L3Harris Technologies Inc (LHX) 2008 Q4 法說會逐字稿

Good afternoon, and welcome to the Harris Corporation 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, operator. Good afternoon, and welcome to Harris Corporation's fourth quarter fiscal 2008 conference call. I am Pamela Padgett, Vice President of Investor Relations and Corporate Communications, and on the call today is Howard Lance, Chairman, President and CEO and Gary McArthur, Vice President and Chief Financial Officer. Before we get started a few words about forward-looking statements. In the course of this conference, 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 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 measures is included in tables in 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, Howie, I will turn the call over to you.

Thank you, Pam, and welcome to all of you joining us today for our fourth quarter fiscal 2008 earnings call. Pleased to report that Harris had another quarter of very good financial results. Revenue in our fiscal fourth quarter was $1.4 billion, 19% above last year. Organic revenue growth was a strong 12% in the quarter. Revenue increased in all four business segments. Orders in the fourth quarter were significantly higher than revenue, providing strong momentum as we enter fiscal year 2009. Earnings were also strong even with absorbing the unexpected costs reported last week by Harris Stratex Networks. Non-GAAP net income was $128 million, $0.95 per diluted share, a 34% increase compared to the prior year. Our full-year results also reflected strong financial performance. Revenue was $5.3 billion, a 25% increase over fiscal 2007. And non-GAAP net income for the year increased 18% to $462 million, $3.39 per diluted share.

Let's move on to the segment results. The defense communications electronics segment, which includes the RF Communications and defense programs reported another excellent quarter. Revenue increased 22% to $567 million. Operating income increased 29%, and operating margin was 30% of revenue. RF Communications revenue was very strong in the quarter at $441 million, a 36% increase compared to the prior year quarter and a sequential increase of about 13% compared to the third quarter. Our success continued across both U.S. and international markets. Operating margins at RF Communication continued strong in the quarter at 33.8% of revenue. We believe that operating margins in fiscal year '09 will be sustained in 33 to 34% range. RF orders for fiscal year 2008 totaled $1.7 billion and significantly exceeded revenue. Backlog at year-end was about $1 billion, significantly higher than at the end of of the fiscal year 2007. This should clear up my misconceptions that the RF backlog has been declining during the past several quarters.

During the fourth quarter we had a number of important orders. We received a $118 million order from the U.S. Marine Corps for Falcon II multiband, manpack radios, part of a $350 million IDIQ contract. The Marine Corps' strategic radio plan provides for a transition from legacy single-band radios to multiband, multimission software defined radios. Harris is playing the central role in this transition plan, delivering Falcon to multiband and HF manpack radios as well as Falcon III multiband handheld radios. Harris also received a $42 million order from the Army in the quarter to enable the installation of our Falcon II manpack radios in their mine-resistant, ambush protected vehicles. We have been reporting to you that the number and size of our international market opportunities has been steadily increasing over the last two years. These opportunities resulted in accelerating revenue growth in the second half of fiscal 2008. During the fourth quarter, Harris received a $43 million follow-on order from a major customer in Latin America for Falcon II HF radios. We also received an $18 million order for the Falcon II HF from the Iraq Ministry of Defense, a $16 million follow-on order for Bowman HF radios from the United Kingdom and a $15 million order from the Ministry of National Defense in Poland for Falcon II manpack radios. And during the quarter, we received our first order from South Africa.

Demand for Harris tactical radios continues to be driven by multiple factors, both at home and and abroad, communications monetization programs, force expansion, force restructuring and interoperability requirements and requirements for increased network-centric communications. We recently reached another very important milestone in the development of our Falcon III JTRS radio product line. In July the Falcon III AN/PRC-117G multiband manpack became the first wideband networking radio to be certified by the JTRS joint program executive office. The Harris 117G significantly improves situational awareness by creating a wideband communications environment that supports networked data intensive applications, such as real-time video transmission. The 117G had previously received Type I encryption certification from the National Security Agency. This latest certification completely validates the design the Harris Falcon III manpack. Ensuring customers that the 117G is both interoperable with legacy radios and able to accommodate new JTRS waveforms as they are created. With the latest certification of the 117G manpack, and the certification last year of the 152 handheld, Harris is the only company to have two certified JTRS radios in production now, at least two years in advance of the JTRS programs of record for a scheduled low rate initial production.

Last quarter, we reported that we were showcasing the capabilities of the new Falcon III manpack with over 100 demonstrations scheduled at U.S. military installations. At this point we are about halfway through the demos. They have been met with widespread excitement from our customer base. The 117G is being used by a number of customers in current field exercises. We have already received 117G orders from a number of DOD and other U.S. Government customers and it is being operationally deployed around the world. We also recently announced another important new product from the RF division, the Unity XG 100 land mobile radio. The XG 100 is the first product in a new family of multiband software defined radios directed at the growing federal public safety and Homeland Security markets. These radios provide direct interoperability between federal agency officials and state and local first responders, using a single radio operating across multiple frequencies. The radios also provide interoperability with National Guard users, who are already equipped with the Harris Falcon III multiband radio. The XG 100 extends the covered frequency range to include the 700 and 800 megahertz bands. It will begin field trials later this calendar year with product shipments beginning in early 2009.

