L3Harris Technologies Inc (LHX) 2007 Q3 法說會逐字稿

Good afternoon, and welcome to Harris Corporation's third quarter fiscal 2007 earnings release conference call. This call is being recorded.

Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. Welcome to our third quarter fiscal 2007 conference call. I'm Pamela Padgett, Vice President, 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, Executive 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 Harris with the SEC.

In addition, in our press release and on this teleconference, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measure is included in the tables of our press release and on the Investor Relations section of our website, which is www.harris.com.

A replay of this call will also be available on the Investor Relations section of our website, and with that Howard, I'll turn the call over to you.

Thank you, Pam, and thanks to all of you once again for joining us today for our third quarter earnings call. Harris once again posted strong revenue and earnings growth in the latest quarter. Revenue increased 22% to $1.1 billion. Organic growth was a very strong 14%. Non-GAAP net income increased 24% and reached $100 million for the first time.

Growth was led by the RF Communications and Government Communications segments where we've done a great job of expanding our served markets and customers, gaining share and winning new programs. We expect the momentum in these two businesses will continue to drive growth and earnings improvement for Harris.

The weaker than expected results in the quarter in both Broadcast Communications and Harris Stratex Networks overshadowed much of the progress we have made in repositioning our two commercial businesses. As we continue to execute against our strategies, we will build much broader business capabilities and this will lead to future growth and enhanced profitability.

In a few minutes, Gary will elaborate on our new share repurchase program which we announced in our press release today. We believe this program supports a balanced use of the Company's strong cash flow.

Now, let's discuss segment performance. The Government Communications Systems segment had another excellent quarter with revenue up 10%, reaching $500 million for the first time. Operating income was $64 million. Operating margin was higher than normal at 12.8% of sales and included a $4 million gain on the sale of the STAT network security product line and the benefit of a favorable mix of programs. This was the fourth consecutive quarter of solid year-over-year revenue growth for Government Systems and for the second quarter in a row, we saw increased revenue in the national programs business area.

We continue to earn follow-on work on existing programs as well as awards on new programs. Revenue growth is also being enhanced by expansion beyond our traditional defense and intelligence customer base into new civil agencies such as the FAA, Census Bureau, and NOA, and into the technical services sector as well where we support operations and maintenance on mission critical programs across the entire customer base.

Our diversity in programs and customers is a significant competitive strength providing a broader base for pursuing new growth opportunities while mitigating the potential impact of federal budget cycles.

Looking forward to fiscal 2008, we believe Harris can continue to deliver growth in the Government Communications Systems segment. We believe that federal spending for communications systems and information networks that support the Department of Defense, the national intelligence community and other federal agencies will continue to be well funded.

In addition, we expect operations and maintenance outsourcing activities to accelerate in order to reduce operating costs and also to deal with retirement trends within the government work force.

Total funded plus unfunded orders backlog is about $4 billion. Our near term opportunity pipeline is almost $5 billion represented by proposals outstanding plus those expected to be submitted within the next 90 days. The total opportunity pipeline, including identified programs outside of 90 days, is more than $20 million.

In the area of critical program pursuits, Harris successfully completed the formal testing of its Advanced Extremely High Frequency Navy multi-band terminal system during the third quarter. Down select for this $1.2 billion, seven-year program is still expected sometime in June. AEHF terminals will provide the Navy with more than four times the bandwidth of today's Milstar terminals.

Harris also announced that it is pursuing the ground segment of the National Oceanographic and Atmospheric Administration's geostationary operational environmental satellite Series R program, GOES-R for short, as a prime contractor. GOES spacecraft are the primary tool used by NOA to detect and track hurricanes and other severe weather. Potential value of the program is $750 million to $1 billion over 20 years. The down select award is expected in the spring of 2008.

We have a number of other pursuit opportunities across a broad array of program areas, including intelligence acquisition, analysis, and dissemination, next generation avionics and satellite platforms, high capacity communications networks, high bandwidth networking radios, weapons datalinks, and the expansion of our core technology capabilities in two other civil agencies.

We are also building a significant business opportunities list in the international systems market by utilizing the well-established international dealer channel offered by our RF Communications business. We are supporting the sales channel by locating advanced systems engineers and business development resources in targeted countries in Europe, central Asia and the Middle East to win and execute programs. We have a number of programs in various stages of pursuit from qualification through bids outstanding.

