L3Harris Technologies Inc (LHX) 2010 Q3 法說會逐字稿

Good afternoon, and welcome to Harrah's Corporation conference call. Today's call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor for Relations and Corporate Communications. Please go ahead.

Thank you. Good afternoon everyone and welcome to our third quarter fiscal 2010 conference call. I am Pamela Padgett, Vice President of Investor for Relations and Corporate Communications On the call today with me is Howard Lance, Chairman, President and CEO, Gary McArthur, Senior Vice-President and Chief Financial Officer.

And before we get started, a few words on 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 and a discussion of such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC. In addition to the press release and on this teleconference, we will discuss certain financial measures and information that are non-GAAP financial measure. A reconciliation to the comparable GAAP measure is included in the tables of our press release and on the Investor Relations section of our website which is www.harris.com. A replay of this call will also be available on the Investor Relations section of our website. With that, Howard, I will turn it over to you.

Thank you, Pam. And welcome everyone to our third quarter fiscal 2010 earnings call. We had another excellent quarter of financial results. And perhaps even more importantly, we set ourselves up for continued growth in the fiscal fourth quarter and in fiscal 2011.

Our gross strategies are clearly working. We're gaining market share in the core markets, while also moving the Company into important adjacent markets to capitalize on growth opportunities. And our mission critical assured communications capabilities are in strong demand across a broad range of market applications. Revenue in the third quarter was $1.33 billions, 10% higher than 1.21 billion in the prior year. Non-GAAP income excluding acquisition related cost was $170 million or $1.30 per diluted share, an increase of 27% compared with the prior year $136 million or $1.02 per share.

Our bottom line continued to be driven by excellent program performance and award fees across the government communications segment, and strong gross margins and operational efficiencies in the RF Communications segment. New orders for the Company were very strong again this quarter at $1.45 billion offering excellent forward momentum. They were significantly higher than orders of $1.03 billion in the prior year and higher than third quarter revenue.

Third quarter revenue for the RF Communications segment was $551 million compared with $439 million in the prior year. Tactical Radio communications business revenue for the quarter was $429 million. About flat with the prior year while the Public Safety and Professional Communications business revenue contributed $122 million in the quarter. Non-GAAP segment income was $208 million in the third quarter, that's excluding charges related to the Tyco Electronics Wireless Systems acquisition. And it is compared to $151 million in the prior year.

Segment operating margin was exceptionally strong again this quarter at 38%. We are continuing to benefit from favorable tactical radio product mix and significant operating leverage provided by cost reduction actions. New orders for the RF segment were $656 million in the quarter. That included $488 million in tactical radio communications systems and $168 million for Public Safety and professional communications system. Both businesses had book to bill ratios of significantly greater than one. Tactical radio communications order backlog at the end of the end of the third quarter increased to $1 billion. Given our strong Q3 orders and our good Q4 momentum, we now expect to enter fiscal 2011 with a Tactical Radio order back log above $1 billion, much higher than our previous expectation of $800 million.

Several factors continue to drive new orders. Customer demand for our next generation Falcon III radios is accelerating. And not just in the US market. Adoption in the international market is beginning as evidenced by the significant order from Australia in the quarter. Overall, international market demand has strengthened with some very large opportunities getting underway. We continue to be the primary tactical radio supplier for the MRAP ATV program by equipping the military's initial 6,644 vehicle purchases. Vehicles that will be used across all of the services.

The importance of the MATV program to Harris is two-fold. Naturally, it is a significant revenue opportunity. But it also offers a platform to showcase the advanced capabilities of our next generation Falcon III radios. This grass roots efforts fields the new radios across a broad spectrum of users and encourages further adoption. A strategy that continues to be very successful for us. Demand for the JTRS approved Falcon III family of radios has resulted in year-to-date Falcon III orders through the third quarter now totaling $620 million. Our Falcon III 117G wide band networking radio is enabling war fighters with unprecedented situational awareness by providing streaming video, simultaneous voice and data feeds, collaborative chat and secure network connectivity. Reports from the field confirm to us that the 117G is changing the way war fighters are conducting their missions.

