L3Harris Technologies Inc (LHX) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harris second-quarter 2012 earnings conference call. My name is Janeda, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today to Ms. Pamela Padgett, Vice President of Investor Relations.

Thank you. Good morning, everyone, and welcome to our second-quarter fiscal 2012 earnings call. It is so nice to be saying, good morning, instead of good afternoon. I am Pamela Padgett, and on the call with me today is Bill Brown, President and CEO; Gary McArthur, Senior VP and Chief Financial Officer; Dan Pearson, Executive Vice President and Chief Operating Officer.

Before we get started, a few words on forward-looking statements. In the course of this teleconference, management may make forward-looking statements. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information and a discussion of such assumptions, risks, and uncertainties, please see the press release and filings made by Harris with the SEC.

In addition, on our press release and on this teleconference and the 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, Bill, I will turn the call over to you.

Thank you, Pam. I want to welcome all of you to our second quarter fiscal 2012 earnings call. As you know, I came to Harris from United Technologies, where I've held a number of line and functional roles, including leading large global businesses from both US and Asia, and executing on a large number of acquisitions and divestures. I also spent seven years at McKinsey & Company working on a variety of strategy and operational improvement projects for a number of industrial companies.

While my background is more in the commercial than the government space, I believe my global experience, track record for M&A and post-merger integration, and operational excellence capabilities are all very relevant to Harris, and important in the current environment. Given the challenges we now face with constrained government spending, we need to take a fresh look at our strategy, and ensure we're as successful in the next decade, as we were in the last.

So while the purpose of today's call is to detail our Q2 results and outlook for the year, I would like to provide you a few initial thoughts and perspectives on what I've seen so far, and what I expect to focus on in the near term, recognizing it's still early, and I have much to see and learn. But first, I would like to quickly review some of the highlights of our second quarter results, turn it over to Gary to walk through the details of the financials, and then come back to share with you a few perspectives.

Turning to slides 3 and 4 in the presentation, Harris posted solid second- quarter results with revenue of $1.45 billion, and non-GAAP EPS of $1.22, both slightly ahead of the prior year. Orders were $1.2 billion, down 15% following a strong start in Q1, and we announced today that we received a very large $235 million Tactical Communications order from Australia in mid-January, after the quarter closed. The second phase of a $500 million multi-year modernization program.

GAAP and non-GAAP net income were lower, primarily due to the last of the expedited MRAP shipments in Q2 of last year. All segments reported sequential operating margin improvement, and cash flow from operations increased significantly compared to the previous quarter and prior year, supporting expectations for strong cash flow again this year. I'll turn it over to Gary to comment on segment results and guidance outlook. And then I'll come back with a few comments, before we open the call to questions.

Thank you, Bill, and good morning, everyone. Moving to segment results on slide 5, the revenue for RF Communications was $526 million, compared to $545 million in the prior year. Tactical Communications revenue was $391 million, declining 8%. Prior-year revenue benefited from the last quarter of expedited MRAP shipments to the DoD.

Excluding the $80 million of MRAP revenue in the prior year, Tactical Communications revenue increased double-digit, with international revenue more than offsetting the decline in DoD. International revenue growth was driven by major deliveries to countries in Africa and Asia.

In Public Safety and Professional Communications, revenue growth was excellent, increasing 14% to $135 million. Operating income was lower, as expected, compared with the prior year. Sequentially, operating margin increased from 31% to -- in the first quarter to 33% in the second quarter, improving as a result of the more favorable product mix, continuing cost containment, and lower manufacturing costs.

Orders for the segment totaled $268 million. Tactical Communication orders were $183 million, and backlog was $581 million. Book-to-bill for Tactical Communications was only 0.47. However, as Bill mentioned, the order from Australia gets us off to a strong start in Q3.

At the most recent Army NIE event, Harris' integrated wide-band networking capabilities successfully connected dismounted soldiers to senior commanders across an Army brigade combat team, using our 117G and the new 152A wideband handheld radios. The system continued to demonstrate Harris' leadership in wideband communications services, providing voice, data, and video in support of the Army's modernization efforts, and validated the maturity of our product offerings.

We continue to see demand for our products from all branches of the US DoD. In addition to the 117G opportunities for the Army, we expect later this year to be awarded a multi-year Falcon III ID/IQ contract for the US Special Forces, with a potential value of up to $400 million, and a 4-year 152 and 152A ID/IQ contract for JTRS [seizures] next-gen with a potential value of up to $500 million. The domestic 12- to 18-month opportunity pipeline remains healthy and well-funded, and as of the end of the quarter, was $1.2 billion.

