L3Harris Technologies Inc (LHX) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harris Corporation's First Quarter 2018 Fiscal Year Conference Call. (Operator Instructions)

I would now like to turn the conference over to our host for today, Anurag Maheshwari, Vice President of Investor Relations. You may begin.

Thank you, Sonia. Good morning, everyone, and welcome to our first quarter fiscal 2018 earnings call. On the call with me today is Bill Brown, Chairman and Chief Executive Officer; and Rahul Ghai, Senior Vice President and Chief Financial Officer.

First, a few words on forward-looking statements. Forward-looking statements made today involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information and a related discussion, please see the press release, the presentation and Harris' SEC filings.

In addition, today's discussions will include non-GAAP financial measures, and a reconciliation of the non-GAAP measures discussed today to comparable GAAP measures is included in the quarterly materials on the Investor Relations section of our website, which is www.harris.com, where a replay of this call also will be available.

With that, Bill, I will turn it over to you.

Thank you, Anurag, and good morning, everyone. Earlier this morning, we posted Q1 fiscal '18 results, and we're off to a good start to the year. Earnings per share was up 8% to $1.38 on flat revenue; margins expanded 70 basis points to 19.2%; free cash flow improved by $50 million; and we returned $144 million to shareholders through share repurchases and increased dividend, our 16th consecutive annual increase.

The highlight of the quarter was orders increasing 33% to a record $2.3 billion with a book-to-bill of 1.6. So let me highlight a few of these key wins across the 3 segments indicated on Slide 4, starting with Communication Systems. We finally secured the much anticipated $260 million order for our Phase III modernization, the first stage of a multiyear program with total potential value of over $1 billion. As you know, the Australian MOD has standardized on Harris' networking technology. And today, we've shipped about $800 million in radios. And we're leveraging that incumbency into developing and building a broader integrated network. This is part of an important strategic initiative to expand our addressable market, and we're replicating it in other geographies.

In Eastern Europe, we received a further $52 million in orders from Ukraine as part of the Ukraine security assistance initiative to modernize communications to meet emerging threats in the region, building on very strong orders performance last year.

In the Middle East and Africa, we anticipated a recovery in '18. And in the quarter, orders were more than double the prior year with a $39 million order from Iraq and $46 million from Kenya. Overall, international tactical book-to-bill was well over 2 and was still greater than 1, excluding Australia.

In DoD, we also saw increased demand with orders growing about 40%, including more than $100 million focused on readiness. A couple of notable awards include $36 million from the Air Force for upgrades of their legacy communications equipment to software-defined radios to support multimission operations, and $38 million from the Marine Corps for radios with MUOS capability to enable high-quality satellite communication on expeditionary missions.

On Army modernization, as I mentioned on the last earnings call, we received an order for 101 HMS Manpack test radios from the Army at the beginning of Q1. And we expect to start deliveries later this quarter. With a [down selected 2 vendors] now accomplished, we're working with the Army as they prepare for field-based risk reduction in the spring of 2018. DoD tactical book-to-bill was also well above 1 in the quarter, and overall Tactical Communications backlog is now $879 million, up 66% from the prior year and 78% sequentially. Excluding Australia, backlog is up 25% sequentially and 17% year-on-year.

Public Safety and night vision also had strong orders, resulting in Communication Systems having record orders of about $825 million and book-to-bill of 2. Following the close of the quarter, we received a $765 million sole-source IDIQ award from the Navy for Falcon III and next-generation radios, replacing a contract that was completely exhausted in April. This value was more than double the previous contract in alliance with the Navy's budget request to ramp up Marine Corps modernization efforts over the next few years.

In Electronic Systems, we continue to see strength in our electronic warfare business, and we received a $133 million contract for U.S. Navy and Australian F-18s, continuing a 20-year relationship and enabling legacy platforms to perform more advanced missions. We also provide the EW system for international F-16s. And in the quarter, we received $47 million in additional funding from Morocco to complete the upgrade of their entire fleet. And we have several additional international opportunities in the pipeline.

In the Avionics business, we continued to ramp production for the F-35 with a $63 million order for LRIP 10 release systems. In addition, we expanded our international footprint with key wins in Singapore and Turkey for smart carriage and release systems on international F-16s. These smart racks can carry 2 payloads of up to 1,000 pounds each and have our innovated and patent electronics, enabling direct communication between the aircraft and the payload.

In C4ISR, we leveraged our classified robotics expertise, and were awarded a contract worth up to GBP 55 million from the U.K. Ministry of Defense to provide robotic systems to support explosive ordinance disposal missions. The U.K. MoD is a global leader in EOD, and our state-of-the-art product delivers real-time haptic feedback and unparalleled range of precision control. We're excited about offering -- about our offering and expect other countries to follow the U.K.'s lead as they upgrade [EOD] capabilities. Overall, Electronic Systems book-to-bill was 1.5, with both electronic warfare and Avionics above 2.