Falcon III orders during the third quarter included $73 million for the 117G multiband manpack from the Marine Corps for use in Afghanistan. $12 million from the Marine Corps to upgrade existing 152C multiband handheld systems from 20 to 50 watts to allow communications over longer distances and in rough terrain. And $74 million for 154 -- for 152C multiband handheld radios and vehicular adapters to equip the MRAP ATVs. And then following the close of the quarter, we received an additional $20 million order for Falcon III 117G multi van manpack radios from a DOD customer.

Other significant US orders in the quarter included $78 million for Falcon II HF radios to equip MRAP ATVs. And then following the close of the quarter, Harris received a $101 million order for Falcon II 117F multiband vehicular radios for the next phase of MRAP ATV purchases and to retrofit other existing MRAP vehicles. This is important because it represents the first order that Harris has received to equip the 4,000 additional vehicles approved by the joint requirements oversight council -- JORC earlier this year.

International tactical communications orders in the third quarter included $112 million from the Australian Department of Defense as part of their communications modernization program. The order was predominantly Falcon III, 152C multiband handheld radios. The potential opportunity is $300 million to $500 million over five years. We believe this is important milestone and we fully expect to see other allied nations standardize on the Harris Falcon III family going forward.

We also received a $44 million international order from a customer in Asia. And a $10 million order from the Iraq Ministry of Interior for Falcon II HF radio systems. Additional significant international orders are still expected this fiscal year from several customers. We believe in the future of our global tactical radio business to maintain its market leadership and our ability to continue to expand into adjacent markets. Our strategy is simple. Listen to our customers and utilize our commercial business model to quickly solve their evolving mission requirements. We are constantly innovating and advancing our technology years ahead of competition and the programs of record.

As an example, let's take a look at the emerging ISR mission needs in Afghanistan. UAVs are proliferating overhead gathering valuable real time video on possible targets and missions. Although, ISR and ground tactical communications have always been viewed as separate missions accomplished with separate radios, our customers asked if it was possible to integrate these capabilities into a single solution. Our engineers seized the opportunity. In only a few months, we responded with a design that integrated the UAVs Rover wave form into our Falcon III 117G wide band networking radio. Video can now be received and then retransmitted over the 117G wide band network without the soldier carrying another device.

The Rover wave form was not of course contemplated in the JTRS program of record specification, but it is already inside the Harris radio. And our engineering team is busy developing even more extensive ISR solutions as we speak.

In our public safety and professional communications business revenue in the third quarter was $122 million and that was about flat compared to the prior year on a pro forma basis. The pipeline of large projects in both the public safety and professional communications markets remains robust. It is driven by requirements for improved interoperability. and upgrades from analog to digital networks. And we scored some major wins in the quarter which will help drive our future growth. On the flip side, the weak US economy is having an impact on state and local budgets and is constraining some of our sales of products into existing systems.

New orders in the quarter were $168 million, much higher than revenue. We ended the quarter with a very strong backlog of $489 million and we are still on track to meet the guidance we established for this fiscal year.

Major wins in the quarter included $100 million to upgrade the Miami Dade County public communications infrastructure to a P25 digital radio system. This project also includes new P25 radios, providing interoperability across more than 80 different agencies with over 32,000 users. A $13 million order was received in the quarter for our Open Sky system to connect employees at a Texas based public utility serving 50 counties. The system features over the air programming to provide remote reconfiguration and software updates. This win is an example of our ability to provide assured communications to the enterprise market.

And then following the close of the quarter, Harris received an order from the New York State police for 1,100 Unity XG 100P multiband radios. The new Harris Unity radios will provide interoperability between the state police and local, metro and county law enforcement officers allowing them to communications with radio systems that are conventional and digital and operate on various VHF, UHF, 700 or 800 megahertz bands all in one radio.

During the quarter we acquired the technology assets of OSI Geospacials Situational Awareness business. With this acquisition, Harris gains advanced software for capturing, viewing and disseminating critical tactical information. The software provides commanders and team members alike in the field with real time information including the location of personnel. The applications are capable of being embedded in both our tactical and our public safety radios as well as in other electronic devices and laptop computers.

