L3Harris Technologies Inc (LHX) 2003 Q3 法說會逐字稿

Please stand by. Good afternoon and welcome to Harris Corporation's third quarter fiscal 2003 earnings release conference call. This call is being recorded. Beginning today's meeting is Pamela Padgett, vice president of investor relations. Please go ahead ma'am.

Thank you. Good afternoon and welcome to Harris Corporation's third quarter fiscal 2003 conference call. I'm Pamela Padgett, VP of investor relations. With me on the call today is Mr. Howard Lance, President and CEO, Mr. Bryan Roub, Senior VP and CFO and Mr. Bob Henry Senior VP and President of the Government Communications Systems Division. Before we get started today I'd like to say a few words about forward-looking statements. In the course of this teleconference, Howard 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 S.E.C. And with that Howard, I'll turn the call over to you.

Thanks, Pam, and welcome to everyone for our Q3 conference call. Today we will discuss Q3 financial results for the company, Q3 business segment results, and our outlook for the remainder of fiscal 2003. We will conclude the call with a question and answer period. Let me turn first to the total company results for Q3. Overall, we had a good quarter, in spite of the weak global economic environment. I was pleased with the results in aggregate, and we met our expectations.

Our financial results improved over the prior year, and the results show that our emphasis on both revenue growth programs and cost reductions is beginning to deliver results. Revenue increased 12% over last year. And orders also increased.

The total of our segments operating income grew by 20% over last year, which shows excellent improvement. Net income, however, was flat. As non-operating income was about $5 m less in the quarter compared to the prior year. This was primarily as a result of smaller gains in the sale of marketable securities.

We continued to have outstanding results in our two government communication related businesses. The principal sales drivers for Harris continue to be first, the required technology upgrades for defense and civilian communications networks and radios. And second, Harris market share gains. As we expected the broadcast division results were disappointing as many of our broadcast customers further delayed their planned capital spending. Finally, it appears that the telecom markets may have stabilized as both the microwave and Network Support division results were in line with our expectations. I'll talk more about each of these segments in detail later during the call.

Engineering, selling and administrative expenses declined by almost $2 m in Q3 compared to last year. Even in light of the higher revenue. We are continuing our review of both corporate and division infrastructure costs as I discussed during our March analyst meeting in Melbourne with an eye towards further cost reduction actions being implemented. The combined improvement in operating expenses at the three commercial divisions was $8 m for the quarter.

Operating expenses increased at the government and RF divisions and at corporate during the quarter, to partially offset this improvement. Before discussing the individual business segments, let me turn now to Bryan Roub and ask him for his comments on positive news on our cash flow and balance sheet in the quarter. Bryan.

Thanks, Howard. The cash flow performance in Q3 represented another solid quarter. We generated $38 m of cash from operations in the quarter, bringing us to a total of slightly over $100 m for the first nine months of this fiscal year. The overall results in all of our businesses in the quarter were good. But the performance in our government communications, microwave and RF communications businesses were the best.

Accounts receivables [inaudible] sales outstanding remains 2nd quarter levels, which represented improvement of 65 days and inventory at 6.8 turns which was also the second quarter level. We have targeted the areas that still need improvement and solutions are under way.

Although the amount is quite modest, I need to mention the point that we did buy back some Harris shares from the open market during the quarter. We bought back 17,500 shares at a cost less than $26 a share. As a result of the good performance, cash and cash equivalents at the end of the quarter totaled $397 m up from $380 m at the end of the second quarter. Total debt was $416 m. As a result net debt outstanding which is debt less cash, dropped to $19 m from $35 m at the end of the second quarter, and $83 m at the end of the fiscal 2002. We're getting very close to a zero net debt position.

I particularly like to emphasize something that's very important these days, and it's the excellent level of liquidity and simply by repeating what we said in the release today, which is that the earliest maturity of any long term debt that we have is more than four years away, in addition to that fact, we have more than $200 m of unused credit facilities available to us. And as the company's debt to total capital ratio at the end of the quarter is at 26%.

Capital expenditures in the quarter were $18 m. That's about the same as the second quarter. Both quarters are up over last year. A big driver of that, significant item is our investment in the network operations center which is part of the FTI win in the government communications business.

