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Executives

Pamela Padgett – VP, IR & Corporate Communications

Howard Lance – Chairman, President & CEO

Gary McArthur – SVP & CFO

Analysts

Jason Kupferberg – UBS

Mark Jordan – Noble Financial

Myles Walton – Oppenheimer & Co.

Joe Nadol – JP Morgan

Chris Donaghey – SunTrust Robinson

Carter Copeland – Barclays Capital

Joseph Campbell – Barclays Capital

Jim McIlree – Collins Stewart

Chris Quilty – Raymond James

Harris Corporation (HRS) F2Q09 (Qtr End 01/02/09) Earnings Call Transcript February 4, 2009 4:30 PM ET

Operator

Good afternoon, everyone and welcome to the Harris Corporation Conference Call. Today's call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Pamela Padgett

Thank you. Good afternoon, everyone and welcome to Harris Corporation Second Quarter Fiscal 2009 Conference Call. I'm Pamela Padgett, Vice President of Investor Relations and Corporate Communications. And on the call with me today is Howard Lance, Chairman, President and CEO and Gary McArthur, Senior Vice President and Chief Financial Officer.

Before we get started, a few words about forward-looking statements. In the course of this teleconference, Howard or other 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 on such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC.

In addition in our press release and on this teleconference, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation of the comparable GAAP measures included in the tables of our press release and on the investor relations section of our Web site which is www.harris.com. A replay of this call will also be available on the investor relations section of our Web site.

And with that, Howard, I'll turn the call over to you.

Howard Lance

Thanks, Pam, and welcome to all of you to the Harris second quarter fiscal 2009 earnings call. We had another quarter of excellent financial results and are well positioned in our markets to continue our growth trajectory in spite of the difficult global economy. Our financial position remains very strong and we continue to generate excellent earnings and cash flows from operations while still being able to invest for the future.

Revenue in the second fiscal quarter was $1.5 billion, a 16% increase over the prior year. Revenue growth was all organic. Operating performance was also strong with non-GAAP net income at $144 million or $1.08 per diluted share. And that's 24% higher than the prior year.

Our GAAP results for the quarter included a noncash, after-tax and minority interest charge of $183 million related to the impairment of goodwill and other intangible assets and our 56% owned Harris Stratex Networks subsidiary. These assets were originally recorded in connection with the January 2007 combination of the Harris Microwave Communications division and Stratex Networks. An asset impairment test was required to be performed in our second quarter. As a result of this significant reduction in market capitalization of Harris Stratex since its formation.

In December, we announced that we are evaluating strategic alternatives related to our ownership position in Harris Stratex. We expect that the segment's financial results will move into discontinued operations in fiscal 2009. As a result, we're updating our fiscal 2009 revenue and earnings guidance to exclude Harris Stratex from the results of continuing operations.

With that, let me move on to the individual segment results in the quarter. Revenue at RF Communications was $438 million in the second quarter. And that was up 23% compared to last year. Operating margin remains strong at about 33% of revenue. We believe margins will increase a bit in the second half, so fiscal 2009 segment margins for the full year are expected to come in at about 34% of revenue consistent with our prior guidance.

Revenue was slightly higher in the U.S. market compared to the prior year quarter, but significantly higher in the international markets. Major deliveries in the quarter were made to the Philippines, Mexico, Iraq, Algeria, Afghanistan and a number of European countries. International revenue growth continued to accelerate with international at 40% of total segment revenue in the quarter. This compares to about 27% for all of fiscal year 2008.

Orders through the first half of fiscal 2009 were approximately $520 million. Second quarter orders were lower than expected as one large order in the international market and several opportunities in the U.S. market moved out of the second quarter. These orders are now expected to book in the second half of fiscal 2009 or in early fiscal 2010. It's important to note that no orders were lost or canceled, they simply moved to the right.

While international order delays are somewhat typical, the issues related to U.S. orders were a little unusual. During the December quarter, the procurement processes within the Department of Defense really seemed to slow down. From what we can see the transition to the new administration created some of these delays as budgets and priorities were being reviewed.

In addition, it's taken longer than we anticipated for our various DoD customers to establish new contract vehicles; to procure our new JTRS approved Falcon III 117G Manpack Radios. We've been working closely with these customers as they evaluate the additional capabilities of the 117G and they're very excited about these new capabilities. But then they have to put in place an acquisition process along with the appropriate contract vehicles before they can release orders to us.

Important new 117G Manpack orders were received in the quarter and in January from the U.S. special operations command, the U.S. Air Force and the U.S. Marine Corp. These included an $18 million order from the U.S. Air Force special operations command for their battle field airman program.

The Harris 117G radios that they will use will include the ability to directly receive real time rover video feeds from a wide variety of tactical UAVs. The 117G is significantly smaller and lighter than the current special purpose systems that are being used to receive this feed.

