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Harris Corporation Reports Strong Increases in Revenue and Net Income; Announces $600 Million Share Repurchase Program


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Harris Corporation (NYSE:HRS) reported revenue for the third quarter of fiscal year 2007 increased 22 percent to $1.072 billion, compared to $881 million in the prior-year quarter. GAAP net income increased to $214.9 million or $1.52 per diluted share. Non-GAAP net income — excluding a significant gain and charges associated with the Harris Stratex Networks transaction, and charges associated with cost-reduction actions in the Broadcast Communications segment — increased to $100.5 million, or $.72 per diluted share, a 24 percent increase when compared to non-GAAP income in the prior-year quarter. A reconciliation of GAAP to non-GAAP financial measures is provided on Tables 5 and 6 along with accompanying notes.

“Harris delivered excellent financial results in the third quarter, led by higher revenue and strong operating performance in our Government Communications Systems and RF Communications segments,” said Howard L. Lance, chairman, president, and chief executive officer. “Organic revenue growth was 14 percent in the quarter, reflecting continued positive momentum for the company. Our diversified U.S. and international customer base, solid program execution, and new product introductions position Harris for continued growth going forward. Significant restructuring activities during the quarter in our two commercial businesses overshadowed the progress we are making in repositioning Broadcast Communications and Harris Stratex Networks as global market leaders.”

New Share Repurchase Program
The Harris Board of Directors has approved a new $600 million share repurchase program. The company expects to purchase $200 million of its shares during the current quarter, with the remaining $400 million spread over the following 24 months. “Our new share repurchase program recognizes our excellent cash flow from operations,” Lance said. “We will repurchase shares in balance with market conditions and the company’s operational requirements, while continuing to invest in both internal growth initiatives and strategic acquisitions.”

Share repurchases will be funded with available cash. Repurchases under the program may be made through open market purchases, private transactions, transactions structured through investment banking institutions, or any combination thereof. The timing, volume, and nature of share repurchases are subject to market conditions, applicable securities laws, and other factors, are at the discretion of the company’s management, and may be suspended or discontinued at any time. The share repurchase program announced today replaces a previous share repurchase authorization, which had approximately 2.5 million shares remaining.

Government Communications Systems
Third quarter revenue of $500 million in the Government Communications Systems segment was a year-over-year increase of 10 percent, and resulted from the award of new programs for communications and information networks and continued expansion of work scope on existing programs. Operating income was $63.9 million, and operating margin was 12.8 percent, reflecting a favorable program mix and a net $4.3 million gain on the sale of the STAT® network security product line.

Year-over-year revenue growth drivers in the third quarter included:

The 15-year, $2.2 billion Federal Aviation Administration (FAA) Telecommunications Infrastructure (FTI) program. FTI is a new, state-of-the-art, telecommunications network that enhances network efficiency, reliability and security while reducing operational costs. The program has a potential value of $3.5 billion;
The 5-year, $600 million Field Data Collection Automation (FDCA) program for the U.S. Census Bureau, which includes the development of a new handheld device with integrated GPS and secure communication capabilities that will be used by 500,000 census takers during the 2010 Census;
Continuing growth of the 10-year, $1.0 billion Patriot technical services program for the National Reconnaissance Office;
More than $100 million in new programs and follow-on contracts with National Intelligence customers; and
The $66 million CDL Hawklink program for the U.S. Navy that transmits real-time sensor data from LAMPS helicopters to naval vessels.
RF Communications
Revenue in the RF Communications segment was $304 million in the third quarter, a 42 percent increase compared to the year-ago quarter. Operating income was $107.4 million and operating margin was 35.3 percent.

Opportunities in both U.S. and international markets continued to be very strong, fueled by on-going global tactical radio modernization. Harris high-performance, feature-rich Falcon® tactical radios continue to demonstrate communications capabilities and interoperability that is unmatched in the industry. During the quarter, Harris received significant new orders from the U.S. Marine Corps, U.S. Army, and U.S. Air Force and from the governments of Saudi Arabia, Algeria, and the Republic of Georgia.

Harris has now delivered over 15,000 units of its next-generation Falcon III multi-band handheld radio since its launch in fiscal year 2006. The Falcon III handheld radio is the first widely fielded tactical radio to receive certification from the JTRS (Joint Tactical Radio System) Joint Program Executive Office and the National Security Agency (NSA). Customers for the Falcon III handheld and vehicular radio systems include the U.S. Army, U.S. Navy and U.S. Air Force, as well as other government agencies. The Falcon III has been well received by the market and is providing combat units in Iraq with true multimode operational capabilities, including ground-to-ground, ground-to-air and long-range tactical satellite communications. The Falcon III multiband man-pack radio, scheduled for release in September 2007, will be the first NSA-certified radio to provide wideband secure networking for data-intensive applications, such as video transmission in mobile battlefield conditions.

Also during the quarter, Harris received Type 1 certification from the NSA for its new SecNet® 54 Secure Wireless Local Area Network product line. This product enables transmission of sensitive defense communications over wireless infrastructures in applications such as tactical operations centers.

Broadcast Communications
Revenue in the Broadcast Communications segment was $139 million in the third quarter, compared to $143 million in the prior-year quarter. Strong positive trends continued in the Video Infrastructure and Digital Media product lines, which posted another quarter of strong double-digit revenue growth. Investments in analog-to-digital and high-definition systems are enabling content providers and broadcasters to create, manage and deliver additional channels and video streams to consumers. HD Radio® Transmission systems revenue also increased as a result of further penetration of the new Harris FlexStar® exciter. Revenue was significantly lower in the quarter in U.S. digital TV Transmission and Automation software systems products.

