L3Harris Technologies, Inc. (LHX) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 3 2013 Harris Earnings Conference Call. My name is Matthew and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Pamela Padgett, Vice President of Investor Relations. Please proceed, ma'am.

Thank you. Good morning, everyone, and welcome to Harris' Third 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. And 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 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. The 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.

Okay. Well, thank you, Pam, and welcome to our third quarter fiscal 2013 earnings call. Our third quarter results were in line with our preliminary release, issued April 11, and significantly weaker than previously expected primarily due to U.S. and international tactical radio procurement delays. Since our second quarter earnings call, U.S. government funding constraints experienced under the continuing resolution were magnified when sequestration was triggered. The resulting slowdown in spending was felt across all of our government businesses, but most significantly in Tactical Communications, where the softness in our DoD business was exacerbated by the delay of key international awards that slipped into the fourth quarter or possibly early next fiscal year. Additionally, operating performance in Integrated Network Solutions did not meet our expectations as a result of a delay in an important software release in commercial healthcare and slower revenue growth in CapRock Communications. Now turning to Slides 3 and 4 in the presentation. Earnings per share was $1.12, down 21% from the prior year non-GAAP EPS of $1.42. Revenue was down 12% compared to the prior year, with book-to-bill of 0.94%, and funded backlog was down 2% sequentially and up 3% over the prior year. We expect the fiscal environment to remain challenging, and we are implementing further company-wide restructuring and cost-reduction actions in the fourth quarter. These actions are anticipated to generate annualized savings of $40 million to $50 million, net of what we expect to pass along to our government customers. We are reducing our workforce by about 3%, including a 7% reduction in indirect employment and about a 10% reduction in our executive population. We also plan to reduce our facility footprint by about 200,000 square feet and have announced an early redemption of $300 million in debt. These reductions are in addition to previous actions taken to address the slower government spending environment. Following these actions, employment will be down by about 6% since the end of calendar 2011, including a 20% reduction in our executive population. We also continue to advance our operational excellence agenda to improve efficiency, streamline processes and lower cost, with productivity savings this year tracking well above our previously announced target of $75 million. Free cash flow was solid in the quarter at $185 million, bringing us to $382 million for the first 3 quarters of fiscal 2013, up 24% versus prior year and 96% of net income. We continue to tighten down on capital spending and now estimate a range of $185 million to $195 million versus $234 million spent last year, and we continue to return cash to shareholders, repurchasing $160 million of stock in the quarter, with plans to repurchase an additional $140 million of stock by the end of our fiscal year. Based on third quarter results, we have recalibrated our full-year guidance to reflect the current environment as we now see it. The passing of the appropriations bill has been meaningful, triggering the process for government fiscal '13 funding to work its way down to individual programs, and the release of the President's 2014 budget has provided insight into spending priorities, which appear to align well with our capabilities. However, we have yet to see how sequestration will impact specific line items, and the political horse trading behind the scenes to get a budget pass, if it happens, has just begun. As a result, we decided to provide fiscal 2014 guidance when we report our full-year results in July when we hope to have a little more clarity around government spending. I'll come back with a few comments before we open the call to questions. So now let me turn it over to Gary to discuss segment results. Gary?

