L3Harris Technologies Inc (LHX) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to Harris Corporation's second quarter fiscal 2003 earnings release conference call.

This call is being recorded.

Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations.

Thank you. Hello, everyone, and welcome to Harris Corporation's second quarter fiscal 2003 conference call. I'm Pamela Padgett, Vice President of Investor Relations, and with me on the call today is Mr. Phillip Farmer, our Chairman and CEO, and Mr. Bryan Roub, our Chief Financial Officer.

Before we get started, I'd 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 the call to you.

Okay. Thank you, Pam. And what I'll do today is, as I've done in the past, discuss first of all the results for the total company for our second quarter, then comment on each of the business segments for the second quarter as well, finally comment on the outlook for the remainder of our fiscal year 2003, which ends in June, and then turn it over to you for the most useful part of our conference, which is the questions and answers. And Bryan, Pam, and I will be glad to take any questions from you.

First of all, for the total company for the second quarter, we believe we had an excellent quarter, both in regard to financial results and in taking specific actions to help improve results in future quarters. Sales were up 16% over last year's quarter. Our net income at the GAAP level was even with last year, 25 cents per share. But most significantly, our GAAP operating income from the five segments was up 19% over last year's quarter, giving great quality to our earnings for the quarter.

The two government-related segments continued to excel in every way. Broadcast showed some very good recovery from its disappointing first quarter, and in microwave, we saw evidence that the worst of the telecom troubles may be behind us. While in our smallest business, network support, we continued to lag in that business, waiting for an upturn in spending from the Regional Bell Operating Companies. I will have more detailed comments on each of the segments later.

Overall, net interest expense, our headquarters expense, and our non-operating income all came in as expected. Cost reduction actions were carried out as we have previously announced in microwave business, and were expensed at slightly above $8 million in the quarter. The actions have been completed.

Backlog increased for the company, as new orders were higher than sales. International orders improved significantly in both the microwave and the broadcast segments. International sales also stopped their slide and rebounded from 19% of sales in our first quarter to 22% of sales in the second quarter, and that on a higher sales level as well.

Before discussing the individual segments, let me turn to Bryan Roub for his comments regarding the continued good performance of cash flow and for other general comments regarding balance sheet items - Bryan.

Thanks, Phil. The cash flow from operations in the second quarter was really strong, even stronger than the first quarter was this year. We generated 38 million in cash in the quarter from operations, which brought us to a total of 63 million for the first half of the year. So we're off to a flying start.

Results in all of our businesses in the quarter were good, but the performance in particularly our government communications, broadcast, and RF communications businesses is simply stellar. They're really doing a great job. Equally important is the absolute performance, generation of cash flow, is the improvement in our relative performance -- basically, our ratios.

Days sales outstanding declined 13% to 65 days in the quarter, and inventory turns increased 17% to 6.8 turns from first quarter levels. We do have a ways to go. Those are not world class ratios, but we continue to monitor these. We're working on them. And I think most important to me is, where we need to have improvement made, we have solutions underway.

Although the amount was modest, I want to point out one thing we did in the quarter which we hadn't done for some time -- we bought back some Harris shares in the open market. We bought 100,000 shares at $24.40 when the price dropped in December to a point we felt we couldn't pass up the opportunity to buy shares at a price we felt was awfully cheap.

As a result of the good performance, cash and cash equivalents at the end of the quarter totaled $380 million. That's up from $363 million at the end of the first quarter. Net debt outstanding, which is that (ph) amount, cash and cash equivalents less short and long term debt, has dropped to $35 million. We're net borrowed 35 million, basically we're about flat, and that's down about 50 million from where we started the beginning of the fiscal year. Total debt was 26% (ph) of total capital at the end of the quarter.

Capital expenditures in the quarter totaled $20 million. That's about double the second quarter last year, and principally reflect an increase in the government communications programs investments, particularly the network operating center for the FTI win, which we won earlier this year. That in itself is the difference.

For the full fiscal year, I believe the ranges for spending and depreciation, which we communicate on the last call, 70 million to 75 million of spending and 55 million to 60 million for depreciation, remain good ranges.

Finally, for the full year, my confidence that cash flow from operations will exceed 100 million has increased a great deal for two reasons. Obviously the first half performance, we're more than halfway there, and our second half looks pretty robust, but also just the attention internally on asset management getting a lot of help from the operating managers gives me even more confidence.

Phil, back to you.

Okay. I'm going to talk about the individual segments, and I'll talk first about the telecom-related businesses. Those are the two, obviously, with the weakest markets. And we have some good news to report there.

First, microwave. We had a very encouraging quarter in microwave. Sales at 75 million were up 4% from last year's second quarter, and we had a very strong bounce-back from the first quarter of this year, when we hit a low of 56 million and caused a great deal of concern for many of you out there. The supplier problems that we talked about last quarter were solved, and we are shipping products that were a problem for us at the end of last quarter. New orders were up 12% over last year and up a very strong 22% sequentially over the first quarter. The cost reduction actions, which cost 8.3 million, were completed, as I mentioned earlier.

