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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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Commission File Number 1-3863
HARRIS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-0276860
(STATE OR OTHER JURISDICTION OF INCORPORATION OR
ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1025 WEST NASA BOULEVARD
MELBOURNE, FLORIDA 32919
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (407) 727-9100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS ---------------------
Common Stock, par value $1 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value (based upon the closing price on the New York
Stock Exchange) of the voting stock held by non-affiliates of the registrant as
of August 21, 1998 was $3,015,835,040.
The number of outstanding shares of the registrant's Common Stock on August
21, 1998 was 80,027,778.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on October 23, 1998 are incorporated by reference into
Part III of this Annual Report on Form 10-K to the extent described therein.
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HARRIS CORPORATION
FORM 10-K
TABLE OF CONTENTS
PAGE NO.
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PART I:
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 8
ITEM 3. Legal Proceedings........................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders......... 10
Executive Officers of the Registrant................................... 11
PART II:
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 15
ITEM 6. Selected Financial Data..................................... 16
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 17
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk... 23
ITEM 8. Financial Statements and Supplementary Data................. 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 24
PART III:
ITEM 10. Directors and Executive Officers of the Registrant.......... 25
ITEM 11. Executive Compensation...................................... 25
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 25
ITEM 13. Certain Relationships and Related Transactions.............. 25
PART IV:
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 26
SIGNATURES................................................................. 29
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................ 31
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PART I
ITEM 1. BUSINESS.
THE COMPANY
GENERAL
Harris Corporation was incorporated in Delaware in 1926 as the successor to
three companies founded in the 1890's. The principal executive offices of the
Company are located at 1025 West NASA Boulevard, Melbourne, Florida 32919, and
the telephone number is (407) 727-9100.
Harris Corporation, along with its subsidiaries (hereinafter called
"Harris" or the "Company"), is a worldwide company focused on four core
businesses: communications, semiconductors, office systems and equipment, and
advanced electronic systems.
The Company's four core businesses were carried out during fiscal 1998
through three business sectors and a subsidiary, which correspond to the
Company's business segments used for financial reporting purposes:
Communications Sector, Semiconductor Sector, Lanier Worldwide, Inc. and
Electronic Systems Sector. Harris structures its operations primarily around the
markets it serves. The operating divisions within each of the sectors and the
subsidiary, which divisions are the basic operating units, have been organized
on the basis of technology and markets. For the most part, each operating
division has its own marketing, engineering, manufacturing and service
organization. The Company produces most of the products it sells, except for a
majority of products sold by Lanier Worldwide and certain broadcast products of
the Communications Sector, which products are sourced from a variety of
manufacturers. Reference is made to the Note Business Segments in the Notes to
Financial Statements for further information with respect to business sectors
and the subsidiary.
Total revenues in fiscal 1998 increased to $3.9 billion from $3.8 billion a
year earlier. Total sales in the United States decreased 2 percent from a year
earlier while international sales, which amounted to 32 percent of the corporate
total, increased 12 percent. Net income for fiscal 1998 was $133.0 million, down
from $207.5 million for fiscal 1997. The reduction in earnings was due in large
part to restructuring and other one-time charges in the amount of $95.8 million
pre-tax taken during the fourth quarter. Before the charges, net income
decreased 5 percent to $196.7 million.
The markets served and principal products of the Company's three business
sectors and Lanier Worldwide, Inc. are as follows:
COMMUNICATIONS SECTOR: produces a comprehensive line of communications
equipment and systems and application solutions for television and radio
broadcast, radio-communication and telecommunication, including: transmitters
and studio equipment for analog television and digital television (formerly
HDTV); analog and digital AM and FM radio equipment; HF, VHF, UHF
radio-communication equipment; air traffic and national law enforcement
communication systems; microwave radios and transmission equipment; digital
telephone switches; telephone subscriber-loop and test systems equipment; and
network management and workforce management systems.
SEMICONDUCTOR SECTOR: produces standard, custom and semi-custom integrated
circuits and discrete devices for analog, digital, mixed-signal, and power
control and protection applications. These products are used in signal
processing, data-acquisition, and logic applications for automotive systems,
wireless communications, telecommunication line cards, video and imaging
systems, multimedia, industrial equipment, personal computers and computer
peripherals, and military and aerospace systems.
LANIER WORLDWIDE, INC.: markets, sells, distributes, services, supports and
provides supplies for copying systems, facsimile systems and networks, dictation
systems, multi-function devices, optical-based electronic-image management
systems, document productivity solutions, continuous recording systems and
computer-based healthcare information management systems and provides a variety
of outsourcing services including transcription, systems integration,
reprographics, litigation support services, binding and mailroom management.
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ELECTRONIC SYSTEMS SECTOR: engages in the design, development and
production of state-of-the-art electronic, communication and information systems
for defense, air traffic, aerospace, telecommunications, law enforcement and
newspaper composition markets. Applications of the sector's technologies and
products include advanced avionics systems; aircraft, spacecraft and missile
communications; terrestrial and satellite communication antennas, terminals and
networks; command, control, communication and intelligence systems, products and
services; global positioning system-based controls systems; signal and image
processing; weather support systems; electronic warfare simulation; civil and
military air traffic control systems; and integrated airport communication and
management systems.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
The financial results shown in the following tables are presented to comply
with current financial accounting standards relating to business segment
reporting. Information concerning the identifiable assets of the Company's
business segments is contained in the Note Business Segments in the Notes to
Financial Statements. In calculating operating profit, allocation of certain
expenses among the business segments involves the exercise of business judgment.
Intersegment sales, which are insignificant, are accounted for at prices
comparable to those paid by unaffiliated customers.
NET SALES AND OPERATING PROFIT BY BUSINESS SEGMENT
(DOLLARS IN MILLIONS)
NET SALES
COMMUNI- SEMI- LANIER ELECTRONIC
FISCAL YEAR ENDED CATIONS CONDUCTOR WORLDWIDE SYSTEMS TOTAL
----------------- -------- --------- --------- ---------- -----
June 30, 1996............... $841.6 $707.7 $1,117.2 $954.7 $3,621.2
June 27, 1997............... 948.0 679.7 1,171.7 997.8 3,797.2
July 3, 1998................ 970.5 697.4 1,256.5 953.0 3,877.4
OPERATING PROFIT
COMMUNI- SEMI- LANIER ELECTRONIC CORPORATE INTEREST
FISCAL YEAR ENDED CATIONS CONDUCTOR WORLDWIDE SYSTEMS EXPENSE EXPENSE TOTAL
----------------- -------- --------- --------- ---------- --------- -------- -----
June 30, 1996............... $ 82.4 $101.0 $120.7 $76.7 $(43.9) $(62.5) $274.4
June 27, 1997............... 83.5 111.9 129.3 84.4 (37.2) (59.9) 312.0
July 3, 1998*............... 105.1 14.1 129.2 63.5 (38.7) (73.2) 200.0
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* Fiscal 1998 results include a $83.8 million ($55.7 million after income taxes
or $.70 per share) restructuring charge and a $12.0 million ($8.0 million
after income taxes or 10 cents per share) provision for costs associated with
an international contract.
DESCRIPTION OF BUSINESS
COMMUNICATIONS
The Communications Sector of the Company, which has recently been
restructured to consist of four operating divisions, designs, manufactures, and
sells products characterized by three principal communication technologies: (i)
communications products and systems, including digital telephone switches,
enhanced services systems, telephone test equipment and systems, and
telecommunication network management systems; (ii) broadcast, including digital
and analog television and radio studio and transmission systems; and (iii)
wireless radio, including microwave radio products and systems, high-frequency
(HF), very high frequency (VHF) and ultra-high frequency (UHF) products, and air
traffic and national law enforcement systems.
Sales in fiscal 1998 for this business segment increased 2 percent to
$970.5 million from $948.0 million for the prior year. Sector operating profit,
which included a $8.3 million restructuring charge, increased to
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$105.1 million, up from $83.5 million in fiscal 1997. The sector contributed 25
percent of Company total sales in both fiscal 1998 and fiscal 1997.
The sector is a worldwide supplier of voice and data digital network
switches, private-branch exchanges (PBXs), automatic call distributors and
standards-based computer telephone integration products to long-distance
carriers, local carriers, utilities, corporations and government agencies. The
sector also offers a pre-paid calling card system.
The sector also supplies telecommunication products and systems, including
telephone test systems and tools (including portable and remote test units),
operational support systems to manage telephone subscriber loops, and workforce
and network management systems.
The sector is the largest producer of analog and digital microwave
communication products and systems in North America and is expanding its
international presence in such markets, particularly in Latin America. The
sector is also a leading supplier of multiband and secure wireless radio
communication products, systems and services including two-way HF, VHF and UHF
radio equipment and offers a comprehensive line of products including
ground-to-air avionics radios and systems for long- and short-distance
communications for commercial, military, law enforcement and government
applications.
The sector designs, manufactures and markets wireless local loop telephony
equipment for private, government and public phone system customers operating
worldwide.
The sector is a leading manufacturer and supplier of analog and digital
radio and television broadcast encoding and transmission equipment, systems and
services and radio-studio equipment, systems and services in the United States
and provided the nation's first advanced television transmitter to broadcast
digital television as well as the first commercial digital television
application. The sector's products include radio and television transmitters,
antennas, encoders and audio, remote-control and video production systems. The
sector is also a leading supplier of mobile broadcast units and provides
comprehensive studio integration services.
Principal customers for products of the Communications Sector include
foreign and domestic commercial and industrial firms, radio and television
broadcasters, telephone companies, governmental and military agencies,
utilities, construction companies and oil producers. In general, the sector's
products are sold and serviced domestically directly to customers through the
sales organizations of the operating divisions and through established
distribution channels. Internationally, the sector markets and sells its
products and services through established distribution channels and has recently
increased its focus in South America and other promising international markets,
particularly in the microwave radio area. See "International Business."
The backlog of unfilled orders for this segment of Harris' business was
$311 million at July 31, 1998, substantially all of which is expected to be
filled during the 1999 fiscal year, compared with $351 million a year earlier.
SEMICONDUCTOR
The Semiconductor Sector of the Company produces standard, custom and
semi-custom integrated circuits and discrete semiconductors for analog, digital,
mixed signal, power control and protection applications and produces devices for
data-acquisition, signal processing, logic and power applications that demand
the highest levels of performance in terms of speed, precision, low power
consumption and reliability, often in harsh environments.
Sales in fiscal 1998 for this business segment increased 3 percent to
$697.4 million from $679.7 million in fiscal 1997. The sector's operating
profit, which included restructuring charges of $59.2 million, was $14.1 million
in fiscal 1998, compared with $111.9 million in fiscal 1997. The sector
contributed 18 percent of Company total sales in both fiscal 1998 and fiscal
1997.
The sector produces discrete-power products, including metal oxide
semiconductor power devices, transistors, rectifiers, power control circuits and
transient suppression products. The sector pioneered development of
"intelligent-power" technology which permits the combination of analog, logic
and power circuits on the same chip. In addition to industrial and electronic
data processing applications for motor
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controllers, personal computers, computer peripherals and power supplies, these
products are widely used in automotive electronic systems, such as automotive
ignition systems, anti-lock braking and engine controls, and instrument
displays.
The sector is a major supplier of devices addressing the communications
market through the provision of complex functions, including wireless, broadband
and data conversion components. In addition, the sector is a leader in
mixed-signal telecommunication line card applications, including SLICs
(subscriber line interface circuits), coder/decoder and filter products, and
cross-point switches used in private-branch-exchange systems and of other
circuits for wireless communications, high resolution medical imaging, broadcast
and interactive cable, video, multimedia and military radar systems.
The sector is a major supplier of integrated circuits and discrete devices
to the military and aerospace markets, with an emphasis on commercial and
military space applications, and other applications for radiation hardened
circuits. The sector also supplies custom and semi-custom integrated circuits,
known as application specific integrated circuits, designed for high-performance
commercial, space and military applications.
The sector's circuits are based primarily on complementary metal oxide
semiconductor, bipolar analog, power analog/digital, metal oxide varistors,
radiation hardening and other process technologies.
Principal customers for the sector's products include electronic data
processing, communications, telephone, industrial, medical, video imaging and
other electronic equipment manufacturers, automobile manufacturers, defense
contractors and U.S. government agencies.
In general, the sector's products are sold directly to customers through a
worldwide sales organization, which includes independent manufacturers'
representatives, and to distributors, who, in turn, resell to their customers.
Internationally, this sector also sells through distributors. See "International
Business."
The integrated circuit industry and technology are characterized by intense
competition and rapid advances in product performance. In addition to its own
research and development, Harris is a party to technology development and
exchange agreements with other companies to develop new and expanded
technologies.
The backlog of unfilled orders for this segment of Harris' business was
$216 million at July 31, 1998, substantially all of which is expected to be
filled during the 1999 fiscal year, compared with $294 million a year earlier.
As a response to difficult conditions in the semiconductor industry,
particularly the logic product line, and in an effort to reduce costs, the
sector has recently announced a restructuring which includes a reduction of
approximately 1,900 employees, or about 25 percent of the sector's workforce,
and a structured phase-out of the logic product line.
LANIER WORLDWIDE
Lanier Worldwide, Inc. is a wholly-owned subsidiary of Harris which,
together with its subsidiaries and affiliated companies, markets, sells, and
services office equipment and business communication products and computer based
healthcare information systems and offers a variety of outsourcing services,
including transcription, systems integration, reprographics, litigation support
services, binding and mailroom management.
Sales in fiscal 1998 for this business segment increased 7 percent to
$1,256.5 million from $1,171.7 million in fiscal year 1997. Operating profit,
which includes an $8.5 million restructuring charge, was $129.2 million,
compared to $129.3 million last year. Lanier Worldwide contributed 32 percent of
Company total sales in fiscal 1998 and 31 percent in fiscal 1997.
Lanier Worldwide is one of the world's largest providers of office products
and document management solutions, services and support, with more than 1,600
sales and service centers in nearly 100 countries. Through its global network of
direct sales, national and global accounts, service centers and authorized
dealers, Lanier Worldwide provides copying, dictation, continuous recording,
facsimile products and systems, multi-functional devices, document productivity
systems and computer-based healthcare information manage-
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ment systems. Lanier has also increased its product line focus on digital
products, color copiers and print-on-demand. Additionally, Lanier provides
facilities management operations and other related outsourcing services and also
provides legal support services. Lanier Worldwide leases certain of its products
to customers on a short-term basis. Lanier sources substantially all of its
products from a variety of manufacturers.
Due to the nature of its business, backlog of unfilled orders is not
considered significant to an understanding of this segment's business.
During the first quarter of fiscal 1999 Lanier completed the acquisition of
the Copying Systems Business Unit of the Agfa-Gevaert Group, which is a member
of the Bayer Group. The acquired business, which had annual sales of
approximately $250 million for 1997, will double Lanier Worldwide's sales and
market size in the European office equipment market.
