L3Harris Technologies Inc (LHX) 2009 Q3 法說會逐字稿

Good afternoon, and welcome to 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.

Thank you. Good afternoon, everyone, and welcome to our third quarter fiscal 2009 conference call. I am Pamela Padgett, Vice President of Investor Relations and Corporate Communications. Also on the call is Howard Lance, Chairman, President, and CEO, and Gary McArthur, Senior Vice President and Chief Financial Officer.

A few words about forward-looking statements. In the course of this teleconference 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 on 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 measure and information, that are non-GAAP financial measures. The reconciliation to the comparable GAAP measures is included in the tables of our press release, and are 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.

With that, Howard, I will turn the call over to you.

Thank you, Pam. Welcome to the Harris third quarter fiscal 2009 earnings call. I am pleased to report we posted another good quarter of financial results, in spite of the challenges and continuing uncertainties in some of our US and global markets. We continue to expect the planned spinoff of Harris Stratex Networks later this month. So all of my comments today will exclude the results of Harris Stratex, which beginning in our fiscal fourth quarter will be included as Discontinued Operations.

Consolidated revenue was $1.21 billion in the third quarter, 5% higher than the prior year. Net income was $136 million, and EPS was $1.02 per share, up significantly compared to the prior year EPS of $0.78 per share. Although revenue and earnings were at strong levels for the quarter, new orders were weak, declining 27% compared to the prior year quarter. While business performance continued to be solid at the government communications systems segment, orders at both the RF Communications and Broadcast Communications segments were sharply lower, and are expected to remain below prior year levels for the next few quarters.

Orders at RF improved sequentially in the third quarter compared to the second quarter, but are running well below plan. Our guidance for fiscal 2010 now projects organic revenue at RF Communications to be well below fiscal 2009, as a result of slowing near term Department of Defense orders momentum, and the stretching out of orders by the Iraq Ministry of Defense.

The economic crisis and deficit spending has put tremendous pressure on DoD budgets. Combine that with other more immediate spending priorities, and a lack of contract vehicles to procure our new Falcon III PRC 117G manpack, and what results, is DoD procurements that have slowed significantly.

It has been our practice for the past several years to provide preliminary guidance for the next fiscal year at about this time, and we are doing so again this year. Given the current uncertainty in several of our markets, however, this task has been more difficult, and our fiscal 2010 EPS guidance range reflects less visibility than in previous years at this point in the process. I will spend a fair amount of time later in the call walking through each of the components of our fiscal 2010 EPS guidance of $3.10 to $3.40 per diluted share. While we clearly have opportunities to drive results above this range, we felt it was appropriate to establish initial guidance, based on the recent actual order trends at RF and Broadcast.

Beyond fiscal 2010, I believe that the Company is well-positioned to return to growth. We continue to invest in new products, and complete acquisitions to expand into adjacent markets, where advanced technologies and capabilities are discriminators. In addition to our broad base of products and programs that serve our core markets, we have six focused growth initiatives, which target high growth markets around the core. These include Public Safety and Cyber Security, both of which were strengthened by acquisitions announced in April.

The other growth initiatives are Healthcare IT, Managed Commercial IT services, International Communication Systems, and New Media Markets, encompassing digital signage, mobile TV, other out of home advertising solutions, and full motion video ISR applications for government customers. We will have much more to say about each of these growth initiatives at our Analyst Meeting in New York, scheduled next week on May 11th.

Let me now move on to the individual segment results for the quarter. Revenue at RF Communications was $439 million in the third quarter, up 12% compared to last year. Operating margin remained strong at 34.5% of revenue. Revenue growth was driven by significantly higher international sales, which represented 43% of total revenue in the quarter, compared with 27% for all of fiscal 2008. US DoD revenue remained at a high level, but declined compared to a very strong prior year quarter. Year-to-date orders through the third quarter were $0.8 billion, which is 37% lower than the prior year.

We have revised our expectations for fiscal 2009 orders at RF to a much lower range of 1.2 billion to $1.3 billion, with the book to bill ratio substantially below 1:1. Organic revenue for the segment in fiscal 2010 is now expected to be significantly lower than fiscal 2009. Our outlook for the next year is much lower than it was just three months ago for two primary reasons. First we now believe that all but $50 million of the $250 million Iraq Ministry Defense order opportunity, has moved beyond fiscal 2010. Of course, we will be working hard to pull in additional orders and revenue from the Iraq MOD, but for now we have discounted it in our fiscal 2010 RF forecast.

Second, we have been counting on a new $500 million IDIQ contract from the US Army, to form the foundation for their large scale deployment of the new Harris Falcon III PRC 117G manpack. We received the new contract in the third quarter, along with an initial $148 million order for 117Gs. However, the order was subsequently canceled. When it was determined by the Army contracts organization, that the 117G could not be procured, under the IDIQ contract in it's current form. Senior Army leadership remains committed to fielding the PRC 117G radios in large quantities, to utilize it's advanced features to benefit forces on the ground in Afghanistan, Iraq, and around the world. But for now we have assumed a six to nine month procurement delay, and have discounted our fiscal 2010 DoD orders and revenue outlook accordingly.