International opportunities continue to be strong, led by several multi-year modernization programs. Let me give you a couple of examples. In the quarter, it did include a $70 million order from an undisclosed country in Africa for the second phase of this potential $400 million multi-year program, bringing total orders for this program to $257 million.

Another example is $11 million order from the Brazilian Ministry of Defense for Falcon II and Falcon III radios, as part of a multi-year modernization program having a potential opportunity in excess of $300 million. Orders to date in this rapidly emerging market total $29 million. In Australia, the large order we received was for phase 2 of a potential $500 million Department of Defense JP2072 multi-year modernization program. This is the second order under this program, bringing total orders to date to $347 million.

These multi-year modernization programs, when combined with similar programs in Iraq, a country in central Asia, and Mexico, and additional sales that come from over 100 other countries around the world, continue to position us well in international markets.

At the end of the quarter, the 12- to 18-month opportunity pipeline for international was $2.3 billion. Adding the $3 billion pipeline for public safety to the $3.5 billion for tactical communications, the total 12- to 18-month pipeline for the F -- RF Communications segment is a healthy $6.5 billion.

Now, let me move to Integrated Network Solutions, so please go to slide 6. Second-quarter revenue in Integrated Network Solutions increased 6% to $526 million, primarily as a result of the acquisition of Schlumberger's global connectivity services business, and strong growth in Healthcare.

On an organic basis, revenue declined 4%, driven primarily by a significant decline in IT services revenue, resulting from the lost Patriot program, lower IT spend coming through government ID/IQ contracts, and contested program awards.

While non-GAAP operating income both was flat year-over-year, sequential improvement was driven by lower losses in Cyber and Healthcare, and improving performance in Broadcast. At Broadcast, the team and our manufacturing partner did an excellent job mitigating the impact of the Thailand flood to approximately $5 million of revenue and $2.5 million of profit, which are now expected to book in Q3. And at Broadcast revenue and operating income were both up year-over-year.

In Healthcare, revenue growth was strong and driven by continuing strength in the government market. While our entry into the commercial healthcare market has ramped slower than expected, opportunities are starting to firm, and we're expecting continued improvement in the back half. We still expect Healthcare solutions to be profitable for the year.

In CapRock communications, organic revenue declined 5% due to the installation of a large subsea tsunami warning system in our legacy maritime business in the prior year. Pro forma revenue for our recently acquired companies increased 5% year-over-year, led by excellent growth in the government market for managed satellite communication solutions.

The leading indicators for this business, such as oil and gas capital spending, rig count, and demand for bandwidth, are all up, and we expect double-digit revenue growth in the back half of fiscal 2012.

Losses in our Cyber initiative have continued. Our plans to provide trusted cloud hosting for government agencies, and our distribution partnership targeted at the enterprise market are materializing slower than expected. We're evaluating alternative corrective actions, with the plan of getting back to you within the next few months regarding any steps we may take.

Let me now move to Government Communications systems, going to slide 7. Revenue in the Government Communications systems segment was $422 million in the second quarter, flat with the prior year.

Good growth in classified programs and commercial satellite reflectors was offset by declines in DoD programs, and the completion of FDCA. Operating income was $63 million, up 6% as a result of outstanding cost performance on fixed-price programs, along with a favorable product mix, continuing to drive our above-industry average operating margin.

High bid volume generated during the quarter is expected to turn into back half awards, now that the government budget is set. Wins in the second quarter included being selected as part of the Boeing team to continue providing communications capability for the Ground-based Midcourse Defense contract, GMD.

Our existing diversified program base, large opportunities ahead in focus areas such as the FAA, and the government-stated priorities in ISR, have the business well-positioned for the expected tougher government spending environment ahead.

Now let me talk to a few of our financial highlights, going to slide 8. We ended the quarter with $387 million of cash on hand. Cash flow from operations was $199 million, compared to $94 million in the prior year.

All three segments generated positive operating cash flow. Operating cash flow is especially strong at RF Communications, where as expected as compared to the prior quarter, day sales outstanding improved nearly 4 days, and inventory turns by 5 -- by 0.5 turns, as a result of a full quarter of manufacturing and shipments at the new facility. Free cash flow was also strong at $159 million. Our effective tax rate for the quarter was 34.1%.