This application I think illustrates the versatility of our new Falcon III Manpack. The war fighter in the field will now be able to use the same radio for both general purpose communications as well as direct reception of tactical UAV video. The 117G's wideband networking capability can then disseminate this video to other users on the network.

We also received in the quarter multiple Falcon III multiband handheld orders from the U.S. Army and U.S. Marine Corps who are using the Falcon III handheld for multiple applications including in the mine resistant ambush protected vehicles designated for Afghanistan.

Our DoD prospects remain positive. We're very well positioned to support U.S. forces as redeployments increased to Afghanistan. It appears the Marine Corp will be leading that redeployment and we have a strong relationship with the Marines who have been early adopters of our new Falcon III radios.

New demand will also be created as force levels increase in both the Marine Corp and in the Army and as tactical radios continue to penetrate further into the battalion, company and platoon command structure.

In addition, remember, there's a large installed base of legacy radios that will ultimately need to be replaced since only a very small percentage of the installed base is JTRS capable radios.

Harris is in a leading position to benefit from this transition. Last week, Secretary of Defense Gates testified before Congress and he suggested ways to reduce defense spending, while still getting the best possible equipment into the hands of combat forces as quickly as possible. He expressed some frustration with the pace of several current programs of record and was encouraging the pursuit of cot systems that “represent a 75% solution.”

Well, you know our Falcon III radios are JTRS approved, they provide features and functionality unmatched in the industry and they're being fielded and are available now. We enjoy a significant lead in the marketplace with more than 65,000 radios now delivered. The fact that Harris JTRS radios are already wildly fielded by all branches of the military puts us in a very strong position as the DoD comes to terms with the future funding of the JTRS programs of record.

Tactical communications modernization programs remain a top priority at U.S. allies and partner nations as well. Both the number and size of international standardization programs have increased and we have added resources to our international sales team to support our international dealers in these pursuits. The opportunity to provide tactical radios to the Government of Iraq, for example, over the next several years could reach $700 million. Australia's tactical communications upgrade program represents a $200 million opportunity.

Just this week, we received a major new contract for $45 million from the Government of the UAE. This is part of a multi-year program and includes Falcon II radios, our new Falcon III high capacity data radios and tactical SATCOM terminals.

We're also seeing good progress in winning international communications systems integration projects where our revenue is expected to grow from about only $20 million last year to an estimated $50 million in fiscal 2009.

Orders in the segment are expected to rebound significantly in the second half as procedural delays are resolved and customers release orders against the new contract vehicles that they are putting in place. We still have the potential to achieve a book to bill of one in fiscal 2009. But given the recent order delays, it will be more of a stretch. If the $250 million current opportunity in Iraq also slips into the first quarter, then the book to bill for this year would likely come in below one.

Now, regardless of the ultimate timing of these near term orders, we believe RF Communications can deliver continued revenue growth in fiscal 2010. Our total opportunity pipeline for tactical radio systems in both the U.S. and international markets stands at $3.5 billion. This opportunity funnel has actually increased compared to last year at this time.

We also expect growing revenue from other new products that we've launched in recent quarters, including products like the secure personal radio, the high capacity line of sight radio, the land mobile radio, several secure communications terminals and the broadband global area network terminal. Our government communication systems segment reported second quarter revenue of $748 million, up 20% compared to last year.

Operating income in the quarter was $85 million, an increase of 27%. Operating margin was 11.4% of revenue in the quarter. Revenue drivers included as sequential revenue increase compared to our first quarter of $115 million related to the field data collection automation program for the U.S. census bureau.

Higher FITCA [ph] program revenue resulted from both our delivery of hand held computers for the address canvassing phase of the program as well as additional equipment originally planned for the second half of fiscal 2009 and fiscal 2010 that was brought forward into the second quarter.

I'm pleased to say that we have successfully put in place a modified FITCA contract. Now with an expected total program value of about $800 million. We will have about $200 million in work remaining after fiscal year 2009. Our FITCA team is executing on schedule against the modified contract milestones.

Other revenue drivers compared to the prior year quarter included several classified programs, the Multiband Satellite Communications Terminal program to the U.S. Navy, avionics shipments for the F-35 Joint Strike Fighter program and an IT services program for the Air Force Weather Agency.

During the quarter, we continued to make progress on the various commercial reflector programs. Three more radio rib design reflectors were successfully delivered to customers for spacecraft integration and test and they've now been returned to Harris for final testing and final shipment. All of the radio rib reflectors are scheduled to achieve final delivery to customers in fiscal 2009. And based on our recent performance, we believe that the financial risk related to the radio rib reflectors has essentially been retired.

We also made significant progress on the other two 22-meter hoop design reflectors by successfully mounting the surface to the structure for the first time. Although several important milestones were achieved in the quarter, the estimated cost at completion for the hoop design program increased, requiring an additional $11 million in reserves. Both of these two reflectors are scheduled to ship during fiscal 2010.

