Aided by the acquisition of Exelis last year, Harris Corp. [HRS] on Tuesday posted higher sales and earnings in its fourth quarter and the company initiated guidance for its next fiscal year that points to flat earnings but a dip in sales.
Net income in the quarter was $160 million, $1.28 earnings per share (EPS), versus a $56 million (51 cents EPS) loss a year. Excluding acquisition costs related to the Exelis deal, which closed in May 2015, and restructuring and other costs, Harris’ income from continuing operations was $183 million ($1.45 EPS), a penny above analysts’ estimates.
The higher income was due to a number of factors including the Exelis deal, lower tax rate, cost savings synergies related to Exelis that are rolling in faster than expectations, and improved operating performance, William Brown, Harris’ chairman, president and CEO, said on the earnings call. The company also reported higher operating income in its Space and Intelligence Systems, Electronic Systems, and Critical Networks segments, which all posted increases in revenue and operating margin.
The company’s margin rate in the quarter was up nearly 2 percent to 16.2 percent
Sales in the quarter rose 24 percent to $1.9 billion versus $1.5 billion a year ago on the strength of the Exelis acquisition. Organic revenue declined 6 percent on declines in tactical communications, public safety communications, and information technology services.
Brown said that tactical radio sales were lower than expected due to delays in finalizing a foreign military sales contract, an “overburdened administrative approval process for task orders” on the contract,” and softness in the United States market due to cautious government buying behavior in anticipation of a continuing resolution to start the new federal fiscal year in October.
Other defense companies that have reported results for their June quarters have not said that the prospect of a continuing resolution is impacting their customers’ buying behaviors at the moment.
Brown also said that tactical radio sales were soft across all the military services with the exception of Special Operations Forces. He added that if a continuing resolution continues into 2017 it will “pressure” the company’s financial results in the second half of its fiscal year.
Orders in the quarter totaled $1.6 billion.
For its fiscal year, Harris posted $7.5 billion in sales, up 47 percent from $5.1 billion a year ago on the back of the Exelis acquisition.
Net income was $324 million ($2.59 EPS), down 3 percent from $334 million ($3.11 EPS). Earnings were impacted by a $21 million (16 cents EPS) loss related to discontinued operations. Harris sold its Aerostructures business, which was part of Exelis, in April. The company’s share count also increased, which negatively impacted per share results.
Harris plans to renew share repurchases in fiscal year 2017 and has instituted a $150 million placeholder to that end.
Excluding acquisition related expenses, restructuring and other charges, Harris’ adjusted earnings from continuing operations for the year were $715 million ($5.70 EPS).
For FY ’17, Harris expects net income between $5.53 and $5.73 EPS and adjusted net income between $5.70 and $5.90. Sales are projected to be between $7.1 billion and $7.3 billion, with declines in the Communications Systems and Critical Networks segments more than offsetting small gains in Electronic Systems, and Space and Intelligence Systems.
Free cash flow in FY ’16 was $772 million, exceeding the company’s $750 million target. The company is forecasting around $800 million in free cash flow this year.
Beyond 2017, Brown said the longer-term sales outlook is improving across the company’s operating segments.
“We still believe that ’18 will be a growth year for Harris Corp.,” he said.
Harris also said on Tuesday that it has reached agreement with one of its investors, JANA Partners, for the future appointment of two “mutually agreed” independent directors to the company’s board. The investor firm is one of Harris’ top 10 largest shareholders.
Barry Rosenstein, managing partner at JANA, said in a statement that “We believe Harris is a leader in its core businesses and has the potential to unlock significant additional value.”