L3Harris Technologies Inc (LHX) 2005 Q4 法說會逐字稿

Good afternoon, and welcome to Harris Corporation's fourth quarter fiscal 2005 earnings release conference call. This call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome to Harris Corporation's fourth quarter fiscal 2005 conference call. I'm Pamela Padgett, Vice President Investor Relations, and on the call with me today is Howard Lance, Chairman, President and CEO; and Bryan Roub, Senior Vice President and Chief Financial Officer.

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 assumptions, 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'd like to turn the call over to you.

Thank you, Pam, and thanks to all of you for joining us today for our quarterly earnings call. On today's call, I'll provide additional details behind our fourth quarter fiscal 2005 results for each of the business segments, and I'll discuss our updated guidance for fiscal year 2006. Bryan Roub will provide additional details on financial performance and cash flow. And I want to note that Bob Henry is out of town today with customers and so will not be joining us.

We had another solid quarter of topline revenue growth. Revenue was $822 million, an increase of 14% over the prior year. Complementing revenue growth was an even greater increase in profitability with net income of $61 million an increase of 60% compared to the prior year quarter. Earnings in the fourth quarter were $0.44 per diluted share compared to $0.28 last year. Quickly summarizing fiscal year 2005 financial results in total, we reached a milestone with $3 billion in revenue, a 19% increase over prior year fiscal 2004. Net income rose 52% to $202 million in the year and earnings per share improved to $1.46 compared to $0.97 in fiscal year 2004.

Fiscal year 2005 was a record year by all key financial measures. Growing market opportunities and consistent execution by the management team drove strong results throughout the year. Topline organic growth remains strong. Operating income increased in all four business segments and important new products were introduced in RF, microwave, and broadcast communications. These new products will help drive further revenue growth in fiscal 2006 and beyond. We also completed two very successful strategic acquisitions during the year. The Orkand Company in Government Communications, and Encoda Systems in broadcast, and both are making solid contributions.

Now let's turn to some specific comments on each of the business segments. The Government Communications systems segment had another good quarter. Revenue increased 6% reaching $462 million. Operating income increased 25% to $53 million. As a result of continued excellent program execution. Year-over-year revenue growth in the quarter was driven by a number of programs that will continue to expand in fiscal 2006. Including the $1 billion ten-year Patriot operations and maintenance program for the National Reconnaissance Office, the $1.9 billion 15-year FAA telecommunications infrastructure program, the $275 million FAA mission support services contract, the U.S. Army aerial common sensor program, the RADIC program for the National Security Agency, avionics for the F-18 aircraft for the U.S. Navy, several classified programs, and contracts with the U.S. Postal Service, Department of State, and other federal agencies acquired as part of the Orkand acquisition.

A revenue driver for much of the past year was the now completed $115 million Iraqi media network program. Compared to most of our government programs, the IMN program was very short-lived, significantly ramping up in the fourth quarter of fiscal 2004 and then concluding in the fourth quarter of fiscal 2005. Also during the fourth quarter we concluded several classified programs.

Turning to program wins during the quarter, and these will contribute to revenue growth in fiscal 2006, included a potential $350 million ten-year contract with the U.S. Navy, for production of common data links for use on its Nighthawk helicopters. A $57 million follow-on contract with the FAA to sustain the weather and radar processing system. And a $35 million contract to modernize the FAA voice switching and control system displays. Other wins in the quarter included three important Department of Defense programs. Enhancements to the U.S. Army multiple launch rocket system, the innovative space-based radar antenna technology program that's being funded by DARPA and the U.S. Air Force, and the U.S. Army Jigsaw laser radar technology initiative for unmanned aerial vehicles. These new contract wins illustrate that Harris continues to be well-positioned to benefit from U.S. Government investment in the areas of secure communications and critical information processing systems.

A number of large program opportunities are still in the pipeline expected to be awarded during the next 12 months. The total value of these programs is nearly $5 billion. And they include the $300 million Advanced Weather Interactive Processing System for the National Weather Service, and that's expected to be awarded in August 2005. The $400 million electronic records archive program, Phase II, for the National Archives and Records Administration. That's expected in September. The $500 million ground segment for the GOES-R satellite program for the National Oceanographic and Atmospheric Administration expected in September. The $500 million potential contract for the Warfighter Information Network program also expected in September. The $600 million ground segment opportunity for the Transformational Satellite Communication System, expected in November. $250 million contract for the Department of Homeland Security's Integrated Wireless Network program, also expected in November. The $300 million Cryptologic Mission Management system for the National Security Agency expected to be awarded in December 2005. The $800 million U.S. Census Bureau Field Data Collection Automation program expected for April 2006. And finally the $1.2 billion down-select [ph] opportunity with the U.S. Navy for the advanced EHF satellite communication terminals, and that's expected to be awarded in June 2006.

