UNITED STATES
FORM 10-K
Commission File Number 1-3863
HARRIS CORPORATION
Registrant’s telephone number, including area code: (321) 727-9100
Securities Registered Pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value (based upon the closing price on the New York Stock Exchange) of the voting stock held by non-affiliates of the registrant as of August 25, 2000 was $1,993,597,775. For purposes of this calculation, the registrant has assumed that its directors and executive officers are affiliates.
The number of outstanding shares of the registrant’s Common Stock on August 25, 2000 was 68,995,754.
Documents Incorporated by Reference:
Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on October 27, 2000 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent described therein.
HARRIS CORPORATION AND SUBSIDIARY COMPANIES
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
THE COMPANY
Harris Corporation is an international company focused on communications equipment for voice, data and video applications. Harris was incorporated in Delaware in 1926 as the successor to three companies founded in the 1890’s. The principal executive offices of Harris Corporation (hereinafter called “Harris” or the “Company”) are located at 1025 West NASA Boulevard, Melbourne, Florida 32919, and the telephone number is (321) 727-9100.
Recent Development of Business
During fiscal 2000, Harris continued its repositioning as a pure communications equipment company. Harris completed the spin-off of Lanier Worldwide, Inc. and the sale of Harris’ semiconductor business. Additionally, Harris announced its exit from the telephone switching and alarm management product lines. Harris also completed several acquisitions designed to strengthen its position in the communications markets.
Spin-off of Lanier Worldwide. In November 1999, Harris completed the spin-off of its Lanier Worldwide, Inc. subsidiary as an independent publicly owned company. The transaction was effected through the distribution of approximately 90% of the outstanding shares of common stock of Lanier to Harris shareholders. Harris retained the remaining 10% of Lanier’s outstanding shares.
Sale of Semiconductor Business. In August 1999, Harris completed the sale of substantially all of its semiconductor business to Intersil Corporation, a subsidiary of Sterling Holding Company, LLC, a Citicorp Venture Capital, Ltd. investment portfolio company. Upon consummation of the sale, Harris received $520 million in cash, $90 million of subordinated notes, and a 10% equity interest in Intersil Holding Corporation. In connection with the transaction, Intersil also assumed most of the liabilities associated with the semiconductor business. Intersil Holding Corporation completed its initial public offering in February 2000 and is now a publicly traded company. Harris also sold its suppression semiconductor business to Littlefuse, Inc. during fiscal 2000.
Repositioning. In addition to the spin-off of Lanier and the sale of the semiconductor business, Harris completed additional steps to reposition itself as a pure communications equipment company and also undertook an internal reorganization. The internal reorganization included the elimination of the sector organization level, reduction of general and administrative expenses and the realignment of the commercial and government businesses into one company focused on the communications market. Harris also decided to exit the telephone switching and alarm management product lines.
Acquisition of Louth Automation. In January 2000, Harris purchased Louth Automation, a leading supplier of advanced automation systems for digital television, over-the-air broadcast, and cable and industrial applications. Harris paid cash in the net amount of approximately $87 million. The acquisition of Louth Automation brings Harris competencies in automation and control to complement Harris’ leadership position in broadcast transmission and digital encoding, thus further broadening Harris’ global position in the broadcast markets.
Acquisition of TRT Lucent Technologies’ Point-to-Point Microwave Business. In June 2000, Harris purchased the point-to-point microwave business of TRT Lucent Technologies to enhance our capabilities in microwave communication product offerings. The acquisition also provides for a five-year preferred supplier agreement for Harris to serve the worldwide point-to-point microwave needs of Lucent’s wireless divisions.
As a result of the spin-off of Lanier Worldwide and the sale of all of the semiconductor business, Harris’ consolidated financial statements and notes for prior periods report these businesses as discontinued operations and accordingly, prior periods have been restated. In addition, as a result of its internal reorganization, the continuing operations of Harris are reported under two segments: (1) the Government Communications
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General
Harris, along with its subsidiaries, is a worldwide company focused on the worldwide market for voice, data and video communications equipment.
Harris structures its operations around two segments: the Government Communications segment and the Commercial Communications segment, which has four divisions. Each of Harris’ divisions have been organized on the basis of specific communications technology and markets. For the most part, each operating division has its own marketing, engineering, manufacturing and service organization. Harris produces most of the products it sells, except for certain broadcast products sold by the Broadcast Communications Division, which products are sourced from a variety of manufacturers. Reference is made to the Note Business Segments in the Notes to Financial Statements for further information with respect to business segments.
Total revenues in fiscal 2000 increased to approximately $1.81 billion from approximately $1.74 billion a year earlier. Total sales in the United States increased approximately 2 percent from a year earlier while international sales, which amounted to approximately 27 percent of the total from continuing operations, increased approximately 9 percent. Net income from continuing operations for fiscal 2000 before an extraordinary item decreased to $25.0 million from $49.9 million in fiscal 1999.
The markets served and principal products of the Company’s business segments are as follows:
Commercial Communications Segment
The Commercial Communications segment serves four primary markets: (1) broadcast communications, (2) microwave communications, (3) network support, and (4) RF communications. This segment produces a comprehensive line of communications equipment and systems and application solutions for television and radio broadcast, radio-communication, wireless access and telecommunication. Products include:
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Government Communications Segment
The Government Communications segment designs, develops and produces state-of-the-art communication, information processing and electronic systems for the defense, air traffic, aerospace, telecommunications, and law enforcement markets. Applications of this segment’s technologies and products include:
Financial Information About Business Segments
The financial results shown in the following table are presented to comply with current financial accounting standards relating to the Company’s business segment reporting. Information concerning the identifiable assets of the Company’s business segments is contained in the Note Business Segments in the Notes to Financial Statements. In calculating operating profit, allocation of certain expenses among the business segments involves the exercise of business judgment. Intersegment sales, which are insignificant, are accounted for at prices comparable to those paid by unaffiliated customers.
NET SALES AND OPERATING PROFIT BY BUSINESS SEGMENT*
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Description of Business
The Commercial Communications segment designs, manufactures, and sells products characterized by three principal communication technologies:
Sales in fiscal 2000 for the Commercial Communications segment increased 6.6 percent over fiscal 1999. Excluding sales from the recently exited telephone switching product line, the Commercial Communications segment sales increased from $803.7 million to $918.0 million or 14.2 percent. Segment operating loss of $33.3 million, down from profit of $34.1 million in fiscal 1999 was impacted by the $41.0 million restructuring charge and the $10.7 million purchased in-process research and development write-off in connection with the acquisition of Louth Automation as well as a $12.0 million write-down of inventory related to the exited telephone switching and alarm management product lines. The segment contributed 55 percent of Harris’ total sales from continuing operations in fiscal 2000 and 53 percent in fiscal 1999.
The Broadcast Communications Division is a leading manufacturer and supplier of digital and analog radio and television broadcast encoding and transmission equipment, systems and services, and radio studio equipment, systems and services. This division provided the nation’s first advanced television transmitter to broadcast digital television as well as the first commercial digital television application. The division is also expanding its efforts in the digital radio area and is developing the next wave of radio-broadcasting including In-Band/On Channel digital radio. The division’s products include (1) radio and television transmitters, antennas, and encoders and (2) audio, remote-control and video production systems. The division is also a leading supplier of mobile broadcast units and provides comprehensive television and radio studio integration services. Following the acquisition of Louth Automation, the division also supplies advanced automation systems for digital television, over-the-air broadcast, and cable and industrial applications.
The Microwave Communications Division is a leading producer of digital and analog microwave communication products and systems in North America and is expanding its international presence in such markets, particularly in Latin America and Europe. This division focuses on two primary applications for microwave: (1) links to connect cellular and PCS sites, and (2) private network applications. Private network applications include electric utilities, railroads, local governments, and emergency service operations where the public telephone network is not reliable, does not exist, or is not sufficiently secure. Additionally, this division designs, manufactures, and markets wireless local loop telephony equipment for private, government, and public phone system customers operating worldwide. This division also focuses on high-frequency communications and provides broadband wireless access to the latest Internet, voice, data and video applications, including millimeter wave technology. The division’s broadband wireless access products have dynamic bandwith-on-demand allocation capabilities which allow a single wireless link to serve many subscribers. The division has recently expanded its international offerings through the acquisition of the point-to-point microwave business of TRT Lucent Technologies. It is also anticipated that the division will be a leader in point-to-multipoint microwave applications following the closing of the acquisition of Wavtrace, Inc., a privately-held leading developer of broadband wireless access systems.
