L3Harris Technologies Inc (LHX) 2006 Q4 法說會逐字稿

Good afternoon. Welcome to Harris corporation's third 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.

Good afternoon, everyone. Welcome to Harris Corporation's third quarter, fiscal 2006 conference call. I am Pamela Padgett, Vice President of Investor Relations and Corporate Communications. On the call with me today is Howard Lance, Chairman, President, and CEO; Gary McArthur, Vice President and Chief Financial Officer; and Bob Henry, Senior Vice President, and President of the Government Communications Systems division. Before we get started let me say a few words about forward-looking statements.

In the course of this teleconference Howard, Gary 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 our press 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 included in the tables of our press release and on the investor relation 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. Howard, with that I would like to turn the call over to you.

Thanks Pam, and thanks to all of you for joining us today for our quarterly earnings call. Harris had another very strong quarter. Revenue and earnings increased significantly compared to both last year and last quarter. Total orders increased 24% above last year's third quarter. This sets the stage for continued growth in the fourth quarter and into 2007. Revenue in the third quarter was $881 million, an increase of 14%. Non-GAAP net income in the third quarter was $81 million, and earnings were $0.58 per diluted share, an increase of 45% compared to the prior year.

In the Government Communications Systems segment several important new program wins will provide the catalyst for renewed growth in that business. In the RF segment we continued to benefit from very strong worldwide demand for our Falcon tactical radio products. Orders were significantly higher and were greater than sales. Strong orders growth also continued in our microwave segment. This is expected to drive very strong year-over-year revenue and income performance in our fourth quarter and strong orders growth in the broadcast segment should also result in a sequentially higher fourth quarter.

Now, let's get into the specific segment results. Starting with Government Communications Systems revenue was $457 million in the quarter. This is about flat with the same quarter a year ago. The year ago revenue comparison was again impacted by about $17 million in revenue from the now completed Iraqi Media Network program. Excluding IMN from the prior year segment revenue increased about 2% in the quarter. Sequentially revenue was up about 3% from our second quarter. Operating income rose slightly to $55 million compared to $52 million last year. Strong operating margins at 12% of sales reflect continuing excellent program execution as well as the higher mix of fixed price production programs.

In the civil programs area, results included higher sequential revenue from the $2.2 billion fifteen-year FAA telecommunications infrastructure program or FTI. This included the related mission support network and other related services. During the quarter Harris was also awarded a five-year $600 million systems development contract from the U.S. Census Bureau. As the prime contractor for its field data collection automation program supporting the 2010 senses. This new technology will allow for the first paperless door-to-door census as well as for a significant reduction in census cost. The new contract complements our existing work with the Census Bureau on the eight-year $210 million MAF Tiger database modernization program making Harris a key information technology partner.

In the technical services area, revenue for the ten-year $1 billion Patriot operations and maintenance program for the National Reconnaissance office continued to contribute to sequential revenue improvement. Also in the quarter Harris was awarded a new $22 million contract for the second phase of the joint environmental tool kit program providing weather forecasting services to the U.S. Air Force.

In the national intelligence programs area we posted more than $56 million in new program wins during the quarter. Several classified programs contributed to higher sequential revenue including the $77 million RADIC program for the National Security Agency. Sales of commercial, satellite antenna products also continued to grow. We are successfully leveraging our number one position in space antennas for the government into new commercial opportunities with companies such as Space Systems Loral and Boeing.

In the Department of Defense business area programs that contributed -- [Inaudible - audio difficulties] program for the U.S. Air Force and Marine Corps and the MIDS SATCOM terminals for the U.S. Navy and Air Force. Harris was awarded a new multi-year potential $80 million FA-18 contract in the quarter. This is to provide a distributed targeting processor, and a companion mass storage unit for the U.S. Navy and Marine Corps aircraft. This system enables pilots to perform improved time critical weapons targeting. Harris also received a new contract to provide cockpit digital video and audio recording devices for the U.S. Army Apache helicopter and we were awarded a new $41 million contract from the NSA for our SecNet 54 secure wireless networking products.

Importantly during the quarter the potential $1 billion U.S. Army War Fighter Information Network Tactical or WIN-T program moved into low rate initial production. Harris was awarded a one-year $10 million contract to continue development of the transmission subsystem. We expect to receive a follow-on two-year $15 million contract award in our next fiscal year. The WIN-T transmission subsystem will also be used in radios to support the Army's future combat system.

Turning to the opportunity pipeline, we are pursuing 10 large programs that have a combined potential contract value of about $2 billion, and these are expected to be awarded within the next twelve months. They include two $300 million classified programs, expected to be awarded in May. A $250 million opportunity for the design phase of the Department of Homeland Security integrated wireless network program also expected for May. The $300 million department of Homeland Security opportunity to provide communications networking equipment for the secure border initiative is expected in September. A $150 million technical services opportunity for the deployment of satellite base band equipment for the Diplomatic Telecommunications Service is also expected in September.

There is a $100 million weather radio improvement program to modernize and integrate terrestrial, satellite and Microwave Communications for the National Oceanographic and Atmospheric Administration expected in December. Also, another $100 million comprehensive large array data stewardship system to modernize NOAs national environmental archive and access service also expected in December of this year. Then there is the $120 million innovative space radar antenna technology or ISAT program for DARPA expected to be awarded in December. We expect a $200 million FTI program expansion opportunity to replace their aging microwave network expected by next February. Finally, a $200 million GPS 3 navigation and positioning satellite program award expected in April 2007.