During the quarter, Harris was awarded new national intelligence programs with a combined value of approximately $300 million, including a $100 million order for systems integration and IT services. We are well positioned in the intelligence market which should continue to receive priority funding for systems that collect, process, analyze and disseminate critical intelligence data to the nation's decision makers.

We're also developing new business areas that hold promise for the future, including our health care solutions business. During the quarter, we completed the first phase of the National Health Information Network Connect program to the U.S. Department of Health and Human Services. Harris is developing and integrating a network capable of moving large amounts of data and images seamlessly and securely across private and public health care networks.

In the second quarter, we also announced the formation of our cyber and information assurance business unit. Retired Major General Dale Myros will be leading our efforts. As the CIO for the Office of the Director of National Intelligence and previously, the CIO for several major Air Force commands, Dale understands the issues and opportunities firsthand. He will help us to leverage our considerable capabilities in this area to address global information security threats.

Today, Harris uses state-of-the-art technology assessment techniques and systems engineering to define, deploy and operate secure networks for customers as diverse as the Department of Defense, the National Reconnaissance Office, U.S. Census Bureau and Federal Aviation Administration.

Moving on to the broadcast segment, second quarter revenue was $163 million, about flat with the prior year. Operating income was $12 million compared to non-GAAP operating income of $10 million in the prior year quarter. Operating margin was 7.4%, improving both sequentially and year-over-year as a result of cost reduction actions that we've taken over the past several quarters. I believe this was solid performance given the weakness in our U.S. markets and that it compares favorably with the performance of our competitors in the broadcast space.

Transmission systems revenue increased in the second quarter driven by the over-the-air digital television transition in both the U.S. and Brazil. Infrastructure, networking and media and work flow revenues were higher in international markets, but were more than offset by lower U.S. revenue.

The weakening U.S. economy has prompted many of our broadcast and media customers to delay capital spending on infrastructure projects. U.S. market demand is expected to remain weak for the next several quarters.

The outlook for our international markets is much more positive. Most of our international customers are not as highly leveraged as our U.S. counterparts and in fact many have government ownership or government funding. In addition, some countries, such as Australia, have mandated schedules for conversion to digital technology.

During the second quarter, Harris received 12 international orders over $1 million for the Harris ONE solution in countries like the UK, Bulgaria, Italy, India, Australia, Iraq, Qatar, and Mexico.

In addition to demand for infrastructure, enterprise software and international markets, we expect future revenue growth from our new international transmitter product line which has both enhanced features and lower costs.

Harris is clearly benefiting from our previous investments to expand our footprint outside North America. There are several large opportunities which we are pursuing in China, Australia and Singapore that could play out in our fourth fiscal quarter and have a positive impact on our results for the year.

We also continue to work on exciting longer term growth opportunities in mobile television, in out-of-home advertising supported by our digital signage capabilities and in full motion video solutions for our government customers. All of these emerging market applications represent significant future potential for the broadcast business.

Harris Stratex Networks revenue for the second quarter was $191 million, an increase of 5% compared to the prior year quarter. Non-GAAP operating income was $9.5 million, compared to $11 million in the prior year quarter. Company reported a GAAP operating loss of $292 million in the segment in the second quarter as a result of the noncash asset impairment that we described earlier.

Harris Stratex Networks will host a conference call to discuss their second quarter results today at 5:30 P.M. Eastern Time.

With that, I'd like to turn the call over to our Chief Financial Officer, Gary McArthur.

Gary McArthur

Good afternoon. Thank you, Howard. To begin with, I would like to say a few words about our majority owned Harris Stratex Networks subsidiary. As a result of the current global economic environment and the decline in its market capitalization, Harris Stratex as required under the statement of accounting standards number 142 recorded a noncash goodwill impairment charge and a related increase in tax valuation allowances that reduced our consolidated GAAP net income by $183 million after taxes and minority interest. As you may recall, we recorded a noncash gain of a similar amount at the time we combined our microwave business with Stratex in January of 2007.

With regards to our evaluation of separation alternatives, we are making good progress and expect to make an announcement during this quarter. The current book value of our investments in Harris Stratex following the second quarter impairment charge is now $251 million, a gain or loss on disposition will be recognized to the extent that the value received in cash or provided in the dividend is higher or lower than our book value.

Moving to our liquidity position, as of quarter-end, we have $354 million of cash, cash equivalents and short-term investments on hand. We have our entire $750 million fully committed revolving credit facility which does not come up for renewal until 2013 available to us and we have no long-term debt maturities coming due until October of 2015. As mentioned in our last call, substantially all of our pension plans are defined contribution, 401K plans and we have no significant obligations under defined benefit plans.

As to this quarter's results, we had a very solid second quarter with all four segments posting positive cash flow from operations. Total cash flow generated from operating activities was $152 million as compared to $126 million in the second quarter of fiscal 2008.

