Good day, ladies and gentlemen, and welcome to Harris Corporation's First Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the call over to Ms. Pamela Padgett, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. Hi. Good morning, everyone and welcome to our first quarter fiscal 2017 earnings call. I'm Pamela Padgett and on the call today is Bill Brown, Chairman and CEO, and Rahul Ghai, Senior Vice President and CFO. First a few words on forward-looking. Forward looking statements made today involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information on a related discussion, please see the press release, presentation, Harris' SEC filings. In addition, a reconciliation of non-GAAP financial measures discussed today to comparable GAAP measures is included in the quarterly materials on Investor Relations section of our website, which is www.harris.com, where a replay of this call also will be available. All right. Bill, with that, I'll turn it over to you.

Okay. Well, thank you, Pam, and good morning, everyone. Harris began fiscal 2017 with a good start out of the gate and we're executing well against our key strategic priorities. So I'll begin with a quick update about how we're delivering on them. As part of an ongoing initiative to optimize our business portfolio, we announced earlier this morning a definitive agreement to sell the CapRock commercial business for $425 million and plan to use the proceeds to pay down debt and repurchase shares. Portfolio shaping supports our strategy to invest in businesses where Harris can provide technology differentiation. And we'll continue to review our portfolio and objectively assess which businesses are a strategic fit and which businesses have better value under different ownership structure. We also remain committed to smart and balanced capital deployment, and in the first quarter, we used $100 million in cash to repurchase shares, and we increased the dividend 6%, our 15th consecutive annual increase. We also repaid $33 million in term debt and, in early October, retired a $250 million bond that was due, making further progress towards our three-year debt reduction goal of $2 billion and we're about halfway there. We remain laser-focused on Exelis integration and capturing synergies and related accretion and, through Q1, we're tracking well towards capturing $50 million of additional in-year savings and achieving our target of $140 million to $150 million in run rate savings as we exit fiscal 2017. And while all integration projects are complete or well underway, we'll continue to find ways to lower cost and drive productivity, as part of our normal operational excellence agenda. And then, finally, investing in R&D and new product development to grow core franchises and expanding the close adjacencies has been an important part of our strategy. And in…

Thank you, Bill, and good morning, everyone. Just to remind you, discussions today are on a non-GAAP basis and supplement GAAP results in our other quarterly earnings material. Turning now to segment detail on slide 4. Communication Systems segment revenue was $431 million and down 5% compared to prior year. Tactical Communications was down 6%, primarily as a result of lower international SINCGARS sales. Public Safety was down 1%. Operating income was $119 million compared with $138 million in the prior year, driven by lower volume and mix. On slide 10, we have again included historical information for legacy tactical, orders, revenue and backlog. Space and Intelligence Systems on slide 5. Revenue was $453 million and up 4% compared to prior year. This was driven by higher revenue from intelligence community customers and from Radiation Budget Instrument program called RBI to provide sensors for monitoring climate change and global warming on NASA's Joint Polar Satellite System. Operating income was $80 million compared with $68 million in the prior year, driven by continued strong program performance and higher pension income. Electronic Systems on slide 6. Revenue was $361 million and up 2% on an organic basis compared to prior year, excluding $19 million of revenue from Aerostructures business that was divested in the fourth quarter of fiscal 2016. Higher revenue from initial ramp of recently awarded integrated battle management systems in Middle East and from electronic warfare solutions was partially offset by lower wireless product sales. Operating income was $74 million compared with $69 million in the prior year. In addition to the electronic warfare contracts that Bill mentioned, Harris received $35 million in follow-on contracts for the F-35 program. Critical Networks on slide 7. Revenue was $527 million and down 7% compared to prior year. Higher revenue from FAA's NextGen…

Okay, well thank you, Rahul. Overall, we had a good start to the year, delivering solid financial results and making excellent progress on our key strategic priorities. We're maintaining guidance for the year and we anticipate that the continuing resolution will extend to the balance of the calendar year and constrain spending as it typically does until a budget is passed. We'll continue to enhance shareholder value by optimizing our business portfolio, deleveraging, reinvesting to drive future growth and allocating capital in a shareholder friendly way. And with that, I'd like to ask the operator to open the line for questions.

And our first question comes from the line of Seth Seifman with JPMorgan. Your line is now open.

Thanks very much, and good morning, everyone.

Hi, Seth.

I'm not sure how much you can comment on it, but there have been reports in the press about potentially divesting other portions of the Critical Networks business. I wondered can you talk a little bit more about your vision for that business, specifically, in the future.

