L3Harris Technologies Inc (LHX) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Harris earnings conference call. My name is Sonya and I will be your operator for today. At this point, all participants are in listen-only not. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Pamela Padgett, Vice President of Investor Relations. Please proceed, ma'am.

Good morning, everyone. Welcome to Harris's first-quarter fiscal 2013 earnings call. I am Pamela Padgett and 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 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 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 the tables of our press release and on the investor relations section of our website, which is www.Harriss.com. A replay of this call will also be available on the investor relations section of our website.

And with that, Bill, I'll turn the call over to you.

Thank you, Pam, and welcome to our first-quarter fiscal 2013 earnings call and I wish that all of you in Hurricane Sandy's path remain safe.

I will begin today's call by turning to slides 3 and 4 in the presentation. Harris first-quarter results were about as expected and represent a good start to fiscal 2013. Revenue was $1.3 billion and down 6% with earnings per share of $1.14, flat with prior year non-GAAP EPS of $1.14.

Although lower revenue and income in Tactical Communications and IT services resulted in a decline in total Company results, we were able to hold operating margin essentially flat with the prior year reflecting reduced cost across the Company. We are tracking well to our productivity target of $75 million with cost reductions taking place across operating units and at corporate headquarters.

Based on first-quarter results, corporate expense is on track to be $70 million for the year, which is about $12 lower than the prior year. The cost reduction is not coming at the expense of R&D investment and product innovation for the future. In the first quarter, total Company funded R&D increased 4% and in RF Communications, by 6%.

In Tactical Communications, we were especially pleased with our success in lowering costs other than R&D. Even with the significant revenue decline of 18%, Tactical operating margin held steady at last year's level.

Total RF Communications operating margin was slightly lower as a result of business mix related to the revenue growth of 12% in public safety.

CapRock's success in serving the international energy market with their global footprint continued to drive excellent results. CapRock's operating performance improved over the prior year and we made good progress in healthcare, where our operating loss declined significantly year-over-year moving us closer to our goal of healthcare being profitable in fiscal 2013.

Government Communications Systems posted an excellent quarter with revenue growth of 5% and operating margin of 14.4%. Total orders for the Company were higher than revenue and funded backlog was up both sequentially and on a year-over-year basis. Maybe most important, the Company was awarded in the quarter a number of significant new contracts that position us well for the future.

In Government Communications Systems, we won three significant contracts with the FAA, all of which provide essential elements of NextGen, which is the FAA's multibillion-dollar initiative to transform the National Aerospace System.

Data Communications Integrated Services for DCIS for $331 million will transform voice-based air traffic control to automated Air Traffic Management. NAS Voice System or NVS for $291 million will upgrade the voice switching system to a modern voice over IP network, replacing a legacy system that you may recall was provided by Harris 20 years ago. And NAS Enterprise Messaging Service or NIMS for $63 million which supports the SWIM program and provides enterprise-wide data sharing.

A lot of acronyms but a lot of capabilities that over time have the potential to be worth more than $1.5 billion. These wins coupled with FTI and the hosted payload solution for the Iridium NEXT constellation that we won in June and that will provide air traffic control over remote regions have substantially strengthened our global air traffic control capabilities over the last six months.

In RF Communications, we were awarded two large follow-on IDIQ contracts, $297 million from the Navy for Navy and Marine Corps requirements and a $397 million Consolidated Single-Channel Handheld Radio contract for the DOD with a ceiling value of $712 million. These contracts support modernization in the US tactical radio market and the continued standardization on Falcon III.

We continue to generate strong free cash flow and create value by returning cash to shareholders through repurchases and dividends. In the first quarter, we increased our dividend by 12%, the second increase this calendar year, to a rate that is nearly 50% than it was 18 months ago.

