L3Harris Technologies Inc (LHX) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter Harris Corp. earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions). At this time, I would like to introduce Ms. Pamela Padgett, Vice President of Investor Relations. Please proceed.

Good afternoon, everyone, and welcome to our call. We are very sorry about the delay. It seems like our conference call company had a little bit of a technical difficulty.

So 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 the teleconference and related presentation, 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 on the investor relations section of our website.

And with that, Howard, I will turn it over to you.

Thank you, Pam. I want to welcome all of you to our first-quarter fiscal 2012 earnings call.

Before I turn to the quarter's results, earlier this month the Harris Board of Directors announced the appointment of William M. Brown as President and CEO to become effective on November 1. Bill joins Harris from United Technologies Corporation, where he most recently served as Senior Vice President, Corporate Strategy and Development. Previously he served for five years as President of UTC's fire and security business, which has revenues of $6.5 billion and 45,000 employees. Bill has a proven track record of driving growth, building and motivating teams and delivering financial results. I'm confident that his P&L management experience, his operating and commercial skills and strategic acumen will allow him to be very successful as he comes forward to lead Harris.

Moving now to first quarter results on slides 3 and 4 in our presentation, we began fiscal 2012 with a number of important new wins and strong orders, so we are off to a good start. Orders increased 23% compared to the prior year. They exceeded revenue, and that drove a book to bill for the total Company of greater than 1 during the first quarter. Consolidated revenue was $1.46 billion. That increased 4% over the prior year. If we exclude the impact of acquisitions, then revenue declined about 2%.

Expedited tactical radio shipments in the prior year of $235 million created a difficult year-over-year comparison to both revenue and income. And you will remember -- these were for the expedited MRAP program. This was expected, the year-over-year change, and included in our prior guidance. Non-GAAP earnings per share was $1.06 in the first quarter.

Also during the first quarter, we repurchased $400 million in outstanding shares, reducing the share count by 8.6% and achieving our targeted share reduction that we had previously discussed of 8% to 9% for the fiscal year.

Moving now to the segment results, first on slide 5, first quarter revenue for RF Communications was $497 million, comprised $373 million from Tactical Communications and $124 million from Public Safety and Professional Communications. Again, the year-over-year revenue decline in RF Communications was as a result of the $235 million of expedited tactical radio shipments in the prior-year quarter.

The worst of these year-over-year quarterly comparisons is now behind us, and our baseline for future growth is essentially reset. All that remains of the $1 billion in expedited MRAP shipments that occurred over five quarters is the last $80 million that shipped in the second quarter of fiscal 2011.

We believe the underlying performance in the quarter was strong with segment revenue of $497 million. Excluding deliveries for the MRAP program shipments, US DoD revenue in Tactical Communications increased significantly year-over-year, driven by continuing Falcon III adoption, supporting the DoD vision to deploy wideband networking to replace outdated voice-centric and line-of-sight tactical communications.

International revenue growth was also strong in the quarter, increasing significantly over the prior year, driven by major deliveries to Australia, Kenya and other countries in North Africa and Central Asia.

Revenue from Public Safety and Professional Communications was $124 million in the first quarter, and that was a 3% increase over the prior year. Significant new wins, including the province of Alberta in Canada, Oregon's Department of Transportation, Floyd County, Georgia and Linn County, Iowa, which were all announced in the back half of fiscal 2011, are contributing to the sales ramp-up and allowing us to maintain a healthy backlog in this business.

For the segment, operating income in the first quarter was lower, as expected, a $154 million, compared with $229 million in the prior year. Operating margin was 31% in the quarter and is expected to improve over fiscal year '12 as a result of more favorable product mix, continuing cost containment activities and lower manufacturing costs. Lean manufacturing improvements implemented as part of our facilities consolidation in Rochester, New York are expected to drive productivity improvements for the year in excess of 5% and production cycle time reductions are expected, 10% to 20% across each of our product lines.

News on the orders front was very positive. Segment orders were $514 million in the quarter with Tactical Communications orders of $398 million and Public Safety and Professional Communications orders of $116 million. That means that book to bill for this segment and for Tactical Communications were both greater than 1. And we are exiting first quarter with $800 million tactical radio backlog and we believe that is very encouraging.

New orders were especially strong in the US market. Perhaps our most meaningful win in the quarter was a $66 million order from the U.S. Army as part of their Brigade Combat Modernization Program, allowing them to outfit the first eight Brigade Combat Teams with their initial wideband networking capability. This is also known throughout the Army as Capability Set 13.

Now, this is not the full extent to which wideband will ultimately be implement it for each of the Brigade Combat Teams, but it marks the beginning of the Army's modernization efforts. We consider the Falcon III 117G order a milestone event in our effort to become the preferred wideband tactical communications provider to the U.S. Army, a leadership position we have already achieved with the US Marine Corps, Air Force and Special Operations Command, all of whom are already standardizing on the Falcon III family of tactical radios.

