L3Harris Technologies Inc (LHX) 2004 Q4 法說會逐字稿

Hello, everyone. Thank you for holding and welcome to the Harris Corporation's fourth 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, Pamela.

Good afternoon, everyone and welcome to Harris Corporation's fourth quarter fiscal 2004 conference call. I'm Pamela Padgett, Vice President of Investor Relations. On the call with me today is 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, 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 risks and uncertainties, please see the press release and filings made by the company with the SEC.

In addition in the tables of our release and on this teleconference we will discuss certain ratios and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in the tables of our release and on the Investor Relations section of our website, which is www.Harris.com. A replay of this call will also be available on the Investor Relations section of our website. And with that, Howard, I'll turn the call over to you.

Thanks Pam and welcome everyone to our fourth quarter earnings call. Today we'll provide additional details on Harris results for the fourth quarter as well as for the entire year fiscal year 2004. I'll structure my comments around the earnings release distributed early this afternoon. Bryan will provide additional commentary on our financial performance in the quarter and for the total year and we'll conclude with our outlook for fiscal year 2005 and your questions. Let me give you the highlights, consolidated revenue in the fourth quarter was $723 million, an increase of 27% compared to the prior year quarter. Growth was all organic. For the first time in fiscal 2004, we delivered solid year-over-year revenue growth in the quarter in all four of our operating segments. Net income for the fourth quarter was $38.2 million, compared to $700,000 in the prior year quarter. Earnings per diluted share on a GAAP basis increased to 57 cents compared to 1 cent in the prior year quarter.

Earnings per share from discontinued operations contributed 8 cents in the quarter, and this included gains from the sale of our network support, tools and test equipment business. We think the more relevant numbers would be on a non-GAAP basis, excluding charges taken this year in the fourth quarter as well as last year. Fourth quarter earning, on a non-GAAP basis, from continuing operations was also at 57 cents per share in fiscal 2004, compared to 40 cents per share in fiscal 2003. That's a year-over-year increase of 43%. Summarizing fiscal year 2004 in total, revenue increased by 22% for the year to slightly over $2.5 billion from $2.1 billion in fiscal 2003. Non-GAAP income for fiscal year 2004 was $131 million compared to just $95 million in the prior year. Earnings from continuing operations increased to $1.96 per share, compared to $1.43 per share in fiscal 2003. For the total year, that was a 37% increase. It was clearly a great fourth quarter and a record-setting year for Harris.

During the quarter we delivered year-over-year growth in both of our commercial businesses, with revenue increasing 19% in microwave and 15% in broadcast. Profitability in both divisions also improved. And fourth quarter cost reduction actions will support further profit improvements in fiscal 2005. Momentum continued in our two government businesses, as they delivered strong revenue growth and excellent operating income performance. Our largest segment, Government Communications Systems again reported record results for the quarter. Year-over-year growth in revenue was achieved for the 17th consecutive quarter. Revenue, at $435 million, was a 37% increase compared to the prior year. With sequential sales growth of 10% compared to the third quarter, the momentum clearly continued in this segment. Operating income was $42 million, an increase of 40% compared to the prior year. The Government Communications Systems segment achieved revenue growth of 32% for the full year. This continued as a result of strong market demand as well as important major program wins.

Department of Defense programs revenue increased by 16% for the year. Major contributors to this growth included JSF, which is the joint strike fighter aircraft program; FAB-T, which is the family of beyond line of site terminals; the Advanced EHF program for the U.S. Navy; and Avionics deliveries for the F/A-18 aircraft. Our national classified programs revenue increased by 47% in fiscal 2004 compared to the prior year, as a result of increased U.S. government funding for intelligence, surveillance, and reconnaissance missions. Harris's leading technology and outstanding program execution are the key discriminators that have allowed us to continue to be awarded new programs with these important customers. Civil agency programs revenue increased 57% for the year. Major contributors to growth included FTI, which is the Federal Aviation Administration telecommunications infrastructure program; MAF/TIGER, the database modernization program for the U.S. census bureau; and the Iraqi media network program.

Technical services programs revenue increased 22% for the year. Revenue growth was primarily a result of the ramp-up of the MCOM program, Mission Communications and Operations Maintenance for the U.S. Air Force. This program was awarded to Harris in fiscal 2003. The Government Communications Systems business also has a number of large opportunities on the horizon, with bids to be submitted in fiscal year 2005. Let me go over some of the key programs in this list. The Patriot program is for the National Reconnaissance Office. This is a network management contract with Harris as the prime and with a potential value of $800 million. The Mission Support Network program for the FAA, which could be worth $300 million. The LAMPS program, which stands for Light Airborne Multi-Purpose System. This is where Harris will provide tactical data links for U.S. Navy helicopters. This program could be worth $200 million.