Turning to RF Communications, RF had another outstanding quarter in orders, revenue, and profitability, and the opportunity pipeline continues to expand, prompting another increase in our fiscal 2006 outlook. Revenue was $164 million in the quarter, increasing 37% from the year-ago quarter. Revenue also increased sequentially by 14%. Demand increased from both U.S. and international customers. Domestic revenue was driven by shipments of the Falcon II HF and multiband radios to the U.S. Army, Army Reserve, National Guard, and Marine Corps in support of modernization efforts. International revenue was driven by initial radio deliveries to the government of Pakistan, continuing shipments under the Bowman program in the U.K., and an expanding list of customers in Europe, Middle East, and Africa. Orders were significantly greater than revenue in the fourth quarter. We reached $642 million in orders for fiscal 2005 in total. That's a 54% increase over fiscal 2004. Domestic orders in Q4 included a $50 million order for HF radios, a $22 million order for multiband radios to support the Army Modularity Initiative and to supply the Army Reserve and National Guard. Also included in Q4 was a $19 million order from the Marine Corps. Significant international orders in the quarter included $16 million from Algeria, $7 million from Ethiopia, $4 million for the Republic of Georgia, and $3 million each for Netherlands and Sweden.

The U.S. has embarked on a major transformational effort to modernize armed forces capabilities enabling greater command, control, and communications in smaller operating units. Over the last several months, these efforts have accelerated, utilizing funding from both supplemental and annual Department of Defense budgets. The announced delay in the Joint Tactical Radio System program with initial fielding of radios moved out to 2010 has placed even more emphasis on upgrading the installed equipment base right now rather than waiting for JTRS production.

RF segment operating income for the fourth quarter was $53 million. That's a 69% increase from the same quarter a year ago. Operating margin was 32% reflecting the operating leverage associated with higher sales volume. We continued significant R&D investment in the quarter, primarily for our next-generation Falcon III radio platform. The Falcon III multiband handheld will be the first radio on the market using the new software communications architecture, allowing it to be compliant with the JTRS standard. We have successfully completed all of the NSA verification testing and are now expecting final certification in the near future.

Turning to the microwave division, revenue in microwave was $91 million in the quarter. That compared to $97 million in the prior year quarter. However, shipments to one customer, MTN Nigeria, has had a major impact in the year-over-year comparisons. MTN Nigeria contributed $45 million in revenue in the second half of last year compared to only $6 million in the second half of this year. So I believe this is distorting the real underlying improvement in this business. We have a broadening customer base, and our new TRuepoint radio is really gaining momentum. Sequentially, microwave revenue increased 22% and was significantly higher in both domestic and international markets. Orders in the fourth quarter were quite strong at over $100 million. Higher than both the prior year quarter and the previous quarter. Orders also exceeded sales for both North American and international markets. In North America the revenue mix between private and mobile networks was more heavily weighted towards upgrades in private networks for federal, state, and local governments. Continuing to be fueled by Homeland Security funding and post-9/11 interoperability concerns. Orders in North America in the quarter increased for both mobile and private networks. Major orders included large ongoing network projects for the Federal Bureau of Investigation, and for a major defense contractor in support of an international communications project. So there will be subsequent orders on, we believe, both of those customers. Other customers placing significant orders in the quarter included the West Virginia Emergency Medical Services, City of Seattle, various U.S. mobile telecom service providers, and three of Canada's largest cellular companies.

In the international markets, revenue and orders in the fourth quarter represented a much more diversified and expanded set of customers. This was most evident in the Middle East, Africa, and Europe. In Latin America, market resurgence is clearly underway in both Mexico and Brazil. Orders from new channel partners further expanded our international presence. We signed an important agreement with IRTE as our new distributor in Italy, opening up an indirect sales channel to expand our customer base in western Europe. IRTE is a leading distributor of telecom and broadcast systems in the region, and also represents Harris broadcast division. Major international orders in the quarter included Radio Movil [ph] in Portugal, the French Guiana Army, V networks in Nigeria, Loteny Telecom in the Ivory Coast, ONATEL in Burkina Faso, Nextel International in Mexico, Lanka Bell in Asia, Broadband Philippines, and ZTE in the People's Republic of China. All of these international orders were TRuepoint orders, and again, you can get a sense for the breadth of new customers that we're attracting with TRuepoint.