Now before turning it over to Gary, let me turn to a topic that I am sure is on everyone's mind with respect to Harris and that is the DOD's recent LRIP approval for the HMS Manpack program. After being selected for the HMS Manpack requirement, for the first two BCTs in capability set 13 and with the publicized performance issues of the program of record, we believe we are well positioned to win the remaining HMS Manpack requirement. We are now assuming the program of record LRIP radios are fielded for that requirement and we have removed the opportunity from our pipeline, which was about $50 million.

While this opportunity has been dropped, a few others have been added recently or have increased in size such as greater opportunities with SOCOM and the Marine Corps and additional encryption products for the Army that cover about half but not all of the LRIP impact.

So we have a little more risk in the year in RF Communications but we still have three more quarters to go to cover it.

On a longer-term basis, keep in mind that the acquisition objective is for 72,000 radios and the LRIP was for only about 3700 radios or about 5%. The excellent news for Harris in all of this is that Frank Kendall, the Pentagon's Acquisition Chief, officially directed full and open competition for the remaining 95% and for the competition to be -- to occur no later than the fourth quarter of GFY13. As we've said many times, full and open competition has been our goal because in a fair fight, we will win on innovation, capability, and affordability. Our radios work. They have been proven at the NIEs, on the battlefields of Iraq and Afghanistan, and in countless other missions of both US and foreign armed forces.

With this final decision by the Pentagon, all JT arrest programs are now open to competition and we've officially overcome the most significant hurdle to competing for the US Army's multibillion-dollar tactical radio modernization.

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 $445 million and declined 11% compared to $497 million in the prior year. Orders for the segment totaled $363 million and book to bill was 0.82.

In Tactical Communications, orders were $254 million, backlog was $612 million, and book to bill was 0.83. Tactical Communications revenue declined 18% compared to the prior year.

As you are aware in the US market we are managing through a market transition from one that previously benefited from strong [up-tempo] to a multibillion-dollar modernization cycle and we are investing in R&D and product innovations to be as successful in this modernization as we were in the last.

As a result of the transitioning US market, we expect tough year-over-year compares during fiscal 2013 but expect sequential improvement as we progress through the fiscal gear. As Bill mentioned and as detailed in our press release, we have excellent new contract wins in US Tactical Communications and our 12- to 18-month opportunity pipeline in the US is still well-funded at $1.1 billion.

In the International Tactical market, orders increased over the prior year and the opportunity pipeline remained at $2.1 billion. In Public Safety and Professional Communications, revenue growth was excellent, increasing 12% to $138 million.

Our backlog in public safety is solid. We continue to have good wins and our opportunity pipeline is $3 billion.

Operating income for the segment was $134 million, down from prior year on lower revenue. Segment operating margin however was 30.2% slightly lower than the 31% in the prior year due to shift in business mix related to strong public safety revenue growth. Even with the steep decline in Tactical revenue, we were able to hold Tactical operating margin in the prior year level.

In Public Safety, operating margin increased significantly over prior year. Lowering costs in the segment was not at the expense of R&D. As Bill mentioned, R&D increased 6% in the segment.

Our Falcon radios achieved some very important milestones this quarter. The Falcon III PRC 117 G Manpack radio achieved JTRS certified status and is the first and only to do so in the ground tactical radio market. Also our Falcon III PRC 152A handheld is now NSA Type 1 certified to operate the JTRS SRW waveform. This marks the first and only handheld radio certified for transmitting secret level SRW voice and data communications, allowing soldiers at the edge to pass secret voice and data communications to higher echelons operating on classified nets.

In Public Safety, we conducted the first multistate demonstration showcasing the power of LTE networks which have the potential to transform the way first responders collaborate and exchange critical data with other agencies. Through the LTE network, all four state locations -- Nevada, Florida, New York, and Massachusetts, were connected real-time sharing streaming video, voice, and positioning data.

Turning to slide 6, in Integrated Network Solutions, first-quarter revenue decreased 10% to $376 million. Solid growth in CapRock of 8%, driven largely by continued strength in the international energy market for our satellite communication solutions was more than offset by a significant of decline in IT services of 27%, driven primarily from the rolloff of the Patriot program. Excluding the impact of Patriot, IT services revenue declined 4%.