Next is the Electronic Records Archival program, or ERA for short. This is a program for the National Archives and Records Administration and could be worth $400 million. The field automation program for the U.S. Census Bureau is valued at $800 million. Then there's the Automated Flight Service Station A76 Modernization program for the FAA general aviation market, and that program could be worth $500 million. And finally, the Transformational Satellite Mission Operations System program, TMOS, where we're teamed with Northrup Grumman in support of U.S. Air Force Space and Missile command; and our value in that program could be worth $100 million. These seven programs comprise $3.1 billion of a total $7 billion, including classified programs that is currently in our bid and proposal funnel for fiscal 2005. Over the past several years, our win rate has exceeded 60%.

Another significant program opportunity I want to highlight today is WIN-T, that's short for War Fighter Network Information-Tactical. WIN-T is the next generation battlefield communication systems for the U.S. Army. Harris has been participating in the initial development phase of WIN-T as part of the Lockheed Martin team. General Dynamics is leading the competing team. The Army recently decided to form a combined national team to accelerate program implementation. We view this strategy as a very positive step. It's currently under review by the Department of Justice to make sure it has full compliance with government acquisition guidelines, but we believe within the next few months the Army will decide how the work is to be distributed and announce that to all the members of the combined team. WIN-T could represent a potential value to Harris of $500 million over the 15 year life of the program.

On July 6, we closed on the previously announced acquisition of Orkand Corporation. Orkand revenue was $81 million for the 12 months ended in June. The acquisition is expected to be immediately accretive to Harris fiscal 2005 earnings. As we've said before, Orkand adds significant scale to the Company's mission critical technical services business and will provide insight into business development opportunities with several important new customers, including the Department of State, Department of Labor, Department of the Interior, Department of Health and Human Services, Department of Energy and the U.S. Postal Service. Integration is moving along smoothly with Orkand so far.

The RF Communications division also achieved strong financial results during the fourth quarter. Revenue increased 21% over the prior year, to a record $120 million. Operating income was $31 million. And at 26% of sales, excellent performance by any measure. Revenue increases were seen from both our U.S. Government and international defense forces customers. International year-over-year sales growth in the quarter matched the growth from the U.S. The international side of our business is benefiting from increasing demand in several areas. First, efforts to combat terrorism and increase national security around the world. Countries such as Philippines, Algeria, Saudi Arabia and Pakistan. Also participation in communications technology standardization programs in the Partnership for Peace countries. And then finally, requirements from coalition forces who are deployed in both Iraq and Afghanistan.

RF division's international revenue is also benefiting from the continued ramp-up of the $245 million Bowman Tactical Radio Programme for the U.K.. Bowman is just finishing year three of the six-year planned program life. This program ramps even higher in fiscal 2005 and then peaks in revenue in fiscal 2006. In addition to the current revenue from the U.K., Bowman also provides a new product springboard for additional opportunities that we'll pursue in Europe and in Australia. Significant international orders in the fourth quarter included $9 million from the United Arab Emirates, $6 million from Pakistan, and $6 million from Romania. Additional orders came from Latvia, Norway, France, Albania, Oman, Uganda and Tunisia. On the domestic side of the RF business, the long overdue upgrade of tactical radio equipment continues, accelerated by continuing troop deployments. There is still 116,000 troops in Iraq. Many of these troops are seeing their tours of duty extended, and they are also being reorganized into smaller more tactical units. Both of these factors have increased the demand for Harris radios. During the fourth quarter we shipped $15 million in tactical radios to the U.S. Army to support forces in Iraq and Afghanistan.

Let me now spend a moment discussing the impact of the recent award of the Cluster 5 portion of the Joint Tactical Radio System. Clearly, you're disappointed whenever you loose a contract, but we believe there's a significant opportunity for Harris to mitigate any long-term impact through development of our next generation Falcon III radio for the U.S. government. The Falcon III design incorporates much of the same technology and wave forms as does JTRS, and it will be compatible with radios currently in the field. We've been preemptively investing in R&D on Falcon III during the last 12 months, and we will now move ahead aggressively with the commercial release of new products. The RF division has been quite successful with this approach in the past. Following the original Sync RS contract award in the late 1980s, we developed our own, highly successful Sync RS-compatible product line. You know it as today's family of Falcon tactical radios. We have completed very successfully against the incumbent suppliers. In fact we've established a leading market share position in both multi-band and man-pac tactical radios. And the number two position overall in global tactical radios, by using this approach.

As a reminder, Harris RF is already under contract as part of the Boeing lead team for the previously awarded Cluster 1. This includes vehicular and rotary aircraft tactical radios. We're also the exclusive supplier of cryptographic subsystems for all Cluster 1 radios. I'll remind you that Cluster 1represents potential revenue to Harris of more than $600 million. And finally along with Rockwell Collins, Harris is part of the Boeing lead team for Cluster AMF. That encompasses airborne, maritime and fixed site radios. We are all expecting a program award by sometime this fall. Harris already supplies the U.S. Navy with tactical radio systems. If we're selected under AMF, this will move Harris into applications for airborne radios, and that's a new market for us.

