L3Harris Technologies Inc (LHX) 2002 Q4 法說會逐字稿

Good afternoon and welcome to the Harris Corporation's fourth quarter fiscal 2002 earnings release conference call. This call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations. Please go ahead.

Thank you. Hello everyone, and welcome to Harris Corporation's fourth quarter fiscal 2002 conference call. I am Pamela Padgett, Vice President Investor relations. With me on the call today is Mr. Phillip Farmer, Chairman and CEO, Mr. Bryan Roub, Chief Financial Officer. Before we get started, I would like to say a few words about forward-looking statements.

In the course of this teleconference, Phil, or other management, may make forward-looking statements. Forward-looking statements involve assumptions, risks, and uncertainties that could cause actual results to differ materially from those statements. For more information and a discussion of such assumptions, risks and uncertainties, please see the press release and filings made by the company with the SEC. With that, Phil, I'll turn it over to you.

OK. Thank you, Pam, and welcome to all of you. As is our normal procedure here, what I'm going to do is discuss the fourth quarter, looking first at the total company comments. Then I'll be talking about each of our business segments. Then, a look at the total year and then, finally, our outlook for the new year which is now underway. And then, finally, we'll turn it over to you, for your questions and we'll try to answer any questions that you may have. And, as usual, we'll devote most of our time to the Q&A session.

First, looking at the quarter, for the fourth quarter and particularly, for these times, Harris had a very good quarter. The earnings per share at 40 cents met our guidance, and was above last year's 37 cents for the fourth quarter of fiscal '01.

The total company sales were down for the quarter, as we expected, due to the continuing bad market conditions for telecom equipment. In fact, the overall sales were down about 6%. Three of our segments had excellent quarters and have a very good outlook for that to continue. Both government related businesses, our government communications systems division and our RF communication radio division, which make up 65% of the company, had a very, very good quarter. We'll talk about the details later.

Broadcast division turned in another good quarter, as it continues to grab market share in the digital conversion era. And the telecom related segments both microwave and network support had a poor quarter. Again, I'll talk about some of the details there.

The company continued its very strong R&D program, through even these difficult times, even though we did lower our research and development expenses that are funded by the company. We lowered those by about $2 ½ million as we reduced our spending in our telecom related businesses. On the other hand, the R&D funds in our government business was up significantly. In fact, they were up $18 million higher than a year ago, quarter. That's primarily as a result of continuing to expend significant amounts of new dollars for the war on terrorism.

Corporate expenses were down by $1.8 million from last year's quarter, helped by obviously, tight controls on spending by all of our department managers. But the most impressive highlight for the quarter, and probably for the year, was the performance in operations regarding cash flow. For that discussion and for other balance sheet and accounting activities, let me turn this over to our Chief Financial Officer, Bryan Roub then I'll return to discuss the segment highlights. Brian.

Okay. I'd first like to talk about two accounting matters. The first is the SEC review of our financial statements and the second is the CEO, CFO certification process that we're about to embark on.

First, on the SEC review, on the last call I explained we had been through an SEC review of our financial statements for fiscal 2001 the 10-K and the 10-Qs that had occurred already in this current fiscal year and was simply part of the SEC review of, basically, the top 1,000 companies in the US. At that time, the only open issue was how many segments we had in our commercial business. I want to emphasize now what I emphasized then, we did not have any accounting issues. We had some disclosure requests for expansion of those disclosures and the most important one was, of course, the segments.

We have in the quarter -- in the past quarter, we finished the process with the SEC. We filed our third quarter 10-Q on the basis of expanded disclosures, including five segments, and shortly after that we amended our 2001 10-K and the quarter 1 and quarter 2 10-Qs for FIO 2 to include the expanded disclosures as well. So we're done with that process. It's behind us.

On the CFO, CEO certification, there's a little bit of confusion among some companies as to -- or analysts, as to what is required here and it's somewhat interesting. Calendar year companies are required to provide a certification of their previous financial statements going back to their 10-Q for calendar 2001 by the August 14th deadline. In the case of Harris, we're a June 30th year company as you well know, and because of that our certification is not required until the filing of our 10-Q which will be in the month of September. That is what needs to be certified by the two of us. We will, of course, be providing that certification at that time.

Now, on to the business of Harris, what's important to us is the cash flow, as Phil mentioned. We had a -- just an extraordinarily good fourth quarter following what I consider an extraordinarily good third quarter. We generated 100 million of cash flow from operations in the quarter. I was really pleased with the results of all of our businesses in the quarter.

Cash flow from operations for the year exceeded 200 million dollars and every operating division generated significant amounts of cash. In the year, we paid down over 100 million dollars in debt and have now, because of that, lowered our debt to total capital ratio to about 21 per cent.

We're going to keep pressure on that very important aspect of our business. I believe that we still have further room for improvement in a couple of our businesses. Others, I don't think they can do any better than they've been doing. But, we're going to try to do better.

Looking forward to fiscal year 2000, on the outflow side, I expect capital expenditures are going to go up a bit from the 46 million dollars that we had in fiscal 2002. In part, because we have, as part of the wonderful win of , there's a 20 million dollar up front investment in a network operations center that's part of that contract. So I think the capital expenditure side for Harris will go into the 75 to 80 million dollar range for fiscal year 2003. Depreciation will be slightly higher than it was this year, between $60 and $65 million. I think that from the operations, as I said, the continued emphasis on working capitol management, good profitability, I would expect that we will generate next year a cash flow from operations of at least $100 million dollars. That's it Phil.

