L3Harris Technologies Inc (LHX) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 Harris earnings conference call. My name is Jenada, 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 to Pamela Padgett, Vice President of Investor Relations. Please proceed.

Hi, good morning, everyone, and welcome to our fourth quarter fiscal 2012 earnings call. I am Pamela Padgett, and on the call with me 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 on forward looking statements. In the course of this teleconference, Management may make forward-looking statements. Forward-looking statements involve assumptions, risks and uncertains that could cause actual results to differ materially from those statements. For more information and a discussion of such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC. In addition, in our press release, and on this teleconference and the related presentation, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable gap 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 the call will also be available on the Investor Relations section of our website. And with that though, I'll turn it over to you.

Thank you, Pam, and welcome to our fourth quarter fiscal 2012 earnings call. I'll begin today's call by turning to slides 3 and 4 in the presentation. Harris' fourth-quarter results represented a solid finish to fiscal 2012. Revenue was $1.4 billion. Non-GAAP income was $162 million, an increased 4% over the prior year, even though revenue declined by 6%. Operating income was higher in all three segments as a result of our productivity and cost reduction initiatives.

Non-GAAP EPS of $1.42 was up a strong 15% compared to $1.24 in the prior year, reflecting higher operating income and share repurchases. In addition, cash flow was particularly strong in the quarter and resulted in record free cash flow for the year. Our new wins in orders in the quarter were encouraging, as we enter fiscal 2013. Total orders in the quarter were higher than revenue and increased in all three segments. Although total revenue declined as expected, due to lower revenue and Tactical Communications and IT Services, we are gaining traction in each of our growth initiatives. Public Safety and Professional Communications continued along its strong growth trajectory and was up 12% in the quarter.

In CapRock, demand was strong for satellite communications solutions with revenue up 8% and orders up solidly double-digit over the prior year, and also, significantly higher than revenue. In Healthcare solutions, revenue increased 69% off of a relatively small base driven by excellent momentum in government healthcare, where funding remains solid. In Tactical Communications, we are managing through a transition in the US DoD market from one previously driven by opp tempo to a modernization cycle driven by wide-band technology, where we are the clear leader and where we continue to win on innovation and affordability. In Government Communications, continuing strong execution is generating solid operating margins with sales to the classified community and civil customers like the FAA, offsetting weaker DoD customer spending.

For the full fiscal year 2012, orders were $5.48 billion, up 8%, and revenue was $5.45 billion, up 1% over the prior year. Although non-GAAP income from continuing operations was down 5%, non-GAAP earnings-per-share increased 4% to $5.20. Overall, Company results for the fourth quarter and full-year demonstrate that our strategy for creating value in a tough government spending environment is working. Successfully execute in our core businesses and in our growth initiatives, drive operational excellence to lower cost across the Company, generate higher free cash flow and return capital to shareholders through share repurchases and dividends. 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.

Thank you, Bill, and good morning. Moving to segment results on slide 5, revenue for RF Communications was $584 million, compared to $628 million in the prior year. Tactical Communications revenue was $409 million, declining 13%. In Public Safety and Professional Communications, revenue growth was excellent, increasing 12% to $175 million. Operating performance for the segment was very good with operating income increasing in spite of lower revenue. Lower manufacturing costs and operating expenses resulted in a higher operating margin of 33.5%, up from 30.4% in the prior year. Orders for the segment totaled $529 million, and book-to-bill was 0.91. In Tactical Communications, orders were $356 million, backlog was $665 million and book-to-bill was 0.87.

During the quarter, Harris was awarded a five-year $400 million IDIQ contract from the US Special Forces Operations Command. And received three orders under the contract totaling $120 million for Falcon III wide-band networking radiators. Harris was also awarded a five-year, $26 million IDIQ contract with the JTRS JPEO to maintain and enhance the JTRS Soldier Radio Waveform, the SRW software, which resides in the JTRS library, and was originally developed by the program of record. This award highlights our company's unparalleled engineering expertise in developing and billing robust waveforms. The domestic 12- to 18-month opportunity pipeline remains healthy and well-funded; at $1.1 billion.

