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Harris Corporation (NYSE:HRS)

F2Q11 (Qtr Ended 12/31/10) Earnings Call

January 26, 2011 4:30 pm ET

Executives

Pamela Padgett - VP of IR

Howard Lance - Chairman, President and CEO

Gary McArthur - SVP and CFO

Analysts

Peter Skibitski - Suntrust Robinson Humphrey

Joe Nadol - JP Morgan

Rich Valera - Needham & Company

Gautam Khanna – Cowen And Company

Chris Quilty - Raymond James

Jim McIlree - Merriman

Jason Kupferberg - UBS

Mark Jordan - Noble Financial

Josephine Millward - Benchmark Company

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Harris Earnings Conference Call. My name is Alicia, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to Ms. Pamela Padgett, Vice President of Investor Relations. Please proceed.

Pamela Padgett

Good afternoon everyone. Welcome to Harris’s. second quarter fiscal 2011 conference call. I'm Pamela Padgett, and on the call with me today is Howard Lance, Chairman, President and CEO; 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, management may make forward-looking statements. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements.

For more information and a discussion of such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC.

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

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

Howard Lance

Thank you, Pam, and I want to welcome all of you to our second quarter fiscal 2011 earnings call. Harris’s second quarter results were excellent with contributions from all of operating segments. RF communications posted strong international growth.

Government communication systems showed continued stability with better than industry average margins. And we saw good improvement in Broadcast Communication results.

I am please to report that the previously announced Schlumberger’s Global Connectivity Services acquisition is still expected to close in our third fiscal quarter.

GCS-add scale to our global managed satellite communications services business, expands our global footprint and further diversifies the company into faster-growing markets. When combined with the previous acquired CapRock Communications business, this merger will create exciting new channels to provide Harris Assured Communications solutions to both government and commercial customers alike.”

Our consolidated revenue in the second quarter was $1.44 billion. That was 18% higher than the prior year. On an organic basis when we adjust for the impact of acquisitions, revenue increased by a strong 9%.

Non-GAAP income, which exclude acquisition related costs was a $155 million in the second quarter or $1.20 per diluted share, that was a 12% compared with the prior-year quarter. Non-GAAP earnings before interest, taxes, depreciation and amortization and also excluding acquisition related costs was $296 million in the quarter and a 11% increase compared to the prior year.

Consolidated orders in the second quarter were $1.41 billion, about even with the very strong $1.42 billion in the prior year quarter. Off course the prior year benefited significantly from tactical radio orders for MRAPs and M-ATVs for the U.S. Department of Defense.

Second quarter revenue for the RF Communication segment was $545 million, 18% higher compared to the prior year. Operating income was $189 million and operating margin for the segment continued very strong at 35% due to favorable product mix and continuing operating efficiencies.

Second quarter orders for the RF segment were $391 million, segment backlog of $1.52 billion at the end of the quarter remains high and is expected to rise in the second half of our fiscal year thanks to several large multiyear contract wins that were awarded during and following the close of the quarter. These wins included the greater than $300 million international tactical radio contract. The province wide Alberta, Canada first responder program and the statewide Oregon Wireless interoperability network contract.

Tactical communications revenue was $426 million in the quarter; increasing 20% compared to the prior year. Revenue growth was driven by strong international deliveries on multiyear modernization programs for Pakistan, Australia and Iraq.

As well as an uptick in the U.S Department of Defense adoption of the company’s new line of Falcon III radios. These increases were partially offset by fewer radio deliveries for the military’s MRAP vehicles program. The remaining $80 million of the fiscal 2010 MRAP backlog was shipped during this quarter. And that compares to a $195 million in MRAP shipments in the second quarter of fiscal 2010.

The positive note however is that even with this significant decline in MRAP deliveries we were able top more than take up the slack through higher shipments of our Falcon III radios such that the total US DoD revenue in the quarter actually increased year over year by 4%

Orders for tactical communications were $300 million in the quarter. The corresponding book to bill of 0.70 and compared to orders in the prior year of $554 million. Tactical communications backlog was a healthy $1.06 billion at the end of the quarter. We expect year end Tactical Commutations backlog to be in the $900 million to $1 billion range. So our U.S. Tactical Radio business remains healthy and is benefiting from strong customer demand for our next generation Falcon III Radios. These are being procured to address a wide range of applications for both ongoing operations as well communications modernization.

Our second quarter closed with a healthy U.S. opportunity pipeline of $1.2 billion. Orders in the U.S. market during the quarter included $24.5 million from the U.S. Army and the U.S. Department of Defense for Falcon III handheld and vehicular tactical systems. $16 million from a DoD customer for development of a new waveform incorporated into the Harris Falcon III radios. $11 million for the U.S. Air Force and U.S. DoD for Falcon III hand held and vehicular tactical radio systems. $10.5 million from the U.S. Department of Defense for Falcon III wide band manpack radios. $5.5 million from the U.S. Marine Corp for Falcon III wide band vehicular radio systems and finally $5.5 million from the U.S. DoD for Falcon II tactical radios for use in MRAP vehicles.

Turning to international markets, orders in the second quarter increased significantly, driven by initial of over $100 million as part of our multiyear contract that exceeds $300 million for an unidentified international government customer.