Ok. Thank you Brian. Let me now turn to the five segments and start with the government division. Sales in the fourth quarter for our government division were up nine percent. Operating income was up a very healthy 29 percent. New orders were up eight percent and we're higher than sales. Considerably higher than sales.

But the real important story, and the really good news in the orders number, is the potential size of the new program wins. Government programs, as many of you know, are typically funded on a year to year basis by Congress. The initial orders booked can booked can be quite small when you first win them. On programs such as the Joint Strike Hider or even the Census Bureau's Math Tiger contract.

However, the potential size of a program may be well know up from and therefore can be viewed as reasonably predictable volume for the years to come. And taking that into account, the government segments backlog of funded and unfunded work at year end, is right about $2 billion. And this for a segment that had $1 billion in sales.

The FAAs technology infrastructure program, which we announced the win just a week ago, will add another $1.7 billion to that backlog number. Bringing us up to close to $4 billion of backlog. The further good news in that business is that opportunities for additional new business wins continue to surface as the budgets are increasing and the Department of Defense, the Homeland Defense activities, the FAA, the intelligence agencies, and indeed other federal agencies as well.

As you all know, this is a long cycle business where these large programs may start out slowly. But the form a strong ongoing business base for many years to come. Operating income margin is continuing to grow in this segment. It's growing nicely and it reached 10.1 percent for the quarter. And 9.2 percent for the total year.

Overhead costs in the business are well controlled. And resources are readily available for sustained levels of research and development and for new business pursuit. This simply is a good business and it's getting better. Turning now to RF Communications, our radio business, they just had an outstanding quarter. Sales were up 17percent, operating income was up 78 percent, leading to both a record quarter for sales and earnings. And a record year for sales and earnings.

The Falcon 2 product line sales that go to support the war on terrorism, are continuing to provide significant growth in sales and profitability. Both the U.S. military forces and our friendly country forces, are selecting the Falcon 2, which we're able to deliver quite quickly. The high software content of the radio permits rapid manufacturing and excellent margins particularly when we get surges in volume.

The Bowman Program, for the United Kingdom, which we announced the win of earlier this year, is also off to a very good start. And that will start contributing to earnings in fiscal year 03' and continue to do so for about five years or more.

The big news in the quarter was the selection of the Boeing team, of which Harris is a member, as the winner of the first phase of the Joint Tactical Radio System Program, which will develop a new line of standard radio products for the US Military. That so-called Cluster One award, which is the first of four, will mean up to 500 million dollars of business for Harris' Radio Division over a large number of years. Bowman and JTRS, as I indicated, will provide many years of profitable business for our Division, and equally importantly, they will provide next-generation products that we can take to other international markets as well. This segment continues to produce the highest profit returns for the Company.

Looking now at broadcast: The Broadcast Division had a very good quarter, even though on a tough year-to-year compare, sales were down 11 percent and operating income was actually down 30 percent from our quarter 4 fiscal year '01. Contrasting that, new orders in the quarter were the highest ever for any quarter in the Harris Broadcast Division. Last year's quarter was helped immensely by large broadcasters, which at that time were rushing to install digital equipment to meet FCC deadlines, and fortunately we provided most of that equipment. For the year, sales and operating income were both up 6 percent in spite of very weak market conditions for broadcasters, who many of you know have suffered all year from lower advertising revenues. As a result of that, broadcasters have held down capital spending wherever they could. Fortunately, there are some very encouraging signs that advertising is picking up. Now, one of the things that makes us happy, of course, of that pick up anywhere, is that our orders were up 25 percent sequentially from the third quarter to the fourth quarter, and surpassed 100 million dollars in total.

The FCC is remaining steadfast on the conversion schedule for digital television, in spite of reports sometimes to the contrary, and the good news for Harris is that we are still capturing about a 65 percent market share for transmitters, sometimes more, and that more than half of the volume for transmitters is still ahead of us. The real good news in the quarter, as the non-commercial stations are now stepping up to buying their equipment, in the PBS station orders for the fourth quarter, the Harris win rate surpassed 80 percent for PBS stations. We are also looking for pick-ups soon in our Automation and Systems and Studios product line as the capital spending constraints begin to loosen in broadcasters. And, coming soon, of course, is digital radio. The standards have now been agreed upon, we have working products developed, and we're looking for that start-up to begin over the next year.

Looking now at our Telecom Divisions. First, Microwave: Don't have much good news to report here. Sales were down 36 percent on a year-to-year basis, and operating income suffered a loss of 5.8 million vs. a profit a year ago. North American sales was the only bright spot; the sales there remained very good, in fact they were even with last year's sales, while international sales were down 55 percent from a year ago. Most disappointing overall was the total level of sales, which were about 65 million dollars for the quarter. We had sized the Division for sales in the mid-70s range, which was our level in the first three quarters of the year, and as many of you may recall, we had sized the division to break even at that level. But the continuing deterioration in international markets, which got even worse than we had anticipated, dropped us into the mid 60s for sales, and of course, led to an almost $6 million loss.

