L3Harris Technologies Inc (LHX) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 Harris earnings conference call. My name is Jeanette, and I will be your operator for today. At this time, all participants are in 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 for your host today, Ms. Pamela Padgett, Vice President of Investor Relations. Please proceed.

Hello, everyone. Good morning. Welcome to our third-quarter fiscal 2012 earnings call. On the call today is Bill Brown, President and CEO; Gary McArthur, Senior Vice President and Chief Financial Officer; and Dan Pearson, Executive Vice President and Chief Operating 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 for the SEC. In addition, in 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 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 turn the call over to you.

Thank you, Pam, and welcome to our third-quarter fiscal 2012 earnings call. I will quickly reviews some of the highlights of our third-quarter results, turn it over to Gary to walk through the details of the financials, and then come back to you with a few comments before opening the call to questions. Turning to Slides 3 and 4 in the presentation, Harris posted solid third-quarter results with orders, revenue, and non-GAAP earnings all higher compared to prior year. Revenue increased 4% to $1.48 billion and book-to-bill was greater than 1. Non-GAAP EPS of $1.39 increased 18% over the prior year and was driven by operating income growth at RF and government communications, nonrecurring royalty income, and a lower share count from first-quarter repurchases.

On the last call, I said we were going to be conservative on cash deployment with a focus on rewarding shareholders. We've resolved a significant financial drag from the cyber hosting facility and completed a thorough review of our business portfolio. And we made good progress on all three fronts. The Company continues to generate strong free cash flow, and at the end of February, we increased our dividend by 18% and raised our target payout ratio from 20% to 25%. We also announced in the third quarter that we are exiting the underutilized cyber hosting facility, and the process to divest the assets is progressing quickly.

Our business portfolio review is well underway, and today we are announcing the decision to divest broadcast communications, which we believe is no longer aligned with the Company's long-term strategy. The combination of a lack of effective integration by the Company over the last decade, coupled with the market outlook that is not as promising today as once believed, led us to conclude that the best -- that the business is best owned by another party. Although broadcast is no longer core to our Company, we believe the business has the potential for strong growth and margin expansion, is led by a solid leadership team, and has long-term value for someone who brings a focused approach to the broadcast and media market. It is our intention to use the proceeds to return cash to shareholders and invest in growing our core businesses.

Also as we said on our last call, the slower government spending environment requires increased attention to operational excellence in lowering cost, including a sharper focus on supply chain, factory and field costs, overhead rates, and employment levels. The guidance that Gary will give it a moment reflects the cost reduction actions we are taking in the first quarter that will benefit us in FY '13. I will turn it over to Gary to comment on segment results and guidance outlook, and then I will come back with a few comments before we open the call to questions. Gary.

Thank you, Bill, and good morning. Moving to segment results on Slide 5, revenue for RF communications was $538 million, compared to $550 million in the prior year. Tactical communications revenue was $398 million and declined 8%, driven by a significant decline in DoD. Although down slightly due to transitioning to Phase 2 of the Australia order, international revenue was at a healthy level and supports the strong double-digit growth expected for fiscal 2012. In public safety and professional communications, revenue growth was excellent, increasing 18% to $140 million with strong growth in both products and programs. Operating performance for the segment was very good with operating income increasing in spite of lower revenue. A favorable product mix, cost containment, and lower manufacturing costs all resulted in a higher operating margin of 33.8%, up from 32.5% in the prior year. Orders for the segment totaled $629 million and book-to-bill was 1.17. Tactical communication orders were $534 million; book-to-bill was 1.34, and backlog was $717 million.

We continue to see demand for our products from all branches of the US DoD. From the US Marine Corps, we received a $64 million order for Falcon III radios, and we were awarded a $49 million IDIQ contract to provide Unity Multiband Land Mobile Radios to Marine Corps first responders. Following the close of the quarter, Harris was awarded a five-year $400 million IDIQ contract from the US Special Forces with an initial order of $39 million for Falcon III handheld radios with wideband networking. We also expect an award later this fiscal year for the four-year potential $500 million JTRS [seizures] NextGen IDIQ contract for Falcon III radios, including handheld's with wideband networking. Late yesterday, the joint program executive office awarded Harris a $26 million IDIQ contract to provide the soldier radio waveform software in-service support for the next enterprise domain. This is a key strategic win for Harris.

