L3Harris Technologies, Inc. (LHX) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Harris Corporation Earnings Conference Call. My name is Anne, and I will be your coordinator for today's call. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the presentation over to Pamela Padgett, Vice President of Investor Relations. Please proceed.

Hello, everyone, and welcome to our fourth quarter fiscal 2011 conference call. I'm Pamela Padgett. On the call today is Howard Lance, Chairman, President and CEO; and Gary McArthur, Senior Vice President and Chief Financial Officer. 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 and the related presentation, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in tables 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 the Investor Relations section of our website. And with that, Howard, I'll turn the call over to you.

Thank you, Pam, and let me welcome all of you to our fourth quarter fiscal 2011 earnings call. To provide added clarity to the call, this time we've posted some slides on our website, and we'll be referring to those throughout the conference call. Beginning first with Slides 3 and 4. We ended fiscal 2011 with another solid quarter. Revenue was $1.67 billion, increasing 15%. Organic revenue growth was 4%, and that was driven by 11% growth in our Government Communications Systems segment and 7% growth in our new Integrated Network Solutions segment. Flat year-over-year revenue in RF Communications was, we think, an excellent outcome for this business as we make our way beyond the large tactical radio shipments in the prior year to equip MRAP vehicles. The first quarter of fiscal 2012 will be our last tough compare as we reset our baseline for future growth. There were certainly highlights in the quarter as our Public Safety and Professional Communications business posted strong revenue growth of 9% and a record quarter end backlog of the $737 million. Our move into this very close adjacent market during fiscal 2009 is contributing nicely to both our revenue growth and higher operating income. The Broadcast Communications business posted 37% growth in orders, 31% growth in revenue and a solid profit. Harris IT Services posted 8% top line growth and higher profitability. And Harris CapRock Communications delivered a solid profit number in the quarter. On the downside, our new initiatives in Healthcare and Cyber will take time to contribute to earnings. Both businesses had operating losses in the quarter. And about $100 million in International Tactical Communications orders slipped to the right as a result of political uncertainty in Central Asia, the Middle East and Northern Africa. Non-GAAP earnings per share were $1.24 in the quarter and flat with the prior year. Of course, again, the prior year benefited significantly from the large MRAP shipments. Fourth quarter 2011 adjusted EBITDA was $320 million, and that was a 7% increase. We think this is a very encouraging sign for future earnings growth. Throughout fiscal 2012, we should see this upward trend in EBITDA continue as we finish integrating the new acquisitions and they begin to significantly contribute to our growth and higher earnings. For the full fiscal year 2011, revenue was $5.92 billion, an increase of 14% and about a 5% higher on an organic basis. Non-GAAP earnings per share were $4.89, an increase of 10%, and adjusted EBITDA was $1.23 billion, an increase of 11%. We are incredibly proud of these results delivered by our team, especially in the year where we faced an extended U.S. government continuing budget resolution, lower MRAP shipments, lower state and local government spending and a drilling moratorium for part of the year in the Gulf of Mexico. At the same time these challenges were occurring, we increased our investments in new vertical market growth initiatives, which we believe will be a major driver of long-term growth and higher earnings for the company. Moving now to the segment results. First, on Slide 5. Fourth quarter revenue for the RF Communications segment was $628 million, as indicated, flat with the prior year. Large shipments of tactical radios in the prior year to equip MRAP vehicles continue to create difficult year-over-year comparisons for us in both revenue and income. As expected, operating income in the fourth quarter was lower at $191 million compared with non-GAAP operating income in the prior year quarter of $227 million. Operating margins in the fourth quarter were 30.4%. Our new manufacturing facility in Rochester, New York is up and running, ahead of schedule and we're back at full production. The new facility consolidates multiple facilities into 1 location, reducing production cycle times and creating a number of operational efficiencies. We now have a single facility of sufficient size, layout and capabilities to fully implement the lean production processes that we need to further reduce our product cost. The new facility will provide cost savings and creates a state-of-the-art, high-volume manufacturing capability for products across the RF segment, including our Unity mobile radio, which is newly introduced to the market and our 700 megahertz LTE subscriber terminals. Tactical Communications revenue was $472 million in the fourth quarter, a decline of 3% compared with the prior year. Again, we believe this was an excellent result given that MRAP radio deliveries declined by $200 million year-over-year. If we look at the non-MRAP revenue to the Department of Defense, it actually increased significantly in the quarter, driven by continuing Falcon III product adoption to support the DoD vision for wideband networking throughout the battlefield in Armed Forces. International revenue growth was driven in the quarter by major deliveries to the Australian Ministry of Defense and a number of countries in the Middle East and Asia. Public Safety and Professional Communications revenue was $156 million in the fourth quarter, as indicated, increasing 9% compared to the prior year. A series of important contract wins led to the best quarter since acquiring this business in fiscal 2009. Turning to orders. RF segment orders were $447 million in the quarter, with Tactical Communications orders accounting for $257 million of this total. Our Tactical Communications backlog stood at $766 million at the end of the year. Ongoing political instability in Northern Africa, the Middle East and Central Asia has continued to delay some of our international orders. While the delays are certainly unfortunate in the near term, they will get sorted out eventually. And we're confident that our business will benefit in the long term from this business. In the U.S. market, important orders during the quarter included $25 million from Marine Corps for Falcon III radios and remote control systems, $18 million for Falcon II HF vehicular radio systems for Army vehicles. Several orders for our Falcon III 117G multiband manpack radios, and these included $12 million from DoD in support of requirements for wideband networking, $16 million from the Army to provide ground forces with expanded interoperable voice and high-bandwidth data communications and $9 million from the Air Force in support of new emerging applications in situational awareness, intelligence and analysis and real-time battlefield collaboration. And we were also awarded an IDIQ contract with a $60 million ceiling from the Navy for our new Technical Key Loader encryption devices, along with an initial order against that contract of $6 million. Consistent with our roadmap, we are introducing additional features and functionality to our Falcon III JTRS product offering. This will widen our technology and product lead in the U.S. market and equally importantly, this lead ultimately fuels our continued leadership in the international markets. First, we expect to receive NSA certification in the next few weeks for the SRW waveform in our Falcon III 117G wideband networking manpack radio and shipments will begin to customers immediately after. As promised, we will be first-to-market with an NSA-certified radio incorporating SRW, the Soldier Radio Waveform, for JTRS. At the same time, we expect to receive NSA certification for and begin shipping our Falcon III AN/PRC-152A handheld radio, which will have new wideband networking capability using the Harris ANW2 waveform. And then shortly down the road in October, we'll begin demonstrations where we will include the SRW waveform also in the 152A. So we're going to end up with a very, very capable JTRS handheld radio. That's going to include the SRW, waveform, the ANW2 waveform and Type-1 NSA certification, and of course, remember that 152A is also backward compatible with legacy radio waveforms in the field such as SINCGARS. Now for a second, compare that with the new Rifleman Radio. Rifleman really has a very narrow mission, to provide position location information up echelon using the SRW waveform. For example, it doesn't have wideband capability or NSA Type-1 capability, nor does it have the ability to communicate with legacy radios using waveforms such as SINCGARS, where there's over 400,000 units deployed in the field. We think this creates a significant differentiation, and once again, Harris takes the lead with radio technology. In June and July, Harris was invited to participate for the first time in the U.S. Army Network Integration Evaluation, or NIE, exercise held at Fort Bliss, Texas and White Sands Missile Range in New Mexico. The NIE is a series of semi-annual evaluations designed to evaluate the Army's tactical network capabilities and to promote competition among the multiple programs of record and viable commercial solutions, and this is all part of the Army's evolving network acquisition strategy. The NIE involves a series of user test and evaluations with the goal to speed the deployment of an integrated battlefield network, while making sure the technologies are ready for prime time use in the field by the warfighter. I'm pleased to say that Harris delivered its combat-proven wideband networking capability through the Falcon III 117G as part of the evaluation. The Army evaluated our 117G radios as a vehicular-based mobile wideband tactical communications network, enabling this network using to Harris ANW2 wideband waveform. Our radio successfully formed a 30-node network across a range of military vehicles included company command post-platforms and provided reliable access to a number of applications such as the tactical ground reporting system, combat chat and the transfer of multimedia mission command files. It was a major success in our view. We received great user feedback and valuable insights into both our radio and waveform functionality, and we'll be quickly incorporating these insights into our future product releases. We will expand our participation in the next NIE scheduled for October, and this will include incorporation of the Falcon III 117G with SRW and the Falcon III 152A handheld with both the SRW and the ANW2 waveforms. Bottom line, we came away from these series of tests more convinced than ever that our radios are, in fact, the most advanced in the world. No competing radios come close to delivering the performance and cost that we can offer our customers. Turning to international orders in the quarter. We had a $16 million order from a country in Africa to provide HF radios, a $10 million order from a country in Southeast Asia for Falcon III and Falcon II tactical radios, a $5 million order from Brazil for Falcon III VHF tactical radios. These will provide the Brazilian Armed Forces with next-generation voice and high-speed data communications. Also, a $5 million order from Canada for Falcon III 117G multiband manpack radios, as well as our RF-7800B tactical satellite communication system. These systems will provide Canada's Armed Forces with next-generation tactical