As a reminder, the FTI win is a potential $3.5 b program brought with it a $20 m capital expenditure in this fiscal year to construct a NOC. That $20 m investment is being recovered in the first five years of the program in monthly installments which have already begun. For the full year my latest estimate of capital expenditures that is moved up somewhat from our second quarter conference call. The continuing growth of the RF business in general and the JTRS win in particular, I have created a need to expand RS facility in Rochester New York. We are cuurently negotiating a purchase of a building adjacent to our existing facility that will cost about $10 m. Accordingly our estimate for fiscal 2003 capital spending has increased to a range of $80 to $85 m. The estimate of depreciation for the fiscal year has not changed.

I still expect depreciation to be in the range of $55 to $60 m. Finally my confidence in the previous guidance, cash flow from operations will exceed $100 m for the year has increased. We've had three quarters of solid performance and I expect Q4 to be more of same. I now believe that cash flow from operations will be greater than $125 m. Back to Howard.

Thanks, Bryan. Let me now turn your attention to the segment detail, and I'd like to begin with our telecom businesses. Sales at the Microwave Communications division were $72 m in the quarter and orders were higher than sales. Our expectation for microwave had been about $70 m in sales. And we'd met that target. North American sales continue to be stronger than the prior year. Sales to cellular and PCS service providers in the region, mainly for back haul were robust and the private network business was also solid.

Harris maintained its leading market share position in the U.S. market. We are by far the number one microwave provider. International sales remained weaker in the quarter than last year. However, we continued our success in winning business in the areas of relative strength, including eastern Europe, southeast Asia and Africa. And speaking of Africa, we also made our first significant shipments of the Clearburst point-to-multipoint systems in the quarter. These were to Oduwa Telecom in Nigeria as part of our broadband wireless access project there.

Turning to Network Support, sales in the Network Support division were $12 m and about flat sequentially with the second quarter of this year. Division cost reduction programs narrowed their operating loss, from $2.5 m in Q2 with to $1.4 million in this quarter.

Cost reductions taken over the past two years are finally beginning to catch up with sales declines as the business stabilizes. Total headcount at Network Support is down almost 60% during this same time period. While it's too soon to call a market upturn, we did see some improvements in average daily orders for the divisions tools and test sets. Harris is the brand of choice for many product categories used by North America's telecom technicians.

The Network Support Division also introduced an important new product for the quarter. Our data access test unit solution links the telecom central office with the field technician and includes a new suite of management software. The solution is aimed at reducing telecom service provider cost while improving customer satisfaction. And doing this by enabling more efficient field operations and reducing customer call-backs.

Turning now to broadcast, results were as expected, but disappointing at our broadcast division in the third quarter. Broadcasters have clearly slowed their capital spending. Even before the threat of war in Iraq, television broadcasters had not fully loosened the purse strings on capital spending. They were simply not convinced that the rebound in advertising revenue they had seen in the second half of calendar year 2002 was sustainable. Also, making broadcasters less inclined to spend capital on digital TV upgrades was the recent behavior of the FCC.

The FCC waiver process flowed considerably. In about 80% of the waiver requests filed last November were ultimately granted. And then, the FCC issued comments that they were considering a formal extension of the deadline for upgrading to full power. Then the war in Iraq began. Regular programming was disrupted, and advertising dollars were lost. Broadcaster’s operating costs increased to cover the war and engineers that would normally be involved in the procurement cycle for our equipment were instead consumed by providing support for the war coverage.

Revenue and operating income at the broadcast division were well below the third quarter of last year. Digital TV equipment sales also declined. And the slippage of studio and automation projects that we discussed at the March meeting actually grew worse as the war got underway. There were, however, I think several bright spots in the quarter. Digital TV transmitter average selling prices held steady in Q3, at $300,000. About the same as Q2.

Harris continued to be the clear market leader in the digital conversion. I spent time recently meeting with our customers at the National Association of Broadcasters exhibition. I can personally attest that they are extremely pleased with both our technology and our high level of field support. Our international AM radio sales were again significant in the quarter. And the adoption of digital radio progressed further. As we received a number of new orders. While good news, IBOC will not contribute significantly to our broadcast revenues in FY '03.

Operating expenses at broadcast were lower in the quarter, as a result of a renewed emphasis on cost reduction. And the division is laying out plans for more significant follow-on cost reduction actions yet to be taken.