Let me now turn to the commercial divisions. In the microwave segment, revenue was $97 million in the fourth quarter, an increase of 19% compared to the prior year. Year-over-year revenue improvement was driven primarily by growth in the Middle East and Africa markets. North America also continues to be an area strength for the division, as it has been all year. Gross margin improved both sequentially and year-over-year, and the segment returned to profitability excluding the impact of the $7.3 million charge for additional cost reduction actions that we took in the quarter. Fourth quarter results do not reflect the future benefit of these actions, which are expected to have a payback period of less than 12 months. By far the largest contributor to revenue in the quarter was a project for MTN Nigeria. We're the microwave radio provider for MTN's new high-capacity GSM network. MTN is the leading cellular service provider throughout Africa, and we see many opportunities to expand our relationship to others over time.

In the quarter we also began system implementation on a project for MTC Vodafone in Kuwait. Their new integrated network management system is utilizing Harris NetBoss software as its core. Our rollout of the new TRuepoint microwave radio product line continues. We received $2 million in new orders for TRuepoint during the quarter and the opportunity list continues to grow. We've already released the six and seven gigahertz frequencies. We'll release the 8 gigahertz product line next month, and we're on track to release 13, 15, and 23 gigahertz models; all before the end of calendar year 2004. And then we'll add the few remaining frequencies by March, 2005. As you'll recall, TRuepoint significantly expands our international product offering and makes us much more competitive in all regions. More importantly, it will further improve gross margins in our international business and significantly contribute to improved division profitability going forward.

In North America, service providers continued to expand cellular coverage and capacity during the fourth quarter. We see this trend continuing as 3g wireless is finally becoming a priority in the U.S. market. And as we reported last quarter, the private network business continues very strong. Many private networks are nearing end of life for their current equipment. At the same time federal funding is available for upgrades that resolve interoperability issues, a significant concern of first responders. Turning to our broadcast segment, revenue for the fourth quarter grew 15% to $89 million, up from $77 million in the prior year. Sequentially revenue increased by 22%. Operating income in broadcast improved to $3.9 million in the quarter. This compares to $2 million in the same quarter of the prior year, excluding cost reduction charges. Results in the quarter also represented a healthy increase from the third quarter's essentially break-even level. We're encouraged by this progress, and we expect our most recent cost reduction actions at broadcast to further improve profitability in fiscal 2005.

In addition to the cost reduction actions, we took steps to improve the overall effectiveness of our Broadcast organization during the fourth quarter. We recently realigned the division into five market focused, customer facing business units, to drive revenue growth and improve our customer responsiveness. Jeremy Wensinger was appointed president of the Broadcast business. Jeremy comes to Broadcast from our Government Communications division where he achieved great success in leading and growing the technical services business and expanding their markets. We also made another great addition to the Broadcast team. Dave Stevenson, previously with our RF division joined as Vice President and General Manager of the Europe business. Improving performance in Europe is the key to improving overall Broadcast division profitability.

Shipments from Broadcast related to the Iraqi media network program were a key contributor to revenue growth in the quarter. Harris Government Communications Systems is the prime contractor in this project, to rebuild the TV and radio network infrastructure in Iraq. Over the last two quarters, the Broadcast division revenue has included approximately half of the $35 million in equipment orders under the current contract. We expect to ship the remaining equipment in the first half of fiscal 2005. There is little news to report on the U.S. digital TV conversion front. The Federal Communications Commission has yet to set a definitive full-power deadline for broadcasters. And. as a result, broadcasters are still reluctant to make the required investments to upgrade their digital transmitters to full power any sooner than they have to. The lack of action by the FCC and by Congress is not surprising in a year where the political focus has clearly been on Iraq and the November elections.

On the other hand consumer support for DTV continues to accelerate. High-definition TV unit sales in the first half of the calendar year were 67% higher than the prior year. And Motorola has recently introduced a low cost TV set top box that converts digital cable signals so they can be viewed on analog television sets. In our view, it's clearly time to reclaim the analog television spectrum for other important uses. On the radio side of the digital conversion, the news is very good. It looks like a market that's about to shift from an early adopter trial market stage to one with large scale digital rollouts. You probably saw the announcement last week that Clear Channel Communications, who is the largest radio broadcaster in the U.S., announced that over the next three years they'll roll out digital broadcasting equipment to 1,000 of their radio stations. Clear Channel is a longtime Harris customer. In fact, we received an order from Clear Channel in the fourth quarter for 17 HD radio transmitters. Clear Channel is not only the largest radio broadcaster in the U.S., but clearly a trendsetter. We fully expect other station groups to follow their lead. Let me now turn the call over to our Chief Financial officer, Bryan Roub.

