Analyzing the Sale of the Harris Broadcast Division

Posted by Joe Zaller
May 07 2012

After last week’s announcement that Harris Corporation plans to sell its broadcast business, I was contacted by a number of people who wanted more information about Harris Broadcast and the transaction.  Here’s a list of the top questions, along with some thoughts on each one

 

How Big is Harris Broadcast in Terms of Employees and Revenue?

Employees: According to this article in the Quincy Herald-Whig, the Harris Broadcast Communications Division (BCD), has 1,700 employees, including 348 employees at its Quincy Illinois facility.

Revenue: The revenue of Harris Broadcast is somewhat difficult to calculate because Harris BCD is part of Harris Corporation’s Integrated Network Solutions (INS) business unit, which was created last year when Harris Corporation strategically realigned its business segments

Until last week, the last time Harris published data about the broadcast business was more than a year ago (Q2 Fiscal 2011).  However, on the company’s recent Q3 2012 analyst conference call, Harris CFO Gary McArthur disclosed that Harris Broadcast had revenue for the third quarter of fiscal 2012 was $111m, a decline of 14% versus the same period a year ago – thereby also implying that revenue in Fiscal Q3 2011 was $126.5m (interestingly this is a different number than Harris provided last year when it said that Broadcast revenue in Q3 2011 had increased 9% versus Q3 2010, implying Q3 Fiscal 2011 revenue of $134m, but for the purposes of this article, I will stick with the implied $126.5m revenue figure for Q3 2011). Fiscal 2011 Q4 can be calculated from previous earnings announcements.

Also on the Q3 FY 2012 earnings call, Harris revised its guidance for FY 2012.  The company had previously said its revenue for Fiscal 2012 would be approximately $6 Billion. In its Q3 2012 analyst presentation (last page), Harris now says that its FY 2012 revenue excluding Broadcast and Cyber Integrated Solutions (Cyber) operations, (which was also part of the INS Division and was shut down in February 2012) will be $5.45 Billion.  This implies that the company was projecting approximately $555m in revenue from the combination of its broadcast and cyber businesses in 2012.

Harris also recently filed an 8-K with the SEC that enables one to derive more information about the broadcast business.  The 8-K filing restated the performance of Harris’s INS division on a pro-forma basis (excluding Broadcast and Cyber).  By subtracting the pro-forma numbers from previously issued results, it’s possible to approximate the revenue of Harris Broadcast in both 2011 and 2012.

Other regulatory filings show that the revenue from the Harris Cyber business was $11.7m for the first nine months of the current fiscal year.   Thus the revenue of the broadcast business can be calculated as shown below. 

 

 

 

The table above shows that in Fiscal 2011 the Harris broadcast business generated approximately $545m in revenue.  What’s interesting is the company’s huge Q4 2011 performance, which was up 31% over the same period in 2010.

It appears that for the first three quarter of the company’s fiscal 2012, Harris Broadcast revenue is approximately $375m, roughly flat with the first nine months of fiscal 2011.  This begs the question as to whether Harris Broadcast will be able to achieve Q4 FY 2012 results that are strong as their performance a year ago.

According to the article reference earlier, a Harris Broadcast spokesperson said that 56% of the division’s revenue comes from North America.

 

 

What is Harris Broadcast’s Profitability and what is the Impact of Corporate Overhead on Profit?

Given the opaque nature of the broadcast division’s financials, it’s difficult to know its profit levels. The company said that broadcast made a profit in fiscal 2011, but did not offer details.

However, it’s important to keep in mind that Harris Broadcast is part of a $6 Billion defense contractor. As such it undoubtedly has significant corporate overheads allocated to it by the parent company.  While this number is unknown, it likely runs into the millions of dollars.  If these costs are substantial, then they could impact the profitability of the division.  Under a new owner, it’s possible that Harris Broadcast will not be charged these overheads, thereby substantially increasing its underlying profitability. 

 

 

How Much Did Harris Spend The Broadcast Business Together?

For many years, Harris has been a leading provider of radio and television transmitters.  However in 2000 the company went on a buying spree that the company began to transform itself into a multi-product industry giant starting in 2000 with the acquisition of Lout Automation. According to an article in TVNewsCheck, Harris spent $942m on M&A since 2000:

  • Louth Automation in 2000, $85m
  • Encoda Systems in 2004 for $340m
  • Leitch Technologies in 2005 for $450m
  • Aastra Digital Video in 2006 for $35m
  • OSI in 2006 for $32m

 

 

Who Will Buy Harris Broadcast?

This is the number one question people are asking, and I don’t have a clue what the answer will be. 

Harris Broadcast is of a size (see above) that makes it one of the largest pure play broadcast technology vendors.  As such there are not many industry vendors large enough to be able to afford the Harris Broadcast business.  This leave several options including a “strategic” sale to a large IT or media vendor, a private equity deal which leaves the current management in place, or the spinning off of the broadcast business as a separate public company. 