The RF Communications division had another record breaking quarter with the business actually accelerating in Q3. Revenue increased by 30% over the prior year. And was up 16% sequentially. All this growth is organic. We are continuing to benefit from our reputation as the most reliable and responsive supplier of secure tactical radios to the U.S. military and our allies in the fight against terrorism.

On sales growth of 30%, operating income increased 79% over the prior year quarter. Operating margins reached almost 28% and return on assets was 57%. We could not ask for better financial performance from a business. Having said that, I believe there are still many opportunities ahead for this division as we participate in designing the radios of the future. Delivery of the first Bowman Program Production Radios for the U.K. began this month. This program is performing right on schedule and the customer's satisfied.

We also launched local radio production at a site in the U.K. Our development work on Cluster 1 of the U.S. Joint Tactical Radio System, also known as JTRS, is well under way. The schedule for JTRS Cluster 5, previously called Cluster X appears to be accelerating. We now expect a final request for proposal in June of this year, and the contract award, perhaps as early as next February.

We continue to estimate that Cluster 5 could ultimately be worth $2 b over the life of the program.

Now, if Cluster 5 is primarily for man-pack radios but it may also include networked and embedded communication packages that would be used for body-worn soldier systems and also for unattended ground sensors and unmanned ground and aerial vehicle communication systems.

And finally, the Harris Government Communications System Division also had a great quarter. And the future potential for this business remains very encouraging. Harris continues to build momentum as we play an increasingly important role in the upgrade of the battle field communications infrastructure.

Bob Henry and his team have done an excellent job of defining and executing their strategy. They have been consistently improving our level of customer intimacy and our understanding much customer missions. New programs have been won and existing programs are being expanded setting the stage for Harris to continue to outperform the industry growth rate.

Revenue and operating income both grew 24% in the third quarter. And this exceeded our prior expectations of 17 to 19% year over year sales growth. The growth rates were consistent across all major program areas, and all the growth was organic.

The most significant program drivers for the business in the quarter were, first of all, new defense and non-defense programs that were won in previous quarters. And these would include the FTI program for the FAA, the Mass Tiger Program for the U.S. Census Bureau, and MCOM and JSF programs for the Air Force.

We also saw strong classified programs revenue both from existing and new contracts. And we received add-ons for existing programs, for example Harris received a $55 m add-on contract to the existing Comanche helicopter program and this program has already generated $285 m in revenue to date.

I also want to mention three important new wins in government communications in Q3. There were others, of course, including some in the classified area that we can't talk about. We're probably most excited about the position we won on this phase of the space based radar program. To develop a prototype radar payload.

The initial value with options is $88 m. But this program could have a value to Harris of more than $1 b, if we win a three-way competition at the end of the first three-year prototype phase. We are prime in this program for the Air Force and National Reconnaissance Office.

What is significant is that this is our first payload design program for a critical satellite sensor system. Our strength in this area historically has been ground based image processing, space antennas and on-board processing.

The next important program win was at NIMA, the National Imagery and Mapping Agency, where we have a strong incumbent position. This particular program is called the Global Geospatial Intelligence Program or GGI and again, we are prime in this case providing geospatial and imaging products. This IDIQ contract is for ten years for a total of $750 m. Based on demand we are already seeing on this contract, this could easily be worth $50 to $75 m per year.

And finally NEXCOM was another major win as prime with the FAA where we already have a strong relationship and a successful track record. The initial 20-month development award is worth $21 m. Harris is one of two teams in competition for the potential $400 m contract implementation phase.

NEXCOM, which stands for next generation air and ground digital communications systems, will enable the FAA to increase air to ground communication channels to meet the rapidly growing requirements of the nation's air traffic control system.

Let me close my remarks with a brief discussion of our expectations for the final quarter of fiscal 2003 ending in June.

While there is reason for continued optimism in both of our government businesses, our other three commercial businesses will face continuing difficult global market conditions and uncertainty in the telecom and broadcast sectors. Having said that, we believe that government communications systems and RF communication divisions should deliver improved revenue and segment income in Q4 compared to Q3. Network Support should be stable, at Q3 levels. Microwave revenue should be flat to Q3, at a minimum. With the potential to trend upward as a result of stronger Q3 order rates, and a growing opportunity pipeline. Segment income should follow revenue. Broadcast revenue in Q4 will likely be lower than Q3, with a resulting impact on segment income. Having said that, there is clearly a lot of pent-up demand for our products and services in the broadcast segment, but it's proving difficult to predict exactly when some of the capital spending restrictions that our customers will begin to be lifted.