And then finally, in Space and Intel, we had a number of significant winds driving a segment book-to-bill of 1.4 with continued strength in the classified domain and in our commercial reflector business. Let me provide a little color where I can on a couple of them.

On our Q2 call last year, I noted a new franchise emerging from an $80 million classified contract that we described then as a ground-based adjacency. We knew this program had the potential to grow into several hundred million dollars. And after a successful startup, we were awarded a $35 million -- $34 million follow-on contract in the first quarter, further solidifying our position in this new franchise area. In addition, I noted last quarter that investing in R&D and innovating ahead of customer need enabled us to win 2 classified smallsat programs. These Pathfinder missions have proven successful as our customers move towards disaggregated, more affordable and responsive space solutions. And we received an award this quarter that has a potential to grow to more than $100 million over the next 2 years.

And then finally, in our commercial space business, we received our largest order for a single commercial satellite, covering 4 reflectors, bringing total orders to 8 over the past 2 years. Our commercial reflector pipeline remains robust, and we expect these recapitalization and expansion trends to continue through fiscal '18.

So, overall, we're seeing positive momentum across the company, and I'm pleased with our strong orders growth, driven by sustained -- our internal R&D investments over the past several years.

This strong start to the year gives us confidence in our full year guidance and reinforces our view that we're at the beginning of a multiyear of growth inflection.

Let me now turn the call over to Rahul for details on the financials. Rahul?

Thank you, Bill, and good morning, everyone. Just a quick reminder. The fiscal '18 results are compared with the prior year non-GAAP figures, which excluded acquisition-related costs.

Total company results on Slide 5. Revenue was about flat with growth in Electronic Systems and Space and Intelligence offset by lower revenue in Communication Systems. Operating income was up 3% and EPS was up 8%. Free cash flow grew by $50 million to $72 million.

Turning now to first quarter EPS bridge on Slide 6. EPS grew by $0.10. The expected $0.08 headwind from the ADS-B program transition was partially offset by disciplined capital deployment in fiscal '17. Strong segment performance delivered $0.12 of accretion from solid program execution, incremental integration savings, higher pension income and lower costs. Benefit of higher volume in Avionics, Battle Management Systems and classified space was offset by lower environmental and Communication Systems volume.

Segment detail on Slide 7. Communication Systems revenue was $410 million, down 5%. Tactical Communications revenue was down 5% with DoD down 2% from lower airborne radios volume. International tactical revenue was down 6% as substantial growth in the Middle East, primarily from Iraq, was offset by the expected declines in Central Asia and in Central and Latin America due to a tough year-over-year compare. And though slightly down, Europe remained strong, driven by Eastern Europe. Public Safety and Night Vision were both down mid-single digits. Segment operating income was flat at $118 million, but margin expanded 140 basis points to 28.8% as lower cost and operational efficiencies more than offset the impact from lower volume. Historical information for tactical orders, revenue and backlog is provided in the supplementary material.

Moving to Slide 8. Electronic Systems revenue was $540 million, up 1% versus the prior year. Excluding the impact of ADS-B program transition, revenue was up 5%. This was driven by the ramp in UAE Battle Management Systems program and growth in Avionics across several platforms, such as F-35, F-22 and F-18. Segment operating income was down slightly to $109 million, and margin was down 50 basis points to 20.2%, a solid performance across the segment and ongoing focus on operational excellence offset a $14 million headwind from the ADS-B program transition.

Slide 9. System and Intelligence revenue was $466 million, up 3%. Classified business was up 8% and environmental revenue declined double digits, in line with expectations as some programs trended down. Segment operating income was up 10% to $87 million, and margin expanded 130 basis points to 18.7%, driven by strong program performance and higher pension income.

Moving to Slides 10 and 11 for full year guidance. Guidance for fiscal '18 remains unchanged with EPS in a range of $5.85 to $6.05, up 6% to 9%, including benefit from $150 million of share repurchases for the year with $75 million completed in the first quarter.

Total company revenue guidance is unchanged in a range of $6.02 billion to $6.14 billion, up 2% to 4%. Communication Systems is expected to grow 3% to 5%, with DoD tactical up double digits from increased focused on readiness and incremental modernization volume. International tactical is still expected to be flat to down slightly with growth in the back half of the year as the Australia modernization program ramps up.

Electronic Systems is expected to be up 3% to 5% with growth in Avionics, electronic warfare and Battle Management Systems. Space and Intelligence is expected to be flat to up 1% as strong revenue growth in the classified area will be partially offset by the headwind from the environmental programs. Total company operating margin guidance remains unchanged in a range of 19% to 19.5%. We also continue to expect $850 million to $900 million in free cash flow for the full year. The first quarter tax rate of 27.7% benefited from the stock-based compensation accounting standard that we adopted in the first quarter of fiscal '17. We still expect a full year tax rate of about 28.5%. The remaining 3 quarters are expected to average 28.8%, varying quarter-to-quarter depending on specific tax timing differences.