Our success at this summer's Army NIE event -- and that NIE is short for Network Integration Evaluation -- led in a large part to the award that we received. The NIE evaluations are a critical element now the Army's network acquisition strategy is evolving. These are expected to be semiannual evaluations. They're designed to assess and qualify the Army's tactical networking capabilities and to promote enhanced competition among programs of record and viable commercial solutions.

Our radios clearly demonstrated the advanced capabilities of wideband networking in a challenging and real-world formal evaluation environment, receiving high marks in both their reliability and their ease of use. At the same time, the NIE pointed out significant deficiencies and challenges yet to be overcome by our competitors as they struggled to deliver the basic program of record radios.

The successful porting of the JTRS soldier radio waveform into the Falcon III, feedback from actual user side-by-side comparisons and the fact that our Falcon III radios provide capabilities beyond what the program of record had promised are all creating strong advocacy for our products.

Also leading to the significant win with the Army has been our excellent performance in real battlefield situations in Afghanistan where we have already outfitted nine Brigade Combat Teams with Falcon III radios in support of the Army's previous capability sets. Our success in the field, along with our performance at the NIE, are helping to create a new model for Army radio acquisition. The latest $66 million order dollar validates our leading position and our ability to win. The DoD is clearly moving away from programs of record models and embracing Falcon III and the enterprise business model as the new way forward in acquisition.

Now, a recurring question has been whether or not the DoD will continue to have an appetite to invest in Tactical Communications modernization during the tough government budget environment going forward without a war and without OCO funding. We believe the answer is yes, and that their commitment to modernization remains strong.

Just two weeks ago in an interview with Defense News, recently appointed U.S. Army Chief of Staff Ray Odierno commented on modernization strategy in the face of budget cuts and priorities. He said, and I quote, networks is one of the most important things we do. Our ability to network and provide information from the highest level down to our soldiers is one of the things we are really working on.

And the reason we are excited about this is we now have companies that have developed their own capabilities and are coming down to Fort Bliss to work with these new technologies. We think there's a real potential here to lower the cost and to move us forward very quickly. We don't want to walk away from that. We have to continue to invest in that, unquote.

Clearly, our customers are pleased with our progress. During the first quarter, we continued to achieve several significant product milestones, creating new capabilities and features in the Falcon III family, and we will demonstrate these at the fall 2011 NIE exercises that are scheduled. We have received NSA certification for the SRW Waveform in our Falcon III 117G wideband networking radio. Shipments of this product have already begun, making Harris the first to market with an NSA-certified radio incorporating the JTRS soldier radio waveform.

We also received NSA certification for and began shipping the Falcon III AN/PRC-152A handheld radio, also with wideband networking capability using the Harris AN/W-2 waveform. The 152A is the only type I-certified wideband handheld radio on the market. Other major US orders for Falcon III wideband networking radios included $29 million from the U.S. Air Force, $20 million to equip MRAP vehicles for the US Army and the US Marine Corps, and orders of $16 million and $15 million, respectively, from the DoD.

We closed the quarter with a healthy opportunity pipeline in the US market of $1.1 billion. Large opportunities continue to exist for Falcon III radios as the Army, Marine Corps and Air Force continue to upgrade their tactical networks. Also, the US pipeline includes opportunities which would be procured through ID/IQ contracts that we expect to be awarded from the Navy and the Special Operations Command.

International Tactical Communications orders in the quarter demonstrate the demand for wideband networking capabilities is also increasing and spreading around the globe. Significant wins in the quarter included two orders totaling $52 million from a country in Southeast Asia for integrated command, control and communications systems using Falcon III and Falcon II tactical radios; a $38 million ID/IQ win with an $8 million initial delivery order to supply military communications and field support services to international partners in the Caribbean and South America and orders from Poland, the Republic of Georgia and Kuwait.

Visibility in the international market has also improved. This is a key point. Last quarter, we talked about the political instability in North Africa, the Middle East and Central Asia and how that has impacted international orders. We are feeling much more optimistic about these areas as the political environment has improved and the opportunities have firmed up. The international opportunity pipeline is $2.4 billion and is highlighted by significant opportunities with the Iraq Ministry of Interior and Ministry of Defense, the Australian Ministry of Defense, United Arab Emirates and a number of other nations in Africa, Central Asia and Southeast Asia.

Orders in Public Safety and Professional Communications were $116 million in the quarter, only slightly below revenue of $124 million, and we think still a very solid orders quarter in what continues to be a weak state and local spending environment. Backlog continues to be large and our pipeline of opportunities remains robust at $3 billion. DSPC orders in the quarter included $16 million from one of the nation's largest electric utilities to provide advanced, OpenSky data and voice communications systems, $7 million for a P25 LMR communications system and related radios for Bexar County, Texas, and $4 million from Mobile County, Alabama, for a P25 system.