Thank you, Howard. We just finished another quarter of absolutely great asset management performance. And importantly, also another quarter of progress. We continue to improve our metrics in this extremely important area. First I'd like to talk about cash flow. Once again, we had excellent cash flow results, primarily driven by our two government businesses. We generated 83 million of cash from operations in the quarter, which brought us to a total of 270 million for the fiscal year. That 270 compares favorably to the 153 million we generated for fiscal year 2003. Our strong fourth quarter cash performance exceeded our last estimate and is attributable to improved asset management in all of our segments and strong profits. For the year each of our segments had positive cash flow from operations. Capital expenditures were 23 million in the quarter and 66 million for the fiscal year, slightly less than prior year total of 73 million. Depreciation was 55 million for the year, essentially flat with the prior year. Capital spending was, as you know, concentrated in our government segments and was tied to the extremely good growth in both of these businesses.

As the positive cash flow results suggest, we continued to have outstanding asset management performance. Not only did we have continued excellent performance in our two government businesses, but we continued to make progress in our commercial segments as well. Inventory turns in the quarter increased from 8.3 in the third quarter to 9.8 in the fourth quarter. The number of days sales outstanding in the quarter also improved from 61 days in the third quarter to 58 in the fourth. An important metric that we monitor is the dollars invested in what we consider to be operating -- net operating working capital, namely accounts receivable, unbilled costs and inventory less accounts payable, accrued expenses and advance payments. Operating working capital at the end of the quarter was 257 million, a figure that represents 9% of sales compared to 11% of sales at the end -- in the third quarter and 14% of sales in the year earlier quarter. Return on invested capital also improved, with the growth of earnings and the reduction of invested capital. The return on invested capital in the fourth quarter of this year was 16%, and for the year was 14%; that compares to 10% and 18 in fiscal 2003.

In keeping with our practice of holding actual shares outstanding flat, we bought back 300,000 shares at an average price of $44.41 in the quarter. And for the year bought back approximately 1.3 million shares. Under our existing repurchase program we have authorization to repurchase approximately 3.2 million additional shares. We expect to continue to repurchase shares to offset dilution from shares actually issued under retirement and stock incentive plans. As a result of these strong profit and asset management results, cash and cash equivalents at the end of the quarter totaled $628 million. That amount greatly exceeded the total debt outstanding of $411 million. Obviously liquidity remains excellent. The earliest maturity of debt is in 2007, we have more than 300 million of unused credit facilities available to us, and we also have significant debt capacity beyond the unused facility were it needed. Our total debt to total capital ratio remains very low at 24%. And as I have said many times before, we would be comfortable at a 35 to 40% debt to total capital level of borrowing.

Next I would like to comment on our cash flow outlook for fiscal 2005. We expect another strong year with cash flow from operations in the 200 million to$250 million range. Capital expenditures should be in the 80 to $90 million range with depreciation between 60 million and 65 million. As a final matter, I'd like to provide some background to you before Howard covers our fiscal year 2005 outlook. First we expect corporate expenses to grow in line with sales. Second, we anticipate a net nonoperating loss of about $1 million a quarter. And finally, we believe the proposed accounting change for convertible debt will become effective during the fiscal year. That accounting change will create a 5 cent to 6 cent per share dilution. Okay. Howard, back to you.

Thank you. Clearly you can see from the results that we're focused very clearly on growth, on profit expansion, but also on asset management. Let me conclude my remarks by discussing our fiscal 2005 outlook. We believe Harris is uniquely positioned to leverage opportunities in both the government and commercial communications markets. In our broadcast and microwave businesses, we've taken additional cost reduction actions, we've realigned the organization structures to better serve our markets, and we've introduced important new products. We expect both of our commercial businesses to increase their contribution to overall company profitability in fiscal 2005. In our government businesses, we continue to be cautious regarding total U.S. government spending levels, however, we expect continued growth at Harris. We will continue to benefit from new program ramp-ups and from our well diversified customer and program base.

The transformation of global defense communications networks will remain an area of great focus and investment, as will meeting the expanding needs for intelligence information to support our national security interest. Both of these missions are at the heart of what Harris does best. As we enter fiscal 2005, I'm optimistic about the year ahead. I'm also confident we can achieve our earnings guidance of $2.25 to $2.35 per share. This represents a 15 to 20% increase above fiscal 2004 results of $1.96 per share from continuing operations. We expect to achieve this through double-digit revenue growth in the total company in fiscal 2005. In the Microwave Segment, we expect good revenue growth of 5 to 7% over fiscal 2004. While all international wireless infrastructure markets have not fully recovered, selected international areas are showing increasing demand. In North America, we expect strength to continue, in terms of both mobile and private network buildouts. Our expected revenue from the new TRuepoint radio for fiscal 2005 is about $30 million, and this will come primarily from our international customers. We expect improving microwave profitability in 2005 as a result of three factors.