The domestic 12 to 18 month opportunity pipeline remains healthy and well funded at $1.1 billion versus $1.2 billion at the end of the second quarter. International orders in the quarter were excellent, with the largest from Australia, $250 million for Phase 2 of the potential $500 million modernization program, and bringing total orders to date under this program to $362 million. Other International orders included $51 million from Iraq and $26 million from Jordan. International opportunities continue to be strong, and as of the end of the quarter, the 12 to 18 month opportunity pipeline was $2.1 billion. A public safety to 12 to 18 month opportunity pipeline was $3 billion.

Let me now turn to Slide 6 and discuss innovative network solutions, which excludes cyber-integrated solutions, now reported as discontinued operations. Third-quarter revenue increased 8% to $500 million as a result of the acquisition of Schlumberger's Global Connectivity Services Business. On an organic basis, revenue declined 1%. Strong organic growth in CapRock and healthcare solutions was offset by declining revenue in IT services and in broadcast communications. Non-GAAP operating income decreased 17% year-over-year to $29 million and operating margin was 5.8%. Strong operating improvement in CapRock was offset by weaker operating results, again in healthcare and broadcast. Organic revenue growth in healthcare solutions was 47% and was driven by continuing strength in the government market. Government funding for improvements to electronic health records, and interoperability remains healthy with new contract wins in the quarter totally $100 million from the VA and the DoD.

Progress in commercial health care continues to be slow, using a $5 million operating loss for health care. As a result, it's unlikely that healthcare solutions will be profitable for the year. In broadcast communications, weaker demand in North America and longer international sales lead time led to a 14% decline in revenue to $111 million and resulted in the non-GAAP operating loss of $4 million, compared to operating income in the prior year of $2 million. In IT services, revenue declined in the quarter resulting from the loss of the Patriot program and a tough government IT spending environment. CapRock had an excellent quarter all around. New contract wins in the government and energy markets resulted in organic orders up 20% and organic revenue up a very strong 14%. Non-GAAP operating income was up more than 2x. The majority of the integration effort is nearing completion, and cost reductions are showing up in the bottom line. Also in CapRock, following the close of the quarter, Harris achieved a significant new win in the maritime market, a five-year contract award with Royal Caribbean to provide global communications services onboard 34 of its ships.

On April 27, our Board of Directors approved a plan for the divestiture of broadcast and preparations to initiate a sales process are now underway. In connection with evaluating strategic alternatives for broadcast communications, we booked a $407 million non-cash after-tax charge to write down goodwill and other long-lived assets. Our non-GAAP results in the third quarter exclude the charge, and beginning in the fourth quarter, broadcast communications current and prior period results will be reported as discontinued operations. This morning, we filed an 8-K providing you with pro forma historical information, excluding broadcast from our fiscal 2011 and 2012 results.

Moving to Slide 7, revenue and government communications increased a very strong 9%, reaching $471 million. Double-digit revenue increases in civil and national more than offset slower spending by DoD customers. Growth drivers were diverse including classified programs, where we are experiencing strong demand and good funding. Major classified awards during the quarter included four awards totaling $183 million. Other revenue drivers in the quarter included continued ramping of the GOES-R weather program, ship port terminals for the Navy to provide broadband services, and commercial satellite reflectors. Operating income was $64 million and operating margin was 13.6%. Our diversified program base, large opportunities in the pipeline, which are in focus areas such as the FAA, and the strength of our classified base positions us well for the tougher government spending environment ahead.