The RF Communications segment had another excellent quarter. Revenue was $304 million, a 42% increase over the prior quarter and a 7% sequential increase over the second quarter of this year. Strong operating performance also continued. Operating income increased to $107 million, with operating margin at 35.3%. Revenue growth was driven by shipments to all branches of the U.S. Armed Forces as well as the international governments of Algeria, Canada, Colombia, Ecuador, Morocco, Poland, Romania, Spain, Tajakstan, and Turkey. Significant new orders in the quarter were received from the U.S. Marine Corps, U.S. Army, U.S. Air Force and international customers in Saudi Arabia, Algeria and the Republic of Georgia. Both revenue and and orders in the quarter reflected excellent regional and customer diversification.

Our backlog is strong and the opportunity pipeline continues to increase faster than orders booked which gives us growing optimism about the business outlook. We continue to expect to finish fiscal 2007 with backlog above $700 million and thanks to the release of a steady stream of new products, we are making significant progress in expanding our addressable market from $2.7 billion in calendar 2006 towards our stated $6 billion target.

Let me talk further about the near term Department of Defense opportunity pipeline. The aggregate potential value from near-term tactical radio procurements totals $3 billion in market opportunity that would be delivered over the next several years. Harris was selected to provide the entire communications suite for the Navy version of the new mine-resistant, ambush protective vehicle or M-RAP, using a combination of our Falcon II and Falcon III radios. We believe that Harris radios will also be used on the majority of the Marine Corps and Army vehicles currently under development. Fielding the M-RAP vehicle fleet is a top priority in order to improve U.S. force protection in Iraq.

At the Army, we also anticipate significant additional requirements for Falcon II HF and multi-band radios and for Falcon III vehicular radios to support legacy programs and also to provide functional upgrades.

At the Marine Corps, there's a significant opportunity for follow-on orders for HF and multi-band, multi-mission radio programs and also for tactical handheld radio procurements.

The JTRS Joint Program Executive Office has issued a Request for Proposal for an IDIQ contract for handheld radios to support U.S. forces. Quantities could total 70,000 to 90,000 radios per year for the next several years.

And finally, the Air Force is expected to issue its own JTRS certified handheld radio procurement. Clearly, the DOD opportunity pipeline remains robust. You should expect additional major orders to be announced from us in the current quarter.

In the international market, there are a number of key modernization programs that will drive Harris growth over the next several years in many countries, including Pakistan, Mexico, Algeria, Iraq, the United Arab Emirates, the Philippines and Australia.

The additional functionality of our new Falcon III radios is another reason to expect increased demand for Harris products. The new Harris Falcon III handheld radio, Model ANPRC 152, has been certified by both the JTRS, JPEO and the NSA. Falcon III represents an immediate alternative to the programs of record products. Since the Falcon III handheld was first introduced last year, we have received more than $230 million in orders. With more than 15,000 Falcon III radios now shipped to customers, feedback from soldiers, marines, sailors, and airmen has been very favorable. We are continuing to make significant investments in the rollout of the remainder of the Falcon III family, including our man-pack radio, which we expect to be released late this summer, following its NSA certification.

Harris will be the first Company to provide wideband secure networking for data-intensive applications such as video transmission in mobile battlefield conditions. Battlefield networking provides sensor and other situational awareness information simultaneously to those on the front lines as well as those in command of ground, air and naval forces. Networking capability was always the core requirement for the JTRS program and Harris will be first to market with this capability.

Let me move next to the Broadcast Communications segment and not only report on the quarter's financial results but talk a bit about the strategy for the business, the progress we've made, and what's left to do. We remain very committed and excited by the potential for this business. Revenue in the quarter was $139 million compared to $143 million in the prior year. Video infrastructure, digital media and HD radio products that have shown strength in recent quarters continued to do so in the third quarter. Revenue for these three product lines increased 19% in the quarter compared to the prior year and the momentum is continuing with new orders for these products increasing by 15% over last year.

Offsetting these increases, TV transmission systems revenue declined 60% in the quarter. While new orders for digital TV transmission systems were somewhat higher than last year, broadcasters continued to push out delivery dates into future quarters.

In the software business, automation and legacy media software revenue was significantly lower than last year and this was partially offset by increases in our new OSi Traffic and Invenio Digital Video Asset Management software products. We are having success at winning new contracts and building contract backlog. However, our revenue model recognizes this contract revenue over the life of the contract which is typically five years or more, rather than as upfront software license fee revenue. As a result, software revenue will grow more slowly.

Non-GAAP operating income in the quarter was $5 million and was negatively impacted by the significant decline in U.S. DTV transmission shipments and automation systems revenue that I've already mentioned and was also impacted by increased expenses associated with the investment and deployment of our new software product line.