And with that, I would like to ask the operator to open the line for questions.

(Operator Instructions) Our first question comes from the line of Pete Skibitski of Drexel Hamilton.

Bill, is revenue kind of in line with your expectations? Or if it was a little bit light, was it just timing or maybe CR related?

Yes. It -- look, I think, we're pretty pleased with where we happen to be in the first quarter coming in at about flat. I'm very, very happy with where we were on orders. Orders were very, very strong and if you look at the balance of the year, we've got fair amount of the back end of the year. It's now covered in the backlog or in firm or follow-on -- high probability follow-on orders. So it's actually quite good when I look just across the businesses. CS came in at down 5%. So we saw a couple of opportunity shift into Q2. But we see though the balance of the year being very, very strong. And Electronic Systems came in at 1%. But when you exclude the impact of ADS-B, it will be up 5%. So that's a pretty substantial drag in the quarter. And we'll see that again in Q2. And then Space coming in at 3% for the first quarter is above the full year guidance and, again, reflects some good trends happening in the business. So, overall, I think we're pretty pleased with where we happen to be in the first quarter.

Okay. Fair enough. And then just last one, Bill, for you. I was wondering if you can make some comments on some of the consolidation we've seen in the space. The UTX buying Collins, Northrop buying OA, that obviously is going to have some impact on the communications market, small satellites, that kind of stuff. And so I was just wondering how you see it. Does that put you at a competitive advantage or disadvantage rather? As the guys get bigger? Or do you feel like maybe you're just more nimble and can maybe move faster than those guys? I'm just curious on your comments.

Yes, Pete. Look, I think, from my perspective at Harris, we don't see any change to our game plan. We have a healthy amount of respect for the competitors we have in the space and the moves that they're making. But we feel we've got good skill position in the franchise areas we happen to be participating in. We spent a number of years investing in our franchises and focusing our businesses where we know we could be successful and winning based on technology. So we feel pretty good. We watch what's happening in the industry. But we feel good about the position of Harris Corporation and where the budgets happen to be going. And I think the future is very bright for Harris.

And our next question comes from Seth Seifman of JPMorgan.

Bill, we had a lot of developments in the tactical comms area over the last couple of months. I wonder if you could address just broadly kind of 2 of them. One being how you think the changes in -- started at the upper end of tactical and having to do with WIN-T and what that sort means for Harris over time? And secondly, for the comments that the Army has made recently basically suggest that they are looking to incorporate more capability into their communications capabilities faster. And how you think that Harris can address these capabilities? And whether you see the Army kind of looking at all to new entrants to try and deliver any of their capability? And if there are any new entrants who can?

Well, I think -- very, very good questions. I think you're referencing a lot of the discussions gone over the last 6 to 8 months. Maybe a little bit longer than that, led by the chief on the future of the Army architecture, the resiliency, the concerns about maneuverability and a variety of other things. They commissioned a study. The study came out with the findings, the Army has deliberated on that over the summer, in fact engaged industry in lots of ways and conversations around it. And there was a recent testimony in September in front of one of the subcommittees of the House Armed Services Committee talking about some directions the Army wants to move in. First of all, in the upper tactical system, that mainly relates to WIN-T, we are a provider of some components on WIN-T. We provide the Highband Networking Radio as well as an HNW waveform, which we've developed. Frankly, as they look for ways of making that system more resilient, more maneuverable, that could flow down with some opportunities to Harris to upgrade its HNW waveform and HNR radio, which we're proceeding with today. In terms of the Army wanting to put more capabilities into the tactical radio with a tactical Internet faster, frankly, works directly in our favor in many ways and I think is a strong foot stomp on the commercial model that Harris has been known for, the ability to quickly embed commercial technologies, continuously innovate, developing new capability, fielding them very quickly, investing ahead of the curve and building headroom on our radios so that you can onboard new waveforms, new technologies based on where the market is moving or threats are changing. So that works very much in favor of the model that Harris I think has been known for, is very, very strong at. So, I think -- overall, I think, this is a -- this will eventually be a good outcome for the company. There's been some deliberation over the last 6 months, but I think it's starting to become clear as to where the Army wants to move. They clearly have made a strong statement in support of the Manpack radio. They made a strong statement in support of the 2-channel leader radio. They want to become more SOCOM like, which again goes back in support of Harris. So I think overall, this could shake out to be good news over time for Harris.

And our next question comes from Gautam Khanna of Cowen & Company.

Couple questions. First, I was wondering could you give us the [legacy tactical] orders and sales in the quarter just so we have them?