Turning to Slide 8, we ended the quarter with $299 million of cash on hand. Free cash flow was strong at $152 million, as compared to $79 million in the prior year. Capital expenditures decreased $35 million to $53 million, and cash flow from operations was $205 million, up $37 million. All three segments generated positive operating cash flow. Our effective tax rate for the quarter was 32%. Let me now move to guidance for 2012.

As shown on Slide 9, consolidated revenue, excluding cyber-integrated solutions and broadcast, is now expected to be about $5.45 billion, and non-GAAP earnings-per-share has been tightened to a range of $5.15 to $5.25 per diluted share. At RF and government communications, our guidance is unchanged. At Integrated Network Solutions, revenue is still expected to increase 9% to 11%. Non-GAAP operating margin is now expected to be between 7.5% and 8.5%. Non-operating income for the year is expected to be $10 million to $12 million, with $8 million occurring in the third quarter as result of nonrecurring loyalty income. Also included in our 2012 guidance is approximately $5 million of restructuring charges planned for the fourth quarter that are anticipated to deliver $20 million to $30 million of savings in 2013 and which is included in our 2013 guidance. We expect cash flow from operations to be about $825 million and free cash flow to be about $575 million to $585 million, up over $60 million as compared to the prior year as a result of lower capital expenditures. Our outlook for the full-year non-GAAP tax rate remains at 33%.

Turning your attention to fiscal 2013, we are initiating guidance with total Harris revenue of flat to 2% higher than fiscal 2012 and EPS in the range of $5.10 to $5.30. This does not reflect any impact from potential sequestration. Turning to the segments for RF Communications, fiscal 2013 revenue is expected to decline 3% to 4% from fiscal 2012 with operating margins of 30% to 31%. Operating income is expected to decrease as a result of lower revenue and increased investment in new products and solutions, partially offset by cost reductions in manufacturing efficiencies.

Lower revenue is primarily a result of the continuing wind down of military operations in Iraq and Afghanistan and the uncertainty surrounding timing of awards from the Army's JTRS modernization program USDOD, partially offset by growth in international and public safety. For integrated network solutions, we expect revenue for fiscal 2013 to be 3% to 4% higher than fiscal 2012 and operating margins between 8% and 11%. For the government communications segment, we expect revenue of 2% to 3% higher than fiscal 2012 and operating margin around 14%. Corporate expenses are expected to decrease about $10 million to around $70 million for fiscal 2013 as a result of cost reductions, and nonoperating income is expected to return to historical levels of $2 million to $3 million of expense. Our full-year tax rate is expected to remain at 33% in fiscal 2013 and assumes the R&D tax credit will be restored in the second quarter. We expect free cash flow to be in the range of $595 million to $665 million as a result of higher operating cash flow and lower capital expenditures. In addition to our typical annual share repurchases of around $200 million, we expect to use a portion of the proceeds from the sale of broadcast to repurchase up to an additional $200 million of outstanding shares.

In short, EPS is staying about flat with fiscal 2012. We believe this is a good result in this environment. The operating income decline in RF communications and the decline and nonoperating income is expected to be offset by growth at government communications and integrated network solutions, cost reduction actions and share repurchases. With that, let me turn it back to Bill.

Okay, thank you, Gary. We are focused on positioning our Company for continued success in increasingly challenging and uncertain environment. Over the past six months, I spent a considerable amount of time in Washington meeting with administration officials and elected representatives who are all wrestling with the trade-offs and tough choices to tackle the deficit problem we face as a nation. How that debate plays out in an election year has significant implications for our Company, the defense industry, and our nation as a whole. And I don't expect much more clarity on the situation until we're well into our next fiscal year.

In that environment, we will continue to focus on the things we control, aggressively addressing our cost structure and relentlessly driving productivity, improving cash generation, and conservatively deploying capital, with the focus on rewarding shareholders through dividends and share buyback, maintaining a healthy balance sheet, and investing appropriately in technology innovation to improve our competitive position. We have very strong core franchise businesses led by an outstanding team that is committed to satisfying our customers and creating shareholder value. And on June 4, I look forward to talking to you more about our plans for next year and beyond. And with that, I'd now like to ask the Operator to open the line for questions.