The Falcon III 117G is the only currently fielded radio, which meets the DoD future tactical communications requirements. It is the first and only radio in the market with wideband networking capabilities. It is NSA approved, and approved as an alternative to the JTRS programs of record. It has already been combat proven in Iraq and Afghanistan, and is deployed to all branches of the Department of Defense. It addresses the future MUOS TACSAT requirements. It provides high band width streaming video, and reconnaissance information capabilities, and it is about half the weight and size of legacy multi-band manpack radios, which is increasingly important in today's mobile war fighting environment.

In the third quarter, for example, we received an $18 million order for the new Falcon III 117G from the US Air Force. The radios will provide battlefield airmen the ability to receive live video feeds directly from various Unmanned Aerial Vehicles, UAVs, using the ROVER waveform. This improves their situational awareness and responsiveness. Incidentally we are also nearing the introduction of a new lightweight hand-held ROVER receiver, based on our Falcon III hand-held radio design.

Also in the third quarter we received over $60 million in new orders for Falcon III multi-band hand-held radios from multiple DoD customers, and we received our first order from the Air Force for our new tactical intercom product for $14 million. Following the close of the quarter we received a $14 million order for the 117G from the US Special Forces Command.

In the international markets demand continues to grow. Over the last several years, the number and size of international standardization programs have been increasing, and we have responded to these new opportunities, with added resources to expand our international sales and support team.

As part of a multi-year standardization program, we were recently awarded a $45 million contract from the Government of the United Arab Emirates. This is an example of our ability to expand our addressable market, through a broader communication systems integrated offering. The UAE program incorporates Falcon II radios, our new Falcon III high-capacity data radios, tactical Broadband Global Area Network, or BGAN SATCOM terminals, and command and control software.

On April 16th Harris announced a definitive agreement to acquire the Tyco Electronics Wireless Systems business unit, formerly known as M/A-Com. This acquisition gives us a huge jump start into the Public Safety Communications market. This is a $9 billion global market, with attractive long term growth rates.

The market has close adjacencies to the technologies inter-tactical military radio market, and is going through a similar transition to digital technology and open operating systems. The market is also moving to software defined radios, that address multiple frequency bands, encryption types, and which incorporate GPS capabilities for situational awareness. We have led all of these transitions in the military market.

Harris solved the interoperability issue for US Special Forces more than a decade ago, and we are ready to lead now in the Public Safety market. The IP-based networks offered by M/A-Com, combined with Harris leadership in multi-band and software-defined radio technology, offers a distinct competitive advantage, versus the established market leader. We believe that customers are eager for a real choice in Public Safety communication systems. The M/A-Com business, which primarily targets customers at the state and local government levels, also helps to diversify our business and product portfolio, not only for RF Communications, but also for Harris.

Our Government Communication Systems segment reported third quarter revenue of $649 million, up 7% compared to last year. Operating income in the quarter was strong at $74 million, and 11.4% of revenue. During the quarter we continued to make good progress on the commercial reflector programs. Seven of the eight radio rib design reflectors, have now been shipped successfully to customers. Work on the eighth reflector has been stopped at the customer's direction, and unrelated to Harris. The two hoop design reflectors are progressing well, and are still on track to be shipped in fiscal 2010.

Revenue increased in each one of the segments' four business units, Defense Programs, National Intelligence Programs, Civil Programs, and IT Services. We have reasonable clarity on the Government Communications Systems outlook for fiscal 2010, and see good underlying revenue growth and solid profitability. The government fiscal year budget submission was largely positive for this business.

The F-35 Joint Strike Fighter is the cornerstone of our Avionics growth plan, and should provide a long term revenue stream, well in excess of $1 billion. The LCS and DDG build plans will help our Navy SATCOM business. Our recent win on the $600 million Army modernization of enterprise terminals, or MET program, also provides additional growth. Harris will design and replace the US Army's aging strategic SATCOM terminals over the next 10 years. These terminals serve as the backbone for the high priority DoD and missile defense systems communications, and the program maintains our ongoing position as a world leader in SATCOM ground systems.

Also high within Secretary Gates priorities, is increased spending for intelligence, surveillance, reconnaissance, and counterterrorism. This is well aligned with our new Cyber Security focus. On April 16th Harris announced it's acquisition of Crucial Security, a Washington DC area provider of cyber solutions. This is a very nice bolt-on acquisition for Harris, that significantly expands our organic capabilities.

Crucial is a major partner supporting Federal law enforcement, with 110 employees and cutting-edge computer forensics capabilities. Computer forensics is used to extract and examine counterintelligence and counterterrorism evidence, that may be stored on computer hard drives, or other digital storage media.