Revenue in the government communications system segment was $666 million in the third quarter compared with $649 million in the prior year. Revenue in the prior year benefited from the field data collection automation or FDCA program for the US Census Bureau which is nearing completion. Year-to-date revenue excluding the FDCA program and adjusting for the impact of acquisitions is 7% above the prior year. We believe this is excellent growth and highlights that our businesses continue to be very well positioned in the market.

Revenue growth benefited from the ramp up of the GOES-R weather satellite program for the National Oceanic and Atmospheric Administration. We recently announced the opening of a new Harris office in Green Belt, Maryland to support the GOES-R program.

The modernization of enterprise terminals or MET program for the army also contributed to revenue growth in the quarter. We successfully completed the critical implementation review or the CIR milestone for the program. And we did this just nine months after program award. With the design base line for the ground terminals now established, the program can move on into its next phase.

Other contributors to revenue growth in the quarter included the IT services program where we are supporting the US southern command, headquarters relocation, several classified programs for national intelligence customers and acquisitions related to our growth initiatives in cyber integrated solutions and healthcare solutions.

Operating income in the third quarter for the Government Communications System segment increased to $90 million compared with $74 million in the prior year. Operating margin was higher at 13.6% and reflected continued excellent program performance as well as favorable timing on award fees. Harris was awarded a significant contract related to our healthcare solutions business in the quarter. A three year potential $72 million contract from the Department of Veterans Affairs to improve the complex billing and collection activities across the nationwide VA organization. After completing a very successful pilot program, this contract was awarded to cover the remainder of the nationwide network. As you know, the VA manages one of the world's largest healthcare delivery organizations.

Also during the quarter, Harris was awarded a $25 million contract to provide our new high band networking radios for the US Army. They will carry critical battle command information and form the communications back bone of the integrated air and missile defense battle command system or IBCS. These radios provide the first ever use of directive beam technology to achieve higher throughput over longer distances within a self-forming, self-healing mesh network.

Revenue in the quarter at Broadcast Communications was $123 million or 7% lower than $132 million in the prior year quarter, but a little better sequentially than our second quarter. The segment posted an operating loss of $5 million Revenue continues to be impacted by lower US broadcaster capital spending.

Gross margins were abut flat with the prior year quarter on much lower revenue indicating the positive contribution of cost reduction activities that have been implemented. The third quarter operating loss included restructuring charges in the quarter of about $1 million with $3 million in charges year-to-date. Additional actions are expected to result in restructuring costs for the full fiscal year of about $10 million.

Operating expenses were slightly higher than the prior year in the third quarter, as we continued to redeploy resources into new media and international markets where we believe there are significant new business opportunities.

Orders in the quarter were $130 million much higher than the prior year quarter and orders exceeded revenue. Order momentum in the second and third quarters suggests that the market is at the bottom and showing at least some signs of improvement. Some major orders in the quarter included $12 million from Cox Broadcasting for our integrated application suite for traffic, billing, order processing, sales management reporting and sales proposal generation. $4 million from the Abu Dhabi Media Company for a high definition production and play out center. And $4 million in Rwanda for a turnkey DVD T transmission solution in support of the country's transition from analog to digital broadcasting.

We continue to experience strong interest in the Company's new media growth initiatives and these are now finally beginning to contribute to segment revenue. This includes live event venue broadcast networks such as the new Amway Center in Orlando, Florida. These system leverage our combined broadcast and IT services offerings to provide solutions which enhance the fan experience. We are in active negotiations with a number of other venues also looking to upgrade their broadcast capabilities.

Another new media initiative is FAME, our full motion video asset management engine which allows our government customers to capture, store, retrieve, analyze and distribute video information. Earlier this month, we demonstrated enhanced FAME capabilities at the National Association of Broadcasters exhibition. This topic was also the focus of my keynote speech during the military and government summit at NAB where I discussed the benefits of using crossover commercial technologies to solve these difficult government ISR challenges.

Harris also made important announcements at NAB related to our 3D and mobile TV solutions. We introduced the industry's most comprehensive end to end 3-D work flows allowing content creators and broadcasters to build a complete solution from the camera all the way to the monitor. The Harris Solution assures broadcasters updating their infrastructures to HD that their investments will also support 3D. Harris joined with the open mobile video coalition to announce the start of mobile TV field trials in Washington DC next month. Harris Solutions will be used by Fox Television, [Connect] Net Broadcasting, Ion Media Networks, PBS, MHZ Networks and Univision. Let me now ask Harris CFO, Gary McArthur to comment on some of the financial results in the third quarter.