Operating income was $32 million compared with GAAP operating income of $22 million in the prior year and non-GAAP of $31 million. The improved operating performance in CapRock and healthcare was partially offset by lower operating income in IT services due again to the loss of the Patriot program.

Segment operating margin in the quarter increased from 7.5% in the prior year to 8.6% while operating margin improvement was most significant in CapRock, operating margin improved slightly in IT services and the loss in healthcare declined. Improved operating performance across this segment reflects our success in lowering costs and in the case of CapRock and healthcare, are the result of our restructuring and integration actions in Q4 of last year.

We continued to expand our presence with the VA. Harris was awarded several contracts with the VA including a four-year $47 million follow-on IT services contract to expand the BAs nationwide wireless network infrastructure from the initial 22 medical centers to 66. And two contracts totaling $18 million under the T4 IDIQ contract to improve electronic data interoperability for claims processing.

Healthcare awards also included a contract for $11 million under the GSAs Alliant IDIQ to provide an electronic healthcare record system for the Department of Homeland Security. All of these contracts were awarded under the previously won Alliant and T4 IDIQs. Our customers are using these contract vehicles extensively to acquire health information technology and modernization services.

In IT Services, awards included a four-year $46 million contract to provide IT support services to the North American Air Defense Command, NORAD, and the US Northern Command, USNORTHCOM and a $65 million follow-on contract to operate and support the Air Force Space Command, the 50th space win. We also received a one-year contract extension on our Navy and Marine Corps Internet program, which carries us at least through fiscal 2013. We are well-positioned in our pursuit of the replacement contract called NGEN.

Moving to slide 7, revenue in Government Communications was $465 million, increasing 5% over the prior year. Year-over-year revenue increases from the GOES-R weather program and NASA's Space Network Ground segment sustainment program were partially offset by continued slower spending by our DOD customers. Operating income was f $67 million compared with $63 million in the prior year and operating margin increased from 14.2% to 14.4% and is all performance-driven. Again, excellent results in a tough government spending environment.

As Bill mentioned earlier, Harris was awarded three significant new wins with the FAA, making us a major player in the FAA's NextGen initiative. In addition to these new contracts, Harris was also awarded a $51 million follow-on contract for satellite terminals under the U.S. Army's Modernization of Enterprise Terminals called MET and a $43 million award from classified customers. These excellent wins contributed to an outstanding 87% win rate for the quarter.

Turning now to discontinued operations, as a result of recent indicators of value including market trends, financial performance, and indications of value from interested parties, we recorded additional non-cash impairment charges in discontinued operations for Cyber Integrated Solutions and Broadcast Communications totaling $222 million.

We've signed an agreement for the sale of the Cyber data center. We should close that shortly and we continue to make progress on the disposition of Broadcast, which we expect to conclude by the end of the calendar year.

Turning to slide 8, free cash flow was strong at $77 million versus negative $3 million last year with operating cash flow of $121 million compared to $79 million in the prior year and capital expenditures of $44 million, much lower than the $82 million in the prior year. During the quarter, we used $50 million to repurchase 1.078 million shares of our common stock at an average purchase price per share of $46.38. This is in line with our planned $200 million in share repurchases from free cash flow for the year. We continue to expect to use up to $200 million of the proceeds from the BCD disposition to repurchase additional shares. Our effective tax rate for the quarter was 31.6%.

Moving to slide 9, our 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. Our guidance does not reflect any potential impact from sequestration or additional budget cuts beyond those already agreed to.

We are scrutinizing capital spending, being conservative on cash deployment and have incorporated a free cash flow metric for incentive compensation. We expect to generate another year of strong free cash flow in a range of $595 million to $665 million. As is typical for Harris, we expect free cash flow to be stronger in the back half of the year.