International orders in the quarter included $31 million from the Kingdom of Jordan for Falcon II and Falcon III radios for the next phase of their C4ISR system supporting domestic and international security missions. Bringing orders to date for the modernization to $57 million, the opportunity could now reach over $150 million. International opportunities continue to be strong, and as of the end of the quarter, the 12- to 18-month opportunity pipeline remained at $2.1 billion. In Public Safety, awards included a contract with the potential value of $109 million with a $32 million initial order from the San Francisco Municipal Transportation Authority. To deploy a communications network that will increase operational efficiencies, improve safety and provide interoperability with Public Safety agencies. San Francisco MTA will be one of the largest transit LMR systems in the country, and is a key win for Harris in the growing Transportation segment; a target market for Harris. The 12- to 18-month opportunity pipeline for Public Safety stands at a healthy $2.9 billion.

Turning now to slide 6, and Integrated Network Solutions. Fourth-quarter revenue decreased 10% to $379 million. Strong growth in Healthcare solutions in CapRock was more than offset by declining revenue in IT Services. Non-GAAP operating income was $34 million, essentially flat with $33 million in the prior year. As continuing strong improvement at CapRock was offset by operating income declined in IT Services. Operating margin improved from 7.9% in the prior year, to 9%. In Healthcare Solutions, revenue increased 69% driven by government wins, primarily under 2 IDIQ contracts known as T4 and Avia, which were awarded late last fiscal year by the VA to upgrade and streamline operations. For the year, Healthcare Solutions revenue increased substantially to just under $200 million.

The commercial side of healthcare business is still very much a work in progress, contributing to a $5 million non-GAAP loss in the quarter for Healthcare Solutions. Significant integration actions were taken during the quarter to bring expense levels in-line with anticipated revenue, and we continue to expect Healthcare Solutions to be profitable in fiscal 2013. In IT services, revenue declined from two programs, the Patriot program roll-off and the completion of systems and network integration for the Army Material Command headquarters, driving most of the $82 million decline in year over year revenue. CapRock had another excellent quarter in orders, revenue and op income, ending the fiscal year with good momentum. As Bill mentioned, revenue increased 8% and orders were significantly higher than revenue. Integration has progressed well driving improved operating performance, with CapRock achieving double-digit operating margin. During the quarter, CapRock was awarded significant new wins in the growing maritime market. Including a five-year contract with Royal Caribbean, and a five-year contract with a customer in the Asia-Pacific region covering up to 2,000 commercial vessels.

Moving to slide 7, revenue in Government Communications was $497 million, as expected, about flat with the prior year. Year over year revenue increases from the GOES-R weather program, NASA Space Network Ground Sustainment Program, and classified programs were offset by lower revenue from defense customers. Operating income was $66 million compared with $63 million in the prior year. Operating margins increased from 12.7% to 13.3%. Harris was awarded a significant new win in the Commercial Space area, a five-year contract to supply 81 ADS-B receiver payloads to be hosted on the Iridium NEXT constellation. We believe the market for commercially hosted payloads over the next five years could potentially be $250 million, and this recent win will be the largest implementation to date.

Let me now talk about the financial highlights and guidance. Turning to slide 8, fiscal 2012 is another solid financial year for Harris. Operating cash flow in the quarter was $370 million compared to $276 million in the prior year. Free cash flow in the quarter was also strong at $311 million, more than double the $147 million in the prior year. For the fiscal year, operating cash flow was excellent at $853 million, and free cash flow at $619 million, a record for Harris, was much higher than $508 million in the prior year. All three segments generated positive operating cash flow and free cash flow for the quarter and the year, capital expenditures were $59 million for the quarter and $234 million for the year. Our effective tax rate for the quarter was 33.9%, and for the year, it was 33.1%.

Moving to slide 9, fiscal 2013 guidance is unchanged, with total Harris revenue still expected to be flat to 2% higher than fiscal 2012, and EPS in the range of $5.10 to $5.30. As we mentioned in June at our Investor Day, we expect the first quarter to be weaker as compared to the prior year first quarter, due to lower sales and income in Tactical Communications and IT Services. We still expect the rest of the year to be in-line with our higher than the prior year. Guidance does not reflect any potential impact from sequestration. In the segments, guidance for RF Communications and Government Communications is unchanged. In Integrated Network Solutions, we expect fiscal 2013 revenue to be 4% to 5% higher compared with the prior year, versus the 3% to 4% previously expected, and operating margins still in the range of 8% to 11%. We continue to expect the full-year tax rate to remain at 33% in fiscal 2013 and free cash flow in a range of $595 million to $665 million, the components of which are set forth on this slide. With that, let me turn it back to Bill.