Moving on next to slide 6, Integrated Network Solutions segment revenue in the first quarter increased 26% to $554 million, primarily as a result of the contribution from acquisitions. Organic revenue growth was 5% in the quarter and revenue increased in each of the business areas included in INS. Segment non-GAAP operating income was $19 million compared with $29 million in the prior-year quarter. The decrease resulted from a combined loss of $16 million in the new cyber and commercial healthcare initiatives, partially offset by year-over-year operating income increases at Harris CapRock Communications and Broadcast Communications.

Across this segment, we are winning prime positions on a number of US government ID/IQ contracts, giving us better access to multiple agencies and the ability to sell a broader solutions offering.

In Harris IT Services, we received a 5-year, $25 million contract from the Air Force Space Command and Missile Systems Center under the Alliant ID/IQ contract to sustain the ground system for the Defense Meteorological Satellites Program.

Also IT services, following the close of the quarter, we acquired and ENCORE II ID/IQ contract from another company, securing a prime position to serve DISA, the Defense Information Systems Agency. ENCORE II is a broad procurement contract vehicle, enabling companies to provide network-centric IT solutions for command and control, intelligence and mission support.

Also following the close of the quarter, IT Services was awarded a prime position on the Connections II GSA contract. This is similar to the FTI program for the FAA, a contract vehicle that is used to procure broad telecommunications and network solutions. As CapRock Communications, we were very encouraged by the leading indicators for increased demand in the energy market that we saw during the quarter. We experienced an increase in requests for proposals from customers anticipating more rigs being put into service. And, on existing contracts, there was definitely an uptick in short-term add-on communication services.

During the quarter, Harris was also awarded a five-year $9 million contract from Farstad Shipping to provide manage satellite communications to their fleet of 53 offshore drilling ships and exploration vessels. And these operate in the North Sea, the Indian Ocean and the Pacific and off the coast of Brazil and Australia.

In the government market, we received several awards totaling $52 million under the DSTSG and FCSA ID/IQ contracts, where we will provide managed satellite communications for DoD and national intelligence customers. Our integration efforts have resulted in Harris CapRock in consolidating five commercial network operations centers down to 2, one in Aberdeen, Scotland and one in Houston, Texas. We are also reducing costs by consolidating our teleport footprint and also bundling our satellite bandwidth purchases, all aimed at driving lower cost.

All three of our vertical markets -- energy, maritime and government -- have significant overlap in their harsh and remote geographic coverage requirements. As a result, we have been able to establish new satellite capacity requirements under long-term contracts and repurpose this capacity as customers change their demand over time.

In Broadcast Communications, we continue to see revenue growth in the international regions of South America, the Middle East and Asia. Orders during the quarter included $3 million from TV Azteca for the first live 3-D transmissions throughout Mexico. Harris also received a $3 million order from Svyaz Engineering, our Russian manufacturing partner, where we will begin local production of digital television transmitters. Russia is only in the initial stages of their transmission from analog to digital. This will ultimately include the replacement of 22,000 transmitters across the country. This will take place over the next several years, and we believe that Harris is well-positioned to participate significantly in this revenue opportunity.

During the quarter, our Broadcast Communications team participated in IBC 2011 in Amsterdam, the industry's largest trade show. There were more than 50,000 attendees, making it the biggest show ever, and this is another encouraging sign for international market growth opportunities in broadcast.

A final comment on Broadcast -- we recently learned that one of our contract manufacturers, located in Thailand, has been impacted by the recent flooding. It's really too soon for us to understand the extent of the impact and what impact it might have on the second-quarter results in Broadcast. But we are working feverishly to mitigate any impact. All of our finished goods have been moved out of Thailand, and our supplier is in the process of moving production and starting at an alternate location.

Moving on, Harris Healthcare Solutions achieved a number of new government wins in the quarter. The National Cancer Institute awarded Harris a 5-year, $37 million contract under their CIO SP2 ID/IQ contract vehicle for comprehensive data management. Under this contract, Harris will continue to provide expertise that has enabled the National Cancer Institute to enhance their research databases and systems used for clinical trials.

Harris was also awarded a 5-year $55 million contract under the recently won $199 million blanket purchase agreement from the Department of Veterans Affairs for a healthcare IT program called EVEAH, Enhance the Veterans' Experience and Access to HealthCare. In this program, we will integrate and deploy a surgical quality and workflow manager tool. We will integrate a COTS solution to reduce surgery wait times and cancellations, increase patient throughput and improve the overall surgical experience for veterans and their families.

This solution represents the first time the VA has used a COTS solution for an enterprise-wide clinical information system. It will operate in all 130 of the VA hospitals who perform surgery and support over 400,000 cases per year.

Four major academic medical centers went live this quarter with our Physician Insight Plus program, which is part of the CareFx Performance Management Dashboard Suite that has been developed in collaboration with the Cleveland Clinic. Dashboards are critical to the interoperability of the healthcare IT systems. It connects stovepipe databases, organizes the information and apply analytics that help improve clinical and operational performance.