We are up and operating at the new consolidated U.S. engineering facility in Raleigh-Durham, North Carolina, and we have ceased engineering operations and are in the process of closing down the facilities in Seattle, Washington, in Torrance, California, and completing the engineering move out of Redwood Shores, California.

Most encouraging, the operating profit of the division was at a break-even level except for the cost reduction actions, and the primary benefit of those cost reduction actions will occur in future quarters and were not with us in the second quarter.

North American sales continue to be very strong, reaching about 50% of total sales, primarily serving the cellular and PCS backhall applications area, along with a steady private network market. International sales rebounded from the very low first quarter results, and point-to-multipoint, our BWA (ph) products, have started to ramp up as well. In terms of areas of strength, Africa, Asia, and eastern Europe were all strong areas for our microwave business, while South America remains very weak, and for us, China was weak during the quarter.

The overall outlook for the business has definitely improved. Sales levels of $70 million per quarter or better appear realistic in the near term, and at that level, with the new cost structure, the business should be break even or better. As the market recovers, the leverage for profitable performance has been greatly enhanced. Since the quarter ended we've received a $17 million order, fully financed, from Nigeria to install a point-to-multipoint system with voice and data capability. We have worked with the customer, Oduwa, for several months to develop a solid business plan which we believe has a great chance of success. The contract with Oduwa, if successful, could double or triple in size in future quarters or years.

Now turning to network support. Network support is, of course, our smallest business, and when we had another weak quarter there. We lost $2.5 million as sales declined to $12.1 million. The radical cost reductions over the past two years, of course, minimized that loss. Our head count is actually down from 481 to 210, a 56% reduction over that period, while expenses are also down 56%, from 16 million to 7 million on a quarterly basis.

Our major customers, the Regional Bell Operating Companies, have continued their tight cost controls and are still holding down purchases of tools and test equipment to levels equal to half of normal rates. We remain confident that they will increase those purchases at some point, but so far, they have not. Unfortunately, our costs are about as low as they can go and still continue to operate as a business. We simply need more sales, and fortunately, we do have opportunities that we believe can help, hopefully in the near term rather than the long term. We have new products in field test, some that have completed field test and are ready to go.

On a positive note, or at least what we hope is a positive note, the FCC appears ready to modify some of the onerous regulations that emanated from the 1996 Telecom Act, particularly the provisions that allowed third party use of Bell infrastructure at very low cost. If the FCC follows through on those actions, as they have hinted, there could be a very positive effect on capital spending by the Bell companies, and if so, we believe we would benefit. Meanwhile, we're just hanging on in the business.

Turning now to broadcast, we had an excellent comeback from that disappointing first quarter. Sales were up 19% over last year's quarter and a very strong 39% over the first quarter. Operating income recovered from quarter one's $2 million profit, rising to $6 million in the second quarter. But that is well below last year's $9.7 million. The decrease in profitability from last year is primarily due to shifts in product mix to non-digital products that have lower margins for us.

International orders, as we predicted, came back very strongly, led by a $65 million contract to install new AM radio stations throughout the country of Romania and to link those stations into a network controlled by Harris's NetBoss network management system. We also received a very large systems order for high-power AM radios from China, and we received some very good automation orders from Germany and from Asia.

Digital television remained on track with market share holding above 60%. The small market broadcasters, as we reported earlier, are still ordering minimal capability systems and will likely continue to do so at some level until the FCC levies a full power requirement on them, which we believe they will certainly have to do within the next year.

Digital TV products are the division's highest profit products, which is wonderful news for the future. Dollar volume and dollars of profit will increase significantly when those stations upgrade to full power to more expensive transmitters and encoders, which they must do.

Meanwhile, I'm happy to report also that digital radio is gaining traction, with significant sales anticipated in the second half of this fiscal year. Profit margins on digital radio are similar to digital TV margins for Harris, and that is very good news.

The outlook for our final two quarters, quarter 3 and quarter 4 for broadcast is good, with sales anticipated to be about last year's levels for both the second half and also for the total year as well. Operating income in the second half is expected to be about 10% of sales or better, as it was last year. But because of the weak income in quarters 1 and 2, the total year profit will be below last year's level, as we will be unable to make up for that shortfall entirely. We're confident that a second half profit performance will be better than the first half because of the backlog that we are working on, consisting of new digital radio sales, some excellent projects in systems in the Studios product line, and additional sales and profit growth in automation products.

We also expect to see a slightly higher percentage of large digital TV transmitters as waivers (ph) begin to expire and as some upgrades start to occur. In the long term, the outlook remains extremely bright, as Harris continues to strengthen its number one position in the broadcast equipment market in both television and in radio.

Turning now to our RF communications radio division -- we're running out of adjectives here. We had another outstanding quarter. Sales were up about 18% over last year, and also 18% over our very strong first quarter. Operating income was up 68% from last year, and operating income hit a remarkable 25% of sales for the quarter. Equally remarkable, the return on capital employed for the business was in excess of 125% for the quarter. And all of this growth and performance is organic. These are absolutely superb financial performance statistics for a government products business.