Other international orders in the quarter included a $9 million order from Brazil to provide HF radio equipment and an $8 million order from Mexico for both, Falcon II and Falcon III radios.

A pipeline of international opportunities even with this order activity remained strong at $2 billion. We see tremendous future opportunities in the countries where we are already selling radios, including Iraq, Australia, Pakistan, Mexico and our latest, undisclosed international customer.

In the longer term, opportunities in these countries alone are about $1.5 billion, with about half of that value falling outside of our 15-month opportunity pipeline.

Our competitive position is as strong as ever. We continue to invest to meet the evolving needs of the war fighter at an affordable cost.Our Falcon III Handheld continues to be the most widely deployed JTRS approved radio.

Our Falcon III 117G manpac is being deployed in increasing numbers by all branches of the U.S. armed forces (Inaudible) secured wide band networking connectivity. This connectivity is enabling a host of new applications, including biometrics, tactical trap, and the broader dissemination of live ISR video to greatly enhance the mission effectiveness of our forces on the battlefield.

Public Safety and Professional Communications revenue was $119 million in the second quarter. That was a 10% increase over the prior year. Although the constrained state and local spending environment is not recovering as fast as we had previously expected, we continue to see modest growth in both, revenue and earnings this year in a flat-to-declining market.

Recent major awards and the eventual pickup of the state and local market as a result of an improving economy should help drive faster growth next fiscal year in the Public Safety business.

Orders in Public Safety and Professional Communications in the second quarter were $91 million. And they included a $15 million order from Monterey County, California to design and deploy a new public safety radio system. The new system will improve coverage, reliability and communication interoperability between local, county, state and federal First Responders and a $7 million order from Dayton Power & Light Company for M22 OpenSky communication system to manage both voice and data traffic.

In addition, this communication system will include our new SG5300 data-only radio, which is used in smart grid data applications. It’s important to note that after the close of the quarter, Harris was selected by the State of Oregon as the radio system and service provider for the Oregon Wireless Interoperability Network, also known as OWIN.

The state of Oregon awarded Harris this 10-year price agreement requirements contract. The contract vehicle will be used by State and local agencies to purchase public safety, communication systems, radios and related equipment and is expected to have a total value of more than $100 million.

So to summarize the RF segment; a strong backlog, the announced new business wins, a robust opportunity pipeline and our continued excellent progress in fielding the Falcon III family radios are all expected in to contribute and result in a strong fiscal 2011 and to support sustained earnings in fiscal 2012.

Revenue in the Government Communication System segment was $776 million in the second quarter. That was 20% higher compared with the prior year. Organic revenue growth excluding acquisitions was about 3% in the quarter.

Revenue growth was driven by contributions from the July 2010 acquisition of CapRock Communications, by the GOES-R Ground segment program, the expansion of the GOES-R program to include the Ground antenna component and our Healthcare solutions and IT Services businesses.

The segment experienced revenue decline on several classified programs and as expected a $20 million year-over-year revenue decline related to the wide down of the 2010 census program. This program will be completely finished by the end of our fiscal year.

Non GAAP segment operation income in the second quarter was $86 million; and operating margin was strong at 11%. This compares with non GAAP operating income of $88 million in the prior year quarter.

In the second quarter we achieved several significant program wins in this core business including a nine year potential $273 million Canadian follow-on contract from the government of Canada for the CF-18 optimized OWSS weapon system support program. Harris will provide engineering services to support fighter-aircraft avionic systems

Also a six year $80 million contract from a classified customer, a 30 month $42 million from Sierra Nevada Corporation to supply radar electronics for satellite that will provide military commanders in the field with timely, high-resolution radar imagery of the earth’s surface.

We also were awarded a four-year $19 million contract from the State of Florida, Agency for Healthcare Administration to implement a statewide health information exchange or HIE. They will improve the delivery and coordination of healthcare across the state.

And finally, $11 million contract from the Dallas-Fort Worth International Airport Authority to provide network security upgrades and expansion for the third busiest airport in the world.

Harris CapRock Communications contributed $96 million of revenue in the second quarter and was essentially flat with their prior year quarter. Revenue was higher in their Maritime, International Energy and U.S. government markets that was offset by lower indirect government revenue in the Middle East and the weaker U.S. energy market.

The oil spill in the Gulf of Mexico and its impact on new drilling is now expected to result in more modest year-over-year growth in revenue and earnings at CapRock than originally forecasted. We believe however these headwinds will be short-lived.

Significant new wins at CapRock in the quarter included an $80 million option year extension on the Defense Information Systems Network Access Transport Services contracts known as DATS with the Defense Information Systems Agency.

Also three contracts totaling $7 million from Intelligence Agency customers to provide satellite bandwidth logistics and related communication services, and a five year $6 million contract with Shahin, Brazil to provide data voice and internet service to three drilling ships operating in the Campos basin.

Harris CapRock Communications was also named as one of the first government contractors added to the new sections of the General Service Administration’s, Federal Supply Schedule 70 IDIQ contract vehicle. This move provides government customers with additional access to our subscription services and least bandwidth.