ELECTRONIC SYSTEMS
The Electronic Systems Sector of Harris is composed of three operating
divisions and is engaged in advanced research, design, development and
production of advanced electronic, information processing and communication
products, services, systems and sub-systems for government and commercial
organizations in the United States and internationally. Applications of the
sector's state-of-the-art technologies include air traffic control; advanced
aerospace products; terrestrial and satellite communications terminals and
networks; weather support systems; image processing; testing of complex
electronics systems; newspaper composition; law enforcement; and communication
and information management systems.
The Electronic Systems Sector is a major supplier of advanced-technology
and electronic systems to the United States Department of Defense, Federal
Aviation Administration, National Aeronautics and Space Administration, Federal
Bureau of Investigation and other federal and local government agencies,
aircraft manufacturers, airports and newspapers and publishing houses.
Sales in fiscal 1998 for this business segment decreased 4 percent to
$953.0 million from $997.8 million in fiscal 1997. Operating profit, which
included a $7.8 million restructuring charge and a $12.0 million provision for
an international contract, was $63.5 million, a decrease from $84.4 million in
the previous fiscal year. This sector contributed 25 percent of Company total
sales in fiscal 1998 and 26 percent in fiscal 1997.
The sector is a leading supplier of air-traffic control communication
systems. The sector is also a major supplier of custom aircraft and spaceborne
communication and information processing systems, a leading supplier of
terrestrial and satellite communication systems, including large deployable
satellite antenna systems and flat panel phased array and single mission
antenna, and is a preeminent supplier of super-high-frequency military satellite
ground terminals for the Department of Defense. The sector is also diversifying
into the commercial satellite business and has recently been awarded a contract
to supply the communications payload for a series of next generation broadband
satellites to GE Americomm.
The sector is a major supplier of custom ground-based systems and software
designed to collect, store, retrieve, process, analyze, display and distribute
information for government, defense and law enforcement applications, including
meteorological data processing systems and range management information systems.
The sector also provides computer controlled electronic maintenance, logistic,
simulation and test systems for military aircraft, ships and ground vehicles and
provides sophisticated ground based and shipboard command, control,
communication and intelligence systems, products and services for many
government end-users. The sector's electronic products enable high speed
communications for platforms such as the USAF F-22 air superiority fighter and
the Army's Commanche advanced armed reconnaissance helicopter.
The sector is a worldwide supplier of information-processing systems for
newspapers and publishing houses.
The sector has formed three joint ventures with the General Electric
Company. GE Harris Energy Controls Systems is a leading supplier of intelligent
energy management systems and services the electric utilities. GE-Harris Railway
Electronics is a leader in communication based electronic planning, scheduling
and control systems for railways worldwide. GE Harris Aviation Information
Solutions provides information systems and services that enable airlines to
monitor and analyze aircraft and engine performance data easier
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and faster, helping to improve airline efficiency and safety. The sector has,
also formed a joint venture with BE Aerospace, Inc. to provide live television
transmission to individual seats on commercial airliners.
Most of the sales of this sector are made directly or indirectly to the
United States government under contracts or subcontracts containing standard
government contract clauses providing for redetermination of profits, if
applicable, and for termination for the convenience of the government or for
default of the contractor. These sales consist of a variety of contracts and
programs with various governmental agencies, with no single program accounting
for 10 percent or more of total Harris sales.
The backlog of unfilled orders for this segment of Harris' business was
$430 million at July 31, 1998, a substantial portion of which is expected to be
filled during the 1999 fiscal year, compared with $470 million a year earlier.
INTERNATIONAL BUSINESS
Sales in fiscal 1998 of products exported from the United States or
manufactured abroad were $1,248.2 million or 32 percent of the Company's total
sales, compared with $1,119.4 million or 29 percent of the Company's total sales
in fiscal 1997 and $1,206.4 million or 33 percent in fiscal 1996. The Company's
international sales include both direct exports from the United States and sales
from foreign subsidiaries. Direct export sales are primarily denominated in U.S.
dollars, whereas sales from foreign subsidiaries are generally denominated in
the local currency of the subsidiary. Exports from the United States,
principally to Europe, Latin America and Asia, totalled $646.0 million or 52
percent of the international sales in fiscal 1998, $550.0 million or 49 percent
of the international sales in fiscal 1997 and $631.6 million or 52 percent of
the international sales in fiscal 1996.
Foreign operations represented 15 percent of consolidated net sales and 24
percent of consolidated total assets as of the end of fiscal 1998. Electronic
products and systems are produced principally in the United States, and
international electronic revenues are derived primarily from exports. Copying
and facsimile products are produced primarily in Asia. Semiconductor assembly
and test facilities are located in Malaysia and Ireland; and communication
products assembly facilities are located in Brazil, Canada and England.
International marketing activities are conducted through subsidiaries which
operate in Canada, Europe, Central and South America, Asia and Australia.
Reference is made to Exhibit 21 "Subsidiaries of the Registrant" for further
information regarding foreign subsidiaries.
Harris utilizes indirect sales channels, including dealers, distributors
and sales representatives, in the marketing and sale of some lines of products
and equipment, both domestically and internationally. These independent
representatives may buy for resale, or, in some cases, solicit orders from
commercial or governmental customers for direct sales by Harris. Prices to the
ultimate customer in many instances may be recommended or established by the
independent representative and may be on a basis which is above or below the
Company's list prices. Such independent representatives generally receive a
discount from the Company's list prices and may mark-up such prices in setting
the final sales prices paid by the customer. During the 1998 fiscal year, sales
from indirect sales channels represented 22% of total Company sales and 41% of
the Company's international sales. Fiscal year 1998 orders came from a large
number of foreign countries, no one of which accounted for five percent of the
Company's total orders.
Certain of Harris' exports are paid for by letters of credit, with the
balance carried either on an open account or installment note basis. Advance
payments, progress payments or other similar payments received prior to or upon
shipment often cover most of the related costs incurred. Performance guarantees
by the Company are generally required on significant foreign government
contracts.
The particular economic, social and political conditions for business
conducted outside the United States differ from those encountered by domestic
business. Management believes that the composite business risk for the
international business as a whole is somewhat greater than that faced by its
domestic operations as a whole. International business may subject the Company
to such risks as the laws and regulations of foreign governments relating to
investments, operations, currency exchange controls, revaluations, taxes, and
fluctuations of currencies; uncertainties as to local laws and enforcement of
contract and intellectual property rights; occasional requirements for onerous
contract clauses; and, in certain areas, rapid changes in governments and
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economic and political policies, political or civil unrest or the threat of
international boycotts and United States anti-boycott legislation. Nevertheless,
in the opinion of management, these risks are offset by the diversification of
the international business and the protection provided by letters of credit and
advance payments.
Except for inconsequential matters involving road and utility
rights-of-way, Harris has never been subjected to threat of government
expropriation, either within the United States or abroad.
Financial information regarding the Company's domestic and international
operations is contained in the Note Business Segments in the Notes to Financial
Statements.
COMPETITION
The Company operates in highly competitive businesses that are sensitive to
technological advances. Although successful product and systems development is
not necessarily dependent on substantial financial resources, some of Harris'
competitors in each of its businesses are larger and can maintain higher levels
of expenditures for research and development than Harris. Harris concentrates in
each of its sectors on the market opportunities which management believes are
compatible with its resources, overall technological capabilities and
objectives. Principal competitive factors in these sectors are
cost-effectiveness, product quality and reliability, service and ability to meet
delivery schedules as well as, in international areas, the effectiveness of
dealers.
PRINCIPAL CUSTOMERS
Sales to the U.S. government, which is the Company's only customer
accounting for 10 percent or more of total sales, were 24 percent, 23 percent
and 26 percent of the Company's total sales in fiscal 1998, 1997 and 1996
respectively. It is not expected that Defense Department budget cutbacks will
have a material effect on the profitability of the Company in fiscal 1999 due in
part to the Company's continuing efforts to diversify and reduce its reliance on
defense contracts.
BACKLOG
Harris' backlog of unfilled orders was approximately $1.0 billion at July
31, 1998, $1.1 billion at July 25, 1997 and $1.3 billion at July 26, 1996.
Substantially all of the backlog orders at July 31, 1998 are expected to be
filled during fiscal 1999.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research and engineering expenditures by Harris totaled approximately $686
million in fiscal 1998, $680 million in fiscal 1997 and $603 million in fiscal
1996. Company-sponsored research and product development costs were $183 million
in fiscal 1998, $175 million in fiscal 1997 and $160 million in fiscal 1996. The
balance was funded by government and commercial customers. Company-funded
research is directed to the development of new products and to building
technological capability in selected semiconductor, communications and
electronic systems areas. Government-funded research helps strengthen and
broaden the technical capabilities of Harris in its areas of interest. Almost
all of the operating divisions within the Company's sectors maintain their own
engineering and new product development departments, with scientific assistance
provided by advanced-technology departments.
PATENTS AND INTELLECTUAL PROPERTY
Harris holds numerous patents which it considers, in the aggregate, to
constitute an important asset. However, the Company does not consider its
business or any sector to be materially dependent upon any single patent or any
group of related patents. The Company is engaged in a pro-active patent
licensing program, especially in the Semiconductor Sector and the Communications
Sector, and has entered into a number of unilateral license and cross-license
agreements, many of which generate substantial royalty income. Although existing
license agreements have generated income in past years and will do so in the
future, there can be no assurances the Company will enter into additional income
producing license agreements. Numerous trade-
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marks used on or in connection with Harris products are considered to be a
valuable asset of Harris. Harris has recently adopted a new trademark.
ENVIRONMENTAL AND OTHER REGULATIONS
The manufacturing facilities of Harris, in common with those of industry
generally, are subject to numerous laws and regulations designed to protect the
environment, particularly in regard to wastes and emissions. Harris believes
that it has materially complied with these requirements, and such compliance has
not had a material adverse effect on its business or financial condition.
Expenditures to protect the environment and to comply with current environmental
laws and regulations over the next several years are not expected to have a
material impact on the Company's competitive or financial position. If future
laws and regulations contain more stringent requirements than presently
anticipated, expenditures may be higher than the Company's present estimates of
future expenditures.
Waste treatment facilities and pollution control equipment have been
installed to satisfy legal requirements and to achieve the Company's waste
minimization and prevention goals. An estimated $1.7 million was spent on
environmental capital projects in fiscal 1998 and $.4 million in fiscal 1997.
The Company currently forecasts authorization for environmental-related capital
projects totalling $2.0 million in fiscal 1999. Such amounts may increase in
future years.
Additional information regarding environmental matters is set forth in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RAW MATERIALS
Because of the diversity of the Company's products and services, as well as
the wide geographic dispersion of its facilities, the Company uses numerous
sources for the wide array of raw materials needed for its operations and for
products that it sells. To date, the Company has not been materially adversely
affected by the inability to obtain raw materials or products.
EMPLOYEES
As of July 3, 1998, Harris had approximately 28,500 employees, of whom
approximately 19,400 were located in the United States. In general, Harris
believes that its relations with its employees are good. During the first
quarter of fiscal 1999, Harris announced that it is reducing its workforce by
approximately 2,300 or about 8 percent of its worldwide workforce, and of that
reduction about 1,900 will be Semiconductor Sector employees.
ITEM 2. PROPERTIES.
Harris operates approximately 40 plants and approximately 290 offices in
the United States, Canada, Europe, Central and South America, Asia and Australia
consisting of about 7.3 million square feet of manufacturing, administrative,
warehousing, engineering and office facilities that are owned and about 4.1
million square feet of sales, office and manufacturing facilities that are
leased. The leased facilities are for the most part occupied under leases for
terms ranging from one year to 30 years, a majority of which can be terminated
or renewed at no longer than five-year intervals at Harris' option. The
Company's corporate headquarters are owned and located in Melbourne, Florida.
The location of the principal manufacturing plants owned by the Company in the
United States, and the sectors which utilize such plants are as follows:
Electronic Systems -- Malabar, Melbourne and Palm Bay, Florida; Semiconductor --
Palm Bay, Florida; Findlay, Ohio; and Mountaintop, Pennsylvania; Communications
- -- Camarillo, Novato and Redwood Shores, California; Greensboro, North Carolina;
San Antonio, Texas; Quincy, Illinois; and Rochester, New York; and Lanier
Worldwide -- Atlanta, Georgia. The location of the principal manufacturing
plants owned by the Company outside of the United States, and the sectors which
utilize such plants are as follows: Semiconductor -- Dundalk, Ireland; and Kuala
Lumpur, Malaysia; and Communications -- Calgary and Montreal, Canada; Shenzhen
Guangdong, China; and Cambridge, U.K.
8
11
In the opinion of management, the Company's facilities are suitable and
adequate for their intended purposes and have capacities adequate for current
and projected needs. Unused or under-utilized facilities are not considered
significant.
As of July 3, 1998, the following facilities were in productive use by
Harris:
APPROXIMATE APPROXIMATE
SQ. FT. TOTAL SQ. FT. TOTAL
SECTOR FUNCTION OWNED LEASED
------ -------- ------------- -------------
Communications Office/Manufacturing 874,510 1,026,589
Semiconductor Office/Manufacturing 2,213,084 44,344
Lanier Worldwide Office/Manufacturing/Warehouse 204,912 759,908
Electronic Systems Office/Manufacturing 2,997,657 312,707
OTHER
Corporate Offices 959,549 93,034
Sales/Service Offices 13,700 1,870,247
--------- ----------
TOTALS 7,263,412 4,106,829
ITEM 3. LEGAL PROCEEDINGS.
From time to time, as a normal incident of the nature and kind of business
in which the Company is engaged, various claims or charges are asserted and
litigation commenced against the Company arising from or related to product
liability; patents, trademarks, or trade secrets; labor and employee disputes;
breach of warranty; antitrust; distribution; or contractual relations. Claimed
amounts may be substantial but may not bear any reasonable relationship to the
merits of the claim or the extent of any real risk of court awards. While it is
not feasible to predict the outcome of these matters with certainty, in the
opinion of management, final judgments, if any, which might be rendered against
the Company in currently existing litigation are reserved against, covered by
insurance or would not have a material adverse effect on the financial condition
or the business of the Company as a whole.
Government contractors, such as the Company, engaged in supplying goods and
services to the U.S. government and its various agencies are dependent on
congressional appropriations and administrative allotment of funds and may be
affected by changes in U.S. government policies. U.S. government contracts
typically involve long lead times for design and development and are subject to
significant changes in contract scheduling and may be unilaterally modified or
cancelled by the government. Often these contracts call for successful design
and production of complex and technologically advanced products or systems. The
Company may participate in supplying goods and services to the U.S. government
as either a prime contractor or a subcontractor to a prime contractor. Disputes
may arise between the prime contractor and the government and the prime
contractor and its subcontractor and may result in litigation between the
contracting parties.
