Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Harris Corporation Earnings Conference Call. My name is Michelle, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host, Ms. Pamela Padgett, Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome, everyone, to Harris Corporation's Third Quarter Fiscal 2011 Earnings Call. I'm Pam Padgett, and on the call with me today is Howard Lance, Chairman, President and CEO; and Gary McArthur, Senior Vice President and Chief Financial Officer. Before we get started, a few words about forward-looking statements. In the course of this teleconference, management may make forward-looking statements. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information on the 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, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in a tables in our press release and on the Investor Relations section of our website, which is www.harris.com. A replay of this call will also be available on Investor Relations section of our website. And with that, Howard, I'm going to turn the call over to you.

Thank you, Pam. I want to add my welcome to all of you for our third quarter fiscal 2011 earnings call. Harris posted solid third quarter results with higher consolidated orders in the prior year and strong operating margins in both our RF Communications and Government Communications Systems segments. Revenue was higher than the prior year quarter primarily due to the impact of acquisitions. Income was lower due to the favorable product mix in the prior year. As you'll remember, we had the large volume of expedited shipments of tactical radios to equip the Mine Resistant Ambush Protected Vehicles for Afghanistan. In addition, our Government Programs and IT Services businesses began to see some impact in the quarter from slowing U.S. Government spending, including the disruption caused by the continuing budget resolution. We've reduced our expected revenue in fiscal 2011 by a total of $100 million in Government Programs and IT services as a result, and we've reduced fiscal 2012 revenue by a comparable $100 million. But you may recall in our previous earnings call we explained that if revenue was in fact impacted by the CR, we did not expect any appreciable impact on margins as a result of our continuing emphasis on operating efficiencies and cost control, and that's exactly what's happened. I'm pleased to report that we've closed now on 3 previously announced acquisitions that have become part of our new Integrated Network Solutions segment. We believe these businesses will help drive revenue growth, margin expansion and increase earnings for Harris in fiscal 2012 and beyond. On April 4, we completed the acquisition of the Schlumberger Global Connectivity Services business. They are a leading provider of satellite and terrestrial communications services for the international energy markets. We also acquired the infrastructure assets from Core180's government business, thereby…

Thank you, Howard. Our balance sheet continues to be strong. We ended the quarter with $885 million of cash and cash equivalents on hand, of which $552 million was used to fund the acquisitions of Schlumberger GCS and Carefx, both of which closed on April 4, the first day of our fourth quarter. $870 million of the $1.05 billion under our 2 revolving credit facilities is available, and no long-term debt maturities come due until October of 2015. Return on invested capital remained strong at 21%, while return on equity was at 27%. During the quarter, we used $50 million to repurchase 1.02 million shares of our outstanding stock at an average price of $49.02 per share, and we currently have $300 million authorization remaining under our share repurchase program. Cash flow from operations in the third quarter was weaker than expected primarily due to timing of U.S. Government funding and payments, decreasing $146 million to $168 million versus $314 million in the third quarter of the prior year. In light of this, we are decreasing our expectation for cash flow from operations for fiscal year 2011 to a range of $775 million to $825 million, back to where we were with guidance as of the end of the first quarter and lower as compared to our most recent guidance of $800 million to $850 million. Depreciation and amortization for the third quarter was $52 million as compared to $40 million for the third quarter of 2010, while capital expenditures were $88 million for the third quarter as compared to $94 million in the third quarter of the prior year. Including the acquisitions of Schlumberger GCS and Carefx, our guidance for depreciation and amortization and capital expenditures are both increasing by $5 million to ranges of $210 million to $220 million and $325 million to $345 million, respectively. Our non-GAAP effective tax rate for the third quarter was 31.7%, and our outlook for the full year tax rate for fiscal 2011 now is 33%. Our initial outlook for 2012 full year tax rate is 33.5%, however, the tax rate for any given quarter could vary up or down as a result of discrete tax events. Other areas of guidance for fiscal 2012 are as follows: cash flow from operations, $850 million to $900 million dollars; depreciation and amortization $280 million to $290 million; capital expenditures, including capitalized software of $275 million to $300 million. Our current priorities for cash that is expected to be generated remain the same: funding internal investments to drive growth and generate higher earnings, pay appropriate dividends, acquire companies that meet our strategic objectives and enhance financial returns and repurchase shares. In summary, we expect to finish fiscal 2011 on a very strong financial foundation with expectations for another very solid year in fiscal 2012. Let me now turn it back to you, Howard.