The Falcon II radio product line is, without a doubt, the undisputed choice for the war on terrorism for U.S. forces and for our international allies. The sales mix for the quarter was 47% in U.S. sales and 53% internationally. A little higher domestic orders than usual, as the U.S. government forces needed more radios for upcoming activities.

The sales increase obviously was driven by the superiority of the Falcon II product line, while the profit increase is being driven by continuing productivity improvements in manufacturing and by volume impact on this heavily software-intensive product line. The new orders were also strong. They were higher than sales, and with a good mix of both international and domestic.

In terms of the two major programs, the $200 million-plus Bowman program remains on schedule, and our first production deliveries are expected in the March time frame. The Cluster 1 Joint Tactical Radio System program for the U.S. military also continues on schedule, and it is currently in its R&D phase. Orders from some new customers in the Philippines and in Algeria will add to the growing list of countries that have now adopted the Falcon II radio.

But as good as that performance in RF communications radio was, the results in our government communications systems division may be even more encouraging. Sales growth was 24% over last year's quarter, and all of this growth is organic. The operating income grew 21%. Growth was across all product lines in this very large division, led by activities in the classified area. We had a very healthy mix of business. No single program or contract came close to 10% of sales.

New orders also remain strong. They were higher than sales, and our backlog grew further. Cash flow was also very strong, well above operating income, and return on capital employed in this business, which is a very labor-intensive business, was a robust plus 30% in terms of return on capital employed. We're obviously going to have to revise our growth objectives for the year again. We're now quite confident that sales and profit are going to grow above 15% for the total year compared to last year.

The business characteristics remain very comfortable within the mix that we know how to manage; about 60% of our contracts are cost-reimbursable, about 40% are fixed price. We have about 40% of our business directly with the U.S. government, about 60% with primes which serve the U.S. government. Our new programs that we won within the past year, the very large ones, are all on track and off to very good starts, including the Joint Strike Fighter, the FTI program with the Federal Aviation Agency, our Mass Tiger (ph) program with the U.S. Census Bureau, and our support programs in our Harris Technical Support Services business.

Ongoing programs continue to perform well, as are the new ones. The F-22 program, the Comanche program, the F-18 program, the Future Imagery Architecture satellite program and others are all performing as planned and continuing to grow.

We also had a very significant event occur during the quarter in that we're building a product which we believe is going to be a very hot product for U.S. government markets. We've developed a capability which we call SecNet, which is essentially a printed circuit board that, when inserted into PCs or laptops, enables the PC or the laptop to have type 1 secure wireless network communications at speeds of 12 megabits or higher. The significant thing that occurred during the quarter is this capability was certified by the National Security Agency for use by the U.S. government forces. It is the only product that is so certified. We expect this product to achieve annual sales levels of $10 million or more within a year or so.

We also had two major programs that we talked about on our last call that were nearing award. Both of those are still pending. First, the NEXCOM program with the FAA. The NEXCOM program is the communications network and ground systems for the next generation digital radio traffic for air traffic control. We expect that to be awarded literally any day. There will be two awards, and we hope that Harris will be one of the companies that receives one of those.

The other major program was the advanced EHF terminal program. These are SATCOM terminals that go aboard all Navy ships. It looks as if the award of that program will be in April now. We had expected it in December or January. There will also be two winners for that program most likely, and again, we hope that Harris will be one of those winners.

We remain very active in Homeland Security, but in the Homeland Security area, most programs are still in the formative stage. We're actively involved, but we have nothing to report at this time that would be a significant win, as the government is still in the planning phase.

I'm now looking at the outlook for the full year for our fiscal '03, which ends in June. Overall, we feel much better about the potential for this year. Net income is expected to yield earnings per share in the 130 to 140 range, and if expenses for the second quarter cost reduction actions in microwave are excluded, EPS is expected to be at the top end of that range. We have included in those estimates a lower total year operating income for the broadcast division, as I commented on earlier, based on continued purchases of minimally compliant configurations of digital TV equipment. Of course, we expect to recover those sales and earnings as broadcasters upgrade to full power equipment in FY '04 and beyond, which of course they must do.

There are some definite signs of improvement for the microwave business, at least for Harris. We are hopeful that sales of 70 million or better per quarter is achievable in the near term, and we believe it is, and if so, the recent cost reductions will help ensure a break-even or profitable business. We, of course, remain very comfortable with the strong outlook for the two government-related segments.

And with that, let me turn the session over to you. Bryan, Pam, and I are available, and we'll be able to entertain your questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and take as many questions as time permits. Once again, please press star 1 if you have a question.

We'll pause for just a moment to give everyone an opportunity to signal for questions.

Our first question will come from Rich Volera (ph) of Needham & Company.

Thank you. Good afternoon, and congratulations on a very nice turnaround from last quarter.

Well, thank you.

