1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-3863
HARRIS CORPORATION
======================================================
(Exact name of registrant as specified in its charter)
Delaware 34-0276860
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
l025 West NASA Boulevard
Melbourne, Florida 32919
==================================================
(Address of principal executive offices)(Zip Code)
(407) 727-9100
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(Registrant's telephone number, including area code)
=================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the registrant's common stock, as of
November 6, 1998 was 80,045,340 shares.
2
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements.
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HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
The following information for the quarters ended October 2, 1998 and October 3,
1997 has not been audited by independent accountants, but in the opinion of
management reflects all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the indicated
periods. The results of operations for the quarter ended October 2, 1998 are not
necessarily indicative of the results for the full fiscal year.
Quarter Ended
-------------------------
October 2, October 3,
1998 1997
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(In millions, except per
share amounts)
Revenue
Revenue from sales, rentals
and services $888.4 $979.6
Interest 14.7 9.8
------ ------
903.1 989.4
Costs and Expenses
Cost of sales, rentals
services 608.0 655.8
Engineering, selling and
administrative expenses 221.4 250.9
Interest 21.1 16.9
Special charge for litigation costs 20.6 -
Other - net (11.1) (.3)
------ -------
Income before income taxes 43.1 66.1
Income taxes 14.7 22.5
------ ------
Net Income $ 28.4 $ 43.6
====== ======
Net Income Per Common Share
Basic $.36 $.55
==== ====
Diluted $.36 $.55
==== ====
Cash Dividends Paid Per Common Share $.24 $.22
==== ====
Average Shares Outstanding
Basic 79.5 79.1
==== ====
Diluted 79.9 79.7
==== ====
See Notes to Financial Statements
(2)
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HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
July 3,
October 2, 1998
1998 (audited)
---------- ---------
(In millions)
ASSETS
Current Assets
Cash and cash equivalents $ 111.2 $ 184.3
Marketable securities 18.0 44.5
Accounts and notes receivable - net, less allowance
for collection losses of $39,300,000 at October 2, 1998
and $30,600,000 at July 3, 1998 853.0 805.1
Unbilled costs and accrued earnings on fixed price contracts
based on percentage-of-completion accounting, less progress
payments of $177,900,000 at October 2, 1998 and
$179,000,000 at July 3, 1998 223.5 247.0
Inventories:
Work in process and finished products 515.5 481.2
Raw materials and supplies 111.4 122.4
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626.9 603.6
Deferred income taxes 199.0 215.2
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Total Current Assets 2,031.6 2,099.7
Plant and equipment, less allowances for depreciation of
$1,391,500,000 at October 2, 1998 and $1,360,900,000 at
July 3, 1998 1,005.3 947.0
Notes receivable - net 222.5 232.5
Intangibles resulting from acquisitions 289.8 214.4
Other assets 354.3 290.4
-------- --------
$3,903.5 $3,784.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 361.0 $ 231.0
Accounts payable 217.0 190.3
Compensation and benefits 211.8 230.0
Other accrued items 293.1 241.9
Advance payments and unearned income 216.8 228.2
Income taxes 26.9 83.9
Current portion of long-term debt 56.6 56.5
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Total Current Liabilities 1,383.2 1,261.8
Deferred income taxes 133.1 144.3
Long-term debt 783.4 768.6
Shareholders' Equity
Capital stock:
Preferred Stock, without par value:
Authorized - 1,000,000 shares; issued - none - -
Common Stock, par value $1 per share:
Authorized - 250,000,000 shares; issued 80,010,371 shares
at October 2, 1998 and 80,012,625 at July 3, 1998 80.0 80.0
Other capital 272.6 271.3
Retained earnings 1,292.1 1,282.8
Unearned compensation (10.1) (3.2)
Accumulated other comprehensive loss (30.8) (21.6)
-------- --------
Total Shareholders' Equity 1,603.8 1,609.3
-------- --------
$3,903.5 $3,784.0
======== ========
See Notes to Financial Statements
(3)
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HARRIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Quarter Ended
-------------------------
October 2, October 3,
1998 1997
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(In millions)
OPERATING ACTIVITIES
Net income $ 28.4 $ 43.6
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 53.3 47.3