Thank you, Howard. Good afternoon, everyone. Q3 was a very strong balance sheet quarter for Harris. We ended the quarter with $406 million of cash and cash equivalents on hand. Return on invested capital was 21%. Return on equity 25% and debt to total capital was 36% down from its recent high of 41% following the May 2009 Tyco wireless acquisition.

Further, our entire $750 million revolving credit facility is available to us with no long term debt maturities coming due until October of 2015. Cash flow from operations increased $99 million to $314 million versus $215 million in the third quarter of the prior year, primarily as a result of strong performance at our RF Communications and Government Communications System segments. In light of this, we are increasing our expectation for cash flow from operations for fiscal year 2010 to a range of $700 million to $725 million up from our previous guidance of $650 million to $700 million. Depreciation and amortization for the third quarter was $40 million as compared to $44 million for the third quarter of 2009.

Our expectation for depreciation amortization for fiscal year 2010 continues to be in the range of $160 million to $170 million. Capital expenditures were $94 million for the third quarter as compared to $30 million in the third quarter of fiscal 2009 and included the acquisition of a new 573,000 square foot manufacturing facility near Rochester, New York, where four existing RF Communications sites will be consolidated. And a purchase of a new facility in the Mid Atlantic region for use by our Government Communications Systems business. Our guidance for fiscal year 2010 for CapEx is now $200 million to $210 million up from our previous guidance of between $150 million and $160 million.

During the quarter, we used $50 million to repurchase 1.1 million shares of our outstanding stock and average price of $44.63 per share. Our non-GAAP effective tax rate for the third quarter was 32.6%. And assuming the investment research and development credit is enacted by Congress in our fourth quarter our outlook for the full year tax rate for fiscal 2010 is now 33.3%. Our initial outlook for the 2011 full year tax rate is 34%. However, the tax rate for any given quarter could vary up or down as a result of discrete tax events.

Other areas of guidance for fiscal 2011 are as follows. Cash flow from operations, a range of $675 million to $725 million. Depreciation and amortization from $170 million to $180 million and capital expenditures including capitalized software, a range of $200 million to $210 million. Our current priorities for cash that is expected to be generated remain the same. One, fund internal investments to drive growth and generate higher earnings. Two, acquire companies that meet our strategic objectives and enhance financial returns. Three, pay appropriate dividends, we're targeting a payout ratio of 20%. And four, repurchase shares.

In summary, we expect to finish fiscal 2010 on a very strong financial foundation, with expectations for another solid year in fiscal 2011. Back to you, Howard.

Thanks, Gary. Before we open the line up to your questions, let me provided some additional perspective on the revisions and increases we have made to our earnings outlook for fiscal 2010, and a little color around our initial earnings guidance for 2011.

First, for 2010, we have once again increased our full year non-GAAP earnings guidance to a new range of $4.35 to $4.45 per share. This represents a $0.10 per share increase compared to the previous range of $4.25 to $4.35 per share. Revenue in fiscal 2010 is still expected to be $5.2 billion to $5.3 billion. In the RF Communications segment, fiscal 2010 revenue is now expected to be in a range of 18% to 19% higher than fiscal 2009. Now, this includes the contribution of course of the acquired public safety and professional communications business coming in at about $500 million.

Segment operating margin for the year for the RF Communications segment is now projected to be higher in a range of 34% to 35% as compared to our previous guidance of 33%. The higher operating margin continues to be driven by more favorable tactical radio product mix, cost reductions and improving operational efficiencies. The acquired public safety and professional communications business is performing about as expected this year.

For Government Communications Systems, we expect revenue for fiscal 2010 to be about flat with the prior year on a reported basis. Now, after you adjust it for the impact of acquisitions and excluding the ending of the FDCA program, the guidance reflects we think, very strong organic growth for the year of about 8%. And operating margins are still expected to be about 12.5% for fiscal 2010.