Thank you. (Operator Instructions) Your first question comes from the line of Carter Copeland with Barclays. Please proceed.

Just two quick ones. I wondered if you might elaborate on some of the areas of strength and weakness in the quarter. It looked like PS-PC was awfully strong. And I know, Gary, you highlighted a big opportunity pipeline there. I wondered if you might speak to the strength you are seeing there. And at the same time, speak to IT services which looked like it was pretty weak in the quarter.

Okay, Carter. Talking first to public safety and professional communications, we do see a very strong pipeline. There's opportunities like the San Francisco Mass Transit Authority ahead of us; opportunities in Trinidad; some big opportunities that will help. We obviously have good wins in the past from what we win in the province of Alberta and the state of Oregon, so that business is very well-positioned.

If you go to the IT services business, as I mentioned, we did lose the Patriot program, which is impacting this year pretty substantially. I think it is down to $57 million year-over-year as expected. Then we have seen just a pretty tough IT spending environment. It seems like the US government is just not spending dollars where they don't need to, and a lot of awards are moving to the right and so that's been pretty tough for us. I think the good news, though, is we are not seeing continued weakening. I think it's starting to look like it is bottoming out, and we are feeling good about where we are ending up I guess for a guidance for the year now that these changes have occurred and where we expect it to go next year.

And one for Bill briefly. On broadcast, I'm interested if you can tell us why now and what you and the Board were thinking with respect to when is the right timing? I understand you are trying to focus on the core, and your core businesses, but at the same time, how you evaluate the appropriateness of the time and given that the business is hovering around breakeven right now? Is this something -- how did you weigh the pull of fixing that business some more and potentially having some more interested buyers versus focusing on your core today? Any color there would be appreciated.

Yes, Carter, thank you. It was a pretty long conversation with the Board over the last six months, but it is not a new topic with our Board. It has been discussed quite frequently over the last several years given where broadcast happens to be and some of the charges that have been taken in the past. It has been an active discussion with our Board on is it a fit? How do we make it better? What is the timing if we decide to exit? All those topics tend to come up quite a bit, and we had a long conversation about that. In our view, given the tough environment that we're facing, we think it is important for us to just focus our resources, including our management, time, and attention, on the businesses that we know to be core to our Company so we can be successful into FY '13 and beyond.

Your next question comes from the line of Joe Nadol with JPMorgan. Please proceed.

It is actually Chris in for Joe this morning. I was hoping you could give a more color on the outlook for RF communications. It seems like tactical radios will be down. And I notice that both the domestic and international pipeline came down a little bit this quarter. Could you just perhaps say how much that business might be down next year and what the offset is in public safety?

Yes, the revenue for next year for RF will be down 3% to 4% as we showed in the guidance page. The tactical communications business we expect to be down mid to high single digits. And we expect PSPC to be up high single digits.

Okay, great. Then I know you mentioned your guidance doesn't contemplate anything for sequestration, anything for a continuing resolution in the fourth quarter?

As Gary went through in some detail, we don't contemplate in any of the guidance or discussions today sequestration, because like everybody else, we don't know if, how much, is it going to be across the board, is going to be targeted? We really can't comment on any hypothetical scenarios or what the impact might be to the Company, but we've done some contingency planning that we can quickly adjust our cost structure if it happens. And one of the things that is on our mind, it is a near-term concern, is the potential impact on our first half, given the likelihood of a continuing resolution and some uncertainty around sequestration that may cause some of our customers to push things out a bit. We are in a situation where our fiscal year straddles sequestration, so our first half will come into play later this year with a potential continuing resolution.

But relative to that, keep in mind or content on large, high-profile platforms is relatively modest. Our products in our view are closely aligned with where the DoD has stated their priorities to be, smaller, more nimble, more capable fighting force, a network battlefield, Special Ops, all of which we have some strength in. Also helping us as well is what we see to be some strength in the international business, which as you know is a little bit more than half our tactical communications business. We are anticipating that there will be a CR that will put some pressure in the first half, but I think the bigger issue is a looming sequestration.