We remain confident in the fundamentals for the microwave business, and its eventual return to growth. But near term, we are looking at further cost reductions to cope with this ongoing weakness. The biggest problem, to put it in a nutshell, is still the absence of capital resources to finance the build out and expansion of cellular networks outside of the United States.

New orders during the quarter were 63 million, slightly below our sales level of 65 million. Some bright signs, Q1 looks a little better, but we're not going to get out, ahead of ourselves on that one. We do have one significant development to report that we think for the long term will have great ramifications for Harris. Our point-to-multi-point products are beginning to find real customers. We have 3 contracts won now, two of which are very large in size. One in Malaysia, and another one in Greece, joining a smaller contract in Sri Lanka. These contracts are for our 3.5 gigahertz product and the uniqueness of this product, it has quality voice capability as well as high speed data capability for internet traffic. We think the implementation of these projects in these countries is going to lead to significant orders elsewhere internationally and hopefully, one day, back in the US as well.

Now, looking at network support. We had another difficult quarter. Sales were down 40% from a year ago, no surprise there. Operating income, we had a loss of 3.1 million versus the loss a year ago of 2.7 million. Orders were just about exactly equal to sales, so no upturn is in sight yet, for this business. Capital spending by the regional operating companies is still depressed and we count on that spending for our tools and test set product lines where we are, by far, the leading provider. The orders for our network management system, NetBoss, stayed very low, due to lower capital spending by just about everybody for telecom software.

We need sales in this business of about $17 million per quarter to assure a break-even level. And unfortunately, the past four quarters have averaged around $14 million. So, what's good about that? Well, opportunities are definitely improving. We have more good proposals outstanding now then we have had for a year and a half. The division management feels much better about the future than they do about the past couple of years, but that wouldn't be hard to do. NetBoss, our network management system will definitely be a part of several major programs that we have won or are about to win, in broadcast, in government communications, and in microwave. So, this is definitely going to help the business. And we know the operating companies are going to have to start buying more tools and test sets one of these days. They know it. We know it. But it hasn't happened yet. And when that happens, we are leveraged for some very good profitability there.

One final little note, a couple of our best customers from the past, as we are grasping at straws here, are coming back to life. Both and are alive, and I won't say well yet, but we're talking to them again about selling equipment to them and they are back into managing their networks.

We may have a small loss in this business in the first quarter, but a break even or better year is beginning to look quite probable.

Turning now, from the segments to the total year, we ended up about where we expected after elimination of the microwave restructuring charges and the nice gain from the sale of our interest in the GE Harris Energy Systems business, our earnings per share for the year wound up at a dollar 30. Which was right in the middle of our 1.25 to 1.35 guidance range and equal to the consensus estimate of analysts. It also was 15 per cent above the previous year and not many communications companies can make that statement.

We always hope to do better, of course, but the further weakening of international microwave markets in the fourth quarter just crushed any chance for reaching the top end of the estimated range, even though some of our other businesses certainly did better than we expected.

New orders for the year are also very encouraging. They were over 2 billion dollars and 8 per cent higher than sales. Many of those orders, as I pointed out earlier, have very large follow-on potential, far above the initial order amount. The cash generation in excess of 200 million dollars from operations was outstanding. That's two and a half times our net income. And perhaps the toughest year ever for communications companies, we feel pretty good about these results, both for the quarter and for the year.

But what about next year which is obviously already underway? Well, we wish the markets for commercial telecommunications were better and we know those markets will get better at some point, but for now, we remain very cautious about both the microwave and the network support segments.

Microwave will likely break even for the first couple of quarters and with some market improvements in calendar 2003, should be able to produce a modest profit in the second half of the year.

Network support, as I indicated earlier, may start the year with some losses and eke out a break- even position for the total year.

The story is much better for the other three segments. The markets they serve are good and our performance is better. We anticipated continued growth in the government segment with revenue increasing 9 to 10 per cent and operating income growing at least 10 per cent.

The RF communication radio product segment should continue to enjoy revenue growth of 10 per cent or more in the coming year. We're not likely to sustain for much longer the unusually high profit margins of the past year, which for the total year were 20 per cent. But we should see some profit growth due to the increased revenues and a continuing superior profit margin for the business.

The digital TV transition is going to continue and we expect continued growth in Harris' broadcast segment. This should be a good year as the non-commercial stations must now step up and install equipment to meet the FCC's scheduled mandates.

Also the broadcasters capital spending may see an upturn as the advertising revenues begin to increase and that will help boost demand for Harris' other broadcast products, automation and systems in studios.

We also expect to see the beginning of the digital radio era. Overall growth of 10 per cent or better for revenue and 15 per cent for operating profit is likely for the broadcast segment.

For the company, our previous guidance of a dollar 50 to a dollar 60 earnings per share for FYO3 appears to be about the right level and we are re-affirming that range today. Of course, no forecast, ours included, is without risk. But we also hope that our forecast also has some unseen opportunities in it. But on balance, we think it's just about right. With that, let me turn it over to you for your questions.

Thank you. The question and answer session will be conducted electronically today. If you would like to ask a question, you can signal by pressing the star key followed by the digit one on your touch tone telephone. We'll take as many questions as time permits. And we'll proceed in the order you signal at. Once again, that's star one to signal for a question. We'll pause for just one moment to assemble the roster.

And our first question will come from Arindum with Morgan Stanley.

Hi folks. How are you?

Hi Arindum.

How are you?