Thank you, Bill and good morning. Moving to segment results on Slide 5, revenue for RF Communications was $418 million and declined 22% compared to $538 million in the prior year. Orders for the segment totaled $486 million and book-to-bill was 1.16. In Tactical Communications, revenue was $276 million and declined 31%. Tactical Communication orders were $297 million. Backlog was $582 million and book-to-bill was 1.08. While orders in both DoD and international were down from the prior year, both DoD and international book-to-bills were greater than 1. In the quarter, we received a $26 million order from the U.S. Marine Corps and a $19 million order from the U.S. Navy for Falcon III radios, as well as a $10 million order from the Department of Defense, the first order for a new ISR product that combines wideband Tactical Communications and signals intelligence. Combining these capabilities results in a more powerful solution and a multifunctional device. It also reduces the overall weight a soldier carries. In the third quarter, Harris was awarded a $500 million increase in the ceiling value of our IDIQ contract with the U.S. Army Communications-Electronics Command or CECOM. The contract supports our foreign military sales and is encouraging as we have already booked orders against it. Significant international tactical radio orders, highlighted in our earnings release, included $40 million from Brunei, $29 million from a country in Asia, $23 million from Australia and $14 million from a country in Africa. Several international opportunities have taken longer to book than expected, pushing into later this fiscal year or some possibly into next fiscal year, including Iraq, Saudi Arabia, the Philippines and Brazil, all of which are excellent opportunities in the tens of millions of dollars. In addition, the next $50 million award from a country in Central Asia, which is part of a longer -- excuse me, a larger $400 million total opportunity mentioned last quarter, is winding its way through the FMS process and nearing completion. The 12- to 18-month international opportunity pipeline is $2.4 billion, with over $1 billion in the proposal or closure phases. This compares to $2.4 billion total pipeline with $800 million in the proposal or closure phases at the end of the second quarter. While slower than we would have liked, a number of the opportunities are very mature and nearing completion like those just mentioned, as well as others such as Poland and the country in Africa. The U.S. pipeline is $1 billion with $500 million in the proposal or closure phases. The pipeline is smaller than the second quarter, $1.2 billion, with $600 million in the proposal or closure phases. The reduction reflects the slowdown in spending, and in particular, the schedule delays in awarding the JTRS manpack Rifleman Radio and MNVR modernization opportunities. These have been reduced from $400 million in the second quarter pipeline to a total of about $200 million in our current pipeline, only 1/3 of which relates to HMS Manpack and Rifleman Radios. In Public Safety and Professional Communications, revenue growth increased 2% to $142 million. Orders almost doubled and book-to-bill was 1.3. Public Safety orders in the quarter included $42 million from Chester County Pennsylvania, $19 million from Spotsylvania County, Virginia, to deploy P25 emergency communications systems, $23 million from the Commonwealth of Pennsylvania for a 2-year maintenance agreement extension to support the statewide radio system and manage the network operations center and a $6 million order in the newly awarded $17 million contract from the U.S. Marine Corps to replace the existing land mobile radio infrastructure at all 7 installations in the Eastern United States. This is the third land radio -- land mobile radio delivery order the company has received in the last year from the Marine Corps, and provides interoperability with civilian agencies, which is critical in disaster relief and in other Homeland Security events. Operating income for the RF Communications segment was $116 million. Cost reductions, our focus on operational excellence and reduced discretionary spending allowed us to achieve 27.8% operating margin in the quarter despite a 22% revenue decline. Year-over-year margin decline was driven by volume-related factory absorption and investment in higher R&D, which was up 6% for the segment and up 9% in tactical. Turning now to Slide 6 in Integrated Network Solutions. The third quarter revenue decreased 6% to $365 million. Revenue growth in CapRock of 4% and in Healthcare Solutions of 6% was more than offset by a decline in IT services revenue of 10%. In CapRock, revenue was flat in the government market, up slightly in energy with the majority of the revenue growth coming from maritime. In Healthcare Solutions, revenue in the government market increased, while commercial revenue lagged as a result of the software release delay. The software is currently being tested in a hospital environment and the new expected release date is now first quarter of fiscal 2014. We said last quarter that the profitability for healthcare in 2013 hinged on this