L3Harris Technologies Inc (LHX) 2006 Q2 法說會逐字稿

Good afternoon, and welcome to the Harris Corporation's second quarter fiscal 2006 earnings release conference call. This call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon, everyone and welcome to Harris Corporation's second quarter fiscal 2006 conference call. I'm Pamela Padgett, Vice President Investor Relations, and on the call with me today is Howard Lance, Chairman, President, and CEO; Bryan Roub, Senior Vice President and Chief Financial Officer; and Bob Henry, Senior Vice President and President of the Government Communications System 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 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 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, let me turn the call over to you.

Thank you, Pam. And thanks to all of you for once again joining us for our quarterly earnings call. Harris had another very strong quarter, as you read in our press release. Revenue and non-GAAP earnings increased significantly versus last year and versus last quarter. Our strong financial performance reflects our continuing strategy -- introduce new products, expand certain markets, reduce costs, and deliver the benefits of a diversified business portfolio, with both government and commercial communication businesses. It's a strategy we believe will support continued growth through a variety of business cycles.

Revenue in the second quarter increased by 14% compared to the prior year, to $842 million. Organic revenue growth was about 7%. Non-GAAP net income was $73 million in the quarter, a 39% year-over-year increase. Non-GAAP earnings were $0.52 per diluted share.

During this call, we will be referring to non-GAAP financial results, unless we specify otherwise. A complete reconciliation to our GAAP results is available, as Pam said, on the Harris website. We believe non-GAAP results in the current year and prior year more accurately reflect the true operating performance of the Company.

During the second quarter the Company recorded after-tax charges totaling $42 million, or $0.30 per share. These charges were related to three previously discussed items -- the end of life announcement on our legacy international microwave product lines, the cost reduction actions initiated in the previous quarter in the Broadcast segment, and costs associated with the acquisition of Leitch Technology.

The charges associated with the international microwave legacy products were significant, to be sure. But this action was necessary to allow the rapid transition to our complete TRuepoint product line. The timing was accelerated by the faster-than-expected market acceptance of TRuepoint. And during the call, you will clearly hear the positive contribution that TRuepoint is making to international microwave orders, revenue growth, and margin improvement.

Both of our commercial divisions are now on a very solid footing to contribute significantly to the Company's financial performance going forward. Both Broadcast and Microwave are well positioned with more competitive costs, a broader base of new products, and an increasing number of market opportunities worldwide.

Now for the segment results in the second quarter. Government Communication Systems revenue was $444 million, compared to $447 million in the prior year. Revenue was up sequentially about 3% from our first quarter. Operating income was $54 million, with continued strong operating margins at 12% of sales in the quarter. These results reflect excellent program execution and award fees and the high mix of fixed-price production programs.

Aggregate program award fees at the halfway mark of the fiscal year were 92%, indicating great performance by all of our program teams on some very complex programs. This kind of performance provides a true competitive advantage for Harris, as past program performance is always a critical factor for winning new programs.

When comparing year over year revenue, this quarter was again impacted by the Iraqi Media Network, or IMN program, a large, but short-lived contract in Iraq, which contributed $22 million in revenue in the prior-year quarter. Excluding IMN, revenue grew 4% year-over-year. Revenue in the quarter increased in both the Department of Defense and Technical Services programs. Excluding IMN from the prior year, revenue also increased in civil programs. Revenue declined in national programs, with budget delays and cost overruns continuing to impact our intelligence customers' ability to fund new programs.

Excluding IMN, civil revenue is expected to grow about 20% for the year, illustrating our continuing momentum in this market. Driving that growth throughout 2006 is the FAA Telecommunications Infrastructure, or FTI, program, and recent FTI scope expansions, including mission support and satellite networks.

During the quarter, we achieved two important milestones on this $2.2 billion potential program. We completed the Internet Protocol over ATM network backbone, and we completed the full transfer of operational services in the Hawaii region, the first complete cutover of a consolidated business area. In total, new services have now been initiated at more than 1,000 of the FAA's 4,500 sites.

Both Department of Defense and Technical Services programs are expected to grow about 10% to 15% for fiscal 2006. Despite several DoD program delays and cancellations, such as Comanche, Aerial Common Sensor, and LAMPS, Harris continues to report solid growth in the DoD space, demonstrating our broad programs diversification. Our communications technology sweet spot plays across a wide variety of DoD platforms and applications.

The biggest challenge for this year continues to be the impact of funding constraints in our intelligence market and its ongoing effect on national programs revenue. Well publicized cost overruns on large programs are reducing funding on existing programs, and they're also diverting funds from new programs. Customer feedback regarding the delayed passage of the defense budget -- which was finally approved in January -- is that funding constraints will likely continue to impact the intelligence program market for the next several quarters, as the government customers work their way through problem programs.

Our competitive position in this customer arena remains excellent. Harris is not contributing to cost overruns on the problem intel programs. Our track record and reputation will continue to give us a competitive advantage in the tight knit intelligence community. This is absolutely critical, since many jobs are never put out for competitive bid. Longer term, we clearly believe that both the intel community and Congress are committed to continuing to invest in new systems that enhance intelligence collection, processing, dissemination, and analysis. It's clear that near-term cost overruns are masking their desire to fund new programs.

But despite funding constraints, we continue to win new classified programs. One recent win, the $77 million RADIC program for the National Security Agency grew revenue in the quarter, and is a good example of how our Company-wide efforts to expand addressable markets are paying off. With RADIC, Harris has diversified into the knowledge management and analysis portion of the intelligence cycle. This is an area receiving a lot of attention, since efforts in knowledge management address the issue of sharing information across multiple agencies and from multiple databases.

Also sales for commercial satellite antenna products grew in the second quarter, yet another example of addressable market expansion. Here we're taking years of government satellite experience and parlaying it into new commercial opportunities with companies like Boeing and Loral. We believe there are additional growth opportunities in this area on the horizon.

Let me now turn your attention to some new wins in the quarter and our list of key program pursuits. Harris was selected for the National Oceanographic and Atmospheric Administration's GOES-R satellite program that will provide improved severe weather forecasting capability. Harris will provide the ground processing systems as part of the Boeing team. While the initial design and development contract is only for $8 million, the potential Harris total program value for GOES-R is somewhere between 750 million and $1 billion. Following the initial design phase, there will be a down select.

Our Department of Defense business unit was awarded yet another F/A-19-related contract during the quarter. The $5 million Digital Map Mission Planning Interface is for the EA-18G version of the aircraft.

We were also selected by Lockheed Martin for a three-year, $27 million program to develop and integrate a communications system that links sensors from the Navy's Advanced Deployable System with its host Littoral Combat Ships. The Advanced Deployable System is an undersea surveillance system designed to provide Joint Forces commanders with a continuous picture of activity over a very large ocean areas.