The previously announced cost reduction actions, which began in the third quarter in the transmission business, will be completed in the current quarter. These actions are designed to lower the cost structure to align with the lower revenue run rate. The transmission business has historically contributed to high gross margins and we plan to put it back on a path to contributing solid operating results. Our resizing of the transmission business assumes that the remaining deployment of about $200 million in U.S. digital transmission systems and a ramp-up in transmission equipment for mobile TV will both continue to move ahead slowly.

In our software business, we are at the junction of the transition from legacy media software solutions to our new platforms. As just noted, we are having considerable success at winning new contracts for these new platforms but operating results are still lower than we expect due to the high expenses associated with the investments in and deployment of these new solutions.

At the beginning of the third quarter, we launched a thorough review of the software business, including the use of some outside consultants to determine how best to improve our near term results while still investing for the future. As a result of this review, we initiated cost reduction actions in this business as well including discontinuing development efforts for a new automation software platform that was in process. This discontinuation resulted in a $19 million charge in the third quarter for the write-off of previously capitalized software.

We also made several changes to the software business organization structure to improve our focus and future effectiveness. Severance and facility charges associated with cost reduction actions in both transmission and software businesses are expected to now total about $8 million, $4 million in the third quarter and an additional $4 million expected in the fourth quarter. These cost reduction actions are expected to drive annual savings of about $12 million in fiscal year 2008.

New orders in the third quarter in Broadcast were $167 million, significantly higher than revenue. Orders growth was 12% year-over-year higher and 6% sequentially higher than our second quarter. Orders were higher in all business areas. Rolling 12-month orders for this segment over the last several quarters are showing a positive trend, giving us added encouragement that future results will improve.

Our strategy has been to transform this business from a low growth, over the air broadcast transmission business with very limited potential into a business with a significantly greater footprint addressing much broader and higher growth segments of the global media markets. We completed a series of strategic acquisitions and are making our way through the lengthy process of integrating those acquisitions and capturing the available synergies. The Leitch Technology, AASTRO Digital Video and OSi acquisitions have established Harris as the only true end-to-end solutions provider for the digital and high definition buildout.

Our new product solutions are enabling customers to create, manage and distribute in high definition, handle multiple streams of digital video and new advertising models, and pursue exciting new markets like multicasting, IPTV, video on demand, and mobile TV. However, new services also pose operational challenges for our customers. The opportunity is for Harris to provide end-to-end solutions, including infrastructure, software and services, that enable our customers to transition quickly and effectively to these more complex business models.

Let me share with you a real life example of the new Harris broadcast capability. Raycom Media operates 37 broadcast stations across the country and they need to transition these stations' operations to high definition. They were able to come to Harris as a one-stop source for all of their transmitters, infrastructure equipment, encoding equipment and services in order to make the seamless transition to HD at their stations. In the past, they had only purchased transmitters from us, choosing to source the other equipment from our competition. We believe this is a story that will be played out multiple times over the coming months for future procurements.

This new end-to-end solutions capability was the major focus for us at the National Association of Broadcasters annual trade show held in mid-April. Harris had a significant presence. I've been to maybe 100 trade shows during my career and the Harris booth was head and shoulders above any that I've ever seen. Customer feedback at the show was very encouraging. It was the first time we exhibited as one broadcast company, bringing together Harris and our four recent acquisitions.

We also demonstrated our innovative new mobile TV technology at the show, designed to extend over-the-air broadcast TV signals beyond the living room to mobile devices. Harris and LG Electronics have joined forces on the development of this new in-band mobile DTV technology that utilizes the current broadcast infrastructure. A key attribute of the mobile pedestrian handheld system is its capability to receive HD broadcast signals at high speed on small handheld receivers. We had live mobile demonstrations of the technology at the show and it created quite a buzz.

One of the most impressive products introduced at NAB this year was our new [Sentrio] multi-image processor. This is a breakthrough product designed to streamline complex large station count broadcast monitoring applications. Sentrio will be used in master control rooms, broadcast trucks, at live events, and staging applications, anywhere dynamic access to a large number of inputs and multiple displays is required.

Also at the show, we announced that Harris [NEXIO] high definition servers will be used by the National Football League for their instant replay systems at 31 locations so now the same Company that brought you the NCAA March Madness basketball tournament in High Definition will now bring you NFL replays in HD.

