L3Harris Technologies Inc (LHX) 2004 Q3 法說會逐字稿

Good afternoon and welcome to Harris Corporation's third quarter fiscal 2004 earnings release conference call. This call is being recorded.

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

Thank you. Good afternoon, everyone, and thank you so much for joining us for our third quarter fiscal 2004 conference call. I'm Pamela Padgett, Vice President of Investor Relations, and I have on the call with me today Howard Lance, Chairman and CEO; Bryan Roub, Senior Vice President and Chief Financial Officer; and Bob Henry, Senior Vice President and President of the Government Communications Systems Division.

Before we get started, let me say a few words about forward-looking statements. In the course of this teleconference, Howard, Bryan and 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.

In addition, on this teleconference, we may discuss certain ratios and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included on the Investor Relations section of our website which is www.harris.com. Also, a replay of this call will be available on the Investor Relations section of the website.

And with that, Howard, I'll turn the call over to you.

Thank you, Pam, and let me welcome all of you to our third quarter earnings call.

Today I'll give you some additional details on our business results for the quarter. These will be structured around the earnings release distributed early this afternoon. Bryan Roub will also provide some additional commentary on our financial performance in the quarter, and we'll discuss our outlook for the remainder of fiscal year 2004, as well as for fiscal 2005. We'll conclude the call by taking your questions, so, let's get started.

Consolidated revenue in the third quarter was $664 million. This was an increase of 23% compared to the prior year quarter. Revenue growth was all organic. Net income in the third quarter was $36 million, an increase of 57% compared to prior year net income of only $23 million. Earnings per diluted share improved to 53 cents in the third quarter compared to 34 cents in the prior year quarter.

Included in net income was an expected nonoperating loss of $1.4 million. This compared against a $2.8 million gain in the prior year quarter, a swing of $4.2 million. Once again this quarter, we feel very good about the quality of earnings that are being reported.

I was very pleased with the overall results for the quarter. We are maintaining consistent year-over-year improvement in revenue, profitability, and asset management. Our government businesses continued to outperform their markets and exceed expectations in the quarter.

We also continued to see areas of progress in our commercial businesses during the quarter. Our commercial markets are gradually improving, and this is being reflected in improved orders and revenue for Harris.

However, the inconsistent level of profitability in both Microwave and Broadcast Divisions is not acceptable. Additional cost reduction actions are planned in both these businesses during the fourth quarter to place them on the proper trajectory for fiscal year 2005.

Our largest segment, the Government Communications Systems Division, again reported record results for the quarter. Year-over-year revenue and profit growth in this business is now at 16 consecutive quarters. Even with that track record, however, growth accelerated in this quarter.

Revenue in the quarter was $395 million. That's a 33% increase compared to the prior year. Operating income increased by 62% to $43 million and represented a 10.9% return on sales.

This strong operating margin in the quarter resulted from continued solid program performance and large award fees. During the quarter, we received a seldom awarded incentive fee for excellent scheduled performance on one of our large classified programs.

Revenue growth in this segment was seen across all major customers, Department of Defense, Civil, National and Technical Services. Major contributors included the rampup of several of our long-term programs, including the FTI program for the FAA. We are only in our second year of this 15-year contract.

Also in the Civil programs area, the MAF/Tiger program for the U.S. Census Bureau continued to grow. Numerous Department of Defense programs in avionics, MilSatCom, and missile defense also contributed to growth as, did new classified programs.

Revenue also began flowing on the Iraqi Media Network contract during the quarter. As you know, the Government Communications Systems Division partnered with our Broadcast Division on this one-year, $96 million contract. Harris is playing a key role in rebuilding the Al Iraqia TV and Radio Network and the newspaper infrastructure.

Good progress has been made in spite of the current instability in the country, with focus being placed on new TV studios and additional locally produced programming in Baghdad. We are now on the air 19 hours per day and are broadcasting via satellite to most major cities inside Iraq, as well as throughout the Middle East.