Number one, savings from the fourth quarter 2004 cost reduction actions. Number two, the higher expected additional revenue. And three, higher gross margin contribution from TRuepoint. While we're making progress in this business on profitability, we've got a long way to go to reach our objectives. We need to achieve a minimum 5% operating income margin by the fourth quarter of fiscal 2005, and then reach for 10% in fiscal 2006. In the Broadcast segment, we are managing the business to deliver profitability improvement and to implement strategic initiatives that will reposition the division going forward. We've decided to exit the TV systems integration business. This business contributed $13 million in revenue in fiscal 2004. In this business, we designed, provisioned and installed TV studios, but the business has not been profitable. Instead, HD radio, studio automation software, and international transmission opportunities will receive additional sales and marketing focus for fiscal 2005.

Total broadcast revenue growth is expected to be up only 1 to 2%, as we must overcome the revenue lost from this exit of this TV systems integration business. Profitability improvements at Broadcast will be driven by two key factors. First is the substitution of more profitable revenue compared to the TV systems integration revenue that we're exiting. And second, the cost savings from the fourth quarter cost reduction actions. We expect to achieve 10% operating income margin by the fourth quarter fiscal 2005 in this business and then target 15% in fiscal 2006.

Turning to the government businesses, Government Communications Systems segment is expecting to have another strong year; with revenue growth of 13 to 15%, including revenue from the Orkand acquisition of 90 to $95 million. We expect to achieve 10% operating income margin on the core business and, as previously indicated, about 7% margin on the Orkand revenue.

Finally the RF Communications segment has shown tremendous growth in revenue and significant profitability expansion over the last several years. We do not expect the same rate of growth to continue in fiscal 2005, but we still expect to grow this business. Our current expectation is revenue growth of about 4 to 6% above fiscal 2004 with a strong first half of the fiscal year. Operating income margins should remain very close to fiscal 2004 levels. With that overview, you can certainly see why we're excited about fiscal year 2005. And with that, I'll ask the operator to open the line for your questions.

Absolutely. [Caller Instructions] We'll go first to Arindam Basu with Morgan Stanley.

Hi, folks. How are you? Congratulations. Howard, could you characterize margins and prices in the microwave sector by region? I'm trying to get a sense of profitability by region or how pricing differs by region, and what you think of this geographic mix in the fiscal year, is it likely to look the same?

I think generally, Arindam, the margin is less once you get outside of North America, less related to the region you're in and more related to the product features in terms of capacity and frequency. In the smaller capacity, high frequency access market, the PDH market, worldwide pricing has been extremely competitive now for a number of quarters. That has an impact on our margins, as you'll recall, because of our older products that we're trying to compete in that area with. When we sell our higher capacity products, such as the MegaStar, which is the principal product going into the MTN project in Nigeria, we experience better margins.

So the message really continues the same with regard to margins in microwave, which is it's somewhat volume dependent, but it is also very dependent on the mix of which products we're selling. TRuepoint margins clearly have at least a 10 point improvement in the gross margin compared to the products they replace. And as we ramp-up and hopefully meet or exceed that $30 million revenue target for the fiscal year, we will not only see the benefit from that, but hopefully we'll be able to go faster.

Similar question on the Broadcast division, I was trying to get a sense for the margins on the Iraqi media network project. How much of the margin improvement in this quarter came from restructuring versus the volume increase.

Virtually none of the improvement came from restructuring. Basically took us the entire quarter to get that done. So we'll see that improvement going forward. Iraqi media network margins are about at the division average, not much better but not much worse. There's a mixture of different kinds of products. Some that we manufacture, some that we are integrating as part of the project with Government Systems. So I think it's fair to say that in the quarter the delta revenue sequentially of about 16 million pulled along around $4 million of incremental operating income in the segment.

We've been throughout the year fighting, as you know, the two major projects, the move in Europe from manufacturing from Austria to the U.K., as well as the implementation of a new ERP system. We still had some carry-over costs in Q4 as a result of both of those projects that didn't give us quite the leverage on the additional revenue that you would normally expect. But those are basically behind us now. And with the restructuring and resizing of the business, we feel that we're well positioned to focus going forward on the growth initiatives, HD radio, certainly opportunities. Internationally in the transmission business, there's a lot of large AM radio projects that are being funded. Of course for several years we participated in Romania projects. In China there are three or four that seem to be emerging, so we're very positive in that area. We're also continuing to invest a lot of effort in growing our software--automation software business.

One last question. I don't write quickly enough and I'm easily confused. So I couldn't quite get the comment you made on the LAMPs project. I think you said it was for helicopter navigation and it was $200 million?

That sounds right. I'll have to check. 200 million. These are for predominantly for data links as those are predominantly anti-submarine warfare helicopters for the Navy and we're providing data links that get the information back to ship board analysis.

And we'll move to John Bucher with Harris Nesbitt.

Good afternoon. Question on the broadcast radio area. Do you expect that there's an opportunity for you to, perhaps, gain share there since while there are some other licensees of iBiquity, it looks like a smaller population than the general competitive landscape? And then I've got a follow-up after that. Thanks.