From time to time, the Company, either individually or in conjunction with
other U.S. government contractors, may be the subject of U.S. government
investigations for alleged criminal or civil violations of procurement or other
federal laws. These investigations may be conducted without the Company's
knowledge. The Company is currently cooperating with certain government
representatives in investigations relating to potential violations of the
federal procurement laws. The Company is unable to predict the outcome of such
investigations or to estimate the amounts of resulting claims or other actions
that could be instituted against it, its officers or employees. Under present
government procurement regulations, if indicted or adjudged in violation of
procurement or other federal civil laws a contractor, such as the Company, or
one or more of its operating sectors or divisions, could be suspended or
debarred from eligibility for awards of new government contracts for up to three
years. In addition, a government contractor's foreign export control licenses
could be suspended or revoked. Management does not believe that the outcome of
these current disputes or investigations will have a material adverse effect on
the financial condition or the business of the Company as a whole.
9
12
In addition, the Company is subject to numerous federal and state
environmental laws and regulatory requirements and is involved from time to time
in investigations or litigation of various potential environmental issues
concerning ongoing activities at its facilities or remediation as a result of
past activities. The Company from time to time receives notices from the United
States Environmental Protection Agency and equivalent state environmental
agencies that it is a potentially responsible party ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act (commonly
known as the "Superfund Act") and/or equivalent state legislation. Such notices
assert potential liability for cleanup costs at various sites, which include
Company-owned sites and non-Company owned treatment or disposal sites, allegedly
containing hazardous substances attributable to the Company from past
operations. The Company has been named as a PRP at 9 such sites, excluding sites
as to which the Company's records disclose no involvement or as to which the
Company's liability has been finally determined. While it is not feasible to
predict the outcome of many of these proceedings, in the opinion of management,
any payments the Company may be required to make as a result of currently
existing claims will not have a material adverse effect on the financial
condition or the business of the Company as a whole.
Additional information regarding environmental matters is set forth in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of fiscal 1998.
10
13
EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF SEPTEMBER 1, 1998*).
EXECUTIVE OFFICE
NAME AGE CURRENTLY HELD PAST BUSINESS EXPERIENCE
---- --- ---------------- ------------------------
Phillip W. Farmer 60 Chairman of the Board, Chairman of the Board and Chief Executive
President and Chief Executive Officer since July, 1995. President since
Officer April, 1993. Chief Operating Officer, 1993
to 1995. Executive Vice President and
Acting President -- Semiconductor Sector,
1991 to 1993. President -- Electronic
Systems Sector, 1989 to 1991. Senior Vice
President -- Sector Executive, 1988 to
1989. Vice President -- Palm Bay
Operations, 1986 to 1988. Vice President --
General Manager, Government Support Systems
Division, 1982 to 1986. Director since
1993.
Wesley E. Cantrell 63 President and President and Chief Executive Officer, Lanier
Chief Executive Officer, Worldwide, Inc. since March, 1987. Senior
Lanier Worldwide, Inc. Vice President -- Sector Executive, Lanier
Business Products Sector, 1985 to 1987.
President, Lanier Business Products, 1977
to 1987. Executive Vice President and
National Sales Manager, Lanier Business
Products, 1972 to 1977. Vice President,
Lanier Business Products, 1966 to 1972.
Employed by Lanier Business Products since
1955.
E. Van Cullens 52 President -- Communications President -- Communications Sector since
Sector June, 1997. Formerly Senior Vice President
and Head of Internet Business Unit of
Siemens Public Communication Networks
Group, Siemens Stromberg-Carlson, 1996 to
June, 1997. Senior Vice President of
Marketing and Business Development of
Siemens Stromberg-Carlson from 1991 to
1996. Various management assignments with
Stromberg-Carlson, 1984 to 1991.
- ---------------
*This listing identifies the executive officers of the Company, as defined
pursuant to the Securities Exchange Act of 1934, as well as all other corporate
vice presidents.
11
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EXECUTIVE OFFICE
NAME AGE CURRENTLY HELD PAST BUSINESS EXPERIENCE
---- --- ---------------- ------------------------
John C. Garrett 55 President -- Semiconductor President -- Semiconductor Sector since
Sector April, 1993. Formerly Executive Vice
President, Industrial Business, Square D
Company, 1987 to 1993, and various general
management assignments with General
Electric Company, 1964 to 1987. Mr. Garrett
has announced that effective September 30,
1998 he will be retiring from the Company.
Charles J. Herbert 62 Acting President -- Electronic Acting President -- Electronic Systems Sector
Systems Sector since February, 1998. Vice President
Melbourne Operations -- Electronic Systems
Sector since July, 1997. Vice President --
General Manager, Government Aerospace
Systems Division, 1981 to 1997. Various
product line and management assignments
with the Electronic Systems Sector from
1960 to 1981.
Bryan R. Roub 57 Senior Vice President -- Chief Senior Vice President -- Chief Financial
Financial Officer Officer since October, 1993. Senior Vice
President -- Finance July, 1984 to October,
1993. Formerly with Midland-Ross
Corporation in the capacities of Executive
Vice President -- Finance, 1982 to 1984;
Senior Vice President, 1981 to 1982; Vice
President and Controller, 1977 to 1981; and
Controller, 1973 to 1977.
Richard L. Ballantyne 58 Vice President -- General Vice President -- General Counsel and
Counsel and Secretary Secretary since November, 1989. Formerly
Vice President -- General Counsel and
Secretary, Prime Computer, Inc., 1982 to
1989.
James L. Christie 46 Vice President -- Vice President -- Internal Audit since
Internal Audit August, 1992. Director -- Internal Audit,
1986 to 1992. Formerly Director -- Internal
Audit and Division Controller at Harris
Graphics Corporation, 1985 to 1986. Various
corporate and division financial positions
at Harris, 1978 to 1985.
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EXECUTIVE OFFICE
NAME AGE CURRENTLY HELD PAST BUSINESS EXPERIENCE
---- --- ---------------- ------------------------
Robert W. Fay 51 Vice President -- Vice President -- Controller since January,
Controller 1993. Acting Vice President -- Controller,
Semiconductor Sector, 1991 to 1993. Vice
President -- Treasurer, 1988 to 1993.
Treasurer, 1985 to 1988. Director --
Financial Operations, Semiconductor Sector,
1984 to 1985. Controller -- Bipolar Digital
Semiconductor Division, 1981 to 1984.
Manager -- Corporate Finance and Cash
Management, 1978 to 1981.
Nick E. Heldreth 56 Vice President -- Vice President -- Human Resources and
Human Resources and Corporate Corporate Relations since July, 1996. Vice
Relations President -- Human Resources since June,
1986. Formerly Vice
President -- Personnel and
Industrial Relations, Commercial
Products Division, Pratt & Whitney
and various related assignments with
United Technologies Corporation,
1974 to 1986.
John G. Johnson 62 Vice President -- Vice President -- Quality and New Processes
Quality and since 1994. Formerly Vice President and
New Processes Program Manager of Core Program. Various
management assignments with the Electronic
Systems Sector, 1962 to 1994.
Pamela Padgett 42 Vice President -- Investor Vice President -- Investor Relations since
Relations December, 1996. Formerly Vice President --
Mergers and Acquisitions MC Financial
Services Ltd., a subsidiary of Mitsubishi
Corporation, 1990 to December 1996.
Ronald R. Spoehel 40 Vice President -- Corporate Vice President -- Corporate Development since
Development October, 1994. Formerly, Senior Vice
President, ICF Kaiser International, Inc.,
in various general management assignments
including member of the office of the
chairman, chief financial officer, and
treasurer, 1990 to 1994; and Vice
President, Investment Banking, Lehman
Brothers (formerly Shearson Lehman Hutton
Inc.), 1985 to 1990.
13
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EXECUTIVE OFFICE
NAME AGE CURRENTLY HELD PAST BUSINESS EXPERIENCE
---- --- ---------------- ------------------------
David S. Wasserman 55 Vice President -- Treasurer Vice President -- Treasurer since January,
1993. Vice President -- Taxes, 1987 to
1993. Formerly Senior Vice President,
Midland-Ross Corporation, 1979 to 1987.
Raymon M. White 60 Vice President -- Washington Vice President -- Washington Operations since
Operations July, 1995. Vice President -- Congressional
Relations, November, 1994 to July, 1995.
Corporate Director Congressional Relations,
August, 1988 to 1994. Director
Congressional Relations, Harris Electronic
Systems Sector, July, 1986 to 1988.
Greg L. Williams 45 To become President -- Vice President -- General Manager -- Power
Semiconductor Sector Products Business, Semiconductor Sector
(effective October 1, 1998) since January, 1998. Formerly with
Motorola, Inc. (July 1984 to January 1998)
in various positions including Vice
President -- Assistant General Manager,
Semiconductor Components Group, Vice
President and General Manager, Power
Products Division and Vice President --
Director, Automotive World Marketing. With
General Electric Company from 1977 to 1984,
positions included sales management,
consulting, software support and
development positions for global data
communications network.
There is no family relationship between any of the Company's executive
officers or directors and there are no arrangements or understandings between
any of the Company's executive officers or directors and any other person
pursuant to which any of them was elected as an officer or director, other than
arrangements or understandings with directors or officers of the Company acting
solely in their capacities as such. All of the Company's executive officers are
elected annually and serve at the pleasure of the Board of Directors.
14
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Harris Corporation Common Stock, par value $1 per share (the "Common
Stock"), is listed and traded on the New York Stock Exchange, Inc. ("NYSE"),
under the ticker symbol "HRS," and is also traded on the Boston, Chicago,
Pacific and Philadelphia Stock Exchanges and through the Intermarket Trading
System. As of August 21, 1998, there were approximately 10,656 holders of record
of the Common Stock.
The high and low sales prices as reported in the consolidated transaction
reporting system and the dividends paid on the Common Stock for each quarterly
period in the last two fiscal years are reported below:
CASH
HIGH LOW DIVIDENDS
---- --- ---------
FISCAL 1997
First Quarter.............................. $ 32 15/16 $ 25 1/8 $0.19
Second Quarter............................. $ 35 11/16 $ 30 7/8 $0.19
Third Quarter.............................. $ 40 $ 33 11/16 $0.19
Fourth Quarter............................. $ 46 1/16 $ 36 5/16 $0.19
-----
$0.76
=====
FISCAL 1998
First Quarter.............................. $ 49 $ 40 3/16 $0.22
Second Quarter............................. $ 50 $ 40 3/4 $0.22
Third Quarter.............................. $ 55 5/16 $ 41 3/4 $0.22
Fourth Quarter............................. $ 53 $ 40 3/8 $0.22
-----
$0.88
=====
On August 21, 1998, the last sale price of the Common Stock as reported in
the consolidated transaction reporting system was $38.00 per share.
On August 29, 1998, the Board declared a quarterly cash dividend of $.24
per share which will be paid on September 23, 1998 to holders of record on
September 14, 1998. The Company has paid cash dividends every year since 1941
and currently expects that cash dividends will continue to be paid in the
future; however, there can be no assurances as to future dividend payments
because they are dependent upon future operating results, capital requirements
and financial condition. The Board also authorized the Company to repurchase up
to 1,000,000 shares of its Common Stock periodically in the open-market.
On August 23, 1997, the Board of Directors approved a two-for-one stock
split to shareholders of record at the close of business on September 4, 1997.
All share information in this Annual Report on Form 10-K/A has been restated to
reflect the stock split.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected historical financial information of
Harris Corporation and its subsidiaries for each of the last five fiscal years.
The selected financial information shown below has been derived from the
Company's audited consolidated financial statements. This table should be read
in conjunction with other financial information of Harris, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements included elsewhere herein.
FISCAL YEARS ENDED
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenue from sales, rentals, and
services............................. $3,877.4 $3,797.2 $3,621.2 $3,444.1 $3,336.1
Cost of sales, rentals, and services... 2,616.2 2,519.2 2,404.6 2,328.5 2,274.8
Restructuring expense.................. 83.8 -- -- -- --
Interest expense....................... 73.2 59.9 62.5 65.4 58.3
Income before income taxes............. 200.0 312.0 274.4 237.6 193.5
Income taxes........................... 67.0 104.5 96.0 83.1 71.6
Income before cumulative effect of
change in accounting principle....... 133.0 207.5 178.4 154.5 121.9
Cumulative effect of change in
accounting principle................. -- -- -- -- (10.1)
Net income............................. 133.0 207.5 178.4 154.5 111.8
Average shares outstanding (diluted)*.. 80.0 78.8 77.8 78.2 79.4
Per share data (diluted)*:
Income before cumulative effect of
change in accounting principle.... 1.66 2.63 2.29 1.98 1.54
Cumulative effect of change in
accounting principle.............. -- -- -- -- (.13)
Net income........................... 1.66 2.63 2.29 1.98 1.41
Cash dividends....................... .88 .76 .68 .62 .56
Net working capital.................... 837.9 774.9 757.8 755.4 893.6
Net plant and equipment................ 947.0 878.3 721.7 581.0 551.3
Long-term debt......................... 768.6 686.7 588.5 475.9 661.7
Total assets........................... 3,784.0 3,637.9 3,206.7 2,836.0 2,677.1
Shareholders' equity................... 1,609.3 1,578.2 1,372.9 1,248.8 1,188.0
Book value per share*.................. 20.11 19.82 17.66 16.06 15.12
- ---------------
* All per share data reflect the two-for-one stock split in September, 1997.
16
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in this review, along with the Business Segment data shown
on page 2, reflects the Company's continuing operations.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED WITH 1997 -- Sales in fiscal 1998 increased 2.1 percent
while net income decreased 35.9 percent. Revenue from services, which are
derived principally from the Lanier Worldwide facility management business,
increased 43.8 percent due primarily to sales associated with acquired
businesses, which had higher costs as a percentage of their sales. Net income
for fiscal 1998 included fourth quarter restructuring and other one-time charges
of $95.8 million ($63.7 million after tax). Excluding these charges, net income
decreased 5.2 percent. Restructuring charges of $83.8 million ($55.7 million
after tax) were incurred for reduction of personnel and write-off or write-down
of assets related to the exit of several product lines. Restructuring expenses
are discussed below in more detail. Fiscal 1998 income also includes a provision
of $12.0 million ($8.0 million after tax) for costs related to a contract of the
Electronic Systems Sector with an agency of the Malaysian government. This
provision relates to additional contract costs incurred in the fourth quarter
and the effect of the Malaysian monetary crisis. The Malaysian monetary crisis
was primarily driven by a high level of domestic indebtedness. The Malaysian
government's solution was to cut expenditures thus putting pressure on all
government agencies to constrain their spending. The crisis, which negatively
impacted the Company's contract in the fourth quarter of fiscal 1998, culminated
in the Malaysian government's decision to impose capital controls in September
1998 which further disrupted Asian financial markets. At that time, the official
exchange rate to the dollar was fixed at 3.8 Ringgits and foreign exchange trade
was severely limited. The Malaysian government's intent was to prevent capital
from flowing out of the country. Since the agency was required to constrict
expenditures due to the economic crisis, the resulting environment makes
contract negotiations difficult. Segment results, as discussed below, exclude
the fiscal 1998 restructuring and one-time charge.