Total backlog in this segment, including funded and unfunded programs, grew to a record $3.9 billion at the end of the third quarter. Backlog has been consistently above $3.5 billion for the past 18 months. But perhaps an even better indicator of the future health of this business is the program potential associated with our large contract wins over the past several years. If I include those, we estimate this program potential at more than $8 billion, including the current backlog.

Our U.S. Government customers are clearly struggling with how to fund so many competing priorities at a time of record budget deficits and the ongoing funding needs for Iraq. Obviously, not all of the programs can be fully funded. Even so, we strongly believe that Harris is well positioned for continued growth in spite of these fiscal circumstances.

Our diversification of technologies, programs, and customers is a key asset of this division. We expect only one of our programs in fiscal 2005 to represent more than 5% of segment revenue, and that's the FTI program for the FAA.

We are also focused in this sweet spot of communications priorities, supporting the war on terrorism and national security. Winning this war is a long-term U.S. commitment, and meeting that commitment will require the continued expansion and enhancement of communications, infrastructures, and capabilities.

Our RF Communications Division also reported record results during the third quarter. Revenue increased 33% over the prior year to $116 million, and operating income increased 39% to $33 million. The immediate need for additional tactical radios, both by U.S. forces and by our coalition partners, is continuing to drive higher revenue.

The Harris Falcon II tactical radio is providing seamless HF and multiband communications interoperability in Iraq, Afghanistan, and other theaters of operation at high levels of reliability in the field. Following the close of the quarter, Harris received another $15 million order from the U.S. army to provide radios for new forces being deployed to Iraq and Afghanistan.

Orders received in the third quarter included $19 million from the U.S. Navy Space and Naval Warfare Systems Command for shipboard HF radio communications systems. That order was part of a previously announced $43 million contract. Since 1992, Harris has provided HF systems for a total of 64 ships, with revenue totaling $180 million.

Other domestic orders received included Falcon 117F multiband radios for the U.S. Marine Corps. As we have mentioned before, the 117F is also used extensively by U.S. Special Forces. This radio has high data transfer rates, Type 1 security encryption, and build-in networking capabilities.

International orders received in the quarter were from Norway, Kuwait, Uzbekistan, the Philippines, Armenia, Poland, and Albania.

Moving now to our Microwave business. Revenue was $77 million in the third quarter. That's an increase of 7% compared to the prior year quarter. Stronger sales and international markets led the revenue growth. Unfortunately the higher mix of international products in revenue negatively impacted our gross margins. The segment reported an operating loss of $2.5 million in the third quarter compared to a loss of $0.8 million in the prior year quarter.

In North America, orders picked up nicely, thanks to the private network portion of our business. We've been expecting this market to pick up as a result of new requirements for communications interoperability among the First Responder agencies. This requirement has created a very compelling story to upgrade older networks, and the Department of Homeland Security is supporting this effort with some Federal grant money.

Large orders in the quarter included $6 million for the government of Quebec, $6 million for the Imperial Irrigation District In Southern California, and $3 million for the City and County of Honolulu.

On the Cellular Service side, FCC filings tell us that we continue to garnish market share, even though business has slowed a bit with the consolidation of Cingular and AT&T Wireless. However, longer term, we believe that this market leader will provide growth opportunities for Harris. Both companies are long-standing customers, and before the merger, Cingular had already started purchases of Harris equipment under a new contract.

The increase in international Microwave revenue came primarily from Eastern Europe and Africa. During the quarter, we began making deliveries on a $24 million contract with MTN Nigeria Communications. They are Africa's largest cellular network provider. And we also began shipping to the Bulgaria Ministry of Defense.

Finally, we booked $2 million in orders during the quarter for our new TRuepoint product line and began initial product shipments to customers. TRuepoint will allow Harris to be a much more effective competitive force in international microwave markets, as well as contributing higher product gross margins to the P&L. TRuepoint proposal activity around the world remains very robust.

Our Network Support Division reported third quarter revenue of $15 million, and this was a 25% increase over the prior year quarter. Our new EXP handheld test solution and our NetBoss Network Management Software business had year-over-year revenue increases. Operating income was $0.7 million, and this compared to an operating loss of $1.4 million in the third quarter of last year. And this was a result of the higher revenue and our lower cost structure.