Thank you, Gary. Our outlook for fiscal 2013 reflects what we believe will be another solid year in a challenging environment. We believe that the technology and innovation we bring to the marketplace are well-aligned with our customers' spending priorities. Communications and ISR capabilities that we provide will allow the government to do more with less. And we provide those capabilities in more affordable solutions than our competitors. We are being smart about reducing costs and improving productivity, so that we can continue to invest in R&D and the long-term success of our businesses, while at the same time, driving value for shareholders by generating solid earnings and cash flow. And now, we would 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.

Hi, good morning.

(multiple speakers) Good morning, Carter.

I just wanted to ask a question about the budget, the backdrop, sequestration, whether or not the guidance contemplates a CR, and just in general, Bill, how you are feeling about the relative risks around sequestration in the various business units? Areas where you think there could be an impact there based on different contract structures, things that are incrementally funded. Any color you can provide on how you are planning and thinking about that outcome, should we actually see it, would be helpful.

Sure. Well, first of all, as Gary mentioned, we do not contemplate sequestration in the guidance that we have given. But I think -- I think we all believe that a CR is a virtual certainty, much like it was last year, and that's going to provide, in our fiscal second quarter, some choppiness, I would say. Based on where our customers will end up, deciding to shift some funding and what happens as we enter the start of GFY '13 under a continuing resolution.

We are looking at a variety of scenarios in our business, much like everybody else is across the board at 10%, sort of bottoms-up, programmatic-type reductions. But based on little-to-no feedback from our customers, on what they see happening, and guidance from them as to what we should be contemplating, it is really a little bit premature for us to give any sort of sense or guidance as to the impact of that going into fiscal year '13 or our fiscal year '13. That being said, we are not a big platform player, Carter, as you know very, very well. We see the things that we do very much align with the DoD priorities of Special Operations, C4ISR solutions. So we feel, versus and relative to other players in the Aero-defense industry, that we are going to be less impacted, though certainly not unimpacted, by the sequestration.

Great, thank you.

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

Thanks, good morning.

Good morning, Joe.

Good morning.

My question is on INS, and sort of on all the things going on there. Could you guys comment on -- it looked, to me, like your charges in there, your non-GAAP adjustments were a lot higher than what you had suggested they would be last quarter, for the year. Could you talk about what is going on in there, and what the outlook is there for those adjustments for FY '13. Also any update on the broadcast divesture? Thanks.

Okay, good. Well, thank you, Joe. Well, first off, you're exactly right. Last time we spoke, in the last call, we gave some guidance around $0.25 a share, as integration expenses for integrating both Carefx, as well as the suite of companies that we now call CapRock, so Caplox, Lumbridge, Core180. And in the reported results, it was $0.40, so it was $0.15 more; that's going from about $42 million to $58 million, or $16 million higher in the fourth quarter than we would have indicated at the end of the third quarter. And that is investment in integration at both the CapRock franchise in Carefx, a little bit more on Carefx than on CapRock.

We saw some additional opportunities, we have seen our profitability in the Healthcare franchise not be what it is, what we think it could be or should be, and we took some tougher actions in the quarter to drive profitability and achieve our targets longer-term. I recall, back in early June, we talked about at our Investor Day, we talked about very significant improvements in FY '13. 400 basis points of margin improvement in CapRock, driving Healthcare from a [D-plus] to profitability in '13, and we think we've taken the actions we need to take to position ourselves for success in '13 and beyond. As you know, any further charges won't be absorbed below the line, they'll be directly in our reported GAAP income, and -- but we think a lot of activities, a lot of the costs are now behind us.

Going into BCD, we've just initiated the process, we are out in the marketplace with offering materials, the response so far has been very, very good. We expect bids in, in the next few weeks and we will expect to conclude a transaction by the end of the year, as the end of the calendar year, as we said last time, and we are on track for that.