Moving on, revenue in defense programs declined 7% in the quarter compared to the prior year in large part due to lower levels of production on the F/A-18 and F-22A aircraft programs. Revenue was also impacted by the JDAM weapon program nearing its completion. Revenue increased in the quarter on several ongoing programs, including the lightweight multiband satellite terminal program for the U.S. Marine Corps, the F-35 joint strike fighter program and the next generation U.S. Air Force global positioning system program. We achieved two significant new wins during the quarter for multiband SATCOM terminals, with a combined potential value of $162 million over five years. These new terminals will augment the Navy's existing military and commercial satellite communications capabilities as well as provide high-speed internet access. Moving on to government communications systems, revenue in the government communications segment and again, that is comprised of civil programs, national intelligence programs and IT services, increased by 24% to $512 million in the quarter. Organic revenue growth was about 6% in the quarter. Operating income increased 57% to $52 million and operating margin was 10.2% of revenue. The strong rebound in operating performance in the quarter resulted primarily from progress made on the ten commercial satellite reflectors that are in various stages of assembly, test and delivery.

In April, we reached a significant milestone, when the first reflector successfully deployed in space on board the ICO G1 global communication satellite. We have since shipped three more reflectors to customers for spacecraft integration. A fifth reflector was nearing completion when it sustained accidental damage in our factory. Harris and its prime contrary have agreed to a revised shipping date that meets the customer's launch window parameters. Harris maintains property insurance policies covering accidental damage and related costs so we do not expect any material financial impact as a result of this accident. Notwithstanding the accident, good progress was made in the quarter on all of the radio rib style reflectors that we have in production, retiring much of the financial risk. The remaining four reflectors of this type are expected to ship by the end of our fiscal third quarter. That leaves the two hoop style reflectors, which are still in the very early statements of manufacturing. As we previously indicated, the hoop design is more complex and carries a remaining risk in the commercial reflector enterprise. Programs with higher revenue in the quarter included a Field Data Collection Automation Program for the U.S. Census Bureau, the Global Geospatial Intelligence program for the National Geospatial Intelligence Agency, and U.S. Airforce NETCENTS IT integration and services program, the Navy-Marine Corps intranet program and the Network Space Operations and Maintenance program for the U.S. Air Force 50th Space Wing.

Continued government outsourcing of IT and communications operations and support requirements is providing excellent growth opportunities for Harris. With our IT services workforce, distributed at the over 300 locations across the U.S., Harris delivers an unmatched level of service, commitment and responsiveness to our military, government and commercial customers. Important new wins during the quarter included several new classified programs with a combined value of $113 million. Also during the quarter, Harris was awarded a potential seven-year $58 million communications contract for the next generation space suit supporting NASA's constellation program, which will establish an outpost on the moon and lay a foundation to explore Mars and beyond in the first half of the next century. We were also awarded a new three-year $20 million IT services contract for tactical video capture systems to support predeployment training at Marine Corps bases across the U.S. and abroad. The system combines real-time and audio feeds from multiple cameras across multiple training events to create an integrated view of the exercise, including the live movement of personnel. And during the quarter, Harris won its second contract in the healthcare IT market. This one is a $12 million contract for the U.S. Army dental command information management and technology division. Harris will provide operations and support for the Army dental command headquartered at Ft. Sam Houston and at other Army clinics and locations around the world.

Turning to the broadcast business, fourth quarter revenue in broadcast communications was $174 million. An increase of 5% compared to the prior-year quarter. Higher revenue in video infrastructure and transmission systems was partially offset by lower revenue from our legacy software products. New orders were higher than revenue in the quarter. Non-GAAP income in the fourth quarter was $8 million, slightly higher sequentially than the third quarter but below the prior-year quarter. Operating expenses increased compared to the prior year as a result of investments in R&D, incremental investments in international sales and marketing and new IT systems. In July, we announced a workforce reduction of about 140 personnel at the broadcast division primarily in North America, aimed at improving our profitability in this business going forward. We expect to incur severance and vacant facility costs of about $5 million in our first quarter of fiscal '09 as a result of these actions. We expect to generate annual savings of about $14 million. So it nets out to about a $9 million expected fiscal '09 improvement in income on a GAAP basis as a result of these actions.