We also received a $40 million contract extension from the U.S. Census Bureau for the MAF/TIGER Database Modernization program that's in support of the 2010 census. Total potential value for this eight-year program is $210 million.

Harris Technical Services was selected as a subcontractor on a five-year potential $90 billion contract to provide information systems engineering and IT services for the U.S. Army.

And, finally, this last win represents our continuing efforts to commercialize technology developed in our government business. Our 15-meter Global Dataset product was selected by Microsoft for use in their new version of Windows Live Local, a search and mapping tool similar to Google Earth. Harris is well positioned to address similar opportunities for web-based commercial satellite imagery and related geopositioning data.

Large program opportunities are still in the pipeline totaling more than $3 billion in combined potential contract value and are scheduled to be awarded before our June fiscal year end. These include -- a 700 million to $1 billion opportunity with the Army for the Warfighter Information Network-Tactical or WIN-T program. Successful tests of the WIN-T wireless transmission system architecture in November should pave the way for a low rate initial production award sometime in this quarter.

Next is a 400 to $600 million opportunity to provide network architecture and infrastructure for the U.S. Air Force Transformational Communications Mission Operations System, or TMOS, program. An award is also expected in this quarter.

A potential $250 million opportunity is being pursued for the design phase of the department of homeland security Integrated Wireless Network, or IWIN, program. Award is expected in April.

Then there's the five-year, $800 million opportunity to design and deploy the U.S. Census Bureau Field Data Collection Automation program. Also, this award is planned for April.

We're also actively pursuing a ten-year Information Services contract opportunity under the General Service Administration's ALLIANT program, where $50 billion in indefinite delivery, indefinite quantity contracts will be spread across about 20 contractors. This award is due in June.

There's also a $100 million Technical Services opportunity for the deployment of satellite baseband equipment. This is for the Diplomatic Telecommunications Service. That award's expected in June.

In addition, we have two major classified opportunities in the 300 to $400 million range to be awarded. And, finally, a $300 million Homeland Security opportunity to provide communications networking equipment for the America's Shield Initiative, due sometime this summer.

Moving on to the RF Communications segment, RF had another outstanding quarter in all respects -- order, revenue, and profitability was extremely strong. Revenue in the second quarter was $181 million, and that's up 55% over the prior-year quarter. Orders in the first half of fiscal 2006 were very strong, increasing 50% over the prior year first half. Demand continues from both domestic and international customers, being driven by forced modernization, interoperability requirements, forced restructuring, and expansion. These are all driving increased worldwide demand for tactical radios.

Not only is demand for tactical radio equipment continuing to increase, but Harris also continues to gain market share, as our Falcon II solidifies its position as a radio of choice for soldiers in the field and the Falcon III serves to expand our addressable market. The RF Communications outlook for fiscal 2006 revenue, orders, and profit has once again been increased, driven by order rates in the first half and by a strong sales funnel for the second half of the year. Also, significant U.S. funding for communications equipment was firmed up and provided in the recently approved Department of Defense budget, as well as in the supplemental budget that was also approved.

We now expect orders in fiscal 2006 to be significantly higher than the $800 million we discussed in our first quarter earnings call, probably more in the 850 to $900 million range. We expect these orders will create a significantly higher backlog by fiscal year end, providing for revenue growth in fiscal 2007. Operating income in the second quarter was $62 million, and margin performance continued to be excellent.

We are continuing to invest during this time in product development for the future. In recent quarters we've accelerated the development of the full lineup of Falcon III products, as well as we've ramped up the development of other new products for adjacent markets, including sensors and tactical data links. Our goal is to fully utilize the power and reach of the RF Communications' global sales channels to introduce new defense and security products to the global market.

The first Falcon III product introduced to the market has been the Multiband Handheld model. This has programmable type 1 encryption, and has already been certified by the NSA. The AN/PRC-152 as this radio is called, not only opens the multiband handheld market for Harris, but it also allows us to take advantage of the $1.7 billion sales opportunity over the next three to five years to sell our radios to the U.S. Army as replacements for the legacy SINCGARS radios. Recall, SINCGARS is an acronym for Single-Channel Ground-To-Air Radio System.

We received our initial order for this opportunity in the first quarter, $38 million for 1,300 vehicular systems. The beauty behind the Harris Falcon III in this application is it provides interoperability with the legacy single-band VHF SINCGARS system, but it also offers multiband capability, portability, and future JTRS compatibility. As a result, the Army can field this advanced-technology radio today, knowing they can adapt it to future requirements going forward.

We continue to increase our manufacturing capacity at RF to keep pace with demand. In December, the division went to, essentially, a three-shift seven-day work schedule in Rochester. Some international radio production has been shifted from Rochester to our U.K. facility to further open up capacity. And future capital expansion plans are in the works for leasing additional space in Rochester to support the SINCGARS opportunity.

Second quarter orders included two major awards from the Marine Corps -- a potential $205 million contract for multiband radios, and contract for HF radios, in which the ceiling was raised from 75 million to a potential $586 million. Two major orders have already been booked under this contract -- or these contracts -- $67 million for multiband, and $52 million for HF radios. Harris has clearly become the primary supplier of tactical communications for the U.S. Marine Corps.

Additional Falcon III handheld radio orders were placed by several classified customers during the quarter. Also, we won a small contract from U.S. CENTCOM for our new Falcon Watch advanced sensor system for intrusion detection and surveillance. This is a market area that we believe holds future growth opportunities.

While RF communications can claim customers in every region of the world, the segment continues to expand its market reach, with new Falcon II orders -- this quarter for Ethiopia, Angola, Uganda, Tajikistan, and the Iraq Ministry of Defense. We also received our first high-frequency type 1 encryption orders from Australia and Canada.

Turning to our Microwave Communication Segment, key financial measures for the quarter, including sales orders and gross margins reflected improved international business results. Segment revenue was $89 million in the second quarter, increasing about 4% compared to the prior year. But orders growth was very strong once again. Orders for the first half of fiscal 2006 have increased 21% compared to the prior-year period. This is the fourth consecutive quarter with solid orders growth led by international demand.

In addition to improved international market fundamentals, we are clearly benefiting from a broader customer base, and this comes from being able to offer the right products to those customers, and that's the TRuepoint radio product line. TRuepoint demand continues to increase, with revenue of $61 million, representing about 40% of total microwave radio revenue in the first half of fiscal 2006. And you'll recall, we designed TRuepoint to have a lower cost, common-based platform across a wide range of frequencies and capacities.