Moving to fiscal 2012 guidance, as shown on slide 9, consolidated revenue is now expected to be about $6 billion, and non-GAAP earnings per share remains in a range of $5.10 to $5.30 per diluted share. In RF Communications, revenue is now expected to be 6% to 8% lower than the prior year, including a 12% decline in tactical communications. Public safety is still expected to grow double-digit. Segment operating margin is now expected to be about 33%.

In Integrated Network Solutions, revenue is now expected to increase 9% to 11%, with organic growth of flat to 2%. Non-GAAP operating margin is still expected to be between 5.5% and 6.5%. In Government Communication systems, revenue is now expected to be 1% to 3% higher than fiscal 2011, with operating margins of about 14%.

Non-operating income in the second quarter was approximately $3 million, as a result of royalty income. We expect additional royalty income in the third and fourth quarters, resulting in $10 million to $15 million of non-operating income for the year.

In short, we're maintaining our EPS guidance, as lower expected operating income in RF Communications and Integrated Network Solutions is expected to be offset by margin improvement in Government Communication systems, higher non-operating income, and lower expenses from cost control initiatives. The guidance provided does not include any actions we may take with our cyber initiative.

We continue to expect cash flow from operations to improve each quarter in the back half, and we're maintaining our guidance of $825 million to $875 million. Our outlook for the full-year non-GAAP tax rate remains at 33%, with the tax rate for any given quarter varying up or down for discrete tax events. With that, let me turn it back to Bill.

Clearly, we're in a more challenging environment with constrained government funding. But we have some very strong competitive positions. A smaller, more nimble fighting force will require more advanced information and communications capabilities, as well as stronger international coalition partners, both of which clearly play to our strengths.

Our tactical communications business has been wildly successful over the past decade, and I like our position today. We have a unique commercial business model that fosters speed and innovation. The wideband modernization of tactical networks in the US is under way, and our products are performing well, both on the battlefield and in test evaluations. And we're winning the large multi-year opportunities in the international arena.

Our lead in the marketplace is exceptional, and what's made us successful in the past will continue to do so in the future. And that is excellent execution on the things that we control -- the technology, the costs, the quality of our products, and the responsiveness of our organization to our customers. And I'm thrilled with the team we're fielding to get that done.

In Public Safety, I kind of like our odds of being David against Goliath. A lot of good work has been done to improve our products and systems, but we need to broaden our offering, drive technology adoption like LTE, develop a stronger, more robust distribution channel, and reduce our cost structure.

We have noise cancellation, software-defined radio, and deep RF systems expertise, which we can leverage from a tactical radio business, and the war fighters who loved our tactical radios on the battlefield are now the first responders using our products stateside. The market is large in North America, and developing rapidly in places like Brazil, and I'm bullish about gaining share and winning in Public Safety.

In Government Communications, we have very good balance across the defense, national intelligence, and civil sectors, above industry-average margins, and a number of multi-year franchise-type programs.

This is a business with truly innovative technologies, led by a team that knows how to execute well on large complex programs like operating the FAA's air traffic control telecom network, where every single day, 65,000 flights arrive safely, using our highly secure and reliable network that operates at very high performance standards across more than 4,000 locations.

And I have learned that our work with the FAA is a great calling card with potential commercial customers. And I'm excited about continuing to explore opportunities to apply this, and other technologies in the commercial space.

In Integrated Network Solutions, our strategy, which was developed to counterbalance the anticipated slowdown in government spending, remains a work in process. In IT services, we have a good cost structure and solid margins, but like everybody else, we're facing budgetary headwinds. We have an excellent team in place that is quickly adjusting costs to match declining volume in order to protect our earnings, and they are executing very, very well.

In Broadcast, we bought several companies over the years, which were never fully integrated. While we continue to see good traction on the top line, our cost structure, driven by complexity, lack of productivity, and growth investment, isn't why we need it to be. And it's preventing us from achieving acceptable returns. Our team is now laser-focused on developing a strategy for this business that maximizes shareholder value.

In Cyber, we know there's a large growing market for cloud computing, and we have the technology and expertise to be an important player in it. But it's becoming clearer that customers, both government and commercial, currently have a preference for on-premise versus off-premise solutions.

As this market evolves, it's also becoming clearer that customers don't place additional value on trust, and are unwilling to move their most mission-critical applications to the cloud before less sensitive applications are thoroughly tested and vetted in a cloud environment. As a result, the capital-intensive facility that we built in anticipation of rapid growth in off-prem hosting remains highly under-utilized and a significant financial drag. Resolving this issue, while crafting a new winning Cyber strategy, is one of my top near-term priorities.