Also during the quarter, Healthcare Solutions was awarded a $10 million contract from Kaiser Permanente to develop and support a health information exchange providing interoperability between their legacy systems. As the largest commercial provider of veteran healthcare, Kaiser Permanente, a $43 billion health enterprise with over 35 medical centers and 400 medical offices serving 9 million healthcare plan members, this contract has the potential to reach $20 million and was a major win for this business in the quarter.

The bottom line is we're continuing to integrate our recent acquisitions. We are winning prime positions on ID/IQ contracts, maturing new initiative with major partners in our INS segment in order to drive growth and improve profitability going forward.

Let me now move on to slide 7. Revenue in the Government Communications Systems segment was $444 million in the first quarter, 5% higher than the prior year. Underlying growth, when we exclude the FDCA revenue from the Census Bureau -- that program finished in the prior year -- our underlying growth was up 9%. Now, we think this is outstanding performance, given the tough US government spending environment. Especially positive in the quarter was the strong revenue growth in our classified programs business. Beginning in the 4th quarter of fiscal 2011, wins in classified programs area began increasing and we continued to experience this pickup in the first quarter, where we won five large contracts totaling $125 million.

Revenue growth in the quarter was also driven by the ramp-up of a couple of large existing programs including the GOES-R program for the National Oceanic and Atmospheric Administration and the MET program for the U.S. Army, which provides satellite ground terminals that make up their worldwide backbone for high-priority military communications. In the quarter, Harris was awarded the next 5-year, $51 million delivery order format to provide additional fixed and transportable X and KA band terminals, equipment racks, spares and operator training. This brings our total orders under the MET program to date to more than $200 million of the potential $600 million contract award value.

Revenue growth in the quarter also came from higher shipments of high-band networking radios, commercial satellite reflectors, wireless products and geospatial products. Partially offsetting this growth, as I mentioned, was the decline in revenue from the completion of the FDCA program for the 2010 US Census and the completion and the buildout of the FTI Microwave Network for the FAA.

Staying with the FAA, Harris received a new program award from them in the quarter, a 10-year contract with a potential value of $85 million for the Alaska Satellite Telecommunications Infrastructure Program. Under this new program, Harris will replace and upgrade the existing satellite communications network that links the Alaska Air Route Traffic Control Center in Anchorage with 64 other FAA facilities throughout the region. This demonstrates our continued strong relationship with the FAA and, we believe, will benefit Harris as the large next-gen programs begin to be awarded over the next several years.

Segment operating income in government communications in the first quarter was $63 million and operating margin was very strong at 14.2%. Strong execution across the segment, along with a favorable mix from our product-focused areas continued to drive our above-industry average margins.

With that, let me now ask Harris CFO Gary McArthur to comment on our financial results in the quarter.

Thank you, Howard. As highlighted on slide 4 and already mentioned by Howard, we repurchased $400 million in shares, reducing shares outstanding by 10.6 million or 8.6%. As of quarter end, we had $600 million remaining authorization under our share repurchase program.

Turning to slides to 8 and 9, we ended the quarter with cash on hand of $305 million. Cash flow generated from operating activities was $79 million in the quarter as compared to $295 million in the prior year. All three segments generated positive operating cash flow. Operating cash flow was weaker mainly as a result of lower operating income and collections, primarily at RF Communications, where in the prior year and expedited shipments and collections on tactical radios for MRAP vehicles benefited income and cash flow. And in the first quarter of this year, the transition to the new factory delayed shipments and, ultimately, collections.

Our expectations for the Corporation are that cash flow from operations will increase steadily over the next three quarters as operating income increases and days sales outstanding declined from 56 days as of the end of the first quarter to the more typical low 50s. Though we are maintaining our guidance for operating cash flow at $825 million to $875 million, as a result of our slower than expected start to the year, we will continue to monitor this closely.

Depreciation and amortization were $63 million as compared to $47 million in the prior year. Our expectations for depreciation and amortization for fiscal year 2012 are unchanged at $280 million to $290 million. Capital expenditures were $82 million as compared to $41 million in the first quarter of fiscal 2011. Our current guidance for fiscal year 2012 CapEx is unchanged at between $265 million and $285 million.

Our effective non-GAAP tax rate in the first quarter was 31%. Our outlook for the full year tax rate remains at 33%, again noting, however, that the tax rate for any given quarter could vary up or down as a result of discrete tax events. Finally, during the quarter, we renewed our 364-day revolving credit facility at a level of $250 million, which, combined with our primary revolver, provides us with $1 billion of short-term debt capacity.

With that, I will turn it back to Howard.

Thanks, Gary. On slide 10 we are maintaining our previous financial guidance for fiscal 2012 both in total and for each segment. Consolidated revenue for fiscal 2012 is expected to be 4% to 6% higher than the prior year, with revenue coming in between $6.15 billion and $6.3 billion.

Non-GAAP income, excluding acquisition-related costs, is expected to be in a range from $5.10 to $5.30 per diluted share, a year-over-your increase of 4% to 8%. Adjusted EBITDA for the year is expected to be in a range of $1.28 billion to $1.32 billion, a year-over-year increase of 4% to 8%.