The Network Support Division provides a complete range of products and systems to test, manage, and enhance communications network infra-structures. The division supplies telecommunication products and systems, including automated line and telephone test systems and tools (including portable and remote test units), operational support systems to manage telephone subscriber loops, and network and workforce management systems. The division provides network management systems and services for large, multimedia
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The RF Communications Division is a leading supplier of multiband and secure wireless radio communication products, systems and services, including two-way HF, VHF and UHF radio equipment, and offers a comprehensive line of products, including ground-to-air avionics radios and systems for long-distance and short-distance communications for commercial, military, law enforcement and government applications. This division is a leader in lightweight, man-portable and mobile radios for law enforcement, tactical and military forces around the world. Its radio products include a secure, mobile communications platform that also provides law enforcement agents with access to the national crime information database for fingerprint matching.
Principal customers for products of the Commercial Communications segment include foreign and domestic commercial and industrial firms, radio and television broadcasters, communication companies, telephone companies, governmental and military agencies, utilities, railroads, construction companies and oil producers.
In general, the segment’s domestic products are sold and serviced directly to customers through the sales organizations of the operating divisions and through established distribution channels. Internationally, the segment markets and sells its products and services through established and newly created regional sales offices and established distribution channels and has increased its focus in South America and other promising international markets, particularly in the microwave radio area. See “International Business.”
The backlog of unfilled orders for this segment of Harris’ business was $367 million at July 31, 2000, substantially all of which is expected to be filled during the 2001 fiscal year, compared with approximately $366 million a year earlier.
The Government Communications segment of Harris is engaged in advanced research, design, development and production of advanced communication, information processing and electronic products, services, systems and sub-systems for government and commercial organizations in the United States and internationally. The segment specializes in airborne, spaceborne, shipboard, and ground communications for the United States government. Applications of the segment’s state-of-the-art technologies include:
The Government Communications segment is a major supplier of advanced-technology communications and information processing systems to the United States Department of Defense, Federal Aviation Administration, National Aeronautics and Space Administration, Federal Bureau of Investigation and other federal and local government agencies, aircraft manufacturers, and airports.
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Sales in fiscal 2000 for this business segment increased 0.3 percent to $815.9 million from $813.2 million in fiscal 1999. Operating profit increased 11.5 percent. These results were impacted by an $18.0 million write-off in fiscal 1999 for the settlement of claims and unrecoverable contract development costs on two contracts. Excluding this write-off, sales decreased one percent, and operating income declined 17.1 percent. This segment contributed 45 percent of Harris’ total sales from continuing operations in fiscal 2000 and 47 percent in fiscal 1999.
The Government Communications segment is a leading supplier of air-traffic control communication systems and is also a major supplier of custom aircraft and spaceborne communication and information processing systems, cockpit digital moving maps, controls and display processors, a leading supplier of terrestrial and satellite communication systems, including large deployable satellite antenna systems and flat panel phased array and single mission antennas, and is a preeminent supplier of super-high-frequency military satellite ground terminals for the Department of Defense. The segment is also diversifying into the commercial satellite business and has been awarded contracts to provide antennas for programs such as the Asian Cellular System.
The division is a major supplier of custom ground-based systems and software designed to collect, store, retrieve, process, analyze, display and distribute information for government, defense and law enforcement applications, including meteorological data processing systems and range management information systems. The segment also provides computer controlled electronic maintenance, logistic, simulation and test systems for military aircraft, ships and ground vehicles and provides sophisticated ground-based and shipboard command, control, communication and intelligence systems, products and services for many government end-users. The division’s electronic products enable high speed communications for platforms such as the USAF F-22 air superiority fighter and the Army’s Commanche advanced armed reconnaissance helicopter.
Specific examples of technology developed by the division include the development of a family of wideband digital links to support the transmission of radar, imagery, and video from reconnaissance aircraft, unmanned aerial vehicles, and satellites and the development of a digital map that electronically displays real-time terrain, flight paths, and target locations for fighter helicopters. The division also has extensive expertise in microelectronics and advanced wireless tracking technology. While classified projects are not discussed in this report, the operating results relating to classified projects are included in Harris’ consolidated financial statements, and the business risks associated with such projects do not differ materially from those of other projects for the United States government.
The segment has formed three joint ventures with the General Electric Company. GE-Harris Railway Electronics is a leader in communication-based electronic planning, scheduling and control systems for railways worldwide. GE Harris Energy Controls Systems is a leading supplier of intelligent energy management systems and services electric utilities. GE Harris Aviation Information Solutions provides information systems and services that enable airlines to monitor and analyze aircraft and engine performance data easier and faster, helping to improve airline efficiency and safety. The segment also has a joint venture with Sextant In-flight Systems to provide live television transmission to individual seats on commercial airlines.
Most of the sales of the Government Communications segment are made directly or indirectly to the United States government under contracts or subcontracts containing standard government contract clauses providing for redetermination of profits, if applicable, and for termination for the convenience of the government or for default of the contractor. These sales consist of a variety of contracts and programs with various governmental agencies, with no single program accounting for 10 percent or more of total Harris sales.
The backlog of unfilled orders for this segment of Harris’ business was $360 million at July 31, 2000, a substantial portion of which is expected to be filled during the 2001 fiscal year, compared with $420 million a year earlier.
International Business
Net sales in fiscal 2000 of products exported from the United States or manufactured abroad were $487.3 million or 27 percent of the Company’s total sales from continuing operations, compared with $448.5 million or 26 percent of the Company’s total sales from continuing operations in fiscal 1999 and $556.4
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Foreign operations represented 14 percent of net sales from continuing operations and 17 percent of long-lived assets from continuing operations as of the end of fiscal 2000. Electronic products and systems are produced principally in the United States, and international electronic revenues are derived primarily from exports. Communication products assembly facilities are located in Brazil, Canada, China and the United Kingdom.
International marketing activities are conducted through subsidiaries which operate in Canada, Europe, Central and South America and Asia. Harris has also established a new international marketing organization and several regional sales offices. Reference is made to Exhibit 21 “Subsidiaries of the Registrant” for further information regarding foreign subsidiaries.
Harris utilizes indirect sales channels, including dealers, distributors and sales representatives, in the marketing and sale of some lines of products and equipment, both domestically and internationally. These independent representatives may buy for resale, or, in some cases, solicit orders from commercial or governmental customers for direct sales by Harris. Prices to the ultimate customer in many instances may be recommended or established by the independent representative and may be on a basis which is above or below the Company’s list prices. These independent representatives generally receive a discount from the Company’s list prices and may mark-up those prices in setting the final sales prices paid by the customer. During the 2000 fiscal year, sales from indirect sales channels represented 16 percent of Harris’ total sales and 19 percent of Harris’ international sales. Fiscal year 2000 orders came from a large number of foreign countries, no one of which accounted for five percent or more of the Company’s total orders.
Certain of Harris’ exports are paid for by letters of credit, with the balance carried either on an open account or installment note basis. Advance payments, progress payments or other similar payments received prior to or upon shipment often cover most of the related costs incurred. Performance guarantees by the Company are generally required on significant foreign government contracts. In order to stay competitive in international markets, the Company also enters into recourse financing in order to facilitate sales to certain customers.
The particular economic, social and political conditions for business conducted outside the United States differ from those encountered by domestic businesses. Management believes that the composite business risk for the international business as a whole is somewhat greater than that faced by its domestic operations as a whole. International business may subject the Company to risks such as:
Nevertheless, in the opinion of management, these risks are offset by the diversification of the international business and the protection provided by letters of credit and advance payments.
Except for inconsequential matters, such as matters involving road and utility rights-of-way, Harris has never been subjected to threat of government expropriation, either within the United States or abroad.
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Financial information regarding the Company’s domestic and international operations is contained in the Note Business Segments in the Notes to Financial Statements.