Thanks, Gary. Let me close with discussion about fiscal 2011 and fiscal 2012 guidance. We've updated our financial guidance for fiscal 2011 as follows. Consolidated revenue is now expected to be approximately $5.9 billion, and that's about 13% above fiscal 2010. That compares to our previously expected revenue target of about $6 billion. Non-GAAP income, excluding acquisition-related costs, is unchanged from our previous guidance, still expected to be in the range of $4.80 to $4.90 per diluted share, a year-over-year increase of 8% to 11%. Non-GAAP earnings before interest, taxes, depreciation and amortization, again excluding acquisition-related costs and expenses, are now expected to be in a range from $1.22 billion to $1.24 billion, representing an EBITDA increase of 11% to 13% above fiscal 2010. For the RF Communications segment, fiscal 2011 guidance is unchanged. I'll just remind you that revenue is expected to be 9% to 10% higher than the prior year, and operating margin for the full year expected to be between 34% and 35%. For Government Communications Systems, we now expect revenue for 2011 to be flat to 2% higher in fiscal 2010. Previous range was 3% to 5% higher. Segment operating margin is it still expected to be between 12.5% and 13%. And for the Integrated Network Solutions segment, we now expect revenue in a range of 33% to 35% higher than fiscal 2010, and that compares to our previous range of 36% to 38%. And again, it's due to the government budget impact at Harris IT Services. Organic growth is now expected to be in a range of 4% to 6% over the prior year. Non-GAAP segment operating margin is now expected to be a bit higher at 5% to 7%. Previous margin guidance was in a range of 5% to 6%. So that's a recap…

[Operator Instructions] Your first question comes from the line of Carter Copeland of Barclays Capital.

Howard, just a quick question, a couple of quickies. Well, I wondered if you might provide a little bit more color on the delays you're seeing internationally as a result of the Mideast activities and whether or not that's funding related or just contracting and government busy with other things. What's the story there? And did you see all of those delays this quarter? Or is there a bit of a guess for how much might move out of the upcoming quarters when compared to second half?

Yes, so the combined impact, we think, is about $100 million in tactical orders. There's no one item. It's a combination of things. Orders that are going through the U.S. FMS process are moving more slowly because of the continuing budget resolution. And then you have situations like in Iraq where we're expecting to get an order from the Ministry of Defense, except they haven't elected the new Minister of Defense who by law has to sign the order. So it's a series of relatively small things, but they add up to about $100 million. We expect to get those orders in the first half of next year. And we're not expecting that any of those will have a material impact on fiscal year '12. We will start the year with a little less backlog but still very adequate backlog and order pipeline to reach the guidance we've provided for the year-over-year, essentially maintaining our revenue with DoD lower as we've been talking now for several quarters, offset by higher International business.

Great. That's very helpful. And another quick follow-up maybe for Gary. With respect to the step-up that's implied in the fourth quarter for the INS margins after the past few quarters in a kind of 4% to 5% range, what's going on there that's driving that step-up especially given the rate guidance? Is that just not a repeat of any losses in cyber integration? Or how should we be thinking about what's driving that progression?

Well, there are several pieces to it, Carter. I think some of it, some of the integration that we've been working on with CapRock has taken place. And so we expect to have benefits there. Obviously, we are now merging that with Schlumberger, which has its own integration aspects to it. We've got the business now of Carefx coming in, which does carry a little higher margin where it's being integrated in with the Healthcare businesses. And so it's several different parameters that are causing it. I can't pick just want. But Howard, you wanted to comment as well?