Operating income in the quarter was $3.1 million. This compares to a loss of $5.8 million in the same quarter a year ago. That quarter did include a restructuring charge of $7.3 million for cost reduction actions at microwave. Improvement in gross margin in the quarter was driven primarily by increased shipments of TRuepoint radios. Our TRuepoint sales in the quarter were $23 million with orders of $39 million. For the entire fiscal year TRuepoint sales totaled 45 million exceeding our original goal of 30 million. The business is entering fiscal 2006 with significant backlog and a good sales funnel.

This quarter's results, revenue, orders, and operating income, all reflect the early success in the rollout of our lower cost TRuepoint product line. The actions taken to bring this radio platform to market are clearly improving the direction and momentum of our business. We continued to ramp up production at our San Antonio, Texas, facility, to add new frequencies to the TRuepoint offering to meet customer demand. In the fourth quarter we nearly doubled production of TRuepoint 5000 radios compared to the prior -- third quarter. And we introduced production of the TRuepoint 4000 radio, focused on serving the international PDH market. All major frequencies and capacities for TRuepoint 5000 are available now. By the end of our second fiscal quarter in 2006, TRuepoint 4000 will be fully available. And during fiscal 2006 we will begin TRuepoint 4000 production in Asia to further lower our costs and open up additional markets for that product line.

Turning next to our broadcast communications business, revenue in the quarter increased 29% from the prior year to $115 million. Operating income for the quarter was $8 million compared to $4 million last year. Encoda Systems contributed to our results and has been integrated into our software systems business unit, and they're performing on target as we expected. Customer renewal rates and new wins are providing further optimism for our software business for fiscal 2006. Our next generation H-Class automation solution is capturing the attention of customers and we have booked several orders in the past quarter.

Other revenue drivers for the fourth quarter included increased sales of HD radio transmission equipment, as the rollout of HD radio is gaining momentum. 2500 radio stations have now committed to convert to digital technology in the next few years. Harris is very well positioned to benefit from this conversion.

Digital TV transmission sales doubled from the same quarter a year ago, driven by demand from broadcasters in the top 100 markets who are investing to meet FCC deadlines for full power transmission of their digital signals. Key orders included digital TV transmitters from Intravision Communications, two stations within the Quincy Newspaper network, Gray Communications, and Lieberman Broadcasting. An agreement was also signed to supply Harris Atlas DVB-T transmission equipment to five Chinese broadcasters.

In the new mobile television market, Beijing Radio selected Harris DAB transmitters to support its digital mobile broadcasting application. Beijing Radio expects to launch six digital broadcasting programs, including video during the latter half of calendar 2005. We had numerous HD radio transmission orders in the quarter including National Public Radio stations, Cox Communications, and Clear Channel, among others. In addition an HD transmitter agreement was signed for nine stations which are part of Intercom Communications, the nation's fourth largest radio broadcaster. Orders in the quarter also included a strong demand for our Intraplex products for the FAA to carry high volumes of real-time mission-critical data.

In our software systems business, major orders were booked with Turner Broadcasting and Sony Corporation. Additionally, our digital asset management and automation solutions were selected by The Weather Channel, The Outdoor Channel, and Cablevision subsidiary Rainbow Networks. Growth in the quarter was partially offset by continued weakness in international markets for both analog and European standard digital equipment and for legacy automation systems as we transition customers to our new H-Class enterprise software platform. To address this market weakness and to further improve profitability the Company is planning to implement a series of additional cost reduction actions in the first quarter of fiscal year 2006. The three primary actions include European standard transmitter production moving from our Huntington, U.K., facility to the Company's Quincy, Illinois, facility, thereby creating a single global transmitter manufacturing operation for both U.S. and European-standard products. Our radio console assembly and related products will be moving from our Mason, Ohio, facility to an outside supplier partner.

And third, new synergies arising from the Encoda Systems acquisition have been identified allowing for the elimination of additional staffing duplications. In total these actions could result in the elimination of up to 150 to 2,000 positions within the broadcast division -- 150 to 200 positions. Facility closure and relocation expenses, severance costs, and other charges associated with these actions could total approximately $27 million in 2006. Savings associated with these actions we believe should yield about a two-year payback.