As the war ends, and the global economy begins to perk up, we will continue to lead in this market. And finally, our corporate headquarters expenses should be sequentially lower, and non-operating income should be in line with our previous guidance.

With that overview, I'd now like to ask Sherry to open the line for your questions.

Thank you, sir. At this time if you would like to ask a question please press the star key followed by the 1 on your telephone key pad. We'll pause just a moment to assemble our roster. And our first question comes from Stephen Murphy.

Hi, good afternoon.

You mentioned you saw some good order trends in the microwave business appearing to be stabilizing. I guess this means you feel you can keep the quarterly revenue above $70 m going forward. I'm wondering what the break-even level of revenue in this business is now.

Well, thanks for the question, Steve. I think essentially we're there in the third quarter. We had a small loss, but I think that's essentially at break-even. I believe that at this point, with our outlook, we should be able to, you know, maintain at a minimum that level of quarterly revenue. We're hopeful, though, that we can drive for higher revenue. The orders were pretty good in Q3. We have seen a little more activity in the pipeline. But having said that, I think in looking back over the past few quarters, we've seen this happen a few times, and it hasn't always, you know, resulted in a huge sequential pickup. So I'm a little conservative in saying I think the floor will be about $70 m. I'm optimistic that we might be able to do better than that.

Okay, great. You continue to have just stellar performance in RF coms and you mentioned your expectations for the fourth quarter. I guess as more development revenue moves into the mix, do you think that beyond, beyond the next quarter, is the margin range in the mid to high 20s sustainable? Or you know, should we expect a pull-back in the future?

Certainly Q2 or Q3 Q3 margins at 28% are not sustainable in the long run at that level for a lot of factors. And the mix of the business as you indicated is the primary one. I do believe, and we will continue to drive for, you know, the best margins that we can in that business, making sure, though, that we're balancing that with the investments that we need to make going forward, continuing investments on Bowman, investments that we will make in order to try and win Cluster 5 and other clusters in the JTRS program. But I'm not going to give you a number per se but 28% would certainly be at the high end of the range. But we're going to work hard not to have that gross or operating margin, you know, number fall precipitously, you know, in the near future.

Okay, great. And just one last detail. How many Intersill(ph) shares do you now have left?

$400,000.

400,000, great, thanks very much.

Thank you Steve.

We go next to Rich Valera.

Getting back to the sort of stellar performance of RF COM and government COM, one, can you point to any potentially nonrecurring benefit you got from the war and I would suspect that is probably more in RF com than in government. And secondly, if you look out to fiscal '04, and I know you're not projecting there but in terms of you're going to have some very difficult year-over-year comparisons after generating 20% plus growth in those businesses, do you think those businesses based on your pipelines can show growth and could it be you know single digit, or could they conceivably show double digit growth next year based on what you're seeing right now?

Let me deal with your -- kind of the first part of your question, Rich, regarding the impact of the war. Pretty difficult to say. In the government communication systems division, I would say it's not material. We have had probably a little bit of impact but not really material. You know, the war itself in RF, it really has been a follow-on, really, from everything post-9/11. We have seen a pickup in our demand for radios from the U.S. military, as well as the allies, really since that time. Certainly, there was some acceleration due to demand related to the war. At this point, I don't have any information on exactly what that number is. It's certainly something that over the next quarter I'll be talking with the RF leadership team about as we do our planning for next year. Your question is a good one, and I really can't give you a definitive answer today. There's a book written called every business is a growth business. I do ascribe to that. So I can certainly say that we will continue to expect growth from both of our government businesses. I think we feel very comfortable in Bob's business, that we ought to be able to continue our rate of double-digit growth. We've been well above that this year, but that double-digit threshold is something that we certainly continue to believe is a realistic expectation. In Chet's business that's a little more difficult to estimate. But I think you should not expect FY '04 total revenues to be, you know, year over year exhibiting the same kind of growth that we have in RF in '03 compared to '02. So, there certainly is, you know, going to be less growth, but I'm hopeful that there is still growth, but that is very much a question at this point I can't answer, and we'll be working on.

That's fair, thank you. And on the overall operating expenses, looks like you showed some real nice improvement on them, some nice improvement on them sequentially. Do we expect them to be sort of sustainable at that level, you know, going into the fourth quarter, or could they go down or you just kind of get a feel for where you stand on them?