Excluding charges for the restructuring and end of life program, Microwave gross margins have improved significantly in the first half of fiscal 2006 compared to fiscal 2005. The success and rapid market acceptance of TRuepoint led us to accelerate the end of life for our legacy international products. After-tax charges are expected to total $37 million in fiscal 2006, related to inventory reserves and the shutdown of our Montreal, Canada, manufacturing operation. That shutdown will occur in the fourth quarter of this fiscal year. The Montreal plant actions are expected to save us about $5 million in fiscal 2007.

Legacy product lines included in our November 2005 end of life letters to customers were the MicroStar MH, MicroStar L, Galaxy, and Clearburst product lines. Excluding the second quarter charge, segment operating income in Microwave was $6 million, compared to only $2.6 million in the prior year. Slightly higher revenue and the richer mix of TRuepoint allowed an operating margin of 6.7% of sales.

With the end of life plan behind us, and having achieved an operating margin in the second quarter that exceeds our interim profit target of 5% of sales, we are closing one chapter in our journey to profitable growth at Microwave and now starting another. We remain committed to achieving sustainable revenue growth in this business, with operating margins of 10% or more. Our current market performance clearly supports that we can achieve these aspirations.

In international markets, improvement is evident across several regions. The Middle East and Africa are still our strongest regions, but Europe and Latin America are stronger, and there are the first signs of improving performance in Asia. Major international orders in the quarter included VeeNetworks in Nigeria; MTN, also in Nigeria; Umniah Mobile Company in Jordan; Beltel, formerly known as Gazprom, in Russia; Radio Comunicatii in Romania; Nextel Mexico; and Brasil Telecom.

In China, we announced an agreement with Shanghai Vision, a leading reseller of telecom equipment in China. They will distribute TRuepoint radios for Harris, expanding our presence in the largest cellular market in the world. China is poised for rapid deployment of a 3G wireless infrastructure, and our TRuepoint radio is ideally saluted -- suited to support network upgrades and expansions in that market.

International orders are beginning to reflect the new strategic rough focus for the division. Direct sales to major accounts, including large mobile operators and systems integrators, supplemented by an effective value-added reseller network, to expand our market reach and better address local requirements.

In the North America market Harris continues to do well and benefit from a longstanding record of success, and customer relationships remain very strong. The market continues to be driven by capacity and security demands across various applications. Mobile operators are building out 3G networks and preparing for the additional capacity demands for applications like video mail and mobile television, as well as hardening their networks against potential disasters. In addition, upgrades continue for private network operators, those operated by utilities and right-of-way owners and also by state, local, and federal government agencies.

Turning to Broadcast, revenue in the Broadcast Communications Segment was $135 million in the quarter, compared to $99 million in the prior year. Excluding our cost reduction charges, operating income was $15 million, and operating margin increased to 11% of sales, as expected. Revenue in the quarter clearly benefited from recent acquisitions -- Leitch Technology in October 2005 and Encoda Systems in November 2004. Both acquisitions are performing on target and have significantly expanded our market opportunities, by contributing revenue growth and higher margins. They've helped us to dramatically increase our footprint in the broadcast arena, transforming Harris into an end-to-end provider of total content delivery solutions.

Harris Equipment and Software allows our customers to create video and media content, including news, sports, commercials, and entertainment programming; schedule and manage digital assets in the studio; and, then, distribute content where and when it's required. Thanks to Leitch and Encoda, we have real strength in our combined portfolio in master control, where Harris products manage and distribute content to and from multiple sources and multiple formats to support media networks, broadcast stations, and cable and broadcast satellite operators.

Leitch Professional Video Systems also adds signal management and test and measurement equipment to our core transmission products, to ensure a high quality delivery of content to consumers, including Internet and mobile TV applications. Leitch is already delivering benefits to our Broadcast segment. They achieve double digit year-over-year growth in the quarter, with higher sales in all of their product areas.

Their introduction of new high-definition products helped to fuel their strong growth. During the quarter, they introduced new HD signal conversion products, a new HD test and measurement product, and a new HD mini master control product. This focus on introducing new, higher-margin HD products and the cost reduction actions that Leitch management had undertaken prior to our acquisition, will drive additional profitability improvement going forward.

Gross margins increased from 52% in Leitch's quarter ended in April of last year, to 55% in the Harris quarter just ended in December. In the core Harris Broadcast business, which includes TV and radio transmission, networking, and European standard products, we expect stronger revenue in the second half of fiscal 2006. Our focus is now shifting from profitability improvement and the exiting of unprofitable business in Europe and TV studio integration to focusing on renewed growth. Improving markets and new product introductions will drive a higher top line and further enhance profit margins in the second half.

Digital TV transmission product revenue was particularly weak in the second quarter. Broadcasters were reluctant to commit to the final phase of the digital transition until Congress mandated an analog frequency sunset date. On December 21st, Congress finally passed the budget reconciliation bill. And this bill included a provision establishing February 17th, 2009 as the analog sunset date. All broadcasters must be broadcasting at full power on their new digital frequencies by that date.

That means many broadcasters currently operating at less than full power finally have a deadline for making their remaining investments in digital transmission equipment. The return of the analog television frequencies will allow for the resale of this spectrum for new uses. It may be used to add capacity for wireless phone service, for new broadcast stations, or for new mobile TV services. In any case, Harris Broadcast and Harris Microwave will potentially benefit from the resale of this spectrum.

Although the investment in digital transmission gear for the conversion has been underway for the past six years, we believe there's still 400 to $500 million of the $1.2 billion original potential in digital transmission investment yet to be spent between now and 2009. Spending on DTV transmitters should pick up in the second half of our fiscal year, and we are encouraging our customers to get their orders into the queue now for future delivery.

Consumer adoption is also helping to drive the digital conversion to its final stage. Digital TVs have become more affordable, there's been a dramatic increase, also, in high-definition broadcast content. And this is aggressively being promoted by networks and cable and satellite providers. According to the Consumer Electronics Association, HDTV sets will comprise about 65% of total sales in calendar 2006. Unit sales of DTVs are expected to increase from 12 million units shipped last year to 16 million this year.

Turning to HD Digital Radio, transmitter orders increased significantly for Harris in the quarter, compared to the prior year, thanks to our new FLEXSTAR product line. We announced during the quarter that Harris received a four-year commitment from Buckley broadcasting to provide our FLEXSTAR HD Radio transmitters and related equipment to its ten FM and nine AM stations located in New York, Connecticut, and California.

Our second generation HD Radio product leap frogs the competition by driving both an analog and a digital signal through one signal -- one single -- excuse me, one single exciter. Our efficiency has also been significantly improved, with FLEXSTAR being two to three times more efficient than any other exciter on the market.

Licensing and installation of transmission equipment is also progressing nicely. iBiquity announced during CES that more than 600 U.S. radio stations were broadcasting in a digital format at the end of calendar 2005, and that number is expected to double, to more than 1,200 stations on the air in 2006. HD Radio and option is being driven by over-the-air broadcasters reacting to the competitive threat from satellite radio. In fact, an HD Digital Radio Alliance, made up of eight of the top radio companies was formed in December to promote digital radio as a high-tech competitive platform. Broadcasters in the alliance are expecting to spend $200 million on advertising and promotion for HD Radio during 2006.