With that, let me turn it back to you, Bill.

Thank you, Gary. As Gary explained, our guidance is unchanged and reflects what we believe will be another solid year in a challenging environment. The threat of sequestration is still on the horizon and we will have to let that point out play out before commenting on what impact it might have on our full year. We continue to prepare as best as we can without any real direction from the government.

Should sequestration or additional budget cuts occur, we will be ready to adjust our cost structure and capital spending plans as appropriate. In the meantime, we will continue to focus on the things that we control.

Over the long term, we strongly believe that the technology and innovation that Harris brings to the marketplace are well aligned with our customers' spending priorities. Communications and ISR capabilities allow our government and military customers to do more with less and our uniqueness as a supplier that competes on a commercial basis puts us in a favored position to provide innovation and more affordable solutions than our competitors. As we reduce costs and improve productivity, we will continue to invest in R&D and the long-term success of our enterprise.

Our strategy remains to execute in our core businesses in our growth initiatives, drive operational excellence to lower costs across the Company, generate higher free cash flow and return capital to shareholders through share repurchases and dividends.

Now let me close by thanking Dan Pearson, Executive Vice President and Chief Operating Officer of Harris, for his many contributions to Harris over his 35-year career with the Company. As you already know, Dan is retiring effective January 9 and this will be his last earnings call with the Company. Dan has been instrumental to our Company's success. He is developed and mentored a number of the senior leaders in the Company today and he has provided much guidance and counsel to me as I transitioned to Harris as CEO. He is going to be missed by all of us.

Now I would like to open -- ask the operator to open the line to questions.

(Operator Instructions). Noah Poponak, Goldman Sachs.

Good morning, everybody. I wondered if you could potentially just elaborate a little bit on what happened with the additional impairments with Cyber Broadcasts, maybe if you could get a little bit more specific outside of just the broad strokes of financial markets. And if you could split out sort of how much was Broadcast versus how much was Cyber?

Then lastly, if this in any way changes how you are thinking about capital deployment as a result of these actions?

It's good questions. First of all on both of those, we are still deep in the processes, particularly on BCD and we will comment as much as we can. Our first-quarter results in Broadcast were a little less than what we expected both because the market is a little bit tough and because some of the issues around us selling the business causes some of our customers to be a bit hesitant.

So the results were a little bit worse than we expected but process is pretty well advanced as Gary said due to some recent indicators of value including those things that I just mentioned. We have written down the business in the quarter. You will see more in the Q that we will announce or release at the end of this week. You will see that we wrote down the value of the business to a net book value that's just under $300 million, at $287 million.

We still expect to use up to $200 million of cash proceeds from the sale of BCD in share repurchases. We still expect that to occur in the third quarter.

On Cyber, again Gary said we've signed an agreement on the building. We are going to work to close that over the next 30-some odd days. We expect that will be completed certainly by the end of the calendar year. Again, you will see in the Q we will release later this week the net book value of Cyber is now written down to $38 million and that certainly implies some estimate of value that we expect from Cyber.

The total impairment was about $222 million in total on a pretax basis and the vast majority of that was in BCD, about $6 million, Gary, or so was in Cyber?

That is correct.

Did I get -- Noah, did I get all the rest of the questions?

Yes, I think that answers it and it's very helpful. Thank you. And then just one other one, just wondering if there's any change within your thinking around mix by segment within your full year revenue guidance. RF and IMS were light of what the full-year target was, whereas GCS was a little better. I don't know if that's what you are expecting or if there's any change to your thoughts on segments for the full year?

No, we've -- if you look on the last page of the webcast, we basically have held the topline guidance across all three of those segments. So no, our guidance for the year overall and by segment has not changed based on what we saw in the first quarter but again, it's still early in the year, Noah, but right now, no, we're not seeing any change.

Okay, had not caught that slide, but thank you very much. I appreciate it.

Carter Copeland, Barclays.