I would like to take a moment to discuss our progress on the FTI program for the Federal Aviation Administration and to clarify some inaccurate information that has recently appeared in the press. As most of you know, this telecommunications network upgrade is a key part of the FAA national air space system modernization plan. The FTI program was award to Harris in July 2002. The legacy telecommunications network that FTI replaces is nearly ten years old and approaching end of life. FTI will provide modern communication capabilities to nearly 4500 FAA locations, and it offers an upgrade path to future capabilities that are not available in the current network. The critical elements of the FTI program architecture will assure unparalleled safety, security and reliability. It will accomplish these tasks at a much lower cost to both the FAA and to taxpayers.

Harris has been a trusted communications partner serving the FAA fore well over two decades. The FAA chose Harris for the FTI program because of their experience with us on previous programs such as the voice switching and control systems program. VSCS is one of the most successful programs in FAA history. It has exceeded every performance expectation including nine-nine's network reliability or virtually zero down time. The FPI program began in July 2002 with a service qualification and test phase. This was to ensure the critical requirements of the program were being achieved prior to any services being transitioned.

Deployment of the system began in January 2004 and started with the air route traffic control centers. These are the largest and most complex sites, and then subsequently deployment moved onto other FAA sites. The rate of transitioning services to FTI has fallen behind the original schedule assumed in the FAA business case. This is an extremely complex network, and deployment plan was front end loaded with the largest and most complex sites. In addition, a number of network security requirements were added along the way and site access problems also emerged. This resulted in the transition plan schedule being restructured by the FAA in April of 2005 in order to increase the effective rate of deployment for site and service acceptance. The Harris team and the FAA are currently executing within 95% of this plan. Of the nearly 4500 total sites we've already transitioned over 1400 sites to new equipment and of the more than 20,000 services, we've transitioned over 5,000 services already to FTI.

These services include voice and data communications, weather radar, and Internet access. In our initial proposal, Harris established December 2007 as the date by which all links, networks services would be transitioned to FTI. We are still actively working to that date albeit with a little more back end loaded transition schedule. Our FTI is doing a great job on a very complex program. The program remains fully fund and our relationship with the FAA is solid. We are confident that the end result will be the most efficient, safe, and secure network ever developed and it will operate at a significant cost savings.

Turning to the RF Communications segment, we had another outstanding quarter in all respects. Orders, revenue, and profitability. Revenue in the third quarter was $214 million, up 49% from the year ago quarter. Orders increased 47% in the quarter compared to last year, and were once again substantially greater than sales. This has provided a further increase in backlog that will drive strong revenue growth throughout fiscal 2007. Orders for fiscal 2006 are now expected to exceed $900 million. Strong demand continued in both U.S. and international markets. Operating income in the quarter climbed to $76 million. This is an increase of 52% compared to the prior year. Operating income continues to be driven by both strong sales and excellent gross margins.

Demand for our Falcon 2 radios remains very strong. For both high frequency and multi-band multi-addition radios. You know these products in the market is the Falcon 2 ANPRC 150 and the ANPRC 117. $150 million in orders were received during the quarter from the U.S. Marine Corps for the Falcon 2 to replace several legacy radio platforms. We also received orders from the U.S. army totaling $76 million for Falcon 2 radio systems.

In the international market opportunities are rich across a number of regions. Significant orders in third quarter were received from the governments of Iraq, Romania, Hungary, Canada, Angola, Indonesia, and the U.K. as well as from NATO headquarters in Europe. The overriding focus of our current R&D and product development is the roll out of the Falcon 3 family of tactical radios. The Falcon 3 radios complement the existing industry leading Falcon 2 product line and significantly increase our addressable market size.

The Falcon 3 radios are the first commercially developed JTRS capable radios in the market. As required under the Army's JTRS program, the radios utilize the software communications architecture or SCA operating system, and they also incorporate the required NSA certified programmable Type 1 encryption. These radios are also backwards compatible with existing legacy systems such as SINCGARS. The first two Falcon 3 products released in the market have been at the ANPRC 152, this is the multi-band hand held radio and the vehicular version called the ANVRC 110. These radios allow Harris to help meet the growing Department of Defense requirements for both handheld radios and SINCGARS capable radios. The first $12 million of the $38 million ANVRC 110 order was shipped in the third quarter. The radios have been deployed as a rapid rate and are already in widespread use by the Army. We expect to receive an additional order from the Army for more of these radio systems in our fourth quarter.

Our Falcon 3 man pack radio is also under development. This month we conducted our first on-air demonstrations for selected DOD customers at the Pentagon. These demonstrations included on-air interoperability between the Falcon 3 and a number of legacy wave forms as well as illustrated transmission of voice, high speed data, and situational awareness information using Harris' advanced mobile ad hoc networking capabilities.

Turning now to the microwave segment, sales were essentially flat with last year at $74 million. Orders growth however was once again very strong for both U.S. and international markets. Cumulative orders over the last three quarters were up 27% compared to the prior year. This has created a significant backlog and is expected to drive much stronger sequential sales and operating income in the fourth quarter. Operating income during the third quarter was $1.3 million excluding charges for legacy international microwave radio products that were discontinued during the second quarter. Orders growth over the last several quarters is reflecting strong demand worldwide that continues to build momentum.

