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Harris Corporation (HRS) Makes the Transition to Record-Breaking Free-Cash Flow

Any company that’s reached its 118th birthday has something that’s worked in the past. However, a history of success doesn’t guarantee a bright future. In fact, to stay relevant, companies have to be able to adapt when the environment they operate in changes. Harris Corporation (NYSE:HRS), a communications and IT company, has recognized the change to its environment and is in the middle of a multi-year transition.

Harris Corporation (NYSE:HRS)

To see whether this transition will prove profitable, I interviewed Harris Corporation (NYSE:HRS)’s CEO, Bill Brown. The following is the second segment in a four-part series that’ll tell you what you need to know about Harris Corporation (NYSE:HRS)’s transition, its future, and why it may merit your investing dollar.

Harris takes on the future
Harris Corporation (NYSE:HRS) is a technology company, but its core customer is the U.S. government. More pointedly, when I asked Brown about Harris’ biggest challenge, he said: “The biggest challenge was that the external environment was rapidly changing. Our core U.S. government customers, who represent more than two-thirds of our revenue, were experiencing a highly uncertain and challenging fiscal environment.”

In other words, because of sequestration and reduced government spending, Harris’ environment has changed. Here’s how it’s adapting.

First, because of the unprecedented nature of sequestration, Brown said Harris Corporation (NYSE:HRS) is focusing on what it can control — namely, “our quality, cost, technology, and performance against customer expectations.”

He continued: “We are focusing our portfolio, maximizing cash flow, returning more capital to investors through higher dividends, and increasing investment in R&D.”

Further, Brown’s statement regarding the focus on the portfolio isn’t just lip service. In fiscal 2011, Harris Corporation (NYSE:HRS) built a state-of-the-art off-site data center called the Harris Cyber Integration Center, which was supposed to be used for cloud computing. Harris had also expanded into broadcast communication services by offering hardware and software products. However, when Brown took over as CEO in November 2011, he examined Harris’ business portfolio, and he came to a conclusion: “I first took a hard look at our portfolio of businesses and decided that our prospects for success in our broadcast and cyber integrated solutions businesses were low, and we divested them.”

In short, Brown found that the broadcast communication services didn’t align with Harris’ overall strategy and portfolio, and the profits for off-site cloud computing weren’t there — so instead of pouring more money into these ventures to try and force them to work, Harris cut the fat. His decision resulted in a better-aligned company, and additional savings.

“By executing the restructuring actions announced in April faster than expected and expanding their scope somewhat, we generated additional savings in the quarter,” Brown said. “These actions are now expected to generate annualized cost savings of $60 million, versus the $40 million to $50 million originally anticipated.”

Those changes aren’t the only ways Harris is focusing on its business environment.

“The continuing U.S. government budget headwinds will certainly be challenging for Harris and virtually any company serving this market,” Brown said. Consequently, Harris is moving to capitalize on overseas sales, which have become more important.

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