L3Harris Technologies, Inc. (LHX) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Harris Earnings Conference Call. [Operator Instructions] I would now like to turn the presentation over to your host for today, Ms. Pamela Padgett, Vice President in Investor Relations. Please proceed.

Thank you. Good morning, everyone, and welcome to our second quarter fiscal 2013 earnings call. I'm Pamela Padgett. And on the call today is Bill Brown, President and CEO; and Gary McArthur, Senior Vice President and Chief Financial Officer. Before we get started, a few words on forward-looking statements. In the course of this teleconference, management may make forward-looking statements. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information and a discussion of such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC. In addition, in our press release and on this teleconference and the related presentation, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in the tables of our press release and on the Investor Relations section of our website, which is www.harris.com. A replay of this call will also be available on the Investor Relations section of our website. And with that, Bill, I'll turn the call over to you.

Well, great. Thank you, Pam, and welcome to our second quarter fiscal 2013 earnings call. Since our first quarter earnings call in late October, the government market has become more uncertain and spending, more constrained. But even in this challenging environment, second quarter results were solid. Turning to Slides 3 and 4 in the presentation. Earnings per share was $1.25, $0.01 higher than prior year non-GAAP EPS and $0.07 higher than prior year GAAP EPS, even with revenue down 2%. Orders were up 30% over the prior year and up double digit in all 3 segments, resulting in a book-to-bill of greater than 1 and funded backlog essentially flat to prior quarter and up about 10% over prior year. A continued focus on operational excellence and productivity is mitigating the impact of the lower revenue. Cost reductions from restructuring actions and efficiencies in the manufacturing and supply chain are now tracking above our target of $75 million, and we continue to further reduce corporate expense, which is down 15% in the first half and is now on track to be down about 20% for the year versus fiscal 2012. Cost reduction isn't coming at the expense of investment in the future. While we continue to focus on lowering cost, we're increasing investment in product development, with total company funded R&D up 15% in the quarter on top of a 4% increase in Q1. Year-over-year Tactical Communications operating margin held steady again this quarter, while operating margin for the RF segment was slightly lower as a result of business mix related to revenue growth in Public Safety. Government Communications Systems reported another excellent quarter, with revenue growth of 4% and operating margin of 14.9%. And our growth initiatives in Integrated Network Solutions performed well, with CapRock and Healthcare achieving significant increases in orders and revenue, as well as improved operating performance. Gary will provide a little more color on segment performance in just a few minutes. Free cash flow was solid in the quarter at $120 million, bringing us to $200 million -- or approximately $200 million for the first half of fiscal '13, about 25% higher than prior year. We continue to tighten down on capital spending and for the first half, are trending well below last year and our previous guidance. While our results in the quarter was solid, the indecision and political gridlock in Washington is creating an even more challenging budget environment. The potential for an extended CR, combined with the continuing threat of sequestration, is creating a good deal of uncertainty around expected spending levels. Since early January, the commentary and tone out of the DOD has changed significantly, and they have now dropped their previous approach of not planning for sequestration. Deputy Secretary of Defense Ash Carter, in a mid-January memo, directed the services to slow spending now and plan for the worst. This was followed by budget guidance memos from each of the services outlining immediate actions to reduce overall spending: freezing civilian hiring, terminating temporary employees, deferring maintenance and looking at all contracts for savings and if necessary, to consider civilian furloughs. Within the last few weeks, we've seen a market change in behavior from several of our U.S. tactical radio customers, as they've turned their attention to sorting out what they can afford to spend and where they need to preserve funding in the face of no budget, a possible expanded CR and even potentially bigger sequestration cuts. This sorting out of budget priorities without having any clarity on what the ultimate budget will be is causing procurement to slow. And while the deadline remains on the horizon, it sure feels to us as if our customers are starting to act like sequestration has already been triggered. And as you know, our prior guidance, which was initially set in April last year, didn't include sequestration. We're hopeful that this gridlock is relatively short-lived and that we'll soon see some budget clarity, with procurement back on track. But for now, we feel it's prudent to reflect in our guidance the reduced discretionary spending we're now seeing and what we believe is the potential impact of greater budget uncertainty on our back half results. I'll come back with a few comments before we open up the call to questions. So let me now turn it over to Gary to discuss segment results.

