Harris Corporation (HRS) performed impressively in the second quarter of fiscal 2015 (ended Jan 2, 2015) reporting better-than-expected earnings and revenues. The company’s earnings (from continued operations) of $1.32 per share breezed past the Zacks Consensus Estimate of $1.17. Higher-than-expected revenues contributed to the earnings beat. Quarterly earnings were 3.9% above the year-ago figure.
Revenues came in at $1,206.3 million surpassing the Zacks Consensus Estimate of $1,174 million. However, revenues declined 1% from the year-ago figure.
Cost of sales in the reported quarter stood at $807.8 million against $795.4 million in the prior-year period. Gross margin was 33% compared with 35% in the year-ago quarter. Engineering, selling & administrative expenses totaled $187.5 million versus $204.7 million in the second quarter of fiscal 2014.
At the end of the reported quarter, Harris generated $222.2 million of cash from operations against $279.5 million in the year-earlier quarter. At the end of the quarter, the company had cash and cash equivalents of $469.5 million compared with $561 million at the end of fiscal 2014.
Total long-term debt stood at $1,575.8 million, flat with the figure reported at the end of fiscal 2014. The debt-to-capitalization ratio for the quarter was 0.47 compared with 0.46 at the end of fiscal 2014.
Government Communications System
Quarterly revenues at this segment were up 5% year over year at $454.3 million. Meanwhile, operating income stood at $78 million versus $66 million in the prior-year quarter. Quarterly operating margin was 17.1% as against 16% in the preceding quarter.
RF Communications
Segmental revenues in the quarter came in at $432.2 million, down 5% year over year. The Tactical Radio Communications and Public Safety and Professional Communications segments contributed roughly 73.1% and 26.9%, respectively. Operating income in the reported quarter was $125 million, down 12% year over year.
During the second quarter, the segment generated orders worth $263 million from the Tactical Radio Communications business and $93 million from the Public Safety and Professional Communications business. Total order backlog stood at $523 million in the Tactical Radio Communications segment and $507 million in the Public Safety and Professional Communications segment. The book-to-bill ratio for RF Communications stood at 0.82.
Integrated Network Solutions
The segment generated revenues of $339.6 million, down 7.2% year over year. Operating income in the quarter was $28.5 million compared with $32.7 million in the year-ago period.
Financial Outlook
Buoyed by a strong quarter, the company raised its earnings per share (EPS) guidance for fiscal 2015. Harris now expects EPS in the band of $4.95 to $5.05 (old guidance: $4.75 to $5.00). The Zacks Consensus Estimate of $4.86 per share lies below the guidance. The company still expects revenues to decline 1–3% on a year-over-year basis in fiscal 2015.
Harris Eyes Exelis
In a bid to strengthen its product portfolio, Harris announced that it will buy Exelis, Inc. (XLS) in a cash and stock deal valued at approximately $4.75 billion ($23.75 per share). We note that the above guidance issued by Harris does not include the impending acquisition, which is expected to close in Jun 2015. The offer price represents a premium of approximately 34% to Exelis’ closing price on Feb 5.
The deal has been cleared by the board of directors of both the companies. Following the closure of the deal, shareholders of Harris will own approximately 85% of the combined entity, while Exelis’ investors will own the remainder. The better-than-expected quarterly results, an optimistic EPS view and the announcement of the deal pleased the investors. Consequently, Harris’ shares gained in pre-market trading.
Zacks Rank
Currently, Harris Corp. has a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Polycom, Inc. (PLCM) and Nokia Corp. (NOK). Both stocks carry a Zacks Rank #2 (Buy).
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