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Executives

Pamela Padgett - VP of IR and Corporate Communications

Howard Lance - Chairman, President and CEO

Gary McArthur - SVP and CFO

Analysts

Tim Quillin - Stephens Inc

Jim McIlree - Collins Stewart

Joe Campbell - Barclays Capital

Joe Nadol - J. P. Morgan

Gautam Khanna - Cowen & Company

Larry Harris - C.L. King

Mark Jordan - Noble Financial

Myles Walton - Oppenheimer

Chris Donaghey - SunTrust Robinson

Michael French - Morgan Joseph

Harris Corp. (HRS) F1Q10 Earnings Call October 27, 2009 4:30 PM ET

Operator

Good afternoon, and welcome to the Harris Corporation first quarter fiscal 2010 conference call. This call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Pamela Padgett

Hello, everyone, and welcome to Harris Corporation first quarter fiscal 2010 conference call. I'm Pamela Padgett Vice President Investor Relations and Corporate Communications. On the call today is Howard Lance, Chairman, President and CEO, Gary McArthur, Senior Vice President and Chief Financial Officer.

Before we get a few words about forward-looking statements. In the course of this teleconference, management may make forward-looking statements. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information 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, we will discuss certain financial measures and information that are non GAAP financial measures reconciliation to the comparable GAAP measures have included 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. Howard with that I will turn the call over to you.

Howard Lance

Thank you, Pam and welcome everyone to our first quarter fiscal 2010 earnings call. Results in the first quarter were excellent. New orders, revenue and earnings exceeded our expectations driven by strong performance in the order of communications and government communication system segments. The positive order trends and increasing opportunities and in our tactical radio business that began to emerge in our fiscal fourth quarter strengthened considerably in the first quarter.

This provides us with renewed confidence in both the near term and longer term earnings outlook for Harris. For fiscal 2010, we have increased our full year non-GAAP earnings guidance by $0.45 per share, a 13% increase, to a new range of $3.85 to $3.95 per share. The new guidance reflects much higher expected tactical radio orders, revenue and income from the U.S. Department of Defense, as well as increased confidence in the underlying growth and strong earnings performance in our government communications business.

Revenue was $1.20 billion in the first quarter, 3% higher than the prior year quarter of $1.17 billion. We achieved strong organic growth of 8% in government communications systems. Revenue in the quarter also benefited from several fiscal 2009 acquisitions including Tyco Electronics wireless systems, Crucial Security, and SolaCom ATC.

Non GAAP income which excludes acquisition related expenses was $109 million or $0.83 cents per share, compared to $119 million or $0.89 cents per share in the prior year. As expected, lower earnings resulted primarily from lower tactical radio revenue in the first quarter, due to order delays, which occurred during fiscal 2009 at the DoD and the Iraq ministry of defense.

Orders for the quarter were very strong, at $1.5 billion; orders were higher than the $1.1 billion in the prior year first quarter and also higher sequentially than the $1.3 billion in the fourth quarter.

More important, orders were much higher than revenue, and our opportunity pipeline continues to be strong. Clearly signaling that the DoD procurement delays we previously experienced are now behind us. And that the adoption of our new Falcon III 117G JTRS approved multi band man packed radio has accelerated.

Let me now move on to the individual segment results for the quarter. First quarter revenue for the RF Communications segment was $424 million, compared to $415 million in the prior year quarter.

Again, as we expected, revenue from the tactical radio business of $303 million was lower than the prior year, due to order timing in both the U.S. and international markets. Segment income was $121 million in the quarter, excluding acquisition-related expenses, compared to $142 million in the prior year.

Segment operating margin was 28.4% higher than previously expected due to favorable product mix and the impact of cost reduction actions implemented in the second half of fiscal 2009. RF segment orders in the first quarter were very strong at $709 million, including $586 million from the tactical radio business.

Tactical radio orders were much higher than revenue resulting in a 1.9 book to bill ratio. Orders were driven by a rebound in DoD tactical radio procurements that began as you will recall in the fourth quarter and by accelerating customer adoption of the next generation Falcon III ANPRC 117G multi-band man pack radio.

Tactical radio backlog stood at $760 million at the end of the first quarter. Orders included $220 million for the new 117G marking the beginning of wide spread customer adoption of this new JTRS approved tactical radio. Orders came from a broad base of DoD customers, who are using the radio in a variety of ground, vehicular and airborne applications.