Sales in the quarter also benefited from deliveries on a significant contract with MTC-Vodafone which we won in the second quarter of fiscal 2004. Harris is the prime contractor for MTC-Vodafone's new multimillion dollar integrated Network Management System Project located in Kuwait, and this project and system utilizes our NetBoss software platform.

Before I review the operating results for our Broadcast Communications Division, I want to make everyone aware that we are in the midst of a management change. Bruce Allan resigned in March to pursue new opportunities outside of Harris. I am personally serving as Acting Division President until a permanent replacement is appointed.

In that capacity I recently attended the Annual National Association of Broadcasters Trade Exhibition where I was able to spend considerable time with many of our key customers. We introduced a number of new products at this show, and these product will drive future growth in revenue and profitability in the division. The show this year was very crowded with over 90,000 people in attendance. Digital media, content creation and distribution, and content management was clearly the focal point for most of the exhibits, dealing both with television and radio.

Our operating results in the quarter at Broadcast were mixed. Revenue was $73 million, which represented 10% sequential growth from the second quarter. Revenue came in slightly lower, however, than last year's third quarter of $76 million from fewer sales of digital television transmitters.

Revenue increased in the Studio Products and Systems Business as a result of new integration projects and the Iraqi Media Network contract which contributed $5 million of revenue in the quarter.

On a positive note, Broadcast orders in the third quarter were very strong compared to the prior year. Orders were higher across all three lines of business. New orders included $18 million for the Iraqi Media Network, $9 million for the next phase of the Romania TV Project, and $5 million for AM radio transmitters for China, Saudi Arabia and South Korea.

Harris also received orders during the quarter from Hearst-Argyle Television to upgrade the digital transmission facilities at 26 of its television stations. From the Corporation For Public Broadcasting for digital-ready radio transmission equipment for 13 of its member stations, and from Clear Channel Communications for digital-ready radio transmitters for five stations.

Operating income in the quarter was $0.5 million, well below the $2.5 million in the previous year quarter. There were several reasons for the decline in income and margins; lower revenue, a smaller mix of digital transmission products, but also poor manufacturing productivity associated with our new ERP implementation of PeopleSoft in North America. And also the impact of the relocation of Europe production from Rankweil, Austria to our new facility in Huntington, U.K..

Both the ERP implementation in North America and the Europe production relocation are essentially complete as of the end of the third quarter. And, in fact, we saw a major improvement in our manufacturing performance in the month of March. Both of these cost reduction moves will provide benefits in terms of fiscal 2005 profitability improvement.

Let me now turn the call over to our Chief Financial Officer Bryan Roub.

Okay. Thank you, Howard.

First, I'm going to talk about cash flow. Once again, we had excellent cash flow results, primarily driven by our two government segments. We generated $60 million of cash from operations in the quarter, bringing us to a total of $187 million for the first three quarters of this fiscal year. That amount compares to $101 million for the same period last year. Each of our segments contributed positive cash flow, both for the quarter and for the year to date.

Capital expenditures were $14.5 million in the quarter and similar to the capital expenditure rates in the prior two quarters. Compared to last year, capital expenditures are slightly lower this year. My latest estimate for fiscal 2004 capital spending is between $70 and $75 million, which is approximately $5 million less than our previous estimate. I still expect depreciation to be approximately $60 million for the year. As a reminder, capital spending was $73 million and depreciation $56 million in fiscal 2003.

I now expect cash flow from operations to be between $200 and $225 million for the full year. We've had three quarters of solid performance, and I expect Q4 to be just more of the same.

As the positive cash flow results suggest, we continue to have solid asset management performance overall. Not only did we have continuing outstanding performance in the government segments, but we continued to make progress on our commercial segments, as well.

Inventory turns in the quarter increased from 7.8 in quarter 2 to 8.2 in the quarter current. The number of days sales outstanding in the quarter also improved, climbing from 63 days in Q2 to 61 days this quarter. The days sales outstanding improvement was primarily the result of better accounts and notes receivable collections in the Broadcast, Microwave, and Network Support segment, and that's a good thing.