Highlighting some of our significant achievements during the quarter was continued traction that the Harris ONE solution is gaining in both domestic and international broadcast markets. Harris is in a unique position in the market to provide a full range of workflow solutions across the entire broadcast delivery chain. This has been especially important to many customers as they transition to digital high-definition broadcasting operations. During the quarter, the Harris ONE solution resulted in an equipment and services contract from a new contractor called Says Me, a widely publicized new entertainment services company combining traditional TV content, video-on-demand movies and internet video into a single easy-to-use consumer service. We are providing Says Me with traffic and scheduling software systems, video servers and a full line of video infrastructure equipment. Harris will also distribute content for Says Me and provide network and IT managed services from our operations center located in Melbourne. On the international broadcast front, our ONE solution led to several new orders during the quarter, including Australia's SBS network where we will provide end-to-end systems to rebuild their playoff facility located in Sydney. Other important international orders in the quarter included Showtime Arabia, Advanced Broadcast Corporation in Thailand, and India's Kalaignar TV. Broadcast communications is continuing to build an impressive list of customers and contracts. We are very pleased with our competitive position and the opportunities we see in the global markets. Continuing attention towards improving gross margins and reducing operating costs should result in improved operating performance in 2009.

I will keep my comments on Harris Stratex Networks brief today since the company just held a conference call last week to provide comments on their preliminary expected fourth quarter results. As you know, they ended the year with strong revenue growth and orders that were significantly higher than revenue. Fourth quarter revenue is expected to be $187 million, an increase of 7% compared to the prior year and sequentially up 5% from the third quarter. Record orders for the quarter resulted in a 1.6 book-to-bill ratio. This excellent revenue and orders performance highlights the progress that has made over the last year in reorganizing and integrating the sales and marketing organizations and setting them on the right course for success. It also highlights that our product strategy is working. Customers are seeing the value of the Harris Stratex partnership. Global wireless transmission markets continue to be quite robust. The transition to IP based networks, the evolution to forge etechnologies and bandwidth expansion in emerging regions continue to drive solid market growth. The challenge at hand for the management team is to focus on further integration of the two businesses, to expand gross margins and reduce costs. New CEO Harold Braun and his team are working through detailed action plans to improve profitability for fiscal '09. And he will be sharing these plans during their fourth quarter earnings call. With that, I would like to turn the call over to our Chief Financial Officer, Gary McArthur.

Thank you, Howard. Good evening. Fiscal 2008 was another very solid balance year for Harris. We ended the year with $373 million in cash, cash equivalents and short-term investments. During the year, we repurchased $225 million of our outstanding stock, paid off or converted $275 million of debt and received a ratings upgrade at Moody's, bringing our current ratings to BBB plus BAA one. Return on invested capital as of the end of the year was 16.1%, nearly twice our weighted average cost of capital. Further, we are entering fiscal year 2009 with nearly $1 billion of borrowing capacity and excess cash available for acquisitions, further share repurchases or higher dividends. As to the fourth quarter, cash flow generated from operating activities was $197 million as compared to $115 million in the fourth quarter of fiscal 2007. All four operating segments generated higher operating cash flow during the quarter as compared to the same quarter a year ago. Operating cash flow for full-year fiscal 2008 was $550 million as compared to $439 million in the prior year. Depreciation and amortization was $46 million for the fourth quarter of the current as well as the prior year. Depreciation and amortization for total fiscal year 2008 was $172 million. Capital expenditures were $37 million for the fourth quarter as compared to $30 million in the fourth quarter of fiscal 2007. Our CapEx spend for the full year was $146 million.

During the quarter, we prepurchased an additional approximately 438,000 shares of common stock, bringing the total number of shares repurchased during fiscal 2008 to $3.95 million. As of year end, we have $175 million of remaining availability under our $600 million share repurchase program, all of which is expected to be used to repurchase shares during fiscal 2009. Our full-year tax rate for fiscal 2008 was 32%, with an outlook for fiscal year 2009 of 33%. Noting however, that the tax rate for any given quarter could vary up or down. Other areas of guidance for fiscal 2009 are depreciation and amortization of $170 million to $180 million, capital expenditures including capitalized software also $170 million to $180 million, and operating cash flow of $650 million to $700 million. This is $25 million lower on both ends of the range than provided during our third quarter earnings call. In summary, fiscal 2008 was another very strong year for Harris, with expectations for continued improvement in fiscal 2009. Back to you, Howard.

Thanks, Gary. Let me wrap up by summarizing our outlook for fiscal year 2009 and then discuss some recently announced organizational changes with you. Revenue in fiscal 2009 is expected to increase by 8 to 10% compared to fiscal year 2008 with revenue growth expected in every segment. We are expecting 9 to 11% growth for defense communications, including within that 11 to 13% growth at RF Communications. We are expecting 6 to 8% growth in government communication systems and 6 to 8% growth in broadcast communications. Earnings in fiscal 2009 are expected in a range from $4.05 to $4.15 per diluted share, representing a year-over-year increase of 19 to 22% above 2008. We expect the second half earnings to be stronger than the first half, because that's where we will see the the benefit of the first half cost reductions we're taking in broadcast, Harris Stratex and government systems. Segment operating margins in fiscal 2009 are expected to be as follows. About 29% in defense communications, including within that margins of 33 to 34% at RF Communications. We are expecting margins at government communication systems in a range of 10.5 to 11.5%. And we are expecting 7 to 9% operating margins in broadcast communications.