You ready to give any further color on what the proceeds might be, or is it still too early?

It's still very, very early, Joe, and I think, more than likely, we will wait until we actually get a deal done in order to give some color to investors around proceeds.

Thanks.

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

Hi, good morning, everybody.

Hey good morning.

Good morning, Noah.

Can you walk us through the small increase in the growth rate expectation for next year at INS? And in doing so, can you just touch on the degree of confidence you have that you've captured all the risks in the IT Services component? Where you cited some downward pressure in the quarter, and we're seeing similar trends, really across the contracting community.

First, we went from what was 3% to 4% growth in INS next year, to about 4% to 5%. So it is about a 1 point improvement, and in reality, Noah, it came from more a reduction in our actual fiscal '12 revenue, as opposed to an increase in revenue in fiscal '13. We held our revenue in '13 because we are confident that we can achieve those numbers going into next year, so that's what really drove it up by that 1 percentage point. Which, in context, is about $15 million, so it's not that material.

In fiscal year '12, as you know, we saw CapRock and Healthcare solutions well more than offset the reduction, the decline in IT Services. We see going into '13, we expect very solid growth in both CapRock, as well as in Healthcare solutions, at or more than market growth rates. And we laid that out in our Investor meeting early in June, and we do expect that that is going to more than offset a flat-to-down IT Services market. Clearly, the environment around IT Services today is pretty tough, and we do see the roll-off of the Patriot loss that happened in early 2011, or late fiscal 2011, and that is going to continue to roll-off for the first- and second quarter of fiscal '13. So -- but as you remember, we took our margin guidance down in IT Services in early June by about 200 basis points, so it's not a very profitable business. So big moves in IT Services, up or down, won't affect our overall profitability in Harris that much.

Okay, that's helpful. And then, at RF, Bill, you talked about in the Tactical Communications side, the transition from an up-tempo -funded environment to a modernization cycle-funded environment. How are you comfortable that the small revenue decline you are guiding to next year captures the risks associated with that transition? Where presumably, the customer is moving from -- give it to me now, as fast as humanly possible, under any circumstance -- to maybe being able to be more patient with the pace at which they procure, and particularly so given the pressure on the overall funding environment?

Yes, maybe I will say couple of words, and then ask Gary to jump in on this. Just in terms of our confidence on US DoD tactical going into next year, we see today about 70% to 75% of the revenue that we are projecting in FY '13 is either in backlog, or has been appropriated in GFY '12 or prior budgets. A little less than what we had thought before, it was about 80% because we did a little bit better in Q4 in that particular business, so that's a little bit softer going into next year. Typically, we see 80% to 90% of our backlog at the end of the year convert in the following year at about 55% to 60% of new orders convert within the year. It is a little bit different going into next year, pretty much, it is going to be consistent with FY '12. We see a little less backlog conversion - a little more expectation of conversion from new orders over the course of '13, so a little more order and ship relatively quickly going into GFY, into our fiscal year '13 than I think we've seen historically. So, Gary, do you want to offer a comment?

Yes, I will just go to the kind of high-level things, Noah, that are helping us, giving us more comfort. Obviously, we're very early in the transition from moving from narrow-band to wide-band networking capabilities. We are looking at a commitment from the Army to open and competitive procurement, which we think bids well for us, as well as SOCOM is going to have increasing importance, and we are very competitively strong there. So as to points Bill mentioned, and if you look at the macro trends of what's going on with this movement to modernization, I think it gives us comfort that we've got it pegged about right.

Great. And then I'm just going to sneak in one more quick one. The Healthcare move to profitability next year, what's the quarterly cadence of that through 2013?

I don't think we are going to provide any sort of quarterly guidance on Healthcare, but if you run the numbers from FY '12, we had a pretty deep operating loss in that segment, and we will drive up the profitability over the course of next year.

But losing -- presumably, still losing money in the first half before making money in the second, generally, as a trend line, versus kind of flat lining through the year?

Again, I'm not sure were going to provide -- in fact, I know we're not going to provide quarterly guidance, but that would not be an unfair assumption. But, no, it will be profitable in FY '13.