Before leaving the Government Communication Systems segment, let me take a few minutes to talk about two of our key organic growth initiatives going forward.Healthcare Solutions and Cyber Integrated Solutions.

Our Healthcare Solutions business continues to grow and is expected to now reach over $100 million in revenue this year at about 10% operating margins. We continue to win new government contracts, such as the previously mentioned $19 million project for the State of Florida. We've also been working on some key partnerships to assist us in pursuing additional commercial healthcare opportunities. We’ll talk to you more about those partnerships and our strategy at our Investor Day in March.

We’ll also talk a lot about our new Cyber Integrated Solutions business at the upcoming Investor Day. We will complete the initial build out of our Cyber Integrations Center located in Harrisonburg, Virginia around the end of this quarter and we will begin to offer our trusted Enterprise Cloud Hosting Services. We’ve accelerated our investments in this business in fiscal 2011 to take advantage of our proprietary security technology and systems architecture as well as to take advantage of the accelerated depreciation tax credits.

Fiscal 2011 capital expenditures for the Cyber Integration Center are now expected to be about $120 million and we are absorbing about $20 million in operating losses for this business within the segment P&L.

We are currently finalizing a multi-million dollar service contract with a blue chip launch customer which will extend over multiple years. We’ll talk more about that at the Investor Day. We remain very confident that our cyber business will be a significant contributor to revenue and earnings growth in the future as we offer a differentiated trusted cloud computing environment to host customer data and their applications.

In the Broadcast Communications segment, revenue in the second quarter grew 11% to $130 million compared with the prior-year quarter of $117 million. The segment operating loss was $1 million compared with $5 million in the prior year and including $1 million of charges in both quarters for cost-reduction actions. Orders in the quarter $134 million, compared with the prior year of $139 million and $135 million in the first quarter. We saw a number of encouraging signs in our business. We accomplished year-over-year revenue growth , a book-to-bill of greater than one for the second quarter in a row and operating results nearing breakeven.

Major order in the quarter broadcast included a $4 million order from Mustafa Sultan Security company following a competitive procurement for the built-out of a video distribution network in the country of Oman. This represents the first order for a new Selenio [ph] baseband and IP networking product line.

We also received a $4 million order from CTV Television in Canada for television transmitters. This is the first major purchase of Harris transmitters by CTV and represents a significant commitment and validation of our new UHF and VHF product platforms. And finally a $3 million order from Vitatech SA in Argentina for transmitters, encoders, multiplexers and our navigator software to support their role of DTV services throughout the country.

With that let me now ask Harris CFO Garry McArthur to comment on our financial results in the quarter.

Garry McArthur

Thank you Howard. We continue to operate from a very solid financial base. As of quarter end we had $741 million of cash and cash equivalents on hand, $720 million available under our $750 million revolving credit facility and all of our $300 million 364 day revolving credit facility available.

In the second quarter we generated $94 million of operating cash flow bringing our cash flow from operations for the first sis months of this fiscal year to $389 million; well ahead of the cash flow operation for the first six months of last year of $321 million. All three operating segments generated positive cash flow in the quarter.

Based on our strong first half results, we are increasing our guidance for cash flow from operation from a range of $775 million to $825 million to an new range of $800 million to $850 million.

During the quarter we issued $400 million of 10 year term debt at the coupon of 4.4%, $300 million of 30 year term debt at a coupon of 6.15% and paid-off substantially all of the commercial paper issued in conjunction with the acquisition of CapRock Communications.

Our current plan is to use available cash on hand for the acquisition of Schlumberger GCS which is expected to close in the third quarter. By the way none of our guidance as provided in the earnings release or this call includes the expected financial results of Schlumberger GCS. Depreciation and amortization for the second quarter was $49 million as compared to the $39 million in the second quarter of the prior year. Our expectations for depreciation and amortization for fiscal 2011 are unchanged to $205 million to $215 million.

Capital expenditures were $67 million for the second quarter as compared to $22 million in the second quarter of fiscal 2010. We have increased our fiscal year 2011 CapEx guidance from our previous range of $250 million to $275 million to a new range of $320 million to $340 million. The increase is primarily related to accelerating the build out of our cyber integration center and other growth initiatives.

During the second quarter, Congress extended the R&D tax credit with its catch-up effect impacting the quarter favorably by $0.05 per diluted share. Though not in the second quarter guidance we provided as we chose not to guess when Congress would enact this legislation, it was included in our annual guidance and has no impact on our expected full year effective tax rate that remains at 33.5%.

Finally, we bought back $50 million of outstanding common stock at an average price $4.13 and we have 350 million remaining in authorization under our share repurchase program. Back to you Howard.

Howard Lance

Thank you, Gary. As we turn to outlook we are maintaining our previous financial guidance for fiscal 2011 with some ups and downs in the individual segments as compared to our previous outlook. Consolidated revenue is still expected to be at the high end of the range of $5.9 billion to $6 billion, about 15% above fiscal 2010.

Non-GAAP income excluding acquisition related cost is still expected to be in a range from $4.80 to $4.90 per diluted share, a year-over-year increase of 8% to 11%.