Meaningful consumer adoption of HD Radio is still several years away. However, it was announced at the Consumer Electronics Show that eight automotive brands, comprising 30 models, will be introduced with HD Radio as original equipment in the fall of 2007.

As noted earlier, the progress and profitability of our core Broadcast business has been steadily improving. The cost reduction actions we began implementing in the first quarter, primarily to reduce manufacturing capacity in Europe and eliminate staffing duplications from the Encoda acquisition are producing the cost savings we had anticipated. Our cost reduction actions are now nearing completion. We're now focused and looking forward to stronger revenue growth and continued improvement in profitability in future quarters in the Broadcast business.

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

Thank you, Howard. The financial position of Harris continued to grow stronger in this quarter. Cash, cash equivalents were at $278 million at the end of the quarter. Cash flow from operations was good in the second quarter, coming in at about $26 million. On a year-to-date basis, was 109 million, compared to last year's 91 million in the first half. RF Communication and Broadcast segments showed improved cash flows in the second quarter and all four segments have positive operating cash flows for the first half.

Next, I'd like to spend a few minutes talking about the inventory write downs and severance costs associated with product discontinuance in the Microwave Communications Segment. Our successful rollout of TRuepoint made it very clear that it's time to put in place an end-of-life plan for our legacy international product line, and we talked about this plan last quarter on our end of Q1 conference call. In November, as was mentioned earlier, we sent out our last time buy letters, contacted customers, and began analyzing what the appropriate write down in inventory would be. We currently expect an after-tax charge of 37 million, as Howard mentioned, which does include a charge in the fourth quarter when the Canadian manufacturing facilities closed. 35.5 million pre-tax of that charge was recorded in this quarter. 34 million of that was for inventory reserved on the discontinued products.

Our normal quarterly calculation of excess and obsolete that is done is based on recent usage and backlog to predict demand. Over the previous four quarters, the total addition to reserves on these products was about a $1 million in total for the four quarters. The reserve calculation triggered by the last-time-buy action this quarter was based exclusively on a forward-looking forecast of demand and reflects a significant drop in demand for the legacy products. As a result, the calculation produced a significant reserve requirement.

Since the last-time-buy letters only went out in mid-November, it is possible we have underestimated last-time-buy demand. My personal experience with last-time-buy demand is that you always underestimate it. We will monitor the adequacy of the reserves throughout the balance of this fiscal year and make adjustments as needed. But I'm quite confident we will not have to add to the reserves.

Let me talk a few minutes about the positive impact that we expect the discontinuance of these products will have on asset management. Inventory turns at the end of fiscal 2005 was about 1.9 for this business. These low turns reflect a collection of products on a wide range of frequencies and capacities that weren't designed on a common platform. Products had very little in common with each other in terms of components and modules and, therefore, required significant inventory on hand to support them. We also manufactured these products in more than one location and have service and support inventories in six countries.

TRuepoint, on the other hand, was designed up front as a lower-cost product family with a common platform and shorter lead times, all of which lower inventory levels. As a result, we expect inventory turns in this business to increase to approximately 3.5 times by the fourth quarter of fiscal 2006.

Now a few words about how we did on EBITDA for the quarter. Earnings before interest, taxes, depreciation, and amortization, after excluding the impact of the inventory impairment in our Microwave Communications Segment and other non-GAAP items is 139.6 million, an increase of 15% over the prior quarter. EBITDA's percentage of revenue also increased from 14% in the prior-year quarter to 17% in the current quarter. The asset management metrics report to you showed improvement as well on both a GAAP and non-GAAP basis.

Days sales outstanding were 53 days, which is continuing to improvement over 55 days last quarter and 60 days in the year-ago quarter. Net operating working capital at the end of the quarter was 300 million, or 9% of annualized revenue, down from the 10% last quarter and 10% in the year-ago quarter. Return on invested capital was 18% in the quarter, compared to 15% in the prior-year quarter.

Inventory turns in the second quarter on a GAAP basis were 5.9, versus 5.6 in the first quarter and 6.1 in the prior-year quarter. Excluding the non-GAAP adjustments, inventory returns were 5.5 in the second quarter, which were the same for the first quarter and lower than the prior-year quarter. The acquisition of Leitch had a negative impact on inventory turns in the second quarter of fiscal 2006 because we only have two months of cost of sales in the quarter and full impact of inventory on the balance sheet. It's a math thing.

In the quarter we bought back no shares of our common stock. Of our existing repurchase plan, we have remaining authorization to repurchase approximately 4.4 million shares. We fully expect that we will repurchase shares of common stock to offset the dilutive effect of shares issued under our stock incentive plans as we go forward.

Depreciation and amortization was flat in the second quarter, compared to prior year, same quarter. Depreciation and amortization, including amortization of software and intangibles, we expect to be between 90 and 100 million for the full year. Capital expenditures, including capitalized software [inaudible] in the quarter. In fiscal 2006 we expect to spend between 105 and 115 million on capital expenditures, included capitalized software.

the capital spending is concentrated in our government segments and is tied to the ramp up of fixed price production jobs and new product development and increase production related to our Falcon family of radios. The increase in software additions is primarily due to software development projects for new products on our Broadcast segment and system improvements being made at our Government Communications System segment.

Now I'd like to comment on our cash flow outlook for fiscal year overall. At the midpoint, I'm happy with our progress toward having another very strong year. We expect our cash flow from operations to be in the 300 million to $350 million range.

Back to you, Howard.

Thanks, Bryan. The latest increase in our 2006 financial guidance, to a range from $2.05 to $2.15 earnings per share, recognizes that we are ahead of plan for the first half of the year. Revenue growth is still expected to be in the 13 to 15% range, compared to fiscal 2005. Much of the increase is attributable to the RF Communications business, where we expect strength in demand and profitability to continue. Our estimates for significant order growth are supported by strong worldwide demand; funding provided by the most recent U.S. government budget; our strong competitive position and new product introductions; and the identification of expanded opportunities, including the $1.7 billion SINCGARS replacement market.

We now expect fiscal 2006 revenue growth at RF to be 40 to 45% above last year. Orders should be significantly higher than sales and should help ensure that fiscal 2007 will be another growth year. We expect RF operating margins in the second half to come in around 33% of sales, tempered a bit from the first half, due to the initial shipments of Falcon III radios.