Thanks a lot.

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

Good morning, guys.

Good morning.

Just a follow-up on the tactical radios, can you tell us, Bill, how much Domestic was down for the year and how much International was up, and then maybe your expectations for those in fiscal '13?

Okay. Just really going into fiscal '13, we see the Tactical Communications business being down mid-to-high single digits, pretty much in-line with what we had said before early in June, as I think, at the last call, as well. What that means is the US DoD will be down in the mid- to high-teens with international being up mid-single digits. Gary, you want to maybe just say a word on '12, and the actuals in '12?

The actuals in '12, with regards to where we come out, was, I think, on the revenue line, we ended up being around 51% coming from US DoD, 49% of revenue coming from International. Orders were higher International then Domestic, and then in '13, we do expect that orders will be -- orders and revenue will both be higher than in International than in Domestic. I think that's about as much color as we want to give on '12 on the International and on the tactical US DoD side.

Okay, are you guys factoring in any kind of wins on some of these competitions, like MNVR and some of the other ones that are out there?

Well, so far, we have won the GMR MNVR requirement for capability sect 13, and that was won at the early part of fiscal '12. But the MNVR RFP still isn't out; it is coming out in August. We will have a solution, we will bid for it and we think we are going to be very, very competitive.

Okay, thanks, guys.

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

Yes, thank you. As I recall, some of the turnaround you expect in Healthcare next year, hinges on a pretty important software update. I was wondering if you could update us on how that's going?

Well, there's really a couple of things that are going to drive the improvement in Healthcare, going into next year. Part of it is just the savings that we are going to reap from some of the restructuring actions we've taken at the back end of fiscal '12, but there's -- beyond that, strategically, there is two things. One is, is there is going to be product upgrades, as well as important developments in the channel. On the product side, we said last time is very much consistent today is that the market is still evolving, the needs of our customers are still evolving with that. And that's requiring us to do a bit more customization in our software product, when we deliver it to the customers, which is why we are losing money in that particular segment.

Going forward, developing a software platform that is going to be a whole lot easier to customize or for a given customer situation. So we won't see that level of customization in the future, and that's progressing very, very well. And, we're doing well, rebuilding the indirect channel that we have in that particular business. So, we are confident that we've got the right plan, the right people working on the initiatives to drive Healthcare to profitability next year.

Good, and then just one more, if I could. We discussed sequestration earlier with respect to the DoD. I think most of us are pretty familiar with the dynamics potentially at work there. Can you talk about how your non-DoD business may be exposed to sequestration? And, how can we think about some of the potential risks there?

Yes, Dan. It would be about the same, again, all our customers, having the same degree of angst about what it is with a 10% cut. Clearly, we believe in some of our areas, if the guidance from OMB gives them some flexibility, we think some of the FAA work we do and the GOES-R work will be very well protected because it's so mission critical. But in general, our customers, similar to the DoD, are still doing a lot of scenario planning, waiting to see what the guidance will come out, and how it will play out from the government. So it's not much --

In terms of worst case though, we should think of the rest of your government business also potentially looking at a 10% to 12% cut or so?

Well, I think, again, that is where the decision will come out from OMB, how they are going to implement it. If they do a 10% to 12% across-the-board cut, it could be that, if they go program by program, we don't personally think they will do that. But again, my Ouija board is no better than anybody else's at this point.

Thank you.

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

Good morning, and thank you so much. I wanted ask you a question about the re-compete event, and NMCI, the next engine program; I think it is your largest re-compete. You just said that the [sub], from what I understand, and can we just get an update on the potential size and timing of this award?

Well, on NMCI, we are the incumbent, so the slow environment in IT Services as a whole works in our favor because it just extends out the contract that we happen to have, and it preserves our earnings going into fiscal year '13. The RFP for the re-compete was received in May, as you know it is called MGEN, but the submittal time frame was delayed very recently by about three weeks to early August. So as we see it, it's pretty unlikely that there is going to be an award on MGEN much before March of 2013, so it's really -- we don't see this NMCI re-compete to have much, if in fact, any impact on our fiscal '13 numbers. We think we are at a very strong competitive position in the things that we are bidding, and we feel very confident that we will come out on top in MGEN. In terms of the size, Dan, do you want to comment on potential size of the deal? I think it could be a little bit bigger than we've seen so far in NMCI.