In Healthcare, we expect to end the year with over $200 million in revenue from a standing start four years ago. We're continuing to see a lot of traction in our government business, where significant investments are being made to wring out inefficiency and improve patient outcomes through information technology, like at the Veterans Administration and in state health information exchanges.

On the commercial side, we're seeing an expanding pipeline of opportunities for the second half, but we need to clearly articulate a differentiated strategy to win longer term in this space. The commercial and the government markets are very, very different, and the important question for this business is whether our skills and successes in the government arena can translate into the commercial environment.

In CapRock, which you'll recall is the combination of three recent acquisitions totalling almost $1 billion of investment, we're seeing good market transaction in each of our key verticals -- government, energy, and maritime. CapRock is the largest satellite bandwidth provider in the world, other than the US government, and will benefit from the explosive growth of bandwidth demand for applications in some of the harshest and most remote locations in the world -- offshore oil platforms, undersea cabling, ocean-going vessels among others.

This business has clear potential for sales growth and margin expansion, and while we're still in the early innings of post-merger integration, I like our prospects in this space.

Overall, I see opportunities to improve on post-merger integration, and I expect in the environment we face to be relentless in reducing cost and improving productivity throughout the Company. And while our cash flow was good, I see opportunities to make it even better, and to encourage more scrutiny in our capital spending.

Acquisitions will clearly play a role in executing on our long-term strategy, but we don't have any acquisition of consequence on the near-term horizon. In an environment where our top line has been more difficult to predict, we'll be focused on what we already own, and what we control. And finally, we'll continue to be conservative on cash deployment, with a focus on rewarding shareholders through dividends and share buyback, and maintaining a healthy balance sheet.

In a nutshell, we'll stay focused strategically. We'll pay a lot more attention to costs and cash. We'll keep working on gaining share through technology innovation and satisfying customers, and we'll make decisions like owners, because that's what we are.

I'm excited to be part of this great Company. We have a terrific team with high ethical standards, a strong technology foundation, and a solid financial position. And with that, I would like to now ask the operator to open the line for questions.

Thank you.(Operator Instructions).Your first question comes from the line Gautam Khanna with Cowen and Company. Please proceed.

Thanks, Bill. I appreciate it. I just wanted to just get your thoughts on two issues, One, is you mentioned broadcast maybe helping to maximizing shareholder value there. Are there any other parts of the portfolio there that don't align well with kind of the strategies, three to five years out? Secondly, on the cash deployment, you mentioned buybacks and dividends taking priority over M&A. What do you think the optimal leverage in this business is? I know right now you are at net debt to cap of 48% or thereabouts. Do you want to pay down some debt before you do that, or do you think you're comfortable with an elevated amount leverage going forward? Thanks.

Gautam, thank you for the questions. And let me address the first one out of the gates. We're taking a fresh look in the environment that we're in, across all of our businesses, with a special focus on cash, on costs, some of the structural costs. Some of the structural cost reductions will come through some investments, which we'll know over the coming months. We'll give you some insights, as we go through the quarter if there is anything notable that needs to be released, where at our third quarter call later in the year. But to comment on what is in or out of the portfolio, we're taking a fresh look at all of the pieces, and that includes all the business that we happen to be in today.

On the side of cash deployment, we don't have any acquisitions that are on the near-term horizon. But clearly, acquisitions will play an important role in our longer-term growth strategy. Whether that still remains to be three to five years out still remains to be seen. We are trying to figure out, just what we are going to do deliver the balance of the year, and the guidance that Gary and I have given you today. In the near term, we do have some debt that we will pay down. It's mostly short-term commercial paper. And we'll be very prudent how we deploy the rest of the cash towards share buyback and dividends. And we'll have more to say about that in the coming months. I don't know, Gary, if you have anything you want to add to that?

Well, I'll just add a couple of comments, Gautam. We're very comfortable with a debt to total capital in the mid-40s to as much as 50% range. Right now, we have every expectation that with paying down commercial paper, as Bill mentioned, we'll be back in the mid-40s by year-end. And we haven't ruled out additional share buyback or increasing our dividend. We've been targeting a dividend of about a 20% payout ratio, that's yielding about a 2%, 2.8% yield currently. We're totally comfortable in that 20% to 25% payout ratio range, and so we'll be looking at that, go forward as well.