A key part of our strategy will be the ongoing process of realigning our R&D resources and new product development to target those markets that yield higher revenue growth and stronger gross margins. We believe the long term success of the the Broadcast business hinges on how successful we are at this process. I believe we've reached an inflection point in the business and that the latest quarter is the low point in the cycle. Strong new order rates, a growing backlog and positive customer response to our new products are pointing to a stronger fourth quarter and a much stronger fiscal 2008.

Let me next spend a few minutes on the results at the Harris Stratex Networks subsidiary. Management of the new company will be hosting a conference call to discuss their third quarter results in more detail immediately following our call at 5:30 p.m Eastern Time.

As most of you know, on January 26, 2007, we combined our former Microwave Communications division with Stratex Networks to create a new Company, Harris Stratex Networks, Inc. Harris owns 57% of the new Company and consolidates its results with an elimination of the minority interest. The combined results are showing up for the first time in our fiscal third quarter financial statements, which include one month of the former Microwave division and two months of the combined Harris Stratex Networks.

Reported third quarter revenue for Harris Stratex Networks was $139 million. Non-GAAP operating income, excluding both the gain on the merger and related transaction costs, was $4 million. We believe it's more useful to review the third quarter results on a pro forma, non-GAAP basis as if Stratex Networks and the Harris Microwave division had been combined for the entire third quarter in both years. On that basis, Harris Stratex Networks revenue was $147 million in the third quarter, about 7% higher than the prior year. North America revenue reflected continued market strength, increasing 34%. Growth was driven by mobile operators substituting microwave capabilities for leased lines and by the requirements for additional capacity to handle high bandwidth services. In addition, a large private network upgrade for a state government was a major revenue driver in this quarter.

International revenue declined 4% in the quarter compared to the prior year, primarily as a result of low order rates and several late quarter project delays in Europe, the Middle East, and Africa. Merger integration activities in these regions clearly has disrupted the existing sales channels more than we expected. Management is dealing with the issues and integration activities are expected to be complete by the first quarter of fiscal 2008. Revenue was higher in Latin America and in the network operations product line, both of which were encouraging.

We remain quite positive about the potential for this business. Global wireless infrastructure investment will continue to grow as mobile operators expand their networks and deploy new audio and video services. Harris Stratex Networks is extremely well positioned in the market as the largest independent wireless solutions provider with the freshest new product line-up, with a global footprint for support.

Operating income on a pro forma, non-GAAP basis, was $5.6 million in the quarter, about flat with the prior year. A higher mix of services versus product revenue in both North America and Africa reduced gross margins and operating results. Ongoing product cost reductions were executed as planned during the quarter with product margins actually increasing as expected.

Integration activities are continuing across the Company. The $35 million in expected synergies should be fully realized by the second half of fiscal 2008. These cost reductions, along with the launch of the new high capacity True Point 6000 product line, are expected to significantly improve business results at Harris Stratex in fiscal 2008.

I'll now turn the call over to our Chief Financial Officer to discuss other aspects of the financial results during the quarter.

Thank you, Howard. Good afternoon, everyone. Let me make a few comments about today's share repurchase announcement. In our continuing efforts to better manage our balance sheet and make effective use of our capital, we announced a $600 million share repurchase program. We expect to repurchase $200million of shares before fiscal year end and the remaining 400 million over the following 24 months. The share repurchases will be funded from available cash. In our continuing efforts to better manage our balance sheet and make effective use of our capital, we announced a $600 million share repurchase program. We expect to repurchase $200 million of shares before fiscal year end and the remaining $400 million over the following 24 months. The share repurchases will be funded from available cash. This announcement does not represent a change in our strategic direction. The Company's solid financial foundation and expected continued strong cash flow generation will enable us to continue to invest in both internal growth initiatives and strategic acquisitions and repurchase stock.

With regards to our financial position, we had another very good quarter. Key drivers of our improving financial position are our strong and improving earnings before interset, taxes, depreciation and amortization, or EBITDA; improving working capital; and stable capital expenditures.

EBITDA on a non-GAAP basis increased from $150 million in the third quarter of fiscal 2006 to $196 million in the third quarter of fiscal 2007, or 30%. Net operating working capital as a percent of revenue decreased from 10.4% to 8.5% and capital expenditures remained relatively flat at $36 million. Cash, cash equivalents and short term investments increased to $523 million as of the quarter just ended.

Cash flow generated from operating activities was $141 million in the quarter. Year to date cash flow from operations was $323 million as compared to $215 million in the first nine months of fiscal 2006. Our full year estimate of cash flow from operations for fiscal 2007 is now forecasted to exceed $450 million.