You know, I'll have to look at the numbers. I think that Q3, in absolute terms, was, as you say, sequentially quite a step down.

Yes.

I would not expect the absolute dollars to stay at that level, going to Q4. But we would expect to continue to, you know, to try and show improvement as we go forward. We have additional work to do as I've commented, going back to our March meeting, we have additional work to do to, in a thoughtful way, find ways to take out infrastructure cost and streamline the organization. That work on that planning is not complete yet, but I do hope to be back to you in the fourth quarter with some specifics of actions that we are prepared to take, which will benefit all of the divisions cost structure.

One final question related to broadcast. Understanding visibility is probably not great there right now, is there any reason, anything that gives you confidence that maybe the June quarter would be the trough quarter, that sort of that could be the low point in broadcaster spending sort of like with the war being over, you know, relatively less activity now that maybe things will improve subsequent to the June quarter? Is there any reason we would suspect that or is it just can't tell at this point?

Well, what's interesting, I think we really are in unusual times, because normally the June quarter for broadcast has been a particularly strongest quarter. It's always the quarter where the National Association of Broadcasters exhibition occurs. That usually drives business for us. But having talked with a number of senior people at our customers at that exhibition, you know, this is certainly not a typical year. We would all like to be optimistic, that with the war apparently ending, that the global economy will start to perk up, advertising dollars will flow, and in all of those things should lead to the infrastructure upgrades that do need to occur. There is a lot of pent-up demand and I'm very confident that we're going to get the leading share of those capital dollars when it comes for products that -- or systems that we can supply. I don't think our crystal ball is very good, in terms of when that's going to turn around. Bruce Allan and his team are operating under the assumption that they want to drive improved profitability next year over this year. And they're going to do that without assuming that there's a huge pickup in demand. I think that's the conservative approach to take. Again, we're trying to be very careful that we don't lower our investment in R&D, and we'll do our business to take cost out of the areas that will least affect the future of the company.

Okay, thank you.

We go next to Arindam Basu.

Hi.

First question for Bryan, Bryan, could you go over how much of the cash is offshore and if you've examined any tax implications if you attempt to repatriate that given your comments about liquidity earlier?

Yes, the offshore cash is about $125 m. The tax implications, if we just brought it all back on a permanent basis would be about 15 to 20%.

Sorry, keep going.

It would be about 15 to 20% leakage.

Okay, thanks. Howard, you commented on the broadcast business that you said more significant cost reductions are coming. Is that a continuing process, or is there a time line that you have set up for another iteration of cost cuts in broadcast?

We should be in a position to take the next steps in the fourth quarter.

Okay. And then last question, on the pricing environment in microwave, could you give some comment there, particularly about any kind of OEM inroads or attempts to cross subsidize some other infrastructure sales with the microwave radios?

I'm not aware of any particular change in the pricing environment, competitive pricing environment in the third quarter. I think in general, as the market has contracted, pricing on big deals has gotten more competitive. I think we've seen it more probably in international markets. I think our prices in North America have held up pretty well, to say from time to time, you know, there isn't more aggressive competition on a given order. But overall, we've been doing pretty well. But the deals that are out there internationally have tended to be the bigger ones and have tended to get more attention I think from the competitive standpoint.

Okay. And then Howard, last question for you. At the analyst day you made a comment about the professional services strategy. Do you have any other thoughts that you could share on your build versus buy strategy for that, you know, for that revenue strategy or for that particular line of business that you wanted to augment?

Nothing specific. I continue to believe that a higher services content for all of our divisions will help us to present an end to end solution to the customer. I think that Bob's business has clearly shown the value of that. It's not just the revenue from Harris technical services corporation, but it's how that -- how those programs have gotten us closer to customers and driven core revenue increases. So it's not just on its own, but it's the synergies. I believe strategically that the same kind of benefits can be achieved in our other divisions. And I continue to talk with our management teams in the divisions about strategies. Certainly, organic growth is one, certainly acquisition is another. You know, we'll continue to look at both of those. The preferred approach certainly is organic. These businesses usually, not always, but usually have lower return on sales, and so the real benefit, financially, is the higher return on capital or return on assets. We pay a big premium with a lot of goodwill for a business that kind of defeats the purpose there.

Okay. And Howard, could you clarify the answer you gave me on the broadcast cost cut strategy? Was that that you're going to be developing those cost cuts in the fiscal fourth quarter or you're going to be implementing them in the fiscal fourth quarter?