In the Government Communication Systems segment, we now expect revenue to be about flat versus the prior year. This reflects underlying revenue growth of about 3 to 4%, excluding IMN from the prior year, with increasing revenue in the second half. Within the segment, DoD and Technical Services programs should deliver solid growth for 2006, with civil programs also delivering underlying growth, excluding IMN. In the near term, we expect funding constraints to continue to impact the national programs area.

There are a number of opportunities in the pipeline, and we expect to win our share of those programs. We don't believe we are being too conservative in our revenue expectations for government systems, as the delay of passage of the DoD budget has pushed opportunities too far to the right to boost current year growth by much. When you combine the revenue in our two government segments, our guidance indicates year-over-year organic revenue growth of 10%. We think this is an excellent growth rate and clearly outpaces the market. Operating margins for government systems should remain quite strong, at 12 to 12.5% of sales in the second half.

Looking ahead in the commercial segments, we expect continuing improvements at both Microwave and Broadcast. With TRuepoint market acceptance and improving international market conditions, we're gaining confidence in the potential of our Microwave business. The TRuepoint product platform is enabling Harris to address telecommunication opportunities worldwide, just as the market appears to be entering a sustainable period of growth. We now expect 10 to 12% revenue growth in Microwave for 2006, and second half margins of 6 to 7% of sales should be achievable, thanks to the contribution of TRuepoint and the cost reduction actions we've taken to significantly streamline our operations.

Our Broadcast business is successfully integrating two very key acquisitions that place Harris at the forefront of the media industry's digital conversion. These acquisitions have significantly expanded our capabilities in the hottest growth areas and are significantly boosting the segment's margin performance. Although growth in our core transmission business has been lagging, we expect all product areas to gain some momentum in the second half. Our Broadcast guidance is unchanged from our last call, with expected revenue in a range from four, thirty to four hundred and -- from 530 to $540 million, with margins of 11 to 12% of sales.

Thanks, very much for your attention. And we'll be glad to now open the phone lines for your questions.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to Rich Valera of Needham & Company.

Thank you, very much. Good afternoon, gentlemen.

Hello.

Hi.

On respect to the inventory write down in the Microwave area, Bryan, do you think it's possible you'll end up recognizing written off revenue? And, if so, do you expect to call that out?

Absolutely. That's what I meant, Rich, when I said the -- we'll look at, very carefully, at what we are -- our end-of-life estimates are as we move through the last six months of the year. And we would adjust the reserve accordingly. And I -- because I think that is the last thing we want to do is have revenue or income affected in 2007 and beyond by this.

Very good. Now, with respect to -- within the RF Com area, can you give us an update on where the various JTRS clusters stand? I know you're involved in a couple that I think are on stop order. Then there's Cluster 5, where you're not involved, which I think you may be benefiting from that activity on the Falcon side. Can you just sort of give us an update there, overall how you see the sort of sluggish progress on the JTRS effecting you?

Yes, at this -- this is Bob Henry. At this point in time we are waiting to hear from the Joint Program Office to see if we're actually going with the stuff with the budgets now coming out. There'll be a restructuring of the Cluster 1 and the Cluster 5 programs, and that will probably be principally to descope capabilities and it'll also extend the schedules on it as they go through. What they're trying to do is they want to get capability out into the field. And with all of the players that they have and the different players wanting different capabilities, they just can't make all of that. So they will be pulling that back and descoping the capabilities on Cluster 1 and Cluster 5.

It looks unlikely that the AMF program, the Airborne Maritime Fixed JTRS program will go forward as is currently formed, and there'll be changes to that that we're not exactly sure where that may go, but we know there'll be changes to that going forward. I believe that the timing of the JTRS productions still remains beyond the 2010 time frame. With that said, the JTRS program continues to present opportunities for our Harris Falcon II products and, of course, our new market entry with our Falcon III.

Okay. Thank you. And, Bryan, on the -- with respect to the margins, you had quite nice gross margins and probably a little higher OpEx percentage than typical. Is that just sort of shifting of R&D between funded and unfunded, or is there anything else going on there?

There was a pretty big influence, Rich -- this is Howard -- from the Leitch acquisition, which has pretty high margins compared to our average.

Okay.

And similarly, higher OpEx expenses to sales. So that was a significant part. We had a little bit of that, if you recall, a year ago in this quarter, as we took on the Encoda Systems acquisition, which also had high margins. So it's really a mix -- a mix thing. Generally speaking, margins are improving in all the businesses.

So in terms of the relative split of gross margin versus, sort of, OpEx, we should look at sort of similar ratios going forward?

Well, probably -- it will probably settle down next quarter, where we get the full quarter impact of Leitch. We only had them for part of this quarter. But it's certainly a -- directionally, going to be closer to where it is now than where it was because of the Leitch mix.

Very good. Thanks, very much.

Okay, Rich. Thanks.

We'll go next to Chris Donaghey of SunTrust Robinson Humphrey.

Hi, good evening, guys.

Hello, Chris.

Question, quickly, on Broadcast Division. And I think you eluded to this a little bit, Howard. By my estimates Leitch was probably somewhere around a 30 to $35 million contribution in the quarter and Encoda in a similar range since we now have a full quarter of Encoda, leaving the core Harris Broadcast business at around $69 million, which is pretty weak. Just based on your comment earlier, can we attribute that almost exclusively to the analog business?

Well, yes. Analog has been weak for some time, especially international. You've heard me talk about that, Chris, several quarters. We had a better quarter in orders than we did in revenue in both digital TV and digital radio. As I indicated in my prepared statement, we are expecting a stronger second half, so there'll be a little bit of a hockey stick there.

We're also -- I don't want to use it as an excuse -- but in the prior year, in Broadcast, you had significant revenue from IMN. They're part of the revenue, as well as you had revenue continuing in the large program we had in Romania. Those are examples of tough comparables. I don't -- I didn't call them out because, regardless of those big programs, we still should be able to grow that business in the core.

I think we're looking forward to a much stronger second half. We've had a lot of focus on getting costs out. And the time is now to focus on getting the top line going again, as we go forward, and I think you'll see improved rules in the second half of this year and, certainly, as we go forward into 2007 fiscal year.

Okay. Great. Thanks. And one question -- or actually a couple questions on the tactical radio business. Now, there have been some investors that are concerned that, given the strong growth that we've seen in that business and where the current reset opportunities are, plus the replacement business, that the growth should slow substantially, especially as we look out into 2008. But that doesn't really take into account the mix of international and how that may be changing. There's some interesting new countries that I noticed in this press release that I haven't seen before.

Yes, right.

So can you talk a little bit about the mix of international to domestic revenue, is one question? And, second of all, on Falcon III, the recent orders, are those being sold into programs like SINCGARS, or are we still looking at, outside-of-SINCGARS-type funding for Falcon III?