Mobile carriers in North America are upgrading networks and adding cast to support the roll out of advanced data and video services. In addition, both mobile carriers and private network operators are hardening their networks to ensure their systems are more secure and impervious to natural disasters and acts of terrorism. Major North American orders in the quarter came from mobile network providers as well as from the commonwealth of Kentucky and the state of Montana. The commonwealth of Kentucky placed a $14 million order during the quarter as part of a potential $42 million project to design and construct a statewide wireless emergency warning system. This network utilizes 144 wireless radio tower sites located throughout the state with battery and generator back up power to provide an always-on microwave backbone for the state's public safety agencies and emergency first responders.

The state of Montana placed $3 million in TRuepoint radio orders during the quarter to support its northern tier interoperability project. This project was created to establish a consolidated local, state, tribal, and federal radio system for law enforcement. This radio system will utilize TRuepoint as the transport vehicle to provide this secure mobile voice and data communications along Montana's 550-mile border with Canada. In emerging international markets such as the Middle East and Africa, new network build-outs are continuing with heavy reliance on wireless backhaul in areas where there is little or no wired telecommunications infrastructure. In more developed international markets such as Europe, there is a focus on capacity increases to satisfy demand for wireless data services.

In markets where 3G networks are fully deployed, new services are driving two to four times an increase in the number of cell sites driving significant demand for microwave radios to meet coverage requirements. We received a number of significant international orders during the quarter. These included $28 million in orders from V-Mobile Nigeria to supply equipment for its microwave radio, transmission and transport network spanning more than 5,000 kilometers within the country. A $4 million radio order from MTN group to design, build and install a new microwave infrastructure for Zambia's national GSM network. Harris has become a strategic supplier to the MTN group, and we followed and supported their growth as they expanded their networks into Nigeria, now Zambia and the Ivory Coast.

Also during the quarter another leading telecommunications operator in Africa, Telecom Kenya selected Harris for a major network infrastructure expansion in central Kenya. Telecom Kenya will use our TRuepoint and MegaStar radios for a digital communications upgrade of central Kenya making internet access and voice-over IP services accessible for the first time. Other significant orders in the quarter came from Radio Movile in Portugal, Telecell in Argentina, Prestige Telecom in Ivory Coast, Nextel in Mexico and Brazil Telecom.

First customer shipment of our 10 gigahertz TRuepoint radio solution to support European broadcasters was also made during the quarter. Demand for Harris microwave products in both international and North American markets remains strong and we will continue to benefit from our new product introductions, strong reputation, and customer relationships. We're looking forward to an excellent fourth quarter in both sales and operating income.

Finally in the broadcast segment revenue was $143 million, up sequentially from $135 million in the second quarter and up significantly from 103 million in the same quarter one year ago. Third quarter fiscal 2006 revenue includes contributions from Leitch Technology acquired in October 2005. The acquisition of Leitch has added much greater scale to this business and has considerably broadened our footprint in faster growing higher margin areas of the market. The Leitch and Encoda Systems acquisitions together have transformed Harris into the leading end-to-end provider of total content delivery solutions. Excluding charges, operating income was $18 million in the quarter compared to $7 million in the prior year. Operating margin was about 12% of sales compared to 7% in the prior year quarter. The substantial margin improvement reflects both the successful cost reduction actions, primarily directed at reducing excess manufacturing capacity in Europe, as well as a more favorable mix of software and digital hardware sales including higher gross margin Leitch products.

The Leitch acquisition is on target by all of our measures. Revenue, orders and income. Leitch organic revenue increased more than 15% compared to the prior year quarter. New product introductions and a broadening product portfolio are enabling Harris to capitalize on the digital transition that's occuring in the broadcast studio. The roll out of HD Radio is continuing, and our second generation FlexStar Exciter is driving significant orders. FlexStar combines both analog and digital signals together, and its improved RF efficiency significantly reduces power consumption and operating costs. The product is a perfect fit for radio stations making the upgrade to HD.

Following the close of the quarter, Harris signed a seven-year contract with Cumulus broadcasting for the exclusive provisioning of HD Radio equipment. Cumulus is the nation's second largest radio broadcaster with more than 320 stations. Significant additional orders for HD Radio equipment were also received in the quarter from CVS radio, Clear Channel Communications, and Alaska Public Broadcasting.

The international analog radio market also contributed with Harris receiving new orders from Madrid based Ibarica de Comonaris, and Radio Global in Brazil. Significant software orders came from Tribune broadcasting, Turner broadcasting, and B-sky-B. Networking orders came from Sprint, TV Azteca in Mexico and Nort Ring in Norway.

Progress in mobile TV continued during the quarter. Harris shipped 25 digital Apex Exciters to Qualcomm who will use the equipment to support their ongoing development of FLOW technology and on April 28, Harris completed its announced acquisition of Optimal Solutions, a leading provider of air-time sales, traffic, and billing software systems to over 350 call letter broadcast stations in North America. The acquisition expands our capabilities in broadcast software and complements the Harris next generation H-class platform. Last week I joined the Harris broadcast team at the National Association of Broadcasters trade show. NAB is the world's largest electronic media show now bringing together well over 100,000 attendees with 1400 exhibitors from 130 countries. Harris introduced a large number of new products at this show. As expected new technologies ruled the day at NAB including IPTV, mobile TV, and HD Radio. Harris had point products and solutions on display for each of these emerging technologies and presented a record 13 papers at the technical conference. Our message was quite clear. We're not just in the broadcast transmission business any more. Let me now turn the call over to our new Chief Financial Officer, Gary McArthur.