The billing delays experienced in our government communications systems segment which resulted from a financial systems upgrade are mostly behind us with only system optimization work remaining to be completed.

Capital expenditures in the quarter were $35 million as compared to $36 million in the prior year quarter. We continue to be on the path of generating our fourth straight year of significant improvements in free cash flow.

During the quarter, we did not repurchase any of our stock. Stock repurchases for the first half of the year totaled $75 million and were at an average price per share of $50.98. As of quarter-end, we have $100 million remaining under our $600 million stock repurchase program.

Let me now turn to guidance. Our expectation for operating cash flow for the full year is now between $575 million and $625 million as compared to our previous guidance of $650 million to $700 million. As a result of the expected separation of Harris Stratex during this fiscal year as well as it’s expected lower operating cash flow results.

Capital expenditures are now expected to be in the range of $140 million to $150 million as compared to our previous guidance including Harris Stratex of $160 million to $170 million. And depreciation and amortization are now expected to be in the range of $165 million to $175 million as compared to previous guidance of $170 million to $180 million.

Our outlook for the full year non-GAAP tax rate for fiscal 2009 is now 32% versus our previous guidance of 33%, noting however that the tax rate for any given quarter to vary up or down as a result of discreet tax events. In looking ahead to fiscal year 2010, without the lower tax rate of Harris Stratex as part of the mix, we expect our tax rate to increase to 35%.

In summary, we have a very solid financial foundation and continue to have a positive outlook for another year of strong balance sheet metrics and cash flow generation. Let me turn it now back to Howard.

Howard Lance

Thanks, Gary. Let me close with comments regarding the overall outlook for the business. We have updated our fiscal 2009 guidance for revenue and GAAP earnings to reflect moving Harris Stratex Networks into discontinued operations prior to the end of fiscal year 2009. Consolidated revenue from continuing operations is expected to now increase by 8% to 9% compared to the prior year.

RF Communications growth is now expected at 15% to 16% above our previous guidance of 13% to 15%. Government communications systems growth is still expected at 6% to 8%. Broadcast communications revenue is now expected to be flat to slightly below fiscal 2008 as a result of the weak U.S. economy.

Our third quarter will probably be sequentially lower than the second quarter with potential for the fourth quarter to improve somewhat as a result of several major international broadcast projects.

GAAP earnings from continuing operations are expected to be in a range of $3.93 to $4.03 per diluted share, representing a year-over-year increase of 17% to 20%. RF Communications segment margins are still expected at 34% of revenue. Government communication systems segment margins are still expected in a range of 10.5% to 11.5% of revenue and broadcast communication segment margins are now expected in a range of 5% to 7% of revenue as a result of the lower U.S. market demand that I've talked about.

At this point, I'll ask the operator to open the line and we'll take your questions.

Question-and-Answer Session

Operator

(Operator instructions) And we'll go first to Jason Kupferberg with UBS.

Jason Kupferberg – UBS

Thanks, guys and congratulations on the quarter. Couple of questions here. First of all on the guidance, is there any change in the guidance for continuing operations? I just wanted to confirm exactly how much you're pulling out for Harris Stratex to give people a sense of whether or not the rest of the business is seeing any change in fiscal '09 outlook?

Howard Lance

Jason, we attributed $0.12 to Harris Stratex in our prior guidance, so all of the adjustment is attributable to the removal of Harris Stratex from continuing operations into discontinued operations.

Jason Kupferberg – UBS

Okay. Where do you guys think overall corporate operating margins should trend on a go-forward basis from the continuing ops when Stratex is divested?

Howard Lance

Well, we'll certainly talk more about that, I think, longer term view of both top line growth as well as margins, Jason, at our analyst day here in March, but it's fair to say that our mind set is margins should improve. We believe there is still significant room for improvement over the long run at broadcast, in that segment, over the next few quarters because revenue is going to be challenged with the U.S. market situation. That may not be possible, but certainly in the longer run, we'd expect double digit margins in that business and we think there is at least some opportunity to continue to improve margins in our government systems business, maybe on the order of 50 basis points to 75 basis points.

Jason Kupferberg – UBS

Okay. That's great. Thanks guys for the color.

Howard Lance

Thank you.

Operator

Thank you. We'll go next to Mark Jordan with Noble Financial.

Mark Jordan – Noble Financial

Good afternoon, gentlemen. Howard, could you give us your view of the JT – where the status is of the programs of record for the JTRS, where are they in terms of potentially having competitive product in the marketplace and how do you see them from a cost standpoint as a competitor?

Howard Lance

I haven't really learned anything new in the last quarter, so my understanding is that LRIP limited rate initial production is still in the 2012 kind of time frame for both the GMR and the HMS programs. I don't have any direct information relative to their costs. Anecdotally, we have heard that the GMR radio is substantially higher by order of magnitude than our cots offering. I haven't heard anything specifically about the HMS products. Clearly, our focus is going to be to offer a better value solution to the customer. I'm sure that all programs of record are under review right now as discussions are under way on the – submitting the fiscal – government fiscal year 2010 budget, which the latest I heard on that is it will go in late April. So I'm sure every program including JTRS is being discussed at the highest levels as they look at government budgets.