For the RF Communications segment, fiscal 2012 revenue is expected to be 3% to 6% lower than fiscal 2011. This includes a 10% decline in Tactical Communications revenue along with double-digit growth in Public Safety and Professional Communications business areas. Segment operating margin is still expected to be 33% to 34%.

For the Integrated Network Solutions segment we expect revenue in a range of 16% to 18% higher than fiscal 2011 with organic growth in a range of 7% to 9%. Non-GAAP segment operating margin is expected to be between 5.5% and 6.5%.

Finally, for the Government Communications Systems segment, we expect revenue for fiscal 2012 to be 2% to 4% higher than fiscal 2011 and segment operating margins of about 13.5%.

Let me close my final earnings call as Harris President and CEO by saying it has been a real privilege for me to serve this great Company and our shareholders. I continue to believe in the future growth prospects for Harris. The Company is well-positioned to outperform in our core US government and defense businesses while benefiting from a growing number of growth platforms, including international tactical communications, public safety, broadcast, satellite communications services, healthcare information systems and cyber integrated solutions. I believe Bill Brown will do a great job taking over for me in the leadership role and want to wish him and the entire Harris team my very best.

At this time, I'll ask the operator to open the line and we will be pleased to take your questions.

Noah Poponak, Goldman Sachs.

Howard, let me first congratulate you on your retirement. My first question is, I'm wondering what you think the post-GMR Army wideband radio procurement structure will look like. Do we continue to see these steady smaller contract awards, or at some point do we get some larger one-time award that covers a lot of what the Army wants to do over a longer period of time? Any insight you have into how this is likely to play out.

Well, I wish I could be specific, but we really don't know. I'm expecting both. In the short run, I think we will continue to see smaller orders released, but I do think at some point, to fully fill out Capability Set 13 across all of the Brigade Combat Teams -- 42, I think, is the total number we talked about previously -- and at a level of penetration of wideband networking which would be more than this initial tranche, that they will probably create some sort of a large ID/IQ contract vehicle to accomplish that. But certainly, I don't have any specifics on the timing of that, any more than we did last quarter.

We are very pleased, obviously, with this first award. Our performance in the NIE, our performance in the field, the advancements we continue to make in the technologies that are further distancing our performance in the radios from the programs of record, ultimately have made this an easy decision, I think, for the Army and one, obviously, we're pleased with.

Okay, that's helpful. One other question related to that -- we've seen the Army discuss your AN/W2 waveform technology as sort of critical to the process. But it's look like they have been saying they are going to try to bring that into their own repository, as they put it, and make it available to others who are also competing. Can you talk about whether or not that's true; and, if it is, if you are selling the technology and would gain a royalty on other contractor wins, or just what might happen there?

It's my understanding that your statement about what they want is correct. We have definitely expressed a willingness to provide the AN/W2 waveform to the library, but we have not negotiated the terms for providing that waveform at the current time. We're certainly not going to give it away. We are going to make it available as part of returning appropriate value for the investments that we have made. I don't know what form that will take, whether it would be a royalty or a one-time payment or some of each. At this point, those negotiations are ongoing and there is nothing to report of a final nature.

Mark Jordan, Noble Financial.

Good afternoon, Howard, and all the best in your future endeavors. The buyback -- you stated that you completed what I assume is basically baked into the estimates and guidance for the year. You have $600 million left. Does that mean that any incremental purchases from here would be added to expected profitability?

And secondly, should we be looking at approximately 115 million shares as a share base for Q2?

On your second question, I will have to ask Pam to tell me if 115 million is a reasonable number for the share count. I don't recall, off-hand; she will look that up.

As it relates to our strategy, we committed to repurchase 8% to 9% of the shares. We said when we announced the share buyback program that we thought that would be about $500 million. Given the lower level of the share price, we were able to get that accomplished with $400 million, which means we have additional money that we could spend to buy back shares and it would be incremental to our EPS guidance.

The question becomes whether or not we do that. That decision has not been made. As Gary said, our cash flow in the first quarter was lower than expected. We're going to monitor this and make that decision at some future date going forward. We're also going to continue to manage our debt to total capital ratio from a ratings standpoint. You will recall, the ratings agencies reaffirmed our debt rating when we announced the share buyback in our plans. And, at this point we don't have any plans to do anything that would change that. So that's kind of the color around what we have done. We are certainly continuing to look at it. Pam?

We stand at 113 million. We always had a little bit of dilution, but I'm sure that we will probably offset that with the purchases, and then the rest of it would go to earnings.

Thank you. Does that answer your question?

Yes, it did.

Carter Copeland, Barclays Capital.

Let me just reiterate, Howard, our congratulations. The Company has seen a lot of earnings growth over the years under your watch, and we just want to wish you the best in your future endeavors. Hopefully, you can see an equal amount of rounds of golf played as EPS. That would probably be a success.

Well, I'll work on that. Obviously, as a shareholder, I'm also very interested in the Company's success going forward, and I'm very sincere when I say I think the Board made an excellent choice in Bill Brown and that there will be a very smooth transition here.