comms in support of a number of network-enabled applications, including video and collaborative chat. And finally, we received a $4 million follow-on order from France for the 117G. The 117G is quickly becoming the radio of choice by all of our NATO allies for their high-end mission requirements. We closed the fourth quarter with healthy opportunity pipelines in the Tactical Communications business, $1 billion in the U.S. and $2.3 billion in international. Large opportunities in the U.S. pipeline exists for follow-on business for the Falcon III radios in the Army, Marine Corps and Air Force. Also, the U.S. pipeline includes opportunities, which will be procured through new IDIQ contracts that we expect imminently from the Navy and the Special Operations Command. The international pipeline is highlighted by significant opportunities with the Iraq Ministry of Interior and Ministry of Defense, the Australia Ministry of Defense, United Arab Emirates, as well as other nations in Africa, Asia and Southeast Asia. As we stated before, some orders have been delayed in the international market during the last 2 quarters, but none have been lost to competition. We've already indicated that Public Safety and Professional Communications had a great quarter. Orders in the fourth quarter were $190 million higher than the prior year quarter and certainly, also had a book-to-bill of greater than 1. Orders included a $50 million order from the Oregon Department of Transportation to deliver a new P25 system, which will support the mission-critical communication needs of ODOT, as well as the Oregon State Police. This program includes 4,200 Unity multiband mobile radios and it will be the first large-scale deployment of our new vehicular version of the Unity radio. This is a very important extension of the Unity family of multiband radios and of course, Unity allows interoperability across a much wider band of frequencies than any other radio in the market. The program in Oregon also includes an integrated statewide network, which will allow Oregon to comply with the federal narrowbanding mandate that is governing spectrum use for land mobile radio systems. And the initial $50 million order is part of a 10-year contract that is expected to have a total value of more than $100 million. We also received 3 other significant orders we want to call out in the quarter, $24 million from Floyd County, Georgia for a P25IP digital radio system, an $18 million order from Linn County, Iowa, again, for a P25IP trunked radio system. And again, this contract includes the Harris Unity multiband portable radios as well. And then finally, a $12 million order from the city of Chicago, Office of Emergency Management Communications for our Maestro dispatch consoles. In summary, we continue to see a steady recovery in new bid and proposal activity in the Public Safety markets, and our pipeline of opportunities for this business remains very large at $3 billion. Let me move on now to Slide 6 and talk about our Integrated Network Solutions segment. Revenue in the fourth quarter increased by 45%, $585 million, and of course, benefited from the acquisitions of CapRock Communications and the Schlumberger Global Connectivity Services business. But we also had strong performance on an organic basis with revenue growing by 7% above the prior year. Our Broadcast Communications business showed excellent revenue growth with 31%. Harris IT Services revenue increased by 8%. Revenue from Harris CapRock Communications was about flat with the prior year on a pro forma basis. Segment non-GAAP operating income was much higher at $32 million or 5.5% of sales, income benefited from the vastly improved performance in Broadcast Communications compared to the prior year. Broadcast was profitable in the quarter and for the fiscal year in total, following the market downturn experienced over the past couple of years. Harris CapRock Communications and Harris IT Services income were also well above the prior quarter. Our Healthcare and Cyber businesses posted a combined $16 million loss in the quarter as a result of the Carefx acquisition and the opening of our Cyber Integration Center in Virginia and its related depreciation and overhead expense. Several new contract wins in the quarter worth mentioning, a 3-year master service agreement with a potential value of $58 million to operate the Offshore Communications Backbone in the Eastern Mediterranean. First year of the agreement is worth up to $22 million. We signed a 2-year, $13 million contract to provide offshore satellite communications with Odfjell Drilling in Norway. This includes a provision of turnkey VSAT services, voice and Internet services. It's a significant expansion of our existing business with Odfjell, and we think demonstrates the value of both our local presence and very strong client relationships. We also were awarded 2 3-year contracts valued at $3 million from Devon Energy in Brazil for our telecommunications and professional services. Devon Energy is a leading independent natural gas and oil exploration company. We also received a 5-year IDIQ contract, which has a very large ceiling of $12 billion from the Department of Veterans Affairs. This is associated with what they call their T4 program, Transformation Twenty-One Total Technology, allowing the VA to upgrade their IT systems. It'll streamline and modernize their operations, including patient care delivery at over 150 VA hospitals. We also received a 2-year blanket purchase agreement with a ceiling of $199 million from the VA for a separate initiative called Enhance the Veteran Experience and Access to Healthcare. Here, the goal of the VA is to expand healthcare access for veterans who reside in rural areas. And in the Broadcast division, we received orders totaling $16 million in the quarter from Turkmenistan Television, the state broadcaster in the country. This project comprises a full range of broadcast solutions from Harris, and the seamless interoperability of our solutions, we believe, was the determining factor in the contract award. We're continuing our global integration efforts at Harris CapRock Communications. During the quarter, we announced Tom Eaton as President of this business. Tom has a remarkable track record in positioning businesses for their next phase of growth. We also officially opened, during the quarter, the new Harris Cyber Integration Center in Virginia. This center will provide cloud computing services for customers within a trusted environment. The Cyber Integration Center has already won national awards for its energy efficiency and innovation. And we continue our collaboration with leading IT companies, including Hewlett-Packard, Sendmail, RedHat, BMC and VCE, who continue to seek partnership with Harris, and we believe this continues to validate with our technology and our security differentiation. In the near term, however, we are experiencing a much longer selling cycle in the Cyber business than we had previously expected. Customers are beginning with small pilot projects and proofs-of-concept before moving their larger applications into the cloud. This will allow the effect of postponing revenue and income out of our fiscal 2012 into fiscal 2013, resulting in a fiscal 2012 operating loss for Cyber currently estimated at about $30 million. Obviously, we're taking steps to improve that outcome, and we'll keep you posted on future calls. In the Healthcare Solutions business, we completed the acquisition of Carefx Corporation at the beginning of fourth quarter. Carefx brings interoperable workflow and clinical analytics solutions to the Harris Healthcare portfolio. Carefx solutions are aimed at enabling improved operating efficiencies and access to vital clinical data within hospitals. Let me give you an example. Hartford Hospital in Connecticut recently implemented a business intelligent dashboard from Carefx to better understand their patient flow trends and to cut the patient length of stay. Hartford increased its early discharge rate nearly threefold after implementing our dashboard. These kinds of success stories will continue to help Harris Healthcare Solutions penetrate the commercial healthcare market and strengthen its overall position as a leading provider of interoperability solutions to both commercial and government customers. In Broadcast Communications, international broadcast sales and growth in new media are both driving higher revenue. In addition to the orders already mentioned for Turkmenistan, we're experiencing orders growth in Asia and Latin America, and we recently installed our first digital signage system in the U.K. at Harrod's. In the U.S., we're in collaboration with Digital Display Networks, Inc. and ABC to create one of the largest digital out-of-home advertising networks in the world, 7-Eleven TV. Digital Display Networks is providing content production, ABC as the sales agent for advertising and Harris is providing its InfoCaster hardware and Punctuate software, along with our managed services and content delivery capabilities. We're already installed in over 3,000 7-Eleven stores. Promotional advertising content has been successfully running on the network for several months. ABC has secured a number of new ad sales and is managing a solid pipeline for the future. Bottom line, we remain very excited about this project in the emerging digital out-of-home market in general. In summary, we continue to be enthusiastic about the future of the new Integrated Network Solutions segment. As the integration of our new acquisitions and the maturing of our new businesses occurs, INS will, in fact, be a major driver of Harris EPS growth going forward. Moving to Slide 7. Government Communications Systems segment revenue was $500 million in the fourth quarter, an excellent 11% growth from the prior year. Revenue increases were driven by the GOES-R program for the National Oceanic and Atmospheric Administration by our new product line, Highband Networking Radios, for the U.S. Army and by satellite reflector programs for several commercial customers. Segment operating income in the fourth quarter was $63 million with margins at a strong 12.7% of sales. Fourth quarter wins in Government Communications included a $19 million follow-on contract to supply more than 100 Harris Highband Networking Radio systems for the Army Warfighter Information Network Tactical, or WIN-T, program. This order is an addition to $6 million contract award from the Army during the quarter for rapid deployment of HNR radios into Afghanistan. This Harris product really redefines battlefield communications with high-capacity wireless networking between both mobile and fixed platforms. Using a breakthrough radio waveform and directed beam antenna technology, the Harris HNR establishes self-forming, self-healing mesh network capable of delivering voice, video and data over very large geographic areas. In the quarter, we also received a 42-month, potential $57 million follow-on contract -- $57 million follow-on contract with the FAA. This is to upgrade and manage the system that provides real-time weather data and flight planning for Alaska general aviation. We also received 2 1-year classified contracts totaling $83 million, and a 4-year, $32 million classified contract in addition. So our national intelligence business tempo is definitely increasing. After the close of the quarter, Harris was selected for a 10-year, $85 million contract award from the FAA as a prime contractor to the Alaska Satellite Telecommunications Infrastructure program. Harris will replace and upgrade the existing SATCOM network and -- that links the Alaska Air Route Traffic Control Center in Alaska -- in Anchorage, Alaska with 64 other FAA facilities throughout the region. So with that, let me now turn it over to our CFO, Gary McArthur, to comment on the financial results for the quarter.