Mark Jordan – Noble Financial

Could you look out for the balance of this year at the RF group, what percent do you think will be – of sales will be derived internationally and where do you think that goes over the longer term?

Howard Lance

Well, we – I think if I recall correctly, we're about 35% in the first quarter, about 40%, as I said in the second quarter. I think for the second half, it will kind of be in that same range and I believe over the next three years to five years, that percentage probably gets a little bit higher rather than lower and again, we'll be talking a lot about this at our March Conference, but certainly international is going to drive a lot of the future growth, especially in the next couple of years as we get more clarity on the JTRS programs of record and get priorities reset with Afghanistan redeployments from Iraq and so on.

Mark Jordan – Noble Financial

And a final question, if I may. On the operating margins, obviously, you took a dip down here. Was this a mix shift and with the growing importance of international, what implications does that have for operating margin potential for the RF group?

Howard Lance

My view is the second quarter at around 33%, still very good margins, but about a point or 100 basis points lower than the first quarter. It's mix related and we expect it in the second half to return to previous levels and to come in about 34% for the year. It's not as a result of international. In fact, in general, international margins run a little bit better usually than margins for DoD. But you've got several moving parts, right? You've got different customers, you've got U.S. versus international and you've got different product families.

Mark Jordan – Noble Financial

Thank you very much.

Operator

Thank you. Next we'll go to Myles Walton with Oppenheimer & Co.

Myles Walton – Oppenheimer & Co.

Thanks. Good afternoon.

Howard Lance

Hello.

Myles Walton – Oppenheimer & Co.

The government com margins particularly strong in the quarter especially if you add back the reflector charge of 11 million, looks like just under 13% type margins. Can you give us some more color on the sustainability of those? Obviously, that's not implied in the guidance, but was there anything positive in the quarter that's one-time-ish or any contract closeouts that were helping that number?

Howard Lance

We certainly did have a couple of contract closeouts and we had a very, very good performance in the quarter on performance fees and as well as on managing our overhead costs, but we're not counting on that to continue at that rate in the second half and that's why we're sticking with our prior guidance for the year of 10.5% to 11.5% margins.

Myles Walton – Oppenheimer & Co.

And was the FITCA revenue actually a margin headwind in the quarter as well?

Howard Lance

No, we had a benefit from both the higher revenue contributing dollars and also improving our overall profit performance to-date on the program as we got the new contract in place. It was not a detractor.

Myles Walton – Oppenheimer & Co.

Okay. In normal conditions would that hardware run below the segment margins though?

Howard Lance

Hardware in general runs – cots hardware that we're passing on as in the case of the handhelds, yes, generally would run lower than our systems integration margin where we're developing all the content ourselves.

Myles Walton – Oppenheimer & Co.

Okay. And then on the census program as well, it looks like at least in the house version there is plus up money for the 2010 census and just curious of your perspective on that money and what, if any, it could mean to Harris.

Howard Lance

Well, I would just be speculating. Clearly, some of it is to fund the higher dollars in our renegotiated contract, but we would like to think that there is still upside opportunity if we execute on the rescope such that we might be able to participate in some upside. But, at this point we've got to meet our new milestones and deliver a very high level of quality in this next phase, which is address canvassing, but I think in the longer run over the next couple of years, there's some upside there, but it depends on our ability to execute and to restore full confidence, not only in the new leadership at the census and the commerce department, but also in the Congress.

Myles Walton – Oppenheimer & Co.

Okay. And Gary, I think you – could you – I'm sorry, I missed the free cash flow – or the operating cash flow number. Could you remind us what that was in the new guidance? And in particular, the drivers that are non-HSTX separating out related?

Gary McArthur

Sure. The new guidance is 575 million to 625 million. The previous guidance was 650 million to 700 million and the change is the whole – I'd say the majority of it is all Harris Stratex.

Myles Walton – Oppenheimer & Co.

Okay. Alright. Great. Thank you.

Operator

Thank you. Next we'll go to Joe Nadol with JP Morgan.

Joe Nadol – JP Morgan

Thanks. Good afternoon. Howard, on the delayed I guess contract vehicles, any sense on timing? I hear you on Iraq and that's a little bit tough to say, but the contract vehicles, where – do you expect those to come this quarter and on the back of that, I guess part B of the question is what do you have left in your existing vehicles so that you can continue to take in orders without getting the new ones?

