L3Harris Technologies Inc (LHX) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Harris Corporation earnings conference call. My name is Michelle, and I will be your operator for today. (Operator Instructions).

I would now like to turn the conference over to your host, Ms. Pamela Padgett, Vice President of Investor Relations. Please go ahead.

Good afternoon and welcome everyone to Harris Corporation's third-quarter fiscal 2011 earnings call. I'm Pam Padgett, and on the call with me today is Howard Lance, Chairman, President and CEO; and Gary McArthur, Senior Vice President and Chief Financial Officer.

Before we get started, 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 and a discussion of such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC.

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

And with that, Howard, I'm going to turn the call over to you.

Thank you, Pam. I want to add my welcome to all of you for our third-quarter fiscal 2011 earnings call. Harris posted solid third-quarter results with higher consolidated orders than the prior year and strong operating margins in both our RF Communications and Government Communications Systems segments. Revenue was higher than the prior year quarter, primarily due to the impact of acquisitions. Income was lowered due to the favorable product mix in the prior year. As you will remember, we had the large volume of expedited shipments of tactical radios to equip the mine-resistant ambush protected vehicles for Afghanistan.

In addition, our government programs and IT services businesses began to see some impact in the quarter from slowing US government spending, including the disruption caused by the continuing budget resolution.

We have reduced our expected revenue in fiscal 2011 by a total of $100 million in government programs and IT services as a result, and we have reduced fiscal 2012 revenue by a comparable $100 million. But you may recall in our previous earnings call we explained that if revenue was, in fact, impacted by the CR, we did not expect any appreciable impact on margins as a result of our continuing emphasis on operating efficiencies and cost control, and that is exactly what has happened.

I'm pleased to report that we have closed now on three previously announced acquisitions that have become part of our new Integrated Network Solutions segment. We believe these businesses will help drive revenue growth, margin expansion and increased earnings for Harris in fiscal 2012 and beyond.

On April 4 we completed the acquisition of the Schlumberger Global Connectivity Services business. They are a leading provider of satellite and terrestrial communication services for the international energy markets. We also acquired the infrastructure assets from Core180's government business, thereby extending our US terrestrial network capabilities and lowering our cost of operations. These two acquisitions have been combined with previously acquired CapRock Communications and the Harris Maritime Communications Services business to create Harris CapRock Communications, a $600 million plus managed communication services business serving government, energy and maritime markets. This business combination positions us as the leading supplier in a high-growth industry. The added scale makes us second only to the US government as a purchaser of satellite bandwidth, which along with our plans to rationalize redundant facilities and operations creates a very rich opportunity for expanding operating margins across the business as we move forward.

We also completed the acquisition of Carefx, a leading provider of interoperability workflow solutions for government and commercial healthcare providers. Carefx has a broad hospital customer base, providing Harris with increased channel access to the fast-growing commercial healthcare IT market. We will benefit from increased sales of Carefx solutions, along with cross-selling additional services offered by other Harris businesses.

Consolidated revenue in the third quarter was $1.41 billion, 6% higher than the prior year. Non-GAAP income, excluding acquisition-related costs, was $149 million or $1.16 per share compared with $170 million or $1.29 per share in the prior year. Non-GAAP income before interest, taxes, depreciation and amortization was $294 million in the quarter compared to $310 million in the prior year quarter. This represents a year-over-year decline of about 5% in EBITDA as compared to an EPS decline of 10%.

Consolidated orders of $1.55 billion exceeded revenue and were 7% higher compared with $1.45 billion in the prior year. This resulted in a consolidated company book-to-bill of 1.1 for the third quarter.

Turning to RF Communications, third-quarter revenue for the RF Communications segment was $550 million, about flat with the prior year. Prior year expedited shipments of tactical radios to equip MRAP vehicles created a distorted year-over-year comparison.

Remember that Harris shipped $1 billion in MRAP program radios over the five quarters that ended in 1Q of fiscal 2011. While this is certainly a great testament to our leading radio technology and our commercial business model, this success produced some very tough quarters to beat in an already very successful business.

Operating income for the RF Communications segment was $179 million compared with non-GAAP operating income of $208 million in the prior year. Again, the prior year benefited from the MRAP shipments previously noted.

Operating margin in the quarter was very strong at 32.5%, and that's about 50 basis points higher than we had previously expected, and we believe these higher margins are sustainable going forward in fiscal 2012.

Our new manufacturing facility is scheduled to be operational in July, further helping us to maintain our low-cost position and supporting healthy margins for the long run.

Tactical Communications revenue was $431 million in the quarter, about flat with the prior year. Now we believe this was an excellent result given the difficult comparison. Deliveries to the MRAP program declined by $206 million year over year. Non-MRAP shipments to DOD customers increased significantly due to the adoption of our new Falcon III 117G wideband networking radio, and international revenue increased significantly, comprising one half of Tactical Communications revenue during the third quarter.