You may also recall we recently signed an agreement with McAfee, to resell their products and technical services to the Federal Government. McAfee is the world's largest dedicated enterprise security technology company, and this agreement enables Harris and McAfee together, to deliver the most advanced Security Solutions to all of our customers in the Federal marketplace. The Crucial security acquisition, the McAfee agreement ,and the recent hiring of Dale Meyerrose, former CIO for the National Intelligence Community, have squarely positioned Harris, in a market that should see substantial funding and growth.

Our IT Services business also continues to expand it's market scope and service offerings, into selected commercial vertical markets. During the quarter, the business was awarded a multi-million dollar 10-year contract by Florida-based Health First, to provide network management and IT services for their enterprise operations. Health First operates three hospitals and multiple outpatient facilities. The contract includes software and hardware support, 24/7 network operation center support, help desk, training, and network security services.

The IT services business is also pursuing major opportunities in the Broadcast vertical market, working on programs and new media technologies, which McDonald's, the NBA's Orlando Magic, and the content provider Sezmi. And finally another area that is high on the new Administration's priorities is healthcare IT systems, that reduce costs and improve the quality of care.

During the quarter we made additional progress in our Healthcare Solutions growth initiative. Harris was awarded its first one year option to it's Nationwide Health Information Network CONNECT contract. CONNECT enables Federal agencies and healthcare providers, to quickly and securely exchange patient information. The Social Security Administration was the first agency to go live on CONNECT, and it is already realizing significant reductions in the time required to obtain medical records, to support the processing of disability claims.

Third quarter revenue in the Broadcast Communications segment was $132 million, compared with $159 million in the prior year quarter. Operating income was $2 million, compared to $7 million in the prior year. Ongoing cost reduction programs in this segment have helped to mitigate the impact of lower revenue on our operating results.

Sales declined across all three of the segments' business units, but the impact of capital expense reductions at customers was most pronounced in the infrastructure and networking business unit. Transmission system sales were modestly lower, as a result of softness in the global radio market. Media and work post sales were essentially flat, with weakness in US and international traffic and billing software, offset by higher sales of media server products.

We are assuming the Broadcast Communications segment continues to see a tough US broadcast market well into fiscal 2010, as TV and radio station groups continue to hold down capital spending on new projects, until they see an improvement in their advertising revenues. International markets are somewhat better, with pockets of strength mainly in emerging markets, where infrastructure is aging and the transition from analog to digital is less far along. We have a diverse and expanding global base of customers, and industry-leading breadth in our product and system offerings.

Eastern Europe, the Middle East, Africa and Latin America have aging analog systems, that will eventually be transitioned to digital, and our one solution is ideal to meet their needs. The market cycle will rebound, and we are well-positioned to outgrow the market when that happens. At the recent National Association of Broadcasters show in Las Vegas, Harris made several important announcements related to new media initiatives.

For example, we are set to begin a field trial with McDonald's this month, to launch their branded TV channel. The trial includes 20 restaurants around the country, and features Harris digital signage solutions and software, to manage, monitor, and play out digital broadcast quality video content, for the in-restaurant McDonald's Channel. Systems will be designed and managed through a collaborative effort between Broadcast Communications and our IT Services business.

In another break-through application, Harris has signed an agreement with the National Basketball Association's Orlando Magic, to create a first-if-its-kind advanced media workpost solution, at the team's new arena, that will be opening in 2010. The solution combines IP TV and digital signage across the same network, and will be built around file-based work flows, that merge Broadcast technology with IT infrastructure. These systems will also be designed and managed jointly by Broadcast Communications and IT Services.

Let me now turn the call over to Harris CFO, Gary McArthur.

Thank you, Howard. Q3 was another very solid balance sheet quarter for Harris. Excluding Harris Stratex Networks, we ended the quarter with $340 million of cash, cash equivalents, and marketable equity securities. Cash flow from operations was up by $50 million, and capital expenditures were down by over $10 million, as compared to the third quarter of the prior year.

During the quarter we repurchased $50 million of our outstanding stock, at an average price of $39.95 per share. Excluding Harris Stratex Networks, return on invested capital increased 3% to 20%, and return on equity increased by approximately 4% to 24%, as compared with the 12 months ended the third quarter of 2008. Further, we have our entire $750 million revolving credit facility available to us, with no long term debt maturities coming due until October of 2015.

Subsequent to the quarter end, we announced that we completed the acquisition of Crucial Security for $33 million, and entered into an agreement to acquire Tyco Electronics Wireless Systems business for $675 million. We continue to expect to close the Wireless Systems business acquisition by the end of our fiscal year, and will fund this acquisition with a combination of cash on hand, funds available under our revolver, and long term debt.

Let me now move to some of the details of the quarter. Cash flow generated from operating activities was $250 million, as compared to $165 million in the third quarter of fiscal 2008, and all four operating segments generated positive operating cash flow. Our expectation for cash flow from operations for fiscal year 2009, continues to be in the range of 575 million to $625 million.