Yes, just to say, Carter, that if you look at the 8-K where we restated the segments, I think you'll find that the margin has now the first 3 quarters of the fiscal year and that the segment moved between 5% to 7%. So we're very much in the range guidance for the year, and the fourth quarter is going to be about in the same part of that range. And the continued improvement in broadcast is helping us on the positive as well as the contribution from Harris CapRock. And serving to offset a little bit of that is we expect the losses in Cyber to accelerate a little bit as we turn on the Cyber Integrated Solutions facility and business on June 1 and start to take some of the depreciation on the equipment there.

Your next question is from the line of Gautam Khanna of Cowen and Company.

Could you give us -- you told us that the year-over-year decline was an MRAP-related sale. Could you quantify what the absolute numbers were like you did last quarter, please?

In this quarter, I think there were maybe $20 million, $30 million of MRAP. So last year, we add $206 million to that.

Okay. And I know you mentioned the Tactical Communication orders list from a foreign side. You've been running book-to-bill under one for the past 3 quarters. I mean, at what point should we be worried about, if we don't get the order, we got to worry about the fiscal '12 forecast jut given lead times and the like?

Well, I don't think we have to worry about it at this point. Obviously, we've provided our segment guidance today and believe that we can achieve parity, plus or minus, in revenue of Tactical Comms next year versus this year. We're going to be starting '12 with less backlog than we started '11, but we're going to be starting with a lot more backlog than we started fiscal '10 and pretty comparable backlog, plus or minus, to what we started fiscal '09. So it's really, as you know, a combination of the backlog then coupled with the orders that you get. When you get those orders, then your ability to turn them. We have a pretty efficient process. We'll have the new manufacturing facility online, significantly more capacity in place. And so I think we're going to benefit from that new facility both in terms of being able to turn orders into revenue quickly but also turn orders into revenue at even more competitive cost. So at this point, not concerned. And as we go forward to the next call and get into the fiscal year, we'll talk about any seasonality that we expect in terms of how we expect to deliver on the comparable Tactical Communications revenue. Does that make sense?

Yes, it does. I guess one other one, just the high-level piece. We're in a constrained DoD budget environment. That's obvious. We've had now, too, or we're about to have a change of Defense Secretary. JTRS GMR still appears to be an underperforming program. I mean, what are the milestones that might actually set in motion the restructuring and/or cancellation of that? Do you have any sense for the milestones that will give your products a better opportunity to compete more formally in the DoD budget?

Yes, I think there are several continuing milestones. Certainly, the testing that is anticipated this summer that we've spoken about previously is going to be an important milestone. We think we're very well positioned with the only field-deployed, proven, NSA-certified technology. So we think that's a huge lead that we have. Secondly, we've recently seen a request for information kind of out of the JTRS JPEO office, essentially asking for what they call nondevelopmental solutions for the GMR specification. Translated in our view, meaning already developed, commercially developed technologies. Again, we think we're the only ones in a position to really meet the full spec and the time frame that they will want so that we can continue to deploy technologies to the brigade combat teams in Afghanistan and around the world. So I certainly like our position more and more as it relates to the Falcon III technology. And then, finally, remember we're going to be porting the SRW waveform very quickly into the Falcon III handheld, and so we're going to have some amount of networking capability using the SRW networking waveform even in the handheld. And you couple that with the announcement we made on the KnightHawk 3G capability to link battlefield tactical networks to 3G cellular networks, and I just believe we continue to widen the lead that we have. That doesn't mean there won't be competition. Certainly, there'll be competition. But when it comes down to who can really deliver today, I think we're in a very strong position.

Okay.

Your next question is from the line of Rob Pakas [ph] with SunTrust Robinson Humphrey.

I just -- is there any way to quantify the potential opportunity out of the GMR program at this point or there's just too much speculation?