Non-GAAP earnings before interest, taxes, depreciation and amortization; again excluding acquisition related costs, is now expected to be in a range of $1.22 billion to $1.24 billion, representing an EBITDA increase of 11% to 13% above fiscal 2010 and $10 million above our previous guidance range of $1.21 billion to $1.23 billion.

For RF Communication segment, fiscal 2011 revenue is now expected to be 9% to 10% higher than fiscal 2010, and this is slightly lower as a result of slower growth in Public Safety and Professional Communications, partially offset by stronger than expected Tactical Communications revenue.

However, segment operating margin for the year is now expected to be higher, at about 32% in the back half of the year and between 34% and 35% for the full-year as a result of product mix and operating efficiency.

For the Government Communications Systems segment, we now expect revenue for fiscal 2011 to be 20% to 21% higher in fiscal 2010.

The core government systems and services revenue is still expected to be very strong at 6% to 8%, even in the face of the U.S. budget continuing resolution.

We have reduced expected revenue contribution from the CapRock Communications acquisition, to a range of $360 million to $370 million.

Overall segment operating margin is expected to be approximately 10.5% for the fiscal year, as a result of slightly lower CapRock revenue and the accelerated investment in our Cyber Integrated Solutions business.

And for the Broadcast Communication segment, we now expect revenue in a range of $520 million to $540 million, that’s 7% to 11% higher than fiscal 2010 results with breakeven operating results.

I remain optimistic about our ability to achieve revenue and earnings growth in fiscal 2012 and we will discuss our strategy in more detail at our March Investor Day, which I hope you can all join.

But for now, let me take a minute and give you some takeaways. We believe our core government systems and services business should continue to outperform its peers. As a result in past program wins and strong program execution.

Our core RF Tactical Communication business is seeing strong international demand and the increasing adoption of our commercial business model with the U.S. Department of Defense versus the JTRS programs in record.

We’re seeing improving economy that will provide healthier state and local budgets and along with our recently announced major program wins contract revenue and profit growth in our Public Safety & Professional Communications business.

Drilling in the Gulf of Mexico is expected to resume and international energy markets are very robust. Our international position will be further enhanced by the pending acquisition of Schlumberger’s Global Connectivity Services business where we’ll create a global leader in managed satellite services for the energy, maritime and government markets.

Our broadcast communications business performance has improved and offers the opportunity to contribute to future earnings growth and lastly our continued investments in attractive adjacent growth markets including healthcare and cyber integrated solutions should provide a robust funnel of new opportunities for revenue and profit growth going forward.

At this time I’ll ask the operator to open the line and we’ll be pleased to take your questions

Question-and-Answer Session

Operator

Ladies and Gentlemen [operator instructions]. Your first question comes from the line of Pete Skibitski from Suntrust

Peter Skibitski - Suntrust Robinson Humphrey

Hi I had a question - few questions on I wonder if you could parse RF orders bit of into the military side, the orders and revenue for us between domestic and international.

Garry McArthur

Certainly for the year we continue to believe that orders will be greater than 50% from international and less than 50% from DoD.

Peter Skibitski

Okay, and then can you give us some color on what would drive kind of the incremental overflow from some of your big international customers like I think Pakistan, Australia, Iraq. I think you have already got some pretty sizable orders from them. Can you give some color on what going to drive upside there?

Garry McArthur

Well I believe in general in those big international markets Pete, what we are talking about are long-term modernization programs where we have been selected as the supplier of choice and then we see the phased in release of orders as certain milestones are achieved.

So in those five or six countries that we mentioned, there is about $1.5 billion of total program value that we believe we will receive, about half of that is included in the $2 billion pipeline of opportunities that we talk about when we say international. The other half of that would be sitting out beyond 15 months.

So it would be tailend of fiscal 2012 or more likely fiscal 2013. All of this is intended to give you a level of comfort that on these large international multiyear modernization programs, we’re awarded the program sometimes an umbrella contract such as the undisclosed country contract we just talked about and then we get the actual orders over a period of quarters or years, but overall a very robust, certainly not all of the businesses within those five or six countries but it’s a big chunk and we wanted to highlight that the opportunities in those countries even extended out beyond the 15 month horizon that we usually speak to.

Peter Skibitski, Suntrust Robinson Humphrey

That’s great. And just, so I understand that the $2 billion international pipeline, you’re basically saying that you can convert that into revenue over the next 15 months or orders over the next 15 months?

Howard Lance

We’re saying that’s the opportunity for new orders, we don’t expect to win a 100% of that. We certainly expect to win a 100% of these blanket contracts that we’ve been awarded. But those would be orders and then they would turn into revenue typically in kind of the six to twelve month timeframe for international is usually what we talk about, the turnaround in U.S. orders tends to be a little faster.

Peter Skibitski, Suntrust Robinson Humphrey

Got you, got you. And I don’t know if its too early to ask, but given you expectations for RF backlog, I think its 900 million to a billion, what’s your sense for RF revenue in fiscal 2012? Do you think it can be up in fiscal 2012 given your sense for year end backlog?

Howard Lance

Well, let's talk about the RF segment. First of all, remember we've got three businesses. Two of them make up what we call the Core Tactical Communications business, the DoD part and the International part, and then the third piece being our Public Safety and Professional Communications business. So, let me just talk very briefly to each one of those, recognizing that we’re very early and we are not giving any specific guidance.