Depreciation and amortization for the third quarter was $44 million, as compared to $43 million for the third quarter of 2008. Our expectation for depreciation and amortization for fiscal year 2009 is now in the range of 175 million to $185 million.

Capital expenditures were $30 million for the third quarter, as compared to $41million in the third quarter of fiscal 2008. Our guidance for fiscal year 2009 for CapEx remains between 140 million and $150 million. Excluding Harris Stratex Networks, our effective tax rate in the quarter was 31.4%, and was lower than the US statutory rate, as a result of a favorable IRS tax settlement for fiscal year 2007.

Our outlook for the full year tax rate for fiscal 2009 is now at 31.5%, with an outlook for fiscal year 2010 of 34%, 1% lower than provided in our Q2 earnings call. However, the tax rate for any given quarter could vary up or down, as a result of discreet tax events. Our areas of guidance for fiscal year 2010 are as follows. Depreciation and amortization in a range of 190 million to $200 million, capital expenditures including capitalized software in a range of 150 million to $160 million, and operating cash flow of 525 million to $575 million.

In summary, we expect to finish fiscal 2009 on a very strong financial foundation, with expectations for another solid year in fiscal 2010.

Back to you, Howard.

Thanks, Gary. Let me conclude with the outlook discussion for fiscal 2009, and go into some detail about our initial guidance for fiscal 2010. In fiscal 2009 we now expect non-GAAP earnings per share from continuing operations excluding acquisition costs, to be at the low end of our previous guidance range of $3.93 to $4.03 per share, which still represents an EPS increase of 17% compared to last year. Revenue is expected to be about $4.9 billion, an increase of 7% compared to last year.

RF Communications revenue is expected in a range from 1.7 billion to $1.75 billion, with operating margin of about 34%. Government Communication Systems revenue is expected to be approximately $2.65 billion, with operating margin in a range from 11 to 11.5%, and Broadcast Communications revenue is expected to be in a range from 590 million to $600 million, with operating margin of 4 to 5%.

For fiscal 2010 we are providing our initial non-GAAP earnings per share guidance excluding acquisition-related expenses, in a range from $3.10 to $3.40 per share, with revenue in a range from 4.9 billion to $5.1 billion. RF Communications revenue is expected to be in a range, from 1.8 billion to $1.9 billion, with operating margin in a range from 25 to 26%, and this includes the contribution from the acquisition of Tyco Electronics Wireless Systems business.

RF Communications revenue excluding Tyco Electronics Wireless Systems acquisition, is expected to be in a range from 1.3 billion to $1.4 billion, with operating margin in a range from 32 to 33%. Please remember this is our initial RF estimates, based heavily upon the recent order cancellations and delays, which we have just encountered.

Government communications systems revenue is expected in a range from 2.55 billion to $2.65 billion, with operating margin in a range from 11.5 to 12%. Revenue from the FDCA program at the Census Bureau is expected to decrease from $350 million in fiscal 2009, to 120 million to $130 million in fiscal 2010, as our work on the 2010 Decennial Census nears completion.

Government Communication Systems revenue guidance in fiscal 2010 if we exclude the FDCA program revenue in both years, represents an increase of about 6 to 8%, higher than fiscal 2009. And finally Broadcast Communications revenue in fiscal 2010, is expected in a range from 565 million to $585 million, with operating margins of 5 to 6%. So those are all of the details in the guidance.

At this point, I will ask the operator to open the line, and we will take your questions.

Thank you. (Operator Instructions). We will go first to Jim McIlree, Collins Stewart.

Yes, thank you, and good evening. Howard, on the RF outlook for fiscal '10, actually not fiscal '10, but beyond that. You say you are looking for growth beyond that. So I am assuming that you are thinking that you would get the 117G Army issue cleared up by that point, and then actually the first part of that question is, what did the Army find unacceptable that they canceled that order, and then, what is going to make it, and what gives you confidence that they're going to find it acceptable at some point?

Well, let me deal with that, and then I'll go back to your other question, Jim. The original contract justification was done for the 117F. The Army believed that they had enough flexibility when they placed the order with us to include the 117G. After review the contracts organization changed their mind, and so they canceled the order. It is a delay. It is not anything more than that.

I am very confident based on the feedback we have been receiving, not only at the command level, with all of our people with customer forces around the world, but at the senior levels of the Army, that they are very committed to utilizing the capabilities of the 117G. It really is significantly more capable than any legacy multi-band manpack radios, including our own Falcon II 117F.

So it is really just a question of timing. We are obviously going to do everything we can, to recapture not only the original order, but the entire $500 million contract ceiling just as soon as we can, but at this point, given that order cancellation, we just didn't feel we could count on that in our guidance, and were either forced to delay providing guidance, or to provide guidance at a relatively lower level as a result of that, and the stretching out of the Iraq Ministry of Defense orders. Does that make sense?