software release, and this pushes our target for reaching full-year profitability into early fiscal 2014. We're still making good progress, reducing losses each quarter with the year-to-date down about half compared to last year. Segment orders were down 34% as a result of delayed government awards and IT services and CapRock. In the health care market, the joint effort between the DoD and VA, called iEHR, to provide a single electronic healthcare record is being reconsidered, and is causing some procurement delays. This effort will eventually provide new opportunities and our credentials in this area are strong. For example, we've been executing well on a major interoperability contract that we won last year and have started 2 initial DoD medical center deployments in Texas and Virginia. Under this multi-year $80 million healthcare integration contract, we developed and are now deploying, a service-oriented architecture suite that will support information sharing and enable new types of clinical collaboration and integration of legacy data. This will be the largest healthcare interoperability system of its kind ever built. In addition, Healthcare Solutions was awarded in the quarter a 4-year contract with a potential value of $38 million from the VA to supply enterprise data warehouse services. With this contract, we have leveraged our strong competitive position in providing interoperability solutions and moved upstream, giving us the opportunity to provide business intelligence capabilities and predictive analytics. Key orders at CapRock included $24 million from several U.S. government customers under the DISA Future Commercial Satellite Communication Services Acquisition program and $17 million follow-on order in maritime from CSnet International for the continued operation and maintenance of a subsea ocean observatory in the Mediterranean Sea. In IT services, we received a $24 million order from the Canadian Department of National Defense for the Avionics Optimized Weapon Systems Support Program for the CF-18 Hornet fleet. In Integrated Network Solutions segment, operating income was $30 million compared with prior year GAAP operating income of $22 million and non-GAAP of $33 million. Operating performance improvement in Healthcare Solutions was more than offset by an operating income decline in IT services as a result of lower sales volume. In CapRock, operating performance improved somewhat after excluding expenses associated with third quarter cost reductions. Moving to Slide 7. Revenue in government communications was $442 million, decreasing 6% from the prior year. Slightly higher revenue from civil customers and flat revenue from national customers was more than offset by a mid-teen decrease in revenue from Department of Defense. Operating income was $67 million compared with $64 million in the prior year, and operating margin was 15.2% as a result of strong program performance on fixed-price contracts, including excellent performance on satellite programs. As previously announced, we completed the sale of the Broadcast Communications business in early February. Turning to Slide 8. Free cash flow was $185 million versus $152 million last year. Capital expenditures were $49 million compared to $53 million in the prior year. During the quarter, we repurchased about 3.4 million shares of our common stock for a total cash outlay of $160 million. Year-to-date repurchases totaled $260 million. Our effective tax rate for the quarter was 26.9% and was favorably impacted by the reenacted R&D investment tax credit, as well as favorable tax settlements. Moving to Slide 9, as previously announced, we updated guidance to reflect budget uncertainty and delays in international tactical radio awards. For total Harris, revenue is now expected to be down 6% to 7% and EPS in the range of $4.60 to $4.70. In RF Communications, our previous guidance of 7% to 9% lower is now 12% to 14% lower. Operating margin is now expected to be around 29%, including 70 to 80 basis points impact of higher R&D expense. In Integrated Network Solutions, we've lowered our revenue guidance from a decline of 0% to 1% to a decline of 4% to 5% to reflect further weakness in government markets and slower-than-expected growth in commercial markets. Operating margin is now expected to be about 8% for the segment. In Government Communications Systems, we expect revenue to be flat to slightly down compared to previous expectations of 1% to 2% growth. As a result of continued excellent program execution and continued favorable program product mix, we expect margin to remain around 14.5%. We now expect our tax rate for the fiscal year to be approximately 31%. We continue to scrutinize capital spending. Our revised guidance for CapEx is now $185 million to $195 million, and we now expect to generate free cash flow in a range of $500 million to $550 million, lower than our previous guidance of $590 million to $650 million as a result of lower income, slower pay by the U.S. government and cash restructuring charges. Based on revised guidance, free cash flow to non-GAAP net income will still be around $100%. With that, let me turn it back to you, Bill.

