Harris Management Discusses Q4 2012 Results - Earnings Call Transcript

Harris (HRS)

Q4 2012 Earnings Call

July 31, 2012 8:30 am ET

Executives

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

Analysts

Carter Copeland - Barclays Capital, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

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

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

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

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

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

Gautam Khanna - Cowen and Company, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Harris Earnings Conference Call. My name is Janeda, 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 to Pamela Padgett, Vice President of Investor Relations. Please proceed.

Pamela Padgett

Hi. Good morning, everyone, and welcome to our Fourth Quarter Fiscal 2012 Earnings Call. I'm Pamela Padgett and on the call with me today is Bill Brown, President and CEO; Gary MacArthur, Senior Vice President and Chief Financial Officer; and Dan Pearson, Executive Vice President and Chief Operating Officer.

Before we get started, a few words on forward-looking statements. In the course of this teleconference, management may make forward-looking statements. Forward-looking statements involve assumptions, risks 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 the 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'll turn it over to you.

William M. Brown

Okay. Well, thank you, Pam. And welcome to our Fourth Quarter Fiscal 2012 Earnings Call. I'll begin today's call by turning to Slides 3 and 4 in the presentation.

Harris fourth quarter results represented a solid finish to fiscal 2012. Revenue was $1.4 billion. Non-GAAP income was $162 million and increased 4% over the prior year even though revenue declined by 6%. Operating income was higher in all 3 segments as a result of our productivity and cost-reduction initiatives. Non-GAAP EPS of $1.42 was up a strong 15% compared to $1.24 in the prior year, reflecting higher operating income and share repurchases. In addition, cash flow was particularly strong in the quarter and resulted in record free cash flow for the year.

Our new wins and orders in the quarter were encouraging as we enter fiscal 2013. Total orders in the quarter were higher than revenue and increased in all 3 segments. Although total revenue declined as expected due to lower revenue in Tactical Communications and IT Services, we are gaining traction in each of our growth initiatives. Public Safety and Professional Communications continued along its strong growth trajectory and was up 12% in the quarter. In CapRock, demand was strong for satellite communications solutions, with revenue up 8% and orders up solidly double-digit over the prior year and also significantly higher than revenue. In Healthcare Solutions, revenue increased 69% off of a relatively small base driven by excellent momentum in government healthcare where funding remains solid. In Tactical Communications, we're managing through a transition in the U.S. DoD market from one previously driven by OPTEMPO to a modernization cycle driven by wideband technology where we're the clear leader and where we continue to win on innovation and affordability. In government communications, continuing strong execution is generating solid operating margins, with sales to the classified community and civil customers like the FAA offsetting weaker DoD customer spending.

For the full fiscal year 2012, orders were $5.48 billion, up 8%, and revenue was $5.45 billion, up 1% over the prior year. Although non-GAAP income from continuing operations was down 5%, non-GAAP earnings per share increased 4% to $5.20. Overall, company results for the fourth quarter and full year demonstrate that our strategy for creating value in a tough government spending environment is working, successfully execute in our core businesses and in our growth initiatives, drive operational excellence to lower costs across the company, generate higher free cash flow and return capital to shareholders through share repurchases and dividends.

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 L. McArthur

Thank you, Bill. And good morning.

Moving to segment results on Slide 5. Revenue for RF Communications was $584 million compared to $628 million in the prior year. Tactical Communications revenue was $409 million, declining 13%. In Public Safety and Professional Communications, revenue growth was excellent, increasing 12% to $175 million. Operating performance for the segment was very good, with operating income increasing in spite of lower revenue. Lower manufacturing costs and operating expenses resulted in a higher operating margin of 33.5%, up from 30.4% in the prior year.

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