Public Safety and Professional Communications revenue was $119 million in the third quarter, also flat with the prior year, and continuing to reflect the constrained state and local government spending environment. However, we expect recent program wins to begin to drive sequential revenue improvement beginning in the fiscal fourth quarter.

RF Communications segment orders were $722 million in the quarter with a book-to-bill of 1.3, and segment backlog increased to $1.70 billion. Orders for Tactical Communications as part of that total were $351 million with a corresponding book-to-bill of 0.8. Backlog continues to be healthy with Tactical Communications backlog standing at $981 million at the end of the third quarter.

US DOD orders were slightly higher than revenue in the quarter with international orders as expected slightly below revenue. Ongoing instability in the Middle East is likely to push about $100 million in orders previously planned for the back half of fiscal 2011 into fiscal 2012.

It is important to note this is simply a timing issue. Now we have not lost any orders. But given its likelihood at the present time, backlog at the end of our fiscal year is now expected to be in the range of $800 million to $900 million for Tactical Communications. This is still very healthy and continues to support our fiscal 2012 guidance.

Key orders in the US market during the quarter included $70 million to deliver encryption devices and support services for the Blue Force Tracking system used by the US Army and US Marine Corps. Total orders for these encryption devices and support now exceed $100 million.

Also, $40 million from the Army for Falcon II HF vehicular systems, $23 million from the Air Force for Falcon III multiband handheld radios, and $9 million from the Army for HF radios for use in the joint biological point detection system, and this is an important new application for our communications systems.

The US Department of Defense continues to accelerate its adoption of Harris Falcon III wideband networking radios, embracing our commercial enterprise business model. We continue to believe that legacy communications, which rely on large, heavy, singleband, single mission radios used primarily for voice, are far beyond their useful life. The modern battlefield where war fighters have to simultaneously deal with multiple threats require high-bandwidth network communications capability, driven down to individual soldiers.

Their increasingly complex missions require video, e-mail, collaborative chat, and multiple waveform application availability. The upgrade from narrowband to wideband radios will occur on a large scale, and Harris will continue to lead this transformation. Ultimately the DOD-installed base of legacy radios represents a $10 billion market opportunity for Harris.

Turning to international, orders in the quarter came from diverse regions around the world and included multiple types of products and systems. It included $29 million from a country in Asia to provide the next phase of their integrated C4ISR project and a $22 million order from the same country for Falcon III's secure personal radios; $19 million from a country in Southeast Asia for Falcon III and Falcon II tactical radios; $11 million from the Australian Department of Defense for Falcon III tactical radios as part of their network battlefield communication system; $10 million from an international customer to provide a secure tactical network communications system, and this one is comprised of Falcon III, Falcon II, as well as our Public Safety land mobile radios; a $10 million order from the Afghanistan National Army for Falcon III multiband handheld tactical radios; and a $5 million order from a nation in East Africa for Falcon II and Falcon III tactical radios.

Our fiscal 2012 outlook for Tactical Communications remains solid. We closed the third quarter with healthy opportunity pipelines -- $1 billion in the US market and $2.6 billion in international markets. While some of the increase from the previous international pipeline of $2 billion reflects timing issues I referred to, most of the increase is due to additional new identified opportunities.

Our expanded regional hubs are playing a key role. In the UK we are serving Europe and Western Asia. In the United Arab Emirates, we are serving the Middle East, Central Asia and Africa. Our new hub in Australia will be serving throughout Asia Pacific, and our hub in Miami, Florida, providing service to Latin America. All of these loves are increasingly effective in securing new business for Harris.

Each location has sales and business development staff, a customer briefing center to show customers the capabilities of our products, along with system engineering and technical support resources.

We are also continuing to expand our addressable markets by investing in new international products and by extending our reach into large integrated communications systems projects.

Orders in Public Safety and Professional Communications in the third quarter were $371 million compared to $168 million in the prior year and included most notably a $291 million order to design and deploy the first responder radio communications system throughout Alberta, Canada. This is a province-wide public safety communications network. And also orders included $15 million from Dane County, Wisconsin, to upgrade their Public Safety Communications System with our digital P25IP solution.

For the past several quarters, we have seen some opportunities in this market push out due to constrained state and local budgets. But, on the positive side, we are finally beginning to see a pickup from new bid and proposal activity, and we view this as a very encouraging sign. Overall our pipeline of Public Safety and Professional Communications opportunities remains large at $3 billion.