Non-current deferred income tax (11.2) (.4)
(Increase) decrease in:
Accounts and notes receivable 23.0 24.6
Unbilled costs and inventories 26.9 11.9
Other assets (57.8) (20.4)
Increase (decrease) in:
Trade payables and accrued expenses (23.4) (69.0)
Advance payments and unearned income (15.8) (18.6)
Income taxes (21.8) 14.7
Other 14.8 (13.1)
------ ------
Net cash provided by operating activities 16.4 20.6
INVESTING ACTIVITIES
Cash paid for acquired businesses (171.1) (8.9)
Additions of plant and equipment (47.4) (72.6)
------ ------
Net cash used in investing activities (218.5) (81.5)
FINANCING ACTIVITIES
Increase in short-term debt 130.0 71.2
Increase (decrease) in long-term debt 14.8 (.5)
Proceeds from sale of Common Stock .8 4.0
Cash dividends (19.1) (17.6)
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Net cash provided by financing activities 126.5 57.1
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Effect of exchange rate changes on cash and cash
equivalents 2.5 (.5)
------ ------
Net decrease in cash and cash equivalents (73.1) (4.3)
Cash and cash equivalents, beginning of year 184.3 70.7
------ ------
Cash and cash equivalents, end of quarter $111.2 $ 66.4
====== ======
See Notes to Financial Statements
(4)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 2, 1998
Note A -- Basis of Presentation
- -------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all information and footnotes
necessary for a complete presentation of financial position, results of
operations, and changes in cash flows in conformity with generally accepted
accounting principles. For further information refer to the financial statements
and notes to financial statements included in the Corporation's Annual Report on
Form 10-K/A for the fiscal year ended July 3, 1998.
Note B -- Accounting Changes
- ----------------------------
For the first quarter ended October 2, 1998, the Corporation adopted Statement
of Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive
Income". This Statement requires reporting of changes in shareholders' equity
that do not result directly from transactions with shareholders. These changes
include the fair value adjustment to certain cost-based investments and foreign
currency translation adjustments. Comprehensive earnings for the quarters ended
October 2, 1998 and October 3, 1997 were $19.2 million and $55.8 million,
respectively. Prior year financial statements have been reclassified to conform
to the requirements of FAS No. 130.
The components of accumulated other comprehensive loss, net of related tax, at
October 2, 1998 and July 3, 1998 are as follows:
October 2, July 3,
(in millions) 1998 1998
------------------------------------------------------------------------
Net unrealized gains on securities
available-for-sale $ 8.6 $ 25.3
Foreign currency translation adjustments (39.4) (46.9)
----- -----
$(30.8) $(21.6)
===== =====
The Corporation also adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information", as
of the first quarter ended October 2, 1998. This statement establishes new rules
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial statements. The Corporation was in compliance with the provisions of
the new statement and, therefore, will not be required to restate prior year
business segment data.
Net sales, operating profit and net income by segment are on page 7. That
information is an integral part of these financial statements. Intersegment
revenues are not material and there is no material change in segment total
assets from prior fiscal year-end amounts.
(5)
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Note C -- Net Income Per Share
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Average outstanding shares used in the computation of net income per share are
as follows:
Quarter Ended
October 2, October 3,
(in millions) 1998 1997
- -----------------------------------------------------------------------
Basic:
Weighted average shares
outstanding 80.0 79.7
Contingently issuable shares (.5) (.6)
---- ----
79.5 79.1
==== ====
Diluted:
Weighted average shares
outstanding 80.0 79.7
Dilutive stock options .2 .3
Contingently issuable shares (.3) (.3)
---- ----
79.9 79.7
==== ====
Note D -- Restructuring
- -----------------------
In fiscal 1998, the Corporation recorded a $83.8 million charge ($55.7 million
after income taxes) for the restructuring of its operations. Restructuring
actions included a work force reduction of approximately 2,300 employees and the
exit of six product lines, the most significant being the semiconductor
commercial logic product line. At October 2, 1998, 735 employees have been
terminated with the remainder to be terminated before the end of fiscal 1999.