A few questions on broadcast, if I could. Last quarter you talked about the ASPs on the digital transmitters, and you mentioned they improved somewhat this quarter. Could you quantify that a little better, how much those ASPs on the digital transmitters increased quarter over quarter?

Yeah, last quarter, they were 209,000, and this quarter, they were right about 300,000.

Okay. And as a percentage of your total business, what would the digital -- can you give us what the digital transmitters were for this quarter -- I mean, of the broadcast business? I'm sorry.

It was around 31% of the business. And of course, we expect that to be higher in the future when they start buying higher-priced equipment.

And you mentioned that you expected the digital radio to start coming on sort of in the second half of this fiscal year, so if you had to look out 12 months from now at your total percentage of digital products, which appear to be your highest-margin products, would you expect it to be, I assume, higher than it is now, higher than that 30%?

Rich, yeah, I'm going to avoid specific numbers simply because we don't have them and we haven't gotten our next year's plans ready for communication externally yet, but the answer is definitely yes. We expect next year to have a higher percentage of digital products, we expect to have a higher percentage of digital TV products as the upgrades for full power and as redundancy and as the final buys begin to take place in PBS. We also expect to have digital radio kicking in as well.

So we expect ultimately -- and I can't pick the month or the quarter, but clearly the digital products are going to be larger than all the other products, you know, is our hope at some point here.

And if you could give us a feeling for your conviction on or your thoughts on when those digital upgrades sort of have to start happening, when do you think the mandated full power requirements, when would you expect to see those start kicking in?

Rich, originally -- let me point out very clearly. Obviously this is not under our control; it's under the control of the FCC to one extent. Originally -- early on, the FCC had an interim milestone guideline that they had put in place for December 31st, 2004, that everyone had to be at full power by then. That was an interim guideline, and is not currently a guideline. Clearly they are going to put something like that in place, probably over the next year. I don't know whether they will pick that same one, December 31st, 2004. I would expect -- you know, I would be shocked if it were way beyond that. You know, maybe it could be a half a year or a year later than that, but certainly not any more than that, assuming that they remain committed, which they have, to the 2006 (ph) completion of installation of the infrastructure.

So it's going to have to happen, and I expect over the next year we're going to see that guideline put in place, and I expect it will be somewhere between December 31st, 2004 and, let's say, kind of outside December 31st, 2005, and then, of course, the broadcasters have to react ahead of that, you know, when the requirement is placed upon them.

Great. And one final question. Just on the government communications, great year over year revenue growth. Pretty solid operating margins, down a bit, I guess, sequentially. Can you just give us a feel for where you would expect the operating margins for that business to trend for the balance of the year?

Yes. We clearly kind of have a bottom margin that internally we put on the guys, which is we expect to see at least a 9% operating profit or better. Clearly they are meeting our expectations there, and I certainly don't expect them to fall short of it at any point. So that's pretty good performance, given our mix of cost reimbursable and fixed price business. Over time, as the business moves more to production phases of some of the programs, such as those large aircraft programs and satellite programs, then we would expect the business to earn slightly higher overall margins. And at that point, we would begin to look for 10% or better margins. But right now, they're doing pretty well, so we're kind of pleased where we are at this point.

Great. That's it. Thank you.

You're welcome.

Our next question will come from Steven Murphy (ph) of CIBC World Markets.

Hi. Good afternoon.

Hi, Steve.

Hi. In microwave, on the last conference call, you had kind of talked about $65 million as being the targeted break-even revenue run rate. Is that still the case, or with the more bullish outlook, have you kind of upwardly adjusted that toward 70 (ph)?

Well, we'd still like for it to be there. You know, some of that depends on mix of products, obviously, but let's just say that we're targeting -- 65 million is where we'd like it to be, but between 65 and 70 -- if we get 70 million of sales, we ought to be break-even or profitable. And how profitable, you know, depends upon the mix of products. So somewhere in that range, depending on where the sales are coming from and what the product mix is.

We're obviously very committed to driving those costs down, you know, to very low levels, you know, for this business, and have made some great progress in doing so. So somewhere between 65 and 70, with our objective still 65. And if we get 70 million of sales next quarter, we would expect to be break even or better.

Okay, great. The -- in terms of the international orders on the broadcast side, obviously they're very strong, and some of those, it sounds like, were things that got pushed out from the first quarter. Can you remind us how much of your broadcast business is international overall, and kind of what's the outlook there second half versus first half?

It's about 20%.

20% international, looking backwards at sales. We would, over time, expect that to be larger. Right now the domestic business dominates because of the digital TV conversion, and hopefully digital radio conversion. But as the whole rest of the world moves toward digital, you know, clearly in the future, we're going to see some significant growth out there. Right now, most of the activity internationally is analog, high power radio, the new radio network in Romania. We have some additional analog radio business in the rest of the world as well.

Historically, when it cycles, you'd have an AM upgrade cycle that we're going through right now. In the future, that will be different because the digital will be (ph) ...