On the the organization front, Bob Henry, Executive Vice President and Chief Operating Officer, has announced his plans to retire following the end of fiscal 2009. I've asked Bob to spend most of his time during this next year in Washington D.C. where he will serve as a mentor to our many business teams located there, as well as he will provide executive leadership on the important FDCA program for the census bureau. He will continue to oversee some of our corporate functions, which include information systems, supply chain management and operations and security. Dan Pearson has been named Group President for the government communications systems division and he will report directly to me. Dan is a 31-year Harris veteran and most recently was group president for the defense communications and electronics segment. As part of this change with Dan, we've moved the defense program's business back together with national programs, civil programs and IT services businesses. So beginning with first quarter of 2009, we will report our two government segments going forward exactly as we did prior to fiscal year 2008. That is, we will report government communications systems and RF Communications as our two separate. So the defense communications electronics segment that we used in fiscal 2008 will no longer exist.

Of course, Dana Maynard continues as President of the RF Communications division and he will now report directly to me. [Jeremy Wenzinger] who was previously Group President for government communications systems will be leaving the company later this month to pursue outside opportunities. I want to take this opportunity to personally acknowledge Jeremy's many contributions to Harris during his 20-year career. Following the filing of our 10-K, we will file a 8-K that will provide you with both the government communication systems and RF Communications quarterly financial segment results for our fiscal year 2008 for comparability purposes going forward. With that, I would like to ask the operator to open the line and we will take your questions.

(OPERATOR INSTRUCTIONS) Take our first question from Myles Walton from Oppenheimer & Company.

Thanks, good afternoon.

Hi, Myles.

You mentioned you received some initial orders on the Falcon III so far and that some of that is in backlog. We haven't seen actually any press releases on it. I'm just curious, is this a customer's request that you're not disclosing the orders yet or are they just not to the material size given you're only halfway through the demonstrations at this point.

Some of each.

When would you expect to complete the demos and actually kind of make those more visible to the outside community as to the market reception of the manpack?

I think they are scheduled through the remainder of this calendar year, so through the next five months or so. We'll get through those hundred hopefully we will, I am sure, continue to have some going forward. But with the certification now behind us, that's a major milestone and has I think encouraged customers to use these currently on field trials, so we're very optimistic about what this significant market lead with the JTRS certified manpack wideband networking radio is going to do for us.

Okay. How, you talked about the reacceleration of international growth in the RF segment in the second half. Can you quantify that in any way whether that is percentage growth or percent sales of RF in general? We just saw, Myles, significantly higher growth in revenue in the second half than the first half.

And we are just trying to remind everyone that international growth going forward is going to be a significant driver of RF revenue in addition to our continued success with U.S. customers.

As far as the percent of the year sales I guess was $1.5 bill or so for RF this year. What was international's component of that using a split.

I don't have that split at my fingertips, but our year-over-year increase was greater in international than it was in the U.S. So, U.S. grew but a higher percentage growth internationally and we had record international orders in the year. So, again, I think we are set up pretty nicely as we start fiscal year '09 and the pipeline of opportunities is very robust. I have been spending a fair amount of my team with the RF team internationally. And whether it is in emerging markets with strong allies that are receiving funding from the U.S. Government or whether it is in strong allies who have lots of petro dollars, the opportunity pipeline remains very strong.

That's really good color. And then lastly and I'll get out of the way, relative to the reflector business, you talked about the hoop design being in the earlier stages of the development process or design process. Can you map out over the next couple of quarters how the risk will be retired and we will all be in a similar position as to where we are with the radial design.

Well, I think we'll know a lot in two quarters. Certainly, all the risk should be essentially retired by the end of fiscal year '09. We are not suggesting we are going to have any more issues. But we do also just want to just reiterate that we are now pretty much through I believe the risk related to the radio rib, but we still have the hoop design. The first one is coming along nicely. I was out in our reflector factory and we've made a lot of progress. But we do still have some of the reserve remaining that we attach to the hoop design. We have two of those that are destined to be produced.

Okay. Thanks.

Thank you, we will take the next question from Jason KupferBerg from UBS.

Thanks. Good afternoon. Nice to see the increase in the revenue growth out look for fiscal '09 for RF. Can you give us an idea of how we should think of the backlog figures here? Obviously, you are kind of flattish versus the last time we heard that number in September, but you are up 23% on a year-over-year basis June to June. And he believe that's pretty significant acceleration versus the growth that you have sees in the prior year on a year-over-year basis. So how should we think about the potential correlation of the backlog growth versus the revenue growth, not just in fiscal '09 but beyond?

