TOP CONTRIBUTORS

Christina Yi

HRS AT A GLANCE

P/E ► 18.7 AVG EV/EBITDA ► 9.94 AVG ROA ► 1.8% AVG ROE ► 1.1% AVG Debt to Equity ► 1.29 AVG Current Ratio ► 1.83 AVG Interest Coverage Ratio ► 9.06 HIGH

 

 

 

 

 

 

Harris Corporation (NYSE: HRS) is a communications and information technology company primarily serving the US government and with commercial markets in more than 150 countries. Since the release of its Falcon III Multiband Manpack Radio in Fiscal 2007, Harris has expanded primarily in its relationship with the U.S. Military. This Falcon III technology has an advantage in its market because it is compatible with the legacy system that it is designed to replace. Over the 2007 Fiscal year, operating income for Harris's radio frequency segment increased 45% to $403.2 million in 2007, from 278.9 million in fiscal 2006. ^[1]. As the military seeks to upgrade its current system of communications with the new Joint Tactical Radio System (JTRS), Harris is in a position to gain a greater share of the government market.

While the U.S. Government accounted for the majority of Harris's revenues in F2007, the company is seeking to expand its market by appealing to foreign governments. The technology that it sells domestically is thus marketed internationally, for example, to Poland's Ministry of National Defense,^[2] Harris seeks to expand its world-wide presence to further diversify its business interests.

Commercially, Harris has made acquisitions that integrate services for High Definition television/radio upgrades and other communications innovations. It has partnered with firms such as VBrick to develop hybrid streaming networks,^[3] and The DirecTV Group (DTV) to provide HD Video Networking.^[4]

Company Overview

Financial Metrics

Cumulative Total Returns of Harris Corp compared with those of the S&P 500 and S&P 500 Information Technology Sector. ^[5]

Total revenue in fiscal 2007 was $4.2 billion compared to $3.5 billion in fiscal 2006. Total revenue in the United States increased 20 percent from fiscal 2006 while international revenue, amounting to 23 percent of total revenue in fiscal 2007, increased 29 percent from fiscal 2006. Net income for fiscal 2007 was $480.4 million compared to $237.9 million in fiscal 2006.^[6]

Business Segments

Contribution of each segment to firm revenue for Fiscal 2007^[7]

Revenues by Division, Fiscal 2006-2007^[7]

For fiscal 2007 Harris was comprised of four divisions:

1) Government Communications Systems covers Department of Defense programs, National Intelligence Programs, Civil Programs (including technology to retrieve data for the US Census), and Information Technology Programs. This segment had over 300 programs in Fiscal 2007, with the U.S. Government accounting for 95% of revenue.^[8]

2) Radio Frequency Communications provides technology for voice and data radio communication products. The Falcon family of products is included in this division and is significant from other radio technology because it is software-based, meaning that the radios can be reprogrammed for upgrades. The Falcon III Multiband Handheld is the first tactical radio to be certified without waivers by the Joint Program Executive Office (“JPEO”) as fully compliant with the Software Communications Architecture (“SCA”) of the Joint Tactical Radio System (“JTRS”). In Fiscal 2007, the U.S. Government accounted for 76% of Harris's revenue.^[9]
Beginning Fiscal 2008, Harris says it will redefine its RF Segment as the Defense Communications and Electronics segment. This will also include Department of Defense programs, previously included in the Government Communications Systems segment.

3) Broadcast Communications supports customers as they expand services for high definition (“HD”) TV and radio, mobile TV services, video-on-demand, and interactive TV. Primary consumers for this segment include television and radio stations, cable and satellite providers, and public safety organizations.

4) Harris Stratex Networks, Inc. provides wireless transmission network connectability, including microwave radio systems for cellular network operators.

Mergers and Acquisitions

On June 15, 2007, Harris acquired Multimax, Inc. for $402 million.^[6] The acquired business operates within Harris's Government Communications Systems division.

In its Broadcast Communications division, Harris acquired Encoda Systems Holdings, Inc. (“Encoda”) in fiscal 2005 and Leitch Technology Corporation (“Leitch”), Optimal Solutions, Inc. (“OSi”) and the Aastra Digital Video business (“Aastra Digital Video”) of Aastra Technologies in fiscal 2006 to expand the division worldwide and provide end to end development opportunities. ^[10]

Harris Stratex Networks, Inc. is the combination of Harris' former Microwave Communications Division with Stratex Networks, Inc. The merger was complete on January 26, 2007, and Harris Corporation owns 57% of the outstanding stock in the resulting company.