It kind of goes with technology. The technology clearly is going digital faster in the U.S. than it is anywhere else in the world, and ultimately the world will have to catch up because all the products are going to be digital -- radios and televisions.

Got it. Okay, great. One last detail thing. On the balance sheet, is -- the advanced payment account was up pretty significantly, by $18 million. What was that for?

Those are advance payments on the international orders of broadcast in particular, and RF communications.

Great. Thanks very much.

Our next question will come from David Feinberg (ph) of Morgan Stanley.

Hi, gentlemen. One quick question -- on the $8.3 million charge, can you talk about how that was spread over the income statement? Was that all within the engineering line?

Yes, it is.

Okay.

Yes, it is.

And then, second of all, with regard to microwave business and the $70 million level that you're hopeful for next quarter, is there any color you can put around that as far as what gives you confidence and that you can reach those levels, or what contracts pending you're hoping to recognize revenue on?

Well, we obviously are into the third quarter already, and we feel pretty good about 70 million for this quarter based upon orders that we have, backlog we're working off, and specific pipeline opportunities. I did mention on the last call that we had gotten far more rigorous in the microwave business, and that, because of the difficulties in the market, and particularly the international market, you know, revolves around those who have money, not just those who want to buy things. And we have really concentrated on opportunities where there is funding, where the projects are real, not just wished for. And we have a number of those that are now in our backlog and are coming in here in this quarter. So we feel pretty good about this quarter.

One follow-up. Is your outlook based on a similar geographic mix with significant strength in North America going forward in the next two quarters?

Yes, but also, you know, good international. We were about 50/50 this quarter, and so we're kind of looking at similar thing for the current quarter as well.

Thank you.

Moving on to Ted Willer (ph) at Buckingham Research.

Hi. Good afternoon. Great quarter. On the broadcast guidance, you're sort of suggesting revenues in the second half would be up a little from the quarter that we just saw, and yet you're suggesting margins could go to 10%. That's quite a jump.

Yes.

How do we get there?

Okay. Ted, a few things. One, the systems and Studios product line is a project product line, because you upgrade a studio or you put in -- or you build a large system from the ground up for a high power radio system internationally, for example. The projects that we have in our backlog right now, we have planned, we know what the margins are going to be. They're going to be better than anything we had in the first half, so that's one that we know about. We're going to have a little more automation volume sales, and the margins in our automation products are very good. That's a software product.

We also are going to improve a bit in the digital TV area. We believe that the sales will be a little bit better in terms of the average sales price, so we feel pretty good about that. We also are going to have a little less expenses in the second half. We've been working very hard in the first half to get our European operations rationalized. For example, our Hirschman (ph) acquisition that was done well over a year ago, we are now moving -- consolidating the manufacturing operations in Europe all into England, closing down our manufacturing operations in Austria and elsewhere. So we've been spending money to get all of that rationalized as well. We're pretty well through that process now. So we're going to get some help from cost as well as from higher margin projects that we have in the backlog now.

Good. Thanks. And one other thing. The comment you made on a Nigerian point-to-multipoint program with a solid business model, and you could perhaps double or triple that. Could you give us a handle on the number of subscribers that, you know, is expected to -- for that 17 million to equip or the double or the triple? I just -- could you just give us some sort of color on the business model and the 17 million?

I don't have those numbers in front of me. Let us follow up with you on that, but I will add a little more insight into -- Oduwa is a private company, but it is a company that's owned by three of the eastern regions, the westernmost regions of Nigeria. We might call them states if they were in the United States. So it is government-backed, but operates as a private entity. It is extremely well financed.

For example, for the $17 million initial phase of the project, we have a full irrevocable letter of credit for all of that. We have been working with them for -- the team could tell you. I know it's at least six months long to help them put together their model. What they're going to bring is, for the first time to businesses, they're going to bring both voice and data traffic -- data traffic means Internet, as well as video conferencing capability.

But as you know, what really pays the bills is voice, so they're going to have voice. And our BWA products have now been proven to work in that environment. Our projects in Sri Lanka are working and working extremely well. We've had some recent releases in the software which has even enhanced the voice capability further. It is already a toll (ph) quality. They have looked at our product. This was a very careful selection.

Oduwa, as I say, is a very well-financed company in many, many businesses, and they used an outside technical consulting engineering organization to help them make a selection. So this has been a very rigorous process, and this one, we are very hopeful, and -- I won't say confident yet, because it's the first time through, but I have confidence that this one is going to be a business model where the provider actually makes money, which is what we need for this whole BWA area. Pam can give you further numbers later - Pam, if you'll follow up with Ted.

Great. Thanks. Great quarter.

Our next question comes from Larry Harris (ph) of HG Wainwright.

Thank you. With respect to the strength that you're seeing in the international microwave area, do you think that the market is expanding, or it the fact that you're taking share from other suppliers?

Larry, I cannot say that the market is expanding. You know, I would like to think that it is. We don't have any evidence of that. I think it's simply that we are doing a better job of concentrating on real opportunities. And the real opportunities that we are seeing for us, again, are Asia, Africa, eastern Europe. And, you know, we would love to tell you that it's rebounding in South America, but so far no evidence that it is.