It's fluctuating around, let me just clarify a little bit. As Bill said, we are the current provider of the Transport section for the NMCI program. HP/EDS being the quote-unquote, prime. So there's two pieces, right, Transport and Enterprise. We have formed a team, and we are priming the transport piece, and it will be hundreds of millions of dollars over a multiple year period. And we are on the CSC team for Enterprise. So again, from the perspective of what it would mean from us, from a revenue perspective, it's about the same as it will be for NMCI to MGEN; maybe a little bit bigger, but again, that's moving up and down.

Okay, and actually the longer it pushes it out, probably the better for you.

Yes.

One more quick question, year-over-year growth in classified programs, in GCS, can you let us know what that percentage was?

I don't think we give detail down below GCS, but I would say that the early part of the year was quite strong. And we ended pretty strong on the segment, which we called National Intelligence, which is primarily classified programs. So overall, a pretty strong year, and we expect it to continue a strong year in 2013.

Okay, thank you.

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

Good morning, everyone.

Good morning, Mark.

A question relative to the two IDIQs for development work under the JTRS program. Is -- are you the only one doing that development work, and are you, in essence, doing the work that was previously billed out by the program of record office?

Are you talking about GMR, Mark? The GMR program --

Yes, well, the two that were referenced here, the $26 million and the Soldier Waveform Software development?

Oh, I see.

For SRW, we are the integration contractor and the sole contractor for that right now.

Okay.

That was originally developed by the JTRS program and they now turned that over to us.

Okay. Finally, could you update us on the status of the buyback activity?

Sure, this is Gary. In the quarter, we repurchased around 600,000 shares for roughly $25 million at an average per share price of $41.43. That brings the total share buyback to the year of $12.2 million shares, spending roughly $467 million at an average share price of $38.14. So, in total for the year, we reduced our outstanding share count as of what was outstanding as of the beginning of the year by about 9.9%.

Thank you.

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

Good morning.

Good morning.

Hi.

Can you give us a number for your total funded backlog? And since you saw nice orders growth, can you give us more color on where you saw strength and how you see that translating into fiscal year '13? Thank you.

I'm just looking at Pam, we provide that in our 10-K, so I guess it's not an issue for regards to providing the total funded backlog, Pam?

Well, the one that we normally talk about is our RF backlog, which --

If it is in the K, I can look it up, that's fine. I -- just looking for more of a breakdown by segment. Perhaps you can talk about the major international RF opportunities that you are expecting to drive growth in the coming year?

Well, okay, maybe I will start with that while Gary and Pam are looking at -- looking for the funded backlog numbers. Just on the International Tactical Communications, we were coming off of a very, very strong fiscal 2012 with both revenues and orders growth being very strong for us. In fact, the revenues in Tactical Communications International achieved a record level in fiscal year '12, and both grew, both revenues and orders grew to solidly double-digit year-over-year. So we are coming off of a very strong, International Tactical year that we have. We are very well-positioned competitively, we're investing in lots of new products and capabilities to continue to grow the addressable market that we happen to have. We've gotten a very healthy pipeline, as Gary went through in his prepared remarks. The opportunities, though, will likely come in the tens of millions not hundreds of millions like we saw with Australia this past fiscal year. That was unusually large, as we always say, the timing on these orders are very hard to predict, it's very, very lumpy, but we feel good about the pipeline.

We see the political climate in Pakistan a lot better today than I would have said six months ago. Who knows what it is going to be the next six to 12 months, so Pakistan is -- seems to be improving. We see opportunities in Iraq firming up; Gary referenced Jordan as some very good opportunities in the pipeline has come up pretty substantially since the last time we spoke. And we have booked quite a bit of orders, about $60 million worth of orders that have been booked very, very recently. We also see good opportunities longer-term in Brazil; it's progressing, we are still in the early stages, but we see good, long-term growth opportunities in Brazil. And I'd say also, Saudi and the UAE are both good opportunities for us over the medium-term. So we feel good overall about the pipe we're having international, and those prospects that I just went through. So, I don't know if you've got any perspective on the backlog or --

I do. Just, again, these numbers are probably not totally final at the moment, but funded backlog is roughly $3.1 billion, and if I go to the components it's roughly $1.3 billion at RF, and roughly $931 billion at Integrated Network Solutions, and then at Government Communications Systems, its $875 million.