Okay, well, thank you, Gary. During this time of transition in the U.S. government market, we're focused on the things that we control. We're implementing further cost reduction actions to position our company for success and we'll continue to adapt as the market dictates, adjusting our cost structure accordingly, while investing in long-term growth. Our focus is also on execution. Our initiatives in Healthcare Solutions in CapRock are not producing the revenue growth and improved margins as quickly as expected. The integration has been difficult and progress has been choppy, as the businesses still lack maturity in systems and processes. We have new leadership at healthcare and at the INS segment level. We've mobilized the best talent from across the company, and we're focused on rapidly addressing these issues. The healthcare market and the energy and maritime market addressed by CapRock are strong in growing, and we're committed to building the talent and skill set to support these businesses as part of a broader, multi-year strategy of excessing, growing commercial markets and creating a larger international footprint. A transformation to this scale have its challenges like we're currently experiencing, but we remain confident about our ultimate success in executing our strategy. We are committed throughout our company to operational excellence, continuous improvement and increasing customer value, and doing these things well would drive superior shareholder returns. And now with that, I'd like to ask the operator to open the line for questions.

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

I wonder if you might characterize the -- what the guidance for RF and tactical implies for the mix between international and domestic revenues for the year and how you see that business exiting domestic versus international in the fourth quarter.

Well, we knew that coming into the year that international would be higher than the DoD business on orders, on sales and that remains to be the case throughout the full year.

Is it materially different in the fourth quarter because of the order delays? I mean, I think, a little bit better than half. I'm just trying to figure out, is there a difference in the trends of domestic versus international specifically in the fourth quarter due to the slippage of the international orders that you're talking about for the remainder of the year?

I mean, we expect the fourth quarter is going to be pretty strong on the international business, and I think consistent in the fourth quarter as like for the full year, probably 8 to 10 points higher in international than it is on the DoD side.

And how do you think about the risk around some of these slippages to the right? Obviously, budget has a lot of pressures. How are you thinking about the risk that these orders may not slide and just slide to the right, but may not materialize in the amounts that you were previously thinking? I know you highlighted a little bit of degradation in the pipeline, but how do you think about the risk that maybe these don't just slide, they come in at much lower amounts than what you were thinking originally?

Yes, well, look, we -- our forecast in our guidance, as we see it today, is based on a bottoms-up approach and we've spoken with all of our customers. We do this as we normally do program by program, opportunity by opportunity, and obviously, we scrubbed this pretty closely as carefully as best as we can, knowing the information that's at our fingertips. It seems on the DoD side, the team is quite confident that with the appropriations bill that's been signed, the procurement freeze that we've seen so far over the course of the last several months is starting to fall. In fact, the dialogue that we're seeing with DoD customers is showing a little more confidence and optimism today than really just another -- a month or 2 ago. On the international side, we are seeing good progress, really good movement on some opportunities. Gary talked about a number of them in Iraq, principally the MoD, Saudi Arabia, Philippines, Poland, country in Central Asia. Not all of those, Carter, have to book and ship in order to hit our guidance. And I think the $500 million increase in the CECOM IDIQ, I think, is a very positive sign for us overall in the support of the U.S. government for certain international markets. So we believe our forecast, our guidance here for the fourth quarter is appropriately calibrated and hedged, and that we feel comfortable that we can hit the guidance range that we set for the full year.

Great. And just as a follow-up briefly on INS, I mean, there's a lot of moving pieces here. I know you had talked about expecting some margin pressure and hits due to the NMCI contract, but also, as you look through the rest of the businesses and healthcare and that breakeven target moving a little bit and CapRock growing a little bit slower and just in general, your commentary across those businesses, how do you think about the long-term margin target for that business and the ability to -- and timing to get to double-digit margins there?

Our long-term target for INS hasn't changed from before. We still see ourselves getting into the low teens over all. We do know that in the IT services business. Margins will come down. They've been very solid for the year. We've been pleasantly surprised with the performance, of the team, and taking out costs as revenue changes and margins have stayed in the pretty solid double-digit rate through the course of fiscal '13 and we feel pretty good about that. That being said, it's not materialized as strongly as we had hoped in both healthcare and CapRock, and instead of the several hundred basis point improvement in CapRock margins for the year, it's quite a bit lower than that. We're not pleased with that, but that doesn't change our long-term perspective that CapRock should be a low- to mid-teens type margin business comparable with other people in the space. And healthcare should also be a low- to mid-teens maybe in the high teens ROS business over time. So I wouldn't lock myself into today in terms of the timeframe to get to that, but I don't change my perspective today that INS, as a whole, can get to the low-teens over time.

But the targets are unchanged?

Not changed, no.

Your next question comes from the line of Yair Reiner from Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: So first, just, Bill, from the last question, for tactical, how much business do you need to book in turn in the quarter to hit your guidance for the fourth quarter?

In our guidance for the fourth quarter, we need to turn a significant amount of orders here in the months of May and June. We have a significant amount of the business already in backlog, and as Bill had mentioned, we're expecting a bigger increase in orders in revenue coming from international than we are from the domestic side. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Okay. And then in GCS, you mentioned that the civil business is holding up pretty well. We've all heard about the cuts, the FAA. Have you seen any change in your civil businesses since sequestration began to kick in, and I guess, the effects of the sequestration have begun to bite a bit harder? Or do you think you're kind of steady state right now?