The Corporation is currently negotiating the sale of its semiconductor
commercial product line. Other smaller product lines are in the process of being
discontinued through the fulfillment of sales backlog and commitments,
collection of receivables and the liquidation of inventory.
Reserve usage for the quarter ended October 2, 1998 is summarized below:
Reserve Balance Use of Reserves Reserve Balance
(in millions) at July 3, 1998 Cash Non-Cash at October 2, 1998
- -------------------------------------------------------------------------------
Severance benefits $48.1 $6.9 - $41.2
Facility write-offs 1.2 .5 - .7
Other exit costs 6.7 1.4 - 5.3
----- ---- ---- -----
$56.0 $8.8 - $47.2
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Note E -- Financial Instruments
- -------------------------------
The Company uses foreign exchange contracts to hedge off-balance sheet foreign
currency commitments and anticipated transactions. The Company has significant
manufacturing operations in Malaysia and has a hedging program in place to set
the exchange rates on the Company's foreign currency operating commitments in
Malaysia. Under this hedging program, increases or decreases in the Company's
local currency manufacturing costs and operating expenses are partially offset
by realized gains and losses, respectively, on the hedging instruments.
At October 2, 1998, the Company had foreign currency exchange contracts to buy
319.7 million Malaysian Ringgits for $99.6 million. The maturity period for
these contracts is 1 to 12 months. Deferred losses resulting from ringgit
contracts is $32.5 million.
(6)
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations.
- --------------
RESULTS OF OPERATIONS
Net sales, operating profit and net income for the first quarter of fiscal 1999
were lower than the same period last year by 9.3 percent, 34.8 percent and 34.9
percent, respectively. Fiscal 1999 first quarter results include a $20.6 million
($13.6 million after tax) provision related to a patent litigation judgment. The
provision relates to the potential settlement of a lawsuit in which the Federal
Circuit Court of Appeals on September 9, 1998 upheld a lower court ruling that
the Company had infringed a competitor's patent for an analog television
transmitter circuit. The award totaled $15.4 million plus attorneys fees and
interest and relates to an older product no longer manufactured by the Company.
Segment net sales, operating profit and net income were as follows:
Quarter Ended
----------------------------------
October 2, October 3, Percent
1998 1997 Inc./(Dec.)
---------- ---------- -----------
(In Millions)
NET SALES
Electronic Systems $211.0 $261.4 (19)
Semiconductor 143.3 180.7 (21)
Communications 202.8 240.3 (16)
Lanier Worldwide 331.3 297.2 11
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Total $888.4 $979.6 (9)
====== ======
OPERATING PROFIT
Electronic Systems $22.9 $20.6 11
Semiconductor 18.3 22.0 (17)
Communications (6.3) 24.2 (126)
Lanier Worldwide 28.9 28.1 3
Corporate Expense .4 (11.9) 103
Interest Expense (21.1) (16.9) (25)
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Total $43.1 $66.1 (35)
===== =====
NET INCOME
Electronic Systems $11.9 $ 8.4 42
Semiconductor 9.1 10.7 (15)
Communications (6.4) 12.3 (152)
Lanier Worldwide 13.8 12.2 13
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Total $28.4 $43.6 (35)
===== =====
Sales in the Electronic Systems segment were 19 percent lower than last year's
first quarter, while segment operating profit and net income increased 11
percent and 42 percent respectively. Lower sales resulted from reduced demand in
all segment product lines. Segment earnings benefited from higher margin program
mix, income from joint ventures and higher interest income.