So we're not tracking. As we mentioned, I think, on the last call, we're not going to track it that way. We're just going to provide now combined results for the tactical radio business between Harris and Exelis. As we've combined and integrate the business, operationally, we're running it as one. Our sales forces are now combined. So we have, even internally -- we just stopped tracking between Exelis and Harris and just tracking it as -- just as the tactical radio business, and we have the details in the supplementary material for the overall business.

Yes. And I don't think the -- adding an Exelis is really changing the trends very much, frankly.

All right. Couple things. One, I was wondering if you could give us your -- the guidance then changed on a net basis. But are there any puts and takes within it, like the Australia, you're expecting $60 million of sales this year? Is that still the expectation? Any comments on kind of beneath the actual net numbers, has there been any changes as a consequence?

Yes. I think, we -- you're about right on Australia. That should be about the flow-through in the year. Overall, we still see good growth on DoD, up double-digit for the year. And international, as Rahul said in his prepared remarks, flat to down slightly. We still see a very strong pipeline. It's about $2.3 billion. We see the Middle East and Africa region perhaps being a bit incrementally better in the year than we thought just a couple of months ago. It's going to be up significantly double-digit and a little better than we have thought. And, again, we're seeing good opportunities flow-through in Iraq. We're seeing that almost doubling over the course of the year. The U.S. government support there is actually quite strong. We know Saudi is going to come up off a very low base from last year mainly because of their (inaudible) product, their SINCGARS product that is going to flow through this year. North Africa looks good. We see Kenya looking pretty good. The [UAE] is pretty strong. The only place that's really soft in the Middle East would be in Jordan. But again, overall, Middle East is a little bit better. Asia Pacific just a little bit better as well than last time, again, up significantly double-digits. Australia is a key part of it. There's a couple of other markets in South East Asia that are quite strong. So APAC a little bit better. Maybe Europe is about the same. Maybe a little bit worse over the course of the last couple of months. We had a good start. The book in Ukraine was a big deal for us. But Romania is going to be some pressure in the year. Poland is going to be some year-over-year pressure in the year. And in CALA and Central Asia, both look a little bit weak and we knew they would be weak, but probably incrementally a bit weaker than we thought before.

Okay. And, Bill, just following up on Pete's question about consolidation. You guys have been buying in a lot of stock. I'm curious, I mean, what is the M&A pipeline looking like for you guys as an acquirer now that the balance sheets [are in] a lot better shape and the Exelis integration is effectively completed. Are looking at stuff? And if so, kind of what types of properties interest you, in terms of size capability? Any color you can give?

Well, I really can't give you much color, we could -- you're right. We have completed Exelis integration. Our balance sheet is getting stronger. We've got a little more debt to pay down at the end of this year, about another $550 million in fiscal '18. We've -- I think we've proven our creds, if you will, on how we bought a company at a good part of the cycle. We're disciplined in what we paid and integrated very, very well. So the team is looking at a variety of different opportunities, none of which are must haves, that could help us -- accelerated some of our key franchise areas. But I don't believe today that we need to acquire to be successful. We're going to be opportunistic. We'll be very focused on where we buy. But we're just starting to look a little bit more. But it won't be in an area that's outside of our core space.

Our next question comes from Carter Copeland in Melius Research.

A couple questions for you. One, Bill, I just want to ask assess question, another way just to get at the kind of risk here. As you think about the deliberations that the customer has had here, are there factored bookings, I would say, in your plan at the latter part of this year that have some sort of risk if the customer moves slower than expected in terms of deciding what the network architecture is supposed to look like holistically? Just trying to get a sense of whether there's incremental risk here to the inflection that you've talked about in the growth.

We think the Army's -- first of all, across the DoD, they were moving money into some of the procurement accounts. We see readiness picking up. This is a bit more aggressively than we thought just a couple of months ago. There's a lot of conversation about equipping new security forces and that is going to, we believe, help us in the year. We have very little in the year on modernization. It's up from last year. We had a good start to the year on selling the Melius waveform. We expect this year to be about $50 million and 80% of that or so was booked in Q1. So that's pretty, pretty strong. But we've sort of derisked what we expect to see coming out of the Army Manpack. It's largely just the test radios that we have shipped. We do see the SOCOM handheld radio beginning to ship in the back half of the year. That's going to ramp into '19. But as I sit here today and based on -- as I look at our backlog and backlog roll off, in the tactical business, largely, we probably have about 50% or just about 50% of the back end. So Q2 through Q4 revenue that's now in backlog and will flow out. So we feel better today looking at the back end of the year, Carter, than we did last year at this point in time. So, I think, we're relatively well calibrated in the year.

Great. That's great color. And then, Rahul, just 2 quick ones. With respect to the margin strength in ES and Space and Intel, were there any net favorable EAC adjustments to note in those? And then the second one is, given the potential for tax reform, how are you guys thinking about potentially prefunding a slug of the pension?