Capital expenditures, including capitalized software for the 3/4 of fiscal 2007, were $99 million. Including Harris Stratex Networks, we continue to expect to spend near the same levels as last year on capital expenditures and capitalized software at between $140 million and $150 million.

Depreciation and amortization increased from $66 million to $89 million for the first three quarters of fiscal 2006 as compared to the first three quarters of fiscal 2007, primarily due to amortization of intangibles resulting from the acquisitions of Leach, OSi, Astrand the combination of Harris Microwave and Stratex Networks. Including Harris Stratex Networks, depreciation and amortization for fiscal year 2007 is expected to be between $130 million and $140 million.

Non-operating income in the third quarter of $2.8 million primarily consists of small gains resulting from the sale of Terion to G.E. and the buyout by Teltronix of our remaining preferred stock interest.

During the quarter, we bought back 400,000 shares of common stock at an average price of $51.45. Under our new repurchase program, we have authorization to repurchase up to $600 million of common stock.

Our outlook for the full year tax rate continues to be at 33%, noting that the tax rate for any given quarter could vary up or down as a result of discrete tax events occurring therein.

With regards to fiscal 2008, depreciation and amortization is expected to be in the range of $145 million to $155 million with capital expenditures, including capitalized software, to be about the same, at $140 million to $150 million.

Cash flow from operations is expected to increase to a range of $550 million to $600 million.

Our tax rate for the year is expected to be 34%, but may vary in any given quarter as a result of discrete events.

Thank you and back to you, Howard.

Thanks, Gary. Let me close by discussing our outlook. Our fiscal year 2007 guidance is in a range of $2.77 to $2.81 per diluted share. he midpoint of this range provides non-GAAP EPS growth of 26% for the year compared to fiscal 2006. We now expect to finish the year with revenue about 20% higher than fiscal 2006 and organic growth is expected to be about 14% higher for the full year. Overall, we are very pleased with our accomplishments in fiscal 2007.

Equally important, we expect fiscal 2008 to be another strong year of growth. Our initial guidance is earnings in a range of $3.20 to $3.30 per diluted share. That's an increase of about 17% above fiscal 2007 at the midpoint. Revenue is expected to be 10% to 15% higher than fiscal 2007. Both EPS and revenue are expected to be more heavily distributed into the second half of fiscal 2008 as a result of the timing of new program and product revenue, and the realization of cost reduction actions in the commercial businesses.

The outlook for fiscal 2008 includes expectations for higher revenue in all four of our operating segments and operating margin expansion is expected in our two commercial communications segments. Government Communications Systems segment revenue is expected to grow 6% to 8% with operating margins between 11% and 12%. RF segment revenue is expected to grow by about 10% next year with operating margins between 33% and 34%. Broadcast segment revenue is expected to grow 5% to 10% with operating margins between 10% and 12% of sales. Harris Stratex Networks revenue is also expected to grow by 5% to 10% on a pro forma basis with operating margins of about 10%.

Non-operating income is expected to be negligible for the year. Net interest expense is expected to be $25 million to $30 million. Minority interest is expected to be $20 million to $25 million and our fiscal 2008 tax rate is expected to be 34%.

And finally, let me remind you of the Harris Investor Conference that's upcoming on May 8th in New York City at Essex House Hotel. Breakfast at 7:30, conference begins at 8:30. Please get in touch with our Investor Relations department if you would like to attend.

And at this point, I'll ask the operator to open the line and we'll take your questions.

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS)

And in the interest of time, if everyone would please try to limit themselves to two questions, we'd appreciate it. If you have another question, just queue yourself back up.

We'll take our first question from [Carter Copeland] with Lehman Brothers.

Hi, good evening. Just a couple of quick ones. Howard, just for some clarification, what was the -- you said the severance costs for Broadcast are going to be $4 million in the upcoming fourth quarter. Is that the only remaining cost reduction that you guys have relating to Broadcast?

Yes. It's the only thing that we have planned at this time so we have notified all the employees and are executing our plans. Some of it got done this quarter. The rest of it should be finalized in Q4.

So once we get through that one cost, you guys are pretty confident that this will be -- have turned the corner and be back on the path to profitability?

We're certainly heading that direction, I think, based on the order rates, based on the response from the new products. That assumes that our declines have kind of reached bottom in TV transmission and in our automation and legacy media business and we think that's the case. We've been growing, as I indicated, in the other product areas but that's been masked a bit by these significant declines and when you have, as you know, all of those fixed costs, it's difficult to immediately respond to that big a decline. But we think with this restructuring, we are now putting it in -- in a position on a go-forward basis. While we may, in fact, have revenue growth, we not counting on it in that transmission business for next year.