Thank you, Howard. Turning to Slide 8. Fiscal year 2011 was another very solid financial year for Harris. We ended the year with $367 million of cash and cash equivalents on hand. We generated $833 million of operating cash flow, $508 million of free cash flow, repurchased $250 million of our outstanding stock and paid $127 million in dividends. None of our outstanding long-term debt comes due prior to October 2015. And as of year end, we had $870 million available under our $1,050,000,000 combined revolving credit facilities. As to the fourth quarter, cash flow generated from operating activities was $276 million as compared to $167 million in the fourth quarter of fiscal 2010, and capital expenditures were $129 million for the fourth quarter as compared to $62 million in the fourth quarter of the prior year. The $67 million higher capital expenditures resulted primarily from the fit-out of our new RF manufacturing facility that is now fully up and operational, the Cyber Security Solutions facility whose grand opening was in late May and capital expenditures at INS as a result of the CapRock and Schlumberger acquisitions. Depreciation and amortization was $63 million for the fourth quarter as compared to $45 million for the fourth quarter of the prior year. Our non-GAAP effective tax rate for the fourth quarter was 32.5%. During the quarter, we increased our share buyback to $100 million. We purchased 2 million shares at an average purchase price of $48.83 per share. Total shares repurchased during fiscal 2011 were 5.3 million or 4.2% of our outstanding shares. As announced in our press release, we replaced our existing share repurchase program with $1 billion new program under which we expect to repurchase up to $500 million worth of our shares, largely by the end of this calendar year or roughly 8% to 9% of the shares outstanding. Further, we announced a 12% dividend increase that takes our quarterly dividend from $0.25 to $0.28, our 10th year in a row of double-digit increases. Moving to Slide 9. We revised guidance for fiscal 2012 as follows: cash flow from operations in a range of $825 million to $875 million; depreciation and amortization of $280 million to $290 million; and capital expenditures, including capitalized software of $265 million to $285 million. Our non-GAAP effective tax rate is now expected to be 33% compared with our prior guidance of 33.5%. The tax rate for any given quarter could vary up or down as a result of discrete tax events occurring therein. We continue to operate from a position of financial strength, which allows us to invest for the future while delivering significant value to our shareholders in the forms of share repurchases and higher dividends. Our outlook for operating cash flow remain strong and fiscal 2012 should be another year of solid financial returns. Back to you, Howard.