Well, I'm very optimistic, John, and we're very excited about Clear Channel stepping out and making this commitment. I think their release said they're going to put this in 95 of their top 100 markets. I think that's clearly going to drive their competitors to get in this game. I think we're very well positioned with our products in both FM and AM. We have been working with iBiquity from the beginning on this technology, and I think that's going to pay off for us. I also think that we have a unique competitive advantage with a release we did several months ago on space combining, which allow our customers to upgrade in the FM space without spending a lot of extra money on antennas. So we view this whole HD radio opportunity as significant. Now, it's going to take a number of years to fully deploy throughout over 10,000 stations in the U.S., but I think this was a very important first move, and I think we certainly expect to benefit from that.

Great. Thank you very much. It does sound then like there is a potential for a gain in market share as a result of this.

Well, we'd like to think so. I'm sure that our competitors aren't going to give that up easily. But I think we're very well positioned.

And then looking at the entire company, can you say what the overall backlog is, if that's meaningful, and how it compares to the last time you've posted a backlog figure?

I think in aggregate, our backlog for the total company is probably about the same as it was at the end of the last quarter. A backlog in our government businesses, as you know, especially in GCSD is a little difficult to calculate, because it depends how much of what's funded or what's unfunded. We tend to look at the total value of contracts that we've been awarded and put all of that in the backlog. Overall company backlog is about the same, hasn't changed much.

Okay. Thank you very much.

Thank you.

Mark Jordan with A.G. Edwards.

Good afternoon. A question on looking at the margins at government communications. It did decline here in the fourth quarter. Given the mechanics of booking for the Iraqi contract, if you're trying to back out the hardware passthrough component that would be reflected there, is it fair to say that you should take something like the 15 or 18 million out of that 435, and then divide that into the operating margin to get what, sort of, the pure operating margin of that segment would be in the quarter?

Mark, I think a better way to do it is as follows. First of all, GCSD and the Broadcast division, the contract is on an arm's length basis. So they have a cost-plus markup on broadcast equipment the same as they do non-Harris equipment. So the factor in the quarter was really not the IMN program. The quarter both in Government Communications and in RF Communications is really more toward the fact that we were taking the opportunity to make some investments in the future, additional R&D, additional bid and proposal investments that we think will reap benefits in FY '05 and beyond.

So as we saw how the year was turning out, saw that we had a number of these big opportunities in front of us, wanted to accelerate the Falcon III at the RF division, wanted to make sure we adequately pursued all seven of those big programs in the Government Communications Systems division, we turned up our investment dollars in both those areas. That's really what related to what you might look at sequentially as a slight decline in margins in both those businesses. I think they're both very good in the quarter. You also might recall that in the third quarter in GCSD, we had an extraordinary program award from one of our classified program customers, because we came in under cost and on schedule.

Okay. In general terms, could you quantify roughly how many millions of dollars you had at higher than normal investment-related spending at Government Communications?

In general terms, Mark, I think we're probably talking between the two businesses you'd probably be talking maybe $5 million. That's just a ballpark.

Okay. Thanks.

We're in that range, I would say.

Second question in the M& A area, obviously you did a significant acquisition subsequent to the end of the quarter, so you would still have over $560 million of cash left after that transaction. In the past you had stated that, you know, in a perfect world would like a more balanced company, government versus commercial. Given the last six months or so, do you still have that feel, or would you believe that it's reasonable to assume that the preponderance of your investments would be more on the governmental side versus commercial over the next year to 18 months.

No, Mark. I would say our strategy hasn't changed. We still believe that we will create a maximum of shareholder value by having diversity and balance in the company between commercial business opportunities and growth profiles, and our government business. We'll be opportunistic in any acquisition if it has the right kind of fit, but we would like to see the business more balanced. We continue to look at a large number of potential acquisitions in both commercial and the government segments.

As you've gotten your house in order over the last 14, 18 months of your tenure, do you feel that -- is there a goal that you have in terms of cash deployment within the next year that you would like to reach?

Well, I think it's difficult to -- it's always difficult to put M&A on a timetable, because it takes a willing buyer and a willing seller and a price that they can agree on. So I guess I'll continue to say what I've said before. It's not burning a hole in our pocket, but both Bryan and I agree that we do need to generate higher returns on that cash than the short-term investment markets are going to provide. So we will continue to go down this path, we'll continue to look at opportunities. If over a long period we weren't able to redeploy that, then we would look at other alternatives. We've gotten questions before on stock buyback at an accelerated rate, increased dividends or whatever. Both Bryan and I and our board believe that more value will be created for shareholders by investing this cash in strategic positions and so we're still holding out to do that.

Chris Quilty with Raymond James.

Good evening, gentlemen. Question for you, can you help us with both the Microwave and Broadcast division, are we looking at a true apples-to-apples comparison, given the NetBoss product line and the whole family has been split up and divvied up into the multiple divisions or are there significant differences that would skew the results we saw?

No, not really, I don't think so Chris. All of, you know, NetBoss is in now the Microwave segment--

and in both years everything was restated. Okay. And there was nothing--so it's all been pulled out of broadcast?