If I had to bet, I would say that the PE option is the most likely, particularly if it is a cash deal.  Harris CEO William Brown implied his preference for a cash deal when he said that Harris will use the first $200m of the proceeds from the sale of the broadcast business to buy back stock, and use the residual balance to fund core activities.

Incidentally, Harris Corporation bought back approximately $800m in stock last year.

 

 

Will Harris Broadcast Be Sold as a Unit or Piecemeal?

It would be pure speculation on my part to hazard a guess at this one, but I’d be remiss if this question was not included on this list.  I am sure Harris is evaluating all the options.

 

 

How Much Will Harris Broadcast Sell For?

This depends on a huge number of factors, and I will defer to others to answer this one.

On the one hand it’s possible that Harris Broadcast sells for a healthy multiple as per the Cisco/NDS and Harmonic/Omneon deals.  On the other hand the valuation may be much lower as per the Francisco Partners / Grass Valley deal. 

One key factor is the expectation of valuation that Harris Corporation has for the broadcast business and how quickly it wants to do a deal.  Although this is not known, the company has provided a few clues in both its statements to analysts, and its regulatory filings.

As stated above on the company’s recent earnings call, Brown said he expects a transaction to occur by the end of calendar 2012.  He went on to say that the first $200m from the sale of the broadcast business would be used to buy back Harris stock.  However, he went on to say that he “fully expects that the proceeds [from the sale of the broadcast business] will be substantially higher than $200m”, although he declined to speculate on a valuation or even a value range.

The company also said it “recorded in the third quarter a non-cash charge of $407m after-tax, or $3.62 per diluted share, to write down a significant portion of the goodwill and other long-lived assets in Broadcast Communications, resulting in the GAAP loss from continuing operations.

In its Q3 FY 2012 10-Q filing with the SEC, Harris Corporation provided useful information about how it calculated the $407m charge, and how it is internally valuing the broadcast business.

The following information is excerpted from the 10-Q:

“Goodwill and other long-lived assets held and used related to Broadcast Communications with a carrying amount of $800.0 million were written down to their preliminary estimate of fair value of $376.0 million, resulting in a preliminary estimate of $424.0 million for a non-cash impairment charge, which was included in income (loss) from continuing operations for the quarter and three quarters ended March 30, 2012. See Note N — Impairment of Goodwill and Other Long-Lived Assets in these Notes for additional information.

 

“Note N — Impairment of Goodwill and Other Long-Lived Assets

“We test our goodwill and other indefinite-lived intangible assets for impairment annually, or under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. Indications of potential impairment of goodwill related to Broadcast Communications (which is part of our Integrated Network Solutions segment) were present at the end of the third quarter of fiscal 2012 resulting from the following circumstances and other factors: (i) an unanticipated revenue decline and operating loss for Broadcast Communications for the third quarter of fiscal 2012 (as a result of weaker demand in North America and longer international sales lead times), which also resulted in a decrease in the fiscal 2012 outlook for Broadcast Communications and (ii) depressed indicators of value resulting from analyses undertaken in the third quarter of fiscal 2012 in connection with the review of our business portfolio, including the evaluation of strategic alternatives for Broadcast Communications that included a potential divestiture of Broadcast Communications and the principal markets currently available. Consequently, in connection with the preparation and review of our financial statements for the third quarter of fiscal 2012, we performed an interim review of Broadcast Communications’ goodwill for impairment as of the end of the third quarter of fiscal 2012. See Note R — Subsequent Event in these Notes for details regarding the approval by our Board of Directors on April 27, 2012 of a plan to divest Broadcast Communications.

“To test for potential impairment of goodwill related to Broadcast Communications, we prepared a preliminary estimate of the fair value of the reporting unit based on a combination of projected discounted cash flows and principal market-based multiples applied to sales and earnings. The current carrying value of the Broadcast Communications reporting unit exceeded its estimated fair value, and accordingly, we preliminarily allocated the estimated fair value to the assets and liabilities of the Broadcast Communications reporting unit to estimate the implied fair value of goodwill.

“In conjunction with the above-described impairment review, we also conducted a review for impairment of other long-lived assets related to Broadcast Communications, including amortizable intangible assets, fixed assets and capitalized software, and impairment of these assets was considered prior to the conclusion of the goodwill impairment review. The estimated fair value of other long-lived assets related to Broadcast Communications was determined based, in part, on an analysis of projected cash flows.

“As a result of these impairment reviews, we concluded that goodwill and other long-lived assets related to Broadcast Communications were impaired as of the end of the third quarter of fiscal 2012 and we recorded an estimated non-cash impairment charge of $424.0 million ($406.5 million after-tax). Due to the length of time necessary to measure the impairment of goodwill and other long-lived assets, our impairment analysis is not complete and is subject to change. We expect to complete our analysis prior to reporting our financial results for the fourth quarter of fiscal 2012 and will record any adjustments to our preliminary estimate at that time. The portion of the estimated impairment charge related to goodwill was $379.0 million and is not deductible for tax purposes. The tax effect of that non-deductibility was treated as a discrete item in the third quarter of fiscal 2012 for purposes of calculating our effective tax rate. We do not expect to make any current or future cash expenditures as a result of the impairment. The estimated impairment does not impact covenant compliance under our credit arrangements, and we do not expect the impairment to impact our ongoing financial performance, although no assurance can be given.”

