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Harris Board Debated Broadcast Division Future for Years

Brown: company faced tough choices given whirlpool of economy, government spending changes, election year

While the announcement that Harris wants to sell its division that manufactures broadcast equipment may have surprised some readers, internally, Harris Corp. had been discussing the future of the broadcast communications division for awhile.

How, if or when to exit the business was a frequent topic among board members, according to a transcript of yesterday’s earnings call with analysts, provided by the investment website Seeking Alpha.

Asked by an analyst how Harris made the decision to sell the broadcast communications segment “given that the business is sort of hovering around break-even,” Harris Corp. President/CEO William Brown said “It’s been discussed quite frequently over the last several years, given where broadcast happens to be and some of the charges that have been taken in the past.” Topics included how to make the division “better” and what would be the timing if the company chose to exit the business all played a part, according to Brown.

Harris announced that in its Broadcast Communications division, weaker demand in North America and longer international sales lead time led to a 14% decline in revenue to $111 million and resulted in a non-GAAP operating loss of $4 million compared to operating income in the prior year of $2 million.

Board members looked at the division question especially hard in the last six months.

In the end, “given the tough environment that we’re facing, we think it’s important for us to just 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 ’13 and beyond,” said Brown.

Much of Harris business consists of military and government communications contracts. Faced with a slowdown in government spending on the military and the uneven economic recovery, the company faced tough choices and decided to focus on what it could control — costs.

Brown said: Over the past six months, I spent a considerable amount of time in Washington meeting with administration officials and elected representatives, who are all wrestling with the trade-offs and tough choices to tackle the deficit problem we face as a nation. How that debate plays out in an election year has significant implications for our company, the defense industry and our nation as a whole. And I don’t expect much more clarity on the situation until we’re well into our next fiscal year.”

While it’s hard to give an exact number for how much cash Harris expects to get from the sale of the broadcast division because the company has just begun the sale process, Brown answered a question about that this way: “What we said was we would use $200 million from whatever the proceeds were for divesting [the] Broadcast [Communications division] to buy back shares. Our assumption is that the transaction closes at the end of this calendar year, so we use that proceeds of $200 million in Q3 FY ’13. We fully expect that the proceeds will be substantially higher than that $200 million.”

What happens if the broadcast business doesn’t generate the figure that Harris wants to sell it for? Would Harris consider spinning that off to investors in the same way that the microwave business was divested some years ago?

Brown deferred answering, “Our intention … is to divest the business in a sale with cash returning to the company.”