A couple of questions if I may. First of all, on the broadcast segment you talked about yours being the highest history. When you unveiled the Ranger product previously, that had a significant contribution. I wanted to get a sense from you of the order contribution from the Ranger products in this quarter.

Arindum, I don't have that number handy. But I would say the Ranger did not add that much to our dollar numbers. The dollar numbers were say, a $101 million or thereabouts for new orders. And of course the Ranger is a starter product. One of the nice things that has happened as a result of our having that product, we spend time with companies that who want to spend as little as possible and by the conversation ends, many of them step up to our higher product because they realize, say for a little bit more money, they have a much better product which is much more expandable on an easy basis.

But Pam can get you that number later. I just don't have it in front of me now.

Ok. That's fine. I just wanted to get sense of the characteristics of the order flow. And that helps a little bit. On the microwave side, from the pricing environment, international; previously we talked about some crazy pricing in terms of competition by the Japanese competition. Has that been impacting the international side of literally only a and an excess to capitol issue?

Arindum, the best we can tell, there's nothing new there from what we talked about before. And the KAPEX is really still the problem. There is no question but that. NEC is very competitive on those international opportunities and has done some price lowering. But we haven't seen any more of that. In fact probably less of that in the last quarter than we did the quarter before.

It really is just an absence of financing alternatives for people who want to continue expanding their networks. And thus far, I would also add, as I think I said earlier, I don't see any improvements happening yet internationally. Thank goodness for the U.S. market right now.

Ok. And you mentioned in the press release that you're bidding on major contracts in the GCS valued at $3 billion. If you could discuss some of those in comment, whether you think there would be cost plus or fixed price opportunities. And then Brian, if you could talk about the number of shares of interest still held as of the end of June.

Ok. Starting out, the next big program for us is a program called Impose. The national poller in orbiting environmental satellite system. Ok. I think I got that acronym correct. That's a program which puts up the weather satellites for the U.S. government. Which is used by both commercial and defense agencies of the U.S. government.

The prime bidder on - the two prime bidders on that are Lockheed Martin and we're on the Lockheed Martin team, and the other prime bidder is TRW. That award is going to be made, we believe, in the August--maybe it will slip into early September, but it's going to be made here very shortly. the size of that contract for Lockheed Martin is in the 5-billion-dollar range, of which the scope for Harris will be something in excess of a billion dollars. Insofar--most of these contracts, if there is a development piece to the contract, that early development will be a cost-reimbursable contract, followed then, by fixed-price contracts for things, which then can be priced accurately. We have some other large contracts, there is one called--a family of beyond-line-of-sight terminals called . We're on the Boeing team there. For Harris this new line would represent about a 160 million-dollar contract. We have another one called--

Is that for Boeing, or for your portion?

That's just for our piece of it.

Okay.

So it would be larger for Boeing. There's another one called , which is a replacement for mobile subscriber equipment in the military. The prime contractor that we're teamed with there is Lockheed Martin. For us, that would be about a 200 million dollar piece, just for our piece of it, and nearer than that, in fact, one that we hope will be awarded by the end of late July, is a service-oriented contract called , which is primarily out of the Denver, and it supports the Space and Satellite--Space Satellite and Systems Assets of the US Government. We're bidding that prime, it's primarily a labor contract, which you negotiate rates for it, but then it's very low risk after that, because you're paid on the basis of those rates. That prime contract will be worth somewhere approaching 500 million dollars, and we are the bidder against that--against another team led by Lockheed. We also have another major contract coming out of the FAA, but it probably will not be until later this year or early next year, called NEXCOM, which is digital radios for air traffic control. We expect to bid that prime, and that will be better than a 500 million dollar contract. So there are lots of opportunities that are available to Harris, and the good news is that we've got the resources and the people to go bid those.

Random shares at June 30 were 1.1 million.

Okay, thanks very much here, appreciate it.

You're welcome.

Thank you. Our next question will come from with CIBC World Markets.

Hi, good afternoon. A couple of questions, I guess kind of start with the bad news a little bit. You talked about running the Microwave business break-even. Can you give us a little more granularity in how you're going to get costs down, and sort of, what is the revenue run-rate you're assuming on a quarterly basis, such that you can be at break-even in year '03?

Sure, Steve, we had, you know, last--at the start of this past year, we kind of picked a number, I mean when you're guessing about the future, you do it as accurately as you can. We picked mid-70s, and sure enough, our first three quarters were there, and we got our break-even down to that level, which is what we had in the third quarter. Unfortunately, this 65 million doesn't get us there, so what we're doing now is we're taking that down to around 70 million dollars, and we can do that on an incremental basis, incremental meaning some actions that we have already taken, and some other ones which are underway, which means just further people reductions, further expense cutting, further consolidation where we can, in terms of facilities, and we believe we can fairly quickly get to about 70 million. Our forecast is that we think the sales will bump back up to about that level, of say, the first quarter, we have a pretty good look at this point, you know, I hate to get too optimistic on this business effort, but it looks like 70 is about the right level. And if we get there, we'll find out pretty quickly, within about 2 ½ months here we're going to know if that's the right level, and if we have a break even at that point. But that's where we're sizing it right now.

At this point, most of the international business seems to be eroded, so what's the revenue mix between North America and international?

Over, well over half of our business is North America now. In fact, it's approaching, in the past quarter it was let's see, --

55%.