Revenue in the Government Communications Systems segment in the quarter was $431 million, up 1% from the prior year. Revenue growth on a pro forma basis was about 7% higher in the quarter, and this is when you exclude the Field Data Collection Automation program for the US Census Bureau, which declined by $24 million year over year as expected. Of course, the winding down of the 2010 census program represents a total of $80 million in year-over-year revenue decline for fiscal 2011 in total.

Revenue increased in the quarter on the GOES-R program for the National Oceanic and Atmospheric Administration, as well as on the F-35 Lightning II fighter aircraft program for the DOD.

Slowing US government spending continued to impact revenue on several of our classified programs. I will remind you that a portion of our classified business consists of short cycle programs, and these are hit particularly hard in the case of a continuing resolution where funding for new programs is not always available. Segment operating income in the third quarter was $60 million, and operating margin was very strong at 13.9%.

During the third quarter, we achieved several significant program wins in the business, and these included a $15 million delivery order from the Air Force for telemetry modules for the advanced medium-range air to air missile program.

Also, a new three-year contract to build Ka-band antennas for three Inmarsat-5 Satellites, which will be the backbone of a worldwide wireless broadband network. And another order for a three-year contract to build 22-meter deployable L-Band reflectors to support military and civilian communications in Mexico. Together these programs have a combined value of more than $100 million and illustrate the current strength in the global satellite market.

And finally, after the close of the quarter, Harris received an $11 million contract from the National Geospatial Intelligence Agency.

We also introduced an important new capability this quarter we call the NightHawk 3G. This is a ruggedized mobile tactical base station that when it is combined with our Falcon III 117G wideband networking radio enables war fighters on the move to maintain cellular services in locations with limited or no connectivity. The NightHawk 3G allows war fighters to train, fight, communicate more effectively, and report to commanders in real-time regardless of their location.

Moving to the new Integrated Network Solutions segment, revenue in the third quarter grew 23% to $463 million. Organic revenue was about flat compared with the prior year. Broadcast Communications showed strong revenue growth of 9%, while revenue declined in Harris' IT services business as a result of the slowing US government spending, including the disruption caused by the continuing resolution.

Segment non-GAAP operating income was $32 million, 6.8% of sales. Operating income benefited both from acquisitions, as well as much improved performance in Broadcast Communications. Broadcast Communications business was profitable in the quarter and is still on target to be at breakeven for the fiscal year. That is a significant year-over-year improvement.

These profit improvements were partially offset, however, by an operating loss in the Cyber Integrated Solutions business. We talked about this last quarter as we continue to invest in this large and fast-growing market.

Also, we talked about last quarter lower pricing on the contract extension for the Navy Marine Corps intranet program, and that is impacting year-over-year Harris IT services margins.

Major Integrated Network Solutions orders or programs wins in the quarter included 14 task orders totaling $150 million to provide CKU and X-band space segment capacity, monitoring of control, teleport services and operations and maintenance to DOD agency customers located around the world.

Also, a $15 million contract extension from the US Department of Veterans Affairs for systems engineering services for their VistA Imaging application; a $4 million contract to provide local operations and support to the US Army dental command at Fort Sam Houston, Texas; Fort Campbell, Kentucky; Fort Bragg, North Carolina; and internationally at bases in Korea and Germany.

We received a $9 million order from a country in Central Asia for broadcast solutions, including master control rooms, production studios, play out and news centers.

Also, in broadcast a contract for the installation of an advanced digital out of home and IPTV network for the new Madison Square Garden transformation project. More than 1100 arena displays will deliver a dynamic viewing experience to fans at MSG going forward. This project will commence this summer and be completed for the 2013/2014 season.

Continuing orders from traditional US broadcast stations also were received in the quarter, including from Grey Communications, Cox Broadcasting and CBS. And we received a $10 million order from Virtual Computing Environment Corporation, or VCE, for trusted enterprise cloud solutions. This is an important milestone for our Cyber Integrated Solutions business.

Harris also recently announced a strategic alliance with VCE and their majority owner EMC that is expected to accelerate the growth of cloud infrastructure as a service. As part of this strategic alliance, development teams from Harris, RSA and VCE are integrating patented Harris technologies within the VCE Vblock infrastructure platform. We expect together to deliver unparalleled levels of visibility, control, security, performance and availability in the cloud environment.

EMC and VCE are also actively engaged in joint marketing with Harris to create trusted enterprise cloud services demand.

Turning to the Healthcare Solutions business, we announced the formation of a joint venture with Johns Hopkins Medicine to develop next-generation medical imaging management solutions. This collaboration brings together Harris' industry-leading health information capabilities and security technologies with Johns Hopkins' renowned clinical expertise. The new image management solutions will be deployed first by the entire Johns Hopkins health system, and later we will market this to other hospitals and healthcare providers around the country.