Great. And one more, just with respect to the language that's worked its way into the supplemental that's as yet stuck on the hill, and the various constraints that are facing [Cingars] in terms of proving that the Army can deliver the radios necessary in time, are you hearing any sort of pressure from the customer that would pressure you to take rates up even higher or move over and try to fill some of that demand? Can you provide a little color about what's going on there?

Well, we're very pleased to be able to, going forward, to continue to be a supplier for Cingars as an alternative to that legacy product. We have ample capacity in place, Carter, to handle higher volumes should the customer desire that and of course, one of the things we're known for is our short lead time and our ability to turn those orders into deliveries. So we think that the customer and the procurement organization in the Army recognizes the important role that Harris can play to supplement their other sources. So we think it's moving forward. I don't know exactly when that bill is going to be signed but we're confident at some point in the near future, it's going to be approved and we'll see order flow.

Good, that's encouraging. Thank you very much.

We'll hear next from Joe Nadol with JP Morgan.

Thanks. Good afternoon.

Hi.

Hi. On RF, could you give some color on the book to bill in the quarter? I know it was strong in Q1, a little below one last quarter, you told us. What was it in Q3?

For the quarter, I don't have that number. But I can tell you that year to date, orders are up about 12% from orders in the prior year. So that's through the nine months. And orders through nine months were slightly below revenue. So I guess in your lingo, that would be book to bill slightly less than one. But the order rates year-over-year growth, along with the guidance we've given on revenue, make us very comfortable that backlog will be above $700 million as we previously indicated, and sets us up then to achieve, at a minimum we hope, the 10% higher revenue growth guidance that we've provided today for next year.

So you're really banking on orders this quarter, as you alluded to in your comments earlier, to get you to that $700 million level?

Yes, but we're not too short of that now so we're not expecting a huge quarter. Like I say, we're already up about 12% through the first three quarters so as long as we continue kind of that run rate, if you will, into the fourth quarter, which is what we're expecting, we'll have double digit orders growth and that will set us up with the backlog that we need.

Okay, and then for second question, on the automation software, I guess just a question as to where you are now in that business? That's where you had the trouble last quarter. What product did you discontinue and where does that leave you competitively? Are you exiting? I know that's a smaller part of your software business. Are you exiting the business altogether? Are you focusing on a different product? If you can update us there.

Absolutely. And as strange as this will sound, the discontinuation of this product actually helped us increase automation orders for the quarter. We had a legacy product that we call ADC Series. That was a Harris acquisition, maybe around the year 2000. With the Encoda Systems acquisition, we got another automation product line called D Series. D Series is predominately focused internationally. ADC is predominately focused in the U.S. About 18 months or so ago, we started down a process of trying to bring these two together with a complete new platform from scratch. We concluded during this third quarter review that that's not what our customers really wanted us to do and in fact, that waiting for that product, which was running behind schedule, was actually holding up some orders. So we decided to terminate our development. As you know, software development cannot be expensed for new products but has to be capitalized on the balance sheet so that's why you get the one-time charge when you discontinue that development effort.

During this last six or nine months, we've done a significant amount of upgrades to our ADC platform, especially here for U.S. customers, moving it up to the Windows XP environment as well as Linus, and with those enhancements, the customers were telling us that's really what we want are continued enhancements of the current product line so that's what led to the decision. So we're hoping this will, in fact, over multiple quarters, drive revenue orders and revenue in a positive direction so that at least we don't have declines in automation hurt the revenue and more importantly, the P&L.

Software businesses are wonderful when they're growing because they're very high margin and they're also very painful when revenue shrinks because you lose $0.80 on the dollar. So we need to get that turned around. That plus other actions that we took within our software solutions business with regard to getting focus on the various product lines, we think it's going to be a step in the right direction and we are very encouraged by the orders as well as the feedback at the NAB show.

Okay. Thank you.

We'll hear next from Chris Donaghey with Suntrust Robinson Humphrey.

Hi, good morning. Good evening. Can you hear me?

Yes.

Howard, I was wondering if you could talk about the JTRS RFP that you were talking about. What relationship does that have to the formal program versus what you're talking about sounds like several thousand potential radios that the military is looking to buy right now?

Yes, great. Bob, why don't you address that?