In Broadcast Communications for fiscal 2010, we reduced expected revenue to a new range of $480 million to $490 million. We expect an operating loss of $20 million for the year including $10 million of that related to restructuring charges. The reduction in segment income since our previous guidance is based on the lower sales volume, somewhat higher investments in international and new media markets and higher restructuring charges associated with additional cost reduction actions.

So, that's fiscal 2010. Let me move on now to fiscal 2011. Of course we are very pleased to initiate earnings guidance in a range of $4.55 to $4.65 per share, 3% to 6% above our fiscal 2010 guidance mid point. Revenue in fiscal 2011 is expected to be $5.5 billion to $5.6 billion, about 5% to 7% higher than fiscal 2010 guidance.

Talk a little bit about the segments. For the RF Communications segment, fiscal 2011 revenue is expected to be 6% to 8% higher than fiscal 2010. This includes the Public Safety and Professional Communications business in fiscal 2011 at $540 million to $550 million about 8% to 10% higher than fiscal 2010.

Segment operating margin for 2011 is expected to be in a range of 32% to 33%. That's about 200 basis points lower than fiscal 2010. As the impact of more typical, tactical radio product mix is partially offset by higher public safety and professional communications business margins. We will continue to actively invest in R&D programs, to further enhance the capabilities of our current product and to introduce additional new products into adjacent markets.

Moving to the Government Communications System Segment, we expect revenue for fiscal 2011 to be 5% to 7% higher than fiscal 2010. Operating margin is expected to be 11.5%. That is about 100 basis points lower than fiscal 2010. This is due to the impact of lower pricing on the follow on contracts for the Navy, Marine Corps. intranet program and the FTI Program, still very strong margins.

For the Broadcast Communications Segment, we are projecting modest revenue growth in fiscal 2011 in the range of $490 million to $510 million with break even operating results. Additionally for fiscal 2011, we expect net interest expense to be about flat with this year while unallocated corporate expense will be lower than this year in a range of $76 million to $78 million. At this time I will ask the operator to now open the line and we will be pleased to field your questions.

(Operator Instructions) We will take our first question from Gautam Khanna from Cowen and Company.

Hey, thanks for taking the question. I just wanted to ask the MWrap and the MWrap ATV programs. Could you give us a sense for how much you booked year-to-date on that quarter. Last quarter, I think you said $554 million on the MATV. And then what the opportunities might be on the 4,000 vehicles for which you have on order already.

Right, so for what we call phrase one which is the first 6,644 vehicles, year-to-date orders totalled 719 million.

Okay.

And we are in the same place we were last call with regard to opportunities and in the phase II which we have said at the time were up to $300 million. And we still think that's a reasonable range. As you indicated, we did receive the first order $101 million and we have a potential of maybe up to another $200 million on top of that.

Okay. Just a quick follow up. There is the review going on with the Army's Vice Chief's office of what to do in terms of buying 117Gs or what have you for deploying troops and the (inaudible) combat team modernization. Do you have a view where that is going to shake out? And when we will have definitive guidelines on what will happen? Thanks.

We remain very confident that the capabilities of the 117 G will lead to it broad deployment across multiple different applications in the Army as well as the other services where we have seen great success. In terms of any specific timing, I don't have anything to share with you. But we are making significant process, as the radios are field dead. And as I talked about my prepared statement, as customers are able to see the real value in their day to day mission accomplishments from the radio. That is more value than any amount of advertising or demos that we could perform. So the troops on the ground are our greatest advocates. And we are confident that we will continue to see a success. And the accelerating orders in the Falcon III, not only from the US, but as we indicated now starting with the international customers.

Thank you.

We will go next to Chris Quilty with Raymond James and Associates.

Hi, guys. Question for you on the broadcast business. I know you have gotten some government military orders in there. Have they gotten to the point where they are starting to be a significant portion of what you are seeing in broadcast and could they be a driver here over the next six to 12 months?

Well, on the latter part of your question, Chris, we certainly hope so. To date, I think specifically around the FAME program, represents about $11 million of revenue. So, on a year to date basis, that's maybe 2% to 3%. I think the opportunity pipeline certainly could have it growing to the 5% and maybe a year or two out, maybe as much as 10% of revenue. So, we think it is a significant driver. Not just with the productions we are offering now, the solution, but we are continuing to enhance that with additional products. And broadly across Harris, we think that our engagement in tactical intellegence surveillance recognizance, ISR, is a big growth opportunity for the Company. And we see it in broadcast technology that can be applied. We see it in capabilities that we have certainly in our (inaudible) and our tactical radios. We also see it in systems integrated opportunities to support the customers in the Government System segment. It is a truly (inaudible) Harris opportunity that we are pursuing.