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

Just a couple clarifications on some of the components in the outlook. Is it correct that the new 2012 guidance does not have any changes in segment revenue or segment operating margin other than moving cyber and broadcast? There's no change to any of the remaining legacy business, is that correct?

That is correct with regards to RF and government communications. No change all to the forecast. I think to the guidance, I think I gave the specifics on the integrated network solutions. And if you just looked at guidance where it was and guidance where we are coming out now and big picture moving cyber into discontinued operations, there was a plus up. And then by moving broadcast into discontinued operations and then the lower income and revenue in integrated network solutions, those were both down as well as the restructuring charges that were taken in the fourth quarter. So net-net

Specifically on the [ROSL] and INS, it's also impacted by margin erosion in health care. We said before it was going to be profitable, now it won't be, and that's a key part of it.

Okay. So those are all of the main components?

Correct.

Then with 2013, Gary, you also alluded to taking the proceeds from the sale of broadcast and buying back stock. Does the 2013 EPS guidance specifically estimate what you'll get for broadcast and then translate that into repurchasing shares and a lower share count? Or would use of proceeds from broadcast be upside to this initial fiscal '13 guidance?

What we have done is assume that a transaction place at the end of this calendar year, so mid our fiscal year. And $200 million of whatever the proceeds happen to be will be used to deploy into share buyback in the third quarter of next year and that's what we've assumed. As Gary mentioned, we just initiated a process to launch a sale, but we're just getting started.

Got it. And then just one more for you, Bill. Now that you've had a few more months to get your arms around the business, I wonder what your view is on when the bleeding stops at RF? How many more quarters or years until that business can go back to top-line growth and stop having margin compression? And perhaps if you could, within that comment, on what you think the right long-term margin we should all be thinking about is in that business?

Well, what we are going to do today is provide you an outlook for '12, and where we are at and 2013 and beyond that is going to come to conversation later on in June. But I think I may take exception and correct you on the bleeding. It is been certainly one of the most successful franchises we own is doing extremely well. It is a global market leader, a leader in the US with exceptionally strong margins, a fantastic team, outstanding technology. And in fact, one of the things that we are doing in the guidance in FY '13 with margins coming down, it is investing in R&D to grow the business over time. So I wouldn't say it is a bleeding business. I would say it is actually an successful one.

No, I don't disagree. But I think the stock's multiple in a lot of ways reflects how difficult it is to forecast with the long-term growth rates and margins are going to be in that business. So any color you give there, if it is today or if it is when you guys get us all together in June, I think would be super helpful to investors.

We understand, and we will provide more in early June, but as we see going into next year, we do see not unexpectedly, some softness in US DoD tactical radios. And we had anticipated that, but fortunately, we are seeing some strength in the international arena.

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

Gary, I was wondering if you could tell us how much non-operating income you have baked into fiscal '12 from either a dollar or cents per share, and if there's any of that baked into fiscal '13?

In '12 it's $10 million to $12 million is the range that we are giving. And for FY '13 it is actually $2 million to $3 million of expense, which is returning to our historical levels. This year, we've benefited from some royalty income, one-off patent sales, we don't plan for those. We do have a team that works on that and they come in intermittently. So this year, definitely $10 million to $12 million. Next year, an expense of $2 million to $3 million is what's in our guidance.

Great. I just wanted to clarify, the expense reductions you are taking in the next quarter, those are expected to save $20 million to $30 million in fiscal '13, is that correct?

That's correct and that is baked into the guidance.

Right. Then finally, just with respect to IT services, Gary in your prepared remarks, it sounded like you feel like that business is bottoming after apparently some weakness I guess throughout this year. Just wondering what you're assuming for fiscal '13. Are we looking at that as a flattish business now, or do you see that going down more in fact or turning to growth at some point?

Right now, we are looking at it more as flattish to up, not flat to down but not seeing strong growth. That's what is baked into our guidance based on the environment we are seeing.