We think we can do better in China than we are doing. You know, China is not as robust as it used to be, but it's a little better than we are there right now. So I'm hopeful also that we're going to see -- by the time we get another quarterly report out, we'll show a little better performance in China as well. But I think it's the rigor and selective that our international -- that we've put into our international sales activities. And that's what we had hoped to get, and it looks as if it's paying off.

Very good. Very good. And with respect to the U.S. digital transmitter market, there's a deadline for the PBS stations of May 1, 2003. Do you think that most of those stations will make it? Do you think that that will favorably affect results over the next quarter or two, particularly sales of the Diamond product?

Yes, we do, Larry. We think most of them will make it; however, there are a large number of waivers out there. I don't know how many are PBS versus other stations. But the number of waivers right now, Pam, still active is ...

Well, there's waiver extensions now, and there are 258 of those that have been granted -- and this is all commercial -- and there's about 230 that are still pending for the FCC to make a decision on, and 19 were dismissed. .

So we've got 500 or so, you know, still waiver-oriented stations out there that we hope will come about, but I think most of the PBS stations are planning to try to be there by 2003, and the mix within the PBS stations is a little better than the small market commercial stations. But again, you do have a lot of -- you do have some PBS stations that are very small, not as well funded as others, and they probably will come in, you know, as low as they can, just like the other guys, until they get a full power requirement as well.

Yes, thank you. And with respect to the digital radio opportunity, there was an article in the Journal on Friday. How many stations do you think we might see, you know, go on the air in the next - say, by the end of your fiscal year, and do you think you'll be able to maintain your current market share in that area?

Let me start backwards. We expect to maintain our current market share, and we hope to have market share in digital radio, you know, as good or better than our digital TV market share. It remains to be seen, but that is our expectation and our hope.

Over the next few quarters -- let's just say this calendar year, it looks as if there will probably be -- and let me put a range -- 100 to 150 radio stations will be on with IBAC (ph), or will at least have ordered their equipment. And then I think -- you know, I think those are -- let's just say that the early adopters. It remains to be seen whether then that ramps up rapidly from there or if there is a little bit of a pause, you know, gaining experience with that. We just don't know yet, because this is new for the radio broadcasters. But I expect we're going to see 100 to 150 orders within, probably, this calendar year.

Okay. That will be great. All right. Well, thank you very much.

You're welcome.

Moving on to Jim McKelly (ph) of Unterberg Towbin.

Thank you. The $17 million Nigerian point-to-multipoint order, do you expect that to ship this fiscal year?

You know, Jim, I don't know, but I would expect -- well, this fiscal year? I think so, and I would certainly say yes, this calendar year, if not this fiscal year. But yeah, the product is ready to go, hardware and software, so I expect we'll ramp that one up fast. I know that the customer is anxious to get this first phase done very rapidly, because the managing directors and key management people from Oduwa were here in Harris a few months ago, and we had extensive discussions on this. I don't know exactly what the schedule is. Pam, do you know?

I think their plans for installation are in the summer.

So the summer, but that -- our fiscal year ends in June. Let's just say this calendar year, it's going to happen.

Okay. And can you size the digital radio total adjustable market?

I don't think so at this point. We know that there are about 14,000 to 16,000 radio stations in the U.S. The early ones, which are buying equipment, let's just say, for the transmitter alone, are fairly good-sized transmitters. They run up $150,000, $170,000 per station. But as you get to the smaller stations, clearly that number will come down. And I don't know whether it's below 100,000, right at 100,000, or above 100,000. But using a round number of 100,000 -- and it may be below that level, because there may be more small stations than I'm aware of. But in any case, anything that has a multiplier of 14,000 to 16,000 is going to make a pretty good market.

Right. And can you use any of the automation software for the television product for the radios? Is there applicability there?

Oh, I'm sure there is, and particularly in the station management, yeah. Management and moving programming, especially as they go digital. As you know, it gets -- you know, that's where the automation products really pay off as you start moving digital databases around through servers and doing things remotely.

Okay. So thinking about the digital radio upgrade, it sounds like it's similar to DTV, whereas it's not just transmitters, but it's a host of things that you can sell in there.

We think so. And remember, this one is going to be driven by competitive, not by any mandates, so it remains to be seen, you know, how aggressively and how fast the broadcasters really move to digital radio. But we think it's going to be -- you know, we think it's going to be very fast, because competition is a much greater stimulus even than a mandate. When the other stations in town start taking your customers away with their CD-quality programming, you decide to get there in a hurry.

Okay. And Phil, I think you said that you were looking for 15% government sales growth for the year?

At least.

At least?

At least.

And if you just got to the "at least" part of it, that would imply about 10% in the second half, which seems low relative to what you've been doing in the first half.

Yes, it is.

How much of a positive to the "at least" portion should -- you know, is reasonable?