The segment’s operating loss of $18.1 million in the quarter included charges of $23.1 million related to cost-reduction actions in both the Transmission and Software business areas, including severance and facilities charges and the write-down of capitalized software associated with discontinuing an Automation software development effort. Excluding these charges, non-GAAP operating income was $5.0 million. Income was negatively impacted by the significant decline in U.S. digital TV Transmission and Automation systems revenue, and by increased expenses associated with the investment and deployment of new Software products including OSi Traffic™ and Invenio® Digital Asset Management. Cost-reduction actions are expected to result in annual savings of approximately $12 million in fiscal year 2008.

Broadcast Communications orders were significantly higher than sales at $167 million, a 12 percent increase over the prior-year quarter. Video Infrastructure product line orders increased 17 percent compared to the fiscal 2006 third quarter. Harris provides industry-leading routers, digital amplifiers, test and measurement and networking technologies that support large, fast-growing segments of the media market. Harris is supporting customers as they expand services for high-definition TV, Internet Protocol TV, video-on-demand, and interactive TV. Recent acquisitions and a series of innovative new products have clearly established Harris as the preferred end-to-end solutions provider for the digital build-out worldwide. Harris solutions were on display at the recent National Association of Broadcasters (NAB) trade show and received very positive customer reviews and numerous awards for innovation.

Harris Stratex Networks, Inc.
On January 26, 2007, the Harris Microwave Communications Division was combined with Stratex Networks, Inc. to create a new company named Harris Stratex Networks, Inc., with Harris owning 57 percent of the outstanding shares. Harris third quarter fiscal 2007 financial results include two months of Harris Stratex Networks on a fully consolidated basis, with an elimination of the minority interest.

Third quarter revenue for the Harris Stratex Networks segment was $139 million. Segment operating income was $141.0 million, and included a $163.4 million gain and $26.5 million of costs associated with the transaction. Non-GAAP operating income, excluding both the gain and transaction costs, was $4.1 million in the third quarter. A reconciliation of GAAP to non-GAAP financial measures is provided on Table 8 along with accompanying notes.

For comparative purposes, Harris Stratex Networks has provided pro forma, non-GAAP financial information related to revenue and income for the third quarters of fiscal 2007 and fiscal 2006, as if the former Stratex Networks and the former Harris Microwave Communications Division had been combined for the entire third quarter in both years. On this basis, Harris Stratex Networks revenue was $147 million in the third quarter, 7 percent higher than the same quarter in the prior year. North America revenue reflected continued market strength, increasing 34 percent compared to the prior-year quarter. Growth was driven by mobile operators substituting microwave capabilities for leased lines and by requirements for additional capacity to handle high-bandwidth services. In addition, a large private network upgrade for a state government was also a major revenue driver in the quarter.

International revenue declined 4 percent in the quarter compared to the prior year, primarily as a result of lower orders and project delays in Europe, the Middle East and Africa. The segment’s merger integration activities in these regions disrupted existing sales channels more than expected. International revenue was higher in Latin America compared to the prior year, and revenue in the Network Operations segment of the business also increased. Global wireless infrastructure investment is expected to continue as mobile operators expand their networks and deploy new 3G services.

On a pro forma, non-GAAP basis operating income in the third quarter for Harris Stratex Networks was $5.6 million, which was flat with the prior-year quarter. A higher mix of services versus product revenue in both North America and Africa reduced gross margin and operating results. On-going product cost reductions progressed as planned during the quarter with product margins increasing. The majority of integration activities should be completed during fiscal year 2007.

Harris Stratex Networks (NASDAQ:HSTX) management will host a conference call and webcast (www.harrisstratex.com) today at 5:30 p.m., Eastern Time, to discuss financial results for their fiscal year third quarter.

Outlook and Guidance
Revised non-GAAP earnings guidance for fiscal year 2007 is a range of $2.77 to $2.81 per diluted share. The company also provided initial earnings guidance for fiscal year 2008, beginning June 30, 2007, of $3.20 to $3.30 per diluted share, representing an increase of approximately 17 percent.

“In fiscal year 2008, we expect to achieve revenue growth in a range of 10 to 15 percent, including the full-year contribution of Harris Stratex Networks,” Lance said. "Our optimism is driven by expectations for growth in each of our business segments. Our Government Communications Systems segment should continue expanding its broad program base with work on future communications and IT platform upgrades, as well as new international opportunities. Further growth in the RF Communications segment is expected as both U.S. and international customers continue to gravitate toward the robust capabilities of our Falcon tactical radios.

“Our commercial broadcast and microwave segments are expected to contribute significant growth in fiscal 2008 as they address a growing list of opportunities, particularly in international markets,” Lance said. “Order growth in the Broadcast business confirms our strategic investments in video infrastructure and digital media acquisitions, and the recent merger of our Microwave Communications segment with Stratex Networks has created a new business with significant mass and product depth in the global telecom market.”

Harris will host a conference call today at 4:30 p.m., Eastern Time, to discuss the above items. Interested individuals are invited to listen to the call by using a dial-in number: (719) 457-2633, access code: 8643460. The conference call also will be broadcast live via the Internet at http://www.harris.com. A replay of the teleconference will be available beginning at 8:00 p.m., Eastern Time, and will run until midnight, Eastern Time, on Tuesday, May 8. To access the replay, please call (719) 457-0820, access code: 8643460. A recording of the call will also be available on the Harris website beginning at 7:00 p.m., Eastern Time, on May 1.

Harris is an international communications and information technology company serving government and commercial markets in more than 150 countries. Headquartered in Melbourne, Florida, the company has annual revenue of about $4 billion and more than 14,000 employees — including more than 6,000 engineers and scientists. Harris is dedicated to developing best-in-class assured communications™ products, systems, and services for global markets, including government communications, RF communications, broadcast communications, and wireless transmission network solutions. Additional information about Harris Corporation is available at www.harris.com.



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