Well, we are certainly very pleased with how we ended up the year in terms of total orders and backlog at around $1 billion. That suggests we have continued very good momentum. What we continue, though, to encourage -- we are not going to report orders every quarter because they do bounce around and we think it is much more instructive to look at the trends. And so certainly at least one time a year we will be talking about where we stand. But don't expect necessarily that will happen every single quarter, because it might give a signal that is really not accurate. But at $1 billion dollars, we are heading into this year with significantly more backlog than last year. To make our expectations, obviously, we still need to get new orders and we want to make sure that that book-to-bill ratio for FY '09 stays above one. That's our goal so that we are continuing to grow backlog going forward. That will come as a result of our continued success with the U.S. Government programs, primarily being the certified JTRS radio in the market. It will come from the international growth that I was describing earlier on the call and then thirdly from our entry into new markets such as the LAN mobile radio, the high capacity line of sight radio we've talked about before, the soldier personal radio which has been launched in international markets and so on. So we continue to see lots of new products coming out of the RF R&D pipeline as a result of our investments and all of those together we think are going to continue to give us good momentum going forward and not only satisfy our need for growth in '09 but hopefully in fiscal year '10 and beyond.

You have a sense of what percent of the fiscal '08 RF Comm orders are expected be filled in fiscal '09?

I don't know the precise number, but it is a majority. Typically, we ship the vast majority of backlog that we have at the beginning of the year in the year. I don't remember the precise percentage, but it is well over 50%.

Turning to Stratex for a second, they made some reference to additional structuring and integrations charges in fiscal '09. Can you help us quantify those at all? I am assuming those are in your guidance. Any additional details there?

I really can't speak to any details. I want Harold to do that on his call. What I will say is that we had to make some assumptions for purposes of our guidance. We have done that. And our guidance going forward is intended to be on a GAAP basis, meaning that we have included the cost of our estimated restructuring in the guidance that we are currently provided. In the case of broadcast, I kind of detailed that for you. We're expecting in the first quarter, for example, to take $5 million worth of charges to get savings throughout the year of about $14 million, so the net GAAP benefit to the P&L of that action will be about $9 million. There's a similar set of assumptions related to Harris Stratex, but the details of those will be disclosed by Harold when he has his earnings call. But we have made some assumptions in our guidance and we plan not to exclude those for non-GAAP purposes. We would plan to continue to exclude items related to acquisitions. Other than that, I it will take a very unusual item for us to exclude that for purposes of non-GAAP. Does that make sense?

Yes, no, that's good to year. And just my last one, Howard, if you can just set the record straight in terms of how senior management and the board view takeout overtures, given all the newsflow on that topic this past quarter.

I am not sure there is anything more to say than has already been said. We are approached from time to time. That did occur in the time frame that we were speaking of last fiscal year. The board carefully considered the initial indications that were provided. Discussions were never particularly advanced discussions. But, I think you should conclude that the board seriously considered the approach, the board determined that the prospects of the company going forward to generate value for shareholders as well as how those indications compared with other market multiples on comparable transactions, that those were inadequate compared to what we believe we could do going forward. I suspect -- I don't know, but I suspect we will continue to have approaches as we have in the past. And I want to reiterate (inaudible) takes these seriously and objectively looks at the validity of what we are receiving and will continue to do that going forward.

Thank you.

We will take the next question from Mark Jordan from Noble Financial.

Good afternoon, Howard. On the third quarter earnings call, you stated that you had $200 million left in your buyback program. You were able to buy back $25 million in the quarter.

It was, I believe stated, that you wanted to complete this program by the end of the quarter.

Was the M&A conversations restrict your ability to buy back stock during the quarter and that's why you didn't complete the program. And secondly, how do you view that buyback program with the stock here in the high 40s.

I don't believe that we said we were going to complete the program in fiscal year '08. So, I don't believe we ever said that. When we announced the program, it was $600 million, $200 million in the fourth quarter of '07, $200 million unexpected over the '08 and '09 fiscal years at around $50 million a quarter. We had accelerated some of the purchases in fiscal year '08, so this quarter we didn't have a lot left. With regard to going forward, I don't want to speak for the board, but we will look at both dividends and share repurchase as a viable use of free cash flow. At the same time, we continue to look for strategic acquisitions that would be a with good fit with our businesses and allow us to create value. I am sure that at upcoming board meetings, we will be talking about how our future plans beyond the $175 million that is left in the share repurchase that is currently authorized.

You stated in the press release that you saw lower revenues out of the F18 and F22 programs. When does the aggregate F22, F18 and F35 programs sequentially start to grow in aggregate again?

I am not sure about the specifics. I think we are expecting at least to be flat in those avionics programs in fiscal year '09 compared to '08 as opposed to having them decline. I don't know that we're expecting them to grow a whole lot. You've got the F 22 that has -- we are kind of through our phase. And you've got the F35 ramping up. In the long run, I think the F35 and strike fighter is going to generate a lot of production volume for us. But I don't think we have much in the way of increases in avionics in '09 over '08, Mark.

