1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM l0-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION l3 or l5(d)
OF THE SECURITIES EXCHANGE ACT OF l934
For the quarterly period ended January 2, 1998
or
[ ] 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 l-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)
l025 West NASA Boulevard
Melbourne, Florida 32919
================================================
(Address of principal executive offices)(Zip Code)
(407) 727-9l00
=================================
(Registrant's telephone number, including area code)
=================================
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section l3 or l5 (d) of the Securities Exchange Act of l934
during the preceding l2 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 X No
----- -----
The number of shares outstanding of the registrant's common stock, as of January
30, 1998 was 79,895,841 shares.
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
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HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
The following information for the quarters ended January 2, 1998 and December
31, 1996, has not been audited by independent accountants, but in the opinion of
management reflects all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the indicated
periods. The results of operations for the quarter ended January 2, 1998 are not
necessarily indicative of the results for the full fiscal year.
Quarter Ended Two Quarters Ended
----------------------- ------------------------
January 2, December 31, January 2, December 31,
1998 1996 1998 1996
---------- ----------- ---------- ------------
(In millions, except per share amounts)
Revenue
Revenue from sales, rentals
and services $970.0 $945.9 $1,949.6 $1,829.3
Interest 9.7 9.1 19.5 18.2
----- ----- ------- -------
979.7 955.0 1,969.1 1,847.5
Costs and Expenses
Cost of sales, rentals and
services 641.0 634.3 1,296.8 1,220.0
Engineering, selling and
administrative expenses 245.6 239.0 496.5 469.9
Interest 16.4 16.0 33.3 30.8
Other - net (3.1) (3.8) (3.4) (.9)
----- ----- ------ -------
Income before income taxes 79.8 69.5 145.9 127.7
Income taxes 27.1 24.0 49.6 44.1
----- ----- ------ -------
Net Income $ 52.7 $ 45.5 $ 96.3 $ 83.6
====== ====== ======= ========
Net Income Per Common Share
Basic $.67 $.59 $1.22 $1.08
==== ==== ===== =====
Diluted $.66 $.58 $1.20 $1.07
==== ==== ===== =====
Average Shares Outstanding
Basic 79.2 77.1 79.2 77.2
==== ==== ==== ====
Diluted 80.2 78.2 80.1 78.2
==== ==== ==== ====
Cash Dividends Paid Per Common Share $.22 $.19 $ .44 $ .38
==== ==== ===== =====
See Notes to Financial Statements
(2)
3
HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 27,
January 2, 1997
1998 (audited)
---------- ---------
(In millions)
ASSETS
Current Assets
Cash and cash equivalents $ 30.8 $ 70.7
Marketable securities 73.9 91.3
Accounts and notes receivable - net, less allowance for
collection losses of $26,500,000 at January 2, 1998
and $28,300,000 at June 27, 1997 786.3 820.6
Unbilled costs and accrued earnings on fixed price contracts
based on percentage-of-completion accounting, less progress
payments of $191,400,000 at January 2, 1998 and
$187,800,000 at June 27, 1997 309.7 324.8
Inventories:
Work in process and finished products 508.4 493.1
Raw materials and supplies 122.1 118.0
------- -------
630.5 611.1
Deferred income taxes 130.9 145.0
------- -------
Total Current Assets 1,962.1 2,063.5
Plant and equipment, less allowances for depreciation of
$1,318,400,000 at January 2, 1998 and $1,282,300,000 at
June 27, 1997 918.4 878.3
Notes receivable - net 213.2 217.7
Intangibles resulting from acquisitions 219.5 227.5
Other assets 302.7 250.9
-------- --------
$3,615.9 $3,637.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 315.1 $ 296.3
Accounts payable 170.3 196.8
Compensation and benefits 198.9 216.9
Other accrued items 189.7 191.7
Advance payments and unearned income 258.1 290.9
Income taxes 93.6 96.0
-------- --------
Total Current Liabilities 1,225.7 1,288.6
Deferred income taxes 80.9 84.4
Long-term debt 686.4 686.7
Shareholders' Equity
Capital stock:
Preferred Stock, without par value:
Authorized - 1,000,000 shares; issued - none - -
Common Stock, par value $1 per share:
Authorized - 250,000,000 shares; issued 79,834,460 shares
at January 2, 1998 and 79,625,670 at June 27, 1997 79.8 39.8
(shares adjusted to reflect September 1997 two-for-one
stock split)
Other capital 266.9 289.9
Retained earnings 1,281.2 1,219.9
Net unrealized gain on securities available-for-sale (net
of taxes) 43.2 53.8
Unearned compensation (7.7) 4.4
Cumulative translation adjustments (40.5) (29.6)
-------- --------
Total Shareholders' Equity 1,622.9 1,578.2
-------- --------
$3,615.9 $3,637.9
======== ========
See Notes to Financial Statements
(3)
4
HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Two Quarters Ended
--------------------------
January 2, December 31,
1998 1996
---------- ------------
(In millions)
OPERATING ACTIVITIES
Net income $ 96.3 $ 83.6
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of plant and equipment 97.3 85.5
Non-current deferred income tax (3.4) 8.4
(Increase) decrease in:
Accounts and notes receivable 40.9 (54.8)
Unbilled costs and inventories (3.0) (65.4)
Other assets (43.6) (37.4)
Increase (decrease) in:
Trade payables and accrued expenses (47.7) 8.6
Advance payments and unearned income (32.7) 9.0
Income taxes 11.3 (21.0)
Other 4.9 8.8
------ ------
Net cash provided by operating activities 120.3 25.3
------ ------
INVESTING ACTIVITIES
Cash paid for acquisitions (9.9) (5.6)
Additions of plant and equipment (140.7) (197.5)
------ ------
Net cash used in investing activities (150.6) (203.1)
------ ------
FINANCING ACTIVITIES
Increase in short-term debt 18.8 88.8
(Increase) decrease in long-term debt (.2) 100.4
Proceeds from sale of Common Stock 6.3 5.0
Cash dividends (35.0) (29.5)
------ ------
Net cash provided by (used in) financing activities (10.1) 164.7
------ ------
Effect of exchange rate changes on cash and cash
equivalents .5 (.1)
------ ------
Net decrease in cash and cash equivalents (39.9) (13.2)
Cash and cash equivalents, beginning of year 70.7 74.6
------ ------
Cash and cash equivalents, end of period $ 30.8 $ 61.4
====== ======
See Notes to Financial Statements
(4)
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 2, 1998
Note A -- Basis of Presentation
- -------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all information and footnotes
necessary for a complete presentation of financial position, results of
operations, and changes in cash flows in conformity with generally accepted
accounting principles. For further information refer to the financial statements
and notes to financial statements included in the Corporation's Annual Report on
Form 10-K/A for the fiscal year ended June 27, 1997.
Note B -- Stock Split
- ---------------------
On August 23, 1997, the Board of Directors authorized a two-for-one stock split
to shareholders of record on September 4, 1997. All references in the financial
statements and exhibits to number of shares and per share amounts (except for
the number of shares shown in Item 4 of this 10-Q) of the Corporation's Common
Stock have been restated to reflect the increased number of shares outstanding.
Note C -- Accounting Change
- ---------------------------
For the quarter ended January 2, 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share". This standard
requires reporting of both "basic" and "diluted" earnings per share. For periods
presented, these amounts do not differ materially from amounts previously shown
as "primary" and "fully diluted" earnings per share. Prior year results have
been restated to conform with the new standard.
Note D -- Credit Arrangements
- -----------------------------
In October 1997, the Corporation extended the 364-Day $300 million portion of
the $800 million syndicated credit facility for an additional 364-Day period.
The $800 facility provides for drawings at interest rates determined by a
pricing matrix based upon the Corporation's long-term debt rating.
Note E -- Financial Instruments
- -------------------------------
The Company uses foreign exchange contracts to hedge off-balance sheet foreign
currency commitments and anticipated transactions. The Company has significant
manufacturing operations in Malaysia and has a hedging program in place to set
the exchange rates on the Company's foreign currency operating commitments in
Malaysia. Under this hedging program, increases or decreases in the Company's
local currency manufacturing costs and operating expenses are partially offset
by realized gains and losses, respectively, on the hedging instruments.
Malaysian Ringgit contracts at January 2, 1998 were as follows:
Contract Amount
--------------- Deferred Gains Maturities
In millions Ringgits U.S. Dollars and (Losses) (in months)
- ----------------------------------------------------------------------------------------
Commitments to Buy 563.6 $203.5 $(61.7) 1-21
Commitments to Sell 10.3 2.6 .1 1-6
(5)
6
Item 2. Management's Discussion & Analysis of Financial Condition & Results of
- ------------------------------------------------------------------------------
Operations.
- -----------
RESULTS OF OPERATIONS
Results for the second quarter and first two quarters were higher than the
comparable periods a year ago. Segment net sales, operating profit and net
income were as follows:
Quarter Ended Two Quarters Ended
----------------------------------------- ---------------------------------------
Jan. 2, Dec. 31, Percent Jan. 2, Dec. 31, Percent
1998 1996 Inc./(Dec.) 1998 1996 Inc./(Dec.)