At our broadcast team, we introduced the new Selenio media convergence platform to the US market at the annual National Association of Broadcasters tradeshow. With Selenio, Harris introduced the industry's first integrated media convergence platform. Traditional broadcast and IP signal distribution together can require the use of up to 45 different components, 25 rack units of physical space, consume 2500 W of power and require 131 connector cables.

Now let's compare that to Selenio. Distribution requires one single component, three rack units of vertical space, consumes only 600 W of power and requires only 14 cables. This is an amazing improvement, and we think will lead to rapid adoption of the new Selenio technology globally across broadcast customers.

We continue to believe the integrated network support segment is well positioned to deliver future revenue growth and margin expansion. As we discussed during our Analyst Day in March, we expect this segment grow faster than other segments and achieve margins of 11% to 12% by fiscal 2014.

Let me now ask Harris CFO, Gary McArthur, to comment on our financial results during the quarter.

Thank you, Howard. Our balance sheet continues to be strong. We ended the quarter with $885 million of cash and cash equivalents on hand, of which $552 million was used to fund the acquisitions of Schlumberger GCS and Carefx, both of which closed on April 4, the first day of our fourth quarter. $870 million of the $1.05 billion under our two revolving credit facilities is available, and no long-term debt maturities come due until October of 2015. Return on invested capital remains strong at 21%, while return on equity was at 27%.

During the quarter, we used $50 million to repurchase 1.02 million shares of our outstanding stock at an average price of $49.02 per share, and we currently have $300 million authorization remaining under our share repurchase program. Cash flow from operations in the third quarter was weaker than expected, primarily due to timing of US government funding and payments, decreasing $146 million to $168 million versus $314 million in the third quarter of the prior year.

In light of this, we are decreasing our expectation for cash flow from operations for fiscal year 2011 to a range of $775 million to $825 million back to where we were with guidance as of the end of the first quarter and lower as compared to our most recent guidance of $800 million to $850 million.

Depreciation and amortization for the third quarter was $52 million as compared to $40 million for the third quarter of 2010, while capital expenditures were $88 million for the third quarter as compared to $94 million in the third quarter of the prior year. Including the acquisitions of Schlumberger GCS and Carefx, our guidance for depreciation and amortization and capital expenditures are both increasing by $5 million to ranges of $210 million to $220 million and $325 million to $345 million respectively. Our non-GAAP effective tax rate for the third quarter was 31.7%, and our outlook for the full-year tax rate for fiscal 2011 now is 33%.

Our initial outlook for 2012 full-year tax rate is 33.5%; however, the tax rate for any given quarter could vary up and down as a result of discrete tax events. Other areas of guidance for fiscal 2012 are as follows. Cash flow from operations $850 million to $900 million; depreciation and amortization $280 million to $290 million; capital expenditures including capitalized software $275 million to $300 million. Our current priorities for cash that is expected to be generated remain the same -- funding internal investments to drive growth and generate higher earnings, pay appropriate dividends, acquire companies that meet our strategic objectives and enhanced financial returns, and repurchase shares.

In summary, we expect to finish fiscal 2011 on a very strong financial foundation with expectations for another very solid year in fiscal 2012.

Let me now turn it back to you, Howard.

Thanks, Gary. Let me close with discussion about fiscal 2011 and fiscal 2012 guidance. We have updated our financial guidance for fiscal 2011 as follows. Consolidated revenue is now expected to be approximately $5.9 billion, and that's about 13% above fiscal 2010. That compares to our previously expected revenue target of about $6 billion.

Non-GAAP income excluding, acquisition-related costs, is unchanged from our previous guidance. It is still expected to be in the range of $4.80 to $4.90 per diluted share, a year-over-year increase of 8% to 11%. Non-GAAP earnings before interest, taxes, depreciation and amortization, again excluding acquisition-related costs and expenses, are now expected to be in the range from $1.22 billion to $1.24 billion, representing an EBITDA increase of 11% to 13% above fiscal 2010.

For the RF Communications segment, fiscal 2011 guidance is unchanged. I will just remind you that revenue is expected to be 9% to 10% higher than the prior year and operating margin for the full year expected to be between 34% and 35%.

For Government Communications Systems, we now expect revenue for 2011 to be flat to up 2% higher than fiscal 2010. Previous range was 3% to 5% higher. Segment operating margin is still expected to be between 12.5% and 13%. And for the Integrated Network Solutions segment, we now expect revenue in a range of 33% to 35% higher than fiscal 2010, and that compares to our previous range of 36% to 38%, and again, it is due to the government budget impact at Harris IT services. Organic growth is now expected to be in the range of 4% to 6% over the prior year. Non-GAAP segment operating margin is now expected to be a bit higher at 5% to 7%. Previous margin guidance was in the range of 5% to 6%.