We'll be developing them and actioning those that can be immediate. Sometimes cost reduction plans you know, take some time to read out the full benefit. But how I would articulate it, Arindam, is that by the end of this quarter I want to have in clear focus across the corporation, not just in broadcast, what our specific plans are to operationalize cost reductions that will benefit us throughout fiscal '04.

That makes sense. Thank you very much. I appreciate it.

Thank you.

Next question comes from James Mcilree.

Thank you.

Hi, Jim.

Can you explain why the headquarters expense was up quarter to quarter this quarter, and why it would be down next quarter?

Well, the short answer is, there are a lot of things that run through the headquarters expense account. And you should expect from time to time that those numbers will bounce around a little bit quarter to quarter. In this quarter, principally had to do with funding of retirement programs and evaluation of those programs trueing up some of our supplemental retirement accounts. Why it should be lower next quarter is a combination of that not being there in the next quarter and just the normal efforts that have already been going on here to reduce some of our discretionary spending at the headquarters group.

Okay. And on Bowman and JTRS, if you look at fiscal '04 versus fiscal '03, is that a very large increase in revenues, or modest?

No, it would be -- it would be small to modest. Bowman really kicks up significantly in '05. And JTRS from a revenue standpoint is really a much longer term program.

Okay. And finally, would you expect the broadcast operating -- would you expect the broadcast division to have positive operating income in Q4?

Would I like it to? Absolutely. Would I expect it? As I said in my comments, Jim, it really has to do with what the level of revenue is. We can't afford revenue to slide too much or we'll be you know, at the break-even point. I can't predict accurately right now what the revenue for the quarter will be. I believe it will be lower. I hope that I'm conservative in that outlook. If it's lower, then operating income for the segment is going to follow it down. I hope it doesn't reach below zero, but it's really going to be a function of revenue in the quarter.

Okay. Thank you.

You're welcome.

We go next to Larry Harris.

Yes, a couple of questions. One with respect to the project in Nigeria with Oduwa. Were there any revenues recognized in the March quarter, or can we expect to see some revenues in the June quarter? Would it be a significant portion of the microwave in the next couple of periods?

It wouldn't be significant. I mean, in terms of as a percent of the total $72 m, it was, you know, less than 10%. But I thought it was an important milestone, Larry, for the deployment and successful operation of that new clear burst system technology.

Yes.

And you know, it is a multi-quarter program. So we would expect ongoing revenue in that fourth quarter, and into next year.

And then with respect to broadcast, and I know everyone's been asking about it. But as I recall, about 15 or 18 months ago, there was a financing program in place, if memory serves, in the broadcast area, and is there any thought of providing that, say, for some of the more solvent broadcasters say in the automation area where there's a clear pay-back from your products and you certainly have the cash, if you chose to do it, to do something like that?

Larry, that's a good question. And just so to remind you, we did have the financing program in place to encourage people to early-buy. And that was all repaid in January, a year ago, basically. We have tried small programs using the strength of our balance sheet to encourage people, nothing of size has gone on, but we're always looking for ways to do exactly what you've said. And we're very -- the financial part of the organization I'm very receptive to that if we can help. And the pricing is good, too. So we have no major program in place at the moment.

Strategically, you know, we don't want to be in the financing business.

Right.

But we have continued to offer that to our, you know, our best credit customers. And at this point, I would say that that has done just had a very, very small impact on moving them off. Because it -- you know, the financially sound customers, this isn't a case of financing. It's really a case of lowering their capital spending budgets to their bores. And the lack of revenues. So I suppose there is some length of time you could let them, you know, pay it off over two or three years. I suppose you might get some people interested. But I'm not sure that the return for our shareholders would be there at that kind of a pay-back period.

I understand of course. All right. Well, thank you.

Thank you, Larry.

We go next to Mark Roberts.

This is Jason Kutsurelis calling for Mark Roberts. First of all I just wanted to congratulate you on a great quarter.

Thanks.

You're welcome. And my first question is, can you provide any further detail on the latest rulings by the FCC and what you feel might be driving them to back off?

Well, at this point it's not a ruling. It's just a proposed rule making, that's out for comment in the comment period, Jason.

Okay.