Interestingly, we've -- both in what we see in fiscal '13 and then also what we see in the President's budget for fiscal '14, we feel pretty good about both our weather programs and the FAA. In fact, on the weather side, it looks like the weather systems, in general, was well-supported. Those are funding for -- next year's up 19%. The FAA programs are well-supported. FTI, which is our -- the backbone we provide for the FAA is well-funded. There's $1 billion in the budget for the NextGen programs. So we've seen no impact in fiscal '13, and we're not expecting any impact going into fiscal '14. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it. And then one last question about the restructuring. Clearly, you're taking a lot of costs out. I imagine a part of that is you found areas where maybe you had unnecessary costs. A part of that is, I imagine, taking out some capacity. So to what extent can we read into this that you see lower potential business going forward, as well and that you need to resize the overall business for that and how should we think about that?

Well, I think, we're taking out cost in order to address what we know as a declining revenue environment. It's reflected in our fiscal '13 guidance that we provided today. We see opportunities across lots of areas in the company, including in our executive population, our indirects. We've taken a harder look at our facilities, some offices around the D.C., Virginia area, but also a few larger facilities and we're taking action to address the cost structure that we happen to have. I think it's going to position us very, very well for success going forward, and it will allow us to reinvest and continue to invest in long-term growth of the company as we've been doing so far year-to-date on growth initiatives and R&D spending.

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

I guess, on RF on Tactical Comms, I'm just wondering. I guess, the nature of that business, it's pretty quick turnaround, but I wonder if you can characterize the revenue decline. Was it across-the-board in U.S. DoD? Was it service-specific? Any more color that you can add on the revenue decline?

Across the DoD business, I think it would be fair to say that most of the decline occurred in the U.S. Army over the course of year-to-date, as well as we expect for the full year.

Okay, understood. And then can you -- I guess, at this point, it's -- some of these upcoming, excuse me, competitions are fairly critical. I wonder if you can update us on the timing of some of the big ones, the JTRS manpack, the MNVR and whatever else you want to mention, appliqué or Rifleman Radio?

Yes, sure. On the manpack and the Rifleman, it appears that both of those programs are getting delayed by about 6 months. That's the latest information that I have. It looks like the RFP is going to come out sometime in the August, September time frame, depending upon the manpack or the Rifleman. The award will be early next year in the February, March time frame, and delivery will be sort of late spring or early summer in the May, June, July time frame for both of the rifleman and the manpack. The MNVR does appear to be tracking closer to the current schedule that we last talked about. Delayed by about 1 month, we still expect an award in June, certainly, the date before the end of our fiscal year. And I understand deliveries on that program will occur early in calendar '14 like around February time frame.

Okay, got it. I'll just take one more, I guess, on capital deployment. Guys, you're retiring $300 million in debt. Should we expect share repurchases to slow, going forward, for a while as a result of that deployment? And also wondering about acquisitions, divestitures, kind of how you're thinking about that right now?

What we said during the prepared remarks is that we do intend to continue to buy back stock going through the fourth quarter, another $140 million, our current target. That would put us to $400 million total for the year, exactly in line with what we had committed before, $200 million of our "regular" buyback, $200 million from the proceed of selling BCD, the broadcast business. And going into next fiscal year, we don't see our capital deployment strategy to be deviating substantially from where we're at today.

Next question comes from the line of Joe Nadol from JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: On the Tactical Communications margins, you guys don't disclose them discreetly, but it looks like they were probably in the 37% range. Just was wondering, either Bill or Gary, if you could just comment, help provide some color around the different moving parts that drive that and how important is volume? What's going on with pricing and then mix? I know it's an open-ended question, but margins were down not surprisingly, given the volume, but were down quite a bit year-on-year. Just trying to gauge what the moving parts look like.