Communications segment sales increased 2.4 percent while net income
increased 30.9 percent. Significant sales and earnings improvement in the
segment's digital switch and telephone test equipment businesses helped offset
the impact of substantially lower earnings in the segment's microwave radio
business, due to the slowdown in the PCS market. Segment earnings also benefited
from substantially higher gains from the sale of investment securities and
higher royalty income.
Semiconductor segment sales increased 2.6 percent as record volume
shipments were offset in part by lower product prices caused by industry-wide
price reductions. The volume of units shipped increased 15 percent over the
prior year while average selling prices decreased 9 percent over the same
period. Excluding restructuring expense, segment net income decreased 32.0
percent. Royalty income, which is significant for both years, was lower in
fiscal 1998. Restructuring actions will reduce the segment's workforce by
approximately 25 percent and once completed, these actions should reduce annual
operating costs by $70.0 to $80.0 million, much of which should occur in time to
benefit fiscal 1999.
Lanier Worldwide segment sales increased 7.2 percent in fiscal 1998 due to
growth in both domestic and international markets. Segment net income increased
2.3 percent due to higher sales. In the fourth quarter of fiscal 1998, Lanier
Worldwide entered into a definitive agreement to acquire the copying systems
business of the Agfa-Gevaert Group. The transaction was completed in the first
quarter of fiscal 1999 and should increase the segment's sales by more than $250
million annually. The acquisition will double Lanier's presence and market share
in the European office equipment market.
Electronic Systems segment sales were 4.5 percent lower in fiscal 1998,
while net income declined 19.7 percent. Reduced sales in the segment's air
traffic control and aerospace systems businesses more than offset growth in the
segment's information systems business. Lower sales, higher interest expense and
gain from the sale of a building in fiscal 1997 contributed to the fiscal 1998
earnings decline.
Cost of sales, rentals and services as a percentage of sales increased to
67.5 percent from 66.3 percent in the prior year. The Semiconductor, Electronic
Systems and Lanier Worldwide segments had lower operating
17
20
margins in the current fiscal year. Cost of product sales and rentals includes a
write-down of $31.0 million for inventory relating to the product lines which
are being exited and $12.0 million for costs associated with the Malaysian
contract. Cost of services as a percentage of service revenue increased to 63.4
percent from 54.7 percent in the prior year due primarily to higher costs
associated with service revenue from acquired businesses, which had higher costs
as a percentage of their sales. Engineering, selling, and administrative
expenses as a percentage of sales decreased from 25.4 percent in fiscal 1997 to
25.3 percent in the current year. Lower marketing expense helped offset a small
increase in company-sponsored research and development.
Interest income was higher in fiscal 1998 due to interest received from the
Internal Revenue Service. Interest expense was also higher in fiscal 1998 due to
higher average borrowings and a lower amount of interest capitalized on new
construction projects. "Other-net" expense was $5.9 million lower in fiscal 1998
due to gains resulting from the sale of investment securities.
The provision for income taxes in both fiscal 1998 and 1997 was 33.5
percent of income before income taxes. The reduction from the statutory U.S.
income tax rate of 35.0 percent in fiscal 1998 resulted from tax benefits
associated with foreign income and export sales.
RESTRUCTURING
In fiscal 1998, the Company recorded restructuring charges of $83.8 million
($55.7 million after tax) for the reduction of personnel and the write-off or
write-down of assets related to the exit of several product lines. Components of
the restructuring charge include $50.3 million for work force reductions and
$33.5 million for costs associated with the exit of product lines.
The Company has targeted work force reductions of approximately 2,300
employees, of which 209 were terminated prior to the end of the fiscal year.
Reductions are primarily focused in the Semiconductor segment where
approximately 1,900 employees will be terminated before the end of fiscal 1999.
Reductions result from the Company's decision to exit several product lines and
from the Company's objective to rationalize its remaining work force. Employee
severance benefits are expected to be paid ratably over the next fiscal year
from existing cash sources. Labor costs savings are expected to be approximately
$95.0 million per full fiscal year, with a $55.0 million expected savings in
fiscal 1999.
Product line exit costs include $13.8 million for the write-off of
capitalized software, $9.7 million for equipment write-offs and $10.0 million
for facility write-downs and other exit costs. Product line exit expenses are
for the most part noncash charges. Anticipated cost savings from reduced
depreciation and amortization will approximate $5.0 million in fiscal 1999 and
2000 and will decrease thereafter.
Within the Company's semiconductor business, product line exits include
commercial logic, multimedia and custom telecom products. In the first half of
fiscal 1999, the Company intends to complete the sale of its commercial logic
product line and, by the end of fiscal 1999, to discontinue the multimedia and
custom telecom product lines. The Company anticipates gains from the sale of
commercial logic technology and will include any such gains as a component of
restructuring expenses in the period a sale occurs. Other manufacturing assets
associated with these product lines may be sold, scrapped or be redeployed
within the semiconductor business.
Associated with the exit of semiconductor product lines are charges for the
disposal of a semiconductor facility in Somerville, New Jersey. The facility
will be vacated in the second quarter of fiscal 1999, with the sale expected to
be completed in the fourth quarter of fiscal 1999. Proceeds from the sale are
expected to be approximately $15 million.
Product line exits in other than the Semiconductor segment include analog
base stations, wirefree communication devices and transportation tracking
systems. The transportation tracking systems business is expected to be sold in
the second half of fiscal 1999, while the other two product lines will be
discontinued in the first half of the fiscal year. Manufacturing assets
associated with these businesses are not significant and will be redeployed to
other product lines.
18
21
Sales from product lines to be exited were $72.6 million in 1998, $91.8
million in 1997, and $90.1 million in 1996. Operating losses from these product
lines, which include allocation of manufacturing overhead costs, were $33.6
million in 1998, $26.6 million in 1997 and $7.6 million in 1996.
CAPITAL EXPENDITURES -- Expenditures for land, buildings, and equipment totaled
$207 million in 1998, down from $279 million in the prior year. In addition,
during fiscal 1998, $78 million was invested in equipment for rental to
customers, up from $71 million invested in the prior year. Substantially all of
this investment in rental equipment is related to Lanier Worldwide products.
FISCAL 1997 COMPARED WITH 1996 -- Sales in fiscal 1997 increased 4.9 percent
while net income increased 16.3 percent.
Communications segment sales increased 12.6 percent and net income
increased 7.9 percent. The segment benefited from strong sales and earnings
growth in its microwave systems business, as well as lower tax rates.
Significant gains from the sale of investment securities were substantially
offset by very poor performance in the segment's digital switch business. This
poor performance relates to high margin orders expected in fiscal 1997 which
were delayed until fiscal 1998. Improvement in the digital switch business
coupled with expected strong performance in the microwave systems and broadcast
products businesses should result in higher sales and earnings in fiscal 1998.
Semiconductor segment sales were 4.0 percent lower than last year while net
income increased 10.7 percent. Lower earnings for the segment's discrete power
and digital products were offset by improved margins for intelligent power
products and significantly increased royalty income. Improving market conditions
for the industry and increased manufacturing capacity is expected to result in a
significant increase in fiscal 1998 sales, and higher earnings.
Lanier Worldwide segment sales and net income increased 4.9 percent and
17.1 percent, respectively. Sales in European markets were adversely affected by
currency fluctuations, while both domestic and international margins increased
due to the favorable impact of sourcing yen-based products. This segment expects
both improved sales and earnings in fiscal 1998.
Sales for the Electronic Systems segment were 4.5 percent higher than the
prior year due to growth in its information systems business. Net income for the
year increased 37.2 percent over last year due to higher margins for the
segment's core defense products and reduced losses in its energy management
business which was transferred to a joint venture in January of 1997. Earnings
in fiscal 1997 include a gain from the sale of a building which was
substantially offset by write-offs on certain long-term contracts. While the
segment continues to adjust to reduced appropriations in its core defense
business, fiscal 1998 sales are expected to be slightly higher than the prior
year with a moderate decrease in earnings.
Cost of sales, rentals, and services as a percentage of sales decreased to
66.3 percent from 66.4 percent in the prior year. For the current year, cost
ratios were lower in the Semiconductor segment due to significantly increased
royalty income, and the Lanier segment due to favorable currency exchange rates.
Engineering, selling, and administrative expenses as a percentage of sales
increased from 25.2 percent in fiscal 1996 to 25.4 percent in the current year.
Lower administrative costs were offset by increased marketing expenses and
company-sponsored research and development.
Interest income and expense were slightly lower for the year as additional
interest on borrowed funds used for major new construction projects has been
capitalized as a component of plant and equipment under construction.
"Other-net" expense was $26.2 million lower in fiscal 1997 due to gains
resulting from the sale of investment securities and a gain on the sale of a
building.
The provision for income taxes in fiscal 1997 was 33.5 percent of income
before income taxes compared to 35.0 percent in fiscal 1996. The reduction from
the statutory U.S. income tax rate of 35.0 percent in 1997 resulted from tax
benefits associated with foreign income and export sales.
CAPITAL EXPENDITURES -- Expenditures for land, buildings, and equipment totaled
$279 million in 1997, up from $225 million in the prior year. In addition,
during fiscal 1997, $71 million was invested in equipment for rental to
customers, up from $68 million invested in the prior year. Substantially all of
this investment in rental equipment is related to Lanier Worldwide products.
19
22
FINANCIAL CONDITION
CASH POSITION -- At July 3, 1998, cash and cash equivalents totaled $184
million, an increase from $71 million at June 27, 1997. Marketable securities
were $45 million at July 3, 1998.
CASH FLOWS -- Cash provided by operating activities in fiscal 1998 was $392
million, up from $204 million from the prior year due primarily to a decrease in
unbilled costs and a significant increase in accrued liabilities. Accrued
liabilities include current year restructuring reserves that will be used by the
Company in fiscal 1999. Partially offsetting cash provided by operating
activities was a $63 million decrease in advanced payments from customers and
reduced levels of unearned income in the Company's Lanier Worldwide copier
business. Cash used in investing activities in fiscal 1998 was $298 million,
which was $76 million lower than the prior year when the Semiconductor segment
completed its capital expansion program. Cash provided by financing activities
in fiscal 1998 included a net $75 million increase in borrowings used to help
finance $285 million in capital additions and a $63 million increase in working
capital.
RECEIVABLES, UNBILLED COSTS, AND INVENTORIES -- Notes and accounts receivable
amounted to $1,038 million at July 3, 1998, unchanged from a year earlier.
Unbilled costs and inventories decreased $85 million from the prior year to $851
million. This decrease reflects a substantial reduction in unbilled costs within
the Electronic Systems segment.
BORROWING ARRANGEMENTS -- As at July 3, 1998, the Company had available $800
million of domestic credit agreements with 33 banks for general corporate
purposes, of which $300 million expires in November 1998. Under these agreements
$243 million was outstanding at July 3, 1998. The Company also had $151 million
in open foreign bank credit lines, of which $62 million was available at July 3,
1998.
CAPITALIZATION -- At July 3, 1998, debt totaled $1,056 million, representing
39.6 percent of total capitalization (defined as the sum of total debt plus
shareholders' equity). A year earlier, debt of $983 million was 38.4 percent of
total capitalization. Year-end long-term debt included $500 million of
debentures, $259 million of notes payable to banks and insurance companies, and
$10 million of other long-term debt.
In 1998, the Company issued 590,733 shares of the Common Stock to employees
under the terms of the Company's stock purchase, option and incentive plans.
The Company expects to maintain operating ratios, fixed-charge coverages,
and balance-sheet ratios sufficient for retention of its present debt ratings.
RETIREMENT PLANS -- Retirement benefits for substantially all of the Company's
employees are provided primarily through a retirement plan having profit-sharing
and savings elements. The Company also has non-contributory defined benefit
pension plans and provides limited health-care benefits to retirees who have 10
or more years of service. All obligations under the Company's retirement plans
have been fully funded by the Company's contributions, the provision for which
totaled $82.3 million during the 1998 fiscal year.
DEFERRED INCOME TAXES -- The liability for non-current deferred income taxes was
$144 million at July 3, 1998, up from $84 million a year earlier.
IMPACT OF FOREIGN EXCHANGE -- Approximately 80 percent of the Company's
international business is transacted in local currency environments. The impact
of translating the assets and liabilities of these operations to U.S. dollars is
included as a component of Shareholders' Equity. At July 3, 1998, the cumulative
translation adjustment reduced Shareholders' Equity by $47 million compared to a
reduction of $30 million at June 27, 1997.
The Company utilizes exchange rate agreements with customers and suppliers
and foreign currency hedging instruments to minimize the currency risks of
international transactions. Gains and losses resulting from currency rate
fluctuations did not have a material effect on the Company's results in 1998,
1997 or 1996.
IMPACT OF INFLATION -- To the extent feasible, the Company has consistently
followed the practice of adjusting its prices to reflect the impact of inflation
on wages and salaries for employees and the cost of purchased materials and
services.
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ENVIRONMENTAL MATTERS -- Harris is actively engaged in complying with
environmental protection laws. In addition to ongoing internal compliance
programs, an estimated $1.7 million was spent on environmental capital projects
in fiscal 1998 and $.4 million in fiscal 1997. The Company estimates that it
will authorize $2.0 million in fiscal 1999 for environmental-related capital
projects. Under the Superfund Act or similar state environmental laws, the
Company also has potential liability at various waste sites designated for
clean-up. The Company is named as a potentially responsible party at nine such
sites where future liabilities could exist. These sites include four Company
owned sites and five non-Company owned treatment or disposal sites, allegedly
contain hazardous substances attributable to the Company from past operations.
The Company routinely assesses its contingencies, obligations and commitments to
clean up and monitor sites in light of in-depth studies, analysis by
environmental experts and legal reviews. At the four Company owned sites, the
Company is involved primarily in monitoring and remediation programs that have
been implemented in cooperation with various environmental agencies. At the
other sites, the Company is involved as one of numerous partially responsible
parties. In ascertaining environmental exposures, management must assess the
extent of contamination, the nature of remedial actions, continually evolving
governmental standards, the number, participation level and financial viability
of any other PRPs and other similar variables. Based upon internal and third
party studies, as well as the remediation and monitoring expense history at the
four Company owned sites, the number and solvency of PRPs at the other sites and
an assessment of other relevant factors, the Company has estimated that its
"discounted" liability under the Superfund Act and other environmental statutes
and regulations for identified sites, using a 6% discount rate, is approximately
$4.5 million. The Company has not accrued these discounted liabilities because
they are not material to the financial position or results of operations. The
expected aggregate undiscounted amount that will be incurred over the next 20 to
30 years (depending on the number of years for each site) is approximately $8.6
million. The expected payments for each of the next five years are approximately
$.3 million per year and the aggregate amount thereafter is approximately $7.0
million.
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.