Thank you, Bill, and good morning. Moving to segment results on Slide 5. Revenue for RF Communications was $486 million and declined 8% compared to $526 million in the prior year. Orders for this segment totaled $402 million and book-to-bill was 0.83. In Tactical Communications, revenue was $337 million and declined 14%. The decline in DOD revenue was partially offset by higher international revenue. As we previously communicated, we are expecting tough year-over-year revenue comparison in fiscal 2013 as the market transitions from strong [indiscernible] to a multi-billion dollar modernization cycle. Tactical Communication orders were $287 million. Backlog was $561 million, and book-to-bill was 0.85. Orders in both DOD and international were up significantly from the prior year, resulting in a book-to-bill slightly better than in the first quarter and limiting backlog erosion to about $50 million. Based on a bottoms-up analysis of specific opportunities over the next 12 to 18 months, the opportunity pipeline is about $1.2 billion in the U.S., with close to $600 million in the proposal or closure phases. International pipeline is $2.4 billion, with over $800 million in the proposal or closure phases. Once an opportunity makes it to these phases, our win rate is typically very high. Key wins in the quarter highlight how we are expanding our addressable markets through product investments and convergence of military and civil security in the international markets. In the international market, Harris received orders totaling $42 million, $36 million in the quarter and $6 million after the close of the quarter, from a country in central Asia for the first phase of a multi-phase integrated C4ISR system that uses Falcon III high-capacity line of sight radios as a high-speed secure communications backbone. An additional $50 million order we were counting on now looks to be moving out of our fiscal year as a result of a longer FMS approval cycle than expected, contributing to the reduced revenue guidance for RF. The political climate continues to improve, and we remain confident that the $400 million of future opportunity in the central Asia country will be realized. Harris was awarded $33 million in orders from a NATO country to supply $22 million in Falcon III handheld radios and $11 million in smaller secure personal radios. Several years ago, Harris was a new entrant in the international secure personal radio market segment. We quickly gained market share, selling over 39,000 units. And for calendar 2012, we are now ranked #1 in the international market. The U.S. market for personal radios is just emerging and was initiated as a sole-sourced procurement of radios, called Rifleman Radios, under the HMS portion of the JTRS program of record. With open procurement for Rifleman Radios now underway, we are bringing this very successful radio back to the U.S. and incorporating the SRW waveform, leveraging the distinct advantage gained from product synergies. You may recall from our June analyst meeting that the U.S. version is called the RF-330E. In several international markets, we are benefiting from convergent synergies between military tactical radio and public safety opportunities. In the second quarter, we received a $31 million order from the Republic of Trinidad and Tobago for a P25 land mobile radio system to provide fully interoperable, seamless communication between military personnel using existing Falcon radios and law enforcement agencies providing public safety. In this instance, a longstanding tactical relationship expanded into a public safety opportunity. We are seeing similar tactical radio and public safety opportunities in Latin America. In Brazil, we received several orders totaling $24 million to supply Falcon III radios and Unity radios to provide interoperability between military and civil police, similar to what we saw last quarter from Mexico. In Public Safety and Professional Communications, revenue growth was strong, increasing 10% to $149 million, and our orders were up 35%. Our backlog in Public Safety is solid and contains multiyear program wins, and the opportunity pipeline is still a healthy $3 billion. Operating income for the segment was $151 million, down from prior year as a result of lower tactical revenue. Segment operating margin held strong at 31.1%. As expected, a shift in product mix due to strong revenue growth in public safety caused operating margin to decline from prior year's 32.8%. As Bill mentioned, Tactical Communications' operating margin was essentially flat with the prior year on lower revenue, which is really good performance. Turning now to Slide 6 and Integrated Network Solutions. Second quarter revenue increased 3% to $396 million. Solid growth in CapRock of 9% and in Healthcare Solutions of 21% was partially offset by a decline in IT Services revenue, primarily from the loss of the Patriot program. This marks the last tough compare related to the loss of Patriot. CapRock revenue was higher in all 3 markets: energy, maritime and government, with the majority of revenue growth in energy and maritime. Segment orders were up 11%. In CapRock, orders were up 21%, with strength across energy, maritime and government. Key orders at CapRock included a contract extension expanding a recent large and strategic win in the maritime market with Royal Caribbean; and in energy, with wins at Baker Hughes