Back in January, the Joint program executive office came out with a new business model for certifying JTRS radios. At that time, they stated that the PUSC 148 and the Harris PRC 152 were both far enough along the way for the basic building blocks and they had them in place to get to JTRS compliance. Immediately following that, ASD reinstituted the JTRS waiver process for handheld procurements because of the increased availability of approved of JTRS radio products. Right after that, there was another announcement from the JPO announcing its intent to execute a full and open competition between the two handheld providers. That RP came out. The RFP was due yesterday and I can tell you that one of the suppliers, Harris, submitted that on time yesterday. So as far as the JTRS and the handhelds go, that's where we stand with that submitted.

Just as a follow up to that, what do you think the ramifications are or the implications are to the larger JTRS program which is now still three, four years out?

Chris, I don't think we ought to speculate about that, but certainly this gives the customer significant opportunity to procure significant quantities of radios in this interim period and whether the program for the handheld and soldier-size radios that was awarded a couple years ago to General Dynamics will continue or be altered, we would just be speculating. But we've been certainly pushing for this certification and recognition for the Harris product and the acquisition community within the Department of Defense, and specifically within the Army, wants this vehicle through the JPEO to be available so that many different branches and organizations can purchase off of it. It will be an IDIQ contract meaning there is no specific commitment or award amount and then we'll compete for various initial awards that are requested.

Okay. Great. And on the Broadcasting side, how long do you think the broadcasting industry can delay this infrastructure purchase before production capacity -- at least through the February 17th deadline of 2009. How long -- how long can they delay before the production capacity is essentially consumed to that deadline?

Wem, I tell you that was very much on my mind at this trade show. I had a number of meetings with CEOs of broadcasters asking exactly that question and the impression that I got, I'm not going to quantify it, but in terms of anecdote, I think that there is an acceleration of the move to HD operations at U.S. broadcasters. One of the ways you're going to see it is investments in HD for local news programming and we thought that would be spread out over a number of years. So I think that there's a universal agreement among our customers that the February '09 date is solid. And that is just now I think becoming a reality for them and not only will that drive the final amount of transmission requirements, but we're seeing it drive investments in infrastructure and digital media products and in our whole product line that came to us with the Leitch and AASTRA acquisitions and Raycom is a good example of that. So I think we're going to see this start to accelerate and so I'm cautiously optimistic that we'll see good growth in Broadcast as a result of that.

Okay. Great. Thanks, Howard.

Your next question is from Jim McIlree with Unterberg Towbin.

Good evening. It seems like every quarter, at least recently, there's been issues with Broadcast and I'm just curious why you're confident that the issues are behind you now when it again it just seems like every quarter there's a new one coming up?

Well, I think it's a fair question. We have seen the declines, Jim, this year in the digital TV transmission business that were certainly not at all anticipated and we believe that it has bottomed out. So as we look at not only what we know, but we look at what we don't know and we look at the various factors that could impact the business, we don't see any reason that the negatives get larger. We believe we put a fence around them and with the restructuring actions are reducing that cost. We certainly are disappointed that we've had to go through '07. It's put us six to 12 months behind where we wanted to be at this point in growing that business on the revenue side as well as profitability. The good news is that Harris is made up of a group of businesses and that we've exceeded our expectations in a couple of the others. Certainly it was not a great quarter from a standpoint of the results. I think we're laying the pipe for future improvement. And we'll certainly be talking a lot more about this at our investor conference and Tim Thorson is really the expert on this business and is running it. We'll be able to talk about that and field the questions.

Okay. Operator, I think we're -- ?

We'll hear next from Ferat Ongoren with Citigroup.

Hi. Howard, two questions on the RF side and I'm just trying to figure out how you think about those and I have a follow-on. The RF is going through potentially large. How do you build that then into your guidance? You mentioned [inaudible] as a potential upside for RF. We also saw some reprogramming action cutting (inaudible) communications and radios to fund them purchases. How do you balance that again in your guidance looking out into fiscal '08?

I think what's different about the RF division than the Government Systems division is it operates as a commercial business and so unlike a program, the F22 for example, where we can look at a line item in a government budget. We know how many planes they are going to build. We know what our content is per plane. In commercial businesses, you have to triangulate in on estimates for growth through lots of different techniques. What are your customers telling you? What does your order backlog look like? What's your order rates look like? What's the opportunity pipeline? So it's not specifically tied to any one of those pursuits. Instead, we look at the whole field of opportunity. All these international opportunities. Lots of domestic opportunities. We look at our backlog which is sizable, as we indicated heading into next year. So it's not like we have to book 100% of new orders and ship those to make our guidance. But it's also the reason that in the case of say Broadcast or Harris Stratex, you don't start the quarter, in their case, with lots of the quarter already in -- on the books. RF's backlog gives it pretty good visibility. At Broadcast and Microwave and many other commercial businesses, you don't have that kind of visibility so you have variability in terms of revenue within a given quarter.