That's very helpful, thank you.

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

Hi, two follow-up questions on the CapRock business. First, with regard to integration, can you give us an idea of how far along you are in that process? I think that was of the more complex activities, putting GCS and CapRock together. And second of all, can you talk to us about the demand environment there? And specifically, on the government side, with increased government investment in the WGS program, how that might impact your demand for services?

In the first one, I would say we are very deep in the integration process. If this was football season, they would say we were deep in the fourth quarter, but we're not spiking the ball yet. We have got some things we are still working on, but we're pretty far advanced on integration. There is also going to be longer-term, clearly some things we're going to do to drive continuous improvement in CapRock that will help us extend beyond the 400 basis points of improvement we are expecting to see in fiscal year '13. So I think we are progressing well, there is more opportunity; it still remains ahead of us. And I will let Dan maybe comment on the government environment on CapRock.

Chris, I think with the WGSKA service, obviously, we will keep an eye on that, as we will the commercial services. But again, for most of the applications that we have currently, the CXKU still is clearly the mission-critical kind of things we still see driving our business.

And what do you see as the primary gross driver by end-market, as you look ahead in the FY '13 or beyond? Is it government? Is it commercial? Or oil services?

You're talking within CapRock?

Within CapRock.

Really, I think it's across all three of them, and we spent a fair amount of time talking about the strategy in each piece at the Investor Day. We know that the energy market is growing solidly double-digit, and we feel good that we're at least holding our own; I would say probably gaining share. Maritime is also growing quite a bit, and we are gaining share in the Maritime segment. We talked about, and Gary mentioned again today, about Royal Caribbean. You can imagine that when one very large cruise line operator goes to the type of broadband capacity on a boat, that Royal Caribbean is, it is going to spur other players in industry to do the same thing. So, we continue to be encouraged by opportunities in Maritime, and Dan just spoke a bit about government so, Chris, really, across all three, we see a very good, strong opportunities.

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

Hey, I joined the late -- the call late, so apologize if you covered this, but if you were to think about the Maycom business, the Public Safety business, is that still doing something on the order of 10% EBIT margins?

We had a very strong fourth quarter, the margins were up hundreds of basis points and solidly above 10%, so solidly double-digit. For the year, came in just below 10%, for next year, we think it will be, again, just below 10% as we make some investments in LTE, both in R&D, as well as in Sales and Marketing expenses to position us for very good, strong, top-line and bottom-line growth going forward. That being said, we still see that business to be sort of a low- to mid-teens business longer-term on EBIT(RAS).

Okay, and do you have any preliminary color on the DAB review of the JTRS HMS program that happened last week?

Well, it's a very interesting series of events. Gautam, over the last couple weeks, which as you would imagine, we are following very, very closely as a lot of other people are. We certainly respect the decision that Undersecretary Kendall made to do what was right for the war fighter, and for the taxpayer by not approving the radio that the Director of OT&E said wasn't ready for fielding. It shows, at least to us, a lot of integrity in the process; the decisions are being made when products are ready for fielding, and at the end of the day, that's what the NIEs really are all about, and it does show integrity in the process that's been laid out by the Undersecretary. We are encouraged by the comments that Secretary Kendall was making around competition; we think that's very encouraging.

Like GMR, like the Fischer Handheld, like the SRW applique, like Rifleman radio, we see HMS is also going to go strongly towards open competitive environment over time. And that message, that is being -- that is coming of the Pentagon is also one that has been well-supported by members of the Congress, because it is the right thing to do for the war fighter and for the taxpayer as a whole. Our radios have been performing very, very well. They have been fielded on the battlefield, they are MSA-certified, and at the end of the day, as we said in early June, and as Dane laid out, we are going to ultimately win the space on innovation, on affordability and importantly, speed, speed of execution. So we follow the DAB, and what has been coming out of Pentagon, very, very closely and we respect the decision that the Undersecretary has made.

