1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 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 1-3863
HARRIS CORPORATION
======================================================
(Exact name of registrant as specified in its charter)
Delaware 34-0276860
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1025 West NASA Boulevard
Melbourne, Florida 32919
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(Address of principal executive offices)(Zip Code)
(407) 727-9100
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(Registrant's telephone number, including area code)
=========================
Indicate by check mark whether the registrant (1) 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 X No
--- ---
The number of shares outstanding of the registrant's common stock, as of April
29, 1998 was 80,004,843 shares.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements.
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HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
The following information for the quarters ended April 3, 1998 and March 31,
1997, 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 and the three quarters ended
April 3, 1998 are not necessarily indicative of the results for the full fiscal
year.
Quarter Ended Three Quarters Ended
----------------------- -----------------------
April 3, March 31, April 3, March 31,
1998 1997 1998 1997
-------- --------- --------- ---------
(In millions, except per share amounts)
Revenue
Revenue from sales, rentals
and services $961.6 $921.4 $2,911.2 $2,750.7
Interest 14.6 9.5 34.1 27.7
----- ----- ------- -------
976.2 930.9 2,945.3 2,778.4
Costs and Expenses
Cost of sales, rentals and
services 627.5 609.8 1,924.3 1,829.8
Engineering, selling and
administrative expenses 246.0 231.5 742.5 701.4
Interest 19.9 16.5 53.2 47.3
Other - net (8.0) (10.2) (11.4) (11.1)
----- ----- ------ -------
Income before income taxes 90.8 83.3 236.7 211.0
Income taxes 30.9 27.7 80.5 71.7
----- ----- ------ -------
Net Income $ 59.9 $ 55.6 $ 156.2 $ 139.3
====== ====== ======= ========
Net Income Per Common Share
Basic $ .76 $ .71 $1.97 $1.80
===== ===== ===== =====
Diluted $ .75 $ .70 $1.95 $1.77
===== ===== ===== =====
Cash Dividends Paid Per Common Share $.22 $.19 $ .66 $ .57
==== ==== ===== =====
Average Shares Outstanding
Basic 79.3 78.3 79.2 77.6
==== ==== ==== ====
Diluted 80.3 79.8 80.2 78.8
==== ==== ==== ====
See Notes to Financial Statements
(2)
3
HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 27,
April 3, 1997
1998 (audited)
--------- ----------
(In millions)
ASSETS
Current Assets
Cash and cash equivalents $ 41.3 $ 70.7
Marketable securities 84.4 91.3
Accounts and notes receivable - net, less allowance
for collection losses of $26,400,000 at April 3, 1998
and $28,300,000 at June 27, 1997 768.9 820.6
Unbilled costs and accrued earnings on fixed price contracts
based on percentage-of-completion accounting, less progress
payments of $183,600,000 at April 3, 1998 and
$187,800,000 at June 27, 1997 304.5 324.8
Inventories:
Work in process and finished products 539.6 493.1
Raw materials and supplies 125.1 118.0
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664.7 611.1
Deferred income taxes 119.0 145.0
------- -------
Total Current Assets 1,982.8 2,063.5
Plant and equipment, less allowances for depreciation of
$1,346,900,000 at April 3, 1998 and $1,282,300,000 at
June 27, 1997 947.9 878.3
Notes receivable - net 231.7 217.7
Intangibles resulting from acquisitions 216.2 227.5
Other assets 330.0 250.9
-------- --------
$3,708.6 $3,637.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 202.8 $ 288.5
Accounts payable 181.1 196.8
Compensation and benefits 205.7 216.9
Other accrued items 175.4 191.7
Advance payments and unearned income 246.8 290.9
Income taxes 97.7 96.0
Current portion of long-term debt 3.0 7.8
-------- --------
Total Current Liabilities 1,112.5 1,288.6
Deferred income taxes 81.0 84.4
Long-term debt 836.4 686.7
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 80,001,928 shares
at April 3, 1998 and 79,625,670 at June 27, 1997 (shares
adjusted to reflect September 1997 two-for-one stock split) 80.0 39.8
Other capital 270.9 289.9
Retained earnings 1,323.6 1,219.9
Net unrealized gain on securities available-for-sale (net
of taxes) 50.0 53.8
Unearned compensation (2.4) 4.4
Cumulative translation adjustments (43.4) (29.6)
-------- --------
Total Shareholders' Equity 1,678.7 1,578.2
-------- --------
$3,708.6 $3,637.9
======== ========
See Notes to Financial Statements
(3)
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HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Quarters Ended
April 3, March 31,
------------------------
1998 1997
------------- --------
(In millions)
OPERATING ACTIVITIES
Net income $156.2 $139.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of plant and equipment 155.0 134.0
Non-current deferred income tax (3.4) 27.4
(Increase) decrease in:
Accounts and notes receivable 39.6 (31.8)
Unbilled costs and inventories (32.2) (27.7)
Other assets (71.1) (85.7)
Increase (decrease) in:
Accounts payable and accrued expenses (44.3) (34.0)
Advance payments and unearned income (44.0) 16.9
Income taxes 27.7 (23.4)
Other 10.8 20.7
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Net cash provided by operating activities 194.3 135.7
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INVESTING ACTIVITIES
Cash paid for acquisitions (9.9) (12.4)
Additions of plant and equipment (226.5) (280.9)
------ ------
Net cash used in investing activities (236.4) (293.3)
------ ------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt (90.4) 74.5
Increase in long-term debt 149.7 104.0
Proceeds from sale of Common Stock 11.5 8.7
Cash dividends (52.5) (45.3)
------ ------
Net cash provided by financing activities 18.3 141.9
------ ------
Effect of exchange rate changes on cash and cash
equivalents (5.6) 1.3
------ ------
Net decrease in cash and cash equivalents (29.4) (14.4)
Cash and cash equivalents, beginning of year 70.7 74.6
------ ------
Cash and cash equivalents, end of period $ 41.3 $ 60.2
====== ======
See Notes to Financial Statements
(4)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 3, 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 of the
Corporation's Common Stock have been restated to reflect the increased number of
shares outstanding.