On your first question, Chris, I think we'll do an injustice trying to deal with the future of -- on the call. Certainly, at our March analyst meeting you can expect us to talk a lot more about that, to try and help you bring that into focus, because I agree, it's a very, very relevant question. And it -- clearly, international will be one of the drivers that we think will continue to help us grow, not only '06 to '07, but beyond.

With regard to the Falcon III revenue, the bulk of the orders we've gotten so far have been the first order in the SINCGARS replacement program. We're starting to make shipments on that during this quarter, and we're hopeful that either late this fiscal year or early next fiscal year, we'll receive a significantly larger SINCGARS replacement order from the Army.

We did, in this quarter, start to get a few additional orders, primarily from classified customers, as indicated in my statement. We are starting market that radio, though, broadly to the U.S. customer base in all the services, and we do expect to see some orders coming through on the handheld model in more traditional handheld applications. And, then, of course, we'll be following that with the manpack version, and the more traditional vehicular adapter version. So the Falcon III is really just getting started at this point.

Again, you'll hear a lot of discussion about that in our March analyst meeting, as we talk about the role Falcon III will play, again, in helping to sustain growth beyond '06.

Okay. Great. Thanks, and good quarter.

Our next question comes from Ferat Ongoren with Citigroup.

Good afternoon.

Hello, Ferat.

Hi. One question on the Broadcast side. The organic revenues were down pretty sharply. And this is probably due to the legacy business, which has very low margins. So I'm trying to figure out when that business comes back as you suggested. And the second part, whether you'll be able to keep these margins?

Again, you're talking, Ferat, about the -- what we call the core transmission part of the Broadcast business?

Exactly, exactly.

Okay. Again, once we're past, now, the first half of the year, you've got the past-year programs I referred to, both IMN and Romania essentially were gone in the first half of last year. So those comparables get a little easier. Second, we saw very good order intake on the new HD Radio transmitter that I talked about -- FLEXSTAR. We'll start delivering on those orders in the second half. And, finally, in digital television, we expect, now that the analog sunset date is fixed, that we will start to see a pickup in those orders.

But the -- ?

We expect margins across the board to improve in the second half, as a result of the cost-reduction actions that we've been taking throughout the first half.

Okay. In terms of JTRS, do you expect to see any signs of the funding levels in the budget? Or do you expect the budget convey no information at this stage? Because as Bob mentioned, there's this stuff over there in place, and, obviously, if the program is not proceeding, the question is whether or not there was the good funding amount in the budget.

Yes. I don't recall the specific amounts related to JTRS and the DoD budget. I'm just not sure if it was called out specifically or whether it was rolled in. We're looking at some notes here. But looks like the Joint Conference had put in around 300 -- looks like around $324 million in total for all the Clusters. So I'm assuming that is what was in the final budget bill. That was down slightly from the request, which was closer to 400 million.

So they're still funding. And I think, at this point, the answer on what JTRS is is just not clear to anyone. I think that DoD is still committed to a JTRS waveform, a joint waveform that can be utilized in lots of different kinds of radios -- ground-based, air-based, and so on -- but they were very aspirational in the specs they put together in Cluster 1 and Cluster 5.

And whenever you're that aspirational with a program, there's a lot of invention that has to be done. There's going to be some trial and error. And I think the reality is, the services got tired of waiting. And as this got pushed out, as Bob said, 2010, 2011, they need radios now. And the radios from Harris offer significantly more capability than the current radios they're using. And so they're using the opportunity now to recapitalize the communications infrastructure. And we're certainly benefiting from that activity.

Okay. And in terms of charges, could the U.S., the quarterly distribution, it seems like the Microwave is going to be in the fourth quarter and the radio Broadcast charges likely to be in the third quarter?

We put a table, I think it's Table 7, in the press release.

We haven't split it out by quarter. That's for the year.

You mention incremental 14 million left for the two quarters.

We didn't specify Q3 and Q4 because it will depend on what exactly happens in those quarters, whether we can take the accounting charge in which quarter. So for planning, you could probably assume they'll be equally distributed. Clearly, the -- most of the Broadcast charges ought to wrap up in Q3. Some of those slid from Q2 because of timing and the Microwave shutdown charges in Q4. Essentially, the Leitch integration charges are essentially done at this point.

And a final question on the restructuring charges. I mean, looking into '07, do you expect to have surcharges going forward or are these the final charges that you're going to take in the foreseeable future?

I would never say never, but I view the era of restructuring at Harris as essentially being over at this point. We've spent a lot of time, a lot of effort, and a lot of charges to fix the Broadcast and Microwave businesses. We think they're well positioned where we are. And so at this time, I do not anticipate any significant charges.

Obviously, if we do additional acquisitions, there are always some amount of charges with those. But in terms of restructuring, my view is that we're basically done. We'll always have cost reductions. We'll always have investments to reshape the business. But my view is we're in a, kind of, a pay-as-you-go approach going forward. And we'll be baking those into our regular operating guidance.

Okay. Thank you, very much.

Thank you.

Our next question comes from Joseph Campbell with Lehman Brothers.

Yes. Good afternoon, Howard, Bryan, Pam, and Bob.

Hi.

Hi, all. I wish I was in Florida. We have questions like everybody else about RF Com. And I wondered if you could just help us a bit. Of the 850 to 900 million in orders that you anticipate, how much of that has been booked? We've been diligently adding up all your press releases, but, of course, they come nowhere near that. Is this stuff that's mostly already done? Or is there anticipation that will -- that the budget numbers that pass very, very late last year, or early this year will fuel additional orders in the back half of the year that will bring the numbers up to there? Kind of, where are we as we stand for these RF Com radios?

Well, without being specific, I know you'd like me to be --

No. Just the orders. You said you would get 850. I'm trying to say, of the 850 -- so here we are Q2, what have we got under our belt already?

We are -- I don't know. I wasn't -- we normally don't share, Joe, specific orders by quarter. I'm concerned about quoting you numbers. I don't have the orders in front of me. It was -- in the first half, it's probably, I'm going to say in the neighborhood of a half of that target, something like that. We did say it's 50% ahead of last year.

Clearly, they're still going up. They were higher in the second quarter than in the first quarter. And we, clearly, continue to have momentum. We expect, now with the budget done, that they will accelerate in the second half. Bryan is now telling me it's a little less than half in the first two quarters.

So basically what we're going to see is the spending of the final '06 bill and the supplemental that was tagged along with it where a lot of these radio fundings resided, they'll do their usual thing, and it will take them a little bit, but whether it gets in this fiscal year or next, but it's basically the application of those orders that came in the late defense bill that will kind of fill you up to that level. And then the numbers that we're going to see next week in the President's '07 budget and the second tranche of the '06 supplemental, presumably, will have another wad of radios that will, I guess, allow you to see the growth in '07 so that you can continue -- so that the orders that you got during '06, obviously, some of them are being shipped already. I mean, I'm just trying to see if that -- is that the way this works?