Good morning, everyone. Let me just be the first to extend the congrats and our sincerest congratulations on all your successes. Dan, you've done a lot for the Company and I'm sure they're going to miss having you around.

Thank you, Carter.

A couple of quick ones, Bill, on RF, the margins there in terms of Tactical holding the holding the line, obviously you said R&D went up so as a percentage of sales, that was higher. Obviously the volumes were down. I am wondering if some of this could be -- the resiliency in the margin could be mix-related? And I wondered if you might speak to the growth differentials domestic versus international and whether that played a role in the resiliency in the margins in the quarter?

No. As we had signaled several months ago, we knew because orders were a bit higher last year in international than domestic, we knew that going into FY 2013 international was going to be a bigger, a bit bigger than US DOD. That is in fact what we are seeing in terms of size orders, size of revenues. But that mix shift is not what's impacting the margins holding steady in Tactical Communications. In fact I think it really comes back to I think very, very good productivity, tight cost controls that Dana and his team have executed up in the JROC factory and throughout their business.

We talked in Q4 about some restructuring that we did, some of which was in RF. We talked about some of the contractors leaving the business. We talked about very tight controls on marketing and G&A expenses, all of which Dana executed on very, very well and offset what was a little bit higher R&D in the quarter. So it comes down to just good execution on the cost side.

Great, and Gary, on the government systems, the margin performance there I know you made a quick comment that it was all performance-driven but obviously really good performance despite the sales year-over-year. I wondered when you said performance-driven, was there anything sort of one-timeish in nature on any particular contractor or was it just a good mix across the board and good performance that is sustainable on a go-forward basis?

It really was just good performance across the board. We looked at the net ups and downs from any kind of reserve releases and if anything, it was net negative, so it was just great program performance, great execution, good award fees across a broad range of programs.

Okay, great. Thanks. I will let somebody else ask.

Michael Lewis, Lazard Capital Markets.

Good morning and thank you. I have a question on orders with regards to the year-over-year comparable. It was stated in last year's Q1 report or release that you had $1.62 billion in orders and it looks like it has been revised down to $1.48 billion. I guess the question is did you debook the $140 million? And if so, where did it come from, what segment?

I would have to look into that but I'm pretty sure it was just removing the Broadcast division from our continuing operations, but not aware of any de-booking of any orders.

I think you may be looking at last year's including BCD before it was moved into discontinued ops, Michael.

Okay, and that's exactly what I was wondering if it's all Broadcast?

I'm pretty sure that is the case but let me double-check and get back to you.

I think we are confident that we didn't go back and restate any Q1 orders from FY 2012, so I think can we can say it definitively today.

Then just a quick question, the five-year Navy IDIQ, at the time of the award, did the Navy also provide any additional -- any initial funded orders on that contract? And if so, how large were they?

The orders that we got off of it were small to date so we still had the other contract running off and most of those orders are expected to come in the future.

Okay, okay, and then just if you are still working on that prior contract, what's left on the ceiling on that one?

Very limited. In fact I think we are just about down to a few million left.

Okay, that's very helpful. Thank you so much.

Gautam Khanna.

I echo Carter sentiments, Dan, congratulations.

Thank you.

A couple questions. First, Gary or Bill, could you just tell us what you need in terms of Tactical book to bill to get to the guidance this year? What should we be looking for as sufficient to hit the guidance?

I think as you know, let me just say we don't typically give guidance on book to bill and don't sort of give guidance on a quarter-to-quarter basis, but you follow the Company long enough, you sort of know where we ended last year on backlog. You know generally how much we convert of that backlog in the course of the year. Typically it's around 80% to 90%. We know it's going to be a little less this year because we've got Australia and a few others. We typically book and ship over the course of the year between 55% and 60% within the year. This year it will be a little bit higher than that.

And if you run all those numbers with the guidance that we've given for the overall segment, I think you can infer that it's going to be about or a little higher than a 1 book to bill, so I am obliquely coming back to answer your question.