Thank you, Howard. Good evening. Before moving to our discussion of financial position, I would like to make a few comments about the Boardex Telecommunications arbitration. As mentioned in our press release we were notified last Monday of an unfavorable arbitration decision relating to the analog bay station business that was discontinued in 2001 awarding damages, court costs, legal fees, and interest totaling 5.4 million to Boardex. We have recorded this amount in our third quarter operating results as required by generally accepted accounting principles as we have no better estimate of the most probable liability owed at the current time. However, Harris continues to believe the claim and unexpected adverse arbitration decision are without merit and continues to explore its legal alternatives.

I will move now to the discussion of Harris' financial position. The financial position of Harris remains strong. Cash and cash equivalents were at 336 million at the end of the third quarter. Cash flow from operating activities was 215 million for the three quarters ended March 31, 2006, compared to 179 million in the prior year period. All four segments showed positive cash flows in the first three quarters of fiscal 2006. The increase was led by higher operating income in our RF Communications segment. Our cash and cash equivalents decreased by 442 million during the first three quarters of fiscal 2006 to 336 million primarily due to the purchase of Leitch for had 444 million capital expenditures of 92 million which were partially offset by the issuance of 300 million in new debt and 215 million of cash flow from operations.

We continue to focus on asset management and have had good results in this quarter. Day sales outstanding improved to 59 days versus 61 days in the third quarter of fiscal 2005. Another metric we monitor is the dollars invested in net operating working capital. Net operating working capital at the end of the quarter was 344 million or 10% of the last twelve months sales down from 11% in the third quarter of fiscal 2005. Inventory turns in the third quarter of fiscal 2006 were 4.9 versus 5.5 in the second quarter of fiscal 2006 and 5.8 in the third quarter of fiscal 2005.

The decrease in inventory turns is primarily related to the significant increase in orders in our RF Communications and Microwave Communications segments which began shipping in the fourth quarter as well as the acquisition of Leitch. The acquisition of Leitch had a negative impact on inventory turns for the twelve months ended March 31, 2006, and December 30, 2005 as we have less than a full year of cost of sales and the full impact of the inventory on the balance sheet. Return on invested capital for the twelve months ended March 31, 2006, was 17%, up from 15% in both the second quarter of fiscal 2006 and the third quarter of fiscal 2005. With the 300 million debt issue in the first quarter of 2006, our total debt to total capital ratio increased to 31% from 22% in the third quarter of fiscal 2005.

Earnings before interest, taxes, depreciation and amortization or EBITDA, for the last twelve months ended March 31, 2006, after excluding non-GAAP items is 533.1 million, an increase of 42% over the last twelve months ended April 1, 2005. EBITDA as a percentage of revenue also increased from 13% in the third quarter of fiscal 2005 to 16% in the third quarter of fiscal 2006. Depreciation and amortization for the first three quarters increased from 60 million to 70 million as compared to the first three quarters of 2005 largely due to the increased amortization expense resulting from the Encoda and Leitch acquisitions. Capital expenditures including capitalized software for the first three quarters were 92 million versus 66 million for the first three quarters of 2005.

The increased capital spending mostly relates to increased software purchases at GCFD, new product development and increased manufacturing capacity related to our Falcon 3 family of radios at RF and the acquisition of Leitch. In the quarter we bought back 215,000 shares of our common stock at an average price of $47.31and under our existing repurchase agreement we have remaining authorization to repurchase approximately 4.2 million more shares. We expect that we will continue to repurchase shares of common stock to offset the diluted effect of shares issued under our stock incentive plans as we go forward. On April 26 Moody's affirmed our current ratings of BAA2, P2 and revised our outlook to positive from stable stating the change in outlook reflects the progress that Harris has made in growing revenue and is operating margins across all of its divisions over the last several years, and Moody's expectations Harris will maintain this positive momentum.

Now I would like to comment on our cash flow outlook for fiscal 2006. I am happy with our progress towards having another very strong year. We expect our cash flow from operations to be in the 325 million to $350 million range. Depreciation and amortization including amortization of software and intangibles is expected to be between 90 and 100 million, and capital expenditures including capitalized software is expected in the range of 130 million to 140 million. This concludes my comments. Back to you, Howard.

Thanks, Gary. Before addressing revenue and earnings guidance, let me spend a few moments just recapping some of our recent organizational announcements. These changes place proven senior management talent in key positions to implement our future growth strategies. Beginning with broadcast, the Leitch technology acquisition brought with it some very talented people including Tim Thorstensen who has been named President of our Broadcast Communications Division. As you know Tim led the turn around at Leitch Technology and before that at Grass Valley Group. He is a seasoned industry executive with a track record of success. He will do a great job in helping us to achieve our aspirations for this business going forward.

I asked Jeremy Wynnsinger to come back into the government business in a new position as Group President of Integrated Systems and Services. That is combining our civil, Homeland Security, and National Intelligence program areas along with technical services. Jeremy did a great job in leading the restructuring of our broadcast business and successfully executed the acquisitions of Encoda and Leitch, two very important additions to the Harris portfolio. We will lead our future growth and drive synergies across these important business areas going forward.

We also named Dan Pierson to a new position as group President of Defense Communications overseeing both our Department of Defense systems programs and our RF Communications division. Dan is a 30-year defense industry veteran and he will help us to achieve closer alignment of these two business areas by leveraging product development and international channel expertise at RF Comm along with our expertise in defense systems integration we'll be able to drive continued growth in both businesses. Both Dan and Jeremy will report to Bob Henry who was named Executive Vice President of Harris and given expanded corporate responsibilities in addition to his continuing to lead our government businesses. Chet Massari, President of the RF Communications division is retiring at the end of this year. If you followed Harris for any length of time, you know that Chet led the RF division through a period of unprecedented growth. His legacy and his contributions to Harris and its shareholders have been significant. Dana Mehnert will be succeeding Chet as President of the RF Communications division. Dana brings 21 years of RF division experience in sales, marketing and operations to his new role. He is well prepared to succeed Chet.