----------------------------------------- ---------------------------------------
(Dollars in millions)
NET SALES
Communications $238.8 $248.4 (4) $ 479.0 $ 456.5 5
Semiconductor 174.7 161.3 8 355.5 322.8 10
Lanier Worldwide 318.9 294.1 8 616.1 553.5 11
Electronic Systems 237.6 242.1 (2) 499.0 496.5 (1)
----- ----- ------- -------
Total $970.0 $945.9 3 $1,949.6 $1,829.3 7
===== ===== ======= =======
OPERATING PROFIT
Communications $ 29.3 $ 22.0 33 $ 53.5 $ 41.6 29
Semiconductor 23.0 19.1 20 44.9 39.8 13
Lanier Worldwide 35.8 33.0 8 64.0 55.6 15
Electronic Systems 18.7 17.3 8 39.4 36.6 8
Corporate Expense (10.6) (5.9) 80 (22.6) (15.1) 50
Interest Expense (16.4) (16.0) 3 (33.3) (30.8) 8
----- ----- ----- -----
Total $ 79.8 $ 69.5 15 $145.9 $127.7 14
===== ===== ===== =====
NET INCOME
Communications $15.7 $11.2 40 $ 28.0 $ 20.8 35
Semiconductor 12.1 9.6 26 22.7 19.6 16
Lanier Worldwide 17.2 16.7 3 29.4 27.2 8
Electronic Systems 7.7 8.0 (4) 16.2 16.0 1
---- ---- ----- -----
Total $52.7 $45.5 16 $ 96.3 $ 83.6 15
==== ==== ===== =====
Communications segment sales were slightly lower in the second quarter compared
to a very strong prior year second quarter. Segment sales for the current
quarter were negatively impacted by difficult market conditions associated with
the Asian economy and the deferral of the use of microwave radios in the PCS
rollout in the U.S. For the first two quarters sales were modestly higher.
Earnings for the segment were significantly higher for the second quarter and
year-to-date primarily due to gains from the sale of an investment security
(Advanced Fibre Communications, Inc.), which was partially offset by the
significant marketing expenses associated with the rollout of the segment's
digital television product line. Net after-tax gains from the sale of AFCI
securities in the current quarter were $7.4 million. Improvement in the
segment's digital switch business, coupled with growth in the segment's
microwave systems, broadcast products and telephone test equipment businesses,
is expected to result in higher sales and earnings in fiscal 1998.
Semiconductor segment sales were moderately higher for the quarter and
year-to-date, while earnings were up sharply for the second quarter and
moderately higher year-to-date. Improved sales and margins in the segment's
power product line and productivity improvements throughout the business have
helped offset the impact of industry-wide pricing pressure and the downturn in
Asian markets. Royalty income continues to be significant for all periods
presented. For the second half of fiscal 1998, the segment expects increased
sales of higher margin products that should result in increased sales and
earnings.
The Lanier Worldwide segment had strong domestic sales for both the second
quarter and the year-to-date compared to the prior year periods. Segment
earnings did not keep pace with the increase in sales due to higher than
anticipated product discounting which resulted in part from the weakening
Japanese yen. For the second half of the fiscal year, the segment expects
continuing strong sales growth and improving margins.
Electronic Systems segment reported relatively flat sales for both the second
quarter and the first two quarters reflecting declines in FAA programs and the
spin-out of sales to a joint venture. Operating profit was modestly higher for
both periods, while net income was slightly lower for the second quarter and
flat for the year-to-date compared to last year's results.
(6)
7
Segment results were bolstered by strong performance from the segment's
information systems business. Revenue for the year is expected to be flat with
moderately lower earnings, due to reduced margins from the segment's core
defense products.
Corporate expense increased significantly in the second quarter compared to the
prior year's second quarter due to foreign currency gains included in the prior
year results.
Cost of sales as a percentage of net sales decreased to 66.1 percent in the
second quarter and 66.5 percent in the first two quarters of this year, compared
to 67.1 percent and 66.7 percent for the respective periods last year. Cost
ratios were lower for the Communications and Electronic Systems segments.
Engineering, selling, and administrative expenses as a percentage of net sales
were unchanged for the second quarter and decreased to 25.5 percent for the
year, compared to 25.7 percent last year due to lower operating expense ratios
for the Lanier Worldwide and Electronic Systems segments. Total research and
development expense, which includes both Company funded and customer sponsored,
increased $24.1 million to $346.1 million for the first two quarters.
Interest expense is higher for the second quarter and the first two quarters due
to higher borrowings. The decrease in "Other-net" expense for the first two
quarters compared to the prior year period resulted from increased gains from
the sale of investment securities which were offset in part by losses on foreign
currency transactions.
The provision for income taxes as a percentage of pretax income was 34.0 percent
in both the second quarter and the first two quarters, compared to 34.5 percent
for the same periods a year ago. The statutory federal tax rate for all periods
was 35.0 percent. All periods benefited from lower tax rates on foreign source
income and export sales.
Net income as a percentage of sales was 5.4 percent for the second quarter and
4.9 percent for the year-to-date, compared to 4.8 percent and 4.6 percent in the
same periods last year for the previously stated reasons.