Yes. Good question, Carter. So on the EAC adjustments, overall, it's kind of similar to where we were last year same time. So really no difference. I think both Space and ES had good operational performance and kind of Space had a little bit of [award fee] timing that those things fluctuate quarter-to-quarter. And ES had some -- a slightly favorable fixed-price content mix and some flows out on fixed-price program. So those things helped in the quarter. But overall, we feel good about where the margins happen to be. And on the -- on your second question on the pension, we contributed $400 million last year. So we had about -- we had about 4 -- we had about 80% funded. So that's -- so we have to be -- which we feel relatively good about and the second part is -- so given that we are -- we'll keep -- and as the interest rates move by about 25 basis points, our pension deficit cuts down by like $160 million. So a point of interest rate movement is going to cut our pension deficit by half. So we're going to continue to monitor that and think about what that means on when we make pension contribution if we choose to do so. We have -- given our fiscal year ending, we have a little bit more time than others do in terms of if we have to do something extra on pension. But right now, we feel good about where we are in terms of funding.

And I think [the thing] you might have mentioned about tax as well, Carter. I think -- we're hopeful that tax reform does occur. I think every 1 point on effective tax rate is worth about $0.08 for us. So net-net, I think, if that moves forward, I think it would be a positive for Harris.

Our next question comes from Rob Spingarn of Crédit Suisse.

So, Rahul, I'd a couple of clarification questions I wanted to ask you. The first one being in the Space and Intelligence business. What is the classified growth in the guidance if you remove the headwind?

So our classified growth is about roughly mid-single digits, around 5% year-over-year in our Space guidance.

Okay. And then just in the cash flow, you had I think it was a source of around $107 million in other cash from ops. I can't recall if you described what that was already. I just wanted to follow up on that. And then, Bill, I have a radio question for you.

Sure.

Yes. So on cash, it was a good start to the year. We're up $50 million year-over-year in the quarter. And as expected, we had some working capital headwinds as we overdelivered $50 million in Q4. So we kind of expected that. And that got offset by some refunds on tax payments we made last year and some cash tax timing differences. But on a long -- last 12-month basis, we had about $900 million of free cash flow and feel good about delivering $850 million to $900 million for the year.

Okay, okay. Bill, moving back to where Seth and Carter were going. I just wanted to ask a little bit more about jitters. Just given that we've just had this network vulnerability study with the Army and then having just visited the [AUSA], et cetera, one of things we are hearing is that the radios, the tactical radios are vulnerable to jamming and that there's a scaling up issue, where only a certain -- you can only get to a certain number of radios. I think it's something like 31 before they begin to jam in the field. And so I wanted to ask you where -- what's your comment on that? Where are we technically? And is there generally an issue with the hardware being able or mature enough to process the software-driven radio? Are we not quite there yet? Is that really the core of the issue in developing this program?

No. It is a very, very complicated question that you're asking. But effectively, we've been in the business for several decades delivering radios and have been nearly standardized across the DoD on our 117G, 152 Alpha radios and are field proven. And we developed -- we've been developing and working on the next generation Manpack radio, the single-channel Rifleman Radio, the 2-channel handheld radio, the mid-tier radio. We're selling them all around the world. And even some of the newer products is being sold both within and outside of the DoD. The technology continues to move, the threat environment continues to change, and the radios have to be adaptable over time given those current huge trends. And what -- I think what the Army has realized is that you cannot take a JTRS program and 10 or 11 years ago, set a specification 5 years before the first iPhone is launched and set a specification and hope to field it 11 years later and have it be relevant. It has to be very nimble, agile, flexible procurement process and has -- you have to be able to upgrade frequently. And in fact, that's where the Army is moving. That's where SOCOM has moved. And that's really the commercial model that Harris, I think, is distinctively good at. We develop headroom in the hardware of our radios, such that when new threats come up or new waveforms that could be low probability of interception or low probability of detection or [A2G] in waveforms, that you can onboard them into that radio in the existing hardware. It's exactly what we did by putting the MUOS waveform on to our existing 117Gs. MUOS was not even contemplated on a 117G. We first started fielding it 8 years ago. But our great waveform engineers up in Rochester were able to customize that waveform and be -- with a simple software download on the drive -- drop it into a 117G. That's the beauty of this particular model. So to your comments and concerns, yes, there's been a lot of question around this. The threat environment is changing, the technology is moving. But we believe that the adaptability of our model, our engineering investments in our products, we think we're going to be well-positioned no matter where the Army or for that matter any of the other services go. So, hopefully, I'm addressing your question, Rob. It's a very complicated one. But I do believe that this ultimately reflects back on the value of the commercial model that Harris is very good at.

Well, you are, Bill, and it is very complex. With all that said, and I think you started to do this when you answered out to Carter's question, do you have a sense of how many Manpack radios you'll ship total this year and next year? Is there a way to quantify this? And can we figure out when the annual production lot competition will begin?