Well, I'll give you a range and, you know, I'll stick with my, you know, 15% or better. 15% to 20%, that range is not out of the question, if things continue as they have in the past. But could there be a slowing? I don't know. But right now, it's pretty aggressive times and pretty good times in the government business.

Okay. And I think this is the last one. If I take the first half of this year in both microwave and broadcast, you know, you had a real weak September but a very strong December. Is it reasonable to think that you just played catch-up in December, or are these numbers -- are these December numbers sustainable going forward?

Jim, I don't think so, and now -- you know, there's a little bit of opinion in here, and forward-looking statements apply here. We think the September quarter was -- you know, was the aberration, and the second quarter is more like it ought to be, and therefore the third and fourth quarters will build off of the second quarter and have no relation to that first quarter. And it remains to be seen, of course, but that's our thinking at the moment.

Okay. And I lied -- there is one more. On the broadcast guidance, can you just go over that again? I was a little confused about what you said.

Okay. I think the sales on the second half of the year are going to be about like they were in the second half of last year. You know, just look at the quarterly numbers for last year's Q3 and Q4, and they'll be close to that. I would like to think that, if they miss that at all, they miss it on the positive side rather than the low side. And last year in the second half of the year, we were earning operating income levels of a little better than 10%. And I think given the projects that we know we have in place, we think we can do that again.

And unfortunately, what that says is that we can't make up for the profit shortfalls that we had in quarters 1 and 2 and achieve a profitability level for the whole year that is equal to what it was last year, although our sales will be about there.

All right. That's terrific. Thank you very much.

You're welcome.

Thanks, Jim.

Moving on to Colin McArdle (ph) of Bear Stearns.

I had one or two follow-up questions at this point, but on the broadcast side, capital broadcasting was an early rollout of digital television, and they are now one of the first purchasers of digital radio. Do you perceive that customer as (inaudible) for low-hanging fruit and are you looking to attack customers who are already - are up the learning curve on digital television with your new digital radio equipment?

I don't know that there's that much relation, but you've got a good point. WRAL in Raleigh is who you're referring to. And yes, they like to be first, and people who are first usually have, you know, some pretty good technical talent, as well as good businessmen at the station. And they really do, so they wanted to be first in radio, as they were in TV.

And if we -- maybe we need to go -- our salespeople need to make the same connection you did, and we'll see if we can't use that same model elsewhere. But I think, in general, you know, radio is probably going to be a little bit different than TV. TV has almost been a forced thing because of the mandate, but you've got a whole different drive among the radio guys, who just have to be so careful that, competitively, they don't get blind-sighted because, as you know, all revenue for radio stations, as well as for TV stations, for that regard, depends on the size of the audience you have out there, and if you and I in our automobile are listening to competitor station, my revenue can get to zero in a hurry unless I get some listeners on my line.

So I think they're going to be driven competitively, and therefore we don't know how fast that drive is going to take place, and what the real important pieces are as far as the decision-makers. TV, they had no choice, they've just got to get there, and some of them are getting there as fast as they can, and others are going to drag their feet as long as they can to hold down capital spending until the last possible moment. I don't think we have that situation in radio.

Given your pretty good visibility into the second half, do you think digital radio could be responsible for as much as 10% or 20% of total broadcasting revenue?

No, that's a little aggressive, Colin, because, you know, these are early adopters and, you know, the size of these things, even 100, 150, 170 units, you're just not going to get enough units to make it that big a portion of the broadcast business. The broadcast business is about $100 million a quarter, so it would take an awful lot of radio stations to get there.

Okay. And then lastly, on the microwave side, could you give us a break down between private networks and cellular providers, and put it in some historical context?

Colin, I do not have those numbers. Pam, can you comment on that, private network business versus cellular/PCS providers in the U.S.?

I don't have it, Colin.

Don't have it here, but we can follow-up with you.

Is it fair to say that essentially all the upside on the microwave business came from cellular as opposed to private network?

I would say that. I'd never use the term "all," but the strength of the business is the cellular PCS capacity expansions and the shift off of lease P1s to microwave or back hall (ph) communication. And our private network business kind of is something that just goes steadily along. So the growth would definitely be driven by the cellular PCS capacity expansions.

Okay, great. Thank you.

You're welcome.

Again, please press star 1 if you have a question.

Moving on to Mark Roberts of Wachovia Securities.

Thank you. Good afternoon.

Hi, Mark.

Most of my questions have been answered. Phil, from a board level standpoint, you haven't really updated where the board is in terms of, I guess, your upcoming retirement here before long.

Okay. Let me do that right now then. We are at the final stages -- final, final stages of determining who will be my successor at Harris, and we will have an announcement on that before much more time passes. And let me phrase that in weeks rather than months. And the reason for that, of course, is, you know, I do turn 65 this year, so we need to have a succession plan that both the board, the company, and our shareholders are comfortable with. So we'll have an announcement very shortly, and resolution is pretty well finalized, and we're working on the final pieces of that right now.

Are you able to talk about whether the new CEO is going to come from the internal management or external to the company?