Certainly, I appreciate that. Second thing you mentioned I think in your prepared comments about the HMS developments and it only removed $50 million from the pipeline. Is that what you see -- you said there's a little bit more risk to the RF guidance. Is it just around that $50 million that was contemplated originally or is it something beyond that?

No, it's entirely related to the LRIP. We had about $50 million in our opportunity pipeline for fiscal 2013 associated with that LRIP and as we pull that out, I think as you know, the way we look at forecasting we've got a pipeline. There's probability weightings on the pipeline. They move in, they move out, they get bigger, they get smaller. This one happened to move out. But what moved in behind it is some opportunities with SOCOM, Marine Corps, some encryption products for the Army, so that's basically what has happened. There's nothing else that's behind that. We've been able to sort of offset about half of it but we still have got about half to go in the next three quarters.

Okay, I may have missed this in response to Noah's question about the impairment charges but are you still expecting about $200 million net -- a little bit more north of $200 million net of tax leakage from the sale of Broadcast? Or could you ballpark how big that sale is?

Yes, what you will see in the Q is the net book value of the business has been written down to just under $300 million, which gives you some indication of the value we expect to receive. This tax leakage as we brought it down a little bit, we thought months ago was between 5% to 10% of net proceeds is now less and 5%.

So we still based on where we stand today, expect north of $200 million of cash proceeds again following just what I said before up to $200 million being used for share buyback in Q3.

Okay, last question if you don't mind pontificating in fiscal 2014 and beyond, just given now HMS and all the (inaudible) programs appear to be open, full and open. What do you think happens with respect to pricing and your ability to kind of hold margins now that you might have a more competitive landscape out there given GD was given entry into this?

First of all, we won't -- we're not going to get beyond fiscal 2013 in terms of guidance. But look, we always have assumed and you heard Dana talk about this in June that the program of record would be competitive over time in the space. We never assumed we would get 100% share. They went with an LRIP. They are going to be a competitor, as will other people over time. So we never assumed that we would get 100% share.

When the order came out for LRIP around $250 million, we know that about half of it is going to be deployed in Capability Set 13. We now half is going to be used about in testing and further development, but if you run the numbers in terms of the numbers -- the quantities of the dollar values, it's a pretty healthy price and frankly if the price comes in at that level, I think we'll have good news to talk about in terms of our margin performance in Tactical radios.

Okay, thank you. I appreciate it.

Joe Nadol, JPMorgan.

Good morning and, Dan, congratulations to you. On RF, I guess starting out, can we speak a bit about the international pipeline near term? It seems like a lot of the US orders or potential US orders are -- and those competitions are certainly in the back half and maybe the fourth quarter of your fiscal year so international I would think would be more prominent in your bookings this quarter and next quarter. Is that fair? Is there anything chunky in the near-term pipeline?

International is always going to be a little bit chunky. This year won't be any different from the past. Keep in mind we've got a big chunk of the backlog that is Australia and that's going to roll out over the course of this year going into FY 2014, so we know we can count on that. That's actually going to happen.

But, Joe, we are coming off of a very strong fiscal 2012 in terms of the international business. We had both double-digit revenue and orders growth through fiscal 2012. I think we are well positioned competitively in the marketplace. We continue to invest in new products and capabilities. We are expanding the market so we are doing I think relatively well. It's a pretty healthy pipeline.

But the reality is we don't see a lot of big Australia sized opportunities out there that are going to be hundreds of millions. There are going to be more like tens of millions of dollars of opportunities that lead to large opportunities for multiyear modernizations but no big Australia like opportunities on the horizon. We see as I said at the Q4 release, we talked about Pakistan. That still looks pretty good. The political climate still appears to be improving. We see opportunities in Iraq firming up. We think Jordan is still pretty solid and the pipeline there has gotten a bit bigger over the last three to six months.