Yes, it does. So when you look at the fiscal '10 numbers, you are taking it sounds like maybe a couple hundred million out for the 117G Army, and then, just ballparking like 100 million or so for Iraq. Would that be round numbers, about right?

I think so. I think the way I would articulate it is three months ago, we said we thought we would struggle to get to a 1:1 book to bill, especially if that Iraq order moved, but at that time we were still feeling pretty good about growth in fiscal '10. So if you take our guidance range now for '09, and compare that to our guidance range for '10, I would hang essentially all of our reduction to these two factors, in terms of what changed in our point of view over the last 90 days.

Okay. That is helpful. I will get back in line. Thank you.

And we will go next to Jason Kupferberg, UBS.

Thanks. Just a follow-up on RF Comm, did you indicated what your forecasted book to bill would be in that segment for fiscal '10? I mean obviously we got the revenue piece, but--?

No, I didn't specify, but I think it is fair to say, given our current view of order rates that I provided for fiscal '09, we are going to end the year with a relatively low backlog, and so one would expect in the year following that, Jason, that your book to bill would be at or above 1, regardless of what kind of guidance you gave for orders. The backlog when we exit this year will be let's say $550 million approximately, and that is about the lowest level backlog that we operate with in a business of this size.

Okay. And then for fiscal '09, the order outlook for RF Comm, I guess seems to imply a pretty big June quarter spike, if my math is right. What is driving that?

There are lots of orders in the queue. We talked about year-to-date orders of about 800 million, and we are providing guidance of, whatever I said, 1.2 billion to 1.3 billion for orders in '09. So that suggests we are looking at 400 million to 500 million from a lot of different sources, both US, DoD, various services, as well as international.

Okay. I mean is the visibility pretty high on that? I mean I guess there would be no reason for you to be overly optimistic just given everything else that is going on. So I mean have you closed a fair amount already in the June quarter?

We talked about several orders that we got after the quarter ended. So we have some momentum. All I can tell you, it is our best estimate based on where we sit on May the 5th, we have still got orders to book obviously to reach the 1.2 billion to 1.3 billion for the year.

Okay. And sorry, just one follow-up on the 117G question with the IDIQ. I know you said the Army contracts organization determined that the vehicle could not be used. I mean I guess it sounds like there is some kind of technicality here essentially that blew up this order. I mean do they have to go back and create a whole new IDIQ specific to the 117G, or are they going to try and issue the order under some other more flexible contract vehicle that the Army currently has? What is the procurement strategy there?

The Army has lots of options available to them, including both the ones you mentioned, as well as putting a completely new vehicle in place. So I think they are looking at alternatives. At this point we don't know what they will decide to do, but it is very clear that they are being asked to go find a procurement vehicle to buy these radios, because of the capabilities, and we think that support is important. We are disappointed obviously about the timing.

Okay.

And we will go next to Myles Walton, Oppenheimer & Company.

Thanks. Good afternoon. I was hoping, Howard, you could comment on the Army's long range tactical radio strategy, your report that came out in the last couple of weeks, and kind of provide us your insights, as you read it, and as you kind of think about it, what it meant for Harris, anything incremental that you took away from the report, and the strategic direction they are looking to go?

Well, I was encouraged, Myles, by several aspects of it, especially what I would refer to, as the strong commitment to fielding wideband tactical networking capabilities throughout the force. Obviously that report at this point is still looking towards the two programs of records to provide that. We obviously represent a real immediate, immediately available alternative to those, and our strategy continues to be to position ourselves as a better value alternative.

I think this plays directly into Secretary Gates view of what he has referred to, as the 70% solution, as it relates to Falcon III and JTRS, I think it is more like a 90% solution, as we continue to add capabilities and functionality to the radio, such as the work we are doing on the MUOS waveform for tactical satellite capabilities. So I view this as a positive report, because it absolutely reaffirmed the path they are on.

Now our challenge is going to be to work with the Army to do two things, #1, to convince them that we are a more viable alternative and #2, to accelerate some of the fielding and the funding that would allow that, as opposed to the current schedule that is underway. So I think it helped to really are clarify our challenges, but I thought it was very positive in reaffirming the need for these kinds of radio capabilities, to serve the mission requirements of the Army.

Okay. That is helpful. And then I guess to clarify on the guidance for fiscal '10, what is the GAAP guidance for fiscal '10? Or how much acquisition expense is included or excluded from the number?

At this point, we are still trying to finalize those numbers. Gary, do you have that?

Yes. Ballpark, it is around $50 million, which includes R&D in-process writeup, write-offs, inventory step-up, the cash amount isn't nearly that high, but it hasn't been finalized yet, and that is why we have preferred not to go out with an exact number at the moment, but ballpark was $50 million in total expenses, relating to those types of items, plus whatever other items we were going to do with regards to restructuring the business.

We are just making it clear that the acquisition-related costs are excluded from our non-GAAP guidance, but that is it.