Well, Seth, thank you for the question. I'm not going to comment on any potential plans. We simply don't – we don't do that. I think we feel good about the transaction we're announcing today on selling the CapRock commercial business. And we've got a pretty strong track record here of looking pretty objectively at the businesses that we're in and assessing which fit and which do not. And I take you back to the broadcast business and commercial healthcare and Aerostructures, now, the commercial CapRock business, and we continue to look pretty objectively at the portfolio that we have and assess what fits in and what does not. I would say that I've been pretty consistent in commenting that we want to be in businesses where technology can differentiate our offering in the marketplace, that's very important to us. Of course, we look at strategic fit and performance of the business, but that is certainly the bar, the milestone that we're tracking there, and we'll say more as the time goes on, but nothing more to report today.

Okay, okay. Great. Thanks. And then, just as a quick follow-up, more in the model and Communication Systems, it's the nice quarter for the tactical radios. The margin overall for the segment was a little below your guidance for the year, is that reflecting R&D or mix or what's going to change through the course of the year to bring that margin up?

Yeah, it reflects both. I mean it's down year-over-year; its flat sequentially. Part of it is volumes of the tactical comms business, not just radio, but tactical comms, it's a bit less favorable mix. We had slightly more sustainment services business in Q1, a little more front-end loaded R&D, which should mitigate a little bit over the course of the year, of course, these things move quarter-to-quarter, but over the balance of the year, we'll expect better mix, and we do expect us to achieve the guidance margins for the year of about 30%.

Great. Thank you very much.

Sure.

Thank you. And our next question comes from the line of Greg Konrad with Jefferies. Your line is now open.

Good morning.

Good morning.

Good morning.

I was just hoping to go back to CapRock. I was just wondering if you expect that to be accretive or dilutive, and then, what could be the cash proceeds from that sale.

Yeah, we're selling for $425 million, so cash will be a little bit below that, probably over $400 million. We're going to use it for both debt pay down and share repurchases, probably a little bit more than half on debt, a little less than half on share buyback. On an annual basis, we would expect it to be about $0.04 dilutive.

Thank you. And then, it seems like you had a couple of good quarters in terms of bookings for electronic warfare. I was hoping you could maybe size that business and what we can expect for the outlook going forward.

Yeah, we feel really good about the performance in electronic warfare, had really strong bookings, really throughout last year. Orders doubled, backlog grew quite a bit, book-to-bill was stronger than one, and coming out of the first quarter, good revenue growth, but also good strong bookings, we feel very good about that business. This is – again, we've got very strong positions in a number of legacy platforms that require modernization upgrades. There is new threats on the horizon. Our military has talked quite a bit about that, and our aircraft need to be upgraded. And we certainly have a great position on F-18, on international F-16s, and large aircraft like B-1B, C-130 and the B-52 has been an important driver of our bookings and future growth. So we feel very good about where we're at today on electronic warfare. We continue to invest in smaller sizeable in-power (19:51) platforms. We've got a good position on the classified side. And over time, when you compare Harris' front-end phased array technology with electronic warfare capabilities from Exelis in the back-end, that capability is pretty special. So we feel good about where we stand today in electronic warfare.

Is that about half of Electronic Systems, is that a fair estimate?

A little less than that. Yeah, the – yeah, it's about 5, 5.50 (20:18) in that range.

Thank you.

Thank you. And our next question comes from the line of Pete Skibitski with Drexel Hamilton. Your line is now open.

Hey, good morning, guys.

Hey, Pete.

Hey, Bill, first quarter sales come in a little stronger than you expected just because of the CR kind of ongoing, or do you think it will impact more from the second quarter because that's the first fiscal quarter of the government's year?

I'm sorry, Pete. (20:44) the phone is breaking up a little, I didn't hear the (20:47) something coming in stronger. Could you say that one more time?

Yeah, sorry, I was just wondering if your first quarter sales came in a little stronger than you expected because of the CR or do you think that the CR will impact more so your second quarter because of the – that's the first fiscal quarter of the government's year?

Well, we see, sort of going back a number of years, we've been operating under a CR at the beginning of the government fiscal year. So we tend to see some end of your money getting spent bookings and revenue and that had to slow down a little bit in the second quarter. So we would expect a normal friction we would typically see in our Q2, as we typically have seen in a CR – under a CR (21:28) improving in the back half of the year.

Okay, great. Thanks, guys.

You bet, Pete.

Thank you. And our next question comes from the line of Robert Stallard with Vertical Research. Your line is now open.