Howard Lance

Well, it's really not a question, Joe, of ceilings on our current vehicles. They're still – there's adequate ceiling for many of our products. The vehicles that we've had difficulty getting in place have been related to the new 117G radio. Before, as you're well aware, before the government can source this from us, they've got to go through a process of evaluation, looking at competitive offerings, trade-offs and so on, especially if it's going to be a directed procurement. So that's just taking a lot longer than we thought. Some of the offices we deal with it have been a little distracted with the change in administration, lots of other work going on relative to budgets and priorities. So, we described it as unusual, but it clearly has created a little less specificity in terms of the timing. So I'm not sure I can tell you if that's all going to happen this quarter or not. I can tell you that we are continuing to ramp up our production in anticipation of the orders and I think we'll be in a position to turn on those relatively quickly and we feel there is a good level of confidence in the guidance we're providing for this fiscal year.

Joe Nadol – JP Morgan

Okay. Do you anticipate the next couple of quarters, as is the normal progression to be higher sequentially in RF from a sales standpoint?

Howard Lance

Yes, sequentially yes. I think that to get to the 15% to 16%, you'd be higher sequentially as well as kind of year-over-year to get to those numbers in revenue. And orders will – as we said, we still have our eye on achieving a one O book to bill. That's going to be a more difficult with the delays that we saw this quarter and we really do need to get the Iraq current opportunity of $250 million closed. If that doesn't happen then we'll end up short of one O. I feel like we still have such a large pipeline, our operations now are able to turn orders into revenue so much quicker than we could two years, three years ago, that we still feel comfortable that we will grow in RF in 2010 and we're also going to be benefiting from a lot of other new products that we've launched and are in production and are pleased that we're ramping up nicely. So I don't feel like we're as dependent as we were a couple of years ago solely on DoD, but we were a bit surprised and at the low order level this second quarter.

Joe Nadol – JP Morgan

Just one more on that topic. On the 117G specifically, because I guess that's where the U.S. contract situation is felt the most, what's the book to ship time frame? Are we talking six months, can you do less than that? To what quarter are sales being pushed out of as the structure gets delayed?

Howard Lance

Well, these orders, as indicated by our guidance, didn't really affect this year's revenue.

Joe Nadol – JP Morgan

Right.

Howard Lance

So that would suggest that we weren't counting on any of these delayed orders for at least six months. Having said that, we can turn the orders a lot faster than six months, so we are going to continue to ramp up our production. That probably means we'll run a little higher inventory levels, but these are all standard products that either internationally or domestically we'll have demand for. So we want to be in position to turn that order to revenue whether it's for Iraq or other international customers or U.S. customers as quickly as possible.

Joe Nadol – JP Morgan

Okay. And then just one more on broadcast. Given what's going on in the U.S. with demand, are you considering more restructuring or are you just waiting to see how the international market continues to hold up before you make any decisions?

Howard Lance

Well, I'd say we're pretty much in a constant mode of looking at how we can take costs out at broadcast. Tim Thorsteinson and his team continue to squeeze on new hires and as we have normal attrition and turnover, we don't fill those jobs or we fill them with people in skill sets that we deploy into the growth areas, whether it's international or some of the new business opportunities. But at this time we're not anticipating any major announcement rather than things we're already doing. We may look at taking vacation furloughs in the third quarter. I think that will depend how orders continue to come in, in the quarter. But short of that, I think it's just become a – what I would – the phrase I would use would be kind of a hunker down mind set there because the U.S. is so weak. Now, I know it's a modest complement, but I think compared to how our competitors are doing, I think we're much more well positioned. But certainly we're disappointed that we're not seeing more year-over-year improvement and I think we're on a track to do that before the economy tank.

Joe Nadol – JP Morgan

Okay, thank you.

Operator

Thank you. Next we'll go to Chris Donaghey with SunTrust Robinson.

Chris Donaghey – SunTrust Robinson

Good evening, guys. Howard, just on the RF com and the delays there, can you talk a little bit about – are we talking about converting existing contract vehicles like MBMMR to a Falcon III product or some of the newer contract vehicles like the ones we're expecting to see for satellite communications-enabled tactical radios for Afghanistan?

Howard Lance

I think it's a combination of contract extensions and new contract vehicles, Chris. We have some of each. Some of the existing vehicles we're able to have extensions to accommodate new products. Other vehicles need to be put in place kind of from scratch.

Chris Donaghey – SunTrust Robinson

Okay. And then on the pipeline, I think that's a new number for us. Can you just talk a little bit quantitatively about how that pipeline has progressed over the past couple of quarters? And can you talk a little bit about the mix of international orders in that pipeline versus U.S.?

Howard Lance

I think it's about – in aggregate about 10% higher than it was a year ago, the 3.5 would have been 3.2 maybe a year ago. In aggregate, it's the combination of business that we would expect to be awarded within the next 15 months is the way that RF has been categorizing that opportunity funnel for us. It is probably a little larger internationally than it was a year ago and it's probably about the same. I think most of the – domestically. I think about most of the growth, I would say, has come from new international opportunities that we've seen emerging. I mentioned a few in our press release and in my comments. Obviously Iraq, not just the current opportunity, but ongoing, Australia, Middle East and so on.