Final question, if I may. What kind of seasonality should we plan at RFs. You have obviously a solid backlog going into the new year. Will you be flat sequentially, down sequentially, up sequentially in the first quarter?

I think we expect sequentially in the first quarter to be down at RF compared to the fourth quarter without providing any specific numbers, but sequentially we were -- I am just looking here at my notes -- we were down a little bit last year even on revenue growth that was up something like 20% in the quarter. So with our guidance this year of 11 to 13%, sequentially the first quarter would normally be down. So I think it is fair to assume that will be the case. I am very pleased with our ability to maintain the margins in the RF business. Maybe we are going to see maybe 50 basis points of erosion now this year, so we are feeling very good about that. And that is not due to price, it's really due to the mix of the new products coming in. But as I said in my prepared remarks, we are expecting EPS in the second half to be higher than the first half, a little more so in terms of the percentage of the total year than we had this year. Because we got the cost reductions that we are taking costs now in the first half of the year. We are going to see the benefits in the second half. So that is not to RF, but that's talking to the consolidated results or expectations.

Next we will go to Carter Copeland with Lehman Brothers.

Good evening. Just a quick question to expand a bit on the profitability in RF, we have run -- you've obviously had a pretty high development spending for the past couple years and we've been running in this kind of 33 to 34 margin guidance for as long as I can remember, despite all that development expenditure. I wondered if you'd provide a little bit more collar on, as you think the business long term, we obviously put a lot of R&D into a bunch of products, presumably there's a little bit of tailwind as that begins to moderate if it does. And then there's obviously a mix issue with the newer products, which are probably slightly lower margin. Is there a longer term margin opportunity in this business or does development spending stay high to continue all the product introductions.

By margin opportunity, do you mean there is a opportunity for margins to be higher?

Yes. Higher than the 33, 34, that we have come to expect annually.

Anything is possible. Certainly in individual quarters, we bounce around depending on the mix and exactly what is being spent. But I think the way I look at the business today is as long as we have a backlog of projects we want to fund that have an excellent return on capital, an excellent return on the R&D dollars and the various metrics we look at, I don't think we'd want it to go a whole lot the higher. We would want to continue to spend. So our spending as a percent of revenue on R&D is going to be about the same in '09 as as it was in '08, which means on higher revenue, it will be higher absolute dollars. And we would expect to continue to develop more products. As you get larger, you have a bigger appetite that you have to feed to maintain your growth rates. So, I don't see a lot of change going forward. It would take something I think different than we are expecting. And I don't see a big reduction that I am interested in talking. Right now, we still have more desire to spend money in the queue than we are funding. So as additional dollars would become available, I would probably reinvest those back in the business. I think the return on capital in this business is just huge. And so it is probably the the best single thing I can do with available additional profits would be to put them back into RF and generate after-tax returns, I don't know Gary, 80% or 90% or whatever the number is. So that's my current thinking.

That's useful color, thank you.

Thank you, our next question comes from Steve Ferranti with Stephens, Inc.

Nice job on the RF strength this quarter. I wanted to see if you might be able walk us through the thought process that led back to the shift back to the old reporting structure.

Well, we accomplished -- organizationally we accomplished our objective, which is we spent two years, '07 and '08 with defense programs and RF reporting to one group executive, so we could really start driving the collaboration there. I think that is going to happen now regardless of how it reports. So, it is clearly -- defense programs resides largely in Florida with those other businesses. They operate from a common cost pool and it just makes more sense for us to report it that way. Organizationally, the change primarily started with Bob Henry's decision to retire at the end of of the fiscal year and an opportunity to look at the organization and to get the businesses reporting back directly to me, which I wanted to do for some time with RF and with Dan Pearson now running GCS. So that is really all there was to it. And the last point is, it is clear that our shareholders and investors wanted more clarity on RF reporting. That's what we had always done previously. So this allows us to do that. It puts us back in a position that investors would like to see with regard to financial reporting and it aligns us with a more natural organization structure of the business.

Very good. That was helpful. Just looking at historical trends in the RF business, it seems like your visibility entering '09 is probably as good as it's been in recent years. Can you just comment on how you feel about visibility entering fiscal '09 relative to prior years?

I think it's very good visibility with regard to feeling like we have a lot of downside risk. You always have a certain amount. You always have to get a certain number of orders and convert them in the year. But I think we feel pretty comparable to last year with regard to that. With regard to upside the last several years, we've outperformed our forecast at the beginning of the year, our guidance. So we don't have perfect visibility to the upside. Nor do I have any better visibility this year to the upside. So I think it has a lot to do with funds, how those funds are available, how they get moved around. But certainly our pipeline for opportunity is just very strong. And it is really just a question of -- especially internationally, which one of the orders will close this year versus next year. Overall I think visibility is about the same, starting with a significant amount of the year in backlog and that's always very positive.