Competition
Harris operates in highly competitive businesses that are sensitive to technological advances. Although successful product and systems development is not necessarily dependent on substantial financial resources, some of Harris’ competitors in each of its businesses are larger and can maintain higher levels of expenditures for research and development than Harris. Harris’ competitors in the Commercial Communications segment include large multinational communications companies as well as smaller companies with developing technology expertise. Harris’ competition for U.S. government contracts typically are large, technically competent firms with substantial assets. Harris concentrates in each of its businesses on the market opportunities which management believes are compatible with its resources, overall technological capabilities, and objectives. Principal competitive factors in these businesses are cost-effectiveness, product quality and reliability, service, ability to meet delivery schedules, and the effectiveness of dealers in international areas.
Principal Customers
Sales to the U.S. government, which is the Company’s only customer accounting for 10 percent or more of total sales, were 41 percent, 42 percent and 47 percent of the Company’s total sales from continuing operations in fiscal 2000, 1999 and 1998 respectively. All U.S. government contracts are terminable at the convenience of the U.S. government, as well as for default. Under contracts terminable at the convenience of the U.S. government a contractor is entitled to receive payments for its allowable costs and, in general, the proportionate share of fees or earnings for the work done. Contracts which are terminable for default generally provide that the U.S. government only pays for the work it has accepted and may require the contractor to pay for the incremental cost of reprocurement and may hold the contractor liable for damages.
Companies engaged in supplying goods and services to the U.S. government are dependent on congressional appropriations and administrative allotment of funds, and may be affected by changes in U.S. government policies resulting from various military and political developments. In many cases there is also additional uncertainty relating to the complexity of designs, necessity for design improvements, and difficulty in forecasting costs and schedules when bidding on developmental and highly sophisticated technical work. For further discussion of risks relating to U.S. government contracts see “Legal Proceedings.” It is not expected that changes to the Department of Defense budget will have a material effect on the profitability of Harris in fiscal 2001.
Backlog
Harris’ backlog of unfilled orders from continuing operations was approximately:
Substantially all of the backlog orders at July 31, 2000 are expected to be filled during fiscal 2001. The determination of backlog involves substantial estimating, particularly with respect to customer requirements contracts, and long-term contracts of a cost-reimbursement or incentive nature.
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Research, Development and Engineering
Research and engineering expenditures by Harris for its continuing operations totaled approximately:
Company-sponsored research and product development costs for its continuing operations were approximately:
The portion of total research and engineering expenditures not Company-sponsored was funded by government and commercial customers. Company-funded research is directed to the development of new products and to building technological capability in selected communications and electronic systems areas. Government-funded research helps strengthen and broaden the technical capabilities of Harris in its areas of interest. Almost all of the operating divisions maintain their own engineering and new product development departments, with scientific assistance provided by advanced-technology departments.
Patents and Intellectual Property
Harris holds numerous patents which it considers, in the aggregate, to constitute an important asset. However, Harris does not consider its business or any business segment to be materially dependent upon any single patent or any group of related patents. Harris is engaged in a pro-active patent licensing program, especially in the Commercial Communications segment, and has entered into a number of unilateral license and cross-license agreements, many of which generate significant royalty income. Although existing license agreements have generated income in past years and will do so in the future, there can be no assurances Harris will enter into additional income producing license agreements. With regard to patents relating to the Government Communications segment, however, the U.S. government often has an irrevocable, non-exclusive, royalty-free license, pursuant to which the government may use or authorize others to use the inventions covered by such patents. Pursuant to similar arrangements, the government may consent to Harris’ use of inventions covered by patents owned by other persons.
Numerous trademarks used on or in connection with Harris products are considered to be a valuable asset of Harris.
Environmental and Other Regulations
The manufacturing facilities of Harris, in common with those of industry generally, are subject to numerous laws and regulations designed to protect the environment, particularly in regard to wastes and emissions. Harris believes that it has materially complied with these requirements and that such compliance has not had a material adverse effect on its business or financial condition. Expenditures to protect the environment and to comply with current environmental laws and regulations over the next several years are not expected to have a material impact on the Company’s competitive or financial position. If future laws and regulations contain more stringent requirements than presently anticipated, actual expenditures may be higher than the Company’s present estimates of those expenditures.
Waste treatment facilities and pollution control equipment have been installed to satisfy legal requirements and to achieve the Company’s waste minimization and prevention goals. An estimated $0.1 million was spent on environmental capital projects in fiscal 2000, $0.3 million in fiscal 1999 and $1.7 million in fiscal 1998. A significant portion of these expenditures related to discontinued operations; however, the Company has retained certain environmental liabilities with respect to those discontinued operations. The Company currently forecasts authorization for environmental-related capital projects totaling $0.1 million in fiscal 2001. These amounts may increase in future years.
Additional information regarding environmental matters is set forth in “Legal Proceedings” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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Raw Materials and Supplies
Because of the diversity of the Company’s products and services, as well as the wide geographic dispersion of its facilities, the Company uses numerous sources for the wide array of raw materials needed for its operations and for products that it sells. The Company is dependent upon suppliers and subcontractors for a large number of components and the ability of its suppliers and subcontractors to meet performance and quality specifications and delivery schedules. In some instances, the Company is dependent upon one or a few sources, either because of the specialized nature of a particular item or because of domestic preference requirements pursuant to which it operates on a given project. To date, the Company has not been materially adversely affected by the inability to obtain raw materials or products.
Employees
As of June 30, 2000, Harris had approximately 10,000 employees, of whom approximately 8,500 were located in the United States. In general, Harris believes that its relations with its employees are good.
Item 2. PROPERTIES.
Harris operates approximately 22 plants and approximately 66 offices in the United States, Canada, Europe, Central and South America and Asia, consisting of about 3.9 million square feet of manufacturing, administrative, warehousing, engineering and office facilities that are owned and about 1.1 million square feet of sales, office and manufacturing facilities that are leased. The leased facilities are for the most part occupied under leases for terms ranging from one year to 30 years, a majority of which can be terminated or renewed at no longer than five-year intervals at Harris’ option. The Company’s corporate headquarters are owned and located in Melbourne, Florida. The location of the principal manufacturing plants owned by the Company in the United States, and the business segments which utilize such plants are as follows: Government Communications segment — Malabar, Melbourne and Palm Bay, Florida; and Commercial Communications segment — Camarillo, Redwood Shores and Sunnyvale, California; Quincy, Illinois; Littleton, Massachusetts; Cincinnati, Ohio; San Antonio, Texas; and Rochester, New York. The Commercial Communications segment also has principal manufacturing plants which are owned by Harris and located outside of the United States including plants in: Sao Paulo, Brazil; Montreal, Canada; and Cambridge, U.K.
In the opinion of management, Harris’ facilities are suitable and adequate for their intended purposes and have capacities adequate for current and projected needs. Unused or under-utilized facilities are not considered significant.
As of June 30, 2000, the following facilities were in productive use by Harris in its operations:
Item 3. LEGAL PROCEEDINGS.
From time to time, as a normal incident of the nature and kind of business in which the Company is engaged, various claims or charges are asserted and litigation commenced against the Company arising from or related to: product liability; patents, trademarks, or trade secrets; labor and employee disputes; breach of warranty; antitrust; distribution; or contractual relations. Claimed amounts may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court awards. While it is not feasible to predict the outcome of these matters with certainty, in the opinion of management, settlements and final judgments, if any, which might be rendered against the Company in existing litigation
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Government contractors, such as the Company, engaged in supplying goods and services to the U.S. government and its various agencies are dependent on congressional appropriations and administrative allotment of funds and may be affected by changes in U.S. government policies. U.S. government contracts typically involve long lead times for design and development and are subject to significant changes in contract scheduling and may be unilaterally modified or cancelled by the government. Often these contracts call for successful design and production of complex and technologically advanced products or systems. The Company may participate in supplying goods and services to the U.S. government as either a prime contractor or as a subcontractor to a prime contractor. Disputes may arise between the prime contractor and the government and the prime contractor and its subcontractors and may result in litigation between the contracting parties.