Okay. Thank you.

Thank you, Gautam.

Your next question comes from the line of Carter Copeland with Barclays Capital. Please proceed.

Good morning, Gary and Pam. And welcome, Bill.

Good morning, Carter.

Good morning.

Just some questions about the guidance, it's probably one best handled by Bill and one by Gary. Within the segment level detail, Gary, you're obviously in the back half implying sequential margin improvement in RF and INS. And some contraction relative to the numbers you called out in government communications, which I think are -- this is performance-related, as you called out in the release. But I wondered if you might provide a little color in what's driving the expansion, both in INS and in, and in RF. And then for Bill, as you look at the guidance, I know this is -- maybe it's too early to say with any sort of certainty, but as you look to the last two quarters -- and you've only been here for this one, we've gone sort of two consecutive quarters where we've lowered the outlook for three segments into the top line. And I'm wondering, how much of this quarter's change, given the environment, is reactionary versus sort of precautionary, given your sort of fresh look at the business over the last couple months. Thank you.

Okay.

Do you want to take the first one?

Yes, I'll take the first one, and Bill can jump in. With regards to better margins at both RF Communications and Integrated Network Solutions, part of that at RF Communications is, is we talked about is continuing to control costs, lowering manufacturing expense for the products. And we have put in place a real initiative across the Company to maintain costs in the back half, which are going to benefit RF, as well as integrated network solutions. With regards to government communication systems, they are just doing a great job of performing. The award fees are very high, and we're seeing really good results throughout that business. And then with the non-operating income, as we talked about picking up in the back half, that will help as well. So overall, we're very comfortable with the guidance and feel good about what we've done.

On your second question, Carter, related to the first one as well, and that's our degree of comfort in the guidance for the year, and sort of the look we've had the last 90 days. Revenue has tightened down a little bit, and that's because of the pace of the orders that have come in. We're now at about $6 billion in the year. Gary described where that's coming from, and the sources of that. That -- we were at $5.10 to $5.30 with EPS guidance for the year. We're still in that same range. Obviously, the slowdown in RF and INS does have an impact on our guidance. That was about $0.16 or so, since the last time we released earnings. We have a bit of a pickup in GCS, in the government business, about $0.05.

That business is performing well. Growth has been pretty solid. We had extraordinarily good margins in the quarter, and we think it's going to be very good margins for the year. And as Gary just pointed out, we are picking up about $0.06 or $0.07 in non-operating income in the year, that was not necessarily factored in prior guidance. We also are looking at what we're doing at taking out some expenses across the company, in particularly at the corporate office and headquarter expenses and eliminations. That was about $0.03. So net-net, we've seen some reduction in the RF and the INS business, but it's offset by some other components, and we think we'll deliver in the $5.10 to $5.30 range for the year.

Thank you for the color, gentlemen.

Sure.

Your next question comes from the line of Noah Poponak with Goldman Sachs. Please proceed.

Bill, the Company -- I guess at it's investor day almost a year ago provided some long-term targets, compound annual growth rates for each segment on the top line, margins for each segment, as well as total earnings for the Company. And I wondered if you would speak to your view of those long-term targets?

I'm aware of the targets that were described a year ago. And frankly, Noah, in the last 90 days and certainly over the next six months, we'll be focused pretty aggressively on delivering against the guidance we've given you today. We'll have more to say at the third quarter release, about FY '13. We'll have an Investor conference in early June. We'll talk with a little bit more color on FY '13. But right now, my focus is delivering on FY '12, and the guidance we're giving you today.

Okay. I mean, is there anything in particular within those targets that you view as unachievable? I mean, I guess we're all particularly focused on RF, where the -- or the long-term forecast there, was an upper single-digit CAGR, versus now we're looking at a negative growth rate in '12. Maybe specifically do you still see that achievable in RF?

I would rather not comment on where we might be two or three years out in any particular business. The only comment I would make is, the one thing that I have seen and we're describing to today, is the progress that we thought we would make in the cyber business is not materializing as we had first thought. But again, anything -- any commentary beyond where we are in FY '12, I think is going to be beyond this call today.

Okay, just one other one, are there any major re-competes anywhere in the business over the next year that are worth highlighting?

Why don't I turn that to Dan Pearson.

No, none that we have on this horizon.

Okay. Thank you very much.

Thank you, Noah.

Your next question comes from the line of Michael Lewis with Lazard. Please proceed.

Good morning, and thank you, and welcome, Bill.