In addition to our focus on reducing costs at broadcast we have continued to aggressively invest in new product development. We've introduced the first module in our next-generation H-Class broadcast enterprise software system solution, and that's focused on automation. In our transmission business, we introduced the new PowerCD UHF digital transmitter. This allows broadcasters to transition quickly to HD while reducing their energy consumption costs. We developed transmission equipment for use in mobile video broadcasting trials in the U.S., the U.K., Australia, and now China. And we continued to invest in our second generation FLEXSTAR HD radio transmitter product line.

The cost reduction actions combined with market synergies from the Encoda acquisition, new product introductions, and the ongoing transition to digital transmission technology gives me a lot of optimism for the increased contributions that we can expect going forward from the broadcast business, the very exciting growth segment that we believe it can be for Harris.

With that, let me turn the call over to our CFO, Bryan Roub.

Thanks, Howard.

Well, we certainly finished 2005 on a high note. In the fourth quarter our strong financial position and high level of liquidity continued. We generated $150 million of cash from operations, which amounted to half of the 300 million we generated for the full year. Total year cash flow from operations represented a 12% increase over 2004. Our cash and equivalents stand at 380 million at the end of the year, and remember, that is after spending in the first half more than 400 million for the Encoda and Orkand acquisitions. Our government communication systems, RF communications, and broadcast communications segments each contributed positive cash flow for the year and all three posted increases over the prior year. The absolute performance in both government and RF were really impressive as they have been for sometime. And broadcast showed some improvement.

Microwave, on the other hand, had a cash-neutral year. That's not bad, in my opinion, because we had been building inventories as we ramp up the production of TRuepoint while continuing to support and ship the products which TRuepoint will eventually replace. I am looking forward to substantial improvement for microwave in fiscal 2006.

Capital expenditures and depreciation and amortization in the quarter were $23 million and $21 million, respectively, and 75 million and 55 million for the full year. Amortization included in the annual figure was 13 million, contrasted to 4 million in the 2004 fiscal year. That reflects the addition of Encoda during the year, much more amortization in this fiscal year. The capital expenditure figure for this year represents an increase of 13% over fiscal 2004. As we've communicated in the past, capital spending is concentrated in the government and RF segments and tied to their growth. In fact, this year up to 75 million of capital spending, about two-thirds or more than 50 million, was for those two businesses.

Our focus on asset management continues and we have made solid improvement over the past several years and expect to have continued improvement through fiscal 2006. Sequentially, days sales outstanding in the quarter improved to 55 days, down from 58 days in the prior quarter. Inventory turns increased to 10.2 in the quarter from 9.3 in the previous quarter. Net operating working capital, a very key measure, at the end of the quarter was approximately 263 million or about 8% of sales. That's down from 10% for the prior sequential quarter. Return on invested capital in the fourth quarter this year was 17%, up from the strong 15% result in the third quarter.

As an update on our stock repurchase program, I want to inform you that during the fourth quarter we repurchased 700,000 shares of our common stock. The average price of those repurchases was $29. Under our existing repurchase program, we have authorization remaining to repurchase approximately 4.6 million shares. We expect to continue our practice of purchasing a sufficient number of shares in the open market to offset issuance of shares under our stock incentive and retirement plans.

I would like to spend a minute on several nonoperating income/loss items that occurred in the quarter. You may have noticed that the nonoperating loss in the quarter was about $100,000. That is a net number which we will analyze in detail in our 10-K, but I think it might be helpful to give you some color now. First, we've settled an intellectual property infringement case with a company we have agreed not to name, which resulted in an $8.5 million payment in income in the quarter. The settlement also provides for future payments and income over the next five-plus years. The income in the quarter was basically offset, however, by impairment charges that were taken on three of our passive investments. The impairment charges were based on normal reviews we do on a regular basis in two cases, and in the third case based on a sale of our investment. As to non-operating income or loss going forward into fiscal year 2006, we anticipate a net non-operating loss of about $1 million a quarter.

Finally a word or two about our cash flow outlook for fiscal 2006. I expect another strong year with cash flow from operations to be in the 275 million to 300 million range. As was the case during fiscal 2005, we expect our first quarter to be modest because of the payment of major accruals that build up through the fiscal year that are paid during our first quarter. Capital expenditures should be in the 80 to $90 million range with depreciation and amortization totaling between 80 to $85 million.

That's it. Back to you, Howard.

Thanks, Bryan.