Semiconductor segment sales were sharply lower for the quarter due to
industry-wide pricing pressure and weak demand. Continuing price pressures, weak
demand, and lower royalty income impacted operating profit and net income which
declined 17 percent and 15 percent, respectively. Lower operating expenses
resulting from prior year restructuring actions, ongoing cost controls, and
gains from the sale of investment securities helped to preserve margins.
(7)
8
Sales in the Communications segment were 16 percent lower than last year's
comparable quarter due to weakness in the international economy, reduced demand
and dampened pricing for some of the segment's products. Segment operating
profit, which was adversely impacted by a $20.6 million provision related to a
patent litigation judgment, declined significantly. Lower gains on the sale of
investment securities also contributed to lower earnings.
Lanier Worldwide segment net sales increased 11 percent and was driven by the
successful first quarter acquisition and integration of the Agfa-Gevaert Group's
copying systems business. The acquisition doubles Lanier's market share in the
European office equipment market. Both domestic and international net income
increased due to improved operating profit margin in its domestic business and
higher international sales.
Cost of sales as a percentage of net sales was 68.4 percent in the first quarter
compared to 66.9 percent for the comparable prior year period. The increase in
the cost ratio was primarily due to a declining gross margin in the
Semiconductor segment. Declining unit volumes, continuing price pressures, the
continuing decline in royalties and losses in the logic business that the
segment is exiting under previously announced restructuring actions all
contributed to the lower gross margin.
Engineering, selling, and administrative expenses as a percentage of net sales
decreased to 24.9 percent in the first quarter from 25.6 percent in last year's
first quarter. The decrease in the operating expense ratio was due to lower
administrative expenses resulting from restructuring actions and lower expenses
associated with employee benefit plans.
Interest income was higher in the first quarter because of interest earned on
amounts due from the Internal Revenue Service. Interest expense also increased
in the first quarter of fiscal 1999, due to higher average borrowings and a
lower amount of capitalized interest compared to the prior year's first quarter.
Capitalized interest is included as a component of plant and equipment on the
balance sheet. "Other-net" expense was lower due primarily to gains on foreign
currency and higher earnings from joint ventures.
The provision for income taxes as a percentage of pretax income was 34.0 percent
in both the first quarter and prior year comparable period. The statutory
federal income tax rate for both periods was 35.0 percent. Both periods
benefited from tax rates on foreign source income and export sales.
Net income as a percentage of sales was 3.2 percent for the first quarter of
fiscal 1999, and 4.5 percent for last year's first quarter for the previously
stated reasons.
LIQUIDITY AND FINANCIAL POSITION
Working capital decreased from $837.9 million at July 3, 1998, to $648.4 million
at the end of the first quarter largely due to cash and short-term debt used to
fund Lanier Worldwide's acquisition of the Agfa-Gevaert copying systems
business. Capital expenditures are down substantially from last year's first
quarter due to completion of several semiconductor related projects. Total
capital expenditures for the Corporation in fiscal 1999, including expenditures
for customer rental equipment, are expected to be approximately $220 million. On
October 28, 1998, the Corporation filed a $500 million "shelf" debt registration
statement with the Securities and Exchange Commission. After this statement
becomes effective, debt securities may be issued from time to time under a
prospectus supplement that will contain specific information about the terms of
an offering. Proceeds from the sale of debt securities will be used for general
corporate purposes, including the repayment of existing indebtedness and
additions to working
(8)
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capital. In November 1998, the Company's 364-day $300 million credit facility
expires and it is the Company's intention not to replace this facility due to
sufficient other borrowing capacity. The requirement for funds to finance
capital expenditures, acquisitions of new businesses and other operational
requirements during fiscal 1999 will be met by cash flow from operations,
potential sales of debt securities and other available borrowing capacity.