The terms of the specific number that we'll ship this year, again, we are under contract on the multichannel Manpack for 100 units -- 101 units. And they're going to ship back into this quarter and into early Q3. So early first quarter of calendar '18. And it also had to do with the field-based risk reduction probably in the April-May time frame. And that's sort of the current operating model. Now the down select really effectively has happened. It's us and Rockwell Collins and we're both aligned at moving the Army forward and ready to go. And I think that voice common from 2 competitors in the Space I think is resonating with the Army. So if anything, that could encourage that procurement to move faster rather than slower. So I think that's kind of where we see it at the moment.

In your plan, do you have a sense of when that production work would start, the 2 of you?

In terms of the full-rate production?

Yes, yes.

It's probably at the back end of our fiscal '18, maybe into early fiscal '19. But I think the Army still wants to field right out of the gate 6 BCTs and that could happen in 2 and 4 or could happen in all 6. We don't really know exactly what they're going to end up doing. But that's probably more likely is fiscal '19 revenue event for us as opposed to fiscal '18. The order could happen, even in the best of cases, towards the back end of fiscal '18. But that's kind of where we see it right now. But when you look at the budget and where the Army wants to move, even though recent testimony (inaudible) in September, all in favor of moving forward at significant quantities of the HMS Manpack. So I think it's very encouraging what we're seeing over the last couple of months.

Our next question comes from the line of Jason Gursky of Citi.

Can you hear me okay?

Sure, Jason.

Okay, great. Bill, I wanted to go back to the Space business for a moment if we can. And now you talked a little bit about some of the dynamics that are going on there, both on the classified and in the commercial side of things. On the classified, just give us a sense of where you're seeing longer-term growth trends going maybe the scope of those growth trends here over the next few years. And then on the commercial side, the DoD has been discussing moving towards a more commercial procurement model, particularly on the communication side of things. I was wondering how Harris is going to potentially play in that. And kind of what that dynamic means, just generally speaking, for the satellite industry?

Sure. Let me maybe hit a couple of key points, and if Rahul, if you have anything to add, jump in. About 2/3 of the Space business is in the classified domain. We see the budgets up sort of mid-single digits. We see that continuing over the next number of years as far as how we can see at a visibility to it. The classified budgets are coming up. And we get a little bit of color within the top line, and we can see where the money is being spent and I feel that it's growing faster in areas that Harris has developed capabilities. So are high-end exquisite sensors as well as are pretty innovative, creative small sat-type solutions. And so I feel very good. Rahul said for the year the classified business will be up mid-single digits in Q1. It was up a bit stronger than that. We continue to see good solid order trends, and the pipeline here is quite good. The commercial business of the Space and Intel business, which mostly commercial reflectors and GPS, that business will also be up pretty strong this year, about double-digit. And again, we talked about some of the awards we've seen. In that commercial reflector business, we've got a strong global share. It's a commercial model-driven business where we invest our own R&D to develop that offering. We sell it into the marketplace. It performed exceptionally well on orbit, almost no failures with very, very high margins. And we have been running at about 2 reflectors a year over the last 6 years. And over the last 2 years, we were at about 4 per year. So it's kind of doubled, and we see another 5 or so that we're bidding opportunities in our fiscal '18. So we continue to see that commercial reflector business ramp. The place that we're seeing some softness in the year is really in the environmental solutions business. We've talked about that over the last couple of quarters, part of it is program transition where we are moving from the build of the GOES-R satellite system. So the onboard optics as well as the ground processing system is moving into sustainment and that we're seeing just some budgetary pressure from where the Trump administration wants to go in environmental sciences. So we factored that into our guidance. We see the environmental business, which more or less is about $350 million to $400 million in size, being down mid-teens for the year. So we saw that in Q1. We see that in the balance of the year and beyond, kind of stabilizing a little bit. So that's kind of where we sit today. The pipeline overall for that Space and Intel business is pretty robust. It's up about 4%, 5% year-over-year, $11.5 billion to $12 billion. So we continue to see good health in that Space and Intel business. And again, a lot of it's from classified and a lot of it is based on the last 5, 6 years of investments in IRAD that have positioned us in places that, frankly, where our classified customers are moving towards with this aggregated resilient response of solutions. So, Jason, hopefully that answered part of your question. Let me stop there and see if there's anything else you want to clarify.

No. That was great. I appreciate the color. That's it for me.

Our next question comes from Noah Poponak of Goldman Sachs.

Can you remind me -- so the environmental programs that are declining in Space and Intel. What quarter did those start going against you?

They started in Q1. So we saw in Q1 the environmental business [drove] down about 10% to 15%.

About 15%.

About 15%. And we see that about the same for the balance of the year.

It's little bit worse -- about the same for Q2, and then maybe little bit worse in the back half of the year.