So that is a recap of 2011. Let me now move on to fiscal 2012. You will recall we initiated guidance for 2012 in March, and today I will update that guidance and provide more color around our three operating segments.

Consolidated revenue for fiscal 2012 is expected to be between 7% and 10% higher than fiscal 2011 with revenue between $6.3 billion and $6.5 billion. Non-GAAP income, excluding acquisition-related costs, is still expected to be in a range of $5.10 to $5.20 per diluted share, so no change in our guidance for non-GAAP EPS. And this range represents a year-over-year increase of 5% to 7%. Non-GAAP earnings before interest, taxes, depreciation and amortization, excluding acquisition-related costs, is expected to be in a range from $1.34 billion to $1.38 billion. That is a strong year-over-year increase in EBITDA of 9% to 12%.

Turning to color around the segments, for RF Communications fiscal 2012 revenue is expected to be 2% to 4% higher than fiscal 2011 with Tactical Communications business about flat with the prior year, reflecting lower DOD revenue as we indicated at the March analyst meeting and correspondingly higher international revenue. Public Safety and Professional Communications revenue is also expected to be higher in 2012. Segment operating margin is expected to be in a range from 32% to 33%.

For the Government Communications Systems segment, we expect revenue for fiscal 2012 to be 3% to 5% higher than fiscal 2011. Segment operating margins are expected to be about 13%. And for our new Integrated Network Solutions segment, we expect revenue in a range of 18% to 20% higher than fiscal 2011, representing organic growth in a range of 9% to 11% compared to the prior year.

Non-GAAP segment operating margin is expected to be between 6% and 8%. That is about 100 basis points above fiscal 2011 expectations. We expect margins to grow faster in the segment beyond fiscal 2012 when the recent acquisitions have been fully integrated and we receive the full benefits of integration.

With that, I will stop, I will ask the operator to open the line, and we will be pleased to take your questions.

(Operator Instructions). Carter Copeland, Barclays Capital.

Just a quick question, a couple of quickies. I wonder if you might provide a little bit more color on the delays you are seeing internationally as a result of the Mideast activities and whether or not that is funding related or just contracting and government busy with other things? What is the story there, and did you see all of those delays this quarter, or is there a bit of a guess for how much might move out of the upcoming quarter since you said the second-half?

Yes, so the combined impact, we think, is about $100 million in tactical orders. There is no one item. It is a combination of things. Orders that are going through the US FMS process are moving more slowly because of the continuing budget resolution. And then you have situations like in Iraq where we are expecting to get an order from the Ministry of Defense, except they have not elected the new Minister of Defense who by law has to sign the order. So it is a series of relatively small things, but they add up to about $100 million. We expect to get those orders in the first half of the next year, and we are not expecting that any of those will have a material impact on fiscal year 2012.

We will start the year with a little less backlog, but still very adequate backlog and order pipeline to reach the guidance we provided for the year over year, essentially maintaining our revenue with DOD lower as we have been talking now for several quarters offset by higher international business.

Great. That is very helpful. And another quick follow-up maybe for Gary. With respect to the step-up that is implied in the fourth quarter for the IMS margins after the past two quarters in the kind of 4% to 5% range, what is going on there that is driving that stuff up that step up, especially given the raised guidance? Is that just not a repeat of any losses in cyber integration, or you how should we be thinking about what is driving that progression?

There are several pieces to it. I think some of the integration that we have been working on with CapRock has taken place, and so we expect to have benefits there. Obviously we are now emerging that with Schlumberger, which has its own integration aspects to it. We have got the business now of Carefx coming in, which does carry a little higher margin where it is being integrated in with the healthcare businesses.

And so it is several different parameters that are causing it. I can't pick just one. But Howard, you wanted to comment as well?

Yes, just to say that if you look at the 8-K where we restated the segments, I think you will find that the margin has now the first three quarters of the fiscal year in this segment moved between 5% to 7%. So we are very much in the range of guidance for the year, and the fourth quarter is going to be about in the same part of that range. And the continued improvement in broadcast is helping us on the positive, as well as the contribution from Harris CapRock, and then serving to offset a little bit of that is we expect the losses in cyber to accelerate a little bit as we turn on the Cyber Integrated Solutions facility and business on June 1 and start to take some of the depreciation on the equipment there.

Gautam Khanna, Cowen & Co.

Could you give us -- you told us that the year-over-year decline was in MRAP-related sales. Could you quantify what the absolute numbers were like you did last quarter, please?

In this quarter I think there were maybe $20 million, $30 million of MRAP. So last year you add $206 million to that.

Okay. And I know you mentioned the Tactical Communications order slips on the foreign side. We have been running book-to-bill under one for the past three quarters. At what point should we be worried about if we don't get the order we have to worry about the fiscal 2012 forecast just given leadtimes and the like?