55 to 60% was US and, I'll remind everybody that historically, you know, when things are going as the world seems to think they ought to be going, we're about 70% international, and about 30% domestic. Domestic has held on but the international has dropped as we said precipitously. So, better than 55% domestic. And that business looks pretty good. That's continuing billed out in capacity expansions of the existing cellular systems in the US as well as a continuing good private network market which Harris is by far, the leading provider for equipment for those markets.

OK. And, similarly, on the network supports idea, you had mentioned you had sized it for about 17 million and it happened to come in around 14 million in the second half. Again, are you predicting growth back to the 17 million level, or cost cutting down to the 14 million level?

We are not planning to cut much more cost out of there. We think we have that about where we need to, you know, at some point, when do you start cutting beyond your capability to operate the business effectively? I won't say that we are there, but I can tell you the division management team feels that they should run with this level and their objective is to get their revenue back to at least 17 million. We know we're going to get some help here pretty soon from the other businesses of Harris, namely broadcast, government and microwave, which is probably giving them a reasonable expectation of getting back to that level, or higher.

When would NetBoss be required for the program? Is that, sort of, years out? Or relatively near term?

I don't know the exact answer to that question, but it won't be years out. Whether it, it's more than months out, but I would say sometime in this first year, we are going to be addressing that issue because that's the whole network management issue. We're going to start putting in that network operating center, in fact, we started already. You know, that effort is one of the first efforts underway. And NetBoss is required for that center.

OK. And in the broadcast business, the last three quarters of FY02 were pretty linear, in growth, you know, $10 million sort of step up each quarter. Are there any events in fiscal year '03, such as, you know, FCC deadlines or anything that would cause particular lumpiness, or should we look for sort of a more steady sequential ramp up in fiscal '03 in the broadcast?

I think it's going to be pretty steady. That's our anticipation, but we are expecting it to be steady, you know, 10% or higher in revenue. And the real things going on this year, of course, is non-commercial stations have to step up. You know, and there's actually a number -- many or more of them than there are commercial stations. So they have to step up to meet the mandates. A large number of them, you know, applied for extensions. Some of them got waivers. A bunch of them did not. Small stations were -- small commercial stations tried the same thing. The FCC is holding firm. So we think we're going to have a good year. We were most encouraged by our ability to win the PBS stations.

details question, why do you suppose your win rate was so, kind of, extraordinarily high --

It's all price and that was the concern. When you bid -- when PBS bids, it's a government bid, it's open the envelope please and all I can tell you is that we priced those products at good margins because of our volumes. In fact, the margins are as good as our volume -- as our margins for the other stations and our win rate was over 80 per cent. Se we were, let's just say, very pleased and the management team of the business will probably tell you they expected it and I was quite surprised by our win rate being that high.

Right, okay. And then, I'm sorry, one last thing, in RF comms, would the mix of what it sounds like more development work for and, I'm not sure exactly where that's at on , what should we think about in terms of margins relative to the, you know, 20 per cent plus levels that you saw for you FY02?

Well, first of all the program will have very good margins. I don't -- I wouldn't want to commit to anybody that in this business that 20 per cent margins are sustainable because it is a very competitive environment and right now, we have, by far, the best products and we have the product of choice and our pricing is holding. But, we'll have some people step up and come after us in that area. But, we are anticipating that our margins are going to stay in the very high teens, you know, for some time to come and we expect the program to perform, you know, at 15 per cent or better kind of margins, because it, also, is a product business.

The program which is with the US government during its development phase will clearly be at margins below that and it will be, you know, risk free, because of the development funding from the US government. But we hope to have very good margins on that program as well, but it won't be at those kind of levels.

Okay, thank you very much.

You're welcome.

Thank you.

And our next question will come from Colin with Bear Sterns.

Good afternoon, everyone.

Hi Colin.

Hi Colin.

My questions are focused on asset management. I wondered if you could talk about the progress on in inventory terms, particularly on a sequential basis being just under 70 days according to my calculations; is that sustainable? And, what would you like to see as potential uses of cash?

Well, let's talk about the , we made steady progress through the year. I expect that progress to continue. I think it -- I don't want to get two granular on each business, but I think that we're about where we need to be, should be. In , RF Comm and probably broadcast. Maybe a little bit more improvement there. is -- we need some improvement. A nice movement here in the fourth quarter. So I look to wring some more cash with the team out of working capital particular at microwave communications.

The same would be true, basically, of inventory. We're all doing pretty well. I think we have some room to improve in programs in place to do so at both broadcast and microwave communications. So progress was made a lot in the year and I think we're going to continue that progress in the next fiscal year.

As far as uses of cash, we have a debt repayment that's due here now in a couple weeks. On a long-term debt. About $30 million. It's not huge. But that's one use. And we'll just risk keeping our powder dry for opportunities as they occur.

Phil, could you articulate the acquisition strategy or what overall consolidation in the industry?

I think I'm going to give that one to Phil.

Well, obviously I can't talk about specifics there, you know, ahead of any announceable actions. The things that we continue to look at and have talked about; we still believe that some consolidation, you know, is or will take place and is desirable to take place in microwave. A lot of people could question that at the moment with the market being as poor as it is. And returns being as bad they are. Why in the world would you want to go do anything in that area.