Okay. Great. Thank you.

And we will go next to Gautam Khanna, Cowen and Company.

Hi, thanks. You mentioned on the RF side some timing delays. Can you help us interpret the '09 supplemental request, which if you add the radio budget accounts is down substantially from '08, why we should think it is just timing, and not maybe a demand drop?

Well, again I will repeat what we have said before on that front, that if you go looking for a line item that says Harris tactical radios in any DoD budget, supplemental or the core palm, you are not going to find that. There are multiple locations throughout the DoD's billions of dollars of procurements that allow them to buy tactical.

We certainly have talked in depth in my prepared statement, about pressure on the budget. So there is no question that that is also a force that is at work here, but I described earlier, our change in view from today versus 90 days ago, can be squarely attached to those two changes in the DoD and the Iraq Ministry of Defense orders.

Whether our outlook in upturns out to be correct or not, I don't know but I think it is fair to say based on our comments today, that we have tried to be relatively pessimistic, based on recent events in setting a core RF Comm revenue target next year of 1.3 billion to 1.4 billion, and in that number we are assuming continued growth in the international revenue side.

So we have obviously set the bar quite low as it relates to DoD procurement of tactical radios, and I am obviously hopeful, and our team will work hard to beat these numbers, but I am hopeful that this will turn out to be too pessimistic as we go through the year, but that is kind of the current views, and it is a combination of specific orders, budget pressure, as well as the inability to have enough contract vehicles in place, to advance the Falcon III at the rate that the Falcon III manpack, at the rate that we want. If you looked at again our 90 days ago view versus now, principally our reductions have been in the Falcon III manpack, with a small reduction in the Falcon III hand-held, based on a competitive procurement that was lost.

Maybe I don't understand, but are you suggesting that we should look at the radio HF cost line item in the supplemental, and the marine radio systems line item, and interpret nothing from it? I mean because it is down 70% year-on-year, and I am just curious are you suggesting we should interpret that that is not a proxy for some of the funding lines that drive your business in RF?

No. Clearly they are two of the funding lines, but they are not all of the funding lines that drive the DoD portion of the RF business. That is all I am saying. Clearly we expect, and again I have been about as clear as we can be and transparent, that we expect DoD revenue to be down significantly next year, compared to this year.

Can you quantify that?

Those are a fraction, Gautam, of the total dollars that will be spent with Harris by the DoD.

I appreciate that. Could you maybe quantify the split of what your expectations are for DoD in your RF assumptions next year ex the Tyco acquisition, and what the international piece is, in terms of percentage of sales? Any sort of color would be useful, DoD, international.

The DoD is expected to be less than 50%, and international would be greater than 50% on a revenue basis, based on our current guidance.

Okay. And may I ask a follow-up just the margins in RF are very good, very strong, and with the lower volumes, should we expect some absorption issues, as we tick down, or I mean how sensitive are your incremental margins to production rates, if indeed volume is coming off next year?

Our guidance indicates margins going from about 34% this year to 32 to 33% next year, given the magnitude of the revenue drop, I think that is very good performance by our team, and will require them to certainly implement additional cost reduction actions, as well as manage their operations very closely. So with this kind of a drop to only lose 1 to 2 points in operating margin I think is excellent performance.

Is there something about the mix with international? Do they command higher prices or something, that provides you with an offset on the top line?

Generally speaking we have said international margins are usually a little bit higher. It is also a function of the mix of products as we said before. So I suspect we are getting a little bit of favorable mix, but not a huge amount in achieving this forecast.

Thanks a lot.

You are welcome.

And we will go next to Chris Donaghey, SunTrust Robinson Humphrey.

Hi, good evening, Howard. This may be a little bit of a sensitive question to answer, but I wonder if you can help us with understanding how the Army was anticipating using these Falcon III radios? Can you just give us a sense for where they were going to go? I know we are talking now about some early spin-out type of activities for some of the brigade combat teams. To the extent you can talk about it, can you walk us through the usage scenarios for the $148 million order?

I am sorry, Chris, I probably don't have enough background to do that. I certainly know that there is a lot of activity related to ongoing operations in Iraq, and new expanded operations in Afghanistan. A lot of activity around intelligence, surveillance, reconnaissance, and the ability for our radios to be used to download video, as we talked about using this ROVER waveform that we have ported to it.

Beyond that in terms of which specific divisions are going to be receiving this first traunch, I am sorry, I just don't know that, but presumably it is going to go into harm's way, into those areas where they can get the greatest benefit from it.

Okay, great. And obviously you have some pretty optimistic expectations for the pipeline as it stands right now. Are there any particular large orders that you are tracking in the international market? What are the concentrations looking like, for the new orders you are expecting?

Well, there are a number of orders I would say in the 50 million to $100 million range. I think for competitive purposes they are sensitive, and I won't be able to talk about individual countries, but there are a number, and again in the longer term, we still believe there is $750 million of total opportunities to the Iraq government, both the Ministry of Defense and the Ministry of Interior. We have gotten some MOI orders. We have been disappointed in the stretching out of the MOD orders, but lots of opportunities there.