The adoption of the Falcon III 117G builds on our previous success, with over 100,000 JTRS approved Falcon III 152 hand held radios now shipped to customers. The 117G is being deployed with the U.S. Army in Afghanistan, and is the first JTRS approved ground tactical radio to be used in a wide band networking battlefield application.

The 117G's wide band capabilities support streaming video and other data intensive applications, including soldier to soldier data transmission. The 117G is NSA approved, and it interfaces seamlessly to the DoD secure Internet protocol router network known as Supernet enabling classified voice and data exchange between the Pentagon and units at the lowest tactical levels on the battle field.

This capability is unprecedented. The 117G also communicates over current generation UHF tactical military satellites while also provides future upgradeability to communicate over the next generation mobile user objective satellite or MUOS system.

Falcon 3 117G orders in the quarter included an initial $165 million order from the U.S. Army as part of a $419 million basic purchasing agreement. Also in the first quarter, the Air Force to ordered 117G radios for both airborne and ground based ISR applications, including a follow on order for their project Liberty aircraft and ground stations. These aircraft are configured to collect and distribute full motion video and other intelligence data.

In addition, we received our first 117G order from the U.S. Coast Guard. 117G multiband radios will replace aging UHF SATCOM, ground to air, ship-to-ship and ship-to-shore radios on their largest cutter class vessels.

We see a significant future opportunities with the Coast Guard as we expect the radios to migrate to smaller ships, as they begin to realize and understand the capabilities of the 117G.

Also in the quarter, Harris received $180 million in Falcon II HF and multi-band tactical radio orders for use in MRAP all-terrain vehicles. These new off-road vehicles are being quickly deployed to Afghanistan to protect troops from improvised explosive devices, or IEDs.

We expect significant additional MRAP ATV orders in the second quarter. On October 16, Marine Core Systems Command announced its intention to purchase up to 6100 additional Harris Falcon II HF radio systems, with an estimated IDIQ contract value of $334 million. We believe the recent orders represent a positive change in DoDs plans to procure commercially developed tactical radios and communication systems for a variety of platforms for the long term.

We also believe that communications technology will continue to evolve at a very rapid pace, as users demand better, faster and more dynamic communications capabilities. Harris will be the driving force behind this continued innovation. Harris is now been embraced by all branches of the U.S. armed forces as the leading commercial supplier of JTRS approved ground tactical radios.

Our Falcon III multiband radios clearly have the broadest capabilities available, including wideband networking and TACSAT connectivity. And our battle proven Falcon II HF and multi-band radios have been selected for use on the newest MRAP ATVs, providing assured communications in Afghanistan.

As a commercial supplier to the DoD, Harris RF has been presented with a significant market opportunity, and we believe it plays directly to the strengths of our business model.

We've invested hundreds of millions of dollars in R&D and production capacity and have hit the mark with both product performance and availability on tactical radios. We've been able to meet the DoD's demanding mission requirements today, not sometime in the future and supply communication systems with complete interoperability and high reliability.

In partnership with our DoD customers, we have demonstrated the capability to be their go-to supplier of critical tactical communications. As evidenced by the recent and planned procurements. Be believes this works very well for the longer term outlook of our business.

International revenue and orders decreased in the quarter as some programs were delayed, and as production was prioritized to meet accelerated DoD delivery requirements. Our international sales force continues to report that the opportunity pipeline is robust.

Large international orders this year are expected from Australia, Pakistan, Mexico, the UK, and Iraq. In the public safety and professional communications business, new orders of $123 million were slightly ahead of revenue.

The business had a healthy backlog of $470 million at the end of the first quarter. Although it's still early in the fiscal year, we believe this business is on target for revenue, orders and income and will meet our expectations.

Highlights in the quarter included orders for more than 1,000 of our new unity XG100 radios from wide variety of customers. This new software-defined multi-band hand held radio provides full spectrum interoperability among federal, state and local agencies.

Our government communications system segment had another very strong quarter. Orders were $672 million, increasing 8% compared to the first quarter of fiscal 2009. Revenue was $668 million, increasing 10% compared to the prior year quarter.

Segment income was $86 million. Segment operating margin was a strong 12.8%, reflecting excellent performance across a wide range of programs. As well as favorable award fees on the FAA, telecommunications infrastructure program known as FTI.