Thanks so much. Good morning.

Hey, good morning, Rob.

Bill, you highlighted the very strong book-to-bill in the quarter, but I was wondering if – of the orders you've taken in the last three months, what is the lead time on this? Is it any different from what you normally expect, I mean what we're obviously looking for is when did this convert into revenues?

Well, the bookings we saw which were pretty good on the tactical side are relatively quick turn orders. I mean that's a short cycle business, so the majority of that will turn in the year and that's positive for us, but it depends on the business. There are some parts of the company that are longer cycle. The very long – the big order we got in the State of Florida is going to happen over the next decade effectively. Some of the EW orders are going to be over the next three years, four years. So it depends on the business. Our longer cycle businesses tend to be in the ES segment and Space and Intel segment, and of course, the shorter cycle orders are going to come in our tactic or CS side.

Okay. And then, the second question, you've mentioned in the past that the Middle East, Central Asia and Africa have been softer markets for you on the radio side recently. Has there been any sign of that stabilizing as yet?

Well, we're not seeing anything better today than we did over the last three months to six months. It's the same factors that we've been talking about that continue to impact that region, certainly, low oil prices which seem to be going down even further or causing budgetary pressures. We know the conflicts in Syria, Iraq, Yemen, it's driving some instability. Some of the funding is going more towards munitions than communications. But I would say that we've seen some opportunities firm up in a couple of areas like Jordan and the UAE. In Jordan, we booked an order here in the first quarter. We see more opportunities on the horizon. Saudi continues at a relatively low level. 2016 came down from 2015, but we don't see another big step-down in 2017. It right now is running at a relatively low level as we see it. There's some pressure in Iraq just because of the strike in the (23:46) country, but the opportunity we see on the horizon in Iraq are very, very sizeable. It's probably the biggest opportunity overall in our long-term pipeline. So it's a mixed bag within the Middle East, but not much of the story has changed over the last three months to six months. Some of the slips that happened from 2016 into 2017, we have started to book, and we'll continue to do that in Q2 and Q3. So thank you, Rob.

That's great. Very helpful. Thank you.

Thank you. And our next question comes from the line of Gautam Khanna with Cowen and Co. Your line is now open.

Hey, good morning, guys.

Good morning.

Good morning.

I had a couple of questions. First, last quarter, if I recall, Bill, you mentioned there were $65 million to $70 million of shipments that slipped into the first fiscal quarter. And I was wondering, did you, in fact, catch those all up, and were those booked in the September quarter or were those in the backlog as of June 30?

Yeah, I think we said that was around $60 million worth of orders did not happen in Q4. A little more than half was international and that did slip into the year into Q1. So it was like $30 million, $35 million in that range and, yeah, we pick those up in Q1 effectively as part of our release. The other part was the DoD side and that was just general slowness and some friction cautious buying behavior on the part of some of the acquisition folks. So that was not necessarily a slip. Certainly, the international piece that moved into Q1 did happen.

And that was a book and ship in the September quarter?

Largely, yes.

Okay. Could you talk a little bit about the tax basis of your IT service business and could you size it for us? I believe it's about $1.03 billion, but wanted to get your sense for that? Also, what the tax leakage will be with the CapRock sale, how much will you actually net in terms of proceeds?

Yeah, I'm not going to comment on the tax basis for services, but services is around $1 billion business, and there's no tax leakage on the CapRock transaction.

Okay. And also, previously, you've updated us on some of the major campaigns like the JTRS Manpack Radio timing. I wondered whether to see, A, when is that going to happen. And do you think it will still be two awardees? Relatedly, if you could talk about when Australia might actually book some orders, is that still in fiscal Q4 this year and maybe any of the other sizeable campaigns that we should be tracking?