As I mentioned last quarter, another metric we track is the dollars invested in net operating working capital, which is receivables, unbilled cost, and inventory, net of payroll expenses and advanced payments. Even with a 9% sequential sales growth, net operating working capital at the end of the quarter was approximately $200 million, which is flat with previous quarter.

We're pleased with the progress being shown in this area, but I think there's much more to do in our Broadcast and Microwave segments. The levels of both inventory and accounts receivable in both of those segments are above levels we believe they can be with continued focus on working capital fundamentals.

Return on invested capital also improved. The ROIC in the third quarter of this year was 14%, and for the year to date, 13%. Those returns compare to 8% and 7%, respectively, in the 2003 fiscal year. These improvements came from increased returns and lower capital levels.

In the quarter, we bought back about 500,000 shares of our stock at an average price of around $47, $48. The purchases in the quarter left us with 520,000 shares remaining from the October 1999 purchase authorization of 15 million shares.

As mentioned in the press release today, the Board of Directors has authorized the purchase of an additional 3 million shares of common stock, which means we can purchase $3.5 million from this point forward. We expect to continue to purchase shares to offset the dilution of earnings per share from shares issued under both the retirement plans and the stock incentive plans of the company. As a result of these strong profit and asset management results, cash and cash equivalents at the end of the quarter totalled $535 million, which is slightly above $8 a share, and greatly exceeded the total debt of about $400 million.

Our liquidity remains excellent. The earliest maturity of any long-term debt is in 2007, and we have more than $300 million of unused credit facilities availability. We also have debt capacity beyond the unused facility if it were needed. Our total debt to total capital ratio at the end of the quarter was 25%. And as we have said many times before, we would be comfortable with a 35% to 40% debt to total capital ratio.

Back to you, Howard.

Thanks, Bryan.

Now let me conclude my remarks by discussing our financial outlook. For fiscal year 2004, Harris expects earnings at the high end of the range of $1.90 to $1.95 per diluted share. Our outlook for earnings for fiscal year 2005 is as previously announced in March and expected to be in the range of $2.15 to $2.30 per diluted share.

Also as previously announced, total company revenue for fiscal year 2005 is expected to grow by 6% to 8% compared to fiscal year 2004. Our Government Communications Systems and Rf Communications segments are expected to once again deliver double digit growth in the fourth quarter of fiscal 2004. And then to deliver solid revenue growth in fiscal 2005, as well, with operating margins similar to fiscal 2004 levels.

In the commercial segments, we expect continued positive momentum in revenue growth from the improving global market and from new products. We also expect profitability to improve, not only from higher revenue, but also from the additional actions being taken in the fourth quarter to reduce product costs and division expense levels. We remain fully committed to increasing the profit contribution of these businesses.

That completes our prepared remarks, and we'll now ask the operator to open the line and take your questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Our first question will comes from Arindam Basu with Morgan Stanley.

Congratulations on the quarter. A question on broadcast division first. How much did the enterprise IT system cost the division?

Well, you know difficult to be precise but I think if you look at the results, the combination of the move in Europe and the implementation of the people soft system in the quarter was several million dollars.

Okay. And were there any Microwave sales to federal government entities yet?

Not of a significant nature but we did reach an important milestone in achieving listing on the GSA contract for Microwave and we have high expectations on growth in our next fiscal year coming from opening the door to those new opportunities.

Perfect. And on the Microwave margins in spite of the restructuring is this taking place you talked about the international mix issues, was this really a true start-up issue or pricing or product mix issues internationally that we need to be cognizant of for our modeling going forward?

I can assure you this had nothing to do with TRuepoint start-up. It's an ongoing issue related to our current MicroStar product line and certainly exacerbated over the last couple years by accelerated pricing declines in the lower capacity PDH section of the international markets.

Those are much more commodity-oriented features and full value are less important to that customer group, and that's why we need and will utilization our full family of new TRuepoint products. The 5,000 which is going to be a broad range product offering opportunities for capacity expansion, fuller features and then our TRuepoint 4,000 product had is very focused and targeted in the PDH commodity area.