The FTI program has completed its equipment build-out phase and is now transitioning to its telecommunications services and maintenance phase. During the quarter, we began to increase capacity on the FTI network by installing a nationwide optical backbone in support of the FAA NextGen programs.

In addition the new optical backbone will provide even higher levels of network reliability by using a dual ring architecture, interconnecting the networks through 42 nationwide carrier grade telecommunications centers.

Our revenue drivers in the quarter at GCSD included the war fighter information network tactical program for the U.S. Army, the commercial broadband satellite program for the U.S. Navy, several classified programs for national intelligence customers, a Patriot IT services program for the national reconnaissance office and net sense IT services program for the U.S. Air Force.

Revenue also benefited from the start up of two new programs, the ground processing segment of the GOES-R weather satellite program for the national oceanic and atmospheric administration, and the modernization of enterprise terminals net program for the Army.

New contract wins in the quarter included a $120 million in national intelligence programs and several IT service program wins collectively valued at more than $400 million including a five-year $200 million contract with the U.S. Department of State Bureau of Counselor Affairs.

Harris will provide critical IT services in support of immigration and VISA services for U.S. citizens of domestically and overseas and services for foreign visitors traveling to the U.S.

Fourth quarter revenue in the broadcast communication segment was $119 million, compared with $130 million in the fourth quarter of the prior year. New orders were greater than revenue at $124 million and about on par with orders in the fourth quarter. The first fiscal quarter is normally our lowest on a seasonal basis. Segment income in the first quarter was $0.3 million. Positive profitability was achieved on substantially lower revenue than the prior year first quarter, primarily as the result of significant cost reduction actions that we implemented in fiscal 2009.

We believe this business has bottomed out from the perspective of quarterly revenue and income and we don't expect to see results decline any further going forward. However, we're cautious regarding the recovery timetable, since so much hinges on a rebound in advertising revenue and the subsequent resumption of capital spending by our broadcast and media customers.

Key wins in the quarter included transmitter for the rollout of digital TV networks in Rwanda and Mexico.

Harris ONE workflow solutions for Meredith Corporations central casting hub in Phoenix, for the NSHS home shopping channel in South Korea and multiple equipment orders were received to enable China central televisions coverage of the Vancouver 2010 Olympic winter games.

Also during the quarter, Harris broadcast was awarded the contract from Lockheed Martin to provide special video systems for U.S. joint forces command.

These systems use advanced broadcast technologies to collect, archive, exploit, and disseminate full motion video that is collected for manned and unmanned aircraft and ground-based sensors. Harris system incorporates our proprietary full motion video asset management engine technology or fame. We believe this technology continues to have broad application in both government and commercial markets.

In early October we announced that Tim Thorsteinson, President of Harris Broadcast Communications was retiring. Over the past four years, Tim has expanded our international sales capability, led the effort to position Harris as the leader in complete workflow solutions and he has driven our expansion into new media markets.

I want to personally thank Tim for his contributions to Harris and wish him very well. While we are searching for a successor, Harris’s Chief Financial Officer, Gary McArthur will take any the additional role of President of Broadcast Communications. And let me now turn the call over to Gary to discuss first quarter cash flow performance.

Gary McArthur

Thank you, Howard. To begin with, I would like to say a few words about our liquidity. As of quarter end, we had $231 million of cash and cash equivalents on hand, and $725 million available under our $750 million revolving credit facility, which does not come up for renewal until 2013.

We have no long term debt maturities coming due until October of 2015. In August, we met with both S&P and Moody's confirming that we were very solid in our BBB plus BAA 1 credit ratings with capacity at those ratings to raise additional debt.

On a separate but related note, all our domestic retirement plans are defined contribution plans. Worldwide, we have only one defined benefit plan with benefit obligations totaling $54 million, which are funded in accordance with U.K. law.

Moving now to Q1 results, cash flow from operations in the first quarter was $135 million, as compared to $38 million in the first quarter of the prior year. Free cash flow was $114 million. Based on our expected stronger operating results at RF Communications and government communication systems, we are increasing our forecast for cash flow from operations for the year from $525 million to $575 million, to between $600 million, and $650 million.

Depreciation and amortization for the first quarter was $42 million, essentially flat with the first quarter of 2009. Our expectations for depreciation and amortization for to fiscal year 2010 are unchanged at $160 million to $170 million. Capital expenditures were $21 million for the first quarter, as compared to $32 million in the first quarter of fiscal 2009.