And basically, a portion of it that had an impact or has an impact on us, had to do with the dates at which broadcasters would have to provide the same level of coverage replication if you will of their current analog signal. And those dates have been proposed, that it would be July of 2005, I believe, I don't have the dates in frond of me, but I think I'm correct here, that it's July 1 of 2005, for the top 100 markets, and then it's July of 2006 for the rest of the country. And originally those dates had been envisioned to be in end of 2004. So it's about a 6 to 18 month pushout. You know, we will provide our comments to the FCC as part of this open comment period. My personal view is, let's set a date. You know, whatever the date is, let's set a date. Because then we can all plan. This has been really inefficient for our company to, you know, go down this path of hurrying up and building up all this capacity and doing all the different models and engineering. And now we're in this waiting game where our digital sales are well below where they were a year ago. In fact I believe we could end up this fiscal year with lower sales in digital TV products than we had in 2001, based on the numbers that I've seen.

I see.

So it's really dropped off you know precipitously. And that's what has created the challenge with revenue and earnings in this business. You know, having said that, we applaud what Chairman Powell has done to get the whole thing, you know, moved forward. The consumer electronics kind of buy in to having this capability in the tuners in the televisions, I think in 2004, every set over 36 inches and by 2005, every set over 25 inches, which essentially are all of them today which are of any revenue. So you'll have that capability, and we think it could be problematic if you have the capability in all the television sets and you're going to pay some premium for that and then you can't get the on-air signal or the on-cable signal. And I know the Chairman is trying to work this very hard between the broadcasters and the cable industry to make sure that this carriage problem gets resolved. So you know, I don't envy his position because he has all these different constituents. And the only thing we would like to see is fix the dates once and for all, then everybody knows what they are, and we can have an efficient process of getting this industry converted. We can do it at the lowest possible cost and still generate a return for our shareholders.

Thank you. Next question, do you have any exposure in your microwave division to the Middle East? Just at a general level.

We have, in several of our businesses, exposure in terms of we've had revenue in -- from Middle Eastern countries, it wasn't a large percentage of our business. And we weren't counting on any tremendous revenues from any Middle Eastern countries in the rest of this year.

On the outlook for he fiscal 4th quarter for the rest of the quarter, if you could provide any further detail, I know in your press release that it looked like you were holding to your guidance for the year.

Yes, that's correct. And what I said was that government communications and RF should have higher revenue and segment income in Q4 sequentially. Network Support we think will be stable at Q3 levels. Microwave revenues should be flat sequentially at a minimum, but I believe there is at least some potential to trend upwards. And the segment income would, of course, follow that if we were successful. And then finally, in broadcast, we believe it's likely to Q4 will be lower revenue than Q3, and that the segment income will follow that. Again, you know, maybe we will find that some of the purse strings do get loosened in Q4. I'd love nothing more than sit here three months from now and tell you that's what happened. But I think we have to prepare that may not happen.

Thank you very much.

Thank you.

We now go to Chris Quilty.

Hi, good afternoon. Different question on the war effort. Are there any particular products or programs that you think Harris was involved with that may benefit in terms of when they do a look-back on things that worked and didn't work, where you might get a pickup on a go-forward basis?

Yeah, it's Bob Henry. There's been a couple. I would say in the imagery processing area would be one of the -- one of the main areas where we've supplied 3D mapping for our real site products.

But none of yours were the ones shown on TV on the networks?

Yes, some of them were. There were some shown on the networks. Actually we just had one shown out at the space symposium. There was one shown, it was either Wednesday night or Thursday night on the news, in Orlando on channel 6 there was one shown about three weeks ago, with some two retired colonels talking about how those 3D models are being used. So they were used. And will be used in the future. We also -- we had 600 munitions where we supply telemetry and command and control data for the multi-launch rocket system, you may have seen that in the newspapers, we're involved heavily with the multi-launch rocket system program, and in the first three or four days of the war, as I said there were over 600 munitions used. And some of the other areas, we get into some of the classified work that we're doing in the communications area. And I really can't get into that. But that's probably the biggest area, and it's just very difficult to talk about that. And there was some uptick in that area, the land will be uptick in that area for the next three to five areas, we have been told by the customers because of the type of work we're doing in that communications area.

Okay. And on some of the new contract wins specifically you picked up some additional business on Comanche and you in the past have mentioned the FAB 22, keep adding letters there, those programs seem to be getting increasingly at-risk. You obviously don't have a huge amount of skin in the game. But do you look at contingency plans in terms of the Rumsfeld strike zone, what you would do to replace them or where that funding might go on alternative programs?