Okay. Last one for me, wonder if you could just comment on where you might see the tipping point approaching when the DOD might begin adopting these interim JTRS solutions that you have available now in the market. Do you see ground being broken there and in terms of momentum growing in that regard?

I feel like every quarter we make good progress. We've clearly, at least in my mind, kind of broken through at the Marine Corps. And Harris and the Falcon III have become very much standardized products with them. We are still working hard on the Army. I think we are making progress there, as a result of our success in the Marine Corps and our trying to establish ourselves as viable, attractive, immediately available, lower cost solutions versus perhaps products they will get from the JTRS programs of record down the road. So I like our position. But clearly are we are still working to displace legacy products like (inaudible). We clearly don't understand and many others don't understand why you would want to put out a radio into production today that is really not compatible with standards going forward. Similarly, we think that the model, the purchasing and procurement model, that had been put together by the JPEO as part of the JTRS program offers customers ultimately better prices, more competition while getting the latest, most advanced radios. We think that is a pretty compelling proposition and over time, I continue to feel like more people step on our side of the line at the Army. But every once is not there yet or we'd be getting 100% of the Army's business.

So we're not there yet, but I think we're making progress every quarter. I don't see any impediments that are standing in our way. And as long as we continue to advance the product, which we will, as I said to some investors on a recent trip, you don't want to compare us today against what a competitor in the JTRS program might have two years from now. It's not like we're going to just sit still. We are going to continue to invest R&D dollars to advance the technology. And I like our track record. And think it is a very solid one with regard to doing what we say we are going to do and being able to compete very effectively. Our commercial model is a real advantage and we're going to continue to use it we think.

That's all I had. Thanks. Good luck ongoing forward.

We will next go to Joe Nadol with JPMorgan.

My first question is actually a technical one, which is that my understanding is that Harris Stratex won't be filing for a little while. And I'm wonder if you are going to be able to file fourth quarter results without them having filed, since of course, they are consolidated.

Joe, this is Gary, yes, we will file the 10-K timely and Harris Stratex is still working towards filing their K timely. It's a goal. They are working towards that. They have not given up on that. But them not filing on the same time frame as us will not prevent us from filing our 10-K.

Secondly, on the same topic, I guess it wasn't quite clear on their call. But it seemed as though, the legacy system that was responsible for the accounting error was a Harris system. Correct me if that is not correct. And if it is correct, I am wondering if that same system is used elsewhere in Harris and if you have gone back and made sure that it is not affecting any of the other businesses.

Thanks for e question, because I do want to clarify what was said on the Harris Stratex call. The answer to your second question is no, this IT system is not used anywhere else in the company. It has been upgraded and replaced everywhere else that it was used previously. This was not an IT system error or problem. This was a process problem with people in finance and accounting not doing reconciliations that had previously been done. So the IT system they're using was functioning. It's not world class, but it functions the way it's been functioning probably for the 20 years it's been used before and after the merger. So nothing changed there. What changed was people not following the process. And it is somewhat a manual process to reconcile lots of accounts and lots of work in process project orders. So that's what wasn't done. Nothing with the system changed.

Okay, that's helpful. And then just finally on FDCA, I am wondering if you could give us an update, Howard, on what is happening there. There's been some various press reports of ongoing negotiations, no award fee and obviously you are looking at potentially -- have been looking at that contract getting bigger. So where are we today?

We are still in discussions. I don't have anything to report. As I indicated, Bob Henry is spending a fair amount of his time leading this effort at this point. I will tell you I don't believe that in our fiscal year '09 that what we've provided in the way of guidance for government systems, I think we're feeling pretty good about the FDCA component that is in that guidance. The question is how much if any upside will there be. And that is ultimately going to be up to the census bureau as they decide to replan and rescope the program. So I don't know. I know what they have said in their public statements as you do, which is they certainly envision continuing to utilize Harris for the next phase of the program, which is called address canvassing. And that runs essentially throughout our fiscal year 2009. I don't envision any change to that based on what I know at this point. How much work we do beyond that as they move into then the rest of the census phase is what is under discussion right now. And just as soon as that is completed -- I don't exactly know when it's going to be completed, I hope it is within the next 30 days or so, I'm sure they will be announcing that and discussing it with congress and then we'll be in a position to announce it, Joe.

Okay. And then just one more to Gary. You changed your cash flow guidance very slightly for next year, just wondering what was the moving part there?

What happened was we did get to $550 million, which was the low end of the range, but it was lower than our internal working capital improvement targets at three out of four divisions in the fourth quarter. We had a little higher inventory, lower collections and with that in mind, I just thought it was prudent to take the guidance down for next year.

But if the working capital was higher, that would give you more opportunity going forward, wouldn't it?