Chris Donaghey – SunTrust Robinson

Okay. Great. And just one more metric on that if you have it. Do you have an estimated win rate at RF com over the past couple of years?

Howard Lance

I don't know what that is specifically. Whatever it is with Dana Maynard and his team, I expect it to go up. But I don't know specifically what it is. But certainly what we do when we make comments about future growth projects is we're looking at our backlog which we still think will be pretty solid as we exit this year and we look at that pipeline, how much of it do we think we'll close, what'll our win rate be and then what – how much of it can we turn or convert from new orders into revenue? So, it's a series of different calculations, but I don't recall the specific win rate per se and I'd have to think about that before I think answering. We will talk again at the March analyst meeting about our views of the market. We've been rolling out the calendar '08 market as we do each year about this time and looking at our market share and the trends there. So I'll try to be in a position to have a comment on that at that point.

Chris Donaghey – SunTrust Robinson

Okay. Great. Thanks. And Gary, just a quick housekeeping item. Are you going to have restated financials with Harris Stratex Networks available?

Gary McArthur

Actually, we will do an 8-K to show the segments as we reorganized going back, so our restated 10-K. With regards to the disposition of Harris Stratex, it will go into discontinued ops at the time we either intend to sell or if we keep to a spend not until we distribute the shares. So we won't be doing that probably until later in the quarter or the beginning of the fourth quarter.

Chris Donaghey – SunTrust Robinson

Okay. Great. Thanks.

Operator

Thank you. Next we'll go to Joseph Campbell with Barclays Capital.

Carter Copeland – Barclays Capital

Good evening. Actually, it's Carter and Joe. First off, Howard, I have to say congratulations on the Emmy award. The picture you sent around was fantastic.

Howard Lance

Thank you. All I did was accepted it, I didn't win it.

Carter Copeland – Barclays Capital

I had a question on the guidance. If I look at what's changed, it looks like you've added about 10 million in op profit from the RF change and about 3 million from the tax rate and that's roughly equivalent to the downward revision in broadcast which looks like it's about 13 million. So if those offset and the quarter was better than planned, I'm just sort of trying to figure out why it is that we didn't raise the full year number, is this completely related to FITCA moving forward a little bit?

Howard Lance

Well, there's lots of moving parts as you suggest. Let me make one – one comment which I didn't make during my prepared comments and that has to do with non-operating income. We are expecting to get a pickup in non-operating income either this quarter or next quarter, most likely this current third quarter as a result of some technology licensing that we're doing and that could be in the amount of about $7 million. So you've got the RF outlook a little bit stronger, you've got the broadcast outlook obviously weaker, you've got the tax rate and then the non-operating income. So when you put all those together, compared to our prior guidance, it all came out about the same on a – as previous basis, if you were to exclude the $0.12 for Harris Stratex.

Carter Copeland – Barclays Capital

Okay. Fair enough. And on the share repurchase, given the financial position I would have assumed – I was surprised to see that you didn't buy back any stock in the quarter. Was there any color there?

Howard Lance

Just ultimate conservatism and prudence that given the situation with credit and so on I just – I felt like we'd take a quarter off, nothing more significant than that. At this point, we intend to restart it this quarter and next quarter, but obviously that could be subject to change, but that's our current plan.

Carter Copeland – Barclays Capital

Okay.

Joseph Campbell – Barclays Capital

Howard, this is Joe. You stood up this new cyber security organization. I just wondered if you could say, are there some specific Harris skill sets, I mean is this Harris attacking other systems or simulated attacks or some sort of comprehensive scoring about how well people do in assessments or is it writing software to defend systems? Sort of what's the way in which Harris goes to market in this cyber security? And does Dale already have current business here or is this total new business situation where you're going to move stuff in or just go get new stuff?

Howard Lance

Yes, good questions and again, in the March meeting, we'll be talking a little bit about this and give you an opportunity to talk with Dale directly about it. It's a – it's an effort to first of all pull together what we are doing because we certainly have cyber and information assurance as an element of a number of our large network programs. Some of that is applying cots capability. A lot of it is starting with cots and then modifying it for our specific customer needs. Is it offensive or defensive, it's all of the above. It certainly, however is understanding how you try and measure and assess the security of a system, how you detect when there has been an intrusion, how you repel that intrusion and how you learn from that, how to make the system even more secure. I see this as being a horizontal capability that will apply to our defense customers, our national intelligence customers, our other federal agencies as well as commercial customers. We think there are opportunities, for example, in the energy and utility space and broader in enterprises where everyone is increasingly coming under more and more attack from a cyber standpoint. And we think we have some unique capabilities and a track record that will give us credibility to go and broaden our efforts as it relates to this area. So that's a little bit of a teaser and more to come at our March analyst meeting.