Thanks, Gary. Let me conclude my prepared remarks and talk about the 2012 outlook, utilizing Slides 10 and 11. We're updating our financial guidance for fiscal 2012 with consolidated revenue now expected to be between 4% and 6% higher than fiscal 2011, revenue between $6.15 billion and $6.3 billion. Non-GAAP income, excluding acquisition-related costs, is now expected to be in a range from $5.10 to $5.30 per diluted share, a year-over-year increase of 4% to 8%. The changes between our prior outlook and current outlook reflect lower revenue and income in International Tactical Communications, as well as increased losses in our Cyber business, offset by higher expected income in Government Communications, a slightly lower tax rate and the positive impact from our new share repurchase plan. We'll certainly have a clearer picture of the timing of international orders and revenue as we move through the next 2 quarters, which will help to tighten our EPS range going forward. Now our current view to the distribution of EPS in fiscal 2012 is about 40% of the earnings in the first half and about 60% of the earnings in the second half, with first quarter EPS in a range of $1 to $1.05 per share. Back to full year guidance, adjusted EBITDA is expected to be in a range from $1.28 billion to $1.32 billion, that's a year-over-year increase of 4% to 8% in line with revenue. For the RF Communications segment, fiscal 2012 revenue is expected to be 3% to 6% lower than fiscal 2011, reflecting the timing of international orders turning into revenue. So the new guidance now anticipates decline in Tactical Communications revenue of about 10% year-over-year versus our previous flat year-over-year revenue guidance. We continue to expect double-digit growth in Public Safety and Professional Communications. And our segment operating margins are now expected to be in the 33% to 34% range. For our Integrated Network Solutions segment, we expect revenue to be in a range of 16% to 18% higher than fiscal 2011, and that represents organic growth in a range of 7% and 9% higher. Non-GAAP segment operating margin is expected to be between 5.5% to 6.5%, which includes the anticipated operating losses of about $30 million in our Cyber business. And finally, for the Government Communications Systems segment, we expect revenue for fiscal 2012 to be 2% to 4% higher than fiscal 2011, and segment operating margins are expected to be about 13.5% of revenue. With that, I'll ask the operator to open the line and we'll be pleased to take your questions.