Well, yeah, let me start with Australia. I mean it's still a big opportunity on horizon, and it's on the order of in total about $600 million or little less than that, but they decided to split it into two pieces, as I mentioned on the last call, and we still expect about half a book towards the back-end of our fiscal year, the other sometime into 2018 or beyond. So we feel very good about the progress there and our position on that particular opportunity. On the Manpack, it continues to progress. We are one of three awardees. It's a very sizeable contract. We complete the qualification test. The customer testing should happen early in fiscal 2017, so with the next three months or four months, and then, it will go into – a delivery order procurement will be made by – decision will be made by August, I believe, of next year, with deliveries off of that starting about a year from now and then, continuing into early calendar 2018, so that has not moved out in terms of the delivery timeframe on the back end. On the other one, which is important is Rifleman. We're one of two vendors, us and Telus (27:37) and you recall it's a $3.9 billion IDIQ, we've gotten through a qual test and customer test. It was for a single channel radio, but you recall that left a big part of the overall war value with the opportunity for a two-channel radio, and it does sound like the Army is looking to perhaps accelerate the purchase of a two-channel radio. They saw the opportunity, the radio we have with SOCOM, which is a single vendor award that we have as Harris Corporation. They sold the radio. There is a possibility they will accelerate the purchase of a two-channel radio which I think will be relatively good news for Harris since we're well-positioned on that particular opportunity. And you saw in Q1 or at least I mentioned in Q1 that we had a milestone C approval on mid-tier radio with half of the opportunity recognized in Q1, the other half will come sometime later in our fiscal 2017. So overall, I think good progress. MUOS, we're very pleased with receiving NSA cert and to see initial fielding of that capability. Keep in mind there's 30,000 117Gs in the field that have the possibility of being upgraded with the MUOS waveform. And as that happens, since the development is all behind us and it's a software load, it comes down to us at a relatively high margin, so all of which I think is good progress in the quarter got them. The last one I would mention is on SOCOM, I think the very important one, and that's a two-channel radio that continues to progress. We're investing in it and we still see that on track for deliveries about a year from now.

Okay. Thank you very much. I'll get back in the queue.

You bet. Sure.

Thank you. And our last question comes from the line of Noah Poponak with Goldman Sachs. Your line is now open. Noah Poponak - Goldman Sachs & Co.: Hi, good morning, everyone.

Good morning.

Hey, Noah. Good morning. Noah Poponak - Goldman Sachs & Co.: Bill, so you've mentioned or you've gone through a lot of detail on a number of moving pieces into your potential future order flow. I wondered if you would just – if you're able to tell us if you think the total company book-to-bill and also, specifically, the legacy tactical radio book-to-bill will be above 1 for the full year fiscal 2017.

That's certainly the trajectory that we're on and the hope that we have. Right now, we came out of the gates in Q1 very, very strong and I think we're pleased about that. And we always hope for – as we expect growth in 2018 and beyond, we certainly hope for good positive bookings in this year that would lead us into growth in 2018. Noah Poponak - Goldman Sachs & Co.: Okay. As a follow-up to the question on the Middle East contribution to the legacy tactical radio business, is it possible to quantify what the peak to trough has already been in that revenue stream, just so we can get a sense of how much lower that could go or maybe if it's approaching a floor just because enough of a decline has already happened?

Yeah. I think see, we're probably down about 40% peak to trough at this point. And from the way we see it today, the Middle East should – may be down slightly more again in 2017, but it depends on the timing of some opportunities in Iraq, again Jordan looks pretty good, UAE looks pretty good, a couple of other things are progressing pretty well in the quarter what we see in the balance of the year. And the funding support from the U.S. government still remains pretty robust. So we don't see a big step-down in the Middle East, but that's where we see it today. Noah Poponak - Goldman Sachs & Co.: Okay. That's helpful.

You bet. Noah Poponak - Goldman Sachs & Co.: And so, what is that run rating then as a percentage of your legacy tactical radio business after that 40% peak to trough?

It's about – on the order of about 25%, 30% of the international business, international about two-thirds of the total tactical, legacy tactical. So it will be a little bit less than that of course. Noah Poponak - Goldman Sachs & Co.: Okay, great. And what is SINCGARS down to at this point?

It's at a relatively low rate. It's mostly international business. There's still some sustainment work going on with the U.S. military, but a lot of that business is international and is experiencing some of the same challenges in our legacy tactical business, a lot being sold into the Middle East. And as you know, we talked about a pretty good opportunity that's been sitting out on the horizon in Saudi Arabia. It's in the $40 million to $50 million range for SINCGARS, and that still remains towards the back end of the year, but that would be the next big opportunity on the horizon, but it's at a relatively low rate. Noah Poponak - Goldman Sachs & Co.: Great. And I'll sneak in one more. The $700 million Florida Comm Systems contract, how much of that will go into the backlog in the December quarter?

Rahul?

It's relatively small. I think it's in tens of millions at this point. So it's going to be low for this quarter. It will come lower as we roll this thing out. It will come in phases.

This is a very big important opportunity for us, because today, we've won the state law enforcement radio system in Florida, and we've been doing that for 15 years, now through 10 hurricanes without a single outage. So we feel very good about that, and that credibility alongside of our reputation with the FAA allowed us to beat a very large telco out of a pretty substantial contract interconnecting a bunch of offices to the State of Florida. So we feel very good about the position that we happen to be in here, and it's going to roll itself out over the next decade or so. Noah Poponak - Goldman Sachs & Co.: Okay. Terrific.