Trends and Forces

Uncertain U.S. Government budgets make up a significant portion of revenue

Approximately 66 percent of the company's net revenue in each of fiscal 2007, 2006 and 2005 was earned from sales to the U.S. Government. ^[11] Since 2001, ongoing operations in Iraq have created large budget allocations for military defense; these allocations, however, are unpredictable and can vary with changing government priorities each fiscal year. In fact, Harris has difficulties because of the annual nature of the Government's fiscal budgets. Although many contracts are multi-year projects, Congress appropriates funds yearly, and some programs thus only receive partial funding with appropriations varying on their time horizons. As a result of dealing primarily with the government, Harris is also subject to more stringent regulations, which provide added costs to their production.

Fixed-price contracts cause input-cost risk exposure

During fiscal 2007 and 2006, approximately 33 percent and 38 percent, respectively, of Harris's total Government Communications Systems and RF Communications segments’ revenue was from fixed-price contracts.^[12] These fixed-price agreements provide an opportunity for additional income should the company be able to produce at a cost below estimates; however, fixed priced agreements also force the company to absorb unforeseen rises in the cost of production. With 2Q 2008 trends of high inflation and rising commodity costs, Harris is exposed to risk with its large volume of fixed-priced agreements.

A large international consumer base creates currency risk exposure

In fiscal 2007, revenue from products exported from the U.S. or manufactured abroad was 23 percent of Harris's total revenue. ^[12] Although 36% of these transactions occurred in local currency environments, the majority of the company's international business is subject to currency rate fluctuations. With Harris's long-term strategy of marketing to foreign governments for its communications products, the issue of currency rate fluctuations is a continuing concern and exposure.

Competitors

Competitors by segment:

1) Government Communications Systems: Accenture (ACN), BAE Systems (BAESY), Boeing Company (BA), Computer Sciences (CSC), General Dynamics (GD), ITT Industries Inc, L-3 Communications Holdings (LLL), Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon Company (RTN), Rockwell Collins (COL), SAIC (SAI)

2) RF Communications: General Dynamics (GD), ITT Industries Inc, Raytheon Company (RTN), Rohde and Schwarz, Tadiran, Thales

3) Broadcast Communications: Avid Technology (AVID), Broadcast Electronics, Chyron, Evertz, Harmonic (HLIT), Microsystems, Miranda, Nautel, NEC (NIPNY), Omneon, Omnibus, Pilat Media, Rad Systems, Rohde & Schwarz, Sony (SNE), Tektronix (TEK), Thomson/Grass Valley, Thomson/Thales, Vizrt, Wide Orbit

4) Harris Stratex Networks: Alcatel-Lucent (ALU), Ceragon Networks (CRNT), Sony-Ericsson, Eltek (ELTK), Fujitsu Limited (FJTSY), NEC (NIPNY), Nokia (NOK), Tadiran

For the communications industry in particular, changes in available cash are important, as they provide capital for research and development. Harris is a relatively small corporation, and thus has less available capital for expenditures and research

References

1. ↑ HRS 2007 Annual Report pg. 31  
2. ↑ Harris Corporation Awarded Contract by Polish Ministry of National Defence.
3. ↑ Harris Corporation and VBrick Combine Digital Signage.
4. ↑ DIRECTV Goes with Harris.
5. ↑ HRS 2007 Annual Report pg. 27  
6. ↑ ^{6.0 6.1} HRS 2007 Annual Report pg. 2  
7. ↑ ^{7.0 7.1} HRS 2007 Annual Report pg. 3  
8. ↑ HRS 2007 Annual Report pg. 6  
9. ↑ HRS 2007 Annual Report pg. 8  
10. ↑ HRS 2007 Annual Report pg. 9  
11. ↑ HRS 2007 Annual Report pg. 17  
12. ↑ ^{12.0 12.1} HRS 2007 Annual Report pg. 18  
13. ↑ Google Finance(http://finance.google.com/finance?fstype=ii&q=NYSE:HRS)
14. ↑ Google Finance (http://finance.google.com/finance?fstype=ii&q=NYSE:RTN)
15. ↑ Google Finance (http://finance.google.com/finance?fstype=ii&q=NYSE:ACN)
16. ↑ Google Finance (http://finance.google.com/finance?fstype=ii&q=NYSE:CSC)