Our current guidance for fiscal year 2010 CapEx is unchanged at between $150 million, and $160 million. During the quarter, we repurchased $50 million of our outstanding stock at an average price per share of $34.64.

As of quarter end, we have $600 million remaining under our stock repurchase program. Our effective tax rate in the quarter was 35%, Our outlook for the full year tax rate for fiscal 2010 remains at 34%, noting however, that the tax rate for any given quarter could vary up or down as a result of discreet tax events in summary, we continue to operate from a very solid financial foundation. Back to you Howard.

Howard Lance

Thanks, Gary. Let me conclude my remarks this afternoon by adding some color around our revised revenue and earnings outlook. As I've already indicated, we significantly increased our guidance for non-GAAP income from continuing operations for fiscal 2010 to a new range of $3.85 to $3.95 per diluted share, compared with our previous range of $3.40 to $3.50 per share.

As a reminder non-GAAP guidance only excludes acquisition-related costs the new guidance is $3.74 to $3.84 per share on a GAAP basis, compared with our previous range, $3.25 to $3.40 per share.

Revenue in fiscal 2010 is now expected to be in a range of $5.1 to $5.2 billion. For the RF Communications segment, fiscal 2010 revenue is now expected to be in a range of $1.9 to $2.0 billion including revenue of $1.4 billion to $1.5 billion for the tactical radio business.

Segment operating margin for the year is now expected to be in a range from 29% to 31%, as a result of the higher volume, favorable tactical radio product mix and lower operating costs.

Previously operating margin was expected in a range from 25% to 27%. For government communication systems, revenue for fiscal 2010 is now expected in a range of $2.7 to $2.75 billion or 0% to 2% above the prior year.

After adjusting revenue for the impact of our two small acquisitions and the lower revenue from the FDCA program for the U.S. census bureau, which you recall is ramping down this year, year-over-year under lying growth is expected to be a very strong 9%.

Operating margin and government communication systems is now expected to be at about 12% of revenue for the year. For broadcast communications we lowered our fiscal 2010 revenue forecast to a range of $525 to $550 million, reflecting a slower expected recovery in orders growth to the continuing global economic recession.

Operating margin at broadcast is now expected to be 4% to 5% for the year as a result of the lower volume. At this time, I'll ask the operator to open the line and we'll take your questions.

Pamela Padgett

And operator before we take a question, I just want to encourage everyone to try to keep it at the one question. If you have a follow-up or another question, you can just come back to the queue, and hopefully this way we'll get everyone on the call to be able to have the opportunity to ask at least one question. Okay operator.

Question-and-Answer Session

Operator

Okay. Great, thank you. (Operator Instructions) We'll take the first question from Tim Quillin with Stephens Inc. Please go ahead.

Tim Quillin - Stephens Inc

Good afternoon. Nice results. You alluded to, I think, a potential radio order from Iraq, and you talked previously about the Iraq MOD order. Could you just give us an update on where you stand there? Thank you.

Howard Lance

Tom, nothing specific, other than we continue to be very bullish in the long run, regarding opportunities in Iraq, both with the ministry of interior, where we have gotten a number of orders in the recent quarters, as well as the Ministry of Defense, where it's been a few quarters since we've received any orders.

We now think that these order wills spread out over time, will come in small chunks perhaps $10 million, $20 million, and $30 million. At this point, don't know precisely when we'll get the next order, but they're certainly queuing up in the pipeline. We still think over the long run there are hundreds of millions of dollars of radio opportunities for us in Iraq, as they transition and get on the ground their own com equipment.

Operator

And our next question will come from Jim McIlree with Collins Stewart. Please go ahead.

Jim McIlree - Collins Stewart

Could you repeat what you said the backlog was on the tactical radios and then of that backlog, how much is Falcon III related?

Howard Lance

I'll look it up here. I believe its $760 million, Jim, is the backlog for tactical radios, and I don't know the precise breakout between the two. We talked about our orders of $220 million in the quarter for Falcon III. I suspect very few of those shipped at this point, but don't have any specifics on the split.

Operator

And the next question will come from Joe Campbell with Barclays Capital. Please go ahead.

Joe Campbell - Barclays Capital

Hi, it's actually Carter Copeland. Just wanted to say first off great quarter, guys.