Let me close by discussing our financial outlook. We announced that we are increasing our earnings guidance for both fiscal 2006 and 2007. For this fiscal year ending in June, we now expect non-GAAP earnings to be in a range of $2.13 to $2.18 per share. Somewhat higher than our previous guidance of 2.05 to $2.15. Revenues should come in about 14 to 15% higher than last year. For fiscal 2007 beginning in July we now expect earnings to be in a range of $2.50 to $2.60 per share, slightly above our previous guidance of $2.45 to $2.55 and representing nearly a 20% year-over-year increase. Revenue is expected to be in a range from 12 to 14% above fiscal 2006 levels.

The stronger outlook for both years is led primarily by higher revenue and income expectations in the RF segment. But the strong orders performance in the third quarter and order intake already seen in the fourth quarter has given us increased confidence in all four operating segments ability to deliver growth going forward. RF segment revenue in fiscal 2006 is now expected to be slightly more than 45% higher than last year with operating income margins at 34%. For fiscal 2007 RF revenue is expected to be in a range from 20 to 25% above fiscal 2006 with operating income margins continuing in a range from 33 to 34% of sales.

Within the Government Communications Systems segment we expect fiscal 2006 revenue to be about flat compared to the prior year. That's unchanged from our previous outlook. This represents underlying growth of about 4% if you exclude IMN from the prior year. For fiscal 2007 we expect revenue growth in a range from 4 to 6% above 2006.

Operating margins at GCSD should be about 12% of revenue for this fiscal year 2006. Now margins through the first three quarters have been unusually high for this business and as we said before, are not sustainable. We expect margins to be approximately 50 basis points lower beginning in the fourth quarter and continuing in 2007. This is still a very healthy margin for this business and well above our peer group. For the microwave segment our full year guidance for fiscal 2006 has not changed. 10% or higher revenue growth and non-GAAP operating margins of greater than 5%. Strong orders growth in third quarter which did not translate into revenue should convert in the fourth quarter resulting in a very strong quarter of both revenue and income. We expect revenue to be greater than $110 million in the quarter with a 7 to 8% operating margin. Growth should be sustainable in the microwave segment in 2007 with our expectations of double digit growth versus 2006. Margins should continue to show progress towards our 10% return on sales objective.

In broadcast guidance is unchanged for 2006 with expected revenue at or above $530 million with non-GAAP margins of at least 11% of sales. For fiscal 2007 we expect revenue growth in a range of 20 to 25% higher than 2006 including the full year impact of acquisitions with margins of 12.5 to 13.5% for the year. And finally, regarding our fiscal 2007 tax rate, we expect to begin accruing at a 35% rate in the first quarter. During the year we expect a favorable tax settlement that will bring the full year rate to more like 34%. However, we cannot predict the exact timing. At this point I will ask the operator to open the line and we'll take your questions.

[OPERATOR INSTRUCTIONS] First up, we have a question from Rich Valera at Needham & Company.

I was wondering if you could comment on the recent restructuring of the JTRS program and what opportunity or issues that might present for Harris?

Well, I don't know about issues. I think also opportunities. I am going to let Bob Henry comment on that, Rich.

I think that the new JTRS acquisition decision memorandum has been signed. This will pave the way for the long anticipated restructuring of both cluster 1 and cluster 5. Cluster 1 will be renamed the grand mobile radio, GMR, and cluster 5 will be the handheld man pack and small from factor HMS radio. The programs will be restructured to report a significantly small number of wave forms like WNW, SRW, SINCGARS, EPLARs and a few others. Some of the other requirements are also going to be relaxed there. Security is going to be relaxed, some frequency coverage et cetera. Formal contractual restructuring should occur over the next several months and we will have more insight as that rolls out. The first -- for the GMR and the HMS are expected in the 2010 time frame with full rate production scheduled to begin in about 2012. The restructured AMF program has been notified -- has notified the industry that it plans to release an RFP later this year. An award would be expected in mid year 2007. We look forward to continually working on the cluster 1 and working towards this RFP on the AMF so we think the future is bright along those lines. In the meantime we will continue with robust sales of both the Falcon 2 and the new Falcon 3 radios.

I think, Rich, it just confirms with LRIP not even beginning until 2010 the need for plenty of capacity in the interim for radios to meet the DOD requirements

Thank you. [OPERATOR INSTRUCTIONS] First up, we have a question from Rich Valera at Needham & Company.

Thank you. Good evening, gentlemen.

Hi, Rich.

Hi, Howard. I was wondering if you could comment on the recent restructuring of the JTRS program, and what opportunity or issues that might represent for Harris.

Well I don't know about issues. I think also opportunities. I'm going to let Bob Henry comment on that, Rich.

I think that the new JTRS acquisition decision memorandum has been signed. This will pave the way for the long-anticipated restructuring of both Cluster 1 and Cluster 5. Cluster 1 will be renamed the Grand Mobile Radio GMR, and Cluster 5 will be the Handheld Manpack and Small Form Factor HMS Radio. The programs will be restructured to support a significantly small number of waveforms like WNWSRW, SINCGARS, epars and a few others. Some of the other requirements are also going to be relaxed there. Security is going to be relaxed, some frequency coverage, et cetera. Formal contractual restructuring should occur over the next several months, and we'll have more insight as that rolls out. The first LREP for the GMR and the HMS are expected in the 2010 time frame, with full-rate production scheduled to begin in about 2012. The restructured AMF program has been notified -- has notified industry that it plans to release an RFP later this year and an award will be expected in mid-year 2007. We look forward to continually working on the Cluster 1 and working towards this RFP on the AMF. So we think the future is bright along those lines. In the meantime we'll continue with our robust sales of both the Falcon II and the new Falcon III radios.