You look around the globe. You continue to see opportunities in Pakistan, central Asia, the Middle East, northern Africa, Latin America. Our international team has I think the broadest list, in terms of just this year, number of different countries and programs that we have ever had. I am also very pleased with the progress we are making in going beyond just selling radios, and into the more integrated communication systems. We highlighted the UAE project,and we have a number of those like that on the books. So lots of opportunity, but balanced with certainly some near term slowing and disappointment in the DoD space.

Okay. And one last question. Do you see the new MATV vehicle program as a significant opportunity for you as well? Thanks.

Well, I think we would expect to do very well on that program, in the same way that we did on the MRAP programs. We were standardized on the MRAP with the Navy, with the Marine Corps, with the Air Force, and had very high penetration in the Army vehicles. So I believe we are going to do very well on that more All Terrain Vehicle, as they spin that up and quickly try and deploy it.

Great. Thanks, Howard.

And we will go next to Ted Wheeler, Buckingham Research.

Yes, hi, good evening. There was an announcement, I guess three or four weeks ago, about another Falcon III order from the Army that has been protested, and I am just wondering, is that order in any of your thinking and guidance, and if you could add some color to the issues surrounding that issue?

I am not aware of any other issues with orders, Ted, other than the order under the $500 million IDIQ contract that I have referred to here.

And that is not an order that was under protest for a competitor. That is an order that has been held up, because the Army is finding a contract vehicle to proceed?

It is my understanding that a competitive protest may have prompted the Army to look at that contract, and ultimately change their mind on it, but that is really all I know about it, but there is not another one that I am aware of.

Then that order, what would be sort of the timetable for that issue to move toward conclusion one way or the other?

Well, the protest has been withdrawn, and the Army presumably concluded that they had gone too far in the procurement and releasing the order to us, and that is why they canceled it. So how long it will take for us to rebook that order through another means, I don't know. We have assumed, again we hope conservatively that it is six to nine months, and again, it is not just that order, but then it is the rest of the $350 million, to get up to the whole contract ceiling.

Right, right. I am just trying to, how much of that thinking is in this thought that perhaps a positive book to bill ratio next year? Do you need the restoration of that order? Do you need movement toward the 500 million? Where does that fit into the idea of a positive book to bill ratio for '10?

So we have a process where we look at the entire funnel of opportunities, and go through them, and make various judgments about the probability of them coming through the funnel, and our receiving orders, and between the process 90 days ago and now, we have placed a much bigger discount on that entire $500 million IDIQ contract. I couldn't tell you exactly what number is in our outlook for a given order, but we have discounted it significantly, in our view that we are giving today for expected guidance for next year at 1.3 billion to 1.4 billion in revenue.

And going forward in '10, new orders will essentially will be over revenue, because again we are starting with a level of backlog which can't go down. It is really kind of as low as you can operate at. So there will be that relationship at a minimum of 1:1 next year. Obviously we are very hopeful it is well above 1:1, and we can start driving growth then in '11 and '12 as we have indicated. I still think there are lots of opportunities in this market, so we view this as a delay.

Again we haven't lost any business. Maybe that is the source of greatest frustration for us, is this really is bureaucracy. Here you have a customer that wants to buy this very advanced radio. The government didn't spend a penny to develop it, and the contracts process isn't allowing that, so such is life, and we have had to adjust our expectations, but our teams will be working very hard to support the customer, to find another way for them to procure the radios from us.

I know it is very early days, but on the M/A-Com business, is there any feeling about book to bill over the next 12 months? Do you think it will be plus one, minus one, or just how do you think that business is shaping up? I assume you are starting to work pretty hard on it.

Yes, we are doing what we can. Of course, we haven't closed, so all we can do is plan at this point. We have in our guidance essentially indicated that we are expecting about $500 million of revenue from the acquisition in the fiscal '10 segment guidance.

With regard to book to bill, I don't really have anything on that for you, other than some color that says that orders continue to be booked at a very good rate during this calendar year. Their last quarter, it is my understanding was another good quarter for new orders, and it is a data point and it is subjective, but the level of phone calls that we have had from existing customers, and potential customers reaching out to us, with very, very positive feelings about the combination of Harris and M/A-Com, I think has been very, made us feel very good about this move and the potential.

We have to deliver, and certainly as we said when we announced the acquisition, there are some headwinds, with regard to state and local budgets. Having said that, the Stimulus bill has a lot of money for state and local in it. We hope some of that flows to rebuilding and enhancing Public Safety communications. You can certainly expect going forward, we will spend hopefully a fair amount of time on these calls, and in our investor briefings, talking about the Public Safety business, and we certainly have very high expectations for what we can do with the business over the next three to five years. We have to realize we aren't going to change the competitive dynamics in a quarter, but in the long run, we think this is exactly the right place for us to be investing.