Joe Campbell - Barclays Capital

One quick one. With respect to jitters changing, you know, control of the program from to the Army, how, if at all, does that change the nature of your interaction with the customer and, you know, obviously with the new product offerings and the success you're having with the Army, you know, what's changed in your mind and how you go to market and how you interact with that customer base now that the nature of the jitters program has sort of changed, you know, from the Navy to the Army?

Gary McArthur

Yeah, I don't think that, on the surface, I don't think that the change of reporting is probably the key element. I think the key element has been our strategy over the last two years where we have aligned ourselves up and down the chains of command in the military, especially in the Army and the Marine corporation and not only in the procurement organizations, but in the command organizations.

We have a lot more people forward-deployed today with our customers. On military bases here in the U.S, as well as distributed in other parts of the world. I think that that has led us to a closer working relationship with the customer, especially with the Army, and so I think you see that reflected in our success with the Army, are being able to be on target with the performance characteristics of the new Falcon III radios. Our ability to do things like incorporate the Rover wave form immediately, not years down the road so that they can take advantage of UAV feeds directly to the radio for review, and then wideband networking. Our incorporation of the DMA waveform and TACSAT capabilities, I give all of that credit to our people who are working side by side with the customer, going through the needs analysis. So I really think that's what has led to our success and will continue to feed our success more than whether the program reports per say into the Navy, Army, or directly to DoD assistant secretary for procurement.

Joe Campbell - Barclays Capital

But given your, all of your success with the Army, you wouldn't see any difference in having Army leadership where you have had a lot of success and a lot of inroads in placing products in the hands of the customer, I suppose to the Navy where that hasn't been the case?

Gary McArthur

Yeah, I certainly think that it made sense for them to make the change, given that the Army is the premier user of tactical communications and we continue to work at all levels, both with the JTRSPEO. They're very important in terms of approving the radios and managing some of the procurements. We also work directly with other organizations whether its Army communications, electronics command, CCOM or as I indicated today, the contract at the Marine core systems command, which we expect to be utilized to have a follow-on procurement this quarter of radios associated with the MRAP ATV, and they've put that intention out in their website, the public domain, and are in the process of, according to that raising the procurement ceiling for that contract.

Joe Campbell - Barclays Capital

Great.

Operator

And next question will come from Joe Nadol with J.P. Morgan.

Joe Nadol - J. P. Morgan

Thanks, good afternoon.

Gary McArthur

Hi, Joe.

Joe Nadol - J. P. Morgan

Hi. My question is on the margins in RF. You know, you decided Howard, three drivers of higher margins. Looks like your drop down from the higher sales of a $100 million is a 100% and some I guess, middle of the range from about 482 to 585, so I'm wondering, I guess, if you could break that out into pieces, if possible, or give us a little color. And, also, just let us know what if the margins in the acquired business, the M/A-COM business are substantially higher than what you had guided for last quarter?

Howard Lance

I will answer the second part of your question, our guidance on the government and public safety business unit, which includes predominantly the Tyco wireless systems, formerly M/A-COM acquisition, and a little bit of our business that we had in public safety. Our expectations for that have not changed around $500 million or so in revenue, and 8% to 10% operating margins. That's what we indicated last time. So we're holding to that, and are encouraged by the initial few months’ operation of that business.

In terms of the details behind the increased margin, so it's all coming from tactical radio revenue, and it really is all of the elements that I indicated; the mix of products, obviously, a higher percentage of HF than we had previously expected, but also a higher percentage of US DoD. When you look across at the mix of what they're buying, it's not just the radio family, but are they buying just radios? Are they buying vehicular adapters, accessories, lots of things come into that mix? Number two, we have exceeded our own expectations in terms of the impact this year of our cost reductions, and not just cost reductions in taking operating expenses out of the business, but in driving down our materials costs, and our efficiencies in the factory. And then third, when you level set your business at a lower level which we did as you know at the beginning of the year, and then your revenue goes up, you produce significant leverage in terms of absorbing factory overhead and other costs. So all of those factors have come together to create the margin improvement that we're indicating, which is around, based on my guidance, about 4 points or so above where we thought it would be in our previous guidance for the segment. It's all driven by tactical radios.

Operator

Next question will come from Gautam Khanna with Cowen & Company. Please go ahead.

Gautam Khanna - Cowen & Company

Good afternoon. Congratulations on great order.

Gary McArthur

Thank you.

Howard Lance

Thank you.