YEAR 2000 ISSUE
For the fiscal year-end July 3, 1998, the Company discussed in its Annual Report
on Form 10-K programs underway to address the Year 2000 issue. At October 2,
1998, the Company had completed over 100 of its remediation programs and was
actively working on more than an additional 250 programs. The focus of these
in-process programs is to replace or modify time-sensitive software systems and
equipment. The Company has provided Year 2000 internet web pages to communicate
general and product specific issues and has initiated formal programs with
customers to resolve certain 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 believes it is diligently addressing the Year 2000 issues and that
it will satisfactorily resolve significant Year 2000 problems. The Company
anticipates completing most 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 $46 million with approximately $26 million planned for fiscal
1999. These costs are generally not incremental to existing information
technology budgets. Rather, internal resources were re-deployed and timetables
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
difference 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 members of the European Economic and Monetary Union
will adopt a common currency, the Euro. The adoption of the Euro will affect a
multitude of financial and business applications within the Company. Programs to
address changes needed to comply with all laws and regulations are underway and
are expected to be completed or substantially completed by January 1, 1999;
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. Costs associated with these programs are expensed as
incurred and are not expected to be material to results of operations, financial
condition or liquidity.
(9)
10
OUTLOOK
The Company believes that revenues will be relatively flat in the second quarter
and by the second half of the fiscal year will show increases over comparable
prior year periods. On September 23, 1998, the Company announced that fiscal
1999 earnings from operations are expected to be slightly below fiscal 1998
results before restructuring provisions. The ongoing semiconductor industry
downturn and general market weaknesses for communications products throughout
Asia, eastern Europe and South America continue to impact earnings from
operations.
The fiscal 1998 restructuring program is being vigorously implemented to reduce
costs and maintain profit margins. Restructuring actions and other ongoing cost
controls will help balance near-term results and long-term positioning to retain
and grow market share in all business segments.
(10)
11
FORWARD-LOOKING STATEMENTS
This report contains, and certain of the Company's other public documents and
statements contain and will contain, forward-looking statements that reflect
management's current assumptions and estimates of future performance and
economic conditions. Such statements are made pursuant to 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
restructuring plan announced in July 1998 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, eastern Europe and South America; fluctuations 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; continuing consolidation in the U.S.
defense industry; the Company's ability to recover costs incurred on fixed price
contracts; termination of customer contracts; continued development and market
acceptance of new products, especially digital television broadcast products and
semiconductor wireless products; continued success of the Company's patent
licensing programs, particularly as it relates to the Semiconductor and
Communications segments; and the successful resolution of 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.
(11)
12
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits:
*(10) Material Contracts
(i) Amendment to the Harris Corporation Retirement Plan.
(ii) Amendment to the Harris Corporation Union Retirement Plan.
(iii) Amendment No. 1 to Harris Corporation 1997 Directors'
Deferred Compensation and Annual Stock Unit Award Plan.
*(12) Ratios of Earnings to Fixed Charges.
*(27) Financial Data Schedule.
* Previously filed with the Company's Form 10-Q Quarterly Report for
the fiscal quarter ended October 2, 1998.
(b) Reports on Form 8-K.
(i) The Registrant filed with the Commission a Current Report
on Form 8-K dated July 14, 1998 relating to certain
restructuring charges and the consummation of the
acquisition of the assets of the Copying Systems Business
Unit of the Agfa-Geveart Group.
(ii) The Registrant filed with the Commission a Current Report
on Form 8-K dated August 31, 1998 relating to its
1,000,000 share repurchase program and increased quarterly
dividend rate.
(iii) The Registrant filed with the Commission a Current Report
on Form 8-K dated September 23, 1998 relating to announced
lower than expected earnings for the first quarter of
fiscal 1998.
Items 1, 2, 3, 4, and 5 of Part II are not applicable and have been omitted.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARRIS CORPORATION
------------------
(Registrant)
Date: April 9, 1999 By: /s/ Bryan R. Roub
--------------------------
Bryan R. Roub
Senior Vice President & Chief
Financial Officer (principal
financial officer and duly
authorized officer)
(12)