LIQUIDITY AND FINANCIAL POSITION
Working capital decreased from $774.9 million at June 27, 1997, to $736.4
million at the end of the second quarter due to lower receivables and unbilled
costs on fixed price contracts. The Company continues to invest in the capital
expansion of its semiconductor business. Total capital expenditures in fiscal
1998, including expenditures for customer rental equipment, are expected to be
approximately $300 million. The requirement for funds to finance this investment
and other operational requirements are expected to be met by cash flow from
operations and unused borrowing capacity.
YEAR 2000 ISSUE
Certain software and hardware systems are time sensitive. Older time sensitive
systems often use a two digit dating convention (e.g., "00" rather than "2000")
that could result in system failure and disruption of operations as the Year
2000 approaches. The Year 2000 problem will impact the Company, its vendors and
suppliers, customers, and other third parties that interface with the Company.
The Company determined it needed to replace or modify many of its software
applications so that these applications function properly in the future. The
Company has replaced, or is in the process of replacing, many of its software
applications that are time sensitive. The Company has programs for testing and
reprogramming all other time sensitive software programs and equipment and
anticipates completing its Year 2000 projects during fiscal 1999.
The Company has also initiated communications with significant suppliers,
customers and other relevant third parties to minimize disruptions to the
Company's operations and to ensure that Year 2000 issues are satisfactorily
resolved. However, there can be no certainty that the systems and products of
other companies on which the Company relies will not have an adverse effect on
the Company's operations. The Company has initiated formal programs to advise
and work with customers to resolve Year 2000 problems; however, the Company
believes it has no material exposure to contingencies related to the Year 2000
issue for the products it has sold.
(7)
8
The Company believes that it will satisfactorily resolve all significant Year
2000 problems and that related costs will not be material. Estimates of Year
2000 related costs are based on numerous assumptions and there is no certainty
that estimates will be achieved and actual costs could materially differ from
those anticipated. Specific factors that might cause such differences include,
but are not limited to, the continuing availability of personnel trained in this
area, the ability to identify and correct all relevant computer programs, and
similar uncertainties.
FORWARD-LOOKING STATEMENTS
This report contains, and certain of the Company's other public documents and
statements and oral statements contain and will contain, forward-looking
statements that reflect management's current assumptions and estimates of future
performance and economic conditions. Such statements are made in reliance upon
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The Company cautions investors that any forward-looking statements are
subject to risks and uncertainties that may cause actual results and future
trends to differ materially from those projected, stated, or implied by the
forward-looking statements.
The Company's consolidated results and the forward-looking statements could be
affected by, among other things, general economic conditions in the markets in
which the Company operates; economic developments that have a particularly
adverse effect on one or more of the markets served by the Company; ability to
execute management's internal operating plans; fluctuation in foreign currency
exchange rates and the effectiveness of the Company's currency hedging program;
worldwide demand for integrated semiconductor circuits, particularly power
products; reductions in the U.S. and worldwide defense and space budgets; effect
of continuing consolidation in the U.S. defense industry on the Company's direct
and indirect business with the U.S. government; the Company's ability to recover
costs incurred on fixed price contracts; termination of customer contracts;
continued development and market acceptance of new products, especially digital
television broadcast products and semiconductor wireless products; continued
success of the Company's patent licensing programs, particularly as it relates
to the Semiconductor segment; and the successful resolution of patent
infringement and other general litigation.
(8)
9
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
At the Annual Meeting of Shareholders held on October 24, 1997,
the following proposals were adopted by the margins indicated.
1. To elect three nominees to the Board of Directors:
Nominee Number of Shares
------- ----------------
For Withheld
--- --------
Ralph D. DeNuzio 34,375,322 266,769
Joseph L. Dionne 34,371,970 270,121
Alexander B. Trowbridge 34,375,122 266,969
2. To ratify the selection of Ernst & Young LLP as the
independent public auditors of the Company for fiscal 1998:
For 34,378,265
Against 199,628
Abstain 64,190
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits:
(10) Material Contracts.
(i) Supplemental Executive Retirement Plan (amended and restated
effective January 1, 1998).
(11) Statement re: Computation of Per Share Earnings.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
No Current Reports on form 8-K were filed during the fiscal quarter
ended January 2, 1998.
Items 1, 2, 3 and 5 of Part II are not applicable and have been omitted.
(9)
10
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: February 4, 1998 By:/s/Bryan R. Roub
-------------------------------
Bryan R. Roub
Senior Vice President & Chief
Financial Officer (principal
financial officer and duly
authorized officer)
(10)
11
EXHIBIT INDEX
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Exhibit No.
Under Reg.
S-K, Item 601 Description
- ------------- -----------
10(i) Supplemental Executive
Retirement Plan (amended and
restated effective January 1,
1998).
(11) Statement re: Computation of
Per Share Earnings.
(27) Financial Data Schedule.