I think, Rich, it just confirms the -- with LREP not even beginning until 2010, that the need for plenty of capacity in the interim for radios to meet the DOD requirements. We've made significant capacity investments and, with our new technology, are covering a much broader range of products than we have with the Falcon II. So I continue to think we're very well positioned in the short run. And we both know, a lot can happen between now and 2010 with regard to these programs.

Sure. One other on the -- At your Analyst Day, you talked about the VRC-110 vehicle mount version of the Falcon III as being sort of the cornerstone I think -- or one of the key components of your proposal of sort of an integrated network for the various ground-based, vehicle-based and into the airborne troops. You said to look for the first orders of that product as maybe one of the key go-forward steps, and you do have some orders now. Are you ahead of plan there? And what is the outlook for your sort of view of the world that you proposed at your Analyst Day, in terms of the sort of integrated network that you talked about?

I still think we're still very much on track. I think that this -- the handheld that we call the AMPRC-152, which when you put two of those together in that vehicular adaptor it gives you compatibility with Legacy waveforms like SINCGARS. It also gives you the multi-band, multi-mission capability. You've got the dismount capability when you need to move away from the vehicle. So the vehicular version, separate handheld versions that the customers are going to buy, we think, as we discussed in March, give you, if you're the DOD lots of flexibility as you go forward. We're ramping up our production. And as I indicated in my comments, we are expecting to get an order of significant size sometime during this fourth quarter. The first $12 million of these systems have been shipped. They were deployed very quickly in theater in the Middle East, and the feedback we're getting so far is very positive as they're out working with -- I believe it's the 101st Airborne.

Great. Thank you.

Thank you.

We'll move on to our next question. This is John Bucher at Harris Nesbitt.

Thank you very much. Just continuing on the RF side. Do you have a feel, Howard, for what you expect the revenue mix between Falcon II and Falcon III series radios in FY 2007?

I don't really have a strong feeling about that. We think there's going to be a significant amount of Falcon IIIs shipped. We'll know more when we get this order, John. As we have indicated, it's the ramp up of that that's giving just a little bit of pressure on the margins. I still think 33 to 34% is still very good profit numbers. I think probably by the July call we'll have a little better clarification on what the mix might be. But it will still be dominated by the Falcon II, certainly.

Okay. That actually leads to the next question there. Did the difference in profitability -- Is it strictly just a learning curve at a manufacturing yield standpoint? In other words, when we're at this phase in the Falcon III production, as you are presently with the Falcon II production, you would expect them to be a comparable profitability?

I think, inherently, the profitibilities opportunities are about the same. I think we're also baking in a little bit of an assumption that, you know, we are in a competitive bid and there might be a little bit of pressure on prices of those systems, but not a lot. We're still within probably 50 basis points of where we are now in profitability.

Thank you very much.

We'll continue with a question from Joe Campbell at Lehman brothers.

Good afternoon.

Hi, Joe.

How are you? I wanted to ask a question about the broadcast. The revenues were up strongly in the quarter and for the year at 530, and next year I think you said 20 to 25% which included the impact of the acquisitions. I wondered if you could just refresh our memory on how much of the growth that we'll see in the 530 this year and how much of the 20 to 25% is sort of underlying growth, and how much of it will be due to the fact that we have acquisitions that are feathering in over the year with full years in '07 and partial years in '06. Thanks very much.

Yes. Sure. I know it's confusing with acquisitions sometimes, Joe. Next year the guidance we're giving provides essentially an underlying kind of 8 to 10% growth rate in the business, which then you add the acquisition -- the full year effect of the acquisitions. So that's a higher organic growth rate than we have seen this year, as a result of several factors. Number one, the Leitch business we acquired is clearly growing faster than our core business. It was one of the reasons that we were attracted to it. Second, we've only at the tail end of this year seen an uptick in our radio business as a result of the new FLEXSTAR Exciter. I expect that to carry over and give us good growth next year. And then, finally, as we start to roll out elements of our Exciter software platform, we'll start to see growth next year. So bottom line, 8 to 10% kind of organic growth next year and significantly stronger growth than this year.

Thank you very much.

We have a question now from Ted Wheeler at Buckingham Research.

Hi. Good evening.

Hi, Ted.

Two questions. On the tax rate change, what is the, I guess, probability of the win? Or what sort of an arbitration are we expecting to come in during the year?

Well it's -- I think the probability is relatively high. We said at the Analyst meeting we thought the tax rate was going to be about 34%. I still think that's what it's going to be for the year, but we're experiencing the change that all companies are in terms of how they book tax events. Rather than those kind of impacting the average tax rate, we now have to essentially take those benefits or costs, I suppose, if it went the other way, all in the quarter in which you learn about it. So, as a result, we have to accrue a kind of 35% rate starting in the first quarter. And then in some quarter during the year we'll be at well below 35% so that we average 34% for the year. I think we feel pretty comfortable that the event is going to happen. We just can't predict when we'll finish those discussions and that the work will be done.