But we still believe that long-term, you know, if opportunities presented themselves there we would like to take advantage of those opportunities. We are always looking to expand our good businesses in related areas. Which may, in many cases, take the form of an acquisition. As you know, we have done so in broadcast. With a couple of acquisitions a couple of years ago. We're continuing to look in that area as we continue to broaden the digital product stream. We'll look further in both the T.V. and the radio side.

In the government area, any acquisitions we do there or anticipate doing there would be relatively small. But if they are technology based acquisitions that fit the kind of things we do, we're always amenable to looking for something there. Probably no surprise to anybody, prices in the government area are going up again. As they were a few years ago during all of the consolidation. And the one thing that we will continue to do in Harris is try to avoid any acquisition that is not accretive, especially during economic times like these.

So our intention right now is to move very cautiously but to continue to look at the things that make sense for us. But not to surprise anybody with an acquisition that is non-accretive or doesn't have a really good rationale associated with it.

All right. And just lastly, on microwave. It would seem that the last mile gap is most evident in first-world country. Why is Point to Multipoint not gaining traction except for third-world countries and are there any technology issues, et cetera?

It's probably a couple of things. And that would probably require a more complex answer than we have time for here. But in the U.S., remember the confusion by Winstar and Telegent buying up all the spectrum in auctions a couple years ago. And - three years ago. And it is still unclear how one gets at that spectrum since they own it and bankruptcies have ensued for both of those companies. Likewise, just the lack of anybody willing to invest in new network build-out in the U.S., particularly for new applications, is still with us.

In the international arena, the services don't exist. Neither the telephone service nor the access to Internet services, both of which are highly desirable in emerging countries like Malaysia particularly. Or Greece for that matter. And what we're able to offer there, is both. That we can provide a system that will give them high-speed Internet access and tone quality voice capability at a--with an affordable system, and so far they think that's a very good idea. In the U.S., of course, people already have voice systems, you know, you don't--they don't need a new voice system, and in many cases, they have some sort of high-speed Internet access, particularly in campus environments, so I think it will be--it will trail a little bit in the U.S. because of those reasons, but there are probably other reasons as well that we don't have time to discuss.

Thank you.

You're welcome.

Our next question will come from Richard , with .

Hi, good afternoon.

Hi.

Hello.

Hi, could--Phil, could you maybe talk about the other--the opportunities for the other JTRS clusters, the timing of those, and sort of the potential of those?

Okay. We are looking at--the next one up on the list, if the government sticks to its schedule, is so-called Cluster 2. Cluster 2 is for hand-held radios, multi-mode, multi-capability hand-held radios. On that one, we're looking at getting that prime. It's sized at about 2 billion dollars in the current government budgeting scheme. We think that award, again, if they stay on their schedule, probably may be as much as a year away, but not much more than that. So let's call it an opportunity that probably will come about within the next year.

The third cluster is the Maritime or Ship Cluster. We may or may not go after that prime, depending on how the--how it's structured. We do provide radio equipment for the--for ships already, and that cluster is sized in the 1 ½ to 2 billion dollar ragne, and that probably is aobut a year and a half away. And then looking at the last cluster, which may be as much as two years away, but not much more than that, that is for a fixed aircraft. That's for a fixed-wing aircraft, and that will probably be at least a billion dollars in size, and if we go after that one, it definitely would be as a teammate.

That is not Harris' strong point, as many of you know that is Rockwell 's strong point for fixed-wing aircraft radios. So those are the four clusters, as the government sees them now. It's now underway, Cluster 1 is done. Cluster 1, by the way, which we are on, provides radios for vehicles and for helicopters. It satisfies those two needs. The next one, again, is hand-helds for soldiers, the next one is for ships, nad the final one is for fixed-wind aircraft.

Great. And, Bryan, it looks like you sold about 15 million dollars of stock this quarter. Are there any plans to change the run rate of those stock sales over the next few quarters?

Yes, it's going to drop dramatically. For one reason, we don't have that level of stock. We sold 60 million dollars' worth of stock in fiscal 2002. Our current plan is probably something more like 20 million for the year, and that's kind of--that is our current plan. I'm thinking--

Okay, thank you.

Our next question will come from Larry Harris with .

Yes, thank you, and good afternoon.

Hi Larry.

Hi Larry.

Hi Larry.

Hi. Congratulations on the great cash-flow performance this quarter. The Studio Systems Integration market in the broadcast area, we haven't heard much about that in recent months. The pickup that you envisioned, is that related to the digital TV transition, or just that with a stronger ad market, the broadcasters will be more apt to spend money in that area?

Well, it's related to both, Larry, and you put your finger right on it. First of all, those are postponeable purchases because, again, the broadcasters do not have to have all of their equipment involved in their studios for the digital era until, you know, much later. They can postpone that for another year or two, and at the maximum case, three years.

They have to be broadcasting but they don't have to have all the local programming in place yet. And it's when they have to have everything local digital as well that the opportunity is increased for our systems of studio product line. They have held that down even those that wanted to go ahead, they've held it down because of their capital shortfalls because of the advertising revenue downturn over the past year.

So, we expect a pick-up, first of all, from time, they've got to do it sometime, but also, they are going to do it when they've got the capital resources that are available and higher advertising revenues will allow that. We are also, obviously, getting more interest for a combination of the two, that is the automation capability that allows them to run the multiple station entities that have come about as a result of consolidation. And as they go to their multiple station and automation entities, they also, you know, accelerate their activity into the system and studio product side as well.