Yes, I think the -- a couple of things. One, we -- in everything that we do in today's environment, we always get price pressure and we push on that very hard. We continue to sell value in the value of our products, and I think we've been successful in holding the line on pricing. What we have seen in our margins overall in RF, and importantly in the tactical business, are 2 things. One is because of the volume deterioration, we're starting to run in the factory absorption problems, and that's the one thing that did ding us in the quarter. The other is continued investment in R&D. And then for the full year, we see that that's probably 70, 80 basis points of impact at the RF segment level. We continue to invest importantly in the tactical business, and those are the 2, I think, principal factors that are impacting our margins in tactical communications. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. So as you look at the profile, rather than year-on-year, if you look sequentially, I mean, there's nothing about -- considering that your book-to-bill was a little over 1 here, and it looks like your volume in Q4 should be in line with Q3 or better and you're looking for orders to pick back up, you wouldn't expect really any more adverse reaction to your margins unless volume were to, again, deteriorate?

No, we don't. We guided for the year 29%. That certainly has an implication for what the ROS is, what the segment is in Q4. It does hinge on volume as you just pointed out. We know the investment that we're making and making in Q4 as well. So at the moment, we don't think it has any further downside. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just over on government comms, your margins there continue to be better and better, hitting 15% here. Could you, I guess, give a little more context around EAC or cum catch-up adjustments and how those have been performing? And maybe, I know you're not giving guidance for next year yet, but a little more color as to how you're thinking about that margin performance going into -- going forward.

Well, we're thrilled with the performance of the GCS team, and they've done a fantastic job. They're executing very, very well on a number of different dimensions, and we're thrilled with the margin performance in the quarter. That being said, I think we pointed out to you before that, that high level of ROS is not sustainable. It's going to come down, and we'll probably be adjusting as we go into fiscal '14. It probably won't be any different than what we've talked about in June of last year, but that is a very special margin rate that we happen to hit. On the EACs, we'll be showing in the Q that our EACs this year are about $16 million in the quarter, it's pretty consistent with the EAC adjustments in the quarter last year. So year-over-year, not a big driver of margin performance. I think it's truly just very good execution by the team at GCS. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Very good. And then, Bill, if you don't mind, just one more on back to RF and the international on tactical. It seems like there's been -- there's a number of things that have slipped, and it seems like it's getting a little better here. I know it's a lot of different countries and you named a whole bunch of the important ones, but is there anything bigger picture, whether it's Department of State, Department of Defense, Afghanistan? What's going on with the conflict that's really underpinning a lot of the movement in the order stream? Or is this really all just sort of one-off different moving pieces? And give us the latest, I guess, on -- if there are any larger factors at play here, what -- how you're thinking about them.

There's really not -- I wouldn't say a lot of larger factors. Obviously, as we spoke last time for the country in Central Asia that is supported by the FMS process, there had been some sand in the gears in that process. We see that starting to break up a little bit and more progress being made. I'm pretty confident that we're not losing share. We're confident that the market opportunities we've talked about before remain. The pipeline is still very robust at $2.4 billion. Joe, it's really just the timing that's very, very difficult to predict. Keep in mind, we're coming off of a very strong 2012. Orders and revenue were very strong last year, up double digits and to record levels. In February of this year, I was in the Middle East at the trade show, and met with the dealers and then customers of all of the customers that we've just spoken about, Iraq, Saudi, UAE, Jordan, Afghanistan, Pakistan. And look, I think we're very well-positioned with excellent products and a very strong reputation in all of those markets. Wideband still is a very, very large untapped opportunity in international markets, and what I observed when I was there through direct conversation is some of the competitors we play against in the international markets have pulled back a little bit on investment in new products, and in fact, we're throttling up, investing in new products, new capabilities to expand the addressable market, and I think we're very, very well-positioned. It's really just a matter of timing. I do hope that you'll see some good announcements coming forth from us in the fourth quarter based on the pipeline that we see maturing in international.

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

Bill, you mentioned, I think, in your opening remarks being somewhat pleased with the DoD's priorities as they were expressed in the '14 request. I'm just wondering if you could elaborate on this because when we look at some of the radio line items, nearly all were kind of revised downwards from the fiscal '13 request. So where do you see kind of the alignment shaping out well?