and Anadarko. And as a result of CapRock's joint initiative with RF Communications, we received, from a country in Europe, our first win for a new service, an end-to-end commercial UHF tactical satellite solution. The same service can be provided to other international customers. According to reports, the global government demand for UHF satellite capacity exceeds government-owned supply by over 200%. Over time, we believe this new CapRock service offering could generate an annual revenue in the tens of millions of dollars. In Healthcare, orders more than doubled over the prior year, driven by continued strength in the government market, as well as a pickup in new awards in the commercial area. We had 4 awards totaling $20 million from large enterprise health care providers for our clinical integration solution, hosting services and health information exchange capabilities. In the Integrated Network Solutions segment, operating income was $32 million compared with GAAP operating income of $20 million in the prior year and non-GAAP of $29 million. Non-GAAP segment operating margin in the quarter increased from 7.6% in the prior year to 8.2%, mainly as a result of improved operating performance in CapRock and operating income in IT Services holding flat on lower sales. Healthcare operating cost was slightly lower than the prior year and compared to our first quarter. Moving to Slide 7. Revenue in Government Communications was $439 million, increasing 4% over the prior year. Year-over-year revenue increases from the GOES-R weather program, the Space Network Ground Segment Sustainment Program and classified programs were partially offset by continued slower spending by the Department of Defense. Operating income was $66 million compared with $63 million in the prior year, and operating margin was a strong 14.9%, as a result of excellent execution and award fees, favorable program product mix and a favorable CAS 403 settlement. Key wins in the quarter included awards totaling $242 million from several classified customers and Harris' selection as 1 of 20 prime contractors to compete for work under the 5-year $10 billion GTACS IDIQ contract. Turning to discontinued operations. We expect to close the sale of Broadcast in early February, and we have a signed agreement for the sale of the Cyber data center. Turning to Slide 8. Free cash flow was $120 million versus $159 million last year, with operating cash flow of $159 million compared to $199 million in the prior year and capital expenditures of $39 million compared to $41 million in the prior year. During the quarter, we repurchased 1,022,000 shares of our common stock at an average per share price of $48.91. This is in line with our planned $200 million in share repurchases from the free cash flow for the year, and we continue to plan to purchase an additional $200 million in shares upon the successful conclusion of the Broadcast sale. Our effective tax rate for the quarter was 30.8% and favorably impacted by tax settlements. Moving to Slide 9. As Bill explained, we're updating our guidance range to reflect expected slower spending, as a result of greater budget uncertainty and the sequestration-like environment we currently find ourselves in. For total Harris, revenue is now expected to be down 2% to 4% and EPS in the range of $5 to $5.20, with lower expected revenue in Tactical and IT Services, partially offset by higher operating margin in Government Communications Systems, continued cost reductions and a more favorable tax rate. In RF Communications, U.S. budget uncertainty and a delayed international order caused by a longer-than-expected FMS approval cycle has caused us to reduce our revenue guidance from 3% to 4% lower to 7% to 9% lower. As a result of continued focus on operational excellence and further cost reductions, we expect to hold operating margins at 30%, the low end of previous expectations. In Integrated Network Solutions, we have lowered our revenue guidance from 4% to 5% growth to a decline of 0% to 1% to reflect further weakness in IT Services, which is now expected to be down 10% to 14%, around 2% to 4% down, excluding the Patriot program. Margin expectations are now 9% to 10% for the segment. In Government Communications Systems, we expect revenue to grow 1% to 2% compared to previous expectations of 2% to 3%. As a result of continued excellent program execution and continued favorable program product mix, we expect margin to be higher, at around 14.5%. We now expect our tax rate for the fiscal year to decline from 33%, which already included the R&D tax credit, to 32% as a result of favorable U.S. and international tax settlements. The R&D investment tax credit expected benefit in 3Q is roughly $7 million and in Q4, roughly $1 million. And looking at the back half of our fiscal year, as a result of greater budget uncertainty and the expected timing of international orders, our expectation is now for 3Q earnings per share to be in line with 2Q '13. We continue to scrutinize capital spending and are being conservative on cash deployment. CapEx for the first half of the year was $83 million, $40 million lower than in the first half of the prior year. Our revised guidance for CapEx is now $200 million to $210 million. We expect to generate another year of strong free cash flow in a range of $590 million to $650 million. And with that, let me turn it back to Bill.