I guess another question you answered, but I'll ask it anyway. In the 900 million of orders this year - which implies a nice step-up from 800 or so earlier - how much of that is the Falcon III that you're expecting in this quarter?

It's a relatively minor portion of the 900 million, would be the Falcon III> We got the $38 million first order. At this point, I don't have clarification exactly how much the second order will be. I don't know if they'll give us another similar size order or whether they'll give us a much larger order. But regardless, we have been given indications that whatever order we do get, assuming we get it in Q4, it will be shipped in '07. So it should be delivered within 12 months.

So the 900 million does include a second Falcon order, but I would assume not overly large?

Yes. That's exactly right. It assumes another modest size order.

Terrific. Thank you. Great quarter.

Thank you.

Next from SunTrust Robinson Humphrey, this is Chris Donaghey.

Hi, Good evening, guys. First of all, Howard, on the broadcast segment. By my estimates if you back out Leitch, the core Broadcast business looks like it would have been down organically versus last year. So I wonder if you could just talk about the core Harris business there. Is there still an unfavorable shift in the analog market? Maybe if you can talk about the relative percentage of your business that comes from analog transmission equipment both last year and year? And also how Encoda is performing relative to your expectations?

Well I think the math is accurate that the core business really hasn't grown this year. The software business is fine. We're doing fine with that acquisition. It's contributing significantly to our improved profit performance. The issue really is the core transmission business. And in that you've got two pieces. Of course, you've got the television piece and the radio piece. The radio piece is coming back as we kind of get toward the end of the year, as a result of the release of our next generation FLEXSTAR Exciter. We're gaining orders. I think we're winning back market share, and I expect that growth to continue. The TV side of the equation is still relatively weak. The issue -- It sounds like a broken record, but it continues to be the fact that broadcasters really don't want to spend more money for transmission systems, digital systems until they have to. They know they have to get everything now up and fully on air at full power by the February '09 timeframe. But that's still kind of three years from now. So orders there are still a little anemic. The good news is that broadcasters are spending capital. They're spending it on other digital elements of the conversion. Again, that's one of the things that attracted us to Leitch, is they are spending it on studio upgrades and HD capabilities in master control, and so on. So the fact that we have now this broadened portfolio and are much more diversified allows to us frankly get revenue and orders that, were we transmission only, we would not be enjoying. So this was part of the strategy to move us into a little faster growing market segment.

Great. Just real quickly, if you can discuss what happened in the microwave segment from a margin perspective. I understand the GAAP reconciliation at the back of the press release from a million to a million three. Were there other charges in there that made that margin abnormally low versus, at least versus my expectations this quarter?

Well there wasn't anything significant. You know, as we've talked before, gross margins do move around from quarter to quarter. But primarily it was just the revenue. At 74 -- $74 million in revenue. The orders were significantly higher. At one point in the quarter, I thought we might end up a lot higher on revenue and be able to turn more of those orders in. That would have yielded a higher profit. But with the large number of international orders and the international letters of credit that go with those, sometimes the process for getting those closed out and ready to ship takes longer than you expect. So, as a result, Q3 was a little lower than I probably would have hoped. Q4 is going to be significantly higher, and so I think we just have a timing issue between Q3 and Q4. The year is going to end up just about where we expected, I think, in terms of both revenue and profitability. Primarily the profit -- the small amount of profit was just on the low level of revenue.

Okay. Great. Nice quarter, guys.

We'll move on now to Larry Harris at Oppenheimer.

Yes. Thank you. Where do we stand in terms of production capacity at the RF Communications division relative to the facility you have in U.K. and additional lease space in Rochester?

We have access to additional manufacturing space, Larry, in Rochester. Additional equipment has already been installed. During the last visit that Bob Henry and I paid there, we saw that equipment up and going through its motions. So we are ready for the ramp up on the Falcon III, and we have adequate capacity for what we believe will be the Falcon II orders. We have shifted some of our international older products to the U.K. and so we have, I think, adequate capacity to handle not only the guidance we've given but some upside beyond that.

Great. With respect to the relationship you have with Qualcomm . You've indicated that you, I think, had shipped some Exciters for use by Qualcomm . Are you also going to be supplying entire transmitters? And if so, when do you think those deliveries will occur?

I believe we will. I don't know if we will be in the first traunch of deployment that they do for their system. I think we've indicated before we were a little late to the party in getting started with our DVB-T technology which we had in Europe, but certainly not the leader in Europe with that technology. My view is that we've closed ground considerably in supporting not only their flow technology, but also Crown Castle and others that are going to be using the DVB-H technology. So I think the game is just getting started. We're going to be a major player in the long run. I don't know when we'll actually ship them some meaningful quantity of transmitters or whether we will be a major supplier in the first round of deployment, but I certainly feel like we will be beyond that.

Okay. Great. Thank you.

Miss Padgett, we are at the one hour market. We do have some more question ns the queue.

I think we have a couple more questions.

All right. We'll move to Steve Ferranti at Stephens, Inc.

Hi, guys. Good evening. Congratulations on a good quarter.

Thank you, Steve.

Howard, I appreciate the update on the FTI program. That was actually one thing I was going to ask you about. One other follow along question I had was, in your Analyst Day you had forecast some fairly significant potential for upside to that project. Do you think that any of the issues you're seeing today would affect that?

I don't think so. I think the challenges with any program of this size and scope are always going to be there. This is a very complex program. You know 20/20 hindsight is always perfect. Should we and the FAA have anticipated a little slower start up? I guess the answer would be yes, in hindsight. But what's important is that we get it deployed. We have committed to this December 2007 schedule from the beginning, and so we're basically still on that track. The FAA has been pretty responsive in trying to react to the slower transition, and so we put this new plan together in place now almost a year ago. The fact that we're 95% on track with that, I think, validates the progress that's being made.