From time to time, the Company, either individually or in conjunction with other U.S. government contractors, may be the subject of U.S. government investigations for alleged criminal or civil violations of procurement or other federal laws. These investigations may be conducted without the Company’s knowledge. The Company is currently cooperating with certain government representatives in investigations relating to potential violations of federal procurement and other laws. The Company is unable to predict the outcome of such investigations or to estimate the amounts of resulting claims or other actions that could be instituted against it, its officers or employees. Under present government procurement regulations, if indicted or adjudged in violation of procurement or other federal civil laws a contractor, such as the Company, or one or more of its operating divisions, could be suspended or debarred from eligibility for awards of new government contracts for up to three years. In addition, a government contractor’s foreign export control licenses could be suspended or revoked. As an international company, Harris is, from time to time, the subject of investigations relating to its international operations, including under the Foreign Corrupt Practices Act and similar laws. Management does not believe that the outcome of these current disputes or investigations will have a material adverse effect on the financial condition or the business of the Company as a whole.
In addition, the Company is subject to numerous federal and state environmental laws and regulatory requirements and is involved from time to time in investigations or litigation of various potential environmental issues concerning ongoing activities at its facilities or remediation as a result of past activities. The Company from time to time receives notices from the United States Environmental Protection Agency and equivalent state environmental agencies that it is a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent state legislation. Such notices assert potential liability for cleanup costs at various sites, which include Company-owned sites, previously owned sites and non-Company owned treatment or disposal sites, allegedly containing hazardous substances attributable to the Company from past operations. The Company has been named as a PRP at eleven such sites, excluding sites as to which the Company’s records disclose no involvement or as to which the Company’s liability has been finally determined. While it is not feasible to predict the outcome of many of these proceedings, in the opinion of management, any payments the Company may be required to make as a result of currently existing claims will not have a material adverse effect on the financial condition or the business of the Company as a whole.
Additional information regarding environmental matters is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of Harris during the fourth quarter of fiscal 2000.
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EXECUTIVE OFFICERS OF THE REGISTRANT (As of August 31, 2000).
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There is no family relationship between any of the Company’s executive officers or directors, and there are no arrangements or understandings between any of the Company’s executive officers or directors and any other person pursuant to which any of them was elected as an officer or director, other than arrangements or understandings with directors or officers of the Company acting solely in their capacities as such.
All of the Company’s executive officers are elected annually and serve at the pleasure of the board of directors.
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PART II
Harris Corporation Common Stock, par value $1 per share, is listed and traded on the New York Stock Exchange, Inc. (“NYSE”), under the ticker symbol “HRS,” and is also traded on the Boston, Chicago, Pacific and Philadelphia Stock Exchanges and through the Intermarket Trading System. As of August 25, 2000, there were approximately 9,817 holders of record of the Common Stock.
The high and low sales prices as reported in the consolidated transaction reporting system and the dividends paid on the Common Stock for each quarterly period in the last two fiscal years are reported below:
On August 25, 2000, the last sale price of the Harris Common Stock as reported in the consolidated transaction reporting system was $29.125 per share.
On August 26, 2000, the board declared a quarterly cash dividend of $0.05 per share which will be paid on September 22, 2000 to holders of record on September 8, 2000. The Company has paid cash dividends every year since 1941 and currently expects that cash dividends will continue to be paid in the future. Following the spin-off of Lanier, Harris reduced its annual dividend rate from $0.96 per share to its current annual level of $0.20 per share. The declaration of dividends and the amount thereof will depend on a number of factors, including Harris’ financial condition, capital requirements, results of operations, future business prospects and other factors the board of directors may deem relevant.
On October 22, 1999, the board authorized the Company to repurchase up to 15,000,000 shares of its Common Stock periodically in the open-market, in negotiated or block transactions or pursuant to tender offers. During fiscal year 2000, the Company repurchased approximately 10.7 million of its shares in open-market transactions.
On August 23, 1997, the board of directors of Harris approved a two-for-one stock split to shareholders of record at the close of business on September 4, 1997. All share information in this Annual Report on Form 10-K has been restated to reflect the stock split.
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Item 6. SELECTED FINANCIAL DATA.
The following table summarizes selected historical financial information of Harris Corporation and its subsidiaries for each of the last five fiscal years. All amounts presented have been restated on a continuing operations basis. Discontinued operations and the restructuring charges are more fully discussed in the Notes to Financial Statements. The selected financial information shown below has been derived from Harris’ audited consolidated financial statements. This table should be read in conjunction with other financial information of Harris, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included elsewhere herein.
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The following discussion and analysis provides information that management believes is useful in understanding Harris’ operating results, cash flows, and financial condition. The discussion is based on Harris’ continuing operations and should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements and related notes appearing elsewhere in this report. Except for the historical information contained here, the discussions in this document contain forward-looking statements that involve risks and uncertainties. Harris’ actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under “Forward-Looking Statements” below.
Results of Operations
On November 5, 1999, Harris completed the spin-off of its Lanier Worldwide, Inc. subsidiary as an independent, publicly owned company. Additionally, on August 13, 1999, Harris completed the sale of substantially all of its semiconductor business. As a result of these actions, the Lanier and semiconductor businesses are presented as discontinued operations for all periods presented. Continuing operations are reported under two segments: the Government Communications segment, which is comprised of the operations of the former Electronic Systems Sector, and the Commercial Communications segment, which is comprised of the operations of the former Communications Sector. The following discussion is on a continuing operations basis.
Restructuring
In fiscal 2000, Harris recorded a $41 million charge ($26.7 million after income tax) for the restructuring of its operations. Restructuring actions included a reduction in workforce of approximately 161 employees and provisions for the write-down of intangible assets, equipment, and other assets associated with the exit from Harris’ telephone switching and alarm management product lines.
In the third quarter of fiscal 2000, 161 switching business employees were notified that their employment would be terminated and what their specific severance benefits would be. These employees worked in the marketing, sales, manufacturing, and administrative areas and were primarily located in Marin County, California. As of June 30, 2000, 62 employees had been terminated with the balance to be terminated by September 30, 2000.
In June 2000, Harris sold the core switch business to Teltronics, Inc. Harris also sold the alarm management business to Mediation Technology Corporation in August 2000. Harris also intends to sell other portions of this product line, including the international activities, during fiscal 2001. Gains or losses from the sale of these operations are included or will be included in restructuring expenses in the period the sale occurs. Estimated discounted cash flows were used in determining the fair value of assets and liabilities in recording the restructuring charge.
Cash outlays for restructuring actions will be primarily for severance benefits. Harris expects to pay these benefits ratably over the first two quarters of fiscal 2001 from currently available cash sources. Sales from these product lines were $73.5 million in 2000, $126.6 million in 1999, and $140.4 million in 1998. Operating losses from these product lines were $18.9 million in 2000, $3.6 million in 1999, and $2.9 million in 1998.
In fiscal 1999, Harris recorded a $5.1 million charge ($3.3 million after income tax) for severance costs associated with the restructuring of Harris. In connection with this restructuring, Harris identified employee reductions of 606, all of which occurred during fiscal 2000.
Harris does not anticipate any further restructuring charges with respect to the items noted above in fiscal 2001 other than gains or losses that may result from the sale of the exited product lines or restructuring noted above. For further information, see the “Restructuring” footnote in the Notes to Financial Statements.
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Purchased In-Process Research and Development
In January 2000, Harris purchased Louth Automation, a leading supplier of advanced automation systems for radio and television broadcasters. Harris paid cash in the net amount of approximately $87 million. The final determination of the purchase price is subject to adjustment.
In connection with the acquisition, Harris allocated $10.7 million of the purchase price to in-process research and development projects. This allocation represents the estimated fair value based on risk-adjusted cash flows related to the incomplete products. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the in-process research and development had no alternative future uses. Accordingly, these costs were expensed as a one-time charge to earnings in the third quarter of fiscal 2000.
In making the purchase price allocation to in-process research and development, Harris relied on present value calculations of income, an analysis of project accomplishments and completion costs, and an assessment of overall contribution and project risk. The amounts assigned to the in-process research and development were determined by identifying significant research projects for which technological feasibility had not been established. The fair values assigned to each of the significant projects and the stage of completion are reported below:
A discussion of the three most significant projects follows:
Version 9.5 of the Automated Device Controller (“ADC”) Software:
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The value assigned to purchased in-process research and development was determined by estimating the costs to develop the purchased in-process research and development into commercially viable products and discounting the net cash flows to their present value using a discount rate of 28 percent.