Yes. The -- look, my comment was really more around the overall budget that the President put forth. I think that's very encouraging. It did give a lot of insights on priorities, and I think that is aligned pretty well with our capabilities. I referenced a bit about some of the positives on weather systems and the impact on GOES-R, the FAA programs, which we feel very, very good about, and we do a lot of work with the VA and IT services for the VA is up double-digit rates. I think on -- perhaps, on the other side of the coin, maybe a little bit more balance on tactical radios. You're right, it's a bit mixed. SOCOM, Air Force, Marine Corps funding is down. Army modernization is supported, although it really is at a slower rate, but I'm pleased to see the commitment to modernization. I'm pleased to see the commitment to open competition. I'm thrilled that the manpack RDT&E has been brought down from $120 million just last year to $5 million. I think these are all very, very important steps that have been taken, and I think work in our favor in many ways over the long term. I do see national intelligence programs funding coming down a little bit. So I think there are some things that are positive in President's budget. There's also some things that, I guess, provide a bit more balance. So for us, like really all other Americans, there is something for everyone to not like in what came out in the President's budget, but we recognize as everyone else does that it's pre-sequestration. It's pre-negotiation on entitlements and on revenue. So I think there's a lot of ground to cover between now and a fiscal '14 budget if that happens over the course of the summer. So we're just being prudent on where we speak today.

And just a follow-up, if I may, can you comment on sort of the duration of the backlog and how that's evolved over the last year? Because, obviously, you had north of 560 in backlog entering the quarter, which would have covered kind of flat sequential sales, you'd think. So I'm just curious how do we think about the delivery timing on some of the orders already booked.

Gautam, this is Gary. I don't know if the duration of the backlog has changed materially, obviously, in the backlog, had included some products and services for Australia that were expected over time, country in Northern Africa, as well as ongoing program, we're into different phases of that. So some of that is expected over time. And the backlog did come in slightly higher in tactical compared sequentially to where it was. So overall, I wouldn't say the duration of the backlog changed materially from what we had expected.

Okay. If I might ask one more, I'm sorry. Last year, I think you had an Investor Day, and it doesn't sound like you have one this year, where you're offered kind of, at least, a preliminary deal on the September quarter. And I just wondered if you could give us, given the restructuring and all the moving pieces, I mean, should we expect that to be kind of the lightest for the year and sequentially down from Q4? Or how do you just directionally think of the profile in '14?

We're not -- I mean, as I mentioned in the remarks, we're not going to provide any fiscal '14 guidance today. There's a budget. There's some visibility we still like to see from U.S. government funding. We will provide some guidance towards the end of July when we publish our full-year '13 results. But like, I think, for us and everybody else, I think, our first quarter, which is the last quarter, the government fiscal year '13 is likely to be challenging for everybody. We are moving fast on the restructuring. Much of the things that we're doing will occur in the course of the fourth quarter. I hope that will give us tailwind going into the fiscal year, but a lot hinges on the behavior of the government customers, and we'll shed some more light on the full year, as well as the balance over the course of the year when we speak at the end of July.

Your next question comes from the line of Josh Sullivan from Sterne Agee. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: For the CapRock business, can you expand on the slower-than-expected revenue growth? I mean the Gulf rig count activity appears to be a little bit better than expected. Was the weakness coming from land-based government communications? Or has there been any sort of technological shift in offshore use of SATCOM versus, say, plain fiber optic cable?

No, the -- look on the -- in CapRock, the maritime business performed, we think, very, very well. Royal Caribbean was a key driver of that. We're performing very, very well. All 33, 34 boats that we're doing for Royal Caribbean are done and operating and I think that customer is very, very pleased. So we've seen good growth on the maritime side. The government side was relatively weak. We think that, that is market related. On energy, it was weak. It was disappointing. From my perspective, it was due principally to execution. I think, in some ways, we stubbed our toe a little bit on the energy side and in our responsiveness to our customers. And I want to reassure you, we've got people focused on that. We're going to get that fixed. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Okay, great. And then just on the Healthcare Solutions business, I mean, how is the rightsizing of the commercial business progressing? I know you have this delay here, but are you still investing in that vertical for growth? Are you looking at more at harvesting at this point?