Mark, I shouldn't comment on that at this point. Why don't we just wait for the announcement because, again, this is -- as I've said many times, is a board decision, not just a management decision. I think, you know, everyone is going to be very satisfied and very pleased, you know, with the resolution. And obviously I'm not going to disappear from the scene on day one, so I'll be here to help make sure that this thing is smoothly done as well.

Okay. And second question. This is a little bit redundant. I know you've gotten a lot of questions on microwave. Can you give us a sense of, in terms of unit volume, how much unit volume was up in microwave, either year over year or sequentially, or in the inverse, could you give us a sense of where ASPs went?

Mark, I do not know what the units are because, you know, microwave has so many different products of varying sizes.

A lot of services too.

Prices -- general comment on prices. We have held our prices. A decision that we made, as painful as this business has been as it's gone down, we have not let our sales prices go down. That may have cost us some sales here and there, and we know it has, but we think that is -- you know, that's a path to disaster, if you start down that.

Fortunately, the strength of the company has allowed us to hold on to our prices, so I would say that our average sales prices are equal to or higher than they have been. And we have -- the division has done a marvelous job of adhering to that direction.

So we continue to sell on quality, services, engineering support, and working with our customers to put in place microwave networks that are the most efficient that they can be, and ultimately, therefore, the lowest cost they can be. And so we keep getting rewarded with business, particularly in the U.S. from the cellular providers because of that. We have not come down on prices.

Okay. And my last question, is the board contemplating a potential change in the dividend policy if tax relief is passed on the double taxation of dividends?

I think every board continues to see that as a very worthwhile discussion, Mark. Let me just tell you what our normal practice is at Harris, and of course, that could change at any time the board wants to change it.

Our normal practice is that we review our dividend policy at our August board meeting, and the reason for doing that as a policy is so that the management team can do the proper research before then so that investment bankers can provide (inaudible) and that we can come to the board with a recommendation, or at least a discussion paper. And clearly we will do that in August.

If the tax laws are modified to make dividends nontaxable to individuals, clearly that will be a major factor in our thinking, but I can't speak at this point for what the board will do in August. But clearly, our board, like lots of other boards -- you know, this is a hot topic of conversation now, and I would say that, you know, we're all looking, you know, with great interest to see what Congress does, because right now, all we have is a proposal from the president. That's all we have. And if Congress were to enact that, as the president has proposed, dividends become a much more attractive way to deliver value to shareholders.

Okay. Thank you very much.

You're welcome.

Thank you.

And we are now approaching our one-minute mark. Would you like to continue with questions, or would you like to conclude the call?

Operator, I think we'll take one more question, and then we'll conclude the call.

Okay. Our last question today will come from Dan Burkuvy (ph) of UBS O'Connor (ph).

Hi. Can you guys hear me?

Yes.

Yes, we can.

Two questions. The first one, you talked in the beginning about RBOC spending coming back if the FCC moves. Is that sort of speculation in reading the papers and stuff, or have the RBOCs actually talked to your salespeople and said that at all?

Yes. Let me say very clearly that it is my opinion. It is speculation. As always, when I express an opinion or speculation, I hope it's an informed one. The Regional Bell Operating Companies have, without question, made it very clear that they are not going to continue to build out network infrastructure if others are allowed to use that network infrastructure for costs they believe are low. So they are not investing heavily in their networks.

Should that requirement go away -- that is, the requirement that they let people use it at a very low cost, they would be much more inclined to invest more money in their networks. And I think I can say that with a lot of confidence. If they were to do so, that will be good for Harris in several ways, and certainly in our network support business. So that was my comment.

Have they given any further color or clarity to your salespeople than that?

No.

Okay. Second unrelated question -- you bought back some stock in the quarter, and I was just wondering how you weighed the stock buyback versus potentially buying back debt.

Bryan, you want to comment on that?

The debt we have in place really is in place, it's long term debt with no maturities available. A little bit of short-term debt we have is there for basically natural hedges of foreign currencies. There really is no debt we can go out and buy down. But we just chose to buy back the stock because of the awfully low stock price.

What types of returns -- I mean, you look at, like, 100% plus return on capital in some of the other business areas. I know that's an anomaly, but what types of return on capital were you thinking were you getting as you bought the stock back at 284.5 and below?

Above our cost of capital, which is somewhere around 10%. That's our thinking.

Thank you very much. Good luck.

Thank you.

You're welcome.

Okay. Thank you, everyone, for joining us today. But before we conclude, I'd like to bring a couple of things to your attention.

First of all, many of you have suggested that we no longer release earnings during market hours. So beginning next quarter, we're joining our peers and will be releasing at 4:00 and have a 5:00 conference call.

And the other thing I wanted to point out to you is that we have scheduled our annual analyst meeting, and that will be held March 10th and 11th beginning on the 10th midday here in Melbourne, Florida. So I hope you can join us for that. Thank you again, and let me know if you need anything else.

This concludes today's conference call. Thank you for your participation, and have a great day.