Remaining development efforts for these in-process research and development projects include various phases of design, development, and testing. The anticipated completion dates for the in-process research and development projects will occur within the next twelve months, after which Harris expects to begin generating economic benefits from the technologies over a seven-year life cycle. Expenditures to complete these projects are expected to total $0.9 million.
These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. We expect to continue these development efforts and believe we have a reasonable chance of successfully completing the research and development programs. However, there is a risk associated with the completion of the projects and there is no assurance that any will attain either technological or commercial success.
Fiscal 2000 Compared with 1999
Revenue and Operating Income by Segment
Revenue for fiscal 2000 was $1,807.4 million, an increase of 3.7 percent compared to the prior year. Operating income in fiscal 2000 was $36.3 million versus $74.5 million for the prior year.
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Segment revenue and operating income were as follows:
Government Communications Segment: Government Communications segment revenue in fiscal 2000 increased 0.3 percent from the prior year, and operating income increased 11.5 percent. These results were impacted by an $18.0 million write-off in fiscal 1999 for the settlement of claims and unrecoverable contract development costs on two contracts. Excluding this write-off, revenues declined one percent and operating income declined 17.1 percent from fiscal 1999. Despite improved operating margins on more recent contract awards in 2000, operating income has been impacted by margin pressure from poorer-performing older contracts. Revenue growth and operating income improved significantly in the fourth quarter compared to the third quarter of fiscal 2000. Backlog continued to build reflecting a robust win rate percentage and increased spending by the U.S. government for defense.
Commercial Communications Segment: Commercial Communications segment revenue in fiscal 2000 increased 6.6 percent over 1999. Excluding sales from the recently exited telephone switching product line, the Commercial Communications segment’s sales increased from $803.7 million to $918.0 million, or 14.2 percent. This segment experienced double-digit growth in all four of the segment’s major continuing commercial product lines: microwave, network support, broadcast, and tactical radio. These revenue increases were partially offset by a 41.9 percent decrease in revenue from the recently exited telephone switching and alarm management product lines.
The segment’s operating loss for 2000 was impacted by the $41.0 million restructuring charge and the $10.7 million purchased in-process research and development write-off mentioned previously, as well as a $12.0 million write-down of inventory related to the telephone switching and alarm management product lines that were exited. These product lines also incurred an additional $18.9 million in operating losses in 2000 compared to a loss of $3.6 million in 1999. The segment’s fiscal 2000 operating loss also includes transition costs of $16.5 million associated with exiting these product lines. Such costs included relocation of the network support business unit’s headquarters from Marin County, California to Melbourne, Florida; collection losses on accounts receivable; and excess manufacturing costs related to idle capacity in Marin County. Harris ceased all marketing, sales, and research and development for the telephone switching and alarm management
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Excluding the items mentioned above in both the current and prior year, as well as a $20.6 million special charge for a patent litigation settlement in the prior year, the Commercial Communications segment’s operating income increased from $58.3 million in 1999 to $65.8 million in 2000, or 12.9 percent. The increase in operating income was driven mainly by the 14.2 percent sales growth in the Commercial Communications segment’s continuing commercial product lines.
Orders and revenue increased for microwave radios during the year as markets continued to rebound in North America, Latin America, and China. In June 2000, Harris completed the acquisition of the point-to-point microwave business of TRT Lucent Technologies. The acquisition provides for a five-year preferred supplier agreement to serve the worldwide point-to-point microwave needs of Lucent’s wireless divisions.
In the first quarter of fiscal 2001, Harris also entered into agreements to acquire Wavtrace, Inc., a privately-held, leading developer of broadband wireless access systems. The acquisition when completed is expected to support Harris’ initiative to lead the world in the delivery of point-to-point and point-to-multipoint broadband wireless access solutions for microwave and millimeter wave frequencies.
The broadcast communications business reported a strong increase in revenues due primarily to its new studio automation business, which was bolstered by the purchase of Louth Automation, the leading supplier of advanced automation systems for digital television, over-the-air broadcast, and cable and industrial applications. The acquisition of Louth Automation brings competencies in automation and control to complement Harris’ leadership position in broadcast transmission and digital encoding. This acquisition further broadens Harris’ global position in the broadcast markets.
The tactical radio product line experienced a significant increase in sales as it continues to benefit from the market’s enthusiasm for its high data rate, multiband, secure radios which were introduced in fiscal 2000 to meet the growing bandwidth requirement as digital technology is embraced by the military.
Orders and revenues also increased substantially for the network support business. This increase was aided by increased demand for the telecom line test systems used by competitive local exchange carriers (CLECs) to deploy digital subscriber lines (DSLs) for applications such as high-speed Internet service and other broadband communication services for voice, data, and video.
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Comparative Statement of Income
Harris’ comparative statement of income is as follows:
Gross Margin: The gross margin as a percent of revenue was 25.2 percent in fiscal 2000 compared to 26.7 percent in 1999. The decline in gross margins was primarily due to a $12.0 million write-down of inventory and lower gross margin related to the telephone switching product line that was exited.
Excluding the impact of this exited product line, gross margin as a percent of revenue was 26.2 percent in 2000 compared to 25.8 percent in 1999. The increase is due to improved gross margins in Harris’ Commercial Communications segment’s broadcast, network support, and microwave radio product lines.
Engineering, Selling and Administrative Expenses: Engineering, selling, and administrative expenses as a percent of revenue were 22.4 percent in fiscal 2000 versus 21.8 percent in 1999. Fiscal 2000 operating expenses were impacted by $16.5 million of transition costs associated with exiting the telephone switching product line. Such costs include relocation of the network support business unit’s headquarters from Marin County, California to Melbourne, Florida; collection losses on accounts receivable; and excess manufacturing costs related to idle capacity in Marin County. The operating expenses were also impacted by administrative and general, marketing and sales, and research and development expenses in the telephone switching product line in the first half of the fiscal year.
Excluding the impact of the exited product line, operating expenses as a percent of revenue were 20.6 percent in 2000 versus 20.3 percent in 1999. The increase was primarily due to planned increases in selling and engineering, research and development expenses, as well as increased headquarters expenses. The increased headquarters expenses were primarily attributable to unusually low executive compensation in fiscal 1999 and costs associated with the centralization of company-wide shared services in fiscal 2000.
Goodwill Amortization: Goodwill amortization increased from $4.3 million in fiscal 1999 to $10.5 million in fiscal 2000. The increase was due to acquisitions made in Harris’ broadcast systems product line during fiscal 2000, primarily the acquisition of Louth Automation.
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Other Income: Other income increased from $19.3 million in 1999 to $48.2 million in 2000 due primarily to a $21.9 million gain from the sale of one million shares of Intersil Holding Corporation stock as a part of Intersil Holding Corporation’s initial public offering. The remaining increase was due to gains on the sale and redemption of other securities partially offset by lower income from Harris’ equity investments.
Interest Income and Interest Expense: Interest income increased from $13.3 million in 1999 to $27.4 million in 2000 due to higher cash balances that resulted from the sale of the semiconductor business and the spin-off of Lanier Worldwide, Inc. Interest expense increased from $9.8 million in 1999 to $25.2 million in 2000 due to a higher allocation of interest expense to the results of discontinued operations in the prior year. Total interest expense from both continuing operations and discontinued operations decreased from $84.0 million in 1999 to $41.7 million in 2000. This decrease is due to the repayment of short-term debt with the cash received from the sale of the semiconductor business and the spin-off of Lanier Worldwide, Inc. and lower interest rates.
Income Taxes: The provision for income taxes as a percentage of pretax income was 35.0 percent in fiscal 2000 versus 36.0 percent in the prior year. Both 2000 and 1999 benefited from tax rates on foreign source income and export sales, which offset the additional provision needed for state income taxes.
Return on Revenue: Income from continuing operations as a percentage of revenue was 1.4 percent in 2000 versus 2.9 percent in 1999. The reduction was primarily due to restructuring expenses, purchased in-process research and development, and the transition costs and operating losses of exited product lines which were partially offset by the gain from sales of Intersil Holding Corporation stock. Excluding these items, income from continuing operations as a percentage of revenue increased from 4.2 percent in 1999 to 4.3 percent in 2000.