And a lot of it, lot of it is -- Noah, is the roll off of the GOES-R program, which was last year. Plus we've got a couple of sensors that we're developing for these NASA and NOAA satellites. They're calling the JPSS, the Joint Polar Satellite System. And then the 3 and 4 I think they call polar follow-on. So they changed the name on it, but we've got some sensors on that. And there's been some funding pressure around the polar follow-on missions, which is JPSS-3 and JPSS-4.

So GOES-R was declining in the back half of last year?

GOES-R was kind of overall flat, Noah, '16 to '17 was kind of flat. And then it declined substantially this year.

Yes. It started to trail off a little bit in the back end of fiscal '17. Because you remember the satellite launched in November of 2016, calendar '16.

Right. I guess what I'm wondering is just you grew -- the segment grew 3% in the quarter despite the environmental programs, headwinds. And the guidance for the year is flat to up 1. So you have to be basically exactly flat the rest of the year to be in that range. So you'd have to decel from the first quarter even though you grew 3% in the first quarter with the headwinds, and even though the year-over-year comparisons in the back half of the year are much easier. So does that headwind accelerate through the year? Or is there something else that goes against you later in the year that [didn't] in the quarter?

No. I think -- Noah, I think, you got most of it. So the headwind does accelerate a little bit on the environmental side. Classified, we're expecting about 5% for the full year. It grew about 8% in Q1. So not as strong of a growth on the classified side on the back half of the year.

Okay. And then similar question on the margin in the segment. I mean, you're sort of 100 basis points above the high-end of the range in the first quarter. You'd have to be much lower the rest of the year to get into the low -- certainly the low-end of the range. What changes in the margin through the year in Space and Intel?

Those margins typically fluctuate quarter-to-quarter, depending on the mix. And we had some award fee true-ups on a couple of programs and that helped margins in Q1. Having said that, the margins were strong in the first quarter. And you really feel good about where the margins -- about the full year guidance for the segment on margins.

Okay, great. So then one other question on the -- I guess, in the legacy Harris domestic tactical radio business, I had sort of always thought of the model as the legacy base business, which I estimated and maybe even said made it to about $300 million last year. And then we're sort of layering on all the new program wins and just sort of assuming and it felt like even hoping that the $300 million legacy based before new programs business to just hang on to $300 million because there is some reason to believe there could be cannibalization of that as new programs came online. And then when you announced this Navy win about 1 month ago, it sort of made one come to the realization that actually about a $50 million piece of that $300 million if the IDIQ conversion holds, now is itself tripling. And so one, I guess, is that true? Of that Navy piece of that business? And then, two, in the remainder of that $300 million, is there anything that is going to shrink considerably over the next 1, 2, 3 years? Or is there anything else in there that has the potential to grow in size as much as that (inaudible) business just did for you?

I think you're about right on the $300 million in terms of base funding. And that has been relatively stable over the last couple of years. We do see -- depends on what we characterize some of the readiness investment we saw in Q1, it's about $100 million in order. So does that sort of [go into] base? Or is that enough size sort of the mix of the 2? But you're largely about right. The Navy IDIQ award is very encouraging coming in. And it was sole source to Harris to replace something that expires. So it was fully exhausted the prior contract vehicle. And what I think it reflects is if you look in the (inaudible) and you'll see out of couple of years, the Marine Corps is going to start to modernize it. It happens in -- I think it's in the fiscal '19, fiscal '20 time frame. And it starts to grow quite large and I think the IDIQ vehicle is sized such that it compensates for -- it allows for that modernization in Marine Corps to happen. So that'll be beyond our fiscal '18. It'll start in '19 and '20. That I think, Noah, is actually encouraging for us overall for where we see the business growing to beyond fiscal '18.

Yes. Is there anything else in the -- so in the remaining $250 million of the $300 million base ex that Navy piece, anything else in there we should be watching out for that has a contract renewal coming up? Or that has some meaningful potential to grow a lot going forward?

No, nothing to point to. No. It's going to be relatively stable. It's going to be resets and spares and repairs and the things that we typically do. There's a number of 117Gs in the inventory, there's 152As, there's SINCGARS radios that have some flow-through. It's not big, but flow-through there. They're going to be some investment over the next couple of years in terms of this crypto mod upgrade. They won't replace all the radios and DoD inventory by the NSA -- the deadline which I think is in 2021, is the time frame. So there are going to have to be some investments to upgrade the cryptography on the legacy radios sitting in there. So there's really nothing specifically to point to, Noah. And we'll talk more about that as we see it over time. But we see it's relatively stable.

Our next question comes from Sheila Kahyaoglu of Jefferies.

Just on ES if I could maybe follow up. Is there -- that's also trending above the high-end of your segment guidance. What's sort of driving the balance for the rest of the year?

Sorry, Sheila. Could you...

Were you talking, Sheila, on ES, if I heard it right?

Can you hear me better?

You're asking Electronic Systems, I didn't quite get that frankly.

