Harris' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Harris (HRS)

Q3 2012 Earnings Call

May 01, 2012 8:30 am ET


Pamela Padgett - Vice President of Investor Relations

William M. Brown - Chief Executive Officer and President

Gary L. McArthur - Chief Financial Officer and Senior Vice President

Daniel R. Pearson - Chief Operating Officer and Executive Vice President


Carter Copeland - Barclays Capital, Research Division

Christopher Sands - JP Morgan Chase & Co, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Richard Valera - Needham & Company, LLC, Research Division

Peter Skibitski

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Chris Quilty - Raymond James & Associates, Inc., Research Division

Josephine Lin Millward - The Benchmark Company, LLC, Research Division



Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Harris Earnings Conference Call. My name is Janetta, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over for your host today, Ms. Pamela Padgett, Vice President of Investor Relations. Please proceed.

Pamela Padgett

Hello, everyone. Good morning. Welcome to our Third Quarter Fiscal 2012 Earnings Call. On the call today is Bill Brown, President and CEO; Gary McArthur, Senior Vice President and Chief Financial Officer; and Dan Pearson, Executive Vice President and Chief Operating Officer.

And before we get started, a few words about forward-looking statements. In the course of this teleconference, management may make forward-looking statements. Forward-looking statements involve assumptions, risk and uncertainties that could cause actual results to differ materially from those statements. For more information and a discussion of such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC.

In addition, in our press release and on this teleconference and the related presentation, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in tables of our press release and on the Investor Relations section of our website, which is www.harris.com. A replay of this call will also be available on the Investor Relations section of our website.

And with that, Bill, I turn the call over to you.

William M. Brown

Thank you, Pam, and welcome to our Third Quarter Fiscal 2012 Earnings Call. I'll quickly review some of the highlights of our third quarter results, turn it over to Gary to walk through the details of the financials and then come back to you with a few comments before opening the call to questions.

Turning to Slide 3 and 4 in the presentation. Harris posted solid third quarter results with orders, revenue and non-GAAP earnings all higher compared to prior year. Revenue increased 4% to $1.48 billion and book-to-bill was greater than 1. Non-GAAP EPS of $1.39 increased 18% over the prior year and was driven by operating income growth at RF and government communications, nonrecurring royalty income and a lower share count from first quarter repurchases.

In the last call, I say we are going to be conservative on cash deployment with a focus on rewarding shareholders. We resolved a significant financial drag from the cyber hosting facility, and completed a thorough review of our business portfolio, and we've made good progress on all 3 fronts. The company continues to generate strong free cash flow and at the end of February, we increased our dividend by 18% and raised our target payout ratio from 20% to 25%. We also announced in the third quarter that we are exiting the underutilized cyber hosting facility, and the process to divest the assets is progressing quickly. Our business portfolio review was well underway and today, we're announcing the decision to divest Broadcast Communications, which we believe is no longer aligned with the company's long-term strategy. The combination of a lack of effective integration by the company over the last decade, coupled with the market outlook that is not as promising today as once believed, led us to conclude that the best -- that the business is best owned by another party. Although broadcast is no longer core to our company, we believe the business has the potential for strong growth and margin expansion, is led by a solid leadership team and has long-term value for someone who brings a focused approach to the broadcast and media market. It's our intention to use the proceeds to return cash to shareholders and invest in growing our core businesses.

Also, as we said on our last call, the slower government spending environment requires increased attention to operational excellence and lowering costs, including a sharper focus on supply chain, factory and field costs, overhead rates and employment levels. The guidance that Gary will give in a moment reflects the cost reduction actions we are taking in the fourth quarter that will benefit us in FY '13. I'll turn it over to Gary to comment on segment results and guidance outlook, and then I'll come back with a few comments before we open the call to questions. Gary?

Gary L. McArthur

Thank you, Bill, and good morning. Moving to segment results on Slide 5. Revenue for RF Communications was $538 million compared to $550 million in the prior year. Tactical Communications revenue was $398 million and declined 8%, driven by a significant decline in DoD. Although down slightly due to transitioning to Phase 2 of the Australia order, international revenue was at a healthy level, and supports the strong double-digit growth expected for fiscal 2012. In Public Safety and Professional Communications, revenue growth was excellent, increasing 18% to $140 million with strong growth in both products and programs. Operating performance for this segment was very good with operating income increasing in spite of lower revenue. A favorable product mix, cost containment and lower manufacturing costs all resulted in a higher operating margin of 33.8%, up from 32.5% in the prior year. Orders for this segment totaled $629 million and book-to-bill was 1.17.

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