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

So just a couple of quick questions. First off, on the share repurchase plan, I mean, obviously, this is quite a big step up from where you've been before. You're going to repurchase in the next 2 quarters more than you've done in the last 2 years combined -- 2 fiscal years combined. So I just wondered if you might talk about the board's view here, and what this may signal in terms of cash deployment, your strategy there? How you're thinking about this? Is this something we should consider as a new norm? Has your view changed? How should we consider this?

Well, first of all, we've consistently said that strategic acquisitions then dividends and then share repurchase have always been a part of our capital distribution and capital structure thinking. As we look at acquisitions, we've made a number of acquisitions in fiscal '11 and the focus in fiscal '12 is very much on integrating those acquisitions and delivering on the promise of them, as well as the ones that had gone previously like the Public Safety business, which as you see is really starting to pick up steam. We certainly feel that a double-digit increase in our dividend rate is consistent with what we've done in the past as we target a payout ratio, north of 20%, and this will be consistent with that. And so when we look at then the cash flow that we're going to generate from operating cash less our needs for the requirements for CapEx, we felt that the current valuation of the shares that this was a very appropriate deployment of cash and makes a strong statement about the board and management's view of the future earnings potential for the company. Whether this becomes the "norm" or not, beyond that, I think, remains to be seen. But the fact that we do have a $1 billion authorization suggest that there is another $500 million tranche that's going to be repurchased beyond fiscal year '12.

Great. And as a follow up, I wondered if we might revisit briefly the targets that you've laid out before in terms of the progression over the next couple of years, both at INS and RF Communications. It would seem there's probably some changes to those, maybe not, how should we think about your prior views of INS given a slower process in Cyber, and perhaps some other areas within there, as well as international, is that just timing and we'll get back to the old target, or is this something that needs to be reconsidered?

Well, I certainly still believe that the kind of 10% to 13% EPS growth targets over the 3-year time frame that we laid out are absolutely still achievable. On the growth side, I think we said 8% to 9% organic growth given that we're dropping off a little bit in '12, perhaps that 3-year CAGR would be just a little bit lower. But the EPS targets I think are absolutely on track and the combination of the operational improvements we expect, as well as contribution from slightly smaller share outstanding.

And our next question comes from the line of Pete Skibitski with SunTrust.

Howard, on that roughly, I guess, 10% sales take down in RF Tactical, I wonder if you could tell us how much of that relates to the U.S. decision to freeze some Pakistani funding, maybe an indication of when that might be alleviated, the restriction there.

Pete, I think that's a pretty small factor in that. There's really no one country or one order, but it's really been kind of a broad-based pushout across Northern Africa, the Middle East and Central Asia. We certainly think that while Pakistan is kind of on-hold currently, we certainly expect that their relations there will warm, and we'll see those -- that market open back up to us. But in and of itself, that one country is not the reason behind it. It's really been everything that you've seen going on across the region over what's been a very tumultuous 6-month period, and it's primarily politically-driven. It's really not at all driven by expectations of somehow a lower security risk or a lower need for these communications. So we're certainly frustrated now 2 quarters in a row to see about $100 million each quarter of orders pushed out. But the good news is we haven't lost any orders, and I actually think our product position is even strengthening as time goes on. So we're going to see the orders come in at some point and get turned to revenue. If that happens earlier in the year, then certainly the high end of our guidance is possible. If it doesn't happen until later in the year, then it might be the lower end. And that's why you see the range a little wider than it traditional is.

Okay. A very quick one for Gary, and I'll get out of the way. Gary, did you have any participating securities adjustments on the income statement in the quarter? I didn't see it in the release.

No, none that I can think of, Pete.

Okay, because you typically have those each quarter, correct?

Participating, not really. I'd go back and have to look, but I don't believe so. I could be correct, and I'll doublecheck, but I don't believe so.

And our next question comes from the line of Gautam Khanna with Cowen and Company.

So your new RF Tactical guidance is like $1.6 billion, which implies today you have a 48% backlog to forward sales ratio, which is among the lower end of what it's been historically. I just wondered if you could comment about kind of how many -- maybe if you could give us a sense for the amount of bids outstanding? Or at what point we should be a little bit more concerned about another possible reduction? Or do you see a lot of stuff in the very near-term pipeline that's likely to convert so that we don't get another downward revision? And then lastly, if you could just update us on the NRO patriot recompete and where you guys stand there?