Yes, I think you have summed it up accurately, and the reason that guidance continues to go up on orders is because we were not certain when we made the $800 million target about the timing on the budget. You have to make certain assumptions on when the budget gets passed and when do those orders flow through the pipeline? We're saying, at this point, 850 to 900, that's our best guess.

Yes.

Could even be higher than that because we might get the orders in June instead of July.

Sure sure.

There is more than an adequate funding and pipeline as we see it today to support the current revenue that guidance we provided for this year. There's not a lot of upside, I don't think, because of when those timings will come -- when those orders will come in. We could do a little better, but we're saying 40 to 45% growth over last year. We think that's a fair estimate, at this point, of where we're going to finish up this year.

But the good news is we're going to have many more orders than revenue, we're going to build backlog, and that's going to drive us into next year. And you talk about the next supplemental budget, that probably has little help this year, but mostly in setting us up for orders between the July and December time frame. And, then, the next year fiscal budget then drives the second half of the year. So, I think you probably summed it up better than I could have.

Howard or Bob, is the part that we can see the clearest the Marine Corps at this point? I mean, I noticed that ITT has ramped their regular SINCGARS radios up from 1,500 to 3,000 and they're now at 4,500 a month. So we see the Army, I guess, from your contract, sort of dabbling a bit in experimenting with the replacement. And the -- some either classified customers or special forces or some small guys are going for the new stuff. How you see the Army sort of bringing to bear as they -- because of the urgency of the need, they just cranked up the SINCGARS? How do you see them actually addressing whether to sort of phase -- or is it that they need so many that you think they'll buy both yours and theirs? Because 4,500 SINCGARS a month is a lot of radios.

What they have told us is that, out of a plan to replace 200,000 SINCGARS radios, that they would like to buy about 65,000 or so of those in the configuration that our Falcon III uses, which is two handheld radios in a mounting with an amplifier in the vehicle, filling in the same physical space that the SINCGARS radio uses. So they said they want to buy about 65,000 or so of those. And that's the $1.7 billion opportunity.

Right. That's -- that will keep us busy for a long time.

Well, we certainly hope so. There is a minimal amount of SINCGARS in our fiscal '06 forecast because, as we said, we've gotten the initial order, but it will really be until those start shipping by the first quarter and second quarter and they start validating this alternate approach, then we think we'll get the next tranche of orders. And we think it will be significantly larger than the 38 million in the first tranche.

So the program's in place, so they're basically -- because you're new to -- this radio was new to them, they're doing the usual -- and it's not their radio -- the usual Army thing to make sure it works with some reasonable quantities. And once you get the green light, they'll then feed you into the high-demand route, where we might see the radio -- the Falcon IIIs ramp up for U.S. Army application?

Yes. And we think, then, as I said, we'll see lots of demand and revenue realized in '07 from that. And this year all of our Army demand is for our HF, High Frequency, radios and multiband manpack radios, which are selling very well to the Army, as well as you discussed, with the Marine Corps. We won some competitive bids with the Marine Corps and are very pleased with our market share gains there. So SINCGARS is a real upside. We do expect it to contribute significantly in '07.

And just on the run rate, we're -- I guess we're a little shy of a couple hundred million a quarter. Would we anticipate that the way this would work was we would -- I mean, I'm not sure what the production plans are for the -- where precisely. Are we going to do the Falcon IIIs in Rochester and sort of phase out something else and find a home for these? Or is the Falcon III production something that's not currently constrained; the constraints are all in the legacy products?

We're going to do Falcon III final assembly and test in Rochester. We have, again, created some capacity, freed up some capacity there by moving some of the international Falcon II products to the U.K. And we are actively in the process of ramping up additional space there, acquiring additional space, tooling up for it, putting new capital in it, so that we can ramp up the SINCGARS line. So, essentially, we're putting in new capacity for SINCGARS and we'll ramp that up, again, as we get the new orders, as we kind of phase from this year into next fiscal year.

We are increasing the amount of outsourcing that we're doing on the boards and lower level assemblies. But we will retain final production and final test.

Bob Henry, the President was at your place today, so how come everybody didn't just ask him for more money?

Well, we did pretty well. The supplemental looks good for us, for RF Com. So we're quite pleased with that. So that's where a lot of this is going to be pushed going forward.

Well, thank you, all, for the comprehensive answers. We appreciate it. And it's pretty nice to see the numbers going up.

Thank you.

Thanks, Joe.

Our next question comes from Jim McIlree with Unterberg, Towbin.

All my questions have been answered. Thank you.

Thank you, Jim.

We'll move next to Larry Harris with Oppenheimer.

Yes, thank you. Two questions. One with respect to the Falcon III. In terms of the guidance for the next couple of quarters, it was indicated that the profit margin at the RF Communications Division might be a tad lower than what we've seen in the last quarter or so due to the Falcon III. Any sort of commentary in terms of the kinds of profitability we're seeing on the Falcon III?

Well, it's a combination of really of the -- it's about 100 basis points lower than the first half, is what we said. And it's a combination of the R&D to which we're spending to make sure we get ready to go. It's the money we're spending in the factory to get ready to go, and the normal startup costs for a new product line. We're on a fast track to be ready for production, and as a result, we haven't fully done all the cost reductions. So it's -- that's really all there is to it. We should get back on track beyond that. This is not the beginning of a margin -- long-term margin erosion in this division.

I understand. Okay. That sounds great. And just a general sense of things on the Broadcast side. There were about 1,550 stations or so that are Broadcasting in digital. Are we still looking at, maybe, close to half that still are using low-powered transmitters?

Well, the percentage, I don't know.

I don't know, Larry.

That's a good question.

I can get back to you with that.

Okay. That's fine. Okay. Those are my questions. Thank you.

Thank you.

Thank you.

Our next question comes from Byron Callan with Prudential.

Yes, good evening, everybody.

Hey, Byron.

Hey, just back to RF. Do you guys think you're pretty much share the same view as your other major competitors in this market about the total size of the opportunity? Joe mentioned ITT and their rates on SINCGARS. I know Thales has opened another facility, I guess, in Maryland. Is it going to be a market share battle? Or is there just that much demand that everybody is going to make out just fine here?

I couldn't comment on what they think the size of the market is. It's clear that the market is large at this point and that legacy suppliers like ITT on SINCGARS, like Thales on some of their handheld models, and like Harris on high-frequency and multiband manpacks, that we are all benefiting from that. Certainly, in the SINCGARS replacement program, we view this as market share gain, because we weren't on the SINCGARS program.

Yes.

So from that standpoint, it's all incremental to us. I think our new handheld radio is going to compete very well head to head against Thales and their handheld, which uses a little older technology. So we're optimistic that we will be able to also gain market share outside of the SINCGARS opportunity as just one of those.