NetBoss was in the Network Support segment that we used to report separately. It had NetBoss, and then it had the tools and test set business. And we sold the tools and test set business and folded NetBoss, the business line, the business line general manager into the Microwave division. It does provide product solutions for our Government business, for our Broadcast business but it's most closely aligned with our telecom customers. So Microwave is where it fits in segment reporting.

Okay. And when the 10-Q finally comes out, will that give us a restated financials for the balance of -- fiscal '04 with the operations pulled out?

Sure. There's also an 8-K that you can refer to that was put out in late part of May that restated '03 and '04 through three-quarters, and now you have the fourth quarter.

Okay. Also on the Government Services business, you gave a much more delineated breakdown in terms of, you know, the different areas between classified and services. Is that something we should expect on a go-forward basis? And am I correct, is that sort of a new level of detail?

My feeling is that once a year it's appropriate for us to give you a sense on how the different pieces of Bob's Government Communications Systems business are moving. I also wanted to emphasize that we are having a lot of success in our diversification activities away from just the traditional DOD area, so that when you hear of this program or that programmed threatened that you understand that, you know, only a small portion of our Government Communications Systems Division revenue is in DOD; 57% growth in the civil program space, Orkand brings us six new high-level customers for us to go and mine additional opportunities. The classified customer growth has just been outstanding in the last 12 months.

We certainly expect growth in that segment to continue as the requirements from those customers for intelligence information is certainly not lessening, it's increasing, if anything. And then the services business talked about the MCOM program ramping up. And now, of course, Orkand will go into that part of our business- Harris Technical Services. Just before the acquisition Orkand won another major program with the U.S. Postal Service, and so we expect to see additional growth in the services business.

This is, you'll recall, Chris, how we reorganized back at the beginning of the calendar year. Organized into Department of Defense, Civil Programs, National Programs, Technical Services, and Homeland Security. And each of those has an individual running those with their own organization to drive business development, engineering and programs management. And I think both Bob and I are extremely pleased with how that transition has worked and how we're getting more focus than ever before on growing those individual businesses. This is not something we'll do every quarter. I think it's helpful on an annual basis to talk about the trends.

Okay. Thank you very much.

Jim Mcilree, Unterberg, Towbin.

Thanks. Bryan, when you were talking about the impact of the convert, were you talking 5 to 6 cents for the entire fiscal year or just for the second half of your fiscal year?

For the entire fiscal year.

And so you're assuming that it would apply to every single quarter, not just the March and the June?

We're talking about the year. And if it's enacted any time during the year, it's going to affect the calculation for the year.

Okay.

And the way it looks now it would be retro anyhow.

We do want to be clear, Jim, that we have taken that into consideration in reaffirming the guidance that we've given. So we are assuming that we have to absorb 5 to 6 cents of cost, thanks to this Emerging Issues Accounting Task Force that we weren't planning on a month or so ago.

Right. That's the second part of this question, where did the extra 5 to 6 cents come from, since you didn't change the guidance?

Clearly I would say I'm feeling more positive about the ability to continue the growth in Government Communications Systems and in RF Communications than I was a month ago. I think to some extent, it's a little bit deja vu. A year ago on this call talking about the fourth quarter and the year and our outlook, we said we've got pretty good visibility in the first half, don't know about the second half. Business was actually even stronger in those two segments in the first half than we had thought and then it accelerated. I'm not saying that's what's going to happen this year, but we feel, again though, very good about the first half. I think that's in focus. The second half is kind of to be determined.

At the same time, we continue to have expectations that Microwave and Broadcast are going to contribute at a higher level of growth. We all are impatient with the rate at which we're improving profitability in those businesses. I assure you that doesn't just speak for those of us on the call, but it speaks for thousands of employees who are in those two businesses. We are making progress. We will make more progress next year than we did this year. But I would say we were able to maintain the guidance by feeling a little more positive about the two government segments than we did two or three months ago when we established the guidance initially for the fiscal year 2005.

Okay. That's great. Thank you.

Ted Wheeler with Buckingham Research.

Hi. Good evening.

Hi, Ted.

A couple of questions on the commercial pieces. Just on the Broadcast guidance, and maybe referencing this year just ended, as well. What are your expectations for high-definition TV transmitter revenues in your guidance for next year? Sounds like that continues to be pushed out. I just wonder where we are on that.

I'm not expecting any growth in the sales in the U.S. of digital TV transmission products. I think they will be flat to maybe slightly down.

Okay.

That could change, obviously, if we do get some hard and fast dates in-- in place. So our growth is going to come from our international transmitter business, which is both analog and digital. It's going to come from HD radio growth. It's going to come from our software automation growth. We've rolled out a couple of new products in the software suite dealing with the media asset management, and digital ingest of broadcast content. And we're very excited about the rollout of those that's occurring at this point. So that's really where the growth is going to come from. Doesn't mean we're going to deemphasize. We're still upgrading products and we'll continue to support all of those. But I'm not going to hang my hat on growing the business, counting on growth in that part of it.