Well, I don't think we have to worry about it at this point. Obviously we have provided our segment guidance today and believe that we can achieve parity plus or minus in revenue tactical comms next year versus this year. We are going to be starting 2012 with less backlog than we started 2011, but we're going to be starting with a lot more backlog than we started fiscal 2010 and pretty comparable backlog plus or minus to what we started fiscal 2009. So it is really, as you know, a combination of the backlog then coupled with the orders that you get when you get those orders and your ability to turn them.

We have a pretty efficient process. We will have the new manufacturing facility online, significantly more capacity in place, and so I think we're going to benefit from that new facility both in terms of being able to turn orders into revenue quickly but also turn orders into revenue at even more competitive costs.

So, at this point, not concerned. And, as we go forward, the next call and get into the fiscal year we will talk about any seasonality that we expect in terms of how we expect to deliver on the comparable Tactical Communications revenue. Does that make sense?

Yes, it does. I guess one other one just high level. We are in a constrained DOD budget environment. That is obvious. We have got now -- we are about to have a change in Defense Secretary, and (inaudible) still appears to be an underperforming program. What are the milestones that might actually set in motion the restructuring and/or cancellation of that? Do you have any sense for the milestones that will give your products a better opportunity to compete more formally in the DOD budget?

Yes, I think there are several continuing milestones. Certainly the testing that is anticipated this summer that we have spoken about previously is going to be an important milestone. We think we are very well positioned with the only field-deployed, proven NSA certified technology, so we think that's a huge lead that we have.

Secondly, we have recently seen a request for information come out of the JTRS JPEO office essentially asking for what they call non-developmental solutions for the GMR specifications. Translated in our view meaning already developed commercially developed technologies. Again, we think we are the only ones in a position to really meet the full spectrum and timeframe that they will want so that we can continue to deploy technologies to the brigade combat teams in Afghanistan and around the world. So I certainly like our position more and more as it relates to the Falcon III technology.

And then, finally, remember we are going to be porting the SRW waveform very quickly into the Falcon III handheld, and so we're going to have some amount of networking capability using the SRW networking waveform even in the handheld. And you couple that with the announcement we made on the NightHawk 3G capability to link battlefield tactical networks to 3G cellular networks, and I just believe we continue to widen the lead that we have. That does not mean there will not be competition. Certainly there will be competition, but when it comes down to who can really deliver today, I think we are in a very strong position.

Robert Takacs, SunTrust Robinson Humphrey.

Good afternoon. Is there any way to quantify the potential opportunity out of the GMR program at this point, or is it just too much speculation?

We can talk in the future about the parameters. I don't have all of those numbers in my head. There are literally billions of dollars of procurements expected over a period of years as they deploy the JTRS-based technology in vehicular applications. So it is a big, big market, and I think what is yet to be determined is exactly what the uptake of that will be.

I commented in my prepared remarks that there is $10 billion of radios deployed today that basically do one thing. They are singleband, single mission, noncompatible with JTRS, and there is about another $2.5 billion radios that are compatible with JTRS but are not wideband networking.

So you have this huge market in DOD that will be upgraded and transformed over time, and it's really just a question of when. We believe that the capabilities that we are providing will accelerate the adoption. When you see what the radios can do, it continually impresses the leadership in DOD, which causes them to become proponents of investing budget dollars in these tactical radio deployments because they lead to more effective missions and ultimately save lives. So those are the best, most positive attributes you could have for your technologies.

Larry Harris, CL King & Associates.

I wanted to talk a bit about the cyber security area. A day does not go by where you hear about another network that has been hacked. So I was wondering if, say, in the past 30, 60, 90 days you have seen additional interest either from commercial or government customers that could help the profits or performance of this business in fiscal 2012?

Larry, the answer would be absolutely yes I think from a wide variety of commercial and government clients, and almost a week does not go by that we hear of another successful cyber attack or issues related to security, for example, taking down one of the Amazon cloud computing sites. So I am more convinced every week that we are exactly in the right place, and we are developing discriminating technology.

On the flip side, the adoption of cloud computing is hard to predict. And what the uptake of orders and turning that into revenue for us, which ultimately would drive profitability, is still an estimate, and I think we will be monitoring very closely our funnel. We will be monitoring the uptake of new orders. We are off to a good start, but have pretty high expectations for 2012 and beyond. So we will pay close attention to that.

But overall I don't believe this is a question of if we will be successful or cloud computing will take off or security and access to what is going on and compliance inside your cloud will be required. I think it is more a question of when and what will the actual uptake be with the new market that is sometimes difficult to pay.

But there is no question, interest is high. Lots of meetings, lots of proposals, and then we will have to see how those work through the funnel and turn into revenue. We have a pretty high fixed cost in that business. Once we get above that, it is going to leverage profitability very, very well, but we have got to get to that breakeven point first.