Your next question comes from the line of Pete Skibitski with Drexel Hamilton. Please proceed.

Bill, I don't know if we should wait until June for this, but I thought I'd see if I could ask you one more time. Do you think you are done at this point with the portfolio reshaping? I think you certainly made your mark on the Company so far in terms of strategy and reshaping things. Would you say you are done at this point, or is there more to go?

We don't see any other portfolio reshaping at this point in time.

Okay, got it. I just wanted to ask you within RF, you gave us a sense on fiscal '13 in terms of public safety versus military. Is it safe to assume that international military revenue within RF for fiscal '13 will be up or no?

Yes. We expect within tactical communications that international will be up mid-single digits.

Got it. Then last question, can you give us a sense of how much you expect RF R&D to be up in fiscal '13?

I think we are going to come back to that in early June, because we can give you little more sense, not just in what's happening with the investment, but more importantly, what we are spending and why we think it is important. But I would say, if you look on the page, it shows the margins. We're going to see from about 33% to about 30% to 31% next year. And half of that decline is relative to gross margin, part of it just mix between PS PC in the tactical business, part of it is price, part of it is volume. The other piece, the other half of the margin erosion comes from investments we are making principally in R&D.

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

I have to applaud you on this broadband -- I'm sorry, this broadcast divestiture. It just never made sense to me, but I will move on. Gary, the after-tax loss from cyber was about $100 million. I think the expectation when you announced it was $70 million to $80 million. What is the delta there, and why was it higher?

There was some additional software that we decided to throw into the mix, and then we also had some lower prices on the building than what we expected. Those are the really, the two main components. And the number we did give you does include the losses from the business as well. So if you took the $100 million, I think you get down to what we said the $70 million to $80 million. We are still in the high $80 millions s of where we are coming out on the building and some additional software and stuff we threw in. And then the rest of it is the losses just from the business.

Okay. Then you brought up Patriot, and that was a tough loss. Have you done the math? If you backed out the Patriot program, what would the IT business look like on year-over-year basis, pulling that out? Have you done that math?

I haven't done the math, specifically, but as I said on the call, the business overall was down about $67 million from Patriot. I don't have right in front of me last year and where we are at, but it has declined some. In the quarter, it was almost all Patriot, and rather than just guessing, let me do the math and get back to you.

Okay, that's fair. And one final question. You're embedding the R&D tax credit into your expectations, which is -- somewhat varies with some of your peers. What would the tax be if the R&D did not hit?

About 1% higher. About eight-tenths of 1% to be precise on the math. It is in that 1% higher range if we do not get the R&D investment tax credit next year.

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

My question is related to acquisitions. Historically, they've been used to build segments, gain scale and focus the Company. Seemingly, the three remaining groups have that scale and are focused. Does this mean that in the coming years, or coming couple of years, that there may be a greater emphasis on buybacks and dividends rather than acquisitions? OR do you see more opportunity to build scale?

I don't think I would necessarily conclude that. I think for the near-term, we don't see a lot of M&A activity happening at Harris. Frankly, we've got our plates a little bit full right now with what we are doing with Cyber and with Broadcast and just with the overall environment and me understanding and resetting the strategy. M&A will clearly play a role in our long-term strategy at the Company, and I expect we will get back to that. And it will be some balance between share buyback and M&A.

Okay. Follow-up, Gary, historically you've looked at capital deployment over a three-year time frame. Do you have thoughts relative to what you see from a deployment standpoint for the fiscal '13 to '15 period, which would be the next three years?

We could probably reserve some of that for, again, our Investor Day in June, but we did give some guidance when we raised our dividend that we are now targeting that 25% payout ratio. So that brackets where we've been on dividends. And we've been actively, over the last several years, in the market buying back a couple $100 million of our stock. I talked about this year that's our normal practice again for '13. That's our expectation, and then we will use some of the proceeds from broadcast to add to that. So I think that 25% payout ratio and around a couple hundred million a year at least our current thinking.