Does that 5% to 10% estimate in the out years assume an international customer base?

No, I think we primarily would think of that in terms of serving the needs of the US, as they continue to deal with this very very large and growing amount of video surveillance content and how to actually utilize it to make real time decisions and create value out of that intelligence that is being gathered.

Okay. Thank you.

We will take our next question from Larry Harris with CLKing.

Thank you. You have been quite. First off congratulation on the results here for the quarter.

Thank you.

And you have been quite forthcoming in terms of the 2011 guidance here at this early date. But I was wondering, is there any comments you can make even at this point in terms of seasonality within 2011 based upon what you are seeing in the RF pipeline?

A little hard to say, Larry. You know that we are going to be starting the year with a very large backlog. And still have DOD priority shipment requirements for the MWrap vehicles. So certainly, that is going to and factor. And we also have a lot of opportunities in the pipeline. So, I just don't have tremendous visibility. And would like to wait until probably the next quarter. And once the year is done, we have a good view to backlog. And orders expected and be able to provide color. We will come out the gate pretty strong as a result of the very strong starting backlog.

With international sales, would they be higher here in 2011 than 2010?

Yes, Absolutely. As we have discussed, orders, international orders expect to be much higher than revenue because we had to defer the shipment of many International customer orders because of the requirements to ship the MWrap Vehicle radios this year. We do expect to see significant growth in international. I don't know what the split next year will be. A year or so ago, we were kind of 60/40 DOD and international. And skewed this year because of it. And I would expect us to go back to more toward where we were in the past.

Understood. Thank you.

We will go to Joe Nadol with JPMorgan.

Good afternoon and thanks for the detailed guidance for next year. Just another question on the RF mix next year. If we're saying we are going to be closer to 50/50 international or at least into the 40s. And if you look at the US piece, $800 million or $900 million in your guidance for tactical, Can you break out what is in there roughly for MWrap and 117 G and other? Get a sense of how you are thinking about it?

Not in specifics. Certainly Joe, a portion of that would be the phase two MWrap vehicles and the orders we received. Some of phase one won't ship until the next fiscal year. And then the upside opportunity from MWrap. So, MWrap will be an element of that. Certainly continued the adoption an acceleration of the 117 G is going to be an important part as well. Then the international market will make up the rest of that guidance.

D.O.T is expected to be lower in revenue than this year. And more than compensated for by the International growth and we think the tactical radio business will be up as we indicated in the preliminary guidance.

As we moved to the next quarter and get through the first quarter, we will have more granularity around the make up of the business as you start to see other orders get announced.

Okay. Thank you.

We will go next to James McIlree with Merriman.

Thank you, good evening.

Hi.

The over $1 billion in backlog that you think you will exit this year in RF, can you give us some feel about what you think the split between international and domestic will be?

Not sure I have that at my finger tips, Jim. So, I don't want to quote something that turns out to be wrong. I'm going to suggest, it is probably more than 50% is international because we have held so many orders this year, but I might not be right on that because the quantity of DOD orders is still very large.

Public safety, margins fiscal 2011, and directionally up. Sideways. And up significantly.

Yes. Higher. And so, it is helping to mitigate some of the reduction. And tactical radio margins that we are providing in the initial guidance. As a result of expectations of more typical product and program mix. So, the tactical radio margins mitigate a little bit. Although they are still very good. And then we get the benefit of some improvements.of the public safety margins. When we bought the Company, we talked in terms of our goal of about 500 basis points of improvement over a three or four year period. And we are at this point, I would say, we are very much on track to achieve that and kind of baked that into the guidance for next year.

That's great. Thank you very much.

Pamela, I think that wraps it up.

I thank everyone for joining us and hope you can join us for the analyst meeting in Rochester. That's going to be our venue for this year. And thank you for joining us today.

That does conclude today's call. We thank you for your participation.