You bet. Noah Poponak - Goldman Sachs & Co.: Thanks very much.

You bet, Noah.

Thank you. And we have time for a follow-up question from Gautam Khanna with Cowen and Co. Your line is now open.

Yes, thanks again. I just have a couple small questions here. One, what is the share CRIP at this point, option CRIP?

I think it's about 1 million shares.

Yeah.

It's about 1 million shares. So with the buyback in Q1, we held our share count I think, Rahul, about flat.

Yeah, so Gautam, our overall share count kind of on the diluted share count is about flat. We ended Q4 at 125.3 million, and we ended Q1 at 125.5 million. So that's where we are.

Okay. So you need approximately 100 million just to offset CRIP, just to be clear. Is that right?

Yes.

Okay. And is there plans to – you mentioned with the proceeds of CapRock you'll repay debt. I mean what is sort of the longer-term plan? Is the plan to take advantage of the weakness in the stock or I mean I just wondered like how flexible is your logic around buyback versus debt repay?

So as Bill mentioned, our current plan is that we'll use slightly more than half the proceeds to pay down debt and slightly less than half for share buyback. What we have to – what we are balancing here, Gautam, is just we have of high debt to EBITDA ratios and we have commitments to our debt rating agency. So we're balancing that, and we have an aggressive debt buyback – debt paydown goal. So that is the objective at this point.

Okay, operator...

Go ahead, go ahead, Gautam.

Okay. The other thing I just wanted to make sure, maybe I missed it, but is there any way you can size the opportunity to upgrade the installed 117G base with the MUOS software capability?

Yeah, I mean we see that could be just north of $100 million.

$100 million in aggregate...

Yes.

...across all 30,000, is that right?

It will be more than that. Yes, that's the total opportunity that we see, as we sit here today.

Okay. And then, Bill, just given all this, if you could put it together for us, what do you expect the book-to-bill to be at tactical legacy RF this year?

Well, we expect it to be over 1. And I think that was a comment I was trying to make earlier today, which is as we go forward into and think about fiscal 2018, we still see some important elements that will drive growth. We see good performance in our longer cycle businesses in Space and Intel and Electronic Systems. We came off of a back half of 2016 with good growth. We had good orders. We ended with higher backlog. We came out of Q1 with good growth, higher backlog, good orders, and that will carry us into fiscal 2018. As we go through this year and we look out into 2018, we still see strong Army monetization opportunities, SOCOM monetization opportunities, Australia will start to come into the picture, and we still see good opportunities to grow that business in fiscal 2018. So that would require us to have a pretty solid bookings through the year. We're early in the year. We had a great start.

Well above 1 or – I'm not trying to be annoyed. I'm just asking because what you sized in the later part of this fiscal year could be fairly substantial contract awards. I mean $300 million award from Australia would move the needle presumably. I'm just wondering is a 1.2 out of the question, or I mean over 1, it seems like a little bar at this point. So I'm just – could you help us...?

Well, it's also early in the year. I mean you don't win a football game in the first quarter. You got three more to go.

Yeah.

And I'll continue to give you an update on the way we see the market, the environment, the opportunities we're chasing, as we go through the year. I think as we've done pretty clearly, over the last couple of years, we'll communicate as much as we can, but right now, we expect and our folks up in the tactical business expect that we'll have a good year and a book-to-bill over 1. And I think, at this point, that's all we're able to communicate.

Thanks a lot, guys. Good luck.

You bet, Gautam. You bet.

Operator, we will take one more question, please.

Thank you. And our last question comes from the line of Carter Copeland with Barclays. Your line is open.

Good morning, guys. This is actually Rubun on for Carter.

Hey, good morning, Rubun.

Hey. Bill, do you think you can speak to more specifically, I guess, like how much op profit and EBITDA you expect to be leading with the CapRock business here. I just wanted to try to get my head around some of the metrics of the deal. Thanks.

Sure. We expect revenue in that CapRock commercial business this year at about $300 million. We did about $75 million and we're sort of at a level run rate for the year, so about $300 million. And it's a mid single-digit ROS business, so call it, 5% to 6%. And it's got $35 million, $37 million of D&A. So that can help you with some of the metrics.

Okay, great. Thanks.

You bet.

All right, everyone, thank you so much for joining us this morning.

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