Your next question comes from the line of Yair Reiner with Oppenheimer & Company. Please proceed.

First, I want to make sure I understand the guidance. It looks like you've gained about $0.13 through the first nine months of the year by shifting the broadcast and cyber losses off to discontinued ops. So by keeping your nominal EPS target unchanged, it looks like you've actually lowered the base case guidance by about $0.15 on a full-year basis. Am I looking at that the right way?

It is very close, yes.

Okay. Then in terms of the cash from divesting the broadcast business and exiting cyber, you said around $200 million for broadcast maybe toward the third quarter next year. Is that what you expect to make in total, or is that the conservative estimate? And then where should we see the money coming in from getting out of cyber and selling those assets?

What we said was we would use $200 million from whatever the proceeds were for the testing broadcast to buy back shares. Our assumption is that the transaction closes at the end of this calendar year, so we use that proceeds of $200 million in Q3 FY '13. We fully expect that the pros would be substantially higher than at $200 million.

Are you ready to give us some range for that?

No. Like I said, we truly have just initiated internal process to launch a sale, so we're not even close. Now, you mentioned about cyber, we do expect that to conclude towards the end of this fiscal year or into early FY '13, and that will be incorporated into our cash flow guidance.

Got it. Any sense of what those assets were worth or is that also TBD?

I think TBD.

Okay, and then just one other quick one. On the guidance for 2013, your profit margin for INS is quite broad, 8% to 11%. Can you give us a sense of what are the factors that potentially take you to the higher end or the lower end of that band? Thank you.

Maybe I will start with that and Gary and pass it to you. Clearly, we do have expectations for continuing growth and margin expansion in CapRock, which is benefiting from very, very solid integration work over the last year. And we do expect to drive the health care business from a loss to profitability in FY '13. And I'd say those are the two biggest factors that we are driving.

I think you hit the two main ones, Bill, and as I said, IT services pretty flattish on the revenue side and the margins won't change dramatically.

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

A couple questions, could you talk about what, specifically, you are doing to get that pay back on the restructuring?

The charge we are taking in Q4 is about $5 million, and it is for -- obviously it is just a charge for the employment reduction, but when I add in employment

Okay. The other thing is you characterize the RF tactical pipeline as still been pretty elevated. I guess when we look back, the bookings quarter to quarter have been pretty choppy. This quarter being an exception to the upside, but could you characterize what do you see in the near term with respect to order potential? Are there any large ones that are close at hand? How should we be thinking about book-to-bill in the June and September quarter so that we are potentially protected at the sequester?

I maybe I will start and maybe toss it to Gary. I think that a year-to-date basis, our book-to-bill is just a little less than 1 at about 0.96. And we've had a very nice Q3, very strong International orders. Of course, we don't and we won't today provide any guidance around orders or when they are going to happen or project a year-end backlog, but so far year-to-date and on an LTM basis as well, the book-to-bill has been relatively good. I don't know if Gary --

I think you covered it again, Bill. We have had we won a great IDIQ contract with the Special Forces. We see another one coming up with the JCAHO office on seizures and we get some initial orders. I would still expect that as in the past, our orders are pretty lumpy from one quarter to the next and won't necessarily change. Some quarters we're up as this one. Last quarter we were down some overall. As Bill said, year-to-date, 0.96 book-to-bill, and we're just not going to get into the pattern of trying to predict where that's going to be.

Are there any lumpy, large ones out there on the International front that you could point to?

There's good opportunities again in the countries that we've talked about, and they're hard to predict timing, but you've got the country in Central Asia. You've got Iraq; you got a country in Northern Africa. You've now got Australia that went to Phase two and other phases will come. We mentioned the Brazil is having opportunity, and so it is hard to predict whether they will do that in steps or sometimes you get a bit award. So I will just leave it at that.

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

A question with regard to the broadcast divestiture. If you are unable to receive what you consider to be a fair bid for that business, would you consider spinning it off to investors in the same way that the microwave business was divested some years ago?