So I don't -- we don't do this by taking a specific opportunity and saying it's in or out. We're expecting to get sizable orders and have sizable shipments next year for U.S. customers and we're encouraged and arrived at our numbers based on numbers that we believe we can deliver first of all, and secondly, we are encouraged by the amount of opportunities and those opportunities over the last six months have gotten larger, not smaller, and we believe funding is going to be adequate regardless of their needs to balance and certainly provide things like M-RAP vehicles and other potential new needs that our troops have.

Okay. And then the follow-on is if you look at '07 guidance, I mean, even on the high end, you have a pretty flat EPS between Q3 and Q4 and the RF business is running at $300 million. It's better than my numbers and you're saying Broadcast you'll do better and you're going to buy back about 4 million shares. So I'm trying to figure whether there's a headwind in the fourth quarter that doesn't give you some sequential growth in the EPS line.

Very good question. Compared to our last call, we did a little bit better in the third quarter so our guidance now essentially pulls a little bit of that into the third quarter and out of the fourth quarter. But if you look at the GCSD return on sales at 12.8%, that's much higher than the typical performance in that business. We're not expecting that kind of performance in the fourth quarter. We had the $4 million gain on the STAT product line sale. We had $3 million or $4 million of other favorable kinds of program expenses and profit which will flip the other way in the fourth quarter so you should expect, based on our current guidance, that GCSD income for that segment will be lower sequentially Q3 to Q4. And that that will balance increases that we are expecting in RF and Broadcast and Harris Stratex fourth quarter over third quarter. In addition, we had about $3 million in non-operating income that Gary identified that we don't expect in the fourth quarter. So those are kind of the moving parts at a high level between Q3 and Q4. And the range we're providing is just to give us a little bit of conservatism. On the lower end, we had some surprises from Broadcast and HSTX in third quarter so it could be sequentially flat. It could be sequentially slightly down. At this point, we don't think it will be materially higher than the third quarter. Overall, a very good year and significant improvement over fiscal '06.

Great. Thanks a lot.

We'll hear next from Larry Harris with Oppenheimer.

Yes, thank you. I was wondering what percentage of (audio difficulties) in the RF Communications division of Falcon III versus Falcon II.

Larry, I'm sorry. You've broken up a little bit.

Okay. Can you hear me now?

Yes.

I was wondering if you could tell us the mix of sales within the RF Communications division currently, say, between Falcon II and Falcon III, and assuming you're successful with this IDIQ, what the percentage mix might look like in fiscal 2008?

I don't have the specific number in front of me. It's still grossly overweighted to Falcon II. We are -- but I don't exactly know. In the quarter, $300 million. I'm just going to guess that it's 90% probably Falcon II and in our systems and Comsat business and 10% Falcon III or something like that. It's going to be materially higher than that next year, but I think it's still going to be well less than 50% of the business. Again, not being any more specific than that. We'll try and be a little more specific, be prepared for this question at the investor conference, Larry.

Thank you.

We'll hear next from Chris Quilty of Raymond James and Associates.

Good evening. Can you hear me?

Yes, Chris.

A follow-up question on that for you. Is the margins on the Falcon II versus Falcon III significantly different?

I think we indicated when we first went into production that the Falcon III was a bit lower and so we've been seeing that. Largely, that's kind of gone away as our volumes have ramped up. But in the longer run, we don't expect they're going to be significantly different. The handheld margins in general are slightly lower than man-pack margins. So we may in the early part of next year see a little bit of impact of the handheld volume as it ramps up, but then we will get a counterbalance positive effect as we get the man-pack into production, hopefully in decent volumes by the second half of next fiscal year.

Okay, and in the Broadcast business, excuse me, I'm working from the road. If I remember correctly last quarter was for $5 million of cost reductions and now it's $23 million. You detailed $8 million of that being in the automation but I think I'm missing a $10 million piece.

In last quarter, we talked about planned $5 million of charges for restructuring that were going to save us about $10 million next year. The restructuring increased to $8 million, $4 million in the third quarter, $4 million planned in the fourth quarter, with savings of about $12 million for next year. In addition, in the third quarter, we had a $19 million charge for capitalized software as we discontinued the automation -- the new automation product line that I was discussing. We had previously not decided to do that when we on the call last and that came out of the work that we did in the third quarter to try and reposition software.

And with that, we will conclude our call for today. Thank you, everyone, for joining us and please make sure you join us Tuesday in New York.