But I would hesitate to guess how big the quote, unquote market is at this point. There's clearly lots of -- billions of dollars going into refitting the entire DoD communications infrastructure for tactical radios. And some of that has been spent, I think, and a lot more is to be spent over the next few years.

Okay. And, then, just on the Government Communication Systems, the slip in the classified programs it doesn't sound like those have gone away. So it's really just an issue of kind of moving the revenue out of 2006 and we'll probably see some better growth in that area in 2007? Is that the way you guys are thinking about it here?

Yes, what I -- let me just make a comment on the whole intel area. There are a number of programs that have overruns on them in the intel area. I can assure you that Harris is not causing any of those overruns in the intel areas, as Howard has already spoken to. However, because of those overruns, they're funneling money to those programs. So that's the major change there.

So what's happening is money is moving to some of these other programs. That will last here for the next six months, nine months or so. And, then, hopefully, we're going to get back to a better run, and more of the companies getting a better split of the funds going forward. What we haven't seen is any major, large program in the intel area going forward. There's not any major, large ones. And what I mean by that is multi-billion-dollar ones. We have a number of those that Howard already eluded in the couple-hundred-million-dollar arena that we expect to win here in the next -- well, by the end of this fiscal year.

So I -- it's really a push out caused by funds going to fix programs that are in trouble.

I certainly think, Byron, that the lack of growth in our national programs business unit is a this-year event.

Yes, you see what I'm driving at. I mean, it should pop up in '07 and '08, and you should be back on, kind of, I don't know, high-single-digit, double-digit track for that business, that would be my assumption here.

Well, without talking about a specific number, what I'm going to say is, two things. Number on, there is not a lack of new programs to start. Our customers in the intel area have lots of things they want to do. And we have a lot of technology that can help them accomplish their mission.

But, secondly, our business unit is not sitting around. They have said market this year is what it is. And they're working on adjacencies. They're working on new customers, new opportunities, like with NSA, the program I've talked about. This is a very important program for us, because we haven't been that active in the knowledge management and analysis part of the cycle. So this is new business for us and success execution -- successful execution on RADIC opens new doors for us, we think, in other areas.

Commercial satellite antenna is another example of business opportunity that we're pursuing. So what I'm hoping is we get this adjacency going and then the core comes back a little bit stronger so that we get growth from that. How much, again, we'll have, probably, a little better, at least, estimate of that at our analyst briefing in March.

Great. Okay. Thanks a lot.

Thank you.

We'll move next to Stephen Ferranti with Stephens, Incorporated.

Yes, hi, guys. Thanks, for taking the call. And congratulations on a good quarter. Most of my questions have been answered, but it looked like, if you excluded the 12.2 million of charges in the -- in your ESG&A line, that OpEx might have ticked up a little bit on a percentage basis. Is that attributed to anything in particular? And is the higher level something we can expect going forward?

Again, I'll look -- we'll look at the precise numbers, but you've got the mix impact from the Leitch acquisition. And margins are up at RF -- gross margins and so is OpEx as we invest in that business. But I'm not sure about the percent of sales number for the consolidated Company. And we're going to probably have to provide further guidance on the makeup of that number and decompose the results in the quarter between, let's say, non-Leitch and Leitch. So we'll have to take that action item and get back to the market.

Okay. That was all I had left. Thanks for the call. And congrats, again, on a good quarter.

Thank you.

Okay, Steve, thank you.

We'll take one last question.

And that question will come from Chris Quilty of Raymond James.

Made the cut. By the way you're -- with that RADIC, you're not helping the NSA listening on this conference call, are you?

We couldn't comment on that.

This is a public -- certainly a public conference call. We don't control what --

You do have some international callers, I'm sure. I hate to ask another question on the Falcon III, but in terms of competition, you mentioned that Thales has a competitive solution. Do you know about how far ahead of them you think you may be?

Well, I don't know. In terms of installed base, they've had a strong position with the U.S. Government Special Operations Command with their handheld radio. We now have a very, very competitive offer. In terms of technology, I'd like to think that we are ahead of them. We're going to -- because it's a newly designed radio, it's going to have the latest technology in it. It's got the JTRS compatibility, which they do not, and so that's a feature which we think will become more important going forward.

But it's their business today in the traditional DoD, so we'll have to go and sell hard against them. Eventually, this product will make its way into the international markets. But our focus with Falcon III right now is U.S. DoD.

Okay. I think there was a comment earlier about contribution from the supplemental, and maybe I missed it on the call, but can you give us a sense of, collectively, between the government coms and the RF coms what you might be seeing in total in orders from the supplemental? Maybe not a dollar -- maybe a general percentage?

Well, I think there was little contribution from the supplemental to the Government Systems Division. There was a significant amount of tactical radios funded in the supplemental. The data I have says about 1.3 billion ear marked for tactical radios, which would include all of the above, SINCGARS, the MBITR from Thales, and all the models from Harris, the PSC-5 -- which I forget if that's General Dynamics or Raytheon, one of them.

We expect, obviously, then, some of that funding from the supplemental is coming to Harris. I think -- as a round number, I'm going to say this year, and it's subject to change going forward, but supplemental budgets, in general, are, probably, maybe half of our total funding, something like that. That's a very broad estimate.

What I don't want you to assume is that Harris orders equal supplemental budgets, because supplementals go away and it's going to be still lots of demand for radios. They're going to find that funding in other places in the very large and expansive DoD budget. So it's a convenient way today for our customers to get funding for tactical radios, and many of them immediately going into the field and supporting our troops.

And don't forget about, of course, our international market, which is a large piece of our business, too.

So when I say half of our orders, I'm talking about half of our U.S. DoD orders, not half the division orders.

Okay. And, final question, Congress really took an axe to the satellite programs like TSAT and others. Impact to Harris, is that a good thing or bad thing for your business long term?

Well, from a standpoint, the TSAT and the TMOS, everybody's waiting on the TMOS announcement, which we expect to have by the end of February. And we believe we're on the right team to win that. Yes, they did take a big hack at it.

All that's going to do, I believe, is just going to push things out a little bit further there. I think the programs will go ahead. It's just a matter of they're going ahead a little bit slower than we had originally anticipated. We have now factored all of that in based on the information we've had over the last, well, actually, since about the July time frame. We have factored that into our plans going forward, and that's done a slow down for those types of programs in our plans.

Great. Thank, you, very much.

Thank you.

Well, thank you, everyone, for joining us. The 10-Q will be filed tomorrow. And I'd also like to encourage you to join us for our annual analyst meeting, which begins the afternoon on March 14th. The entire Harris management team will be here. It will be a great chance to meet and hear from them. Again, thank you for your participation today.

And that does conclude today's conference. Have a great day.