No, we're not going to be harvesting. I think this is not an issue of cost takeout. It's about getting a piece of software right, and we got a good set of team that's pushing on this. We will launch it in the first quarter of fiscal '14. From what I have seen and heard with large commercial healthcare operators who have seen the software that we're going to be releasing. They were enthusiastic about it. They're excited about it. I have to say it's a very complicated piece of software, which is what has caused us some difficulties, but this is an investment. We are going to move forward with it, and I think, ultimately, we're going to be very successful in the commercial healthcare side.

Your next question comes from the line of Chris Quilty from Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: I wanted to follow-up on your comment about the R&D investments in the RF business. Can you clarify, is that a stepped-up level of investment from what you had planned, perhaps, a year ago? And if so, is it being driven by the tactical radio or the first responders side of the business? And is it primarily a new product or is it pushed into new product areas?

Chris, this is Gary. We definitely have stepped up the R&D investment, as we talked about, doing a year-over-year compare. A lot of the investment is in the Tactical Communications area. It has to do with building the 2 channel manpack, making sure the wave forms are where they need to be on WNW. So a lot of investment is going in there, as well as we have increased investment in public safety, where we're continuing to invest in LTE. We expect that market to take longer to come to fruition, but it is an important area for us and we're investing there as well. Chris Quilty - Raymond James & Associates, Inc., Research Division: Speaking of wave forms, have you ever made progress on the ANW2 and getting that accepted into the repository?

We continue to work on that. We do know that, that is very important for the U.S. Army, and really, the services, in general, in particular the U.S. Army, to have a nonproprietary waveforms in their fielding requirements and we continue to push on this, and we'll update you as we make progress. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And a follow-up on the Public Safety business, can you just give us sort of an update on where you think you stand with that business both in terms of your product offering, your geographical presence and the overall spending environment for the local municipal government market relative to the federal?

Okay, Chris, this is Gary again. In the public safety market, looking across our product line, we think we have quality products. We think there's additional room for taking out costs of those products, but we expect to be more competitive over time in the terminal fees. I think on these systems and the open architecture, I think we're extremely competitive with Motorola in that space. And in looking at the government market, right now, we're seeing that state and local growing mid-single digits. So we're seeing opportunities there to continue to increase our revenue with the market growth, as well as taking share from Motorola.

Your final question comes from the line of Pete Skibitski of Drexel Hamilton.

Just to follow-up on that last one, public safety. It seemed like you had a fantastic first half of the year, and it seemed like revenue kind of slowed in the quarter, and I think you have a really tough comp in the fourth quarter this year. So I'm just wondering, overall, do you still expect the type of growth for the full year in public safety that you were thinking earlier in the year or is the market slowing there?

We still see very good growth for the year in public safety. We think it's going to be up mid-single digits. The orders in Q3 were very strong, and as Gary pointed out, was up more than double in the quarter, 1.33 book-to-bill. I think the outlook for that business continues to be very, very positive. We will see a slightly weaker second half than we saw in the first half. We saw a very strong first half result, but the backlog is solid. The pipeline is large, it's healthy. I think we're doing a very, very good job winning large program opportunities in the marketplace. Those, as you know, could be lumpy. We went for a number of quarters with book-to-bill less than 1. I think we need to and will do better on the flow business, which is the terminal side of the business. But in general, I think we feel still pretty good about growth this year as well as long-term growth possibilities in Public Safety. I think there's lots of opportunities to grow and improve margins in that business.

Okay and just one last one if I could. I apologize if you spoke to this already, but on the cost reductions in the $40 million to $50 million annual savings, is that company-wide? Or is it focused on RF, in particular? And then as a corollary, the previously announced charges, $65 million to $115 million, have you narrowed those and are they going to be all booked at the corporate level?

Well, that is company-wide and it's across all the businesses, as well as at corporate. The charges will likely be booked, I think, Gary, at the corporate level. And the delta between the low-end and the high-end is just potential impairments that we might have to take, including in the healthcare business in the fourth quarter. That is yet to be determined and that's the delta between the low-end and the high-end of the cost range.

I think that wraps us up. Thank you, everyone, for joining us and we'll see you next quarter.

Thank you. Thanks for joining, ladies and gentlemen. This concludes your presentation. You may now disconnect. Good day.