Okay. Well, thank you, Gary. We remain hopeful that sequestration and budget uncertainty are soon resolved so we can get more clarity not only on the current GFY '13 budget but some indication of the GFY '14 budget and the direction and priorities over the next several years. We believe the guidance provided captures the challenging budget environment for the back half of fiscal '13 as we now see it, and we stand ready to adjust our cost structure, as appropriate, for fiscal '14, once there is more clarity on the extent of expected budget reductions. As I mentioned at our analyst meeting last June, we said we would address the possibility of sequestration and government budget uncertainty by focusing on the things we control, such as executing in our core businesses and exiting what's non-core, integrating recent acquisitions, driving operational excellence and lowering cost while investing in the future through increased R&D. We are making good progress in all of these areas. We're growing share with core customers, like the FAA, recently winning 2 large NextGen programs; and with our classified customers, where orders and revenue continue to climb as a result of our unique capabilities. We have focused our portfolio and are close to the end on Broadcast and Cyber. We're integrating, growing and improving our performance in our recent acquisitions, CapRock, Healthcare and Public Safety, with each showing solid growth in margin performance in the first half, results which indicate we're well on our way to making these growth initiatives a valuable part of Harris. We're increasing our international market presence by capturing synergies and convergence opportunities like between Tactical and Public Safety in Trinidad and Tobago, Brazil and Mexico; and between Tactical and CapRock, with the UHF satellite service that CapRock is now offering to international Falcon users. We're stepping up our game on operational excellence, and we're tracking well above our $75 million productivity target for the year. And at the same time, we're investing more in R&D, recently launching a number of new products, including AppStar, InTouch, KnightLite, ReCon, Seeker, the 700 and 800 megahertz versions of XG-25 and a ruggedized tablet computer. We have reduced our capital intensity, with CapEx down about 30% in the first half, allowing us to maintain strong free cash flow. We're deploying capital in a shareholder-friendly way, and we've raised our dividend twice in the last 12 months. Now we've rounded out our leadership team, with a new head of Integrated Network Solutions and a new head of Healthcare. We are making good progress. I'm confident in our strategy, and I'm optimistic about the long-term potential of the company as we address the fiscal challenges we've been anticipating for some time. We have a terrific team, working very hard and executing exceptionally well in a difficult environment. And with that, I'd like to ask the operator to now open the line for questions.