Yes, but I thought really where we ended up, where are target metrics were a little lower than we expected them to be at the end of this year, so the bridge to get to where I had hoped was a bigger amount obviously. And I just thought at this point in time, it was prudent. We hadn't made as much progress as we hoped. I do want to say though that we made substantial progress over where we were at last year. I think you're aware that we've said that free cash flow as percent of income was 79% in '07. We finished this year at 87%. Every one of our working capital measures improved over last year. They just weren't as high as we had hoped. And I thought it was prudent with that to take the guidance down for next year.

Thank you.

Thank you, we will go next to Chris Donaghey with SunTrust Robinson.

Good evening. Want to circle back to the acquisition speculation from a few weeks ago. And presumably in the board discussions, you looked -- you had to to have looked beyond just fiscal 2009, so I wonder if you could just characterize for us the discussion around the three-year outlook for the business and how those discussions went.

We do a three-year strategy plan that we present be to the board each year and we did that again this year. And the timing just happened to coincide with this approach, so I think the board had the latest view that senior management has about the future. Obviously, any forecast has a range of possible outcomes and we talk with the board about a plan. We also talk about upsides and we talk about risks. We go through all of that. And consistent I think with appropriate practice, they brought in outside legal counsel and financial counsel to also hear what we were saying and look at the analyses. So I think they have the best possible input that we could provide. It was not only a point estimate, but a range of potential outcomes. Because we certainly don't have perfect visibility even in fiscal year '09, as any company would say, and certainly we don't into '10 and '11.. But we tried to lay out the range of possibles. And again the conclusion was, really for two reasons, based on our internal plans and how they felt about the likelihood of those being completed. And I would say they were influenced I think by our performance the past several years where we typically beat our plans and exceeded them. But they were influenced by looking at what is fair value based upon various market multiples and metrics of comparable transactions. And in the board's judgement, in their business judgement, it fell short on those counts. And so there was no discussion or no decision to proceed with further discussions.

Great. Thank you for that color. I appreciate that. One last question. Sort of a macrotopic as well. With the issues that impacted Harris Stratex Networks this quarter and the margins at least in broadcast coming in below my expectations, how are you thinking about those commercial segments in terms of their strategic value to the company going forward.

Well, as I have said before, I view or equate strategic value with what can those businesses do to create value for our shareholders. And on the one hand, I am still very optimistic and very positive about both of the businesses' ability to create value, because they are not nearly at their potential margin levels. So from where we are to where they could go, they have the potential to create a lot of value. The question that we will continue to ask ourselves and discuss with our board is what is the likelihood of them achieving it? Because just having potential but not the achieving it doesn't create shareholder value. Instead it ties up our capital in these businesses that perhaps could be redeployed and create value more efficiently in some other way. So clearly, we did not meet our expectations this year in either one of those businesses and we will continue to have discussions about their ability going forward.

Right now, we are firmly committed and believe that both will do better in '09. And if they accomplish the objectives that are embedded in the guidance that we've provided, they're going to create value for shareholders and I think return some optimism and some positive view on their long term roll in the company. If they don't, then I think it is going to be subject to us looking at various alternatives. But I am certainly not signaling that today. We think both of them are going to provide improved performance. Having said that, we said that before and it hasn't always come to fruition. So the board has to look at the likelihood of that and compare it to other potential alternatives that we might have. Today, we are very optimistic and part of the optimism I don't think is blind optimism. It is driven by the fact that both businesses are doing very well in the top line. That says that they are doing a lot right with regard to customers and product strategies and business strategies. Execution has to improve in both businesses and they have got to continue to both take costs out and they have both taken actions on that in this quarter. And I talked with you about broadcast. Harold will talk in deal about Harris Stratex. Operator, we will take one really quick question and then we will have to wrap it up.

Your final question comes from Chris Quilty from Raymond James.

Define quick question.

Go ahead, Chris, you have got the floor.

You didn't mention the win T program in the defense area. And that's something you seem to have been excited about a while back.

I am still excited about battle space networks. I think the win T program per se has morphed a little bit into early fielding for the JNN program. I don't think we have seen a lot of year-over-year growth in the program. So, I probably don't know enough details to go into any more than that. But I will have someone look into it and we'll give you a call.

Okay. And did I just -- I can check the transcript later, but Howard did you say that international orders were greater than domestic in the RF Comm business?

I said international orders' growth, so the percent increase in orders '08 over '07, so the percent increase was higher in international and international was a significant record.

Was it also the sales growth was also greater?

In the second half of the year, yes, it was.

Okay, and final part --

Not to confuse you, but there was growth domestically in the second half as well. But international growth was just higher.

Okay.

Thank you, we will turn the call back over to our speakers for additional or closing remarks.

Thank you everyone for joining us. We appreciate it.

Ladies and gentlemen, that does conclude today's conference. Have a wonderful day.