Okay. Last question, you mentioned briefly AT&T and Singular, what's your read on the consolidation of those two and the spending and purchase patterns there, what's your sense from the pull-through of those two North American providers in particular?

My view is it's causing a bit of a pause in capital spending. I don't believe it's going to have a long-term impact on our relationship with those customers. We're well positioned with both of them as well as with other customers in the market.

It is having an impact as they come together and rationalize their net worth. They have put slowdown on some other capital spending but I don't think it will be an ongoing issue.

Thanks a lot. I appreciate it.

Thank you, sir. Our next question from John.

You mentioned last week out of the national, so of broadcasters. I was wondering whether the communications and discussions there have caused you to change your outlook overall for broadcast. You indicated before it's about a 5-7% annual Global Market growth and specifically whether you've seen any heightened interest at all on the HT Radio side?

First of all, I certainly wouldn't change our long-term view of the market growth rate but I clearly came away with a positive bent relative to opportunities that we have to grow not just that but perhaps above the market growth rate and we have to execute, of course, to do that. I think the opportunities are there. They're coming interest several different areas.

We have introduced recently a couple of new suites, new applications as part of our Harris resource suite and automation software. I'm very excited about what's going to happen with our offer to customers and their reaction as a result of their new digital media asset management offers. And software is clearly an area that is continuing to get investment in the broadcast space particularly in North America.

Secondly our reaction and the market's reaction to digital Radio remain positive. Having said that, with traditional adoption rates of new technology and we looked at a lot of them that have been consumer driven from DVDs and satellite television and other new technologies and typically the big rampup is by the consumers in year four and five we're going to see demand for our products to get stations geared up in advance of that but that says while we'll see some growth next year, the big opportunity is still two or three years away. We'll continue to promote that.

We think that the opportunity offer by HD Radio to re-engage the radio stations in the delivery of digital media content not just music or talk radio but other forms of radio content because of the capabilities with HD Radio, we think those are positive developments in the technology and will drive consumer demand. We'll wait and see when a lot of new receivers are available both in the model of audibles this year as well as home receivers introduced by Kenwood and three or four other manufacturers.

Thank you very much. Very helpful.

Thank you, John.

Next we move to Mark Jordan with A.G. Edwards.

You talked about the Government Communications Group. You mentioned extraordinary award fees received. Could you quantify what they were and what would be the implied normalized operating margin of that group given the revenue base?

You can look at our trend line this quarter was clearly above the trend line and it was one program, one large classified program where frankly our team did such a good job on getting the project done earlier than planned at a lower cost level as a result of that that some of the cost savings from the customer was shared with us.

I'm extremely proud of our team for that accomplishment. Given would it be reasonable looking into '05 for this group to be in the mid-to high % range rather than 10 or 10% plus more the expected norm here?

What we have said for some time is that we have aspirations above 10% return on sales level we have not been there consistently up until this point but certainly are approaching those levels of return on sales and I certainly I know I speak for Bob in saying we want to get to that level and stay there.

At this point our indicates that we think we can deliver about the same level of performance next year as this year. What that means is that without any expectation of these special awards we're going to improve the underlying performance of the company to fill any gap from a margin return on sales stand point if you follow me.

Second question implied in your Q4 guidance if you back up nine months from the full year guidance. Does that guidance implied for Q4 include the charges or would they be in addition to what you have implied.

At this point we haven't sized the spastic amount of the charges. This outlook would not be conclusive of any charges. It would be on a consistently outlook basis with other outlooks.

Thank you. We do expect to be back to the market at some time during the quarter to not only describe the size of the restructuring but also the details of what we are doing and the benefits. I can tell you we will expect less than a one-year payback so that whatever the charges we expect to get at least that much or more in dollar savings in our fiscal year '05.

Thank you.

Our next question comes from Ted Wheeler with Buckingham Register.

You mentioned in the Microwave activity being avoid a little bit by -- bouyed a little bit by grants. Can you give more color on that, maybe how long you expect this process to be available or be a stimulant to that market and incremental opportunity that this creates for the market overall?