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

Just a big-picture question for you, Bill. And then, I want to kind of go off your comments you made right there at the end about being optimistic about the longer-term outlook for the company. I wondered if you might speak to the longer term, let's call it, 3- to 5-year outlook for INS and not in terms of formal targets, but what you see for the pieces of that business in terms of returns on capital or margins or however you like to think about it, but where do you see that business ultimate -- the pieces of that business ultimately heading sort of 3 to 5 years out, if you can?

Sure. And it's a very good question. You know, INS is composed of a variety of businesses that we're just still in the mode of integrating, and I think we're performing very, very well. CapRock, I'm very, very proud of what they've done. They're growing at very high-single digit rates. The margins are coming up pretty nicely. And I still think we're in the early stages of integration, and I'm very optimistic about the longer-term potential in that business. We talked about the 3 pieces that we compete in: energy, maritime and government, and I think we're very well-positioned in each. We're a market leader in energy, and that's growing nicely. We're growing our share in maritime with the win with Royal Caribbean, and you can imagine that there's more wins that are going to come down the path in that business. And I think we're holding our own, if not gaining a little bit of share on the government side. So longer term, I feel very good about CapRock. To me, that's a sort of a mid- to maybe high-teen margin business, but that's going to take us some time to get there, but boy, I'm pretty optimistic about where we're going in CapRock. The Healthcare business, we performed very, very well on the government side. We've grown dramatically. We acquired Carefx. We're integrating it. We're turning it around. As you know, we lost a lot of money in that business last year. We expect to be profitable in Healthcare in fiscal '13. I think we're making very good progress in that direction. We have reaffirmed today we'll be profitable in Healthcare through the full year, and over time, I see that business growing very nicely. That also could be a mid-teens type of business over time, once we look at how Carefx and the software suite really takes hold in the marketplace. We've got a big event coming up at the end of February, where we're releasing a new version of the software. So I think the back half of our year hinges on that, but I feel pretty good about our prospects longer term in Healthcare. And in INS -- or in IT Services, we've been very well-positioned, strong double-digit margin based on a particular contract we have with the government. As you know, that contract is being rebid. I think we're well-positioned on that contract. It will be awarded probably sometime in the back half of our year. It's really uncertain as to exactly when. But the reality is that business, which has been a double-digit margin business, is going to come down in margin. It will be mid- to high-single digit. We expect that. And based on all of that, we see that the margins in INS continue to improve. You saw today we've narrowed the range to 9% to 10% of margin in that particular business, and that's a double-digit margin business going -- longer term.

Your next question comes from the line of Joe Nadol with JP Morgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: I'd like to focus in on the RF, the Tactical Communications business, internationally, if you could. And I heard what you said in the comments about a $150 million opportunity maybe flipping out. I was just wondering if you could characterize the the overall international business. Or, x that one booking, are things tracking the way you expected 6 months ago or is there any other changes, one way or the other? And then, last quarter, you characterized the business as having lots of small orders but no big ones. Are there any larger fish that are starting to come into the -- your profile?

Yes. It's a good series of questions. Let me sort of take it from a high point and then come back to specifically what happened in the quarter, why we adjusted the year for international. As Gary mentioned, we have a pretty robust pipeline in international, $2.4 billion. It's still -- as I said last time, it's in the tens of millions, if not hundreds of millions of dollars, over time. We don't see any gigantic one-off opportunities like we saw with Australia, but we see, in series, there are lots of good opportunities in a variety of countries around the world. The Middle East remains, I think, still pretty robust. Iraq remains pretty strong. UAE, Saudi, Jordan all look very good for us over time, as does northern Africa. That's been a pretty good market for us, and I think it remains to be important going forward. Central Asia, the countries in central Asia that we're referring to have very, very strong potential. The political climate continues to improve. Brazil and Mexico were very, very promising, and we're winning orders in Brazil. We feel pretty good about our prospects there. And we won some orders in Europe that we've talked about today and had some releases on very recently. So I think overall, the pipeline looks robust. We feel very good about that. As you recall, Joe, our fiscal '12 was very, very strong in international. We had very strong double-digit orders and revenue growth in international tactical radios. It remains a lumpy business, but we're still feeling pretty good about fiscal '13 and beyond. Now what happened just in the last 30, 60 days in international, as Gary mentioned, we had a pretty large order for $50 million that just moved out. But the FMS process for this particular country is taking a little bit longer than we had thought 30 to 60 days ago. We're seeing the state department and the DOD wanting to spend a bit more time scrutinizing exactly how the FMS funds are being spent within this country. That is different than what's happened in the past, so we're going through a bit of a transition. The orders we booked in Q2 and a little bit in Q3, which totaled $42 million for this particular country; we're well in the process there, with long-term orders that we've been working at for quite some time. The $50 million follows on that. And longer term, we see the opportunity to be something like $400 million. So this a very big opportunity. It's a timing issue. It moved out of the year. It just didn't move out of the opportunity set for Harris Corporation. A couple of other things moved around. We saw some ins and outs in the Middle East. We are seeing, as Iraq converts from an FMS process to commercial terms, it's taking a bit longer than we expected, but no big movers in or out, other than the one I'm referring to as the $50 million. We still feel pretty good about our prospects long term in international, Joe. Thank you.