And just a quick follow-up on my first question, if you were to assume Maycom has a -- whatever, 14% margin or something thereabouts, you still have the tactical RF business doing well north of 40% operating margins, and that's been the case for, I think, three quarters now. Can you comment on how we should think about that, that level, given the mixed dynamics you explained for next year with DoD Tactical down well in excess of what Foreign is up, will you be able to maintain those margins?

We guided next year to margins of 30% to 31% in the RF segment. And we talked at some fair detail as to how that's -- what's causing that margin to come down from where it has been this year and in the past. Part of it is mix and volume and pricing and tactical, and part of it is some investments that we have made in R&D, as well as in Sales and Marketing expenses. So Gautam, I think you're right on with Tactical coming down mid- to high-single digits next year, and PSPC growing, and we all know that PSPC comes in at a lower overall margin, that does sort of compress the margin expectations next year in that particular segment. But again, I come back over the longer term, we feel good about being able to preserve our margins in both Tactical, and grow our margins in Public Safety over the long time -- over the long periods. So we feel good about our prospects there, and again, I think Dan laid out his strategy for achieving that pretty clearly in early June.

And what do you anticipate the Public Safety margins should be at? You know, when you are mature on your process? Is it 15% EBIT margin business? Is it a 20% business?

Well, right now, what we're focused on is making sure that we make the proper, smart investments in fiscal year '13. It will compress our margins a little bit; it won't be down year-over-year, but it will be sort of consistent with where we ended up at fiscal year '12, as we make the right investments, to position that business for longer-term success. Longer-term, we have got lots of opportunities to drive efficiency, productivity, operational excellence, throughout Public Safety. Dane and his team have a beat on this, they are working very, very hard on this, and that business, the margins will expand over time. Could be into the low-teens to mid-teens, but again, we are focused right now on delivering fiscal year '13.

Thanks, guys.

You bet. Thank you.

Your next question is a follow-up from the line of Joe Nadol with JPMorgan. Please proceed.

Thanks. You guys put out a press release a couple of weeks ago that you are working with the SRW Waveform and evolving it. I was wondering if you could comment on that, specifically, as well as what that means, if anything, for ANW2.

Well, Joe, this is Dan. First of all, the SRW, what we are, is the integrated service contractor, so similar to what GD does for WNW. The [JTRS JPL] has picked somebody who keeps up with the Waveform, keeps enhancing, keeps it current in the library. That's our job on that particular one. SRW and A&W are part of a family of waveforms. SRW is at the lower -- the lowest level of the echelon, and A&W is higher than that, so they don't, in essence, compete with each other. So --

So I shouldn't read this as you are being brought into the fold on the jitters waveforms, and have agreed tacitly to, maybe a little bit to push your proprietary waveforms less?

Well, no, I think what it means is we've always been in the -- working with the library on JTRS from day one. Pulling things out the library, whether it be WNW, SRW, MUOS, whatever they are, and put them on our radios. I think as we go longer-term, we are moving to a situation where we are going to continue to press the government, and where, the proprietary, as you call it ANW2, we are working actively with them to put that into the library. So there is no long-term plan on anybody's part, not to have all these in the library in open source to everybody, all waveforms.

Okay, thanks.

Okay, you bet.

Operator, we will take one more question, please.

Your last question is a follow-up from the line of Pete Skibitski with Drexel Hamilton.

Hi, I am not sure who wants to speak to this, but I was interested in your comments, if you thought it was significant that DoD is sort of seems to have disestablished it to the PEO, or at least change the name. I don't know if that's kind of a pro forma thing, or if you think there is something that could potentially benefit you to that move?

I think, Pete, this is Dan, I think what -- clearly, the clear message was that, and if you read the release, what the Undersecretary did, was he said -- okay, I am going to give the service who has the most need for radios control over it. And that basically, no shock to any of us; we don't think it changes much in what's going on. Clearly, we're going to continue to work with the Army as the new Executive Officer, whether it is PEO C3T, or whoever it is when they get it all done. We don't think it changes much, innovation and our agility and affordability will still win out no matter who the JPO is.

Great, thank you.

All right. Thank you, everyone for joining us.

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