Thank you. Good morning.

My question is with regard to tactical sales. If we could talk a little bit about the, in comparison to Q2 '12 versus Q2 '11, breaking out the US versus international portfolio by [both] revenue, in order so we can get a sense of where that segment, where that sub-segment sits right now, where specifically the US market is, that would be helpful?

Let me first comment on where we think we'll be for the year, and then I'll let Gary offer some comments on where we ended up in Q2. For the year, we do expect as we have indicated before that, that the international business on orders on revenue will be slightly ahead of US DoD on the course for the full-year. We have seen international activity pick up over the last few years. And that's certainly going to be an important driver this year, as US DoD softens a little bit. Gary, any comments on Q2 specifically?

Yes, not much more than what I said. Obviously, we did see that if you took out the $80 million of MRAP revenue that was in last year that we didn't benefit from this year, the business did grow. And it was basically the decline in US was offset more than that, with the growth in the international business. So we saw a really good growth international. We saw a little bit of a decline in the US market, which was offset by international. And again, if you take out the MRAP, it was good growth overall for the tactical communications segment.

Okay. So the way I hear this, is that it sounds like the US market is still doing relatively well, as we back out the MRAP sales from the year-over-year comparable?

I think that's fair. As we mentioned, we have lots of ID/IQ contracts coming up, that we have lots of opportunities. Overall, the business is always lumpy on orders. We didn't have an outstanding second quarter. We had a very strong first quarter. And we have expectations for good third and fourth quarters in the year.

Okay. Thank you so much.

Thank you, Mike.

Your next question comes from the line of Rich Valera with Needham & Company. Please proceed. Please proceed.

Thank you, good morning. Just wonder if you could give us an update on your discussions about getting your ANW2 wave form into the JTRS repository, if there's any update there?

We have, we have initiated conversations with US government around granting government purpose rights for ANW2, and those conversations, those discussions are still ongoing.

And any other color you can give us on what happened at the full NIE? It sounds like you were pretty happy with your performance. Any potential implications from your performance there in terms of potential new ID/IQ vehicles perhaps down the road?

What we've heard anecdotally, and then through various sources is that we performed very, very well in the NIEs, and we have been invited back to the April NIE. And any specific stand that you want to offer on any take-away--

No, Rich, I think we're very happy with the summary report. The last one's not out yet, so it would be all anecdotal, but we have done very, very well. And as you saw with the retiring vice chief, he did specifically mention, how that it, that helped us get that 117G order. We're going to have over -- around 400 117Gs and 100 hand-held's, and a lot of high capacity line-of-sights at the one in April. So we're really going to be expanding the network, in the integration we're doing there. So we're pretty excited about how it's going.

Okay, thank you.

Thank you.

Your next question comes from the line of Joe Nadol with JPMorgan. Please proceed. Hi, thanks. Good morning, everyone.

Hi, good morning, Joe.

I have a couple. Just on the, on the cyber, Bill, how -- if you guys could quantify how large the loss is there, so we can kind of think about what, as you eliminate that loss or reduce it significantly, what the profit opportunity might be there? And then in terms of the facility, it was a large investment. Is there opportunity for repositioning that, either within Harris or outside of Harris, and just as you think about recovering that, what are the opportunities? The other question is just on the government com margins, they were great. I think this was the highest quarter ever, at 14.9%. Is there -- seems like there's some positive [EFC] adjustments in there that are helping. Gary, can you quantify those? And is there any commercial off-the-shelf mix starting to come into this, or is this just all fixed price, normal government pricing? Thanks.

Okay. Thank you, Joe. A number of components there. Let me start with cyber for the year. In Q1, we lost about $10 million. We were on a run rate for the year between $30 million and $40 million of losses, is the expected losses on the cyber business. I think as you know, we've mentioned before, we invested in the Harrisonburg facility just under $200 million. Of course, we're looking at all available options internally to find what we can do to best maximize the value of that asset that we have. But we have made no determination, as to what we're going to do in the disposition of it at this point. And as I mentioned earlier, as we make decisions, we'll certainly communicate with investors as to what we decide to do. But about $200 million was the total investment.

Okay, and going to government systems communications, let me just talk about the 14.9% was obviously outstanding operating margins for the quarter. Several things impacting that, award fees, as we said, have been outstanding across the business. We have been, if you remember, in commercial reflector in years past, we had some big write-offs in that area. We learned from that. We are the best in the world at building some of the largest reflectors. And margins in that business, it's a fixed price business, have been excellent, and we've seen a lot of opportunity in space reflector, in the commercial and on the government side. So that business is contributing very well. We also have our wireless products group, and our high band networking radios that are more products in natures, those carry higher margins. And we've seen good sales for those products that are helping.