Your next question comes from the line of Yair Reiner with Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: So I was wondering whether the new guidance now fully reflects the potential for sequestration? And if not, how you would size the incremental downside risk to your targets if sequestration does, in fact, kick in. And I guess, as a follow-on to that, I got the impression from your comments that most of the headwinds you're feeling right now are in the tactical realm. Just wondering how you see sequestration potentially impacting Government Communications; that side of the business as well.

Well, you're right. We are seeing most of the headwind in tactical radios. Our Government business remains relatively resilient. It's a longer cycle business. There's pieces of that -- as you saw, we trued up our growth guidance for the year. There's pieces of that are being impacted, but not anywhere near like we're seeing in IT Services and of course, more importantly, in tactical radios. And just stepping back, we've been saying for quite some time that sequestration is not in our guidance. It has always been our biggest risk for the fiscal year. It's been driving a lot of uncertainty for us and for other peers in the defense space. The new guidance that we now give assumes that the continued budget uncertainty and this threat of sequestration that still hangs over our heads is dramatically slowing DOD procurement, and that's going to continue until we see some sort of budget clarity; something that's achieved in our U.S. government. Customers, we see they're clearly acting as if sequestration has been triggered, and we've reflected that changing behavior of our government customers into our guidance. With the difficulty in forecasting, there's still a lot of uncertainty. We've left a pretty wide range of guidance to reflect the uncertainty. We think the bottom end is pretty well covered unless there's very severe, draconian cuts that go beyond what we've heard in the press about sequestration. But as I step back and look at the impact of sequestration on our business, to the extent that sequestration is triggered and the DoD has given some freedom to make surgical cuts, as opposed to peanut butter cuts -- and I think there's been some evolving support in Congress for making that happen, that actually can work to our advantage since the products that we have in our portfolio seem to be pretty well aligned with what we understand to be the stated priorities of the DOD. And that's C4ISR, the network DoD field, special operation. And we think that, that will ultimately work in our favor. So that's basically where we stand today. We're reflecting in our guidance the uncertainty we're experiencing, and we'll come back and revisit that to the extent the situation changes, as it continues to evolve.

Your next question comes from the line of Peter Skibitski with Drexel Hamilton.

So Bill, just to put a cap on that, the bottom end of your guidance reflects what you see as the impact of sequestration if it's sort of a "peanut butter" approach to sequestration?

As I said -- look, we think we've been pretty conservative on the bottom end. We've thought very, very long and hard about that. We've looked very hard, in particular, at our tactical radio business. We've got a great team in our tactical radio business. As Gary went through some of the details and shared with you some of the orders that are in the proposal and closure stage, we knew we've got pretty high probability of winning those jobs. We track them very, very aggressively, and I think we've taken a relatively conservative look at what we see to be -- what's happening in the government. But our crystal ball is still as cloudy as anybody else's. So our job here is to drive wins with our government customers, execute flawlessly, adjust our cost structure where it's smart and makes sense and protect ourselves on the bottom end, and that's what we've tried to do. As I said, to the extent that what's evolving in the government over the next 2, 3, 4 months changes from a pretty draconian state that we're seeing today, we'll come back and revisit our guidance. But right now, we think our bottom end pretty well covers the situation.

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

A 2-part question on RF. So I know you're saying that the outlook is cloudy and there's not a lot of visibility. But you've also provided a decent amount of color on the behavior you're seeing in the U.S. and the opportunities internationally. Can you tell us if you expect new order book-to-bill to be below or above 1 in the back half? Just to help us formulate the beyond-2013 growth picture. And then on the segment margin, guidance changed there. Is that just absorption on the lower revenue outlook? Or is there something else going on in terms of change in the behavior terms of the contract with the customer on the margin side?

Good questions, Noah. Thank you. I think, for the year, we're still expecting our book-to-bill for tactical to be at or higher than 1, and you should take it as reassuring if that may be, because we've dropped our revenue. So we have said it would be about 1 or higher than 1 last time, and we're still at the same position today. The tightening down of our margin range is due to volume. There's no big change on customer behavior or extraordinary pressure on pricing. It's really volume-related, and we work very, very hard to take cost out and still allow to invest aggressively in both Public Safety, as well as in Tactical Communications R&D. And that's a lot of conversation within the management team. It's a lot of conversation with our board. Our board fully, fully supports us investing in this business for the long term, and that's what we're continuing to do. So that's what's the basis of the tightening down at the bottom end of the range on margin.