Selected financial information relating to geographical regions and export sales is set forth in the note “Business Segments” in the Notes to Financial Statements.
Fiscal 1999 Compared with 1998
Net Sales and Operating Income: Revenue from product sales and services decreased 9.4 percent to $1.74 billion in fiscal 1999, from $1.92 billion in fiscal 1998. Income from continuing operations before extraordinary item was $49.9 million, down 24.8 percent from $66.4 million in fiscal 1998. Income from continuing operations before extraordinary item in fiscal 1999 included a restructuring charge for employee reductions of $5.1 million, a one-time $20.6 million charge for litigation costs for the settlement of a patent litigation relating to an older product no longer manufactured by the Company, and an $18.0 million charge for settlement of claims and unrecoverable contract development costs on two contracts. Prior-year income from continuing operations includes $16.1 million of restructuring expenses and a $12.0 million provision for costs associated with a Malaysian contract. Excluding all of the above items for both years, income from continuing operations declined approximately 8 percent in fiscal 1999.
Net sales for the Government Communications segment in fiscal 1999 were $813.2 million, 14.5 percent lower than the prior year, while operating profit increased 18.7 percent to $52.1 million. Excluding prior year restructuring charges and unusual long-term contract charges in both years ($18.0 million in fiscal 1999 and $19.8 million in fiscal 1998), operating profit increased 10.0 percent in fiscal 1999. Lower sales in the segment’s information systems and aerospace systems product lines more than offset growth in the communications systems product line. Lower sales in information systems and aerospace systems was primarily attributable to declining order backlog. The increase in operating profit was related to final settlement of prior year’s overhead rates and to increased gross margins resulting from a more favorable contract mix.
Commercial Communications segment sales decreased 4.5 percent to $930.3 million in fiscal 1999, from $973.7 million in fiscal 1998. Excluding a fiscal 1999 one-time $20.6 million charge for litigation costs and a fiscal 1998 restructuring charge of $8.3 million, operating profit declined 19.9 percent to $54.7 million from $68.3 million in fiscal 1998. Significantly lower sales and gross margins in the segment’s microwave radio and digital switch product lines offset modest improvement in sales and earnings for the segment’s broadcast equipment product line. Lower sales in the microwave product lines resulted primarily from weak international
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Cost of Sales and Services: Cost of sales and services was $1.28 billion in fiscal 1999. Costs as a percentage of sales decreased from 75.0 percent in fiscal 1998 to 73.3 percent in fiscal 1999. The decrease was primarily attributable to improved gross margins in the Company’s Government Communications segment which were partially offset by the decline in the gross margins in the Commercial Communications segment.
Operating Expenses: Engineering, selling, and administrative expenses as a percentage of sales were 22 percent in 1999, up slightly from 21.9 percent in the prior year. Higher expenditures for marketing and Company-sponsored research and development were offset by lower administrative expenses for the year. Headquarters expense, which is included in administrative expenses, was $28.4 million lower than fiscal 1998 due to lower expenses associated with the employee benefit plans and a continued emphasis on cost controls.
Other Income and Expense: Interest expense was lower in fiscal 1999 due to a lower level of borrowings from continuing operations in fiscal 1999 compared to fiscal 1998. Interest expense is allocated to the Company’s discontinued operations based upon the capital employed by the business. Interest expense before allocations to discontinued operations increased from $73.2 million to $84.0 million due to higher borrowings and higher interest rates.
“Other income” was $38.3 million lower in fiscal 1999 due primarily to lower amounts of gains from the sale of investment securities and lower royalty income compared to fiscal 1998.
The provision for income taxes from continuing operations as a percentage of income before income taxes was 36.0 percent in both fiscal 1999 and fiscal 1998. The increase from the statutory U.S. income tax rate of 35.0 percent in both years was due primarily to provisions for state income taxes.
Liquidity and Financial Position
Harris’ comparative financial position is as follows:
Cash and marketable securities: Harris completed several transactions that resulted in significant cash receipts including $520 million from the sale of it semiconductor business to Intersil Corporation, $546 million from the Lanier Worldwide, Inc. spin-off, and $120 million from the payment of a note and the sale of Intersil Holding Corporation shares as a result of the initial public offering of Intersil Holding Corporation. Harris has used a portion of this cash to reduce total debt by $347.7 million, to repurchase Harris’ Common Stock, and
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Harris plans to use its remaining cash balances for similar general corporate purposes in the future, such as acquisitions and repurchases of its Common Stock.
Marketable securities increased from $15.5 million as of July 2, 1999 to $432.5 million as of June 30, 2000. The increase was primarily due to Harris’ holdings in Intersil Holding Corporation and AirNet Communications Corporation, each of which completed initial public offerings during fiscal 2000.
Harris also has available a $500 million syndicated credit facility and a $500 million shelf registration. Management currently believes that existing cash, funds generated from operations, sales of marketable securities, the credit facility, and access to the public debt markets will be sufficient to provide for Harris’ anticipated requirements for working capital, capital expenditures, and any additional stock repurchases under the current repurchase program for the next twelve months.
Working capital: Working capital increased $849.0 million from $224.1 million as of July 2, 1999 to $1,073.1 million as of June 30, 2000. Also, total debt decreased from $838.7 million to $491.0 million for the same periods. These changes were largely due to a $292.5 million increase in cash and cash equivalents, a $248.1 million decrease in short-term debt due to the sale of Harris’ semiconductor operation and the spin-off of Lanier Worldwide, Inc., and a $417.0 million increase in marketable securities noted above. These increases were partially offset by a $142.9 million change in current deferred income taxes related primarily to unrealized gains on marketable securities, increased receivables due to more extended terms in Harris’ Commercial Communications segment, and a decrease in accounts payable.
Intangibles resulting from acquisitions: Intangibles resulting from acquisitions increased from $72.8 million as of July 2, 1999 to $166.2 million as of June 30, 2000. The increase was due primarily to goodwill recorded as a result of the Louth Automation acquisition and intellectual property associated with the TRT Lucent Technologies’ point-to-point microwave radio business acquisition.
Non-current deferred income taxes: The liability for non-current deferred income taxes was $14.1 million as of June 30, 2000 versus $47.3 million as of July 2, 1999. The decrease was due primarily to lower amounts of timing differences related to accruals and depreciation partially offset by more timing differences related to international tax loss carryforwards.
Total debt and capitalization: At June 30, 2000, debt totaled $491.0 million, representing 26.3 percent of total capital (defined as the sum of total debt plus shareholders’ equity). A year earlier, debt of $838.7 million was 34.5 percent of total capital. Cash received from the sale of Harris’ semiconductor operation and the spin-off of Lanier Worldwide, Inc. was used to decrease the debt balance. Year-end long-term debt included $350.0 million of debentures, $30.5 million of notes payable to banks, and $2.1 million of other long-term debt.
In 2000, Harris issued 161,545 shares of Common Stock to employees under the terms of Harris’ stock purchase, option, and incentive plans.
Harris’ debt is currently rated “BBB” by Standard and Poor’s Ratings Group and “Baa1” by Moody’s Investors Service. Harris expects to maintain operating ratios, fixed charge coverage ratios, and balance sheet ratios sufficient for retention of these debt ratings.
Purchase of Common Stock for Treasury: Harris used $232.8 million to repurchase 10.7 million shares of its Common Stock in fiscal 2000 compared to $15.7 million to purchase 0.4 million shares in fiscal 1999. Harris’ board of directors has approved a share repurchase program which authorizes the repurchase of up to 15 million shares through open market transactions, in negotiated block transactions or pursuant to tender offers.
Additions of Plant and Equipment: Additions of plant and equipment for 2000 were $81.3 million versus $60.4 million in 1999. The increase is due to the purchase of a new headquarters building for Harris’ broadcast communications operation in Mason, Ohio and the buyout of a lease on a PC board manufacturing plant in San Antonio, Texas. Harris has outsourced this manufacturing process and is leasing the space to the new manufacturer. Total additions for Harris in fiscal 2001 are expected to be approximately $80 million.
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Retirement Plans
Retirement benefits for substantially all of Harris’ employees are provided primarily through a retirement plan having profit sharing and savings elements. Harris also provides limited health-care benefits to retirees who have 10 or more years of service. All obligations under Harris’ retirement plans have been fully funded by Harris’ contributions, the provision for which totaled $37.4 million in fiscal 2000.