Let me conclude my remarks by discussing our revised guidance for fiscal year 2006. We've increased our guidance from a previous range of $1.73 to $1.78 per diluted share to a new range of $1.80 to $1.90 per diluted share, excluding any expected charges related to the broadcast cost reduction actions that I have discussed. The midpoint of the new guidance represents a 23% increase over fiscal year 2005 earnings per share, excluding charges associated with the Encoda acquisition. Revenue growth is now expected to exceed 10% for the year. Our outlook reflects stronger orders performance in the fourth quarter, a good sales funnel, and expectations for revenue growth in each of our four business segments in fiscal 2006. Order rates in the opportunity pipeline continue to drive strong momentum in our tactical radio business and we now expect RF Communications to post revenue growth of approximately 25% this year, very similar to our growth rate last year with operating margins at about 32%.

At government communication systems we anticipate decisions on a number of large contract opportunities over the next several quarters. Combined with the continuing ramp-up of some of our recent program wins this should drive healthy growth of about 8% for the year. We expect operating margins at about 10.5%, reflecting continuing very solid program performance. The microwave division finished fiscal 2005 with increased momentum thanks to our initial success with the TRuepoint product line. We expect fiscal 2006 revenue growth of about 8% and meaningful improvement in operating margins to above 5% for the year. Finally, in broadcast, the addition of the Encoda product line to our software systems portfolio has significantly broadened our footprint and opens up new market opportunities. In addition, R&D spending is paying off with new product introductions for software, HD radio, digital TV and mobile video. For fiscal year 2006 we expect broadcast segment revenue in a range from 430 to $440 million, with growth in software and transmission systems partially offset by the restructuring actions I discussed in Europe. We expect operating margins in a range of 11 to 12% for the year.

In summary, I think we'll get off to a good start in the first quarter. Fiscal 2006 should prove to be another solid year of growth for Harris with improved financial results in each one of our four business segments. At this time I'll ask the operator to open the line, and we'll take your questions.

[OPERATOR INSTRUCTIONS]. Chris Donaghey, Suntrust Robinson Humphrey.

Hi. Good evening, guys. Good quarter.

Hi. Thanks.

Howard, I wonder if you could talk a little bit about operating margin for a couple of segments and your longer terms projections? I mean, the analyst day you've continued to highlight in excess of 10%, but you've had three very strong quarters at the government communications segment and RF continues to grow as a percentage of revenue. How should we think about operating margins going forward for the firm?

Well, for -- for fiscal year '06, Chris, I think we provided today on the call some feedback on operating margin in each of the businesses, about 10.5% to sales in government communications. That's a number I would use for planning at this point. We think RF should be able to deliver solid returns, about 32% of revenue. We will get north of 5% this year for the microwave division. How much we get above 5% has a lot to do with the revenue. At this point we're saying about 8% year-over-year growth but we would hope we can do better. Then finally we said between 11 and a 12% return on sales in broadcast. So if you mix those together and put in corporate headquarters growth, kind of consistent with topline revenue, and then the non-operating income guidance that Brian provided at about $1million negative per quarter, that's kind of where we think the overall calculations will bring you to the guidance that it will be in the range from $1.80 to $1.90. Overall, I don't have the number in front of me, but I think that has operating income for the total entity above 10% to revenue. I think we ended this year above 10% to sales also.

Right. And, I have those numbers written down. I guess I'm curious why you expect the government communications segment to decline now to 10.5 after again three-quarters over 11%?

It's driven by the mix -- as I see it, the mix of the revenue with a lot of the growth in services and civil programs. Longer term civil programs should be equal or above that kind of margin, but in the start-up phase it's not unusual to have margins be a little bit lower. So again, I think it's primarily a mix factor. We also tend to see each year but don't forecast the impact of program close-outs. So if there is a program close-out with a given contract and we do a little better in the close-out then that flows through as additional margin, but it's just not the sort of thing I'm comfortable in forecasting. So at 10.5% of revenue we think that's a modest and appropriate planning kind of number.

Okay. And just one last question on government communications. If you pull out Orkand it seems like the organic growth year-over-year was about 0%. Is that accurate?

Yes, I think fourth quarter was maybe 1%. I would remind you, it's not an excuse, but a reason, that we had about $29 million less revenue in Q4 from the Iraqi Media Network program than we had the year earlier so that created -- that was about 7% of the prior year sales in the segment. That created quite a hill in that one quarter to climb out of. So to end up up 1% means we had to fill that with new programs. I see this as really just a transition time between a couple of big programs winding down and while we've had some wins, they're just getting started. So I don't think in the long run Bob Henry nor I are coming off our long-term goal of double-digit organic growth in this segment. We're calling about 8% this year. And we'll probably start out the first quarter or two a little slower than that, and it will gain momentum as we enjoy some of the program wins later in the year.