With regard to the Year 2000 problem, more than 400 project initiatives of
varying magnitudes have been identified throughout the Company and its various
business segments. Each project has been assigned a leader and prioritized based
on the size of the task and the perceived business risk. A steering team
comprised of senior management in key functional areas including: accounting,
finance, legal, quality & new processes and information management has been
established to monitor and oversee the progress of each project. Some of these
projects have been completed and a substantial number are steadily progressing.
The Company has determined it needs to replace or modify several of its
software systems and is in the process of replacing or outsourcing many of its
time sensitive software systems. In addition, the Company has software programs
for reprogramming other time sensitive software and equipment.
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 has Year 2000 exposure in its operating systems and business
systems; including engineering, manufacturing, order fulfillment, program
management, financial and administrative functions. It is the Company's belief
that the greatest potential risk from the Year 2000 issue could be its inability
to meet commitment dates on delivery of product and has focused the majority of
the Company's effort and dedicated resources to address this issue. In addition,
the Company believes that a limited number of the non-information technology
systems, such as manufacturing machinery, equipment and test equipment with date
sensitive software and embedded microprocessors may be affected, and evaluation
and remediation are underway.
The Company has also initiated communications with significant suppliers,
customers and other relevant third parties to identify and minimize disruptions
to the Company's operations and to assist in resolving Year
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2000 issues. 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 believes it is diligently addressing the Year 2000 issues and
that it will satisfactorily resolve significant Year 2000 problems. The Company
anticipates completing substantially all of its Year 2000 projects during fiscal
1999, with major completion milestones being targeted for the second and fourth
quarters of fiscal 1999. In the event the Company falls short of these
milestones, additional internal resources will be focused on completing these
projects or developing contingency plans. The estimated cost for resolving Year
2000 issues is approximately $42 million with approximately $20 million planned
for fiscal 1999. These costs are generally not incremental to existing
information technology budgets; internal resources were re-deployed and time
tables for implementation of replacement systems were accelerated. The largest
portion of this expenditure is being used to replace existing software and
hardware. 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
be materially greater than 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 timely identify and correct all
relevant computer programs, and similar uncertainties.
EURO CONVERSION
On January 1, 1999, certain member nations of the European Economic and
Monetary Union ("EMU") will adopt a common currency, the Euro. For a three-year
transition period, both the Euro and individual participants' currencies will
remain in circulation. After January 1, 2002, the Euro will be the sole legal
tender for EMU countries. The adoption of the Euro will affect a multitude of
financial systems and business applications as the commerce of these nations
will be transacted in the Euro and the existing national currency. For the year
ended July 3, 1998, approximately 9 percent of the Company's revenues were
derived from EMU countries.
The Company is currently addressing Euro related issues and its impact on
information systems, currency exchange rate risk, taxation, contracts,
competition and pricing. Action plans currently being implemented are expected
to result in compliance with all laws and regulations; however, there can be no
certainty that such plans will be successfully implemented or that external
factors will not have an adverse effect on the Company's operations. Any costs
associated with the adoption of the Euro will be expensed as incurred and the
Company does not expect these costs to be material to its results of operations,
financial condition or liquidity.
OUTLOOK
Overall, the Company believes the fourth quarter restructuring actions,
along with continuing investment in new products and services, should enable the
Company to grow revenues and earnings in fiscal 1999. However, revenue growth
will be difficult in the first half due to on-going weakness in the
semiconductor market, softness in the North American microwave radio market, and
economic instability in the international markets served by the Company's
communications businesses.
In the Communications segment, continuing improvement in the digital switch
business coupled with expected strong performance in its other businesses,
particularly microwave and broadcast products, should result in higher sales in
fiscal 1999. Earnings in this segment are expected to be relatively flat as
higher operating income is expected to be offset by lower gains from the sale of
investment securities. Restructuring actions are expected to help the
Semiconductor segment remain profitable in the face of difficult market
conditions and be well positioned when the industry eventually turns around.
Lower operating costs in the Lanier segment, resulting from fiscal 1998
restructuring actions, and higher sales are expected to result in improved
earnings. The Electronic Systems segment expects relatively flat sales and a
strong increase in fiscal 1999 earnings.
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 assump-
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25
tions 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; the ability
to execute management's internal operating plans (specifically, management's
announced restructuring plan which includes employee reductions, cost reductions
in its commodity semiconductor lines, particularly Logic products, consolidation
of administrative, technical, sales and marketing functions, and manufacturing
facilities, and the successful exit of several product lines and a program);
stability of key markets for communications products, particularly Asia, Brazil
and Russia; 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; 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. The Company disclaims any intention or obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company, in the normal course of doing business, is exposed to the
risks associated with foreign currency exchange rates, fluctuations in the
market value of its equity securities available for sale, and changes in
interest rates. The Company employs established policies and procedures
governing the use of financial instruments to manage its exposure to such risks.
The Company uses foreign exchange contracts and options to hedge both
balance sheet and off-balance sheet foreign currency commitments. Specifically,
these foreign exchange contracts offset foreign currency denominated inventory
and purchase commitments from suppliers, accounts receivable from and future
committed sales to customers, intercompany loans, and firm committed operating
expenses in Malaysia and Ireland. Management believes the use of foreign
currency financial instruments should reduce the risks which arise from doing
business in international markets. Contracts are generally one year or less. At
July 3, 1998, the Company had open foreign exchange contracts with a notional
amount of $434 million, of which $222.7 million were to hedge off-balance sheet
commitments. Additionally, for the fiscal year ended July 3, 1998, the Company
purchased and sold $1,474.5 million of foreign exchange forward and option
contracts. Reference is made to the Note Financial Instruments in the Notes to
Financial Statements for further information with respect to commitments to buy
or sell foreign currencies. The Company's hedging activities provide only
limited protection against currency exchange risks. Factors that could impact
the effectiveness of the Company's hedging programs 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
the Company's foreign currency derivatives held July 3, 1998, would have an
impact of approximately $4.3 million on the fair value of such instruments. This
quantification of exposure to the market risk associated with foreign exchange
financial instruments does not take into account the offsetting impact of
changes in the fair value of the Company's foreign denominated assets,
liabilities and firm commitments.
The Company also maintains a portfolio of marketable equity securities
available for sale. These investments result from the funding of start-up
companies that have technology or products that are of interest to the Company.
The fair market value of these securities at July 3, 1998, was $45 million with
the corresponding unrealized gain included as a component of shareholders'
equity. These investments have historically had higher volatility than most
market indices. A 10 percent adverse change in the quoted market
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26
price of marketable equity securities would have an impact of approximately $4.0
million on the fair market value of these securities.
The Company utilizes a balanced mix of debt maturities along with both
fixed-rate and variable-rate debt to manage its exposures to changes in interest
rates. The Company does not expect changes in interest rates to have a material
effect on income or cash flows in fiscal 1999, although there can be no
assurances that interest rates will not significantly change.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial information and data
required by this Item are set forth in the pages indicated in Item 14(a)(1) and
(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item, with respect to Directors of the
Company, is incorporated herein by reference to the discussion under the heading
Board of Directors in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on October 23, 1998, which proxy statement is expected
to be filed within 120 days after the end of the Company's 1998 fiscal year.
Certain information regarding executive officers of the Company is included in
Part I hereof in accordance with General Instruction G(3) of Form 10-K.
Reference is also made to the information relating to Section 16(a) compliance
which is presented under the heading Section 16(a) Beneficial Ownership
Reporting Compliance in the Company's Proxy Statement for the 1998 Annual
Meeting of Shareholders, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item, with respect to compensation of
Directors and Executive Officers of the Company, is incorporated herein by
reference to the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on October 23, 1998, which proxy statement is expected
to be filed within 120 days after the end of the Company's 1998 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item, with respect to security ownership
of certain beneficial owners and management of the Company, is incorporated
herein by reference to the discussion under the heading Security Ownership of
Directors and Executive Officers and Certain Beneficial Owners in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on October 23,
1998, which proxy statement is expected to be filed within 120 days after the
end of the Company's 1998 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the fiscal year ended July 3, 1998, there existed no relationships
and there were no transactions reportable under this Item.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
PAGE
(1) Financial Statements:
Report of Independent Certified Public Accountants..... 32
Consolidated Statement of Income -- Fiscal Years ended
July 3, 1998, June 27, 1997 and June 30, 1996......... 33
Consolidated Statement of Retained Earnings --
Fiscal Years ended July 3, 1998, June 27, 1997 and
June 30, 1996......................................... 33
Consolidated Balance Sheet -- July 3, 1998 and June 27,
1997.................................................. 34
Consolidated Statement of Cash Flows --
Fiscal Years ended July 3, 1998, June 27, 1997 and
June 30, 1996......................................... 35
Notes to Financial Statements.......................... 36
(2) Financial Statement Schedules:
For each of the years ended July 3, 1998, June 27, 1997
and June 30, 1996
Schedule II -- Valuation and Qualifying
Accounts......................................... 45
All other schedules are omitted because they are not applicable, the
amounts are not significant or the required information is shown in the
financial statements or the notes thereto.
(3) Exhibits:
(3)(i) Restated Certificate of Incorporation of Harris Corporation
(December 1995), incorporated herein by reference to Exhibit 3(i) to the
Company's Form 10-Q Quarterly Report for the fiscal quarter ended March
31, 1996.
(3)(ii) By-Laws of Harris Corporation as in effect February 23,
1996, incorporated herein by reference to Exhibit 3(ii) to the Company's
Form 10-Q Quarterly Report for the fiscal quarter ended March 31, 1996.
(4)(a) Specimen stock certificate for the Company's Common Stock,
incorporated herein by reference to Exhibit 4(a) to the Company's Annual
Report on Form 10-K for the fiscal year ended June 27, 1997.
(4)(b) Stockholder Protection Rights Agreement, between the Company
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated as
of December 6, 1996, incorporated herein by reference to Exhibit 1 to
the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 6, 1996.
(4)(c) Indenture, dated as of May 1, 1996, between the Company and
Chemical Bank, as Trustee, relating to unlimited amounts of debt
securities which may be issued from time to time by the Company when and
as authorized by the Company's Board of Directors or a Committee of the
Board, incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-3, Registration Statement No.
333-03111.
(4)(d) Pursuant to Regulation S-K Item 601(b)(iii), Registrant by
this filing agrees, upon request, to furnish to the Securities and
Exchange Commission a copy of other instruments defining the rights of
holders of long-term debt of the Company.
(10) Material Contracts:
*(a) Form of Senior Executive Severance Agreement, incorporated
herein by reference to Exhibit 10(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996.
*(b) Harris Corporation Annual Incentive Plan, incorporated herein
by reference to Exhibit 10(b) to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1996.
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29
*(c)(i) Harris Corporation Stock Incentive Plan, incorporated herein
by reference to Exhibit 10(c) to the Company's Annual Report on Form
10-K for the fiscal year ended June 27, 1997.
(ii) Forms of Stock Option Agreement and Performance Share
Agreement under the Harris Corporation Stock Incentive Plan,
incorporated herein by reference to Exhibit 10(v) to the Company's
Form 10-Q Quarterly Report for the fiscal quarter ended October 3,
1997.
(iii) Form of Outside Directors' Stock Option Agreement,
incorporated herein by reference to Exhibit 10(c)(iii) to the
Company's Annual Report on Form 10-K for the fiscal year ended July
3, 1998.
*(d) Harris Corporation 1981 Stock Option Plan for Key
Employees, incorporated herein by reference to Exhibit 10(d) to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1991.
*(e) Lanier Worldwide, Inc. Key Contributor Bonus Plan,
incorporated herein by reference to Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995.
*(f) Lanier Worldwide, Inc. Long-Term Incentive Plan for Key
Employees, incorporated herein by reference to Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1995.
*(g) Harris Corporation Retirement Plan (amended and restated
effective January 1, 1998), incorporated herein by reference to
Exhibit 10(i) to the Company's Form 10-Q Quarterly Report for the
fiscal quarter ended April 3, 1998.
*(h) Harris Corporation Supplemental Executive Retirement Plan
(amended and restated effective January 1, 1998), incorporated herein
by reference to Exhibit 10(i) to the Company's Form 10-Q Quarterly
Report for the fiscal quarter ended January 2, 1998.
*(i)(i) Lanier Worldwide, Inc. Pension Equity Plan, incorporated
herein by reference to Exhibit 10(i) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 27, 1997.
(ii) Amendment No. One to the Lanier Worldwide, Inc. Pension
Equity Plan, incorporated herein by reference to Exhibit 10(i)(ii) to
the Company's Annual Report on Form 10-K for the fiscal year ended
July 3, 1998.
(iii) Amendment No. Two to the Lanier Worldwide, Inc. Pension
Equity Plan, incorporated herein by reference to Exhibit 10(i)(iii)
to the Company's annual Report on Form 10-K for the fiscal year ended
July 3, 1998.
*(j) Lanier Worldwide, Inc. Savings Incentive Plan, incorporated
herein by reference to Exhibit 10(j) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 27, 1997.
*(k)(i) Lanier Worldwide, Inc. Supplemental Executive Retirement
Plan, incorporated herein by reference to Exhibit 10(k) to the
Company's Annual Report on Form 10-K for the fiscal year ended June
27, 1997.
(ii) Amendment No. One to the Lanier Worldwide, Inc.
Supplemental Executive Retirement Plan, incorporated herein by
reference to Exhibit 10(k)(ii) to the Company's Annual Report on Form
10-K for the fiscal year ended July 3, 1998.
*(l) Lanier Worldwide, Inc. Supplemental Executive Retirement
Savings Plan, incorporated herein by reference to Exhibit 10(l) to
the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1997.
*(m)(i) Directors Retirement Plan, incorporated herein by
reference to Exhibit 10(i) to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1996.
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30
(ii) Amendment to Director's Retirement Plan, incorporated
herein by reference to Exhibit 10(ii) to the Company's Form 10-Q
Quarterly Report for the fiscal quarter ended October 3, 1997,
incorporated herein by reference to Exhibit 10(m)(ii) to the
Company's Annual Report on Form 10-K for the fiscal year ended July
3, 1998.
*(n) Harris Corporation 1997 Directors' Deferred Compensation
and Annual Stock Unit Award Plan (amended and restated effective
October 24, 1997), incorporated herein by reference to Exhibit 10(i)
to the Company's Form 10-Q Quarterly Report for the fiscal quarter
ended October 3, 1997.
(o)(i) Harris Corporation $300,000,000 364-Day Credit
Agreement, dated as of November 6, 1996, incorporated herein by
reference to Exhibit 10(i) to the Company's Form 10-Q Quarterly
Report for the fiscal quarter ended December 31, 1996.
(ii) Amendment No. One to 364-Day Credit Agreement, dated
as of October 21, 1997, incorporated herein by reference to Exhibit
10(iii) to the Company's Form 10-Q Quarterly Report for the fiscal
quarter ended October 3, 1997.