In the DoD part, we certainly expect that sequentially, revenue in '12 will be lower than '11 and that’s based on the wind down of the MRAP program. We are very pleased with the growth that we had outside of MRAP. But we don’t see another big MRAP program coming there. We expect that’s going to be lower but still very, very significant.

Offsetting that decline, though, will be continued growth we believe based on the orders and the opportunity pipeline in international. So, we expect international to drive higher revenue than '11 and offset decline in the DoD piece. And then we certainly expect a significant growth in the public safety business and profit increase as a result of the higher revenue.

So, net net, when I add all of that together, we would say, our current perspective, given that we are long away from fiscal year 2012, is that we can see a path to higher revenue in the segment and sustainable earnings in the segment, assuming everything that we assume plays out as advertised. So, we think that’s a very good prognosis for the RF segment. We certainly don’t see any kind of a major drop-off in that segment in profitability in fiscal year ‘12 based on the current assumptions we’re using.

Peter Skibitski, Suntrust Robinson Humphrey

I appreciated the call. Thanks Howard.

Operator

Your next question comes from the line of Joe Nadol from JP Morgan. Please proceed.

Joe Nadol - JP Morgan

Thanks. Good afternoon.

Howard Lance

Hi.

Joe Nadol - JP Morgan

Hi, just following up on the first question there. Howard, the $900 million to $1 billion that you expect by the end of this year in backlog, has that changed?

Howard Lance

That would represent Joe, about a 0.8 to 0.9 book-to-bill. So we’ve come off of the 1.0 book-to-bill for the Tactical radio part of the business. We’re actually seeing stronger orders than we previously expected in the Public Safety & Professional Communications business.

So I think overall backlog in the segment will be about as we had expected previously and it was $1.52 billion I think I reported at the end of Q2. We expected to grow in second half of the year as a result of these new orders that we have been notified of, our new contracts but all of them have not turned to orders.

Overall, we’re feeling a good about the Tactical Comms piece, we’re feeling very good about the Public Safety piece.

Joe Nadol - JP Morgan

Yeah on the Tactical comms, was it a DoD or international that that slipped out or a combination of two?

Howard Lance

I don’t think it’s anyone order, I think it’s the timing of when we expect to get orders. Again, I emphasize another way that we’ve lost any major business, so I would attach it to the timing of when follow-on orders are going to be provided in international and when additional funding of orders will be available in DoD.

Joe Nadol - JP Morgan

Okay and then just finally on the $300 million plus international order, sounds like you have $100 million in your backlog.

Howard Lance

Yes.

Joe Nadol - JP Morgan

The other $200 plus million, is that firm, is it options, is it I guess its not IDI, I think its international but how do we think about gauging the likelihood of that you seem to think it’s a100% that’s going to come through? Is that fair?

Howard Lance

I don’t think it’s a 100% because it is milestone based and we have to do some things to continue to earn it. We don’t think its necessarily in this fiscal year. So it is in that opportunity pipeline $200 million of the $2 billion would be that one program. We’re feeling very confident on it, but the timing will probably be next fiscal year. But never a 100% Joe, I don’t think you ever say that because we don’t have the order.

Joe Nadol - JP Morgan

It doesn’t depend on their exercising an option, it just depends on you performing something. Am I understanding that correctly?

Howard Lance

That’s my understanding. Yes.

Joe Nadol - JP Morgan

Okay. Finally, are there any more of those out there in your backlog or is that just the only one that is kind of unique?

Howard Lance

Well again when we add up the kind of total program opportunities in five or six countries that I mentioned, they add up to about $1.5 billion. That we have not received as orders.

So that’s the remaining portion, our programs that are being funded, combination of locally or some of it through FMS and about half of that are opportunities we believe we will realize within our opportunity pipeline, which we use about a 15 month rolling kind of five quarters when we talk about that pipeline and the rest of it would be then outside of that business that will come into the pipeline as we move into say fiscal year ’13.

Joe Nadol - JP Morgan

Okay. All right, thank you.

Howard Lance

I think the bottom-line is our momentum in international is really significant both in terms of the timing of these orders and the scale of the opportunities, and so that’s certainly making us feel good about our momentum there. And as I said earlier, that gives us a lot of comfort in terms of what we can deliver in the overall segments.

Joe Nadol - JP Morgan

Thanks.

Operator

(Operator Instruction) Your next question comes from the line of Rich Valera from Needham & Company. Please proceed.

Rich Valera - Needham & Company

Thank you. Howard, you referenced operating as a continuing resolution was a challenge. Was there any specific programs that you can point to or you think maybe funding is being held back because of that situation and sort of conversely if in fact we had a budget passed, do you think that would be sort of boom in any specific areas?

Howard Lance

Thanks for the question Rich. Our guidance assumes that kind of the spring we get through the continuing resolution. We don’t have any huge program that I am aware of that is kind of sitting there waiting for this bill. The good news is we don’t have a lot of major programs that are falling off, so we haven’t have to count on a lot of programs that aren’t already up and running and to fill any holes.