Okay. Great. Good additional information.

Okay. Thanks, Chris.

John Bucher, Harris Nesbitt.

Thank you very much. Questions on RF Communications. It looks like your book to bill was greater than one for the quarter. I'm wondering, did you provide a total backlog figure, Howard?

No. For the year, we said $640 million in orders, and revenue for the year was, what? 530, or thereabouts, so we certainly increased backlog by that amount, and we had two of the strongest quarters in a row of orders that we have ever had in the division, and so, hence, our level of comfort that funding is there, demand is there to continue this significant upgrade in infrastructure as well as to supply radios for the modernization program -- modularity program, and a 25% increase in revenue is we think attainable based on where we're starting the year and our sales funnel going forward.

Howard, do you have -- can you give a rough idea had of what percentage of the backlog does that 25% growth assume that you work through, or is there another sort of metric that you use in coming up with the 25% growth there? And also the last question there is, does that factor in any potential upside from Falcon III? It sounds like you've made great progress in getting through some of the certification there. Could there be a potential upside to that with Falcon III?

I'll answer the last question first. While there is upside we have factored some market share gains due to the new Falcon III offering in the plan. Time will tell whether those are right on or too conservative, but we do have some in there. As it relates to shipping, and in our backlog, the only -- the only backlog that will not at this time be shipped in '06 would be a little bit of Bowman backlog. We booked all of those orders for the program that runs out, as you know, into '07, but virtually all of the rest of the backlog will be delivered in revenue at some point in '06. So all the backlog we're starting the year with.

Okay. Thank you very much. Great quarter.

Thank you.

Byron Callan, Merrill Lynch.

Yes. Good afternoon, gentlemen, and again, good quarter.

Hi. Thank you, Byron.

Good. A couple of quick things, Howard. Jitters, I guess, what? Boeing effectively has a program back on track but you mentioned the delay in fielding. Have you built into your forecast any pickup because of that delay, or is it really kind of a wash as far as you're concerned, in FY '06, at least? You're part of Jitters program, but you mentioned there'd be incremental fielding, possibly in radios. I'm just curious if that's a net positive change, or how do you -- how should we walk through that?

Our financial model doesn't have any material increase in our Jitters revenue for '06 over '05, so to the extent the program gets back on track and we get some additional work orders I suppose there could be a small upside from that, but as you know, the real revenue for us from Jitters would be in the production phase and that has clearly slid out to kind of that 2010 timeframe. I think it's really helping us though in the meantime because it's continuing to support demand for Falcon II, and as we roll out Falcon III, they can [inaudible - background noise] a Falcon III radio which can be very easily be compatible with Jitters when does it get in production, unlike the older radios which won't have that interoperability.

Okay. The cash flow guidance for 2006 I assume that includes the charge that -- that charge is basically all cash and that will be all realized in the current year?

Yes, the cash flow guidance includes that charge. Some is cash, some is not. Probably about half.

Okay. Fine. And then just last, kind of big picture question, on the acquisition front, we've heard from some of the other companies that reported so far. Lockheed talked about a fairly robust pipeline, L3 still seems to be quite active on kind of the smaller properties, and just kind of what are you seeing on the defense IT side in terms of acquisition flow? Is -- things kind of the same as they were last quarter? Has it picked up? Or valuations moved too high? What's your sense of the landscape there?

I don't see a huge increase, but I think it's fair to say that companies who perhaps aren't particularly well positioned I think are scrambling to say how are we going to drive the kind of revenue growth we need to support our market share price, and so I think it's active. It's been active for IT and services for some time. You saw the Lockheed results. Strong growth in their IT segment. Northrop Grumman's had similar kind of growth in that segment. So I think it's most intense in the IT area. And we continue to look at opportunities. We continue to believe that acquisitions for us that would bring us additional customer relationships or additional product technologies would be desirable, but at the same time, I don't feel like we have to do one in order to reach the objectives we've set out here in guidance.

Great. Thanks a lot.

Jim McIlree, Unterberg.

Thank you. Your operating margin expectation in the broadcast division is much higher than the Q4 results. Can, one, you tell us how you're going to get there because I know the restructuring has a part in it? But also, would you expect to have that -- the full-year results in all of the quarters or is it back-end -- back-half loaded? Thanks.

