Harris (NYSE:HRS), a communications and IT company, just released its first-quarter results for fiscal 2014. The good news is net income and free cash flow were up compared to the prior year, and earnings per share from continuing operations was up 4%. Plus, EPS was $0.05 above analysts' consensus estimates.
The bad news is revenue was down 6%, and orders were down 11%. However, given the nature of defense spending, this was expected. Moreover, Harris has a few competitive advantages that are helping the company. Here's what CEO Bill Brown had to say when I asked him about it.
Competition gets fierce
It's no secret that cuts to defense spending have increased competition among defense contractors. But Harris' competitive advantages have allowed it to survive even though it's a "small" defense company and its main customer -- the government -- is embroiled in sequestration. Here's how.
First, Brown stated that Harris is "focused strictly on reliable and secure communications and IT," and that "we invest nearly $1 billion in research and development and have 14,000 employees -- including 6,000 engineers and scientists -- who are focused on developing and delivering the highest value solutions in the industry." In other words, Harris is committed to advancing its technology, and creating a superior product -- and it's putting its money where its mouth is to accomplish this.
This results in contract wins. In its latest reported quarter, for example, Harris won a two-year, $141 million sole-source indefinite delivery/indefinite quantity, or IDIQ, contract to supply the Army with mid-tier networking vehicular radios. Further, at the end of the quarter, the U.S. Army Communications-Electronics Command increased Harris' sole-source IDIQ contract by $847 million for its contract supporting international sales of tactical radio systems under the U.S. government's Foreign Military Sales program. International sales for tactical radios are one area Brown highlighted as having the most potential for growth.
Second, Brown stated that Harris has a "diverse portfolio of offerings -- from individual products to global managed network services. And we can leverage our government and commercial technology to create new solutions as few others can."
This also results in contract wins. As I previously mentioned, in June Harris won a $92 million contract from a Middle Eastern company to supply it with Fusion 4G LTE base stations and tactical radios. In July, Harris won a $61 million order from Poland to supply the Ministry of National Defense with Falcon III AN/PRC-117G manpack radios, and Falcon III AN/PRC-152A handheld radios. Further, in October Harris won a five-year contract from Carnival to provide satellite communications solution across its fleet of 103 ships.
Beyond the numbers
Budget cuts and sequestration mean reduced revenue for defense companies. That's just the nature of the beast. Harris is neither an exception nor particularly devastated by this. More importantly, Harris has a plan for how it'll survive sequestration and the current budget environment. As such, I don't think this 118-year-old company is going out of business anytime soon. It could take a few more blows from reduced spending, but Harris' CEO is smart: He knows how to work Harris' advantages into contract wins, and he has a clear vision for the future. Consequently, Harris could make a great long-term investment.