We have seen in a couple of our classified areas that we finished mission and some program and we not seen the new funding for the next mission or next program. So I think there Sheldon would say there is a few classified programs that we are hoping will get released with the continued resolution being succeeded by a budget approval. But outside of that, I am not aware of any big ones.

Rich Valera - Needham & Company

Okay. And if I could just follow up with one more on the JTRS [ph] programs of record. Would you be willing to give us an update of where you think, they are, particularly GMR and any exploration of alternatives to GMR given some of their operational issues.

Howard Lance

I don’t think I know anything that’s not out in the public domain, Rich, GMR, as I understand, it is going to be funded on a very limited basis going forward, fielded, I think, to one brigade combat team only on a very limited basis. I think the pricing for that very, very complex and expensive radio system has caused DoD to want to go in a different direction and to field more affordable radios that can be distributed down ashalone [ph].

Clearly Harris is participating in that decision and I see us as benefiting as a result of what our Falcon III is doing in the field. With regard to any other specifics to the HMS program, I don’t really know anything new. Again, none of those radios for the programs of record are in any kind of limited production. There’s still in the engineering and test phase to the best of my knowledge.

We are still the only ones that are fielding radios that are doing what the troops needed to do today which is take advantage of the wide band networking. As you know, we are incorporating the SRW waveform into the Falcon Radios. We are augmenting that with our existing ANW II Harris waveform for wideband networking.

We continue to offer that waveform to the DoD, should they want to establish it in the library [ph] as a standard. And just, bottom line, we continue to gain momentum and credibility as each quarter goes by and we are seeing that in the orders. I think the other thing on Falcon III to note is the up tick in the international.

We’re now up to something like I think it’s 20 or more international countries have taken their initial deliveries of Falcon III and as you’ve heard this talk before to me, this is the beginning of a wave that will not only continue in the U.S. but then will be picked up and adopted in these international countries and Falcon III is not involved in all of those international contracts and programs that I'm talking about. It is in Australia for example that was one of the reasons I think we won that one but again many of the other countries will still be deploying Falcon II radios and we’ll have the opportunity down range for Falcon III upgrades.

We also continue to have a lot of success with our secure personal radios, this is the smaller-form-factor radio we’re marketing internationally and I think now we’re up to over 35 international countries that have taken additional initial deliveries on the SPR. So lots of momentum in both Falcon III adoption in domestically as well as internationally with Falcon III and the SPR.

Rich Valera - Needham & Company

Thank you very much.

Operator

Your next question comes from the line of Gautam Khanna from Cowen And Company. Please proceed.

Gautam Khanna – Cowen And Company

Yes. I was just wondering if you could may be give us a sense for how the old Maycom [ph] business is tracking with respect to operating margins?

Howard Lance

It’s tracking lower than we had expected at the beginning of the year as a result of the lower volume. It’s also been affected by the mix of revenue with state and local budgets being tight, the kinds of things that they aren’t doing is buying as many replacement and backup tactical handsets. The margin on the terminal so the handsets is a lot higher than systems, so the revenue is a little lower, but the mix is skewed a little less favorably as well and then two of those are having an impact on operating margins. We think that both revenue and those margins will perk up next year as a result of stronger demand.

Gautam Khanna – Cowen And Company

Okay and then if you could elaborate a little bit on the CapRock guidance revision. What’s going on there, what is the contributed year to date or what exactly [Indiscernible] [00:43]

Howard Lance

Well on the revenue, our most recent guidance here I just articulated is now $360 million to $370 million in revenue. If memory serves me right that’s about $20 million less than previous guidance. So that’s basically the impact that we would attribute to the slowdown in new business take-up from drilling moratorium and slowdown in the Gulf.

International business is very strong, we’re going to benefit from that with the new Schlumberger acquisition which is 90+ percent international in its revenue makeup and where they go to market. So that’s going to be a positive. We see this though as again it’s we haven’t lost any market share. I think this is an intermediate kind of slowdown. Some of those rigs are no longer in the Gulf. They are now off the west coast of Africa they are in Brazil, they’ve gone to Asia-Pacific and so we really are going to benefit from having this global footprint have very excited about that prospects which will we believe mitigate in the long run any impact of less drilling in the Gulf of Mexico. Does it make sense?

Gautam Khanna – Cowen And Company

It does, Howard. I guess one last one, and this is tougher one to answer but when you look out not just the fiscal ’12 which is best far away, but the fiscal ’13, I mean, can you give us a sense of where you think the trajectory will be on the U.S. military radios and the international and if we’ll able to maybe stay flat or do you think both of those things will kind of aggregate to a decline in fiscal ’13? Thanks.

Howard Lance

Well, Gautam I mean, my telescope isn’t that good. I will tell that we’ll talk about this certainly in March as we cover strategy at the investor meeting. But certainly the way we want you to think about the business, solid foundation in our core government systems business, may not grow as quickly as it has because of overall pressure on defense spending. And our RF segment, international Tactical radios and the systems they are part of as well as Public Safety I think have excellent growth prospects.

DoD as I already have said we expect to be lower in ‘12 than ‘11, but that’s a lower as in zero; its lower, still a very healthy level and one that I don’t see any reason why we shouldn’t be able to sustain for the go forward. And then, you got all the growth opportunities on top of that from the energy business with CapRock and Schlumberger, government managed services with satellite, our cyber business, our healthcare business and some recovery in broadcast.