There's a little more savings in the second half of the year, Jim, than the first half. We don't expect to move the production from the U.K. until the end of the calendar year, so kind of the first half of the year will be ramping down production there and starting to move. In terms of the -- the savings, we said about a two-year payback on the 27 million. Pretty much split 50/50. So I think you can count on two -- 2.5 to 3 points of margin improvement as a result of the cost reduction activities. We get a favorable mix in margin because of the full year impact of Encoda. That's helping as well. And then Jeremy and his team are working hard to improve the profitability of the core business. The basic software business and U.S. standard radio and television business and our networking business, those are really all running very well. And we just, unfortunately, needed to take these additional actions to get the international business to the right level of profitability so that it's contributing and not draining on the rest of the business. So it's not one action but a combination of those.

And was there anything else, Mr. McIlree?

No, that's it. Thank you.

Ted Wheeler, Buckingham Research.

Great quarter, great year.

Thanks, Ted.

On the -- a couple little specifics. You mentioned a mobile TV program with Beijing Radio.

Yes.

I think you mentioned six programs. What kind of just bracketed revenue opportunity is that for you in terms of the initial stage, and is there a -- expanded stage potentially beyond what they're doing so far?

At this point, they're really just in the trials mode. I don't have a good answer for you in terms of the magnitude of the potential opportunity at Beijing Radio, so I would have to investigate that. I just don't know what the number is.

So this --

It's just getting started. I don't think anyone is going to be in a mode where they're offering real live full-frame video services in this calendar year. I think the calendar year goal for Beijing Radio I think is to have their trials completed by that time.

So this is a this is a -- I guess, a reasonably good-sized trial?

Yes. I don't know how many different cities they're doing it in but clearly we think China's a big market opportunity just because of the large number of consumers and also what I would say is a pretty tech savvy population and especially what they would call the middle class, which is -- has more people than the U.S. So I'm just real pleased that we're there, and as we go forward we'll try and give you a little more color around that opportunity.

As it's a trial are there other competitors' equipment involved here, or have you gotten to some -- past some milestones?

I don't know the answer to that, Ted, I'm sorry.

Okay. In microwave, on the growth of 8%, it just felt like from your comments it might be a little higher than that as we go into the year. Are there some programs that are dropping off? You mentioned one in particular in this last year, but are there some program revenues that drop off in '06?

Well, there are always some, but I'm not aware of any of the magnitude of the MTN impact last year. I think we're encouraged by a very strong fourth quarter and especially encouraged about the adoption rate of TRuepoint. And I'm also encouraged by the breadth of the new international customer base that we are attracting. Lots of new names that we really haven't sold much to in the past. TRuepoint is giving us a reason and an opportunity to go and penetrate some of these customers and we finally are getting to a cost position where we can do that and contribute to profitability. So all of those things together I think are very positive. Will we do better than 8%? Well, time tells. The last couple of years we haven't. And so compared to the actual results, 8% sounds like a relatively robust forecast. But I will tell you, given to -- compared to internal expectations that Guy Campbell and I have, we're certainly going to do our best to meet or hopefully exceed that number, and we have some good momentum starting the year. That's what I like.

I know it's lumpy but your fourth quarter orders are obviously well above annualized -- your full year expectations, and then there's a lot of products yet to come. So I mean --

Yes. And they were helped by the launch of those two big projects, the one with the FBI in North America and the other with one of the North American defense contractors that is doing a big international project. So those two are not orders that I expect we'll get in that magnitude every quarter, but they are the beginning of a broader long-term program. So that helped us a little bit, but in international, I think if you say what were our objectives and how are we doing, it was broaden the footprint of customers, get indirect distribution to augment our direct, and I talked about IRTE as one example of that, and give our sales force something to sell where we can both be competitive as well as make a profit. We've got the whole 5000 product line now out. The 4000 is nearly out, and we've made the the commitment with our supply partners to go to Asia to manufacture that and that'll only improve our competitiveness for that large market.

So all in, we're cautiously optimistic that we will break through this 5% barrier which has been our goal for the entire time I've been here and it's -- it's in focus. It's still a tough market. We understand that. But Guy Campbell and his team are making good progress.

And just one other. You mentioned JTRS 2010 timetable. For you, what would that mean if that holds? When would you start to see some revenue ramp? I guess you're not going to see much this year?