Wonderful. Just a couple of quick ones -- first, sort of a bigger picture just question on INS. Obviously, there's a lot of moving pieces here, whether it's in commercial healthcare or whether it's inside cyber, where you are losing money and hopefully hope to turn that around here relatively soon. And there's obviously some restructuring on the cost front. It really seems like 2012 is a real rebuilding year.

Is it your view that you will get through most of those activities and we can see the money-losing businesses moving to profitability in '13 and the restructuring largely being behind you in 2013? Or, is this going to be a process that drags on further than that, based on what you are seeing today?

I would say yes, that's our current view. Whether that remains the case going forward, I don't know. But right now, we expect to see improvement as the year goes on, and we are not expecting to take that negative 16 to a positive number next quarter, but we are expecting progress in the commercial healthcare business we bought as well as the cyber business that we have started from scratch.

So I think that's a reasonable expectation that the drag from those gets eliminated in '12 and that they are breakeven or above in 2013.

The other thing just to remind you of is there's a significant amount of amortization of intangibles and depreciation of the assets invested in cyber that are really dragging down and creating a much bigger gap between operating income growth and EBITDA growth year-over-year. On a cash basis, these businesses are doing much better than on a fully amortized and depreciated basis.

Having said that, we understand that that's the way we are reporting the numbers. That's what you should focus on. I think you got it about right. In '13, these two contribute. We continue to see improvement from the Harris CapRock acquisition and their growth and in broadcast and continue to feel for a positive about the INS segment as a major driver of revenue growth and margin expansion in '13 and '14, to help us get up to the higher levels of EPS that we are striving for.

Joe Nadol, JP Morgan.

Good afternoon and good luck to you, Howard. On the RF business, I was wondering if you could break out domestic versus international bookings for the quarter and for the year and what your book-to-bill expectations are for the year. And then just a quick one for Gary -- where are the receivables or where did they build in Q1? Which part of the business, which products, etc.?

Well, as it relates to orders, for the year we still expect that international orders will be slightly greater than US orders and that international revenue will be slightly higher than US revenue. I'm not going to comment on any specific book-to-bill forecast. We're off to a very good start. We are over 1-to-1, and obviously our goal is to keep that going.

Gary, do you want to comment on receivables question?

Yes, Joe, the receivables increased primarily at RF. Their days sales outstanding increased by about seven days. That was really as a result of the impact of the factory coming online in July with most of the build in shipments taking place in August and September, and then not having time to collect that in the quarter. So we don't see this as a long-term issue. We see it as a timing issue and we should get back to more normal days sales outstanding at RF and in the Company going forward.

We'll collect those dollars, Joe, in the second quarter instead of the first quarter. That's essentially the point.

Got it. They were late billings as opposed to --

Yes.

-- International customers that are not paying?

Yes, absolutely. See, normally, you would have the full three months to be building and we really didn't build anything, ship anything, in July because that's the month that we moved everything and started the factory up. We were up and running by the time we had our call, I think it was August 1, August 2. But we really didn't ship anything in July, so we shipped it all in August and a lot of it in September, and those bills weren't due yet.

So this is not a question of quality of receivables at all.

Okay, all right, thank you.

Michael Lewis, Lazard Capital Markets.

If I could just circle back to the cyber operation, qualitatively, what type of -- are we seeing more clients starting to participate in the operation? And, are you getting more traction from the government customer?

I think the answer is yes across both government and commercial customers. We are getting a lot of traction, but as we had discussed before, the traction is around pilots and the kind of demonstration programs rather than the scale at which we had hoped we would be able to get people to convert to cloud computing and hosting services.

But we are seeing that the pilot activity -- continue to pick up, and it's across both government and commercial clients.

Okay, thank you.

Pete Skibitski, SunTrust.

I was just wondering if we could get more clarity on the 8 BCT Manpack order, the $66 million order. Is it your understanding that that basically fills out completely the 8 BCTs for now, and that we will have to sort of wait for that future competition before we see further BCT-related orders or penetration there?

I view it as initial order against the 8 BCTs. It certainly does not fill them out at a level of penetration of wideband networking for either Manpack, vehicular or handheld that they ultimately will want.

Okay, so you expect to see more orders before the kind of the follow-on formal competition?

I don't know that we could be specific on the timing, but I expect more orders, absolutely.

Okay, and then on the recent notice on the $20 million order for the 117Gs for MRAPs, it seemed like you guys called attention to that as well in terms of I'm not sure if most of the MRAPs had Falcon IIs and now are beginning maybe a Falcon III migration into the MRAPs. But do you guys see it that way, as sort of a tech refresh opportunity for you?

Yes. The answer is, most of the MRAP vehicles that were deployed out of that $1 billion in orders were using Falcon II technology because the contract vehicles were not in place to allow them to use Falcon IIIs. It sounds counterintuitive; why wouldn't you put the new radios in, because you're going to have to replace them? But we will have a significant opportunity to upgrade all those vehicles as they need wideband capability.