Note C -- Accounting Change
- ---------------------------
In the second quarter of this year, 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 million facility provides for drawings at interest rates determined by
a pricing matrix based upon the Corporation's long-term debt rating.
Note E -- Long-term Debt
- ------------------------
In February 1998, the Corporation issued $150 million of debentures due February
1, 2028. The interest rate for these debentures is 6.35 percent and they are
redeemable as a whole or in part, at the option of holders thereof on February
1, 2008 at 100% of their principal amount plus accrued interest and at the
option of the Corporation at any time on or after February 2, 2008.
Note F -- 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 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 April 3, 1998 were as follows:
Contract Amount Deferred Gains Maturities
----------------------
In millions Ringgits U.S. Dollars and (Losses) (in months)
- ----------------------------------------------------------------------------------------
Commitments to Buy 476.2 $169.5 $(45.5) 1-18
Commitments to Sell 6.4 1.7 .1 3
(5)
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Item 2. Management's Discussion & Analysis of Financial Condition & Results of
- ------------------------------------------------------------------------------
Operations.
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RESULTS OF OPERATIONS
Sales and net income for the third quarter were higher than the same period last
year by 4.4 percent and 7.7 percent, respectively. Sales for the first three
quarters increased 5.8 percent over the same period a year ago, while net income
increased by 12.1 percent. Segment net sales, operating profit and net income
were as follows:
Quarter Ended Three Quarters Ended
------------------------------------------ ---------------------------------------------
April 3, March 31, Percent April 3, March 31, Percent
1998 1997 Inc./(Dec.) 1998 1997 Inc./(Dec.)
-------- -------- ----------- ---------- ---------- -----------
(Dollars in millions)
NET SALES
Electronic Systems $ 231.0 $ 251.8 (8) $ 730.0 $ 748.3 (2)
Semiconductor 175.8 169.0 4 531.3 491.8 8
Communications 239.0 216.5 10 718.0 673.0 7
Lanier Worldwide 315.8 284.1 11 931.9 837.6 11
-------- -------- ---------- ----------
Total $ 961.6 $ 921.4 4 $ 2,911.2 $ 2,750.7 6
======== ======== ========== ==========
OPERATING PROFIT
Electronic Systems $ 19.8 $ 23.6 (16) $ 59.2 $ 60.2 (2)
Semiconductor 31.6 32.3 (2) 76.5 72.1 6
Communications 31.4 20.9 50 84.9 62.5 36
Lanier Worldwide 35.6 31.0 15 99.6 86.7 15
Corporate Expense (7.7) (8.0) (5) (30.3) (23.2) 31
Interest Expense (19.9) (16.5) (21) (53.2) (47.3) 12
-------- -------- ---------- ----------
Total $ 90.8 $ 83.3 9 $ 236.7 $ 211.0 12
======== ======== ========== ==========
NET INCOME
Electronic Systems $ 7.9 $ 10.8 (27) $ 24.1 $ 26.9 (10)
Semiconductor 17.5 17.1 2 40.2 36.7 10
Communications 17.1 11.7 46 45.1 32.4 39
Lanier Worldwide 17.4 16.0 9 46.8 43.3 8
-------- -------- ---------- ----------
Total $ 59.9 $ 55.6 8 $ 156.2 $ 139.3 12
======== ======== ========== ==========
The Electronic Systems segment reported lower sales for both the third quarter
and the first three quarters reflecting declines in Federal Aviation
Administration programs and the spin-out of sales to a joint venture. Sales for
the segment also were lower as increased demand for the segment's communications
and information systems products and services was more than offset by reduction
in FAA and aerospace business. Operating profit and segment net income were
substantially lower for the third quarter primarily because of the completion of
programs with the FAA. Revenue and operating profit are expected to be
relatively flat for the fiscal year with a substantial decrease in net income
due to lower margins and higher tax rates.
