30, 2010)
|
||||||||||||||||
|
Repurchase Programs (1)
|
None | n/a | None | $ | 450,522,775 | |||||||||||
|
Employee Transactions (2)
|
4,937 | $ | 42.85 | n/a | n/a | |||||||||||
|
Month No. 2
|
||||||||||||||||
|
(July 31, 2010-August 27, 2010)
|
||||||||||||||||
|
Repurchase Programs (1)
|
706,400 | $ | 42.44 | 706,400 | $ | 420,539,922 | ||||||||||
|
Employee Transactions (2)
|
110,508 | $ | 42.81 | n/a | n/a | |||||||||||
|
Month No. 3
|
||||||||||||||||
|
(August 28, 2010-October 1, 2010)
|
||||||||||||||||
|
Repurchase Programs (1)
|
467,500 | $ | 42.76 | 467,500 | $ | 400,549,402 | ||||||||||
|
Employee Transactions (2)
|
54,361 | $ | 43.71 | n/a | n/a | |||||||||||
|
|
||||||||||||||||
|
Total
|
1,343,706 | $ | 42.64 | 1,173,900 | $ | 400,549,402 | ||||||||||
|
|
||||||||||||||||
| * | Periods represent our fiscal months. | |
| (1) | On March 2, 2009, we announced that on February 27, 2009, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $600 million in shares of our stock through open-market transactions, private transactions, transactions structured through investment banking institutions or any combination thereof. Our repurchase program does not have a stated expiration date. The approximate dollar amount of our stock that may yet be purchased under our repurchase program as of October 1, 2010 was $400,549,402 (as reflected in the table above). Our repurchase program has resulted, and is expected to continue to result, in repurchases in excess of offsetting the dilutive effect of shares issued under our share-based incentive plans. However, the level of our repurchases depends on a number of factors, including our financial condition, capital requirements, results of operations, future business prospects and other factors that our Board of Directors may deem relevant. As a matter of policy, we do not repurchase shares during the period beginning on the 15th day of the third month of a fiscal quarter and ending two days following the public release of earnings and financial results for such fiscal quarter. | |
| (2) | Represents a combination of (a) shares of our common stock delivered to us in satisfaction of the exercise price and/or tax withholding obligation by holders of employee stock options who exercised stock options, (b) shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of performance shares or restricted shares which vested during the quarter, (c) performance or restricted shares returned to us upon retirement or employment termination of employees or (d) shares of our common stock purchased by, or sold to us by, the Harris Corporation Master Rabbi Trust, with the trustee thereof acting at our direction, to fund obligations of the Rabbi Trust under our deferred compensation plans. Our equity incentive plans provide that the value of shares delivered to us to pay the exercise price of options or to cover tax withholding obligations shall be the closing price of our common stock on the date the relevant transaction occurs. |
Sales of Unregistered Securities
During the first quarter of fiscal 2011, we did not issue or sell any unregistered equity
securities.
Not Applicable.
29
Table of Contents
Not Applicable.
The following exhibits are filed herewith or incorporated by reference to exhibits previously
filed with the SEC:
|
(3)
|
(a) Restated Certificate of Incorporation of Harris Corporation (1995), as amended, incorporated herein by reference to Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 2008. (Commission File Number 1-3863) | |
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(b) By-Laws of Harris Corporation, as amended and restated effective October 24, 2008, incorporated herein by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed with the SEC on October 29, 2008. (Commission File Number 1-3863) | |
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|
(10)
|
*(a) Harris Corporation Annual Incentive Plan (Effective as of July 3, 2010), incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 2, 2010. (Commission File Number 1-3863) | |
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*(b) Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010), incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 2, 2010. (Commission File Number 1-3863) | |
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*(c) Form of Stock Option Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
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*(d) Form of Performance Share Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
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*(e) Form of Performance Share Unit Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
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*(f) Form of Restricted Stock Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
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*(g) Form of Restricted Stock Unit Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
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*(h) Amendment Number Eleven to the Harris Corporation Retirement Plan, dated September 2, 2010 and effective as of October 1, 2010. | |
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*(i) Amendment Number Twelve to the Harris Corporation Retirement Plan, dated October 27, 2010 and effective as of August 28, 2010. | |
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*(j) Amendment No. 4 to Harris Corporation Supplemental Executive Retirement Plan, dated October 27, 2010 and effective as of August 28, 2010. | |
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*(k) Amendment Number Three to the Harris Corporation 2005 Supplemental Executive Retirement Plan,
dated
October 27, 2010 and effective as of August 28, 2010. |
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*(l) Amendment Number Two to the Harris Corporation 1997 Directors’ Deferred Compensation and Annual Stock Unit Award Plan (Amended and Restated Effective January 1, 2006), dated October 27, 2010 and effective as of August 28, 2010. | |
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*(m) Amendment Number One to the Harris Corporation 2005 Directors’ Deferred Compensation Plan (As Amended and Restated Effective January 1, 2009), dated October 27, 2010 and effective as of August 28, 2010. | |
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*(n) Fourth Amendment to the Harris Corporation Master Rabbi Trust Agreement, dated October 27, 2010 and effective as of August 28, 2010. | |
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*(o) Form of Executive Change in Control Severance Agreement, effective as of, and for use after, April 22, 2010. | |
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*(p) Form of Director and Executive Officer Indemnification Agreement, effective as of, and for use after, August 28, 2010. |