Got it, okay, thank you.

Chris Quilty, Raymond James.

Circling back on the JTRS opportunity, I think one of the other requirements for whatever is going to replace the GMR is that it be a 2-channel radio. And at this time, the Falcon III platform is a one-channel radio, though I know you have talked about an applique that would take it to 2-chance. Can you talk to us about what your thoughts are on whether they actually want or will need a 2-channel radio and how long it would take you to position your product for that opportunity?

Best of my knowledge, they still want a 2-channel radio. We are clearly working on turning the Falcon III 117G into a 2-channel version to accomplish that. I don't think you should view it as an applique, but rather a full radio system that would have 2 channels. So that's to the best of my understanding.

But I think what is important to keep in mind is that this is a fluid situation in terms of requirements. The good news, Chris, is that we have been able to shape the requirements and actually enhance them because we have features in our radio beyond the program of record. So I don't think that requirement is necessarily cast in stone at this point, but my latest understanding is it still is a 2-channel request.

Okay. And as sort of a follow-on to that, you have integrated wideband networking waveform into the 152, I believe?

Yes. We have integrated our AN/W2 and we, as we said last time, we are working on also integrating SRWN, and we expect to have that in, in time for this fall NIE evaluation.

So SRW -- I thought you had that certified on at least one platform?

Yes, SRW has been certified by the NSA on the 117G.

Okay. And so, the question is, to get the W and W certified, is that something that you would anticipate a long lead time, or can that be done on relatively short order?

Well, they have (inaudible)

Yes; I think the real key, to Pam's point, is the WMW is not ready for prime time, and that was clear in the summer NIE evaluations. So how long does it take once it is in the library and ready? I don't know. I wouldn't be too precise. A lot of it has to do with NSA testing and requirements. I'm going to throw out, it's a year, probably, process. But there's not much we can do until it's really finished. And, to the earlier question, that's why they are very interested in the AN/W2 waveform, which performed, I think, up to a 30-node network at Fort Bliss and in the testing, which they were very, very pleased at. That's many more nodes than the SRW can do and much wider, larger bandwidth, wider pipes.

So the AN/W2 is battlefield proven, but does it need to get NSA-certified in order to get into the repository?

Well, it's already NSA certified in, now, both of our products, the 117G Manpack vehicular, as well as the 152A. So it has to get into the repository when we choose to give government purpose rights to it. So it's really up to us and the government to negotiate something. We are not opposed to doing it, but we have invested a lot of money from our shareholders to get here and we certainly expect a return on investment.

Great, thank you.

Larry Harris, CL King.

Thank you, and congratulations on the quarter and best of luck going forward, Howard.

A question about the Public Safety business. The other day, you announced an alliance with AT&T on the LTE front. And of course, Motorola Solutions is working with Verizon. Are you still working with Nokia Siemens in terms of their base stations? And what do you think is the timing for the deployment of LTE within the Public Safety arena?

Yes, we are still working with Nokia Siemens. I think this process is going to be what I will describe as long-term and not necessarily linear. I think it's going to be lumpy. A lot of it has to do with funding. Everybody wants to have the ability to pass data over an LTE network that is robust and private and secure. It's a lot more efficient and lower cost than what they do today, where they are basically using cards in laptops over these public networks, commercial networks.

The issue is all about funding. The FCC and Congress are trying to move forward on this national broadband plan, $5 billion continues to be talked about. But it's just not something that it is apparent is going to be available in the budget for a couple of years. So I think up until this time, you're going to see trial systems out and essentially proving out the technology.

I'm very pleased with our progress. I think LTE as a technology is going to be, ultimately, pervasive in both the public safety as well as in the DoD market. And ultimately, our advantage, I think, in being in both of these, both tactical radios as well as public safety radios, is we are going to be able to develop integrated networks between tactical and LTE and public safety and LTE so that, from our customers' perspective the network traffic and how it's all being managed is just going to happen behind the curtain. They are not going to care, but it's going to seamlessly be able to move traffic over those networks but still give them the secure, private control of the networks that they need. I'm still very but which on the technology. But it's going to be a long, long road before it's adopted on any scale, in our view.

All right, well, thank you.

Michael French, Morgan Joseph.

Good afternoon, everyone, and Howard, good luck on your future pursuits.

On the subject here of the transition, Bill Brown has a lot of M&A experience, so it seems safe to assume that there won't be any change to the Company's acquisitive nature. So I'll go ahead and ask the question since you didn't mention M&A in the opening remarks. How important a consideration was that in selecting him for this role? And should we expect any changes with your outlook towards acquisitions in the near or longer-term?

I think that M&A was only one of a number of preferences in the requirements for the new CEO. It certainly was not at the top of the list. But it's a wonderful skill and experience that Bill has been not just doing acquisitions, but in integrating them. And I think that his focus in fiscal 2012, as we have said previously, will be on integrating acquisitions that we have, getting them fully up to speed both from a cost standpoint as well as driving revenue synergies.

