EPS from continuing operations up 19%, 8% versus non-GAAP, on flat revenue
Orders of $2.3 billion; book-to-bill of 1.6
Operating cash flow $95 million; free cash flow $72 million
Reiterated FY18 revenue, EPS and free cash flow guidance
Harris Corporation (NYSE:HRS) reported fiscal 2018 first quarter revenue of $1.41 billion, flat compared with prior year. Earnings per diluted share from continuing operations increased to $1.38 from $1.16 (GAAP) and $1.28 (non-GAAP1). Operating margin expanded to 19.2% from 17.3% (GAAP) and 18.5% (non-GAAP1).
We are off to a good start in fiscal 2018 with solid first quarter results, including record orders of $2.3 billion and a book-to-bill of 1.6, said William M. Brown, chairman, president and chief executive officer. In addition, our focus on productivity and program execution contributed to 8% EPS growth and drove 70 basis points of margin expansion. These results mark good progress against our strategic priorities and position us to achieve our guidance for the year.
Summary Financial Results
Revenue was flat, as growth in Space and Intelligence Systems and Electronic Systems was offset by lower volume in Communication Systems. The improvements in GAAP operating income, margin and EPS were primarily due to Exelis acquisition-related charges incurred in the first quarter of fiscal 2017. Non-GAAP operating income grew 3% and margin expanded by 70 basis points (bps) from strong execution and program performance across all three segments and higher pension income, partially offset by a $14 million unfavorable impact from the ADS-B program transition from build-out to sustainment. The 8% EPS increase was driven by higher operating income and lower share count, partially offset by a less favorable tax rate. The 33% orders increase resulted in a book-to-bill of 1.6.
Communication Systems
Segment revenue declined 5% primarily from lower International Tactical Communications volume. Operating income was flat, as operational efficiencies and lower costs were offset by lower volume.
DoD Tactical Communications received several significant orders to meet ongoing base-business demand and support U.S. Army modernization:
$38 million from the U.S. Marine Corps for 117G radios with MUOS capability
$36 million from the U.S. Air Force, including $14 million for 117G radios and $22 million for integrated tactical vehicular radio systems
101 HMS Manpack test radios from the U.S. Army as the next milestone in a multi-year modernization
International Tactical Communications received several key orders for large multi-year modernization programs, ongoing counter-terrorism support and combating other evolving threats:
$260 million from Australia for an integrated tactical network as part of a multi-year modernization
$52 million from Ukraine for Falcon III tactical radios and equipment
$46 million from Kenya for Falcon III tactical radios
$39 million from Iraq for integrated tactical vehicular radio systems
Electronic Systems
Segment revenue increased 1% from higher volume in Avionics with growth in several platforms, including the F-35, and the ramp of the UAE battle management system, mostly offset by lower volume from the ADS-B program transition. Operating income declined 2% as strong performance on Electronic Warfare (EW) programs and higher Avionics volume were more than offset by the impact of the ADS-B program transition.
EW received a $133 million, 3-year contract for IDECM systems for U.S. Navy and Australian F/A-18 aircraft and $47 million in additional funding for EW solutions on Moroccan F-16 aircraft as customers upgrade legacy platforms to combat emerging threats.
Avionics received a $63 million order for LRIP 10 release systems on the F-35 program, as well as orders of $26 million from Singapore and $20 million from Turkey for F-16 smart release rack systems as international customers continue to modernize platforms.
C4ISR / Battle Management Systems received a contract worth up to £55 million from the United Kingdom for T7TM robots in support of explosive ordnance disposal missions, a new franchise for this business.
Space and Intelligence Systems
Segment revenue increased 3% from higher Classified revenue, driven by space superiority programs, partially offset by lower revenue on environmental programs. Operating income increased 10% driven by higher volume, strong program performance and incremental pension income.
In Classified programs, order momentum remained strong, particularly in space superiority. In addition, investments in innovative ground processing capabilities and small satellite technology resulted in two key wins in the quarter - a follow-on contract to a ground-based adjacency initially awarded in fiscal 2017, and a new award with the potential to grow to $100 million over the next two years.
Funding support continued for key environmental programs, including $72 million for the GOES-R program and $63 million from NOAA/NASA for the Joint Polar Satellite System Cross-track Infrared Sounder.
Commercial received its largest order for a single satellite, covering four reflectors and marking the 8th reflector win in the last two years, driven by constellation recapitalization and fleet expansion.
Cash and Capital Deployment
Harris generated free cash flow of $72 million and ended the quarter with $388 million of cash, after returning $144 million to shareholders through dividends and share repurchases and reducing debt by $33 million.
Guidance
Harris reiterated guidance for fiscal 2018:
Revenue in a range of $6.02 - 6.14 billion, up 2 - 4 percent from fiscal 2017
EPS from continuing operations in a range of $5.85 - $6.05
Free cash flow in a range of $850 - 900 million
Conference Call and Webcast
Harris will host a conference call today, October 31, at 8:30 a.m. Eastern Time (ET) to discuss its fiscal 2018
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EPS from continuing operations up 19%, 8% versus non-GAAP, on flat revenue