Well, overall the current grants are in place through the end of the government's current fiscal year in September so we have a couple more quarters. I'm afraid at this point I can't quantify what this has meant to us in dollars or what it could mean to us. The overall Homeland Security budget that's allocated to state and local governments is billions of dollars. Obviously, that's for a wide variety of different programs, Ted, but at this point I don't know how much of that specifically is for Microwave.

And, in addition to grants is also some bonds that have been specifically targeted for use in this area. What I was trying to indicate in my remarks is directionally we are starting to get increased number of quotations from state and local governments aware of this money and we're utilizing this information to make calls on older network users who might be in position to upgrade the network and achieve the goals for first responders that the government is intending.

I'm sorry I can't be more specific than that. I just don't know what the numbers are.

It sounds like it's a beginning of a process here, is that right?

It's positive as opposed to negative. In general our private network business continues to be solid as I indicated in three large size network orders that we receive this quarter. I view that as a positive. I just don't know how positive I guess is what I'm saying.

Just on the comments on revenues next year overall, I wonder if you could refresh us as to divisional or product line revenue expectations, I think you mentioned an overall number. What does it look like for the government, et cetera?

At this point, I don't see a large variation across the segments. I think we have been consistent in saying that RF communications, at some point is going to reach a little bit of a plateau. We expected it perhaps to occur sooner than it has. Once everyone in the military has one of our radios, we probably are going to slow down a bit, just as a side comment. I expect RF to be a little bit below that at this point; although, I've been pleasantly surprised before and I expect the government systems business to be above that.

In aggregate, both the government, two government sectors when added together and the commercial segments when added together at this point are all going to be in this 6-8% range. I don't see a big the difference. Again government systems will grow a little bit faster and RF at this point I'm outlooking will grow slower.

Obviously, we're going to do everything we can to exceed these numbers and deliver better results but that's the level of our visibility at this point. It won't let us go beyond that without making commitments that we're not likely to achieve.

Just and lastly could you give us an update on the Cluster 5, I guess, and as a second competition in that area that's in the JTRS area that's moving fast?

Cluster 5 and Cluster AMF. Right.

On the Cluster 5, we expect within the next week or so to have some information from the government on how they're going to proceed with Cluster 5. We're waiting a decision on that and we do expect that in the next 4-5 days and hopefully that will be positive. We feel fairly good about that right now.

I think we told you in March that that program had slowed a little bit because of funding issues, something we're going to hear more of and various programs. But the latest information is that they now have a plan of attack on how to go forward and they'll be communicating that within the next week or so.

Cluster AMF continues to go forward at this point the formal RFP is not on the street but we expect that in the near future hopefully before the end of this fiscal year and the award date would be sometime into fiscal year '05.

Great, thanks.

You're welcome.

Once again that is star 1 if anyone does have a question. Star 1.

Next we move to Chris Quilty with Raymond James.

How are you guys doing? Can you do a follow-up with the discussion earlier with the HD radio. In my drive to work I picked up on broadcast industry commercials they've been doing, promoting disparaging satellite radio and to that end can you discuss if there's a broad-based industry consortium toward promoting their distribution method. Is there likewise going to be some follow-up in effort to push HD Radio?

Chris, you got me there. I'm not aware of any consortium to promote HD Radio compared to satellite radio so I'm not sure you heard something from an individual station or not. Here in Florida, Miami has a large number of stations on the air so I'm just not sure who you might have heard.

Also switching gears on the Microwave business, you didn't mention anything on the Latin American market. Can you give us an update on where that stands?

I can't recall anything in the third quarter that was particularly note worthy. I think our proposal, level of proposals has increased a bit over the past quarters in Latin America, but I haven't seen anything that would indicate that we're going to see a huge rebound.

It does start with proposals and requests for quotations and doing some network design and we are seeing a high level there but at this point it has not found its way through the system in terms of high level orders.

And just for reference sake when you had to fall off a couple years ago, Latin America was the biggest delta in terms of lost sales.

Absolutely. If you go back several years, you look at our peak in revenue in the Microwave division, we were well over $100 million in revenue from central America, Latin America, a large portion of that specifically from Brazil and compare that with our levels now which are a very small fraction of that revenue volume.