Brazil is looking pretty attractive to us. It is still in the early stages but we think is progressing pretty well. I think we are well positioned in the Middle East particularly in Saudi as well as in the UAE and we are seeing some opportunities in the Philippines, in Poland, a little bit in Denmark.

So we see in lots of different pieces but again not the big Australia sized opportunities but still we feel very good about prospects for the year as a whole. I think as we talked before, it's tough to predict a particular order and a particular quarter but overall for the balance of the year, we think international is going to end up being pretty good.

Okay, thanks for that. Just one other one on the Broadcast situation, obviously just by definition, you guys are going to get a bit less -- you're going to get a bit less than you'd hoped when you started out the process. So my question is is there a price at which you would not sell the business or are we firmly committed on this track 100%?

Look, we have made a decision to divest the Broadcast business because we didn't think it fits strategically with where we want to take the business. It's now our job to maximize value for shareowners and as we dispose of that business and that's exactly what we are doing.

I don't think it's appropriate to talk about where is the sort of the walkway price. We are committed to sell the business and do the right thing for shareowners given the fact it doesn't fit strategically and that's what the management team has got a bead on right now.

So we will tell more. We will have more of an update towards the end of the year as we announce the sale of Broadcast and clearly more to say as we announce our Q2 results.

Okay, thank you.

Yair Reiner, Oppenheimer.

Thank you, just a couple of housekeeping questions. First, taxes came in a little bit below your full-year guidance. Can you give us any update there?

This is Gary. As we've always said, tax rates in any given quarter jump up and down because of discrete tax events. We still feel very good about the 33% rate for the year. If the R&D credit comes in as expected, we probably are going to do a little bit better than that, but that's where we're at currently.

Great, and it looked to me like the adjustment participating securities was lower than typical. Can you give us an update on the guidance there?

We did buy again about 1.078 million shares in the quarter. I think that's what you are referring to. The decline in shares outstanding actually went up a little bit rather than declined because of the exercise of options and awards that came out in Q1. There was a lot of activity by employees exercising stock, but that would be the only reason the decline wasn't as great.

Thank you.

Mark Jordan, Noble Financial.

Good morning. A question relative to the international backlog. Is there a way or do you have it segmented by geographic region so we have a have a sense of what is Middle East, what is Australia, what is Western Hemisphere?

We do, actually. We have a very good sense of where the backlog is by not just hemisphere or geographic region but by country and specific opportunity within a country. Dana and his team know it very well. They track it day to day. They probability weight it. They have their salespeople chasing it. But that's just a level of detail that we are not going to get into on an earnings call. Certainly that has some competitive sensitivity to it, clearly. Yes, we do know that detail very, very well.

Okay. Secondly, relative to what is the competitiveness in the international market with regards to people that you would be bidding against? Is there effective competition there or are you finding it more a decision of a specific country going to exercise a purchase order and you are the only game in town?

No, no, typically look, there's a lot of competition in the international markets but clearly based on what we have seen in terms of market share over time, we are performing very, very well. You have to understand, though, in a given geography that has standardized on a Falcon II and then a Falcon III product, clearly we have -- we are in the catbird seat to win future generations of radio purchases.

So I think we're well positioned in places where we've been established for some period of time, but in any place, in any country we happen to go in especially with the fiscal constraints we see almost in any place we operate, yes, there's going to be competition. There's going to be a desire to get a good radio at a lower cost over time and we meet our customers' expectations as best we can.

Thank you.

Chris Quilty, Raymond James.

Thanks, gentlemen. I wanted to follow up. You had mentioned the certification on the 152A handheld and wanted to clarify. I know the Rifleman Radio Program has also been opened up to full and open competition. Does the 152A meet all the specs there and if so, how would you stand competitively with that product?

I think I'm going to start and then probably get beyond what I really know and maybe ask Gary or Dan to step in. But no, the 152A can meet those requirements but it's probably a little bit beyond the requirements of what's typically for the Rifleman Radio application based on its clearance and classified data traffic it can handle. So we are developing a new product generation which will be ready when Rifleman goes to full and open competition by the end of fiscal 2013.