Right. So on RF backlog, if you go back 6 years, you'll see the numbers as low as 30% and as high as 70%. So there's a wide range of where we've entered the year with backlog compared to what our sales turn out to actually be. The average is 51.5%, so I don't think 48% is materially different than the average. Obviously, we're counting on some new orders coming in. And the timing of those orders, as I indicated, especially in international because they can be very large and lumpy, will have an impact on when those turn to revenue. With regard to the patriot recompete, there's been a down select made, I think, the 2 companies. We are not one of those companies. And so we have reflected the lower revenue from that recompete not going our way in the guidance we've provided for INS, part of INS that Harris IT Services provides. So that's in the guidance, and it will affect us for about half a year starting in kind of January.

And our next question comes from the line of Michael French with Morgan Joseph.

Howard, first, I'd like to ask you about the succession planning. It was a little bit of surprise to see that you're planning to retire. I think you've done a good job, you've established a great culture, and you're definitely a pleasure to be around, so very sorry to hear that. But just perhaps, you could walk us through how the search is going and what you -- what kind of timing you would expect on an announcement?

Well, there's certainly nothing specific I can say about timing on an announcement. What I can say is that the board is diligently engaged in interviewing both external and internal candidates. I know that they feel a sense of urgency to name a successor, not because they're anxious to get me out of here, but because we certainly don't want to be in a void for an extended period where leadership is uncertain. But in terms of the timing, that remains to be seen. But there's a real sense of urgency obviously balanced by the desire to pick the right person to lead the company in our next chapter. So lots of work is underway, and you'll just have to stay tuned. I can't say anything specific with regard to timing.

Okay. And then I'd like to follow up on something you mentioned on the last call, that at a SPA warrant in San Diego, they have an RFI for essentially an off-the-shelf jitters radio. Has there been any movement on that process?

Not that I'm aware of at this point.

Okay, and then...

Are you speaking about the GMR alternative?

Yes.

Yes, I don't believe anything has happened subsequent to that, at least not that I'm aware of.

Okay. And then you mentioned today that on the Cyber side, you were going to be taking some steps to accelerate business there. Can you elaborate on that? Are you talking about being more aggressive on pricing, or are there other things that you can do?

Yes, I'm not sure it's as much accelerate on the revenue side. Certainly, we're doing what we can, but we're just seeing that while I think the cloud -- computing cloud hosting market is going to be very, very large and lucrative at some point in the future, the transition's going much more slowly, and we've seen that and talked to a lot of companies. So I'm not sure we're going to be able to accelerate that, although we'll do what we can. But certainly, in response to that, we're taking a hard look at the cost side of the equation and our expenses and plans for additional capital expenditures and depreciation and amortization and that sort of thing, to see what can be done to potentially trim, what right now our best estimate is about a $30 million operating loss, whereas previously, we had hoped that to be kind of break even for this year.

And our next question comes from the line of Joe Nadol with JPMorgan. Joseph Nadol - JP Morgan Chase & Co: Howard, on the margin guidance for RF, it's up 100 basis points versus where you had guided 3 months ago or last quarter. And the part of the revenue guidance that came down was obviously some of the higher margin part of the business. Also, if you just look at the fourth quarter, you did 30.4% margin in the RF segment overall and the mix to me looks pretty similar to what you're expecting for the coming year. So I'm just wondering what are the offsets to get the margins up, those 300 basis points that you're expecting from the fourth quarter? Is R&D coming down? Are there any other items in there, some other kind of mix, et cetera?

Yes, great question, Joe, and you're exactly right. We've taken a lot of steps to mitigate the amount of the margin decline from '11 to '12. In the segment it's only about 100 basis points. So how have we done that? Well, number one, Public Safety, Professional Communications business return on sales or margins are moving significantly higher. If you go back 2 years, Gary and I talked about guidance in that business, and we are now starting to see the top line and the bottom line move. And so it's becoming, as a result, less dilutive to the segment. Secondly, our new manufacturing facility and a number of other operational and cost reduction actions are allowing us to actually maintain very, very high margins in the RF segment. Fourth quarter was a little bit of an anomaly. We used the opportunity to accelerate some of our R&D by using some contract engineering, not only inside, but outside the company. And so the previous quarter, I think, for the segment was 32.5%. So Q4 was a little bit of an anomaly, as sometimes happens in quarters. But the bottom line is, we feel very confident in the 33% to 34% guidance we're providing, and it does not involve a major reduction in R&D, but rather focuses heavily on actions at the gross margin line in both Tactical, as well as significant progress being made in Public Safety. Joseph Nadol - JP Morgan Chase & Co: Well, you've indicated that Public Safety is around 10% in the past, and I'm wondering if you could give a little more color as to where we're getting there. Is that getting up into the mid-teens?

Well, as we've integrated the businesses, it's a little difficult to call that out. But I can tell you that we are very comfortable that we are now on track toward the kind of return on sales numbers that Gary and I talked about. Ultimately, I think on the call, we said our goal was about 15% EBIT and closer to maybe 19% EBITDA margins, and this absolutely is moving us that direction.

And our next question comes from the line of Larry Harris with CL King. Lawrence Harris - CL King & Associates, Inc.: I was wondering if you could talk about the texture of orders or bookings right now in some of the U.S. government businesses, Tactical Communications outside of the 117G and Government Communications and Integrated Network Solutions. Some companies that have been reporting, I guess, paperwork problems this past quarter, what are you seeing right now in some of your businesses?