We can talk in the future about the parameters. I don't have all of those numbers in my head. There are literally billions of dollars of procurements expected over a period of years as they deploy the JTRS-based technology in vehicular applications. So it's a big, big market. And I think what's yet to be determined is exactly what the uptake of that will be. I commented in my prepared remarks that there's $10 billion of radios deployed today that basically do one thing: They're single-band, single-mission, noncompatible with JTRS, and there's about another $2.5 billion of radios that are compatible with JTRS but aren't wideband networking. So you have this huge market in DoD that will be upgraded and transformed over time, and it's really just a question of when. We believe that the capabilities that we are providing will accelerate the adoption. When you see what the radios can do, it continually impresses the leadership in DoD, which causes them to become proponents of investing budget dollars in these tactical radio deployments because they lead to more effective missions and ultimately save lives. So those are the best, most positive attributes you can have for your technologies.

Great stuff. Thanks for taking my questions.

Your next question will come from the line of Larry Harris with CL King & Associates. Lawrence Harris - CL King & Associates, Inc: I wanted to talk a bit about the cyber security area. A day doesn't go by where you hear about another network that has been attacked. And so I was wondering if, say, in the past 30, 60, 90 days you've see additional interest either from commercial or government customers that could, say, help the profits or performance of this business in fiscal 2012?

Larry, the answer would be absolutely yes, I think from a wide variety of commercial and government clients. And almost a week doesn't go by that we hear of another cyber -- successful cyber attack or issues related to security, for example taking down one of the Amazon cloud computing sites. So I am more convinced every week that we're exactly in the right place, and we're developing discriminating technology. On the flipside, the adoption of cloud computing is hard to predict and whether -- and what the uptake of orders and turning that into revenue for us, which ultimately would drive profitability is still an estimate. And I think we'll be monitoring very closely our funnel. We'll be monitoring the uptake of new orders. We are off to a good start but have pretty high expectations for '12 and beyond. So we'll pay close attention to that. But overall, I don't believe this is a question of if we will be successful or cloud computing will take off or security and access to what's going on and compliance inside your cloud will be required. I think its more a question of when and what will the actual uptake be with the new market. That's sometimes difficult to peg. But there's no question interest is high, lots of meetings, lots of proposals, and then we'll have to see how those work through the funnel and turn into revenue. We have a pretty high fixed cost in that business. Once we get above that, it's going to leverage profitability very, very well. But we've got to get to that breakeven point first.

Your next question is the line of Josh Sullivan of Gleacher & Company.

On the CapRock business, you had mentioned that TCS was more capital intensive versus the comps modeled that the legacy CapRock business followed. I'm Just wondering if you've made any strategic decisions as far as you pursuing one or the other at this point.

No, we haven't. I think there was maybe a small difference. And neither of them are hugely capital intensive, a little more capital intensive than our traditional businesses at Harris but still relatively low capital. And it has a lot to do with whether the customer rolls into the monthly costs for providing services, the very small aperture antenna terminal or not. And the more they include that, then the more the capital is a little bit higher. Other customers sometimes prefer to pay for that, capitalize it themselves, and then just buy the various services from us. So there is a variety. But I wouldn't expect it to be materially different across those 2 businesses as we put them together. We are still engaged, and you may also be thinking about discussions we've had about kind of the make-or-buy question. CapRock traditionally bought VSATs and Schlumberger GCS, designed and manufactured their own line of VSATs. And so we certainly have that make-or-buy analysis going on to determine which makes the best sense from a cost standpoint as well as from a differentiation and solution standpoint. Lawrence Harris - CL King & Associates, Inc: And so the follow-up. How should we look at the VCE order as it relates to the volumes? I think you had mentioned that you're going to operate this segment more on cycle times or use. I'm just trying to get an idea of how we should look at that order.