No, I don't. And in fact, we actually have in our current outlook, we have less Jitters revenue this year than last year. So to Byron's earlier question, if we were flat with '05, that would be a little bit of an upside compared to our current outlook and whether the recent re-initialization, if you will, of the program on cluster 1 with Boeing causes that or not, I don't know. I haven't heard that at this point. But I don't think JTRS is going to be a major contributor to us for two, three years. And we're not counting on it, and we see enough demand to keep the business growing as a result of all of the modernization that will go on in the meantime. Having said that when it does come around, we're a player right now in cluster 1. We believe we've got a good chance in the down-selective AMF, whenever that happens, and we're going to have, in my view what is a quasi-cluster 5 radio long before the cluster 5 team. So I think we're pretty well positioned. But we work every day at RF on the future to make sure that we are taking advantage of opportunities in adjacent markets and other strategies such that we never have an interruption in the growth trend of this division, because it's such an important contributor to the corporate profitability.

Again, great results. Thanks.

Thank you.

Larry Harris, Oppenheimer.

Yes, thank you. And if I could add my congratulations on the quarter. Just, I guess, a bookkeeping item. With respect to the 27 million in charges, would we expect the bulk of that in the September and December quarters, or what sort of timing would we be looking at?

Yes, I think.

Yes, I think so. The majority of it should be in the September quarter, some of it may, because of when we're allowed to book the cost, may go into the second quarter. I wouldn't expect too much of it beyond that.

I understand. And with respect to the RF Communications division, in terms of revenues in fiscal 2006, would we expect maybe the first quarter somewhat lower then the balance of the year being fairly level, or any sort of comments there? And also, what are you doing in terms of production? Are you using additional facilities or outsourcing?

On the production question as we've indicated before, we've ramped up our capabilities in the U.K. to make some of the international models. We've invested in additional capital in the Rochester facility in order to be in a position to meet demand at the level that we are talking about. So I don't see at this point any issues with regard to being able to meet the production capacity.

With regard to the seasonality, always a difficult -- difficult to say, but I think given the strength of our backlog I think we're going to come out of the gate in Q1 and Q2 very strong, at probably above the 25% guidance that we've given for the year. And I, therefore, in the second half of the year, we start coming up against more difficult comparables, and we'd probably be a little below the 25%. But with the very strong orders in Q3 and Q4, we're going to be coming out of the gate on a year-over-year basis very strong Q1 and Q2 in RF.

Great.

Having said that, Larry, I said earlier, I think to John that -- or Jim, that we're in this a little bit, I think, of a valley with GCSD where we've come off a couple of big programs and the increases are a little later in the year, so for government systems we're likely to be a few points below the nominal guidance we've given in the first half and above it in the second half. So there'll be a little bit of an offsetting between those two, but I can -- that's at least our current view, and subject to change, but that's how we currently see both those businesses from a seasonality standpoint.

Okay. Just a couple of other quick questions. Sprint, are we seeing shipments to Sprint of TRuepoint? I know you won that major contract earlier this year.

Not in any material quantities as of yet, so that's part of our growth plan for '06.

Great. And with respect to the digital TV, are we seeing -- you mentioned, I think, that the digital TV transmitter sales doubled year-over-year. Are we seeing moves in terms of some of the smaller stations or the stations outside the largest markets moving to full power?

We are. We saw it in this quarter, and it's just been burned on that a few times, so I don't want to make a one-quarter trend point. Let's see if we see similar kind of results in Q1 and Q2. We had a good Q4, but that business has been kind of lumpy over the last year or so, and I just don't want to commit to being able to sustain that. But clearly, there's some dates in the sand at least, and they may be a little further out than I would personally like for the total spectrum giveback to 2009, but at least that date's set, and between now and then, everybody's got to get to full power. And we can't make all the transmitters in a half a year so we're going to be making it very clear to customers they better start getting in line and giving us orders so that we can manage production at a reasonable level. So I'm cautiously optimistic. We'll see.

I understand. Well, thank you very much.

Thank you, Larry.

Operator, we'll take one more question.

Jeff Lee, A.G. Edwards.

My question was answered, so I'll take myself out of the queue. Thank you.

Okay, Jeff. Thanks. Is there one more question?

We have no more questions at this time. I'll turn the call back over to Pamela Padgett for closing remarks.

Okay, and I want to thank everyone for joining us and just want to let you know that we do expect to file our 10-K sometime during the week of August 29th. Thank you again for joining us.

That does conclude today's conference. We thank you for your participation.