And we've seen a real uptake in classified, which has always been a higher margin business for us, because of the work that we do. So all of those are benefiting the high margins, that we're seeing in the government communication systems business.

Were there any reversals of any of those write-offs in the reflectors business during the quarter?

I wouldn't call them reversals. We basically had some reserves on programs, that because of better execution, we're able to see those go away and be mitigated, but nothing in the reversal form.

Okay, thank you.

Thank you, Joe.

Your next question comes from the line of Mark Jordan with Noble Financial. Please proceed.

Good morning, gentlemen. I guess, first question relates about your discussion of pipeline. I believe you phrased the pipeline for both international and DoD as a 12 to 18 month pipeline. I think on prior calls, it's been referred to as a 15 month or 5month pipeline. Is there a difference in the way you're looking at it? Or is this just a change in terminology, but it's basically the same roll-up methodology being used? And then sort of a second related question, the ID/IQs that you're receiving, obviously they are sole source for your specific products, but are -- is there any other competitive product out there, that could have addressed the needs of those two customers?

Well, let me answer that. The first one with regard to your question, it's really the 12 to 18 month is no different than how we've looked at it before. 15 months was just the midpoint.

-- flip flopping--

But it is no difference on that. And then with regards to your second question, just repeat it so I make sure I got it right.

Well, the ID/IQs are obviously for specific radios, which are yours, so the assumption obviously that those are sole source. The question was, is there a competitive product in the marketplace that could have addressed the needs of this customer?

Well, let me talk to the [CISR] one, because in the past, that has been competitive. We did compete with Talus on that for hand-helds, which were -- our offering was the 153 and 152A.I would expect that to be competitive as we go forward as well. We have been winning the majority of those contract awards because of the performance of our product. The 152A is the only wide band networking radio in the market. So depending on how they write the specs it could be potentially sole sourced. But if they write it in a general way, we would be competing against Talus on that. The US special forces, I know that we are probably the only product out there, but I wouldn't say that there isn't other competition, because the DoD is always trying to promote competition.

Thank you very much.

Thank you.

Your next question comes from the line of Chris Quilty with Raymond James. Please proceed.

Good morning. I had a question concerning last week's sort of preview on the FY '13 budget. One of th issues that, I think for the tactical radio business is the expectation is, that they are going to reduce land forces by about 100,000 troops, or 13%, which obviously means less demand for radios. On the other hand, the document sort of obliquely talks about increasing investments in communication. So I was just looking for your thoughts on whether, that's a push in terms of those two offsetting? Or do you think it's some near-term weakness with longer-term upside, or how do you think that might play out?

I would say that the guidance that we've given you today through the balance of FY '12, is consistent with whatever we've heard in both the FY '12, and previews on the FY '13 budget as well. And there are some things that we've seen in the FY '13 look, that work in our favor. The emphasis on Special Forces happens to be one. And we do know there are some things that might give us a little bit of pressure, and that's the declining troop count, 100,000 both between the Army and the Navy. But beyond FY '12 and our guidance for today, we're still trying to sort through, waiting to see specific line item detail coming out of the budget.

Chris, it's Dan. I think from that perspective, again if you look at the obliqueness as you've mentioned it, the mobility, the force -- not just the structure and the number, but the mobility aspect of it, it's going to play to our advantages on wide band networking. So my view of that it's kind of a push right now, until we get more specifics and see how it's going to play out when the President comes out with it.

And, Dan, you had mentioned there's no big re-bids, but what are beyond the FAA data com, which I think is June?

Yes, but it's not a re-compete. That's a new one.

Yes, and I was going to say besides that, what are the other new opportunities you'll be looking at in the next 12 months?

Well, the big ones in GCSD will be data com, which has been bid. And we're doing the, also the proposal now for next generation voice switch, so which FAA is very big right now. There is some interesting classified work going on, but those are really the biggest ones. The FAA is, again, the recap for next-gen and some classified things. But other than that, and keep funded on [GOSAR] and things -- and I don't think there is -- what I call the big critical pursuit in GCSD -- [CISR] for Dana, is the -- the ID/IQs will be big for him. And as you know, we've got some very good international opportunities continuing to play out. Those are really the big ones.