Right. Great. On the issue, if I may raise it, of succession planning, back at the time of the analyst meeting it was indicated there might be some comments on that in the August time frame. I guess we're almost in August. Do you think we might see an announcement or some commentary on that next month?

We might, Larry, in the, you know, August, September. We could. Again, you know, I'm getting a little bit ahead of the full board because this is, as you know, a very important decision for the board of directors. I will repeat that we are actively working to make sure that we have a very good answer for succession planning and for those of you who don't know, who are on the call, we have mandatory retirement in Harris at age 65, and I am only one year and one month away from 65. So we need to start providing an answer for that question, so that no one worries about what's going to happen to Harris when I do decide to retire. But it could be we could have an announcement in the next couple of months, or we may not, it depends on the board.

Understood. Alright. Well, thank you.

Your welcome.

We will now hear from Jim McIlree with CE Unterberg, Towbin.

Thank you. Bryan, the lower level of stock sales next year, is that going to lead to a dramatic change in the non-operating income level also?

No. Big reason, Jim, is in the current, in the past fiscal year, 2002, we spent 23 million dollars on marketing and technology projects and the expectation is that number will drop to about 3. So that's a $20 million difference right there. Second big shift from year to year, is last year, and we pursue intellectual property, we try to pursue royalties for intellectual property portfolio that we have. Last year and the year before, we've spent significant amounts of money and we're looking to reap some of those benefits, modest, in this current fiscal year, 2003 and that should be a swing of about $10 million in itself. So the non-operating income should fall a bit from the $40 million level that we had in 2002. 10 of that, of course was the GE sale, which we pulled out of our numbers anyhow and maybe it'll fall another $4 million or $5 million in that level, from the 30, all right? So 25 million.

All right. And Phil, you mentioned 5 large contracts that you're going after in the government business, , , , , ?

Yes.

Do you need to win one or more of those in order to hit the 9 to 10 per cent revenue growth in government in fiscal 03?

No, we do not. But I sure hope we win one or more of those. No, we do not. No, the programs that we have one already and the follow on work from programs won, obviously, you know, years ago, will support the level of business that we are currently forecasting.

Our hope, Jim, and I don't think it's a surprise to anybody, that if our win rate continues the way it is, and if we are able to pull in something like and we'll be back with an advisory to everyone that things are going to go better in the government business than we had forecast at this point.

But that would be like a fiscal 04?

And maybe a fiscal 03.

I see.

Because those are pretty early.

Gotcha.

Both and are going to be awarded here within the next 60 days. And they both have very good start ups and I -- if we win both of those contracts, you're going to hear from me pretty quickly.

Okay.

And so is the division.

Unless the Board makes their decision first.

Right, right.

Just a couple of others. as a per cent of the RF Comm revenue, is that a predominant amount now, or is it -- or not?

Yes, I think it's by far the largest share and including the fact that the is actually the basis for the program.

All right.

As we ramp that thing up this year. You could call that related as well.

Okay, and lastly, on broadcast, did you have any special promotions in order to get the orders that you spoke about? I know, was it a year ago, 18 months ago, you guys had, like a 2 for 1 special, did you repeat that?

No.

We had no special promotions.

Okay, beautiful. Thank you very much.

Thank you Jim.

Thanks Jim.

We'll now hear from Walkoviate Securities', Mark Roberts

Thank you, good afternoon.

Hi, Mark.

Hi, Mark.

On -- most of my questions have been answered, but just briefly, Phil, could you talk about some of the strategic investments that you still have in your portfolio that, in the past, have been pretty successful spin-outs and kind of what areas those are in, you know, that we could be watching for in the future?

Yes, we could. We have -- the one that we're most optimistic on is a company called . still is private and it is a fingerprint reader and identifier. The product is being designed into some very exciting applications. The company is doing very well at designing itself in. We think we've got the best fingerprint reading technology in the world, or we thing has the best fingerprint reading technology in the world.

In a more normal world, you know, they probably would have had a public offering, you know, by now, but clearly in this environment they have not and probably won't any time soon. They have adequate funding so there are no issues with the company about its funding or its burn rate.

Second company is one that is in existence . is a company that provides a messaging and tracking capability for the trucking industry and has an incredibly large number of customers already out there, Bryan, I think the number is over 50,000 are currently equipped with the equipment. That company did run into a cash flow problem over the past year, did declare Chapter 11. We, all of the owners got together and have prepared, with the bankruptcy judge, a plan to come out of bankruptcy, and we believe that we will be coming out of bankruptcy here, within the next month or two, and they have a line of customers who are just waiting for them to come out, so we feel pretty good about coming out as a successful entity.

The other outside entity that we currently own a piece of is LiveTV. Those of you who have flown JetBlue and seen the live television that is the seatback of all the JetBlue aircraft will understand how well that application is going, JetBlue credits the live TV capability of this airplane for making it one of the only, I think, two profitable airlines in the country. So, they are very happy with it, as are other airlines. The business has a new order for frontier airlines to start outfitting their aircraft as well. We own 49% of LiveTV, or in the high 40s with the majority piece being in the low 50s, being owned by Palace, of France. We expect that entity is going to continue to prosper and that you know, we will either retain that ownership, or cash out in some way, as you always do with these kind of ventures. But, it's going very well.