Impact of Foreign Exchange
Approximately 50 percent of Harris’ international business is transacted in local currency environments. The impact of translating the assets and liabilities of these operations to U.S. dollars is included as a component of shareholders’ equity. At June 30, 2000, the cumulative translation adjustment reduced shareholders’ equity by $16.5 million compared to a reduction of $11.7 million at July 2, 1999.
Harris utilizes foreign currency hedging instruments to minimize the currency risk of international transactions. Gains and losses resulting from currency rate fluctuations did not have a material effect on Harris’ results in 2000, 1999, or 1998.
Impact of Inflation
To the extent feasible, Harris has consistently followed the practice of adjusting its prices to reflect the impact of inflation on salaries and fringe benefits for employees and the cost of purchased materials and services.
Market Risk Management
Harris, in the normal course of doing business, is exposed to the risks associated with foreign currency exchange rates, fluctuations in the market value of its equity securities available for sale, and changes in interest rates. Harris employs established policies and procedures governing the use of financial instruments to manage its exposure to such risks.
Harris uses foreign exchange contracts and options to hedge both balance sheet and off-balance sheet foreign currency commitments. Specifically, these foreign exchange contracts offset foreign currency denominated inventory and purchase commitments from suppliers, and accounts receivable from and future committed sales to customers, and intercompany loans. Management believes the use of foreign currency financial instruments should reduce the risks, which arise from doing business in international markets. Contracts are generally one year or less. At June 30, 2000, Harris had open foreign exchange contracts with a notional amount of $28.5 million, of which $4.0 million were to hedge off-balance sheet commitments. At July 2, 1999, Harris had open foreign exchange contracts with a notional amount of $37.0 million, of which $7.7 million was to hedge off-balance sheet commitments. Additionally, for the fiscal year ended June 30, 2000, Harris purchased and sold $432.3 million of foreign exchange forward and option contracts, compared to $366.1 million for the comparable prior year period. Harris’ hedging activities provide only limited protection against currency exchange risks. Factors that could impact the effectiveness of Harris’ hedging programs include accuracy of sales estimates, volatility of currency markets, and the cost and availability of hedging instruments. A 10 percent adverse change in currency exchange rates for Harris’ foreign currency derivatives held at June 30, 2000 would have an impact of approximately $1.7 million on the fair value of such instruments. This quantification of exposure to the market risk associated with foreign exchange financial instruments does not take into account the offsetting impact of changes in the fair value of Harris’ foreign denominated assets, liabilities and firm commitments.
Harris also maintains a portfolio of marketable equity securities available for sale. These investments result from the retained interest in sold or spun-off businesses and the investment in start-up companies that have technology or products that are of interest to Harris. The fair market value of these securities at June 30, 2000 was $432.5 million, compared to $15.5 million as of July 2, 1999. This increase was due to the initial public offerings of two of these investments and an increase in these securities’ quoted market prices. The corresponding unrealized gain is included as a component of shareholders’ equity. These investments have historically had higher volatility than most market indices. A 10 percent adverse change in the quoted market
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Harris utilizes a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage its exposures to changes in interest rates. Harris does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 2001, although there can be no assurances that interest rates will not significantly change.
Environmental Matters
Harris is actively engaged in complying with environmental protection laws. In addition to ongoing internal compliance programs, an estimated $0.1 million was spent on environmental capital projects in fiscal 2000 and $0.3 million in fiscal 1999. Harris estimates that it will authorize $0.1 million in fiscal 2001 for environmental-related capital projects. Under the Superfund Act or similar state environmental laws, Harris also has potential liability at various waste sites designated for clean-up. Harris is named as a potentially responsible party at eleven such sites where future liabilities could exist. These sites include two Harris-owned sites, four sites associated with former Harris locations, and five non-Harris owned treatment or disposal sites, allegedly containing hazardous substances attributable to Harris from past operations. Harris routinely assesses its contingencies, obligations, and commitments to clean up and monitor sites in light of in-depth studies, analysis by environmental experts, and legal reviews. At the two Harris-owned sites and four sites associated with former Harris locations, Harris is involved primarily in monitoring and remediation programs that have been implemented in cooperation with various environmental agencies. At the other sites, Harris is involved as one of numerous potentially responsible parties (PRPs). In ascertaining environmental exposures, management must assess the extent of contamination, the nature of remedial actions, continually evolving governmental standards, and the number, participation level, and financial viability of other PRPs and other similar variables. Based upon internal and third-party studies, as well as the remediation and monitoring expense history at the two Harris-owned sites and four sites associated with former Harris locations, the number and solvency of PRPs at the other sites, and an assessment of other relevant factors, Harris has estimated that its discounted liability under the Superfund Act and other environmental statutes and regulations for identified sites, using a 9.5 percent discount rate, is approximately $5.5 million. Harris has accrued these discounted liabilities. The expected aggregate undiscounted amount that will be incurred over the next 20 to 25 years (depending on the number of years for each site) is approximately $11.1 million. The expected payments for the next five years are: 2001 — $1.4 million; 2002 — $0.9 million; 2003 — $0.6 million; 2004 — $0.6 million; 2005 — $0.6 million; and the aggregate amount thereafter is approximately $7.0 million.
Year 2000 Issue
The Year 2000 statements set forth below are designated as “Year 2000 Readiness Disclosures” pursuant to the Year 2000 Information and Readiness Disclosure Act.
Certain software and hardware systems are time sensitive. Older time-sensitive systems often use a two-digit dating convention (e.g., “00” rather than “2000”) that could result in system failure and disruption of operations in 2000 and later years.
During the past several years Harris diligently addressed the potential Year 2000 problem by undertaking 235 remediation project initiatives relating to four basic aspects of Harris and its business operations: (1) internal information technology systems, including sales order processing, contract management, financial systems, and service management; (2) internal non-information technology systems, including office equipment and test equipment; (3) products and services; and (4) material third-party relationships. Harris completed all these initiatives at the originally estimated cost of $20 million dollars. This cost was generally not incremental to existing information technology budgets.
Harris did not experience any significant business disruptions or system failures as a result of Year 2000 issues. Further, there have been no substantial Year 2000 related issues reported from our major suppliers or customers.
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Although the Year 2000 event has occurred, and while there can be no assurance that there will be no problems related to the Year 2000 for a period of time after January 1, 2000, Harris believes it has not and will not be adversely impacted by Year 2000 issues.
Outlook
The outlook for fiscal 2001 is for strong growth in sales and earnings, building on the momentum established during the past year. The major repositioning actions have been completed, yielding reductions in overhead costs and much tighter integration of Harris. Although profit margins are low by historical standards as Harris ends the repositioning period, Harris expects to see continued improvement, quarter by quarter, during the coming year. Harris also expects to accomplish additional acquisitions to further strengthen Harris’ position in markets that it serves.
Forward-Looking Statements
This report contains forward-looking statements that reflect management’s current expectations, assumptions and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements may be identified by their use of forward-looking terminology, such as “believes”, “expects”, “may”, “should”, “would”, “will”, “intends”, “plans”, “estimates”, “anticipates”, and similar words. Harris cautions investors that any forward-looking statements are subject to risks and uncertainties that may cause actual results and future trends to differ materially from those matters expressed in or implied by such forward-looking statements. Harris’ consolidated results and the forward-looking statements could be affected by many factors, including:
The forward-looking statements contained in this report are made as of the date hereof and Harris disclaims any intention or obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events, or otherwise.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Harris, in the normal course of doing business, is exposed to the risks associated with foreign currency exchange rates, fluctuations in the market value of its marketable equity securities available for sale, and changes in the interest rates. Harris employs established policies and procedures governing the use of financial instruments to manage its exposure to such risks. For a discussion of such policies and procedures and the related risks, see “Market Risk Management” in Item 7, which is incorporated by reference into this Item 7A.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial information and data required by this Item are set forth in the pages indicated in Item 14(a)(1) and (2).