Got it. Thank you, gentlemen.

Thank you, Chris.

Your next question comes from the line of Larry Harris with CL King. Please proceed.

Yes, thank you, good morning, and welcome.

Thank you, Larry.

I was interested in the announcement recently that you set up a final assembly facility for tactical communications in Brazil. I believe, a number of years ago you had one in the UK. Are there plans perhaps for additional facilities in other locations? And I assume this would help your international sales process. Could it also help reduce the cost of manufacturing?

Well, we haven't made any decisions to set up any other manufacturing facilities outside of what's been announced to date. As you know, we made a very large investment in Rochester to upgrade our facilities, to move from three factories into one, which I've seen. It's truly a world-class state-of-the-art facility that we're very, very proud of. And outside of this newest line in Brazil, we don't have any other plans to establish anything beyond that.

Yes, Larry, this is Dan. We would only -- we do that when the national funds require us to go do that. It is obvious that we would like to be an exporter from Jefferson Road, but the same time, large countries and large opportunities, national programs, they require that. So we'll look at them case by case. None more on the horizon that we see right now.

Okay, thank you.

Thank you, Larry.

Operator, do we have another question in the queue?

We do have a question from the line of Josh Sullivan from Sterne Agee. Please proceed.

Good morning. Thanks for taking my question. I know you had mentioned that the tactical backlog would benefit from international this quarter, but what about the public safety side of the business? How is that market of backlog maturing, both domestically and internationally?

This is Gary responding. Most of the backlog opportunity is in North America. Internationally, it's specific to countries that have the APCO P25 standard that we have opportunities in. And in North America, we're seeing a very strong backlog. I'm not going to get into specifics, but we said, it's about $3 billion. That's pretty consistent with where we were last time I think we talked. And there are some opportunities that are pretty near end, that we expect some announcements on. But overall, the backlog is good. And we talked about our growth of 14% in the quarter was outstanding, and the business is today very, very competitive with our largest incumbent. And we feel very good about the opportunities ahead.

Great, thanks.

Your next question comes from the line of Gautam Khanna with Cowen and Company. Please proceed.

Yes, I wanted a couple of clarification points. One, when you mentioned the $80 million of MRAP in the prior year period, does that compare to zero this quarter, or is there any recurring kind of spares or logistic tail to that?

It was effectively zero this quarter, $80 million a year ago.

Okay. The Australian order, and maybe just more generally on international RF business, can you comment on kind of directionally the margin, how they compare with the US DoD business?

I'll take that one. This is Gary. Gautam, the margins have been pretty consistent. Obviously, when you take into consideration there's a commission as well. But when you put the commission in with the higher margins that we typically get for international, they are not that much different than what we have received in the US marketplace.

Okay. And then follow-up on Joe's question about the government com margin, could you maybe quantify what the award was added, what the margins may have been ex the award fees? Unusual award fees?

I would probably have to get back to you on that, Gautam. I don't have that exact dollar amount in front of me. But we could sure get you the detail and get it to you, if you need it over the -- in a call.

Yes, I guess maybe you can comment now just directionally, where do you think margins over time move in that segment?

Well, we've given guidance for this year that they will be around 14%. I think in talking to the team, and the nature of our business being the cost plus, fixed price kind of 50%-ish in each of those, we still think 13.5% is a very good margin for the business. Depending on the product mix, if we're selling more of the high bandwidth network radios, the WPG products, we get either reflector business, maybe it's a little better than that. But I think overall, you should consider this business in that 13.5% kind of range, 13.5%, 14% is very good performance.

Okay, thanks a lot.

Operator, we have one more in the queue, and I think that does us.

Your next question comes from the line of Carter Copeland with Barclays Capital. Please proceed.

Yes, thanks. Just a quick follow-up on RF. I sort of remembered the expedited MRAP orders of a year ago, sort of limiting the capacity that you had to ship international. And I wondered, this uptick we see this quarter, on a kind of year-over-year basis for international, if there's any sort of element of a catch-up associated with that, that we should be considering, as we build our models for next year? Or is this a base level of business that's sort of we could build upon?

Yes, Carter, this is Dan. No, I don't think there will be any issues with that. The factory is up and fully running. And some of these programs are not quote, unquote, expedited in the sense-- they will be at a more delivery schedule, so I don't think we have any more issues with that.

Okay, great. Thank you.

Thank you, Carter.

All right. Thank you, everyone, for joining us this morning. We really appreciate it.

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