Josh Sullivan, Gleacher & Company.

On the CapRock business, you had mentioned that GCS was more capital intensive versus the Cox model that the legacy CapRock business followed. I am just wondering if you have made any strategic decisions as far as pursuing one or the other at this point?

No, we have not. I think there was maybe a small difference, but neither of them are hugely capital intensive. A little more capital intensive than our traditional businesses at Harris, but still relatively low capital. It has a lot to do with whether the customer rolls into the monthly costs for providing services the very small aperture antenna terminal or not. And the more they include that, then the more the capital is a little bit higher. Other customers sometimes prefer to pay for that, capitalize it themselves, and then just buy the various services from us. So there is a variety, but I would not expect it to be materially different across those two businesses as we put them together.

We are still engaged and you may also be thinking about discussions we have had about kind of the make or buy question. CapRock traditionally bought VSATs, and Schlumberger GCS designed and manufactured their own line of VSATs. And so we certainly have that make or buy analysis going on to determine which makes the best sense from a cost standpoint, as well as from a differentiation and solution standpoint.

And just as a follow-up, how should we look at the VCE order as it relates to volumes? I think you had mentioned that you were going to operate this segment more on cycle times or use. Just trying to get an idea of how we should look at that order.

Well, I'm not sure I have a lot of color to give you around that, other than it is a $10 million contract. It is providing services to VCE and perhaps to some of the affiliated companies, and it is we feel an important first step.

It is our second client on board now, and we look forward to being able to hopefully talk about additional ones once we finally open the door here on June 1 and move forward. Again, to the previous question, there is lots of discussion, lots of interest. And some of this I think, though, is going to take us to open the doors and then be able to show clients through our portal what is different about our services than the kind of consumer grade services that you are going to get from an Amazon or a Google. Our price points are going to be higher because what we are going to be delivering in security and compliance and control is going to be a lot higher. And so I think while we talk about a lot of that now, to some extent it is brochure ware until you are up actually operating the center.

Ted Wheeler, Buckingham Research.

I wondered if you could circle back and help me out on the timing on this request for non-developmental solutions for GMR. Now was that -- how long will that take to work its way through, and when would the next news event from that be expected?

I'm not sure we have a timeline, so this will just be kind of my opinion. But my opinion is that they already know how the tests are going to run this summer, and they are trying to get ahead of that cycle by starting with the RFI, request for information, and then they will follow it with a RFP, which will then go to selection.

I don't know whether that will be a couple of quarters or longer, but I would not expect it to be much longer than that. And depending on the needs for the next capability set deployments, it might be faster rather than slower. But there is a cycle, as you know. It is RFI, RFP and then award, and I think the fact that they have started the RFI before the tests is a little bit of a leading indicator of how they expect the test to turn out.

Thanks for that detail. And one other question on timing, what about the Alberta program? How will that play out, I guess, on a run-rate or duration for both?

I think the deployment in total is over maybe three years. We will have a material amount of revenue in fiscal 2012 from that program. I don't think there is much in fiscal 2011, just a little bit. And to remind you with these programs, I think it is pretty typical, what we will be doing during the initial deployment phases is putting in the systems and the infrastructure along with our partners. That is typically a little lower margin business. And then toward the end of it are the opportunities to sell the terminals both portable as well as mobile and much higher margin opportunities.

So we will expect to see takeup in revenue, certainly profitability but not at the level we will ultimately get to when we are able to deploy the terminals into the completed system.

So, at any given time, we have got a large number of these projects at different phases. But given that we took over the business, it was not growing all that much. We have good success in growing it. We still have a lot of programs that are kind of toward the front end of that cycle. I think we talked about that previously as it relates to our margins. So some of the margin uptake in this business is going to feed into the segment is going to come from the mix of what we are selling, not necessarily that there is a lot of costs coming out, but more that as the mix gets higher for selling terminals or radios, the margins are going to be better than when you are selling a higher percentage of systems.

And I guess just, lastly, how is the pipeline, I guess, of conversations on programs? Not maybe of that magnitude, but maybe these tend to be big programs for public safety. Are there still ample folks being approached and working toward something?

Yes, there are. The pipeline is about $3 billion. It has been pretty steady even as we have been winning programs. So that suggests that others are coming in.

You know we see this contrast. Day to day they are not hiring a lot of additional police officers or firefighters. So the day to day add-on sales for an additional base station for more capacity or more radios for more people we are not seeing. That is where the budgets are absolutely being constrained because of state and local revenue income.

On the other hand, the big projects continue to move along. Many of them are already funded, either funded through federal grants or they are funded through revenue producing kinds of services or fee-based. In Florida, for example, the statewide network gets income from licenses of various kinds.