I think Dana talked about this in early June with the 330E and we will be ready with a very, very good product that is competitive on size, weight, and power and at a great cost point relative to Rifleman.

Okay, and also on the RF business with the two recent contract awards, both large contracts but both IDIQs, so you can't count those towards the backlog in the way that you would traditionally, and I know you have some granularity there. Can you give us a sense -- a little bit disappointing on the book to bill here on the radio on the contract for the quarter. Are you carrying a much higher level of IDIQ business than you might have been in years past that sort of offset the lower traditional book measures?

This is Gary, Chris. We're not really. In fact, those vehicles are very similar to the contracts that were in place. We continue to see a lot of opportunity with those different agencies or the government. The Navy, Marine Corps have been standardized on our products. We see lots of opportunity coming from that but you are correct, we don't book IDIQ vehicles in our backlog. The only thing that's in backlog are funded orders.

Okay, final question on the Manpack, I think the actual award for the HMS program was closer to $250 million. Your point, $50 million was all you had in your particular forecast but does it not imply that there's maybe a bigger chunk of follow-on business that might not be available? And can you also talk about if you can specifically -- these are known items -- where you think you stack up in terms of size, weight, performance, pricing, battery life, and other metrics that are going to be used to eventually determine which way the orders go?

I think on the first one, I briefly referenced it but let me hit it a little bit more directly. You're right, the order for the LRIP was about $250 million but our understanding is that only about half of that LRIP is going to be fielded and keep in mind that the LRIP radios are coming at a much higher price than what we would have had in our pipeline for $50 million.

We also assumed that the next three BCTs were going to be mostly light versus light and heavy BCTs. They also added a fourth in -- for [Carson] coming out of the DAB which sort of made the purchases a bit more. So all of those factors come into play in what happens, why it's 250 versus what we only expected to be about $50 million.

I think the biggest piece of it is only half is going to be fielded and it is a much higher price than what we've put in our own opportunity pipeline.

I think relative to the Manpack and our ability to compete against that, look, we are working very hard on -- and we plan to offer a two channel Manpack when it goes to full and open -- integrative two-channel Manpack when it goes to full and open competition by the end of the fiscal year and I think we are going to be very competitive versus where the program of record happens to stand.

As we said, when you asked the question on MBR, we will have a two-channel competitive solution but we are not going to get into what it's going to do right now.

Is that the applicator that you demonstrated a couple of years ago?

No.

And you can have a two-channel radio certification but the process of getting an NSA certification typically takes about a year so does that put you behind the competition?

No, we will get there.

Great, thank you.

I think we have one more queued up again, maybe Gautam?

Gautam Khanna, Cowen.

I just had a quick follow-up. You guys talked about the foreign RF pipeline, mentioned Pakistan. I just wondered, does sequestration, does it matter who is elected president? How much of a moving train is that order and orders similar to that in the Middle East, say? How dependent are they on kind of Congressional approval, whether it be something that has already been approved or is it something that you think you are going to need buy-in from Congress before it can happen?

And does it matter who wins the election in terms of the likelihood or non-likelihood of those orders happening this fiscal year?

Look, we first of all, our pipeline doesn't really hinge on who takes the White House and who is in Congress in November or not. You know, I think -- I won't talk specifically about the opportunities and how they are being funded, but in general from what we saw in the President's budget, the FMS funding line looks pretty good -- it is sort of flat, maybe up a little bit in GFY 2013.

But also the amount of our international business that is coming from countries that require FMS funding is declining over time. Two years ago, it was north of 40%. Last year, it was about a third or a little less than that. This year it's sort of down towards 20%, so it's coming down over time and therefore is less dependent upon US Government funding for those kinds of opportunities. Hopefully I answered that question.

Yes, that was very helpful, thank you.

All right. Thank you, everyone. I appreciate it.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.