Sales in the Semiconductor segment were up slightly for the quarter and were
moderately higher for the first three quarters. Net income was moderately higher
for the year despite relatively flat sales in the third quarter. Royalty income,
which is significant for all periods presented, was slightly higher in the third
quarter and higher for the first three quarters. While segment sales are
expected to be somewhat higher for the year, continued losses in the segment's
logic product line are likely to dampen earnings. The Company is currently
evaluating strategic alternatives in the logic product line, including the
possible sale, downsizing, exiting or any combination of the above.
Communications segment sales were 10 percent higher for the third quarter and
the first three quarters. Segment earnings were up significantly due to improved
profitability in the segment's digital telephone switch business. The segment
also benefited from stronger performance in its high-frequency radio business
and from royalty income. Partially offsetting these higher results were lower
gains from the sale of investment securities in the third quarter as compared to
the year earlier quarter and substantially lower earnings in the segment's
microwave radio business. Improvement in the segment's digital switch business,
coupled with growth in the segment's radio communications, broadcast products
and telephone test equipment businesses, is expected to result in higher sales
and earnings for the year.
(6)
7
Lanier Worldwide segment sales were 11 percent higher in the third quarter and
the first three quarters due primarily to growth in both domestic and
international markets. Higher sales resulted in higher earnings in both periods.
Segment sales and earnings are expected to show continuing growth for the
remainder of the fiscal year.
Cost of sales as a percentage of net sales were 65.3 percent in the third
quarter and 66.1 percent in the first three quarters of this year compared to
66.2 percent and 66.5 percent for the respective periods a year ago. Improved
cost ratios were largely due to higher royalty income and improved operating
margins in the Communications segment.
Engineering, selling, and administrative expenses as a percentage of net sales
increased to 25.6 percent in the third quarter and 25.5 percent for the first
three quarters compared to 25.1 percent and 25.5 percent for the comparable
prior year periods. The increase in operating expenses for the third quarter was
primarily due to higher administrative costs related mostly to relocation
expenses for the Broadcast Division. Company funded research and development
expense increased $8.4 million to $135.9 million for the first three quarters.
Customer funded research and development, which is included in cost of sales,
increased $15.6 million to $385.3 million for the first three quarters.
Interest income was higher in the third quarter due to interest due from the
Internal Revenue Service. Interest expense increased in the third quarter due to
higher average borrowings and a lower amount of capitalized interest in
comparison to the prior year's third quarter. Capitalized interest is included
as a component of plant and equipment on the balance sheet. "Other-net" expenses
were higher in the third quarter due to the lower level of gains from the sale
of investment securities in the quarter as compared to the year earlier period.
For the first three quarters, higher gains from the sale of investment
securities were offset by foreign currency losses.
The provision for income taxes as a percentage of pretax income was 34.0 percent
in both the third quarter and for the first three quarters compared to 33.3
percent in last year's third quarter and 34.0 for three quarters-to-date last
year. The statutory federal income tax rate for all periods was 35.0 percent.
Tax rates on foreign source income and export sales benefited the provision for
income taxes for all periods.
Net income as a percentage of sales was 6.2 percent for the third quarter and
5.4 percent for the year-to-date, compared to 6.0 percent and 5.1 percent in the
same periods last year for the previously stated reasons.
LIQUIDITY AND FINANCIAL POSITION
Working capital increased from $774.9 million at June 27, 1997, to $870.3
million at the end of the third quarter. The increase in working capital
resulted from a decrease in short-term debt in the third quarter as the Company
refinanced $150 million of short-term debt with long-term debt. The Corporation
continues to invest in the capital expansion of its Semiconductor business.
Total capital expenditures for the Corporation in fiscal 1998, including
expenditures for customer rental equipment, are expected to be approximately
$300 million. On April 22, 1998, the company announced that its Lanier
Worldwide, Inc. subsidiary has signed a definitive agreement to acquire the
assets of a copying systems business and will pay approximately $160 million in
cash and assume certain liabilities. This acquisition is expected to be
consummated in July. The requirement for funds to finance capital expenditures,
acquisitions of new businesses and other operational requirements during fiscal
1998 will 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.
(7)
8
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.
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 and product pricing 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 and
Communications segments; and the successful resolution of patent infringement
and other general litigation.
(8)
9
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits:
(10) Material Contracts.
(i) Harris Corporation Retirement Plan (amended and restated effective
January 1, 1998).
(ii) Harris Corporation Union 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.
The Registrant filed with the Commission a Current Report on Form 8-K on
February 3, 1998, relating to the announcement of its financial results
for the fiscal quarter ended January 2, 1998 and for purposes of
amending the Registrant's Registration Statement on Form S-3 (Commission
File No. 333-3111) to add certain exhibits thereto in connection with
the sale of its 6.35% Debentures due February 1, 2028.
Items 1, 2, 3, 4 and 5 of Part II are not applicable and have been omitted.
(9)
10
SIGNATURE
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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: May 12, 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) Harris Corporation Retirement Plan
(amended and restated effective
January 1, 1998)
10(ii) Harris Corporation Union Retirement Plan
(amended and restated effective
January 1, 1998)
(11) Statement re: Computation of Per
Share Earnings
(27) Financial Data Schedule