 

 

Timing – Why Now?

On the company’s conference call with equity analysts, Brown was asked why the broadcast business is being sold now.  Brown said that the divestment of the broadcast business was “Not a new topic with our board, it has been discussed quite frequently over the last several years given where broadcast happens to be… it’s been an active discussion with our board on is it a fit, how do we make it better, what is the timing if we decide to exit… we had a long conversation about it… in our view, given the tough environment that we are facing it’s important for us to focus our resources including our management time and attention on the businesses that we know to be core to our company so we can be successful into FY 2013 and beyond.”

One reason could be Brown himself, who became president & CEO of Harris Corporation in late 2011.   

The current broadcast business was put together under the watch of former CEO Howard Lance who retired last year.  Lance was supportive of the broadcast business so while he was at the helm of Harris Corporation, the structure was unlikely to change.

Brown joined Harris from United Technologies where he was responsible for the company’s global strategic planning and M&A activity.  He’s a deal-maker who has not wasted any time divesting of “non-core” assets, starting with the Cyber Integrated Solutions business, and now broadcast. 

Now that Brown has set up Harris to be more focused on its core defense business, one has to wonder whether he will continue to run the Harris as a defense company, or try to engineer a larger deal that would see Harris Corporation itself sold to a larger defense contractor.

 

 

What Happens to FAME and DooH Initiatives?

Harris Broadcast has for many years sought to leverage its expertise video processing, management, manipulation and storage into market verticals outside of broadcast.  The two most prominent examples of this are the work it does with the military, and its efforts in Digital Signage or “Digital out of Home” (DooH).

For military markets, Harris has long touted its FAME (Full-Motion Video Asset Management Engine) initiative, which seeks to use broadcast technology to capture, manage, analyze and store the vast amounts of video-based content that are now being created in military operations.  Harris has never revealed the extent to which this initiative has gained traction with customers.  However it seems logical that if Harris Broadcast is spun off, the contacts (and contracts) that Harris Corporation have with government customers will live on.  On the other hand it’s also possible that a more focused owner may devote fewer resources to this area in favor of initiatives that are more core to the broadcast industry.

Harris has also very active in the digital signage business, and has had good success with clients including 7-Eleven, Harrods, McDonalds, the Orlando Magic, and Madison Square Garden. Some of these  contracts (especially in the sports market) have undoubtedly resulted in the sale of a lot of Harris Broadcast gear including signal processing and storage products.  The retail-focused projects are more about the digital signage solution than the sell through of broadcast technology.  Thus the issue for DooH markets is similar to the Harris FAME initiative – the contracts will live on, but it’s possible that a new owner may shift resources away from these areas in favor of a more focused approach to the broadcast market.

 

 

Branding — What Happens to the Harris Name?

Harris is one of the biggest names in the broadcast industry, but if its broadcast division is sold off to a PE firm, or is somehow spun out as a separate company, it may have only limited rights to the Harris name.  So depending on the outcome of the sale process, branding could become a major issue for the firm.

So how strong is the Harris brand? As part of our annual Big Broadcast Survey (BBS) study of the broadcast market, we have measured the brand values of Harris Broadcast for the past four years, so we are in a good position to know. 

The 2012 BBS uses a broad variety of metrics to benchmarks how buyers of broadcast technology perceive the strengths and weaknesses of more than 100 broadcast technology brands.  The Harris Broadcast brand is regarded very highly throughout the broadcast industry, and appears to have increased in several key areas over the past twelve months. 

For evidence of the its standing in the market, one only has to look at various broadcast industry message boards to see the outpouring of affection for the Harris broadcast brand. 

 

So what are your thoughts?  There are certain to be many more questions about this deal.  It will be very interesting to watch.

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Related Content:

Harris Corporation To Divest Broadcast Business

Press Release: Harris Corporation Reports Fiscal 2012 Third Quarter Results

Harris Q3 FY 2012 10-Q Filing

Harris 8-K Filing – Restates Fiscal 2011-12 Revenue on Pro Forma Basis (Without Broadcast and Cyber Integrated Solutions)

Press Release: Harris Corporation Reports Fiscal 2012 Third Quarter Results

Harris Fiscal Q3 2012 Analyst Presentation

Harris Fiscal Q3 2012 Conference Call Transcript

TVNewsCheck Article: Tech’s Big Question: What’s Next For Harris?

Quincy Herald-Whig Article: Prospective buyers seek information on Harris broadcast; business as usual in Quincy

Harris Broadcast Revenue and Income Rise in Q2 2012, Says It’s Laser Focused on Maximizing Shareholder Value.

Harris Corporation Shuts Down Cyber Integrated Solutions Business

Harris Corporation Strategically Realigns Business Segments; Broadcast Communications Rolled into New “Integrated Network Solutions” Unit

Harris Corporation Names New President and CEO

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