Gautam Khanna - Cowen & Company

I was going to ask, there was a talk about ANW2 waveform testing to see if it was scalable for deployment, more widespread deployment in Afghanistan. Can you update us on what those tests determined?

Howard Lance

The testing is ongoing, and so we won't have any results until those have been completed by the government so I can't comment on how that's going to come out. Obviously, we believe it's going to be very positive. We believe that the DoD will authorize broader fielding of the ANW2 waveform. It is, we think, very robust. And it is already becoming battlefield proven in its capabilities. So we continue to be very positive, and optimistic about broader feeling of the waveform, but in terms of the specifics of the test results, we haven't received those yet.

Gautam Khanna - Cowen & Company

May I ask a quick follow-up as to how those might be procured if the tests are successful, would it be under the IDIQ Contract you announced recently or would it be another vehicle? And also would you provide…

Howard Lance

Well certainly we have a lot of head room left under the blanket purchasing agreement, when we compare the $419 million to the initial order of $165 million. So it certainly can be procured in that way. As we have seen, DoD has many pass to procure our radios, and have taken advantage of probably all of them over the last year or two. But that's certainly one way that they could immediately place additional orders for the Falcon III, including the ANW2.

Operator

And the next question will come from Larry Harris with C.L. King. Please go ahead.

Larry Harris - C.L. King

With respect to capacity utilization, I think you mentioned earlier on the call that some international sales were deferred because of pressing domestic requirements. So where do we stand in terms of capacity utilization. I know a few years ago there was talk about setting up a second manufacturing facility in the UK. How do you stand? Do you think you'll have to add additional capacity?

Howard Lance

I think we have adequate quite capacity if you put in perspective that even with the increased guidance for the tactical radio business; we're still a little bit below last year's level. So we clearly have overall capacity. Some of these orders have come in very quickly, so it's really a question of how quickly can we ramp back up the capacity that we have installed by bringing back workers, and how quickly you can do that without creating any kinds of quality problems, which obviously we don't want to do. In addition, these are relatively quick delivery requirements, because of the urgency of the MRAP program especially. So we're trying to bake all of that in, and at this point we have started to move out some quantities, at least until later in the year, some quantities of international radios, as well as I'll say lower priority U.S. DoD radio shipments. So that we can, especially in the second quarter and the third quarter, get our capacity up and support the MRAP deployments, which are the top priority of DoD.

Operator

Next question will come from Mark Jordan with Noble Financial. Pleased go ahead.

Mark Jordan - Noble Financial

Good afternoon, everyone. Howard, on your the fourth quarter conference call, you gave viewers to what you perceive to be the pipeline of opportunity for the tactical RF business 12 to 18 months. Of about $3.5 billion, $1.5 billion international and $2 billion DoD? Given the $586 million in the Q1 and obviously the positive developments in the marketplace could you update those numbers, update and given what's transpired the last three months?

Howard Lance

I don't have anything specific for you, Mark. I don't think that the overall pipeline is all that diminished. We continue to identify major programs and needs in the very long run as we've discussed before. It has more to do with priorities and funding, both U.S. as well as internationally, than it does the needs and demand. We think the demand absolutely will continue to outstrip the, current term funding, because you'll recall there are lots of legacy radios just in the DoD inventory that have been deployed, that ultimately all of these units are going to want the same kind of capabilities of the latest technology.

So bottom line, I don't see a major impact, certainly not over the next year or two, as today compared to in the fourth quarter.

Mark Jordan - Noble Financial

Okay.

Operator

The next will come from Myles Walton with Oppenheimer.

Myles Walton - Oppenheimer

Thanks, good evening, and great quarter. The order outlook at RF, I think you previously said $1.3 billion to $1.4 billion kind of looking at a book to bill one times in the tactical radio business, now that you have got the strong 1Q and NATB in hand for 2Q, what does that number now look like as you see it for the full year?

Howard Lance

Myles, in terms of the book to bill?

Myles Walton - Oppenheimer

The bookings exactly, for tactical.

Howard Lance

Certainly above one to one, don't have a lot of precision at this point and exactly what the number is going to be, because the requirements literally continue to evolve on a weekly basis, but I'm certainly confident we're going to be well above one to one, and that we will build backlog at RF tactical radios during the year.

We're obviously hopeful and optimistic that we can also build backlog in the public safety part of that business as well as time goes on in the rest of the fiscal year. So we expect to finish the year with more backlog than we began.