Well, I'm not sure I have a lot of color to give you around it other than it's a $10 million contract. It's providing services to VCE and perhaps to some of the affiliated companies. And it is, we feel, an important first step. It's our second client on board now, and we look forward to being able to hopefully talk about additional ones once we finally open the door here on June 1 and move forward again. To the previous question, there's lots, lots of discussion, lots of interest. And some of this, I think, though is going to take us to open the doors and then be able to show clients through our portal, what's different about our services than that kind of consumer-grade services that you're going to get from an Amazon or a Google, our price point's going to be higher because what we're going to be delivering in security and compliance and control is going to be a lot higher. And so I think while we talk about a lot of that now, to some extent it's brochureware until you're actually operating the center.

Your next question comes from the line of Ted Wheeler of Buckingham Research.

I wondered if you could circle back and help me on the timing on this request for nondevelopmental solutions for GMR. Now with that -- how long will that take to work its way through? And when would the next news event from that be expected?

I'm not sure we have a timeline, so this will just be kind of my opinion, Ted. But my opinion is that they already know how the tests are going to run this summer, and they're trying to get ahead of that cycle by starting with the RFI, request for information, and then they'll follow it with an RFP, which will then go to selection. I don't know whether that will be a couple of quarters or longer, but I wouldn't expect it to be much longer than that. And depending on the needs for the next capability set deployments, it might be faster rather than slower. But there is a cycle, as you know. It's RFI or RFP and then award. And I think the fact that they've start the RFI before the tests is a little bit of a leading indicator of how they expect the tests to turn out.

And one other question on timing. What about the Alberta program? How will that sort of play out, I guess, on a run rate or duration or both, is the second.

I think the deployment in total is over maybe 3 years. We'll have a material amount of revenue in fiscal '12 from that program. I don't think there's much in fiscal '11, just a little bit. And to remind you with these programs, I think it's pretty typical, what we will be doing during the initial deployment phases is putting in the systems and the infrastructure along with our partners. That's typically a little lower margin business. And then toward the end of it are the opportunities to sell the terminals, both portable as well as mobile, and much higher margin opportunities. So we'll expect to see pickup in revenue, certainly profitability, but not at the level we'll ultimately get to when we're able to deploy the terminals into the completed system. So at any given time, we've got a large number of these projects at different phases. But given that we took over the business, it wasn't growing all that much. We've had good success in growing it. We still have a lot of programs that are kind of toward the front end of that cycle. I think we talked about that previously as it relates to our margins. So some of the margin uptake in this business that's going to feed into the segment is going to come from the mix of what we're selling. Not necessarily that there's a lot of costs coming out but more that as the mix gets higher for selling terminals or radios, the margins are going to be better than when you're selling a higher percentage of systems.

And I guess just lastly, how's the pipeline, I guess, of conversations on programs? Not on maybe of that magnitude but these tend to be big programs for public safety. Are there still ample folks being approached just working towards something?

Yes, there are. The pipeline is about $3 billion. It's been pretty steady even as we've been winning programs. So that suggests that others are coming in. We see this contrast day to day. They're not hiring a lot of additional police officers or firefighters. So the day to day add-on sales for an additional base station, for more capacity or more radios for more people we're not seeing. That's where budgets are absolutely being constrained because of state and local revenue income. On the other hand, the big projects continue to move along. Many of them are already funded, either funded through federal grants or they're funded through revenue-producing kinds of services or fee-based. In Florida, for example, the statewide network, its income from licenses of various kinds. So there's still a number that are out there. There are still a lot of very old technology, analog technology that needs to be upgraded. There's still a requirement for going to this narrow banding so they can give up frequency for the other uses. And then, finally, you've got the opportunity being offered by the introduction of this LTE fourth generation of broadband technology. And we think we're going to be in a very strong position to integrate, converge networks of LTE 4G for wideband along with our traditional narrowband LMR radio technology. So we're feeling very positive about the market. We wish that the state and local funds were a little clear as it related to the higher margin add-on kind of business. But overall, I think we're very pleased with the progress we've made since we bought the business. Have some new leadership in place. Very pleased with how that is coming along. Very pleased with the strides that we've made in the sales organization, sales leadership, channel partners, having signed up a couple of Motorola dealers. To me, lots of positive signs. It never comes as quickly as we want, but the progress is definitely a there.