Not applicable.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item, with respect to directors of Harris, is incorporated herein by reference to the discussion under the headings Proposal 1: Election of Directors — Term Expiring In 2003 and Current Directors Not Up For Election in the Harris’ Proxy Statement for the Annual Meeting of Shareholders to be held on October 27, 2000, which proxy statement is expected to be filed within 120 days after the end of Harris’ 2000 fiscal year. Certain information regarding executive officers of Harris is included in Part I hereof in accordance with General Instruction G(3) of Form 10-K. Reference is also made to the information relating to Section 16(a) compliance which is presented under the heading Section 16(a) Beneficial Ownership Reporting Compliancein Harris’ Proxy Statement for the Annual Meeting of Shareholders to be held on October 27, 2000, which information is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION.
The information required by this Item, with respect to compensation of directors and executive officers of Harris, is incorporated herein by reference to Harris’ Proxy Statement for the Annual Meeting of Shareholders to be held on October 27, 2000, which proxy statement is expected to be filed within 120 days after the end of Harris’ 2000 fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item, with respect to security ownership of certain beneficial owners and management of Harris, is incorporated herein by reference to the discussion under the headings Our Largest Shareholders and Shares Held By Directors and Executive Officers in Harris’ Proxy Statement for the Annual Meeting of Shareholders to be held on October 27, 2000, which proxy statement is expected to be filed within 120 days after the end of Harris’ 2000 fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the fiscal year ended June 30, 2000, there existed no relationships and there were no transactions reportable under this Item.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
All other schedules are omitted because they are not applicable, the amounts are not significant or the required information is shown in the financial statements or the notes thereto.
(3) Exhibits:
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(b) Consent of KPMG LLP.
(b) Reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Item 8
Financial Statements and Supplementary Data
Fiscal Year Ended June 30, 2000
MELBOURNE, FLORIDA
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Harris Directors and Shareholders:
We have audited the accompanying consolidated balance sheets of Harris Corporation and its subsidiaries as of June 30, 2000 and July 2, 1999, and the related consolidated statements of income, cash flows and comprehensive income and shareholders’ equity for each of the three fiscal years in the period ended June 30, 2000. Our audits also include the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of GE-Harris Railway Electronics, LLC and subsidiaries (a company in which the Corporation has a 49% interest), have been audited by other auditors, whose report has been furnished to us; insofar as our opinion on the consolidated financial statements as of and for the year ended July 2, 1999, relates to data included for GE-Harris Railway Electronics, LLC and subsidiaries, it is based solely on their report.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors (as of and for the year ended July 2, 1999), the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Harris Corporation and subsidiaries at June 30, 2000 and July 2, 1999, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein.
Orlando, Florida
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See Notes to Financial Statements
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Consolidated Statement of Comprehensive Income and Shareholders’ Equity
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Significant Accounting Policies
Fiscal Year — Harris’ fiscal year ends on the Friday nearest June 30. Fiscal Years 2000 and 1999 include 52 weeks, while the 1998 fiscal year includes 53 weeks.
Cash Equivalents — Cash equivalents are temporary cash investments with a maturity of three months or less when purchased. These investments include accrued interest and are carried at the lower of cost or market.
Marketable Securities — Marketable equity securities are stated at fair value, with unrealized gains and losses, net of tax, included as a separate component of shareholders’ equity. Realized gains and losses from marketable securities are determined using the specific identification method. The cost basis of marketable securities was $63.5 million at June 30, 2000, and $3.9 million at July 2, 1999. The proceeds from the sale of marketable securities was $52.6 million in 2000, $9.9 million in 1999, and $39.6 million in 1998. The amount of gross realized gains included in “Other income” was $49.6 million in 2000, $9.6 million in 1999, and $38.8 million in 1998. The fiscal 2000 gross realized gains included a $21.9 million gain from the sale of one million shares of Intersil Holding Corporation stock as a part of Intersil Holding Corporation’s initial public offering.
Inventories — Inventories are priced at the lower of cost (determined by average and first-in, first-out methods) or market.
Plant and Equipment — Plant and equipment are carried on the basis of cost. Depreciation of buildings, machinery and equipment is computed by the straight-line and accelerated methods. The estimated useful lives of buildings range between 5 and 50 years. The estimated useful lives of machinery and equipment range between 3 and 10 years.
Intangibles — Intangibles resulting from acquisitions are being amortized by the straight-line method principally over 10 to 15 years. Recoverability of intangibles is assessed using estimated undiscounted cash flows of related operations. Intangibles that are not expected to be recovered through future undiscounted cash flows are charged to expense when identified. Amounts charged to expense are amounts in excess of the fair value of the intangible asset. Fair value is determined as the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.
Income Taxes — Harris follows the liability method of accounting for income taxes.
Revenue Recognition — Revenue is recognized from sales other than on long-term contracts when a product is shipped, from rentals as they accrue, and from services when performed. Unearned income on service contracts is amortized by the straight-line method over the term of the contracts.
Retirement Benefits — Harris and its subsidiaries provide retirement benefits to substantially all employees primarily through a retirement plan having profit-sharing and savings elements. Contributions by Harris to the retirement plan are based on profits and employees’ savings with no other funding requirements. Harris may make additional contributions to the fund at its discretion.
Environmental Expenditures — Harris capitalizes environmental expenditures that increase the life or efficiency of property or that reduce or prevent environmental contamination. Harris accrues environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.
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Foreign Currency Translation — The functional currency for most international subsidiaries is the local currency. Assets and liabilities are translated at current rates of exchange, and income and expense items are translated at the weighted average exchange rate for the year. The resulting translation adjustments are recorded as a separate component of shareholders’ equity.
Unearned Compensation — Compensation resulting from performance shares granted under Harris’ long-term incentive plan is amortized to expense over the performance period and is adjusted for changes in the market value of Harris’ Common Stock.
Net Income Per Share — Net income per share is based upon the weighted average number of common shares outstanding during each year.
Reclassifications — Certain prior-year amounts have been reclassified on the financial statements to conform with current year classifications.
Stock Split
Accounting Changes
Discontinued Operations
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The information set forth in the remaining notes to the financial statements relates to continuing operations unless otherwise specified.
Business Combinations
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Extraordinary Loss
Joint Ventures
Receivables
Inventories and Unbilled Costs
Unbilled costs and accrued earnings on fixed-price contracts are net of progress payments of $180.0 million at June 30, 2000 and $171.1 million at July 2, 1999.
Plant and Equipment
Intangibles
Credit Arrangements
Short-Term Debt
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Long-Term Debt
The weighted-average interest rate for notes payable to banks was 6.4 percent as of June 30, 2000 and 6.3 percent as of July 2, 1999. Maturities of long-term debt for the five years following 2000 are: $32.8 million in 2001, $0.6 million in 2002, $31.0 million in 2003, $0.5 million in 2004, and $0.3 million in 2005.
Preferred Stock Purchase Rights
Stock Options and Awards
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Price ranges of outstanding and exercisable options as of June 30, 2000 are summarized below:
Presented below is pro forma information regarding net income and net income per share. It has been determined as if Harris had accounted for stock options using the fair value method of accounting for stock options. The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
For purposes of pro forma disclosure, the estimated fair value of options is amortized to expense over their three-year vesting period. Under the fair value method, Harris’ net income and net income per share would have been reduced as follows:
Because the fair value method of accounting for options applies only to options granted subsequent to June 30, 1995, the pro forma effect was not fully reflected until 1999.
Net Income Per Share
Research and Development
Interest Expense
Lease Commitments
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Income Taxes
A reconciliation of the statutory United States income tax rate to the effective income tax rate follows:
The components of deferred income tax assets (liabilities) are as follows:
United States income taxes have not been provided on $346 million of undistributed earnings of international subsidiaries because of Harris’ intention to reinvest these earnings. The determination of unrecognized deferred U.S. tax liability for the undistributed earnings of international subsidiaries is not practicable.
Business Segments
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Corporate assets consist primarily of cash, marketable securities, plant and equipment, and net assets of discontinued operations.
Financial Instruments
Commitments to Buy Foreign Currencies
Commitments to Sell Foreign Currencies
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HARRIS CORPORATION AND SUBSIDIARIES
(in thousands)
Note A — Foreign currency translation gains and losses.
Note B — Uncollectible accounts charged off, less recoveries on accounts previously charged off.
Note C — Acquisitions
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