So, we certainly think we’re going to layout a profile that’s going to suggest to investors that ‘12and ‘13 and beyond offer good growth prospects for the company and that we’re not going to go in hole in ‘12 or ‘13 because of a slowdown in government and defense spending. Now, obviously lots of assumptions go into that but that’s our view today and we’ll talk a lot more around that and our strategies that are going to make that happen at then Investor Day.

Operator

And next question comes from the line of Chris Quilty from Raymond James. Please proceed.

Chris Quilty - Raymond James

Thanks. Howard, you didn’t talk about the appliqué products that you introduced for the Tactical Radio product line. I think that was introduced about a year ago. Have you got any customer update with that and, do you first need to get the appropriate NSA certification before you can begin sales?

Howard Lance

The answer of the second part of the question is, if you ask we would require the NSA approval and certification. This whole mission module concept is still in its infancy and we have not made any specific dates on the productization of it. We are working toward engineering prototypes right now on the various concepts as you heard us talk about second channels and HF appliqué and intelligence, surveillance, reconnaissance appliqué and appliqué that might include other specialized waveforms.

We think the prototype process is a quick and cost-effective way to understand and test the markets with the customers. And so, that’s where we are right now and we haven’t made any decision. We are probably six months away from making any firm investment decision. But it's really allowed us to engage in an excellent discussion with the customer. And I think, it's also illustrated our agility and our flexibility with our commercial business model in responding to the mission needs.

Chris Quilty - Raymond James

And is it fair to assume, you are then looking at a year-and-half, two years for NSA certification?

Howard Lance

I don’t know that it would take that long. We would do things in parallel and we have a pretty good track record. But I think, it is fair to say at this point we’re not baking into a lot of our expectations for fiscal ‘11 or ‘12 much from this Mission Module appliqué product distention.

Chris Quilty - Raymond James

Okay and since we did long conference calls in the past on your reflector business. I was surprised you didn’t take a moment to mention the successful deployment on the SkyTerra 1 and with that have you finally removed all the write-down risks associated with those contracts?

Howard Lance

Well, thank you for mentioning. We were very pleased with the deployment of this really revolutionary 22-meter hoop design on the SkyTerra satellite and yes our view is that we don’t have any material risk going forward in any of the programs that are under contract and we start to see some pickup coming and additional opportunities in that business, now that we have this proven-designs and opportunities to take on some new contracts at materially better margins without taking on additional risk.

So overall, we’ve kind of come through the valley in that business and my hats off to my team for accomplishing some really difficult tactical challenges and putting us back on I think a positive track.

Chris Quilty - Raymond James

Great, thanks.

Operator

Your next question comes from the line of Jim McIlree from Merriman. Please proceed.

Jim McIlree - Merriman

Thank you, good evening.

Howard Lance

Hello.

Jim McIlree - Merriman

Howard, you spoke about bigger investment in the Cyber business this fiscal year and I think you attached the loss number to the business as well.

Howard Lance

Yes.

Jim McIlree - Merriman

Can you repeat what the loss number is and indicate if that is greater or less than what you had thought it was going to be let’s say last quarter or two quarters ago and then when you would expect that business to be breakeven and then profitable.

Howard Lance

Yes so where I’d like you to think about the investments we made in the business is an acceleration. So it’s not a new investments but it’s doing it this fiscal year rather than next fiscal year.

We believe we have a significantly differentiated solution as relates the security, how we handle that and how we manage the architecture, the system to really make this a trusted cloud computing environment. And as a result we made the decision to invest sooner, both in capital as well as in operating expense and people to get organized, to ramp up that business and that has created a larger CapEx in fiscal 2011. Garry included in his guidance now the total, the largest amount of that delta was the acceleration of about $50 million from next year into this year for the cyber center.

The second element is acceleration to people and yes in what I said about $20 million of operating loss in this fiscal year, in our current guidance buried within the overall segment and that number is larger than we would have expected a couple of quarters ago because we’re pulling in the people and we’ll start taking some depreciation and amortization on the CapEx. So we think this is a great business opportunity and we believe it was prudent to make those investments now rather than to wait six months and that’s kind of the story.

Jim McIlree - Merriman

And does the -- , so are you still ramping? Let me put it this way, does the acceleration kind of end at the end of this year, and then you go back to the normal path or how long does this accelerate spending in both capital as well as people continue?

Howard Lance

Well, the objective was to pull ahead the investment in people and capital so that we pulled forward the revenue. So we expect as a result of doing this to have more revenue and profitability in fiscal 2012 than we would have had had we not done it. And again, we’ll be talking about some specifics, certainly some color around this in the March analyst meeting.

Jim McIlree - Merriman

That’s great. Thank you very much.

Howard Lance

I mean, bottom-line we certainly don’t expect the cyber integrated solution business to have a $20 million operating loss in fiscal 2012. We certainly expect that it will do much better than fiscal 2011 and that it will be the source of some our EPS improvement year-over-year.

Jim McIlree - Merriman

Right, got it. Thank you.