So there is still a number of them out there. There is still a lot of very old technology, analog technology, that needs to be upgraded. There is still a requirement for going to this narrowbanding so that they can give up frequency for other uses. And then finally, you have got the opportunity being offered by the introduction of this LTE fourth generation broadband technology. We think we are going to be in a very strong position to integrate converged networks of LTE 4G for wideband, along with our traditional narrowband LMR radio technology.

So we are feeling very positive about the market. We wish that the state and local funds were a little freer as related to the higher-margin, add-on kind of business. But overall I think we are very pleased with the progress we have made since we bought the business. We have some new leadership in place, very pleased with how that is coming along. Very pleased with the strides that we made in the sales organization, sales leadership, channel partners having signed up a couple of Motorola dealers. To me lots of positive signs. It never comes as quickly as we want, but the progress is definitely there.

Josephine Millward, Benchmark Company.

Congratulations on your cyber order. Howard, can you talk about what you are expecting from cyber in 2012 and what a breakeven point might look like?

Well, I don't think I want to be quite that specific from a competitive standpoint. But certainly we have made investments now of north of $175 million as it relates to all the infrastructure, including customer-facing equipment, maybe even approaching $200 million.

So it is fair to say that you got to get revenue certainly, let's say, well above $50 million to be able to even at very high gross margins cover those fixed costs and fixed expenses. Our expectations are higher than that, and as I said earlier on the call, we will have to see how the takeup is.

I think this is a business where we don't want to be too short term in our thinking or we will not invest, and we will miss what we expect -- and we are not the experts on this -- what everyone in the market expects to be a major transformation in how IT is delivered to users over the next decade.

We have got a strong leadership position, some very discriminating technology, and I really don't want us to be penny wise and pound foolish. I think that would be a mistake for the opportunity to build long-term shareholder value.

Having said that, we are going to try and match expenses to revenue as best we can, and we tried to bake into our guidance for next year expectations as it relates to our cyber business that we can meet.

(multiple speakers) I have a follow-up question on JTRS. The Army recently talked about trying to stop funding in R&D funding for the JTRS GM radio. What do you think happens to the $1 billion dollar in 2011 defense budget allocated to JTRS? It seems a big chunk of that is related to GMR R&D. Would that flow through the upcoming solicitation? Can you comment on that, Howard?

Well, we cannot say for sure, but we certainly hope that a portion of that will go not for R&D of a radio that is not going to be competitively priced based on its feature, but that it will go towards procurement so that we can put more radios in the hands of our war fighters.

So certainly that is what we are promoting, and I think a lot of people are starting to turn in that direction. And it is very logical given the performance of the Falcon III radios in the field. So we are certainly very optimistic, but until the 2012 budgets are approved, everything is still up for negotiation. We are certainly engaged in that to the extent possible and trying to influence a positive outcome for Harris.

Operator, we will take one more if it is quick.

Joe Nadol, JPMorgan.

I will be very quick. I have a couple of quick ones, and I will ask them at once. One is just mechanically with the sales guidance coming down a little bit, what is the offset to keep EPS the same for both this year and next year?

And the second question is a very significant increase in that pipeline, the international pipeline from $2 billion to $2.6 billion. So 30%. $100 million of that is the slip presumably, and so it is a $0.5 billion increase. And, Howard, I was wondering if you could talk about -- maybe give a little more color as to what is in there? Is that the systems emphasis you have been talking about? Is it just geographical? So anything more you can give. Thanks.

Well, to your second question first, I would love to be able to be more specific country by country, but increasingly -- and you are seeing this in our reports -- we are not able to divulge the individual countries. You know. security and deployment of these technologies is becoming more and more of an issue. So I really can't go country by country.

I can tell you that it's a well diversified mix of opportunities. It is our traditional tactical radios. It is our new products like the Falcon fighter, the secure personal radio, high-capacity line of sight, high-capacity data radios, and a mix of services and systems that we wrap around that. But it is a very good cross-section and I think real opportunities. You can imagine, I'm a skeptic when I see that kind of an increase, and we have scrub the pipeline to make sure it is real, and we are very comfortable that it is.

To your first point in terms of FY 11, Gary talked about it a little better on the tax rate, and we also raised about 100 basis points the expectation for the new Integrated Network Solutions return on sales for 2011. So that is offsetting the margins associated with the $100 million of revenue in government programs and IT services. We have not provided that level of detail in 2012. We felt we had adequate comfort in the guidance we provided to maintain the EPS guidance, even in the face, again, of about $100 million lower revenue.

So we are still very comfortable in our growth rates and margins for next year. I think 2012 is going to turn out to be a good year for us as we go forward.

All right, operator, everyone on the call, thank you so much. Appreciate you joining us.