In terms of add ons, I think the FAA will still be interested in adding on other networks that are available to that. I talked about the microwave opportunity coming in around February or so of next year. They've already added and had given us the mission support network, which is administrative network, as well as the satellite network. So I don't think they've lost any confidence. And, in the long run, we still believe the program is going so save taxpayers lots of money and give the FAA a lot more flexibility than their current program. Having said that, we've still have work to do to finish the deployment to turn on all the services, but there is a fair amount of misinformation swirling around out there and we just felt it was important to kind of clear the air on some of it during today's call.

Great. I appreciate that. And then it sounded like RF, internationally, was pretty strong in the third quarter. Can you talk a little about how far along you feel like you are in terms of penetrating the market opportunities that you see out there internationally?

Well, Steve, we have a good position. But I think at our Analyst Day we outlined a number of opportunities that we're going after that are really pretty sizable. We're used to having pretty good programs. But I think if you think back about a year ago with the $68 million Pakistan order, internationals kind of entered into a whole new league in terms of the magnitude of potential orders out there. We talked about the opportunities in Pakistan cumulatively reaching, potentially, $400 to $500 million. We talked about Iraq, $150 to $200 million. Those are sizable programs. Potentially $50 to $100 million opportunity in Mexico, as they recapitalize radios that are now going on 10 years old. So I think we're entering into a prolonged cycle of opportunity in international, and I think the dollars are a lot bigger than we are used to. So, like anything else, it is going to boil down to us being competitive and responsive, and also the funds being available. Some of those funded by their local government economies, others funded by the foreign military sales program. So that's really the only caveat I would lay out there. I think the demand is going to be very strong.

Very good. Thanks for taking my questions.

Next up from Raymond James, this is Chris Quilty.

Good evening.

Hi, Chris.

Two questions. One, Howard, can you give us an idea of when you think you will see some impact from the census contract? Obviously we're four years away. And second, on the government coms, with regard to national programs or intelligence programs, you've had a multiple quarter slow-down in that area. Can you give us an update of where you think that business area will finish in fiscal '06 on a year over year basis, both revenue and profit flat to down? And what are the prospects for that operation or that business segment turning around in fiscal '07?

Chris, we'll see a little trickle of revenue from FTCA beginning in the fourth quarter and then it will ramp up next year obviously, be significantly higher. There is a big revenue number, though, in the year when we deploy all of the handheld devices, which will be our fiscal year '09. So it's not exactly a level-loaded revenue profile for the $600 million, but we'll see meaningful revenue this quarter and it will contribute nicely to growth in '07. With regard to the national business, we're starting to kind of flatten out or bottom out if you will on a sequential basis. And we're hopeful with a number of growth initiatives and some new pursuits. I talked about a couple of large classified programs that we hope get awarded this quarter. We've got the commercial satellite antenna business, which is growing nicely. And so that plus some just good work that the team is doing expanding into some of the adjacent opportunities within the customer base, we're hoping to return to some modest growth in the next fiscal year. So we are seeing that flattening out, which you expect to precede returning to go growth.

But is it fair to assume you will finish the year down from fiscal '05?

Yes. I think that's an accurate statement for fiscal year '06 for national intel compared to '05.

Okay. Thank you.

Thank you. Operator, we'll take our last question.

Thank you. From Citigroup, this is Ferat Ongoren.

Good evening.

Good evening, Ferat.

One question on RF Communications. It seems like the margins are going higher and higher, and last time you provided a guidance you had indicated that some R&D were basically could put some pressure on the margins. Is there a mix change? Or are you seeing some benefits from new production?

No. Not really at this time. We had a very strong quarter in margins. You know mix does have a small impact from quarter to quarter, but the guidance we're providing still would suggest that margins as a percent of sales are going to slightly come down in the fourth quarter, and be between 33 to 34% next year. Those are still very good margins. We are investing heavily in R&D. We'll continue to do that, but at the same time, you know, I don't see a significant change in those margins. Some years ago we were in the 15% return on sales, and I know when I arrived and we were at 20, I think, at that time everyone was wondering if we would come back down to 15. I just don't see any kind of a major trough out there in margins in this business. We've got our costs under control. We're getting a lot more leverage because of our higher production volumes and taking advantage of our supply chain activities.

So do you have higher R&D you can absorb it better? Is that the reason for the higher margins, basically, going forward?

Well I think margins and the guidance we've given is maybe about 50 basis points lower than FY '06 and not significantly --

Okay. And then it seems like there is a $0.06 charge in the fourth quarter. Could you provide a break out between Microwave and Broadcast, and tell us what to expect?

Let me turn to, Ferat, to the table attached to our press release which is table seven. And table 7 indicates the charges for the quarters that ended our Q1, Q2, Q3 and the total year. And so it works out to about $0.06, and in the fourth quarter it's primarily related to the final actions in Microwave in closing the Montreal, Canada facility and the final small piece of the Broadcast closure in the U.K. and the last very small piece of integration costs associated with the Leitch acquisition.

One quick question for Gary. Are all segments cash flow positive in the quarter?

Yes.

Thank you very much.

Ferat, thank you.

I think we'll end with that. I want to thank everyone for joining us today, and please let me know if I can be of any help.

Thank you again everyone. That will conclude today's conference call. Have a good day.