Those are the three major ones. The other ones are kind of minor. You know, we still own stock in Airnet Computer. We have about 3.8 million shares of Airnet and their stock price remains around the dollar range, our cost basis so it's currently its sitting profitably on our books. Airnet is doing an amazing job of surviving during probably, you know, the worst environment that one could survive as a base station building.

They are a low cost, software base station, which is compatible with virtually all of the major cellular systems. It's holding them together. They're feeling pretty good and we are optimistic although we are not doing anything about it. We are optimistic that that company is now going to survive and with any upturn in the cellular arena, particularly international, they're going to prosper as well. So those are the primary ones.

OK. Thank you.

You're welcome.

Thank you, Miss Padgett, we are currently at the one hour mark and we still have a couple more questions in the queue.

OK. We'll take those two questions then.

OK. We'll go next to Kevin with Wells Fargo Securities.

Hi guys. Good job on the quarter.

Thank you.

Phil, could you just detail some of the major government contracts that you are working on now and how long you think you'll be able to keep them and whether or not you think they're falling off the next year or so?

First of all, the contract that we are on now, the major ones are growing, not declining. We have a whole series of contracts for satellite terminals. That's probably the biggest single piece. The satellite terminals range from the very large fixed terminals used by the military to the mobile ones all the way to the portable ones which are suitcase versions that they can set up in a mobile battlefield environment. And now the range of programs in there is significant, it's multiple programs, and it probably adds up to, I don't know, Pam, maybe you can help me a bit, 100 million dollars' worth of business a year in those terminal programs, or more?

More.

More than that, and they are growing, not shrinking. The classified area, which obviously, I never talk about, and we can't discuss, all I can tell you about the classified area, and given the environment, everybody will understand this, the offers--the work that we have, the contracts that we have, and the opportunities that we are pursuing are all growing in the classified area. And that is a very important piece of business for Harris.

Terminals for satellites, or antennas for satellites, an area that we maintain a leadership; good activity there. We continue to do work for the military in the weather area. We continue to have an ongoing activity with the FAA for our original Voice Switching and Control System program, which is the telephone system used by air traffic controllers, and we continue to have some major business on platforms, meaning we're on the F-22 program. That work continues to grow; this year we're doing the first production contracts, the first fixed aircraft, which are production orders for the F-22. We continue to have growing activity on the Comanche program as it continues to work its way toward production, although it is not in production yet.

We continue to have growing work on the F-18 program. As we add equipment to the F-18 program, and finally, probably--hopefully, long run, the biggest of all, the fighter program, which we just won this year, the is definitely accelerating on that, and even in the prototype phase, we expect that program will be a couple hundred million dollars for Harris, even in the prototype activity. So most of the things we have are solid, and are either level or growing, or they're new, and definitely in the growth phase, so pretty good range of programs for the business.

Could you give me a rough idea on how many commercial television stations have made the digital conversion, at least in some degree?

Yes, I think we can give you that number. Pam, you had some data on that, can you get at that?

Yeah. There is about--depending on how you count it, what--under what license they're operating, there's 483 stations that are out there operating on--under some sort of license, and we estimate that about 840 stations have ordered some level of equipment.

Okay, thanks a lot guys.

You're welcome.

Thank you.

There was one other question? operator: Thank you. And we'll go next to with .

Hi there. I'm just wondering if you could comment a little bit on point to multi-point, you know you mentioned some signs of ramping there. What could point to multi-point represent as a portion of overall microwave revenues in '03? And then secondly, on the U.S. side, any signs of continued market-share gains as some of your competitors de-emphasize their focus in that area? Thanks

Okay, in terms--the first part of the question, on point to multi point, and these are of the--primarily the international opportunities that we're talking about. Those international opportunities, we believe, in the current year, could represent somewhere around 30 to 40 million dollars of business for us, and if we are able to book other contracts, could represent even more than that, of course.

But just on the ones that we are working on, we believe we can get to that level of business. So that would represent 10, 15 percent of total year sales, assuming that our, kind of, what we hope if conservative and what a lot of people may think is optimistic, outlook for the business, which is, as we said, about 70 million a quarter here, early on, and maybe wrapping up a little in 2003. So, let's call it a $300 million business. At the moment we are looking at 30 to 40 or 50 million dollars from point-to-multi-point, internationally.

Second part of the question, I'm sorry, was US?

Yeah, just on the evidence of market share gains as some of your competitors de-emphasize their focus in that area?

I don't think anybody is de-emphasized the US in microwave, you're referring to?

Yes.

In microwave in general, we are holding on to our market share in the US, and if anything growing it. That doesn't mean other people haven't tried, but let's say that, you know, the quality of the Harris product, the longstanding relationship, the integrity of their cellular networks and the importance of that, has led to Harris wins when somebody comes in to try to compete with us. We also try to stay competitive on price and we, although we do get a premium for our price, we continue to look at our cost and are priced just as we should. So, I don't think it's, anybody has not tried, but thus far, our success rate has been very good in retaining our US business.

Thank you.

Your welcome.

Thank you and with no further questions, I'll turn things back over to Pamela Padgett.

OK. And I'd like to thank everyone for joining us today and please let me know if I can be of further help.

And this does conclude today's teleconference. Thank you all for your participation and have a great day.