Joseph Campbell – Barclays Capital

And just one last one, on FITCA, you mentioned that there's at the end of '09, 200 million to go. How did – I mean does FITCA tail off, does it slow down and stretch out as it goes into a different phase or does it abruptly end or how should we be thinking about what's going on here?

Howard Lance

Well, I certainly think the majority of the 200 we'll see in our fiscal year '10. So there will be a tailing off. We'll have some of it in fiscal year '11, but a lot more in fiscal year '10. You'll recall from the original program scope the decision was made to take back in-house and to go paper based for the non-response follow-up activity. And so that's why our program now becomes much more front-end loaded because as we get through the address canvassing phase this fiscal year, we have a more diminished role in the roll out of a census itself and the non-response follow-up in our fiscal year '10 and '11. Now again if we do a bang-up job, there is an opportunity always for us to go and potentially get additional money and help in additional ways, but at this point, we're very pleased to have locked in the contract modification at 800 million and about 200 million of that remains after this fiscal year, most of the 200 million in '10 and a smaller portion in '11.

Joseph Campbell – Barclays Capital

Great. Thanks very much.

Operator

Thank you. We'll go next to Jim McIlree with Collins Stewart.

Jim McIlree – Collins Stewart

Thanks. Good evening.

Howard Lance

Hello.

Jim McIlree – Collins Stewart

What was the reason for the lower tax rate during this quarter?

Gary McArthur

The lower tax rate in this quarter was a result – let me just make sure I get this straight. Well, there were several moving parts to it. We had some audits that were completed on the state and local level was the majority of the reduction in this quarter.

Jim McIlree – Collins Stewart

Okay. And secondly on RF, I just want to make sure I understand what happened. The revenues in the U.S. was weaker than you expected as well as order push outs, but the order push outs have an impact on the fiscal – they don't have an impact on fiscal '09. Is that correct? So there's two kinds of things going on with RF at least domestically. Is that right?

Howard Lance

I didn't say anything about revenue, Jim, that I recall. I think the revenue was pretty much as we expected. It was really all about orders.

Jim McIlree – Collins Stewart

Okay. Great. And again, that relates to U.S. contract vehicles, the 117G isn't an international product yet, is it?

Howard Lance

Not to any extent. So it's really U.S. contract vehicles for the 117G and the cloud around the timing of this initial Iraq opportunity of about $250 million.

Jim McIlree – Collins Stewart

Alright. Okay. Great. Thank you.

Pamela Padgett

Operator, we'll take one more question, please.

Operator

Okay. With time for one final question, we'll go to Chris Quilty with Raymond James.

Chris Quilty – Raymond James

Always the last one in. Howard, on that question of the win rate, Dana told me he never loses anything, so that that question on the 117G, you've gotten orders from the marine and the Air Force, but what about the Army and what are the prospects there?

Howard Lance

Well, the prospects are good, but I don't want to jinx myself. I think the prospects are very good. I mean to some extent we're very focused with all of our customers on getting the 117G adopted compared to previously the 117F. We think that's very important for our longer term position to be established and in the field with that product. To some extent we probably through that strategy delayed some orders. We probably could have had some 117F orders, but we've worked very hard across all the DoD customers to really drive the 117G and at the time – and I still think that's the right strategy. At the time we probably didn't think enough about all of the bureaucracy that had to be accomplished in order to get those new contract vehicles in place.

Chris Quilty – Raymond James

Okay. And the 7 million non-operating item, is that one time in the third quarter or spread over several quarters or is (inaudible) fee?

Howard Lance

It will be a one-time event and it has to do with the sale of some IP that we don't believe we need, but others – another party values and it will occur, we believe, in the third quarter, always a chance it doesn't, but it would be a one-time nonrecurring $7 million income item.

Chris Quilty – Raymond James

Okay. And electronic medical records, the talk about blowing billions of dollars to make it happen, you're relatively new in the health care field, but seem to have good capabilities there, any potential?

Howard Lance

I think a lot of potential. Whether it turns into billions or not, probably premature for me to speculate, but there is no question that the health care infrastructure as it relates to technology of information in this country needs to be upgraded and needs to catch up with a lot of other enterprises and we would like to think that we have the capabilities that would be valued there and that's why we're putting a lot of resources into this area, trying to chalk up some wins in the military health space so that we then have credibility as exactly how this money would be spent evolves that we can participate in that in some way and I don't – I don't know enough about it to speculate how we participate, but clearly I think we're in a better position to be on somebody's team or prime certain aspects of that now than we were a year ago. So we've been working hard to put in place the foundation so that as money is available we can be a player.

Chris Quilty – Raymond James

Got it. Thank you.

Pamela Padgett

Alright. Thank you, everyone for joining us and make sure you make time to join us for our March Analyst Meeting, 18th and 19th. Thank you very much.

Operator

This does conclude today's conference. You may disconnect your lines at this time.

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Source: Harris Corporation F2Q09 (Qtr End 01/02/09) Earnings Call Transcript
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