Sounds great.

Your next question comes from the line of Josephine Schmiller [ph] of Benchmark Company.

Congratulations on your Cyber order. Howard, can you talk about what you're expecting from Cyber in '12, and what a breakeven point might look like?

Well, I don't want to be that quite specific from a competitive standpoint. But certainly, we have made investments now of north of $175 million as it relates to all the infrastructure, including customer-facing equipment, maybe even approaching $200 million. So it's fair to say that you've got to get revenue certainly, let's say, well above $50 million to be able to, even at very high gross margins, cover those fixed costs and fixed expenses. Our expectations are higher than that. And as I said earlier on the call, we'll have to see how to takeup is. I think this is a business where we don't want to be too short term in our thinking or we won't invest and we'll miss what is what we expect -- and we're not the experts on this, what everyone in the market expects to be a major transformation in how IT is delivered to users over the next decade. We've got a strong leadership position, some very discriminating technology. And I really don't want us to be penny-wise and pound foolish. I think that will be a mistake for the opportunity to build long-term shareholder value. Having said that, we're going to try and match expenses to revenue as best we can. And we've tried to bake into our guidance for next year expectations as it relates to our Cyber business that we can meet.

Okay, I have a follow-up question on JTRS. The Army recently talked about trying to stop funding, R&D funding for the JTRS GMR radio. What do you think happened to the $1 billion in the '11 defense budget allocated to JTRS? It seems a big chunk of that is related to GMR R&D and will that flow-through, the upcoming solicitation? Can you comment on that Howard?

Well, we can't say for sure, but we certainly hope that a portion of that will go not for R&D of a radio that is not going to be competitively priced based on its features but that it will go toward procurement so that we can put more radios in the hands of our war fighters. So certainly, that's what we are promoting, and I think a lot of people are starting to turn that direction. And it's very logical given the performance of the Falcon III radios in the field. So we're certainly very, very optimistic. But until the '12 budgets are approved, everything is still up for negotiation. We are certainly engaged in that to the extent possible and trying to influence a positive outcome for Harris.

Sounds good.

Your next question comes from Joe Nadol of JPMorgan. Joseph Nadol - JP Morgan Chase & Co: It'll be very quick, Pam. I have a couple of quick ones, and I'll ask them at once. One is, just mechanically with the sales guidance coming down a little bit, what's the offset to keep EPS the same after both this year and next year? And the second question is, a very significant increase in that pipeline, the International pipeline from $2 billion to $2.6 billion, so 30%, $100 million of that is the slip presumably. And so it's a $0.5 billion increase. And Howard, I was wondering if you could talk about and maybe give a little more color as to what's in there? Is that the systems emphasis you've been talking about? Is that just geographical? Just anything more you can give.

Well, to your second question first, I would love to be able to be more specific country by country. But increasingly, and you're seeing this in our reports, we're not able to divulge the individual countries. Security and deployment of these technologies is becoming more and more of an issue. So I really can't go country by country. I can tell you that it's a well diversified mix of opportunities. It's our traditional tactical radios, it's our new products like the Falcon fighter, the secure personal radio, high-capacity line of sight, high-capacity data radios and a mix of services and systems that we wrap around that. But it's a very good cross-section, and I think real opportunities. You can imagine I'm a skeptic when I see that kind of an increase. And we've scrubbed the pipeline to make sure it's real, and we're very comfortable that it is. To your first point in terms of the FY '11, Gary talked about a little better on the tax rate, and we also raised about 100 basis points, the expectation for the new Integrated Network Solutions return on sales for '11. So that's offsetting the margins associated with the $100 million in revenue in government programs and IT services. We haven't provided that level of detail in '12. We felt we had adequate comfort in the guidance we've provided to maintain the EPS guidance even in the face again of about $100 million lower revenue. So we're still very comfortable in our growth rates and margins for next year. I think '12 is going to turn out to be a good year for us as we go forward.

All right, operator. And everyone on the call, thank you so much. Appreciate you joining us.