Your next question comes from the line of Justin Amero with Cowen and Company.

Do you have any updates on the HMS Manpack radio, when it might be -- the next award might be placed or how large you expect it to be?

Well, the HMS, the Manpack itself, the RFI was out late November. We expect the RFP to come out sometime in the February or March timeframe, although that's still a little bit uncertain, but probably in the next couple of months. We still expect the award sometime in the late spring -- May, June timeframe, and deliveries occurring probably sometime in the spring of 2014, and that's the best that we know today. Again, it's pretty fluid. The budget is being set or reset, and obviously, we have no color on GFY '14 yet. But that's the best intelligence we have today.

Your follow-up question comes from the line of Yair Reiner with Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Yes. I was wondering about the intercompany sales in the quarter. They were a bit higher than usual. What drove that and which segment did that benefit in terms of sales?

It was actually between our RF Communications and Harris IT Services group, as well as between Harris IT Services and our Government Systems group. So a little higher in the quarter, good cooperation between the teams, but nothing specific to take from that as a go-forward look. I think it was just unusually high in the quarter.

Your follow-up question comes from the line of Joe Nadol with JP Morgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Bill, you've now been in the seat for a year, and it's been a pretty busy year; raised the dividend twice and buying back a lot of stock and divested Broadcast -- or divesting Broadcast, cutting costs, integrating businesses in INS. And we know about all that stuff. I'm wondering what's next and if you can help characterize -- because I don't expect you to slow down the pace here. What should we think about when we think of calendar year 2013 that -- what areas you're going to look at for real strategic focus?

I'm spending a lot more time today, Joe, on our R&D investments and R&D portfolio. As you know, I'm somewhat new to the business and the technology. I've been here for a year and a couple of months. It feels like it's a day, but it's a year and a couple of months. We've got a lot of interesting technology that we work on. As I said before on this call and I think at the investor meeting, we have historically developed our R&D plans segment by segment, but haven't really done an integrated look across the company, and I'm spending a lot more of my time on that. Because I do think there's opportunities as we increase our investments in R&D to make sure we're spending on the right spots and we're just making sure we're leveraging technology across the franchise, as opposed to optimizing it within each individual segment. So I'm spending a lot of time on R&D. I do think that, that's going to be important and essential to the future of our company. Spending a lot of my time on integration activities. We're not through that yet. I think there is more work that we need to do, so I'm spending some time there. And eventually, we're going to come back and talk about how we grow our topline, how we grow our franchise through M&A. We're not there yet. In the environment that we're in today, it's pretty cloudy. It's hard to kind of go to our board and say, "We'd like to buy company X, Y or Z" and be articulate in the financial expectations, just given the cloudy environment. That is going to arrive at some point in time. It will get clearer, and when it does, I think we've got a good balance sheet as we put BCD behind us and Cyber behind it. I think we've got a strong enough balance sheet to start to step out a little bit on M&A. Part of our confidence in being able to do that is developing very, very strong integration skills internally, convincing our board we know how to integrate companies, convincing our shareholders we know how to integrate companies. And once we do that, we'll step out and do some M&A. Not today, but that's going to come over time. So thank you, Joe. It's a good question. Thank you.

Your next question comes from the line of Peter Skibitski with Drexel Hamilton.

Bill, the book-to-bill of Public Safety has been under 1 for a number of quarters now. Has the sales outlook there dimmed at all?

This is Gary, Peter. No, it really hasn't. It's -- we still see some really good opportunities. It's been a lumpy business with regards to orders. And looking at the pipeline, there's San Francisco Mass Transit Authority, there's Chester, PA. There's good opportunity, so it's more related to timing of some of these orders and the lumpiness than less opportunities to go forward.