Okay. There's still upgrade needs out there, but I guess until the full-power mandates come you just prefer to assume that doesn't -- not much activity there?

There's a couple hundred stations that aren't on the air yet that still need to go and get transmitters, and we're pursuing those. And then you have, as you commented, the whole upgrade cycle. And in the absence of a deadline, the upgrades will happen over a longer period of time. So it's not that we won't have any upgrades. But if we have about the same upgrades next year, the number that we had this year, that's kind of flat sales. So to drive growth, we would need the upgrades to accelerate and I think legislation is the only thing that's really going to do that.

Just kind of going over some earlier discussed ground on Microwave, I guess I was a little bit surprised by, you know, the lack of profit leverage with volume in the fourth quarter, and just thinking about how the cost efforts you've been putting in there, plus taking down break-even levels, et cetera. The margins just don't seem to be coming in yet. You discussed it pretty openly. But are there some special reasons for that, or is it just pricing on the various products and the mix issue you talked about? Does that pretty much explain it?

Well, I think it does. I don't think there's anything special going on in the quarter. We did have improvement sequentially. If you take out the $7.3 million in cost reduction charge, you know, we made a profit of about $1.5 million in the segment in the quarter. That's about a $4 million improvement from the prior quarter's loss of $2.2 million on about $15 million of incremental revenue. Would you like to leverage that at 40 to 50%? I would. But the reality is that the margins on the current product portfolio are just not there to allow that.

So it's not anything I could point to that's really special that kind kind of held down the margins. We have gone worked some issues we've talked about before with you this year, in terms of some quality issues and field campaigns. And we're trying to get our capacities in our two factories more balanced. We've got a lot of capacity excess in the Montreal plant. We're running kind of fullout in the San Antonio plant. Part of the job cuts of 100 people and the job moves of 140 that we have announced relates to trying to get those plants a little more balanced, especially getting the workforce in the Canadian plant more aligned with the amount of business we have right now there.

We also made the decision to launch the TRuepoint product in the San Antonio factory. We think that's going to be the place where we can maximize our profitability, maximize our quality and that factory also has a wonderful reputation with regard to serving customers. That's where our Constellation and MegaStar product lines are made. Again, Ted, we continue to be optimistic that we're going to make meaningful profit in this division. It's not coming as fast as we would like. We think the overall profitability of Harris, I think the improvement speaks for itself. But as I've said candidly in a number of meetings, at some point we get this division and Broadcast to the point we're they're materially contributing or else they shouldn't be a part of our long-term strategy. I'm certainly not there yet, I think we're making progress. But the next 12 to 18 months are going to be very important that we make more progress.

Just very lastly on this subject, if you do a 10 --or if you achieve a 10% '06 margin in Microwave, will that imply TRuepoint is , I don't know, what kind of percentage of the sales mix would you expect TRuepoint to reach to get that?

I don't know a specific percentage, but I think it's fair to say it'd be several times the $30 million goal for this year.

Got it.

Our business is relatively split 50-50. So if you look at the '04 revenue, $330 million, take out NetBoss revenue, you've got 150 or so million of international business. So TRuepoint won't get to 100% of that, but it needs to be at a significant piece of it. If you just kind of do some modeling, assuming about a 10 point higher gross margin, you can kind of back into the number. It's a pretty high percentage. But we'll have the whole product line rolled out by March. Every capacity, all the frequencies, and by then I would expect we have a strong ramp going in terms of the sales funnel, new orders coming in and shipments going out, that would allow us to support much higher production, then, in FY '06.

Terrific. Thank you.

Operator, we'll take one really quick question, and then we need to wrap this up.

Okay, then we'll go to Jennifer Graff with Trustco Capital.

Yes. Hi. My question's just on the HD radios. I'm just curious what the impact on margins are for that group?

HD radios, our products for HD radio should be at margins that are kind of at the division average in the Broadcast division, Jennifer. They're, you know, slightly lower than digital TV margins, but better than some other products. So I think they're kind of at the average. So we should get good profit lift if we're successful in driving incremental revenue in that product line this year.

Okay. And I know you've been speaking fairly positively about competitors probably ramping up once Clear Channel gets on their way, do you have any idea of a timeframe? Are we talking over the next quarter, or within the next 12 months?

I really can't say any more than what Clear Channel said in their press release. I can tell you that we are working very closely with them, and we'll keep you posted on our success. They are a long-term customer, but at the same time I'm sure it's going to be a very competitively-driven bid to supply them with their HD radios for their stations.

Okay. I want to thank everyone for joining us. Let me know if you need anything else. Remember, this is our fiscal year end, so we will not be filing a Q tomorrow. So don't be waiting on that. The K will be out late August. Thank you.

That will conclude today's conference. Again, we do thank everyone for their participation.