We haven't seen anything particularly, Larry, a significant item that I would call out. I think there continues to be a lot of concern and at times confusion around exactly what money is going to be available for what programs. And certainly, we've seen a lot of talk now in the last 24 hours by various analysts as a result of the debt ceiling deal that was crafted in Congress. We really haven't seen anything material as a result of the last quarter. It's been a little slow, as you know, and our guidance shows modest growth compared to what we've been able to deliver in the past. So obviously, we're hopeful that this is overblown and the opportunity to have higher growth in government systems and in IT services. We've been doing very well in IT services and with 11% in government systems, that's kind of a blowout quarter. So we really haven't seen a lot of big things. I think that has a lot to do with our diversity of programs for a company our size, with 250 to 300 programs across not just DoD, but intelligence, civilian agencies, lots of $10 million and smaller annual revenue programs. I think that's cushioning us pretty well. We won't be totally blind, I'm sure, to program adjustments and so on. But at this point, we're not seeing anything of the magnitude that you're asking about. Lawrence Harris - CL King & Associates, Inc.: Understood. And you mentioned that there were a couple of IDIQ-type contracts, I believe, in the Tactical Communications area. If you win those, could those convert to sales this fiscal year?

I don't know specifically whether we have any of those contracts in our -- it's certainly in our pipeline. I don't know how many of them we might have in the actual revenue forecast. What I can say in terms of little color around those, one is the special operations forces, we think that's expected to be kind of in hundreds of million of dollars of opportunity. That's probably an FY '13 program and that's kind of tied to one of the future capability sets in the Army, and I think that's correct. And then the other one for the Navy is maybe tens of millions of dollars. That one is more FY '12 oriented. So gives you a little bit of color around them. But the nice thing about IDIQs, it sets a ceiling and gives a lot of flexibility. So if up-tempo or needs emerge and new technology they want to take advantage of, especially special forces, they had then have a contract ceiling and a vehicle to procure radios. So as we continue to put out radios with more and more capabilities, we love to see these IDIQ contracts because I think that the balance shifts really toward a commercial company like Harris and to be able to make the maximum benefit out of those kinds of vehicles. Lawrence Harris - CL King & Associates, Inc.: Yes, hundreds of millions, that would be significant.

And our next question comes from the line of Josephine Millward with Benchmark Company.

Howard, in your updated fiscal year '12 guidance, are you assuming another CR, or can we see further downside if the '12 budget hasn't get done until some time next year?

Yes, so you're talking about whether we are expecting an additional or a new continuing resolution in the government fiscal year '12 budget? Well, I don't think we have or expect anything to be signed in September when it's supposed to. So I suspect that we are looking for it to be executed maybe January or February, that's kind of in the pattern. But I don't think that we're expecting a full year continuing resolution. So we're probably balanced somewhere in the middle on that.

That's fair. Can you give us an update on the 117G manpack contract vehicles, I believe, you have in place with the Army moving at SOCOM? How much is left on the ceiling of these contracts? And when do you expect the RFP on jitters alternative for manpack and GMR to come out? Would they -- would you anticipate them some time after the follow-on networking exercise in October?

First of all, I don't have, at my fingertips, how much is remaining on those contract vehicles side. I just don't know those numbers, so we'd have to get back to you on that. I'm not aware at this point that contract vehicles are an issue so -- but I just don't have those numbers. With regard to the timing on GMR, I would really be speculating. We certainly know that they need a replacement. We think that the market -- just to remind you the market size for, say, a 2-channel GMR vehicle replacement, we still think we're talking about upwards of 25,000 radios, $3 billion in revenue opportunity over a period of years. So really can't say how many years, can't say when they're going to start that. We really don't have anything to speak of in our fiscal '12 guidance. So we're expecting -- and I think beyond that. When the timing of an RFP would occur, I really can't say. But you may be right, it's likely to be after that October NIE and we're really not counting on anything in '12. But certainly, for '13, '14, '15, I think we would expect to start seeing some opportunity there. I think we're going to be in a very strong position to take advantage and serve that 25,000 unit ultimate opportunity.

And our next question comes from the line of Josh Sullivan with Gleacher. Josh Sullivan - Gleacher & Company, Inc.: In the past, you've talked about how Public Safety applications can be leveraged internationally. Can you talk about any traction there?

Yes, I think we have a limited amount of ability to leverage, and it's really in those markets that are using the P25 standard. The other standard, which I'm forgetting the name of it, is TETRA. Thank you, Pam. The TETRA standard, we don't have access to that technology currently. And most of the international market of $4 billion or so annually is TETRA. But those markets which are not they tend to be more rural in nature, larger geographies, tend to use the P25 standard, and we are pretty well positioned with those. We saw nice increases in fiscal '11 with our international Public Safety orders. It was a nice growth area off of fiscal '10, and we certainly have expectations of another very good growth year in fiscal '12 internationally. But it's still going to be a relatively small piece of our overall revenue in PSPC. Josh Sullivan - Gleacher & Company, Inc.: Okay. And just secondly, domestically, just given the pressure on some municipalities under -- I mean, what does the competitive landscape look like here? Are you guys winning contracts on cost or capability?