Let me add on that. I think the first half, we were -- Public Safety grew at double-digit rates, and we're guiding on the full year now to be sort of high-single -- mid- to high-single digit rates at PSPC, so that would imply the back half is going to slow down a little bit. You have very good backlog. That backlog is rolling through, and we expect to see more orders coming in the back half. But long term, our confidence in Public Safety remains as it was before. We do see good long-term growth opportunities there, as well as margin expansion.

The next question comes from the line of Noah Poponak with Goldman Sachs.

I just had a few, if that's okay. The recompete -- the IT Services recompete that you've mentioned in INS, just a few thoughts or clarifications there. Is it the back half of your fiscal year as in the next 6 months or the back half of calendar '13? And then, can you maybe talk about sort of how many competitors were there last time and how many you expect to be there this time and sort of how aggressive folks might be coming after that? And I don't know if you could also remind us how large that is for you as well.

Okay. Well, let me take most of that and maybe Gary can augment whatever I'm missing. It's -- the recompete I'm talking about is NGEN. It's the recompete for the NMCI contract. We had submitted our bid back in August, early August of 2012, so it's been out there for some time. We expect the award, we've heard, in March, but every indication is that it's going to be sometime after March. It has no impact on our fiscal '13, so there won't be any transition. But through June -- I think our contract with NMCI was extended through September, as I understand it. So we're good through June and probably through September with the current NMCI contract as it stands today. There's -- what the government looked for was 2 bids here. They looked for a transport plus an enterprise bid, and we're in partnership with CSC. As you know, we are the incumbent, working with HP on the transport side. And then a combined -- my understanding is that HP has bid a combined offering. They did not bid it in pieces, transport versus enterprise. My understanding, is we're the only ones that have done that. I'm not sure how aggressively others have come at it. I think it's us with CSC and HP that are in, but there could be others. But it is going to be a pretty aggressive contract, and that's why we know NMCI margins, as they stands today, will come down. And we're optimistic that, I think, we're well positioned, and I think we'll end up winning. The size of it today -- today, NMCI is worth to us, on a fiscal year basis, around $100 million -- between $100 million and $110 million, in that size range. The way we understand it, NGEN could be around $125 million to $150 million a year, so it's a little bit bigger on a per-year basis at that lower margin. So I think, Gary, those are the major points.

Yes. You hit them all, Bill.

Okay, good. Thank you.

Your next question comes from the line of Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: One more follow-up on the tactical radio business. I think there's 2 other meaningful contracts on the horizon, the MNVR and SRW Appliqué. Can you give us an update on the timing of those contract awards and, to the degree you can, where you think you fit competitively, either on a product offering or pricing strategies? And I guess, as a second question, the status of the 2-channel radio integration for the Manpack.

Okay. Well, let me take the MNVR. Maybe Gary can take the SRW. On the MNVR, we submitted a proposal for MNVR back in October of last year. Our product is in testing today. We expect an award in the May timeframe. Again, it could shift out a little bit. Our best guess today is a May award. Delivery, we understand to be, again, sometime in early spring of 2014, so around April, May timeframe of 2014. There is -- the initial part of MNVR, we think, is about 2,500 radios. The overall size of the contract will be $140 million, $150 million plus or minus. To the best of our knowledge, we have GD as a competitor in there. We think Northrop with Exelis is in. We think BAE may have something in the fight. We don't know where Raytheon is with MAINGATE. But I actually think we're very, very well positioned on MNVR, and I'm very optimistic that we're going to prevail and win MNVR. And maybe Gary can say a couple of words on SRW.

Yes. In the SRW Appliqué, Chris, there was an RFP out in October. Expectations are: Award kind of any time here in this timeframe, February; looking for a March delivery. Not a big impact to our fiscal year, kind of less than $10 million in the fiscal year from that application.

And on the Manpack, look, the RFP is not out yet, so -- but I will assure you, we'll have an offering that's going to be very, very competitive. It's going to meet the specification, and we're going to go after that very, very aggressively. So I think I'm pretty confident around what's going to happen with the Manpack. We'll have offering that meets the spec. Thank you.

Okay. All right, with that, we will wrap it up, and I thank everyone for joining us today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.