Right. Most of those programs, the 22, the 18 is fairly solid but the JSF, the F-22 Comanche is another one. Of course the customers all tell us those are going forward, and are either No. 1 or 2 priorities for each of those, for their respective services. Our revenue on those programs today is not a very, very large portion of our revenue. That revenue really kicks in, in the '08 and beyond when we get into the production cycles on that and we're not really in the production cycles on those programs other than the small L rip cycle for the FAB 20-22. So we have other things that are picking up as I said in the communications area, because of the intelligence weakness that was shown prior to and related to 9/11. So I see that the communications void will be filling in for some of the production stuff that we might see, and some of the development stuff we might see on the platforms that you mentioned.

Okay.

Chris, one of the things that is a strength for Harris is the portfolio distribution that we have within our government communications business. We really don't have any single program that, you know, if it were to go to zero, has a tremendous impact on our company, and that's not the case with a lot of the defense and aerospace contractors.

Okay. And speaking to that, the pickup or at least I guess in the running for the payload for the SBIR program --

Yes.

-- you currently don't have a lot of those capabilities. So does that mean you look to acquire or develop or outsource the ability to do a complete payload?

Right. I believe that the reason there were three -- three competitors on that, three people picked. The other two that were selected are the, I'm going to use the word same old technology, same old way of doing business. We provided a very unique solution for the combined air force National Reconnaissance Office customer, and stuff that we've done in the ground processing area, and capability that would be needed in the payload to provide some different type of data down so we could use some of the ground processing new techniques that we've worked on. And I think that was the strength, and one of the reasons that we were selected to go forward on this. However, with all of that said, each of these companies, no matter who they are, won't do the whole thing themselves. They'll all be looking for some partners and subcontractors on this. And we'll be doing the same thing. And we will leverage our strength on the onboard processing. We will leverage our strength in the antennas area and we will leverage our strength on the ground processing side of that.

Okay. And if I can ask one last question, not directed at Bob, on the microwave side of the business, where do you stand in terms of the facilities consolidation and the research triangle, is that all basically set or are there incremental costs coming out of the business on a go-forward basis?

No, the cost associated with the relocation of our three U.S. engineering facilities to one facility in RTP is complete, and we moved those engineers who were going to be relocated and we have hired at this point about 40% of the new hires that we were going to complete in this fiscal year.

Okay. Great. Thank you very much.

Thank you Chris.

And our final question comes from Joy Mukherjee.

Good afternoon. From a modeling standpoint, would you give me some idea of how Q1 would compare with Q4, and if you would, base this pretty much on the different product lines, that would be helpful.

I -- I would love to talk about Q1, but I'm just not smart enough right now to do that. And you know, obviously our goal is to show improvement. We'll start with looking at Q1 last year, and that's kind of our benchmark, obviously do better than that. I think probably, in looking at, you know, Q3, that's kind of the current state of affairs. We expect more of the same. I think if you sum up everything I've said about Q4, it's kind of more of the same, with maybe a few opportunities for improvement. But a little bit of risk in broadcast. I don't believe that Q1, just because we're crossing our fiscal year threshold, is probably going to be a whole lot different.

Okay, so historically you haven't seen much seasonality as such sequentially?

Usually, usually Q4 is stronger than Q1, certainly from a revenue and earnings standpoint. I think, you know, having just joined, I'm not the historical expert. But I think if I've looked at the data in Q1, would certainly usually, probably, be lower than Q4, in terms of revenue and income. But on a year-over-year basis, that's really going to be our -- you know, our point of comparison. And I don't -- I just don't expect that we're going to see as rapid a change in the global economy as we might like. But my hope is that we have bottomed out in these markets and that with the war ending, and the tax cut, even at a reduced level going through, that that will drive some capital spending in North America, and if financial markets continue to then start to open capital up to some of the developing countries, I think our communications portfolio positions us pretty well to participate in that. I'm sorry I can't be a little more specific at this point, but really, that's -- that plan for next year is what we'll be hardening up during this quarter, and we'll certainly talk a lot more about that on the next call. Thank you for your question.

That's fine. Thank you.

I thank everyone for joining us today, and I hope you found this a convenient time, and please let me know if you have anything else that you need. Thank you.