In the longer-term, we certainly would expect acquisitions will continue to be, as they have been in the past, a part of our growth strategy, filling in holes for vertical markets, product or technologies or geographies. So I think all those are going to be positive, and certainly Bill's experience in those areas will be a great help. But don't think you should read into this too much. He was in the M&A corporate development job only for a few months at UTC. His primary background is in running businesses and growing businesses organically. But he's got a lot of experience in allowing acquisitions to fit and to fit effectively.

So it will be a great added value that he will bring to the Company by having that experience. But I don't think you should read into it that it's going to somehow change Harris's strategy or that the Board is going to go out and charge Bill with doing a big deal like the UTC/Goodrich acquisition. That's just -- that's coincidental and in fact hadn't even been announced when they were talking with Bill. So that was not why they went out and found him.

Very good, thanks, Howard. And a follow-up is on the NIE, the test for the Falcon III that's coming up in the fall. Can you discuss some of the capabilities they are looking for, how their radio is performing? And as I understand it, this is just a technical evaluation. They are not looking at economic considerations, such as cost of the radios. Is that correct?

Yes, that's my understanding, that the NIE doesn't really look at cost, although I think General Odierno's quote that I read clearly says that he is interested in cost and speed and capability. And I think that's where we win this game. We really are offering all three of those, no one else can do it.

In terms of the additional features, I think it's more of the same. I think it's very much about the network and the network effectivity. We will be able to use radios now from Harris at that NIE in the fall that will have both the SRW and the AN/W2 waveform. No one else is going to have both of those in the radio. And so we just have such a significant lead.

But I think it's just more of the same. The last one was their first NIE. Part of it is just getting, I think, a tempo of doing this a couple times a year. But I can't really speak to any specific requirements they have added over the last one at this point, Michael, so I'm just not aware of anything significantly different. But I know what we are going to be bringing are the lessons learned and continued enhancements we've made since the last one and the integration of the SRW2 -- SRW waveform into both the 117G and the 152.

Okay, thanks again, Howard.

Josephine Millward, The Benchmark Company.

A bunch of your RF orders were actually announced in October. Is there a reason why you are including them in your September quarter?

We're certainly not including October orders in the September orders book. We are talking about them because we think they are significant; they occurred after the quarter end. So when the order is booked is what determines what quarter it goes into. Sometimes -- in fact, in every case -- there's usually a gap of at least a few weeks between when we get an order and when the customer approves a press release, allowing us to announce it. So those don't always line up when we issue it.

It's normally weeks. As Pam says, sometimes it's longer. But we can announce an order in October, but the order may have been booked, received and appropriately booked in September; it would have been included in the first-quarter numbers. But we don't include anything in the quarter that doesn't meet our requirements as a bookable order, and that's got a pretty high threshold, and E&Y reviews that.

Okay, that's what I thought. So the $66 million Falcon III order for Brigade Combat Teams was received in September, but you didn't press release it until October?

Right.

Okay, great.

That's correct.

I was wondering if you can -- now that the government is operating under a CR again, can you comment on whether you are seeing any impact on your order activities so far?

I don't think we've seen anything immediately. We have tried to look at this every which way. We don't believe that a CR would have a meaningful impact on our fiscal '12 operations. We have tried to bake into our outlook what we think may be some impact. Now, it's always possible it could be worse. But I don't feel like today there is much downside for Harris Corporation if we stayed on a continued resolution for the rest of fiscal year '12. '13, '14, '15 -- there's lots of question marks out there regarding budgets and so on. So I'm not going to comment on that because I don't know what's going to happen any more than you do.

Bottom line is, I think our '12 guidance is solid and the continuing CR shouldn't have much downside impact this fiscal year. I think that, again, our level of diversification in programs, in customers and now across a number of government and commercial vertical markets should allow us to continue to outperform the market. Will we outperform at a level we are all happy with? I think that time remains to be seen, whether we do that. But I really like our position and it's much longer than it would have been if this had happened several years ago, where we were much more dependent only on a couple of growth initiatives.

Operator, I think we have one more person in the queue, and we'll be done.

Pete Skibitski, SunTrust.

Just a couple quick follow-ups -- I know you guys have won a large Veterans Affairs multi award ID/IQ called T-4. Is that on protest, or is that in the clear now?

I'm not aware that we have anything with the VA under protest.

Okay. And then the classified win in GCS -- could you just maybe characterize them? Are those space related?

No, I can't really talk about the details. Our work in classified generally has three categories. It's space systems, it's mission systems and it's information systems. And I think we are seeing strong progress in all three of those areas. So don't think it's any one particular area.

This part of our business has been a little cyclical, and we are very pleased to see it coming back. We have great long-term relationships with customers and our team's performance on these very, very difficult technologies has just been superior over time.

Great, thank you.

Thank you very much. And again, I want to thank all of you for your interest in Harris. And I hope that you will stay tuned. I think this Company has a very, very bright future.

Thank you, everyone, for joining us. And again, I'm sorry for the late start.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.