Operator

Next question will come from Chris Donaghey of SunTrust Robinson

Chris Donaghey - SunTrust Robinson

Hi, good evening, guys, and again good quarter.

Howard Lance

Thank you.

Chris Donaghey - SunTrust Robinson

Howard, I wonder if you could talk about your guidance philosophy for this particular year. I remember in the past you had kind of set tactical radio guidance based on about six months of visibility.

Based on what you're seeing now with some of the planned procurements, plus the orders in hand, and future expectations, can you talk about what you're using to set this new guidance number? You know, how much is till on the coming versus already in backlog, or at least factored into the high probability?

Howard Lance

Yes, very good question, Chris. We certainly, where we have really good visibility on backlog and when the deliveries are going to be, you know, all of that is baked in. Everything else is factored based on probability, and, you know, those are judgment calls. We spent a lot of time over the last week trying to assess, with the RF leadership team, where we wanted to establish guidance on today's call.

We've established that as indicated, about a $100 million dollars in revenue higher than we had previously. But there still are lots of moving parts in terms of how orders turn into revenue at this fiscal year versus next fiscal year.

I think you would find our practice and our track record is to be, well, say, leaning toward the conservative side of guidance, so, overall, I would say I feel like there's more upside than downside.

That's one of the reasons that we provide a range. Something could always happen that you're not expecting, but I'm feeling very optimistic with regard to the order rates. This indication about the additional RF orders obviously weighs heavily into our thinking for guidance, but, at the same time, it's not in at a hundred percent.

Chris Donaghey - SunTrust Robinson

Okay. Great. And then just a quick follow-up on the margins. Obviously with the current margin guidance, you would expect to end the year at a run rate that would be in the low 30s, call it 32% or so. How sustainable do you think those margins are going forward?

Howard Lance

I think it's too early for me to really comment on that. I think the message about beyond FY-10, starts with the momentum that we have going on now in terms of acceptance, especially of our Falcon III radios and I would say acceptance and encouragement by the customers and the DoD for the long term role for commercially developed products.

In terms of the sustainability of margin, at any given level it has a lot to do with, as I answered earlier, with the mix of all of the business it’s in there in the costs and it's just a little too far out at this point, Chris, for me to indicate whether it will be sustained or not.

We clearly are going to continue to invest in this business. So to the extent that we feel we've cut the expenses a little too low and we want to ramp back up some R&D, we're certainly going to do that.

Having said that, I think it's fair to assume we will manage that and you shouldn't look for any steep or step-like decline. So we'll manage our way through it. If we feel we need to moderate the margins a bit, as I think you've seen us do in the past where RF margins have 100 or 200 basis points but it's always been over a gradual period of quarters as we kind of manage it.

So I'm not suggesting that will happen in this case, I just don't know at this point whether margins are sustainable at that level. I will tell you, our team has done just an outstanding job in taking costs out of these products and given the features that we have in the products that gives us the ability to earn the price that we receive and through the cost reductions to earn higher margins, as well. So I think you know me well enough at this point, and my division leadership does, that I'm not going to give up those margins unless there's some strategic reason for doing it on the investment side. So hopefully that gives some color around it.

Chris Donaghey - SunTrust Robinson

That's great. Thanks again.

Operator

And the next question will come from Michael French with Morgan Joseph.

Michael French - Morgan Joseph

Congratulations to you and your team for a strong performance.

Howard Lance

Thank you.

Michael French - Morgan Joseph

A question on the public safety business. You're able to produce bookings in excess of revenue for the quarter, and I know its early days, the acquisition, but has your assessment of the market opportunity changed any in that segment?

Howard Lance

No I don’t think so. I've been spending a lot of time with our team, with customers over the last three to four months, since we closed on the acquisition. I think that the opportunity pipeline is in fact larger, if anything, because there are so many systems out there with relatively antiquated communications capability.

And the needs of the customers in public safety are frankly not all that far behind the needs in the military in terms of assured communications, more interoperability across different organizations and agencies, covering a wider areas geographically. And so it really is more of a question of not if that market is there, but when can it be realized in orders based on funding. Certainly, state and local funding is under some pressure, as a result of overall budgets. And some of the stimulus money is flowing though from the federal level into state and local. That's helping. And other forms of funding are being identified.