Well, it certainly continues to be and will continue to be a competitive market, but I think you need to think of the market in 2 pieces. The part that's really been most impacted by kind of yearly annual budgets is what I would call the kind of repair and replacement, what we call the flow business. And we have certainly seen pressure on that business because they're not adding additional police officers, firemen, emergency technicians. If they have 5 radios in reserve and 2 break down, they're not buying new radios because they don't have the short-term budget money. So we've already seen, I think, significant impacts from that. On the flip side though, money is available for these large modernization programs. And we have won 4 or 5 large ones over the last several quarters we've announced. These have all been competitive. And I think a combination of 3 factors is allowing us to win. Certainly, we have to be competitive on price, but we don't need to have the lowest overall price by a significant amount. We are viewed as having very competitive and often superior technology and support. And thirdly, the Harris brand that's now wrapped around the Public Safety business has created a lot of demand and a lot of traction for competitive bids in this market. So I think you put those factors together and a strong and even upgraded management team at PSPC, and we certainly like the momentum that seems to be building in that market. Having said that, certainly, it's competitive, and the day-to-day replacement and upgrade business, budgets are tight.

And our next question comes from the line of Ted Wheeler with Buckingham Research.

I wondered if you could give a little more color on the Cyber situation. You talked about some cost issues, but maybe you could address the revenue side? I mean, does the slow start a pushout? Or are some of the people or potential contracts that you would hope to engage in moving elsewhere? I wonder if you could just kind of go through what might be a new outlook for getting the revenues to where you want them to be?

Yes, I think overall, Ted, I would kind of characterize this as kind of a 1-year slip in our expectations. Back in March, we talked about the investments that we've made in capital for the facility, the upgrade, for all of our initial tranche at customer-facing equipment, kind of in the $175 million to $200 million range. And that would ultimately be able to drive revenue of about $80 million at nice profitability with maybe $50 million of revenue or so being at the break-even point, given the expenses that we have and we have people operating the business and the depreciation and amortization on the investments. So that's kind of where we were sitting. We thought that in FY '12 we would have enough momentum to get to that level and kind of be plus or minus at break even. My assessment now is that's going to be probably pushed out a year. I don't believe that we have lost a significant amount of business. I think we were just in the category of start-up. We started up the business and opened the center a little later than we have planned, and just didn't allow enough time in our planning for what was going to be channel development, starting to work with our partners on developing prospects. And then the time to close, once we had a prospect, is turning out to be much longer. Because people are just going to be a little more cautious, especially about taking their business to the cloud in an outside cloud as opposed to -- they may take it to a cloud faster in their own operations than outsource it to someone else. And again, we were focused -- we are focused on really mission-critical, very high-end applications. And so in hindsight, we were just too optimistic in how quickly this was going to turn. We're still very convinced this is going to be a very large market, one that suits Harris well and one that we ought to be able to generate $100 million of very profitable revenue from. But we are not starting out where we had hoped. We lost, as we already had indicated, an excess of $20 million in fiscal '11. And now we're estimating this $30 million for fiscal '12. So I think it's -- unfortunately, like sometimes new market entries, you don't know what you don't know. You make assumptions. You find out sometimes you're right. In this case, we weren't. And so we've had to bake that into our updated guidance for next year.

I guess, the number of conversations and evaluations also change from what you thought or -- and therefore, just sort of timing a process? Or are you having difficulty getting -- sort of people getting started to kick the tires?

I think the conversation has now have begun, and they really have been about 6 months later than we'd really expected in terms of really ramping up. It was hard to have a lot of conversations before we have the facility open. The customers could come in or go in our portal and see really what it is with more specificity around what we're offering. I think coming forward, in future quarterly calls, we'll provide more color around the pipeline and how it's going. But right now, we wanted to communicate where we think we are.

Big swing for fiscal '13, I guess?

Well, that's the way I view the opportunity certainly. If we -- now have in the numbers we've given you, $30 million loss and can get to break even in '13, that's $0.15, $0.17 a share improvement in '13. But I'm sure there are some investors from Missouri at this point that we're going to have to convince that, that's more real than we thought it was 6 months ago. Let me add on Josephine's question that the notes indicate that we do expect to see the RFP before the end of the calendar year. I don't know if that'll happen or not, but that's a current expectation. And then it'll take some months to award, so it could easily be to the end of the fiscal year before the RFP is awarded and any contract comes out of that. So that's what our current thinking is, but I think it's probably a fair subject to change.

We do have one final question, and that's a follow-up from the line of Pete Skibitski with SunTrust.

Yes, two quick ones. Howard, just wondered if there's any opportunity to protest the NRO patriot loss?

We do not plan to protest that loss.

Okay. And then I just wondered on the Healthcare opportunity set, there was used to be a lot of talk about a lot of money from the stimulus bill available for healthcare opportunities. I'm wondering what the update is on that front.

I think the opportunity pipeline is very, very large and we bought a commercial business, it's not that large. And so, a couple of deals slipping out in the quarter can have an impact on profitability. It's a software and services business with high gross margins. So I don't want you to take away from our comments that we lost money due to Carefx acquisition in Q4 as that, that's going to be an ongoing loss, as I've indicated Cyber will be. We expect a turnaround and grow in that commercial healthcare business and be profitable in fiscal '12. And as you heard from my prepared remarks, we are making a huge amount of progress with the Department of Veterans Affairs, and our Healthcare business there is going to grow significantly. So I think fiscal '12 is going to be a very good year for the Healthcare Solutions business at Harris, both government and commercial. I think we're going to build momentum and see a lot of growth in '13 and '14. But the reality was that we lost money primarily on the commercial acquisition in Q4, and we need to build that results base to show you as we go forward in '12. But we do not expect to lose money in the Healthcare in fiscal '12.

Thank you everyone for joining us today.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.