Through the last several years, even as the North American market has contracted, our revenue has actually increased as a result of our market share gains and North America so we've been able to mitigate some of this decline through great performance but the Latin America market at this point employs to increase 2 or 3 or 5 times and have to get up to 10 X to get where it was a few years ago.

And the broadcast business you mentioned that the stereo business had picked up or an area of strength. Can you comment whether that was existing stations where you had already sold digital transmitter equipment or some other metric driving it?

Most of the increase was attributed to the media network project which in terms of what we have shipped and recognized as revenue to date is largely studio products and equipment. Transmitters are going to start to be shipped in the fourth quarter and first quarter of next year. So in total we booked $18 million of orders for IMN. We shipped 5 million in the first quarter and essentially all studio-related equipment.

Very good, gentleman.

Thanks, Chris.

Next we move to James McIlree.

Thank you. Can you -- I know you're not working out the amount of charges at the commercial divisions but what type of quarterly revenue are you targeting for break even after these charges or after you take these actions?

I think I'll be in a better position, Jim, to talk about that and by break even I assume you mean in our Microwave division. I'll be in a better position to talk about that when we have finalized the actions that we're going to take.

Clearly, in Microwave, as you recognize the break even has much to do with what the mix of revenue is between our North America and international products as it does the absolute level of expenses in the division. Expenses today are lower than they were one or two years ago.

So we have to be successful in both driving the expenses down further but also in improving the mix of revenue and the answer to that is ultimately our TRuepoint introduction getting a higher percentage of revenue from TRuepoint product which is will have higher products than the products they are replacing. That's going to be the key there.

Okay. And the classified revenues grow faster than the overall revenue this quarter?

We're checking that, I believe the answer is, yes. But not by a huge amount.

Not by a lot.

Okay. But slightly faster growth.

And I know you said it tongue in cheek about once everybody in the army has a radio.

Well, they don't yet so don't get worried.

Do you have a figure or idea about what type of penetration you don't have into the U.S. armed forces and Nato forces?

I don't have in terms of statistically by what percent of the units have our radio or one of our new radios. There's a very large installed base out there. We know in the HF and multiband area we are the leading market share and that market share has been going up.

I can tell you there still are many generations of radios out there to be replaced. It is a function of funding to do that and the timing associated with the new joint tactical system JTRS. The military would like to wait and only spend money on JTRS compliant radios because their goal is to have all the radios interoperable. Contrasting that, though, is the immediate need for improved forms of communication for troops that are being deployed not just in Iraq but elsewhere around the world.

We'll continue to have that balancing act and at this point clearly the needle is tipping to the side of the need to have better and more improved radios than they currently have, more operability across the teams and the forces compared to holding off and waiting for JTRS compatibility because essentially every radio that someone buys today they're not upgradable in their current form so they have to be replaced with another radio down the road so you can understand a fiscal standpoint they would like to delay those as long as possible. The troops need the radios so waivers are being granted.

Okay. And finally on the call this morning the Cluster 5 might be delayed until June. Are you participated in different areas, you're looking for something that might happen in the next 4 or 5 day as soon as.

We're participating in the same area and we're looking at the award date pushed up that long, yes.

I think Bob was referring to we are expecting an update on the timing and that may be June or some other date, I don't know, but expecting feedback, not an award this week.

Great. Thank you very much.

Thank you, Jim.

Next we move to Troy with Oppenheimer and Company.

Can you hear me?

Yes.

Congratulations on the quarter. I was wondering as far as rapid turnaround order, what you're feeling as far as expecting more orders of that type, orders on the short turnaround basis or do you think that was more of a onetime thing?

We have been getting a number of these throughout really the last 4-6 quarters so I'd say they have become much more the norm and these quick turnaround shortly time orders being driven by deployments not only of U.S. forces but also coalition forces and we have really our RF division has shined during this time because of our commercial business model.

We anticipate the orders through our forecasting process, build components and with the matter of a week or two can drive these to our production line with a much faster response time. This is really allowed us to take a significant lead compared to other providers of radios and to the extent that this continues we love it because it really gives us a competitive advantage.