So, you know, bottom line, I think the market in North America is very large, very robust, and in the long run. And I guess the thing that I would leave you with that's probably been the biggest impact impression on me has been the acceptance and encouragement we're getting from customers and prospects. We felt that the market would welcome and support a stronger player, which we think the combination of Harris and Tyco electronics wireless systems creates. And I've seen nothing but a confirmation of that in my discussions with customers and prospects over the last 90 days.

Operator

Next question will come from Tim Quillin with Stephens Inc. Please go ahead.

Tim Quillin - Stephens Inc

Thank you for taking my follow up. I just had two quick questions. One is, you mentioned that you had award fees on your FTI contract. I was wondering if you could gives us a sense of the magnitude, because it sounds like you expect margins to be a little bit lower for the remainder of the year in [GCS], and then the second question is, do you have any kind of early insight into the government fiscal '11 budgeting process and how the funding profile for tactical radios might change as we get more granularity in to the next few years, kind of pre-jitters program ramp up. Thanks.

Howard Lance

Well, with regard to your first question, without commenting specifically on the FTI award fee, 12.8% represents about $5 million higher than our 12% kind of target now for the year. So, that would kind of give you directionally what some of that might be worth.

We transitioned from the program phase, we were in which was largely deployment, and now our transitioning into the ongoing phase, which will run for the next eight years, I think, in the total 15-year program. Overall, though GCS continues to perform at a very high level, we have a minimal number of red programs. And we continue at a 12% kind of target to be in the higher end of integrated systems and services companies. And so we're very proud of that performance.

I wish I could have more insight into your question regarding government fiscal year '11 budget. Obviously there's a lot of work underway right now. We certainly know that there is a desire on the part of secretary gates to find room in the budget, because of overall pressure. Our strategy continues to be to try and focus in those areas and programs that we think are going to be highest priority. We think communications, and IT systems, especially mission critical communications and systems will continue to be funded. A lot of our programs are funded through long-term program budgets that do not appear to be under any kind of pressure.

Many of our programs, FTI, for example is a cost savings compared to the myriad old networks that it replaced. So, certainly don't see pressure in those areas. We continue to believe that our commercial solutions and JTRS-approved radios offer significant advantages in terms of overall cost, and availability, and feature sets, and continue to tell that story to our customers, and the DoD procurement organization. But in terms of having any particular visibility into what's going to be in the budget, I don't think we have that, and we'll have to stay tuned like everyone else.

Operator

Your next question comes from Jim McIlree with Collins Stewart.

Jim McIlree - Collins Stewart

Thanks again. Gary, does the expected tax rate for the year include an R&D tax credit?

Gary McArthur

Right now it does, but there are also some one-time events that could also benefit, so it's a moving target in a way, I should say, but ultimately, we will expect to be around 34% for the year, regardless of what happens with the investment tax credit, but that definitely factors in to our thinking.

Pamela Padgett

Operator, we'll take one more question.

Operator

That question will come from Mark Jordan with Noble Financial.

Mark Jordan - Noble Financial

Good afternoon again. Howard, you mentioned that there seems to be a shift in receptivity of DoD for Cox generically on the radio side. Does that have an implication for the JTRS formal program, where there is subsidization of radio development in the industry that could develop into competition? Is there the opportunity for that to be reviewed by gates and truncated given the lack of performance and high cost?

Howard Lance

Well, I say again, certainly can't predict what the DoD will do with regard to those programs of record, but we are certainly in a position where we're making a very strong case advocating Harris and other commercially developed products as viable alternatives. We have, through this program, I think it has really shown the value and the place for commercially developed technologies as an adjunct to traditional government programs of record.

We've gotten to the market faster, we're able to hit the mark in terms of advanced features. We can add those features very, very rapidly and continue to stay current. We are particularly valuable at times where communications and the urgent need is there, because our ability to respond in advance in anticipation of orders is so different than a traditional program of record which even long lead time items typically aren't ordered until you have some indication from the customer.

So I think, it's presented a stark contrast, not that one is better than the other, but that there is clearly a place for both in your thinking when you are trying to manage all of the trade-offs between schedules, budgets, and features, and I think based on the results, I think they speak for themselves in terms of a lot of listening and acknowledgement of our position is going on.

Pamela Padgett

All right everyone. Thank you so much for joining us today.

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Source: Harris Corp. F1Q10 Earnings Conference Call
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