Thanks for the color.

And we will go next to Steve Ferranti with Stephens, Inc.

Thank you, good evening. Howard, wonder if you could give us a sense of your view of when you think the official JTRS program of record manpack radio might get fielded, and I guess to what extent do these delays potentially start pushing you into an area where, potentially you are not the only JTRS-compliant manpack solution on the market?

I am probably not aware of any specific production dates, but I still believe there is no production of any real quantities planned for manpack radios before 2012. So yes, if this delay were to go on for several years, you could have a point, but it is not like we are fielding zero radios. We are still fielding radios, it is just not at this high level of engagement.

I feel like we will be successful in getting large quantities fielded with the Army, and that is going to have a significant long term impact on the balance of future procurements between the programs of record and Harris COTS radios, and my view is that if their competitor is taking actions, and protesting something, when they do not have a product to supply, that implies to me, someone who is very concerned about our products, and about the competitive advantage we have established in the market. Time will tell, but while I don't like the result, to me it just simply reinforces that we are absolutely on the right track.

Okay. And then you referred to the Falcon III as a 90% solution I think before. Can you walk us through perhaps, what the 10% gap is to get you to full solution, and perhaps also, where do you see advantages to Falcon III, either in terms of cost or size? I think that would be helpful.

Again I probably don't have a level of expertise to get into too much technical detail, Steve, but probably the most single differentiation right now would be the number of channels. So ours is a single channel radio. The requirements under the HMS program is a two-channel radio, and the requirements under the GMR program is a four-channel radio. So that is the biggest requirement.

My view is that the other capabilities related to the porting of things like the MUOS waveform, the SRW waveform, which is not fully released yet, and the WNW wideband networking waveform, which is not close to being released, those would all be specs as well under the programs of record. There is no reason why we won't be able to port those waveforms into our radios, once they are finalized and available. So that is why I talk about it in terms of the 90%.

We will keep adding capability and functionality to it, and ultimately if the customer wants, we certainly can develop a multi-channel radio, and there are we believe inherent lower costs, we will have an inherently lower cost to deliver these radios than the programs of record, and I think we have illustrated that already with what you could pay for four Falcon III manpacks, compared to one four-channel GMR radio under the program of record. So there are significant advantages that we have in costs.

We are a commercial company, and we have commercial manufacturing processes and mindsets. The RF team has taken significant costs out of our products over the last several years, and again, I think that that puts us well ahead on the cost experience curve, that will be very difficult for others to catch up. At the same time, we have pretty high expectations for profitability, and that is the reason we will keep driving down those costs, so that we can also deliver high levels of cash income to the business.

Thanks, Howard. That is it for me.

Operator, we'll just take one more question. I know there are quite a few people in the queue, and I am sorry to cut off, but we are going on over an hour, but we will see you on Monday, May 11th in New York at the Essex House at 1:30. So we can certainly answer your questions then. Operator?

And we will have others in the management team, who obviously can answer some of the more detailed questions that you have asked about the Falcon III, and other features.

And we will take our final question from Chris Quilty, Raymond James.

Thanks. Just a clarification on the guidance you provided for fiscal '10 RF Comms. If kind of back into the blended operating margins of 25 to 26, it seems to imply about a 5 to 10% operating margin for the acquired wireless systems business, unless I ran those numbers wrong. Is that just the impact of amortization on the business, or is there something else?

You have got it about right, Chris. It is about 8 to 10% income. There are around 25 million to $26 million of amortization of intangibles assumed in that number, so that is about 5 points.

So that would put you in the 13 to 15% cash earnings, and we talked about our belief that this can be a 20% kind of EBITDA business, as we get up and get our cost reductions and synergies in place over the next couple of years. The other way to triangulate in on this, is we said on the acquisition call, that this acquisition would be only slightly accretive, and if you look at that kind of margin, and compare it with our costs on the debt for the deal, you get a few pennies, maybe $0.03 to $0.04 or so, of contribution next year at the GAAP line.

Obviously on a cash basis it is more profitable, and will contribute to cash flow, and again we are going to work very hard to try and accelerate cost reductions and synergies, and perhaps we will be able to do better than that, but this guidance is consistent with our previous guidance on profitability in year one for the acquisition.

Okay. Just wanted to make sure there wasn't any change, and the 50 basis point improvement range for the government business operating margins 11.5 to 12, up from about 11 to 11.5 this year, is that just lower margin FDCA falling off?

No. It is predominantly the expectation that we don't have any more new commercial reflectors coming into the equation, the commercial reflector pipeline is relatively dry at this point, as a lot of those companies are not able to get funding to do additional launches. We think it will come back, but we don't see much in the next 12 months. So that is the primary item that is allowing that improvement, is the improved execution of the rest of the programs.

Okay. Thank you.

Thank you, everyone, for joining us today.

And that concludes today's conference. Thank you for your participation.