30
Table of Contents
|
|
(q) 364-Day Revolving Credit Agreement, dated as of September 29, 2010, by and among the Company and the other parties thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 5, 2010. (Commission File Number 1-3863) | |
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(12)
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Computation of Ratio of Earnings to Fixed Charges. | |
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(15)
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Letter Regarding Unaudited Interim Financial Information. | |
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(31.1)
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | |
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(31.2)
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | |
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(32.1)
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Section 1350 Certification of Chief Executive Officer. | |
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(32.2)
|
Section 1350 Certification of Chief Financial Officer. | |
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(101. INS)
|
**XBRL Instance Document. | |
|
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|
(101. SCH)
|
**XBRL Taxonomy Extension Schema Document. | |
|
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||
|
(101. CAL)
|
**XBRL Taxonomy Extension Calculation Linkbase Document. | |
|
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||
|
(101. LAB)
|
**XBRL Taxonomy Extension Label Linkbase Document. | |
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|
(101. PRE)
|
**XBRL Taxonomy Extension Presentation Linkbase Document. | |
|
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||
|
(101. DEF)
|
**XBRL Taxonomy Extension Definition Linkbase Document. |
| * | Management contract or compensatory plan or arrangement. | |
| ** | Furnished herewith (not filed). |
31
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
HARRIS CORPORATION
(Registrant) |
||||
| Date: October 28, 2010 | By: | /s/ Gary L. McArthur | ||
| Gary L. McArthur | ||||
|
Senior Vice President and Chief Financial Officer
(principal financial officer and duly authorized officer) |
||||
32
Table of Contents
EXHIBIT INDEX
| Exhibit No. | ||
| Under Reg. S-K, | ||
| Item 601 | Description | |
|
(3)
|
(a) Restated Certificate of Incorporation of Harris Corporation (1995), as amended, incorporated herein by reference to Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 2008. (Commission File Number 1-3863) | |
|
|
||
|
|
(b) By-Laws of Harris Corporation, as amended and restated effective October 24, 2008, incorporated herein by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed with the SEC on October 29, 2008. (Commission File Number 1-3863) | |
|
|
||
|
(10)
|
*(a) Harris Corporation Annual Incentive Plan (Effective as of July 3, 2010), incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 2, 2010. (Commission File Number 1-3863) | |
|
|
||
|
|
*(b) Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010), incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 2, 2010. (Commission File Number 1-3863) | |
|
|
||
|
|
*(c) Form of Stock Option Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
|
|
||
|
|
*(d) Form of Performance Share Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
|
|
||
|
|
*(e) Form of Performance Share Unit Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
|
|
||
|
|
*(f) Form of Restricted Stock Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
|
|
||
|
|
*(g) Form of Restricted Stock Unit Award Agreement Terms and Conditions (as of July 3, 2010) for grants under the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010). | |
|
|
||
|
|
*(h) Amendment Number Eleven to the Harris Corporation Retirement Plan, dated September 2, 2010 and effective as of October 1, 2010. | |
|
|
||
|
|
*(i) Amendment Number Twelve to the Harris Corporation Retirement Plan, dated October 27, 2010 and effective as of August 28, 2010. | |
|
|
||
|
|
*(j) Amendment No. 4 to Harris Corporation Supplemental Executive Retirement Plan, dated October 27, 2010 and effective as of August 28, 2010. | |
|
|
||
|
|
*(k) Amendment Number Three to the Harris Corporation 2005 Supplemental Executive Retirement Plan,
dated
October 27, 2010 and effective as of August 28, 2010. |
|
|
|
||
|
|
*(l) Amendment Number Two to the Harris Corporation 1997 Directors’ Deferred Compensation and Annual Stock Unit Award Plan (Amended and Restated Effective January 1, 2006), dated October 27, 2010 and effective as of August 28, 2010. | |
|
|
||
|
|
*(m) Amendment Number One to the Harris Corporation 2005 Directors’ Deferred Compensation Plan (As Amended and Restated Effective January 1, 2009), dated October 27, 2010 and effective as of August 28, 2010. | |
|
|
||
|
|
*(n) Fourth Amendment to the Harris Corporation Master Rabbi Trust Agreement, dated October 27, 2010 and effective as of August 28, 2010. | |
|
|
||
|
|
*(o) Form of Executive Change in Control Severance Agreement, effective as of, and for use after, April 22, 2010. | |
|
|
||
|
|
*(p) Form of Director and Executive Officer Indemnification Agreement, effective as of, and for use after, August 28, 2010. |
Table of Contents
| Exhibit No. | ||
| Under Reg. S-K, | ||
| Item 601 | Description | |
|
|
(q) 364-Day Revolving Credit Agreement, dated as of September 29, 2010, by and among the Company and the other parties thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 5, 2010. (Commission File Number 1-3863) | |
|
|
||
|
(12)
|
Computation of Ratio of Earnings to Fixed Charges. | |
|
|
||
|
(15)
|
Letter Regarding Unaudited Interim Financial Information. | |
|
|
||
|
(31.1)
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | |
|
|
||
|
(31.2)
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | |
|
|
||
|
(32.1)
|
Section 1350 Certification of Chief Executive Officer. | |
|
|
||
|
(32.2)
|
Section 1350 Certification of Chief Financial Officer. | |
|
|
||
|
(101. INS)
|
**XBRL Instance Document. | |
|
|
||
|
(101. SCH)
|
**XBRL Taxonomy Extension Schema Document. | |
|
|
||
|
(101. CAL)
|
**XBRL Taxonomy Extension Calculation Linkbase Document. | |
|
|
||
|
(101. LAB)
|
**XBRL Taxonomy Extension Label Linkbase Document. | |
|
|
||
|
(101. PRE)
|
**XBRL Taxonomy Extension Presentation Linkbase Document. | |
|
|
||
|
(101. DEF)
|
**XBRL Taxonomy Extension Definition Linkbase Document. |
| * | Management contract or compensatory plan or arrangement. | |
| ** | Furnished herewith (not filed). |
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. (removed and Reserved)Item 5. Other InformationItem 6. ExhibitsItem 601 Description