In terms of the turnaround for that 15 million deal, are we still talking in terms of length about a couple of weeks?

I think certainly the name implies that they expect us to turn this order in the quarter. I don't recall specifically whether they'll ship all of it in the quarter or not but we'll do our best to do that.

And lastly, just turning back to the Microwave division, would it be reasonable to say that if we assume more of a reversion to the norm in terms of the split between the business there, international domestic split that Microwave can get back on track toward profitability or what we're seeing there in terms of orders not much change from Q3?

We said we had a good order quarter in North America so I'm hopeful with that so at the end of the day it's right now whether I like it or not dependent upon the mix of the revenue that actual gets built and shipped. We have a fairly large backlog of orders. We made a commitment to customers and going to keep those. As many orders as we can push through the factory in the quarter we'll do that because it will improve our mix. At this point I'm not going to comment whether we make money or not in the quarter.

We are focused in the Microwave business with Guy Campbell on board and getting that division to profitability. Unfortunately there's no one silver bullet that's going to do that. In order to accomplish that in the longer term, we've got to drive down our expenses and we'll take more actions to do that. We have to improve our product gross margins. We're clearly taking actions to do that with TRuepoint and TRuepoint is the linchpin of our strategy in that area.

Third as we have higher product margins, we want to actually grow our market share internationally because that's where the market growth is the fastest. To do that with a product that doesn't make us any money obviously is not as good a strategy. Really it's those three things together. Having said all that we're not done in America. Our sales team we now have the GSA contract.

Other opportunities to expand our markets in North America so I would say those are the four corners of our strategy that we're driving on by quarter by quarter we are going to be dependent on the mix of this business and that's where we are in the recovery plan. If we look further out into next year, we're going to see improved results in this division. I feel confident of that.

Okay. Sounds good. Thanks so much.

I think we have time for another question, please?

And our last question will come from Reyna Smith.

I wanted to follow up on the Broadcast Division. You said the broadcasting conference looked to be picking up possibly and that orders were looking good. Wondering if you could characterize the orders outlook excluding that large Iraq order that you've got sort of the domestic or nonIraq outlook at this point for broadcast?

Let me try to get my hands on specific information here. Orders in the quarter even without their the Iraqi order would have still been up compared to last year.

Okay.

And we saw improved orders for the first time in a while in the transmission area as a result of the Romania TV project. What we didn't see a big increase of is renewed demand for digital transmission here in North America while we did get some orders from Hearst-Argyle for upgrades.

Our customers are still taking a wait and see attitude until the FCC locks down these file dates for a full powered compliance which their proposal is where it has been for the last six months, middle of '05 for the top 100 markets, middle of '06 for all the markets. We believe hopefully in the not-to-distant future they'll come out and set those dates in concrete and we'll start to see some movement. What our customers are concerned about right now is making investments in the wrong places in digital transmission.

One of the other things they have to do in the near future is take a stand on what their final channel allocation is going to be. Today, as you know, they have a different channel for analog and digital and some are the same in the end range, some are in VHF and UHF and they have to make that tradeoff and that concern and placing a lot of concern on them they'll have to invest capital and move transmitters around and so on. We support the FCC putting a date in place whatever that date is. We think it's going to be the dates that have been proposed in the notice of public rule making.

We did have a decent quarter, also in our automation software orders. Again, I commented earlier on our new product offers. I'm very excited about that as well as our process to put in place a newly reconstructored automation sales force and re-engagement with systems integrators who is an important channel market and one we haven't courted as aggressively as we are now doing that. A major meeting with systems integrators at the NAB show and I think they were, the feedback I got was that they were very positive on what they saw in our product offers and I think some renewed channel-selling through those systems integrators is also going to drive revenue for us.

And we also had good sequential growth with those orders and that's without the Iraqi Media Network.

Great. That's very helpful. Thank you very much.

Okay. I think that concludes the call for today. Just want to remind you that we will file the 10-Q tomorrow morning so be looking for that, and I thank you again for joining us.

And that concludes today's Harris Corporation 2004 teleconference call. We thank you for your participation. You may now disconnect.