(p)(i) Harris Corporation $500,000,000 5-Year Credit Agreement,
dated as of November 6, 1996, incorporated herein by reference to
Exhibit 10(ii) to the Company's Form 10-Q Quarterly Report for the
fiscal quarter ended December 31, 1996.
(ii) Amendment No. One to 5-Year Credit Agreement, dated as
of October 21, 1997, incorporated herein by reference to Exhibit
10(iv) to the Company's Form 10-Q Quarterly Report for the fiscal
quarter ended October 3, 1997.
*(q) Harris Corporation Union Retirement Plan (amended and
restated effective January 1, 1998), incorporated herein by reference
to Exhibit 10(ii) to the Company's Form 10-Q Quarterly Report for the
fiscal quarter ended April 3, 1998.
*(r) Form of Director and Executive Officer Indemnification
Agreement, incorporated herein by reference to Exhibit 10(r) to the
Company's Annual Report on Form 10-K for the fiscal year ended July
3, 1998.
(12) Statement regarding computation of earnings to fixed charges.
(21) Subsidiaries of the Registrant.
(23) Consent of Ernst & Young LLP.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed with the Commission a Current Report on Form 8-K on
April 22, 1998 relating the announcement of its impending acquisition of
the assets of the Copying Systems Division of the Agfa-Gevaert Group.
- ------------------
*Management contract or compensatory plan or arrangement.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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)
Dated: April 9, 1999
By /s/ BRYAN R. ROUB
-----------------------------------
Bryan R. Roub
Senior Vice President-Chief
Financial Officer
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33
ANNUAL REPORT ON FORM 10-K/A
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FISCAL YEAR ENDED JULY 3, 1998
HARRIS CORPORATION
MELBOURNE, FLORIDA
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34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Harris Directors and Shareholders:
We have audited the accompanying consolidated balance sheets of Harris
Corporation and subsidiaries as of July 3, 1998 and June 27, 1997, and the
related consolidated statements of income, retained earnings, and cash flows for
each of the three fiscal years in the period ended July 3, 1998. Our audits also
include the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Harris
Corporation and subsidiaries at July 3, 1998 and June 27, 1997, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended July 3, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth herein.
ERNST & YOUNG LLP
Orlando, Florida
July 29, 1998
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35
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
Fiscal years ended
-------------------------------------------
(In millions except per share amounts) 1998 1997 1996
---------------------------------------------------------------------------------------------------------
REVENUE
Revenue from product sales and rentals $3,213.9 $3,335.7 $3,189.2
Revenue from services 663.5 461.5 432.0
Interest 48.9 37.4 38.1
-------------------------------------------
3,926.3 3,834.6 3,659.3
COSTS AND EXPENSES
Cost of product sales and rentals 2,195.5 2,267.4 2,151.9
Cost of services 420.7 251.8 252.7
Engineering, selling and administrative expenses 979.3 963.8 911.9
Restructuring expenses 83.8 -- --
Interest 73.2 59.9 62.5
Other-net (26.2) (20.3) 5.9
-----------------------------------------
3,726.3 3,522.6 3,384.9
-----------------------------------------
Income before income taxes 200.0 312.0 274.4
Income taxes 67.0 104.5 96.0
-----------------------------------------
Net income $ 133.0 $ 207.5 $ 178.4
-----------------------------------------
Net income per share
Basic $ 1.68 $ 2.66 $ 2.32
Diluted $ 1.66 $ 2.63 $ 2.29
-----------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Fiscal years ended
-------------------------------------------
(In millions except per share amounts) 1998 1997 1996
---------------------------------------------------------------------------------------------------------
Balance at beginning of year $1,219.9 $1,072.7 $ 969.4
Net income for the year 133.0 207.5 178.4
Cash dividends ($.88 per share in 1998, $.76 per share in
1997 and $.68 per share in 1996) (70.1) (60.3) (52.8)
Treasury stock retired -- -- (22.3)
-------------------------------------------
Balance at end of year $1,282.8 $1,219.9 $1,072.7
-----------
See Notes to Financial Statements.
33
36
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
July 3 June 27
--------------------------
(In millions) 1998 1997
-----------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 184.3 $ 70.7
Marketable securities 44.5 91.3
Receivables 805.1 820.6
Unbilled costs and accrued earnings on fixed price contracts 247.0 324.8
Inventories 603.6 611.1
Deferred income taxes 215.2 145.0
--------------------------
Total current assets 2,099.7 2,063.5
OTHER ASSETS
Plant and equipment 947.0 878.3
Notes receivable-net 232.5 217.7
Intangibles resulting from acquisitions 214.4 227.5
Other assets 290.4 250.9
-------------------------
$3,784.0 $3,637.9
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 231.0 $ 288.5
Accounts payable 190.3 196.8
Compensation and benefits 230.0 216.9
Other accrued items 241.9 191.7
Advance payments by customers 71.5 99.3
Unearned leasing and service income 156.7 191.6
Income taxes 83.9 96.0
Current portion of long-term debt 56.5 7.8
-------------------------
Total current liabilities 1,261.8 1,288.6
OTHER LIABILITIES
Deferred income taxes 144.3 84.4
Long-term debt 768.6 686.7
SHAREHOLDERS' EQUITY
Preferred Stock, without par value; 1,000,000 shares
authorized; none issued
Common Stock, $1.00 par value; 250,000,000 shares
authorized; issued and outstanding 80,012,625 shares in
1998 and 79,625,670 shares in 1997 (shares adjusted to
reflect September 1997 two-for-one stock split) 80.0 39.8
Other capital 271.3 289.9
Retained earnings 1,282.8 1,219.9
Net unrealized gain on securities available for sale 25.3 53.8
Unearned compensation (3.2) 4.4
Cumulative translation adjustments (46.9) (29.6)
-------------------------
Total Shareholders' Equity 1,609.3 1,578.2
-------------------------
$3,784.0 $3,637.9
-------------------------
See Notes to Financial Statements.
34
37
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal years ended
---------------------------------------------
(In millions) 1998 1997 1996
--------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 133.0 $ 207.5 $ 178.4
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation 196.6 170.3 158.1
Amortization 13.6 13.2 12.6
Non-current deferred income taxes 59.9 22.2 7.4
Changes in assets and liabilities:
Receivables (3.7) (188.8) (88.1)
Unbilled costs and inventories 87.1 7.1 (65.0)
Accounts payables and accrued liabilities 53.6 (7.2) 63.7
Advance payments and unearned income (62.9) 2.4 23.3
Income taxes (82.3) (3.9) (14.8)
Other (3.3) (18.4) (13.8)
---------------------------------------------
Net cash provided by operating activities 391.6 204.4 261.8
INVESTING ACTIVITIES
Cash paid for acquired businesses (12.9) (24.3) (69.9)
Capital expenditures:
Plant and equipment (206.9) (279.4) (225.4)
Rental equipment (78.0) (70.5) (67.5)
-------------------------------------------
Net cash used in investing activities (297.8) (374.2) (362.8)
FINANCING ACTIVITIES
Proceeds from borrowings 5,454.9 6,519.4 1,152.2
Payments of borrowings (5,379.6) (6,305.4) (1,025.3)
Cash dividends (70.1) (60.3) (52.8)
Purchase of Common Stock for treasury -- -- (26.0)
Proceeds from sale of Common Stock 12.1 10.9 9.2
-------------------------------------------
Net cash provided by financing activities 17.3 164.6 57.3
-------------------------------------------
Effect of translation on cash and cash equivalents 2.5 1.3 (1.0)
-------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 113.6 (3.9) (44.7)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 70.7 74.6 119.3
-------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 184.3 $ 70.7 $ 74.6
-------------------------------------------
See Notes to Financial Statements.
35
38
NOTES TO FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the
accounts of the Corporation and its subsidiaries. These statements have been
prepared in conformity with generally accepted accounting principles and require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant intercompany transactions and accounts have been
eliminated.
FISCAL YEAR -- In 1997, the Corporation changed its fiscal year to end on the
Friday nearest June 30. Fiscal years prior to 1997 ended on June 30. The 1998
fiscal year includes 53 weeks, while 1997 and 1996 fiscal years include 52
weeks.
CASH EQUIVALENTS -- Cash equivalents are temporary cash investments with a
maturity of three months or less when purchased. These investments include
accrued interest and are carried at the lower of cost or market.
MARKETABLE SECURITIES -- Marketable equity securities are stated at fair value,
with unrealized gains and losses, net of tax, included as a separate component
of shareholders' equity. Realized gains and losses from marketable securities
are determined using the specific identification method. The cost basis of
marketable securities was $4.4 million at July 3, 1998, and $5.8 million at June
27, 1997. The amount of gross realized gains included in operating profit was
$44.7 million in 1998 and $24.6 million in 1997. Gross realized gains for 1996
were not material.
INVENTORIES -- Inventories are priced at the lower of cost (determined by
average and first-in, first-out methods) or market.
PLANT AND EQUIPMENT -- Plant and equipment are carried on the basis of cost.
Depreciation of buildings, machinery and equipment is computed by straight-line
and accelerated methods. The estimated useful lives of buildings range between 5
and 50 years. The estimated useful lives of machinery and equipment range
between 3 and 10 years. Depreciation of rental equipment is computed by the
straight-line method using estimated useful lives from 3 to 5 years.
INTANGIBLES -- Intangibles resulting from acquisitions are being amortized by
the straight-line method principally over periods between 15 and 40 years.
Recoverability of intangibles is assessed using estimated undiscounted cash
flows of related operations. Intangibles that are not expected to be recovered
through future undiscounted cash flows are charged to expense when identified.
Amounts charged to expense are amounts in excess of the fair value of the
intangible asset. Fair value is determined as the present value of estimated
expected future cash flows using a discount rate commensurate with the risks
involved.
INCOME TAXES -- The Corporation follows the liability method of accounting for
income taxes.
REVENUE RECOGNITION -- Revenue is recognized from sales other than on long-term
contracts when a product is shipped, from rentals as they accrue, and from
services when performed. Unearned income on service contracts is amortized by
the straight-line method over the term of the contract.
Revenue and anticipated profits under long-term contracts are recorded on a
percentage-of-completion basis, generally using the cost-to-cost method of
accounting where sales and profits are recorded based on the ratio of costs
incurred to estimated total costs at completion. Contracts are combined when
specific aggregation criteria are met. Criteria generally include closely
interrelated activities performed for a single customer within the same economic
environment. Contracts generally are not segmented.
Amounts representing contract change orders, claims or other items are
included in sales only when they can be reliably estimated and realization is
probable. Incentives or penalties and awards applicable to performance on
contracts are considered in estimating sales and profit rates, and are recorded
when there is sufficient information to assess anticipated contract performance.
Incentive provisions which increase or decrease earnings based solely on a
single significant event are generally not recognized until the event occurs.
When adjustments in contract value or estimated costs are determined, any
changes from prior estimates are reflected in earnings in the current period.
Anticipated losses on contracts or programs in progress are charged to earnings
when identified.
Royalty income is included as a component of cost of product sales and rental
and is recognized on the basis of terms specified in contractual settlement
agreements.
RETIREMENT BENEFITS -- The Corporation and its subsidiaries provide retirement
benefits to substantially all employees primarily through a retirement plan
having profit-sharing and savings elements. Contributions by the Corporation to
the retirement plan are based on profits and employees' savings with no other
funding requirements. The Corporation may make additional contributions to the
fund at its discretion. The Corporation also has non-contributory defined
benefit pension plans which are fully funded.
Retirement benefits also include an unfunded limited healthcare plan for U.S.
based retirees and employees on long-term disability. The Corporation accrues
the estimated cost of these medical benefits, which are not material, during an
employee's active service life.
ENVIRONMENTAL EXPENDITURES -- The Corporation capitalizes environmental
expenditures that increase the life or efficiency of property or that reduce or
prevent environmental contamination. The Corporation accrues environmental
expenses resulting from existing conditions that relate to past operations when
the costs are probable and reasonably estimable.
Based on an assessment of relevant factors, the Corporation has estimated that
its discounted liability under the Superfund Act and other environmental
statutes and regulations for identified sites, using a 6% discount rate, is
approximately $4.5 million and, accordingly, will not have a material
36
39
NOTES TO FINANCIAL STATEMENTS
adverse effect on the Corporation's financial position or results of operation.
The expected aggregate undiscounted amount that will be incurred over the next
20 to 30 years (depending on the number of years for each site) is approximately
$8.6 million. The expected payments for each of the next five years are
approximately $.3 million per year and the aggregate amount thereafter is
approximately $7.0 million.
FUTURES AND FORWARD CONTRACTS -- When the Corporation sells products outside the
United States or enters into purchase commitments, transactions are frequently
denominated in currencies other than U.S. dollars. To minimize the impact on
revenue and cost from currency fluctuations, the Corporation enters into
currency exchange agreements that qualify for hedge accounting treatment. It is
the Corporation's policy not to speculate in foreign currencies. Currency
exchange agreements are designated as, and are effective as, hedges of foreign
currency commitments. In addition, these agreements are consistent with the
designated currency of the underlying transaction and mature on or before the
underlying transaction. Gains and losses on currency exchange agreements that
qualify as hedges are deferred and recognized as an adjustment of the carrying
amount of the hedged asset, liability or commitment. Gains and losses on
currency exchange agreements that do not qualify as hedges are recognized in
income based on changes in the fair market value of the currency exchange
agreement.
FOREIGN CURRENCY TRANSLATION -- The functional currency for most international
subsidiaries is the local currency. Assets and liabilities are translated at
current rates of exchange, and income and expense items are translated at the
weighted average exchange rate for the year. The resulting translation
adjustments are recorded as a separate component of shareholders' equity.
UNEARNED COMPENSATION -- Compensation resulting from performance shares granted
under the Corporation's long-term incentive plan is amortized to expense over
the vesting period of the performance shares and is adjusted for changes in the
market value of the Common Stock.
NET INCOME PER SHARE -- Net income per share is based upon the weighted average
number of common shares outstanding during each year.
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 financial
statements and notes to financial statements to number of shares, per share
amounts, and market prices of the Corporation's Common Stock have been restated
to reflect the increased number of shares outstanding.
SUBSEQUENT EVENT
In July 1998, the Corporation completed the acquisition of the Copying Systems
Business Unit of the Agfa-Gevaert Group, which is a member of the Bayer Group,
Leverkusen, Germany. The acquisition which had 1997 annual sales of
approximately $250 million will double the Lanier Worldwide segment's sales and
market size in the European office equipment market.
The cash purchase price of the acquisition was approximately $162 million.
ACCOUNTING CHANGES
Effective January 2, 1998, the Corporation adopted Statement of Financial
Accounting Standards (FAS) No. 128, "Earnings per Share." This Statement
establishes standards for computing and presenting earnings per share. All prior
years have been restated to conform with the provisions of the new Statement.