Yes, exactly. Just the margins trending better in the quarter. And what changes throughout the year?

Yes. So Sheila, again, the margins kind of -- same thing on Space. The margins do fluctuate quarter-to-quarter and that's why we don't provide kind of quarterly guidance and margins. But the fact was that we -- our mix was a little bit more skewed towards fixed-price program. That helps. And also there was some closeout on fixed-price programs in the quarter that helps margins as well. So, again, really a good start to the year and we feel good about where the year happens to be -- where our guidance happens to be for full year.

And then just the F-35 program (technical difficulty) think about the build rates and potential content wins and what that means for the Harris growth rate for that program for '18?

Yes. Look, we've good content on F-35. It's just over $2 million per ships that we provide, the common components, avionic components, backplane, liquid cooled racks, things like that. We also provide the antennas, for the -- what they call the MADL, The Multifunction Data Link, and then we also provide release systems as well. So the carriage and release. And we talked about an award we received in Q1 associated with F-35 release systems. So overall, it's just over $2 million. We're on well, I think, LRIP 10 on the release systems and LRIP 12 on the common components in the Avionics systems. There's been a lot of conversation around block buys. We're working with our partners on that as to how they might flow in and get shaped over the course of the year. But we've also won some recent content. We've won the aircraft memory system, which was a big -- important win for us. We won the panoramic cockpit display electronic units, so the head-down display electronic units. And that adds, call it 5% to 10% roughly to the content per ships and that will flow in over time. So we're performing very, very well. We have very high delivery rates. We've been working strongly with our partners and taking costs out and driving improvement for reliability. We've invested in open system technologies. So we have an opportunity to compete for new mission systems, open systems over time. And we're very competitive in that space. So, overall, we think F-35 is going to be a good -- has been and will continue to be a good story for us, Sheila.

And then, Bill, just the last one. You mentioned the leader radio program. If you could just provide RFP time line for that and just the sizing of that opportunity?

Sure. The RFP is out. The proposals are in. We expect an award sometime in early calendar '18. It'll build off of the existing Rifleman Radio. The IDIQ was contemplated originally at $3.9 billion to include the possibility of a 2-channel radio. That, in fact, is happening. We'll provide some small number of radios for testing in the early part of next year. And then it will ramp for us in fiscal '19.

And our final question comes from Robert Stallard of Vertical Research.

Bill, we've covered a lot already. But one thing I feel was worth asking. You highlighted a very strong book-to-bill in Q1. I was wondering if you sort of, I think, pull forward into the first quarter and whether the looming continuing resolution might have had any impact on DoD orders in the quarter.

Yes, not particularly. There were -- obviously, Australia was an important component to that in the CS business. But even excluding that, we had very good book-to-bill internationally in DoD. We actually saw a couple of things that moved out of September and October that we had hopes would happen in September. But we're on good track for them in Q2. Again, similar good trajectory right now in Electronic Systems as well as Space and Intel. So nothing in particular that I would characterize as a pull forward because of the end of the fiscal year. I mean, as we normally see -- as you know, as we normally see that at the end of the fiscal year in September, that tends to be our -- a big booking month and it was again. But nothing unusual that we saw this year relative to the prior years.

Sorry, Rob. Just to put a final point on that. I mean, even -- so overall our book-to-bill was 2.3 -- sorry, 1.6. And even if we exclude Australia, it was 1.45. So when compare that to last year, it was about 1.2. So even excluding Australia, the book-to-bill was really good.

Yes.

I was just going to follow up to ask. I mean, it's tough to nail this down annually, let alone quarterly. But are you still confident that you'll have a book-to-bill of over 1x for the year?

Yes. We believe it'll be more than 1. In fact, it should be -- I wouldn't say substantial. But it will -- because of Australia in the CS segment, we're much more confident there in a more substantial book-to-bill for the year.

Okay, well, thank you, everybody. Before we end the call, I'd like to make sure we thank the Harris team for delivering a strong quarter despite the impact of Hurricane Irma to our Florida operations, which as many know, has more than 6,000 employees. The storm passed early on a Monday morning. We partially restarted operations on Tuesday, and we're back to nearly 100% by Wednesday. And it's remarkable. It was within 48 hours, and I'm very, very pleased and proud of the team's performance. I'm also proud that our customers experienced no significant disruption in service, including the FAA, which relies on our network operation centers here in Florida to monitor air traffic across North American airspace as well as the first responders that we support throughout the state of Florida. So we responded very, very well. And I'm very pleased and proud of the team. Overall, we had a good start to the year. We're confident in both our fiscal '18 and medium-term outlook. We're in an environment where defense budgets are coming up. The technology solutions we provide are aligned with the mission priorities of our customers, and very importantly, we have a dedicated team that's geared towards exceeding customer expectations and delivering shareholder value. So thank you, everybody, for joining the call, and we'll speak again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.