We are going -- I'm going to defer that to later in the year when we actually start the process and start seeing what the activity happens to be. I don't think I would comment on any structure. Our intention today is to divest the business in a sale with cash returning to the Company.

If you were look today at your business portfolios, which area would rise to the top as the one where you would most likely invest?

Again, I'm going to push that to a later conversation. I don't think I want to speculate today on where across the portfolio we are going to invest cash proceeds or cash in terms of an M&A perspective. Clearly, I did reference the increasing investment we will see in R&D next year in our RF business, both in tactical communications as well as PSPC. We will also see a little more R&D spending -- internal spending at our government communications business as we invest in developing products and innovation for future growth. But that's really the things we are going to focus internally. We are clearly getting back to what is the businesses at our core, and making sure that they are fully funded and our successful.

Okay. And if I can, on the tactical radio business, correct me if I'm wrong, but the MWVR contract is currently the biggest opportunity sitting out there with the US government. Can you give us a rundown of where you stand in terms of certifications for that program, both in terms of riflemen radio, waveforms, and encryption relative to the competitive field? And when you expect a likely contract award for that particular contract?

Chris, this is Dan. The procurement has been delayed about three months right now is where we're at out of the contracting shop. But quite frankly, for competitive reasons, we are not going to talk about what certifications and other things that we're going to do in that radio, how channel two, how it is going to be configured. Clearly, it is something we are very much focused on with our RF team. From a competitive perspective, we are not going to talk about it. We did get (inaudible) certification for SRW, and if you've seen from the JPO, we are very happy with the software contracts. But we are moving along our path with all waveforms just like we have, but we are not going to get in the business specifically, especially on the very competitive [technical difficulties].

Your next question comes from the line of Josephine Millward with Benchmark. Please proceed.

Can you talk about funding sources for the US tactical radio market going forward? In particular, on this $400 million [So-com] and this $500 million seizure IDIQ contract. In the past, they were primarily funded by the supplemental. So how do you get visibility going forward in this environment?

We are feeling pretty good, Josephine, about the visibility on the funding. Basically about 80% of the revenue that we are forecasting for FY '13 US DoD is already either funded from backlog or in the GY government budget of '12, so leaving only 20% of the funding to come from FY '13 appropriations. So overall, it doesn't come from any particular one line item. Some of them are easy to identify, but we sat down with our RF team and gone through every line item of where that revenue is expected to come from. And as I said, 80% of it -- of what we are expecting next year is already funded.

That's very helpful. Can you provide a more detailed breakdown of your assumptions for your guidance for integrated network solutions? What's the growth rate assumption for CapRock and health care next year?

I don't think we are going to get today any more granularity on INS or GCS. I did provide quite a bit of insight into our thinking on the RF business for obvious reasons, but I think I'm going to push out into early June any further conversation on guidance on INS.

Okay, operator, we will take one more question.

Your last question comes from the line of Pete Skibitski with Drexel Hamilton. Please proceed.

Just a follow-up on the healthcare IT margins, guys, I'm just wondering why the loss in the quarter? And maybe Bill, if you have a target margin rate for that business?

Well, I think issue in the quarter is what we've seen over the last six to nine months is in the commercial -- first of all, the government health care side of our business is performing very, very well and we are thrilled with that. We are executing well. We're winning new contracts and we are feeling very, very good about that. And if you may recall, in the last earnings release, I talked about our ability to port some of those capabilities from the government side into commercial. Last year, we bought a company called CareFX. Clearly in the commercial side, the market is still evolving. Needs of customers aren't entirely well-defined, which sometimes requires a higher cost customization of the software and that's what we are seeing now in some of the losses that are occurring. But we see ourselves evolving the product. We think costs will come down. We think conversion rate of opportunities to order should improve. And we expect that business to be profitable next year. So I think that's the direction we'd give today.

Thank you, everyone, for joining us, and we hope you join us for our June 4 analyst meeting in New York City. Thank you.

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