In fiscal 1999, the Corporation will implement two accounting standards issued
by the Financial Accounting Standards Board in June 1997. FAS No. 130,
"Reporting Comprehensive Income," and FAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," will not impact results of operation,
cash flows or financial position as they require only changes in or additions to
current disclosures.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The statement
establishes standards for recording derivative financial instruments and the
recognition of gains or losses resulting from changes in the fair values of
those instruments. The Corporation plans to adopt the new standard in fiscal
2000, however, the Corporation has not determined the anticipated impact of FAS
No. 133.
RESTRUCTURING
In fiscal 1998, the Corporation recorded a $83.8 million charge ($55.7 million
after income tax) for the restructuring of its operations. Restructuring actions
included a reduction of approximately 2,300 employees, primarily manufacturing
and administrative, and provisions for the write-down of equipment, intangible
assets, and other assets associated with the exit from certain nonstrategic
product lines.
At July 3, 1998, 209 employees had been terminated with the balance to be
terminated in fiscal 1999. Within the Corporation's semiconductor business,
product line exits include commercial logic, multimedia and custom telecom
products. Within the Corporation's other businesses, product line exits include
analog base stations, wirefree communication devices and transportation tracking
systems. It is the Corporation's intention to sell its semiconductor commercial
logic and its transportation tracking systems businesses during fiscal 1999. The
remaining product lines will be discontinued during fiscal 1999. Gains or losses
from sale of restructured product lines will be included in restructuring
expenses in the period the sale occurs. Estimated discounted cash flows were
used in determining the fair value of assets and liabilities in recording the
restructuring charge. Cash outlays for restructuring actions will be primarily
for severance benefits and are expected to be paid ratably during fiscal 1999
from currently available cash sources. Sales from product lines to be exited
were $72.6 million in 1998, $91.8 million in 1997, and $90.1 million in 1996.
Operating
37
40
NOTES TO FINANCIAL STATEMENTS
losses from these product lines, which include allocation of manufacturing
overhead costs, were $33.6 million in 1998, $26.6 million in 1997 and $7.6
million in 1996.
The components and use of restructuring reserves are summarized below:
Use of Reserve
Original --------------- Reserve Balance
(In millions) Reserve Cash Non-Cash at July 3, 1998
- ----------------------------------------------------------------------
Severance benefits $50.3 $2.2 $ -- $48.1
Capitalized software
write-offs 13.8 -- 13.8 --
Equipment write-offs 9.7 -- 9.7 --
Facility write-offs 3.3 -- 2.1 1.2
Other exit costs 6.7 -- -- 6.7
----- ---- ----- -----
$83.8 $2.2 $25.6 $56.0
-------------------------------------------
RECEIVABLES
Receivables are summarized below:
--------------------
(In millions) 1998 1997
- --------------------------------------------------------------------
Accounts receivable $ 711.0 $734.0
Notes receivable due within one year-net 124.7 114.9
--------
835.7 848.9
Less allowances for collection losses 30.6 28.3
--------
$ 805.1 $820.6
--------
INVENTORIES AND UNBILLED COSTS
Inventories are summarized below:
---------------------
(In millions) 1998 1997
- -------------------------------------------------------------------
Finished products $209.5 $238.0
Work in process 271.7 255.1
Raw materials and supplies 122.4 118.0
--------
$603.6 $611.1
---------
Unbilled costs and accrued earnings on fixed-price contracts are net of
progress payments of $179.0 million at July 3, 1998 and $187.8 million at June
27, 1997.
PLANT AND EQUIPMENT
Plant and equipment are summarized below:
-------------------------
(In millions) 1998 1997
- --------------------------------------------------------------------
Land $ 30.8 $ 31.6
Buildings 535.5 514.0
Machinery and equipment 1,471.7 1,364.3
Rental equipment 269.9 250.7
--------
2,307.9 2,160.6
Less allowances for depreciation 1,360.9 1,282.3
----------
$ 947.0 $ 878.3
-----------
INTANGIBLES
Accumulated amortization of intangible assets was $66.0 million at July 3, 1998,
and $60.8 million at June 27, 1997.
CREDIT ARRANGEMENTS
The Corporation maintains syndicated credit facilities with various banks which
provide for borrowings up to $800 million. These facilities consist of a 364-day
$300 million facility which expires November 1998 and a five-year $500 million
facility which expires November 2001. Interest rates on borrowings under these
facilities are determined by a pricing matrix based upon the Corporation's
long-term debt rating assigned by Standard and Poor's Ratings Group and Moody's
Investors Service. A facility fee is payable on the credit and determined in the
same manner as the interest rates. The Corporation is not required to maintain
compensating balances in connection with these agreements. Under these
agreements, $243.0 million was outstanding at July 3, 1998, $100 million of
which has been classified as long-term based on the Corporation's intent to
maintain borrowings of at least that amount for the next year.
The Corporation also has lines of credit for short-term financing aggregating
$150.9 million from various U.S. and foreign banks, of which $62.2 million was
available on July 3, 1998. These arrangements provide for borrowing at various
interest rates, are reviewed annually for renewal, and may be used on such terms
as the Corporation and the banks mutually agree. These lines do not require
compensating balances.
Short-term debt is summarized below:
---------------------
(In millions) 1998 1997
- -------------------------------------------------------------------
Bank notes $182.1 $278.0
Other 48.9 10.5
--------
$231.0 $288.5
---------
The weighted average interest rate for bank notes was 6.2 percent at July 3,
1998 and 6.0 percent at June 27, 1997.
LONG-TERM DEBT
Long-term debt includes the following:
---------------------
(In millions) 1998 1997
- -------------------------------------------------------------------
Notes payable to banks, due from 2001 to
2016. $162.5 $162.5
10 3/8% debentures, due 2018 150.0 150.0
6.35% debentures, due 2028. 150.0 --
7% debentures, due 2026 100.0 100.0
6.65% debentures, due 2006 100.0 100.0
Notes payable to insurance companies, due
from 1999 to 2001. 96.0 150.0
Other 10.1 24.2
--------
$768.6 $686.7
---------
The weighted average interest rate for notes payable to banks was 6.0 percent
at July 3, 1998 and 6.5 percent at June 27, 1997. The weighted average interest
rate for notes payable to insurance companies was 9.7 percent at July 3, 1998
and at June 27, 1997.
Indentures and note agreements contain certain financial covenants including
maintenance of at least $800 million of tangible net worth and total debt not to
exceed 45 percent of total capital.
Maturities of long-term debt for the five years following 1998 are: $56.5
million in 1999, $36.6 million in 2000, $95.5 million in 2001, $100.9 million in
2002, and $31.3 million in 2003.
38
41
NOTES TO FINANCIAL STATEMENTS
SHAREHOLDERS' EQUITY
Changes in shareholders' equity accounts other than retained earnings are
summarized as follows:
----------------------------------------------------------
Net
Common Unrealized Cumulative
Stock Other Gain On Unearned Translation
(In millions) Amount Capital Securities Compensation Adjustments
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 1, 1995 $38.9 $240.3 $12.2 $(1.7) $(10.3)
Shares issued under Stock Option Plan (221,890 shares) .1 3.6 -- -- --
Shares granted under Stock Incentive Plans (245,500 shares) .1 6.2 -- (6.3) --
Compensation expense -- -- -- 10.0 --
Termination and award of shares granted under Stock
Incentive Plans (263,384 shares) (.1) (2.1) -- (1.7) --
Shares sold under Employee Stock Purchase Plans (172,414
shares) .1 5.0 -- -- --
Change in unrealized gain on securities, net of income taxes
of $(.8) -- -- (1.1) -- --
Foreign currency translation adjustments -- -- -- -- (5.8)
Purchase and retirement of Common Stock for treasury
(962,000 shares) (.5) (3.2) -- -- --
Shares issued for acquisition of company (574,748 shares) .3 16.2 -- -- --
----------------------------------------------------------
BALANCE AT JUNE 30, 1996 38.9 266.0 11.1 .3 (16.1)
Shares issued under Stock Option Plan (254,690 shares) .1 4.4 -- -- --
Shares granted under Stock Incentive Plans (251,900 shares) .1 7.5 -- (7.6) --
Compensation expense -- -- -- 12.9 --
Termination and award of shares granted under Stock
Incentive Plans (200,450 shares) (.1) (.9) -- (1.2) --
Shares sold under Employee Stock Purchase Plans (185,712
shares) .1 6.2 -- -- --
Change in unrealized gain on securities, net of income taxes
of $24.5 -- -- 42.7 -- --
Foreign currency translation adjustments -- -- -- -- (13.5)
Shares issued for acquisition of company (1,390,610 shares) .7 6.7 -- -- --
----------------------------------------------------------
BALANCE AT JUNE 27, 1997 39.8 289.9 53.8 4.4 (29.6)
Two-for-one stock split (39,949,231 shares) 39.9 (39.9) -- -- --
Shares issued under Stock Option Plan (237,476 shares) .2 5.6 -- -- --
Shares granted under Stock Incentive Plans (238,550 shares) .3 10.1 -- (10.3) --
Compensation expense -- -- -- 7.8 --
Termination and award of shares under Stock Incentive Plans
(340,174 shares) (.3) (.5) -- (5.1) --
Shares sold under Employee Stock Purchase Plans (114,707
shares) .1 6.1 -- -- --
Change in unrealized gain on securities net of income taxes
of $(16.7) -- -- (28.5) -- --
Foreign Currency translation adjustments -- -- -- -- (17.3)
----------------------------------------------------------
BALANCE AT JULY 3, 1998 $80.0 $271.3 $25.3 $(3.2) $(46.9)
==========================================================
39
42
NOTES TO FINANCIAL STATEMENTS
PREFERRED STOCK PURCHASE RIGHTS
On December 6, 1996, the Corporation declared a dividend of one preferred share
purchase right for each outstanding share of Common Stock. These rights, which
expire on December 6, 2006, are evidenced by Common Stock share certificates and
trade with the Common Stock until they become exercisable, entitle the holder to
purchase one two-hundredth of a share of Participating Preferred Stock for $250,
subject to adjustment. The rights are not exercisable until the earlier of 10
business days (or such later date fixed by the Board) after a party commences a
tender or exchange offer to acquire a beneficial interest of at least 15% of the
Corporation's outstanding Common Stock, or the first date of public announcement
by the Corporation that a person has acquired a beneficial interest of at least
15% of the Corporation's outstanding Common Stock or such later date fixed by
the Board of Directors of the Corporation.
Upon the first date of public announcement by the Corporation that a person
has acquired a beneficial interest of at least 15% of the Corporation's
outstanding Common Stock, or such later date fixed by the Board of Directors of
the Corporation, each right (other than rights beneficially owned by an
acquiring person or any affiliate or associate thereof) would entitle the holder
to purchase shares of Common Stock of the Corporation having a market value
equal to twice the exercise price of the right. In addition, each right (other
than rights beneficially owned by an acquiring person or any affiliate or
associate thereof) would entitle the rightholder to exercise the right and
receive shares of common stock of the acquiring company, upon a merger or other
business combination, having a market value of twice the exercise price of the
right.
Under certain circumstances after the rights become exercisable, the Board of
Directors may elect to exchange all of the then outstanding rights for shares of
Common Stock at an exchange ratio of one share of Common Stock per right,
subject to adjustment. The rights have no voting privileges and may be redeemed
by the Board of Directors at a price of $.01 per right at any time prior to the
acquisition of a beneficial ownership of 15% of the outstanding Common Stock.
NET INCOME PER SHARE
Average outstanding shares used in the computation of net income per share are
summarized below:
-----------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------
Basic:
Weighted average shares outstanding 79.9 78.8 78.0
Contingently issuable shares (.6) (.7) (1.0)
-------
79.3 78.1 77.0
Diluted:
Weighted average shares outstanding 79.9 78.8 78.0
Dilutive stock options .3 .3 .2
Contingently issuable shares (.2) (.3) (.4)
-------
80.0 78.8 77.8
--------
STOCK OPTIONS AND AWARDS
The following information relates to stock option and incentive stock awards.
Option prices are 100 percent of market value on the date the options are
granted. Option grants are for a maximum of ten years after dates of grant and
may be exercised in installments.
-------------------------------------------------
Number of Weighted Average Option Prices
Shares Exercise Price Per Share
- ---------------------------------------------------------------------------------------------------------------
Exercised during the year:
1996 449,614 $19.59 $ 7.19 to $28.88
1997 472,208 $21.12 $ 7.19 to $34.88
1998 439,703 $26.46 $10.94 to $45.50
Granted during 1998 751,300 $44.14 $41.31 to $53.63
Terminations during 1998 119,782 $36.64 $29.31 to $49.94
Outstanding at June 27, 1997 1,542,628 $28.08 $ 7.19 to $45.50
Outstanding at July 3, 1998 1,734,443 $34.83 $ 7.19 to $53.63
Exercisable at June 27, 1997 594,754 $22.61 $ 7.19 to $33.57
Exercisable at July 3, 1998 683,297 $27.68 $ 7.19 to $49.88
Price ranges of outstanding and exercisable options as of July 3, 1998 are
summarized below:
------------------------------------------------------------------------
Outstanding Options Exercisable Options
------------------------------------------- --------------------------
Average Weighted Weighted
Number of Remaining Life Average Number of Average
Range of Exercise Prices Options (Years) Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------
$ 7.19-$29.31 534,889 4 $25.11 430,358 $24.21
$30.69-$42.69 479,194 5 $31.62 217,850 $31.64
$43.19-$53.63 720,360 4 $44.18 35,089 $45.62
--------- -------
1,734,443 683,297
========= =======
40
43
NOTES TO FINANCIAL STATEMENTS
Presented below is pro forma information regarding net income and net income
per share. It has been determined as if the Corporation had accounted for stock
options using the fair value method of accounting for stock options. The fair
value of each option grant is estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
-------------------------------
1998 1997 1996
- --------------------------------------------------------------------
Expected dividend yield 2.1% 2.1% 2.1%
Expected stock price volatility 20.4% 22.4% 20.8%
Risk-free interest rate 5.8% 6.3% 6.4%
Expected life (years) 4 4 4
For purposes of pro forma disclosure, the estimated fair value of options is
amortized to expense over their 3 year vesting period. Under the fair value
method, the Corporation's net income and net income per share would have been
reduced as follows:
-----------------------------
(In millions, except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------
Net income $ 4.9 $ 2.7 $ 1.4
Basic net income per share $ .06 $ .04 $ .02
Diluted net income per share $ .06 $ .03 $ .02
Because the fair value method of accounting for options applies only to
options granted subsequent to June 30, 1995, the pro forma effect will not be
fully reflected until 1999.
The Corporation has a stock incentive plan for directors and key employees.
Awards under this plan may include the grant of performance shares, restricted
stock, stock options, stock appreciation rights or other stock-based awards. The
aggregate number of shares of Common Stock which may be awarded under the plan
in each fiscal year is one percent of the total outstanding shares of Common
Stock plus shares available from prior years. Performance shares outstanding
were 625,365 at July 3, 1998; 827,110 at June 27, 1997; and 1,005,222 at June
30, 1996. Shares of Common Stock reserved for future awards under the plan were
2,509,002 at July 3, 1998; 2,380,516 at June 27, 1997; and 2,297,636 at June 30,
1996.
Under the Corporation's domestic retirement plan, employees may purchase a
limited amount of the Corporation's Common Stock at 70 percent of current market
value. The discounts from fair market value on Common Stock purchased by
employees under the domestic retirement plans are charged to compensation
expense in the period of the related purchase. Shares of Common Stock reserved
for future purchases by the retirement plan were 2,250,303 at July 3, 1998.
RETIREMENT PLANS
Retirement and defined benefit plans expense amounted to $82.3 million in 1998,
$79.7 million in 1997 and $77.6 million in 1996.
RESEARCH AND DEVELOPMENT
Corporation-sponsored research and development costs are expensed as incurred.
These costs were $182.7 million in 1998, $174.9 million in 1997 and $159.8
million in 1996. Customer-sponsored research and development costs are incurred
pursuant to long-term contractual arrangements and are accounted for principally
by the percentage-of-completion method. Customer-sponsored research and
development costs incurred under government-sponsored contracts require the
Corporation to provide a product or service meeting certain defined performance
or other specifications (such as designs).
INTEREST EXPENSE
Total interest was $80.7 million in 1998, $68.9 million in 1997 and $64.0
million in 1996. Interest attributable to funds used to finance major long-term
construction projects is capitalized as an additional cost of the related asset.
Interest capitalized was $7.5 million in 1998, $9.0 million in 1997 and $1.5
million in 1996. Interest paid was $58.6 million in 1998, $65.6 million in 1997
and $64.2 million in 1996.
LEASE COMMITMENTS
Total rental expense amounted to $66.6 million in 1998, $56.0 million in 1997,
and $49.8 million in 1996. Future minimum rental commitments under leases,
primarily for land and buildings, amounted to approximately $181.5 million at
July 3, 1998. These commitments for the years following 1998 are: 1999 -- $50.8
million, 2000 -- $34.7 million, 2001 -- $25.6 million, 2002 -- $19.6 million,
2003 -- $13.3 million, and $37.5 million thereafter.
INCOME TAXES
The provisions for income taxes are summarized as follows:
-------------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------
Current:
United States $ 43.7 $ 33.8 $ 82.3
International 8.9 33.5 19.3
State and local 8.0 6.7 17.3
-------
60.6 74.0 118.9
-------
Deferred:
United States 6.5 30.2 (19.3)
International (.2) (2.9) --
State and local .1 3.2 (3.6)
-------
6.4 30.5.. (22.9)
-------
$ 67.0 $104.5.. $ 96.0
-------
The components of deferred income tax assets (liabilities) are as follows:
-------------------------------------------------
1998 1997
----------------------------------------
(In millions) Current Non-Current Current Non-Current
- -------------------------------------------------------------------------
Inventory valuations $ 46.5 -- $ 64.9 --
Accruals 163.1 $ (21.7) 96.0 $ 8.8
Depreciation -- (125.2) -- (85.0)
Leases (2.9) (12.6) (2.0) (19.3)
International tax loss
carryforwards -- 8.7 -- 6.7
All other-net 8.5 14.6 (13.9) 11.1
--------------------
215.2 (136.2) 145.0 (77.7)
Valuation allowance -- (8.1) -- (6.7)
--------------------
$215.2 $(144.3) $145.0 $(84.4)
--------------------
41
44
NOTES TO FINANCIAL STATEMENTS
A reconciliation of the statutory United States income tax rate to the
effective income tax rate follows:
----------------------------
1998 1997 1996
- -------------------------------------------------------------------
Statutory U.S. income tax rate 35.0% 35.0% 35.0%
State taxes 2.6 2.0 3.2
International income (4.6) (2.4) (3.2)
Tax benefits related to export sales (2.8) (1.7) (2.1)
Nondeductible amortization 1.3 .8 .7
Other items 2.0 (.2) 1.4
--------
Effective income tax rate 33.5% 33.5% 35.0%
----------
United States income taxes have not been provided on $544 million of
undistributed earnings of international subsidiaries because of the
Corporation's intention to reinvest these earnings. The determination of
unrecognized deferred U.S. tax liability for the undistributed earnings of
international subsidiaries is not practicable.
Pretax income of international subsidiaries was $13.5 million in 1998, $76.4
million in 1997 and $74.2 million in 1996.
Income taxes paid were $44.6 million in 1998, $75.1 million in 1997 and $95.6
million in 1996.
BUSINESS SEGMENTS
The Corporation is structured primarily around the markets it serves and
operates in four business segments: Communications, Semiconductor, Lanier
Worldwide, and Electronic Systems. The Communications segment produces
broadcast, radio communications, and telecommunications products and systems.
The Semiconductor segment produces advanced analog, digital, and mixed signal
integrated circuits and discrete semiconductors for power, signal processing,
data-acquisition, and logic applications. Lanier Worldwide sells and services
copying and facsimile products, and PC-based healthcare management systems. The
Electronic Systems segment engages in advanced research and develops, designs,
and produces advanced communication and information processing systems.
Communication and electronic products and systems are produced principally in
the United States with international revenues derived primarily from exports.
Copying and facsimile products are produced principally in Asia with
international revenues derived from the Corporation's international
subsidiaries.
Net sales and operating profit by segment are on page 2. That information is
an integral part of these financial statements.
Sales made to the U.S. government by all segments (primarily Electronic
Systems segment) were 24.0 percent of total sales in 1998, 22.7 percent of total
sales in 1997 and 25.7 percent of total sales in 1996. Intersegment sales, which
are insignificant, are accounted for at prices comparable to unaffiliated
customers.
Selected information by business segment and geographical area is summarized
below:
----------------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------
IDENTIFIABLE ASSETS
Communications $ 716.7 $ 756.0 $ 691.5
Semiconductor 1,022.0 964.2 746.6
Lanier Worldwide 1,166.5 1,034.6 867.1
Electronic Systems 545.7 605.1 658.1
Corporate 333.1 278.0 243.4
-----------
$3,784.0 $3,637.9 $3,206.7
-------------
CAPITAL EXPENDITURES
Communications $ 32.7 $ 29.2 $ 33.8
Semiconductor 103.8 176.4 146.8
Lanier Worldwide 16.3 35.9 11.7
Electronic Systems 24.9 24.1 28.1
Corporate 29.2 13.8 5.0
-------------
$ 206.9 $ 279.4 $ 225.4
-------------
DEPRECIATION
Communications $ 23.9 $ 20.5 $ 17.9
Semiconductor 67.0 50.2 47.6
Lanier Worldwide 19.9 16.8 10.3
Electronic Systems 23.9 25.2 24.2
Corporate 8.4 9.0 8.9
-------------
$ 143.1 $ 121.7 $ 108.9
-------------
GEOGRAPHICAL INFORMATION
U.S. operations:
Net sales $3,275.2 $3,227.8 $3,046.4
Operating profit 186.5 235.6 200.2
Identifiable assets 2,867.5 2,914.3 2,544.4
International operations:
Net sales $ 602.2 $ 569.4 $ 574.8
Operating profit 13.5 76.4 74.2
Identifiable assets 916.5 723.6 662.3
Capital expenditures and depreciation do not include equipment for rental to
customers. Corporate assets consist primarily of cash, marketable securities,
deferred income taxes and plant and equipment.
Export sales approximated $646.0 million in 1998, $550.0 million in 1997, and
$631.6 million in 1996. Export sales and net sales of international operations
were principally to Europe, Asia and Latin America.
FINANCIAL INSTRUMENTS
The carrying values of cash equivalents, marketable securities, accounts
receivable, notes receivable, accounts payable and short-term debt approximates
fair value. The fair value of long-term debt as determined by quotes from
financial institutions was $787.2 million at July 3, 1998 and $701.0 million at
June 27, 1997.
The Corporation uses foreign exchange contracts and options to hedge
intercompany accounts and off-balance-sheet foreign currency commitments.
Specifically, these foreign currency denominated financial instruments offset
exchange rate changes in foreign currency denominated inventory and purchase
commitments from suppliers, accounts receivable from and future committed sales
to customers, and firm committed operating expenses. Management believes the use
of foreign currency financial instruments should reduce the risks which arise
from doing business in international markets. Contracts are generally one year
or less. At July 3, 1998, open foreign exchange contracts were $433.6 million
(as described below), of which $222.7 million were to hedge off-balance-sheet
commitments. The fair value of foreign exchange contracts and options as
determined by quoted market indices and quotes
42
45
NOTES TO FINANCIAL STATEMENTS
from financial institutions was $433.7 million at July 3, 1998. Additionally,
for the year ended July 3, 1998, the Corporation purchased and sold $1,474.5
million of foreign exchange forward and option contracts.
Deferred gains and losses are included on a net basis in the Consolidated
Balance Sheet as other assets and are recorded in income as part of the
underlying transaction when it is recognized.
At July 3, 1998, the Corporation had $6.5 million in open option contracts.
Total open foreign exchange contracts at July 3, 1998, are described in the
table below.
COMMITMENTS TO BUY FOREIGN CURRENCIES
------------------------------------------------
Contract Amount
-----------------
Foreign Deferred Gains Maturities
(In millions) Currency U.S. and (Losses) (in months)
- -----------------------------------------------------------------------
CURRENCY
Malaysian Ringgit 417.8 $145.8 $(45.0) 1-15
Belgian Franc 1,402.3 37.9 (0.4) 1-9
Irish Punt 13.0 19.1 (.9) 1-5
German Mark 31.3 17.5 (0.2) 3-9
French Franc 103.9 17.1 0.1 1-3
Swiss Franc 8.7 6.3 (0.6) 3
Japanese Yen 601.0 4.8 (0.4) 1-3
Norwegian Krone 23.6 3.1 -- 6
Canadian Dollar 4.5 3.1 -- 1-6
British Pound 1.9 3.1 0.1 1-6
Netherlands Guilder 3.1 1.5 -- 9
Italian Lira 1,692.6 1.0 -- 12
- -----------------------------------------------------------------------
------------------------------------------------
Contract Amount
-----------------
Foreign Deferred Gains Maturities
(In millions) Currency U.S. and (Losses) (in months)
South African Rand 5.2 0.9 -- 1
Hungarian Forint 192.9 0.8 -- 6
Australian Dollar 0.2 0.1 -- 8
COMMITMENTS TO SELL FOREIGN CURRENCIES
-----------------------------------------------
Contract Amount
----------------
Foreign Deferred Gains Maturities
(In millions) Currency U.S. and (Losses) (in months)
- -----------------------------------------------------------------------
CURRENCY
Swiss Franc........... 91.9 $60.7 0.2 1-3
British Pound......... 25.6 42.0 (0.6) 1-23
German Mark........... 37.8 21.4 0.5 1-9
Belgian Franc......... 345.8 9.4 0.1 9
Canadian Dollar....... 13.0 9.3 0.4 6-8
French Franc.......... 47.2 7.9 0.1 1-8
Malaysian Ringgit..... 19.7 4.8 -- 3-4
Italian Lira.......... 6,100.0 3.5 -- 1-6
Danish Krone.......... 18.4 2.7 -- 9
Korean Won............ 1,501.3 1.5 0.4 13-14
Netherlands Guilder... 2.9 1.4 -- 9
Swedish Krona......... 10.3 1.3 -- 12
Finnish Markka........ 6.4 1.2 -- 9
Irish Punt............ 0.8 1.2 -- 9
Hungarian Forint...... 192.9 0.8 -- 6
Czech Republic
Koruna............... 25.0 0.7 -- 6
Norwegian Krone....... 5.1 0.7 -- 6
Spanish Peseta........ 78.3 0.5 -- 3
Australian Dollar..... 0.7 0.5 -- 6-8
43
46
QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is summarized below.
[CAPTION]
Quarters Ended
Dollars in Millions Except Per Share Total
Amounts 10-3-97 1-2-98 4-3-98 7-3-98(1) Year
------------------------------------------------------------------------------------------------------
FISCAL 1998
Net sales.............................. $979.6 $970.0 $961.6 $966.2 $3,877.4
Gross profit........................... 323.8 329.0 334.1 274.3 1,261.2
Income before income taxes............. 66.1 79.8 90.8 (36.7) 200.0
Net income............................. 43.6 52.7 59.9 (23.2) 133.0
Per share:
Basic net income..................... .55 .67 .76 (.29) 1.68
Diluted net income................... .55 .66 .75 (.29) 1.66
Cash dividends....................... .22 .22 .22 .22 .88
Stock prices (high/low).............. 49-40.19 50-40.75 55.31-41.75 53-40.38
-------------------------------------------------------------
(1) Fiscal 1998 fourth quarter results include a $83.8 million
($55.7 million after income taxes or $.70 per share)
restructuring charge and a $12.0 million ($8.0 million
after income taxes or 10 cents per share) provision for
costs associated with an international contract.
[CAPTION]
Quarters Ended
Dollars in Millions Except Per Share Total
Amounts 9-30-96 12-31-96 3-31-97 6-27-97 Year
------------------------------------------------------------------------------------------------------
FISCAL 1997
Net sales.............................. $883.4 $945.9 $921.4 $1,046.5 $3,797.2
Gross profit........................... 297.7 311.6 311.6 357.1 1,278.0
Income before income taxes............. 58.2 69.5 83.3 101.0 312.0
Net income............................. 38.1 45.5 55.6 68.3 207.5
Per share:
Basic net income..................... .49 .59 .71 .86 2.66
Diluted net income................... .49 .58 .70 .86 2.63
Cash dividends....................... .19 .19 .19 .19 .76
Stock prices (high/low).............. 32.94-25.13 35.69-30.88 40-33.69 46.06-36.31
-------------------------------------------------------------
44
47
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
HARRIS CORPORATION AND SUBSIDIARIES
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------------------------------------------------------------------------------------------
ADDITIONS
---------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS-- BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 3, 1998:
Amounts Deducted From Respective Asset Accounts $ 515(A)
$ 7,477(B)
-------
Allowances for collection losses........... $28,266 $10,383 $ -- $ 7,992 $30,657
======= ======= ======= ======= =======
YEAR ENDED JUNE 27, 1997:
Amounts Deducted From Respective Asset Accounts $ 812(A)
11,838(B)
-------
Allowances for collection losses........... $31,380 $ 8,880 $ 656(C) $12,650 $28,266
======= ======= ======= ======= =======
YEAR ENDED JUNE 30, 1996:
Amounts Deducted From Respective Asset Accounts $ 40(A)
132(C)
-------
Allowances for collection losses........... $29,976 $ 8,407 $ 172 $ 7,175(B) $31,380
======= ======= ======= ======= =======
Note A -- Foreign currency translation gains and losses.
Note B -- Uncollectible accounts charged off, less recoveries on accounts
previously charged off.
Note C -- Amounts reclassified from other accounts in the consolidated balance
sheet.
45