Howard Lance

Thank you

Operator

Your next question comes from the line of Jason Kupferberg from UBS. Please proceed.

Jason Kupferberg - UBS

Thanks guys. Just a couple of questions. So, just a follow up on the CapEx point, just to be clear, in fiscal 2012, should we expect overall CapEx to go back to kind of more normal levels if you will if we think about that in terms of a percent of revenue?

Gary McArthur

I can answer that. This is Gary. Yes, we’ll expect it to go back but obviously we do have CapRock, we do have Schlumberger. I think a good run rate probably on the CapEx line go forward in 2012 is more in the 220 to 250 range. Well, down from this year but higher than past years because of the acquisitions.

Jason Kupferberg - UBS

Okay. And then roughly how much revenue do you expect to get from the GCS acquisition in fiscal 2011, I mean, based on your best estimate of exactly when in Q3 it will close?

Gary McArthur

I think we’ll disclose that when we get the deal done. We talked I am sure when we announced the acquisition, we talked about the trailing revenue but I think –let's get the deal done and then when we announce that, we will certainly update our guidance at that time, Jason.

Jason Kupferberg - UBS

Okay. And then, just any gut feel about the upcoming initial fiscal '12 budget requesters in a few weeks, both in terms of your business as well as that of some of the competitors. Any comment around the program of record on JTRS side earlier. But what's your overall feeling going into the budget requesters. There has been so much rhetoric out there.

Howard Lance

Well, there is a lot of rhetoric and I am not sure that, I have any particular insight into that, other than, I think, that where we are positioned, communications, information technology, ISR, mission critical spending, no big programs dropping off. I feel like we are going to probably fare better, not necessarily because of the budget but because of where we have focused our business and the distribution of our various programs across so many different agencies.

I think the whole industry certainly will see fewer new programs started. We talked about that before. I don’t think that’s a surprise and what exactly our growth rate will be in fiscal '12 over '11 remains to be communicated. But I feel pretty comfortable in saying our positioning should allow us to outperform the peer group. Whether on an absolute basis, we like that or not, that remains to be seen.

Jason Kupferberg - UBS

Okay.

Howard Lance

But I don’t think -- I guess, we have to continue to work harder on communicating because to take the mix of business that Harris has and where we are investing and what our portfolio looks like going forward and lump us together with prime DoD contractors, to me, it just doesn’t make a lot of sense. We will be talking a lot about that in the March Analyst Meeting.

This company going forward is much better positioned because of where we are in government and DoD, where we are in our international programs and where we are with a number of these initiatives that are driving commercial markets in energy, healthcare and allowing us to take to this commercial markets what we already do very well and very credibly in the government space.

So hopefully overtime, we’ll be able to distance ourselves from the pack and not because they are good companies but because they are serving the same markets going forward as we are.

Jason Kupferberg - UBS

Okay, well, it sounds good. I’ll look forward to attend you guys in March.

Operator

Your next question comes from the line of Mark Jordan from Noble Financial. Please proceed.

Mark Jordan - Noble Financial

Good afternoon. A quick questions and it’s a little bit about an [update] on two CapRock and Schlumberger acquisitions. Previously there was more of the service models since you had the product for sale. Did you have a preference on how you deploy actually one-price tag and secondly is there other opportunities to the acquisitions similar to those so that would increase preferably impact of satellite communication effort?

Howard Lance

Mark, you’re kind of garbled so I’ll try and see if I got the question is right. Your first question was around products versus services. Clearly, our business model in the CapRock and Schlumberger GCS is to offer managed service and that is a certain commitment to a service level agreement, certain commitment to bandwidth connectivity, a certain lists of services for a fixed price on a monthly and annual basis in contracts. There are some product sales that are a part of that but our preference is to really deploy the whole thing and give the customer one-price tag on a monthly or annual basis for the services they want and let us worry about all of the equipment and details required to provide that.

That also gives us the ability then with that fixed price. We’ve locked in the cost of the space segment. We have an opportunity to our efficiencies and scale economies to improve margins. So that’s our preferred model. Do we sometimes sell products? Yes. But the predominant is the services and that’s true both in the government and the energy and the maritime pieces that make up their business.

With regard to your second question, certainly it’s a very fragmented market, we made two major acquisitions, there maybe opportunities down the road to do others, but you shouldn’t look for us to be doing anything major in this segment of the kind of scale we’ve just done for a while. We want to integrate what we have, this really is a merger if you think about it. Harris had a maritime communications business, we’ve now acquired back in July the CapRock communications business and now we are acquiring Schlumberger’s GCS business.

So, Peter Shaper who leaves this group is really focused on putting all of these together with the right organization, the right global footprint and the most efficient operating processes. So we won’t let that get done before we would bring any more into the mix, so I suspect that’s a couple of years down the road, Mark.

Operator

Go ahead I’m sorry

Mark Jordan - Noble Financial

Okay I just want to quickly of tactical radio sales Of what piece of large international piece was awarded in January. And my question relates what percent of international radio sales are funded by the U.S government versus customer funded?

Howard Lance

I don’t know that I know the percentage that is funded by U.S. government but it appears to be a decreasing percentage. This large contract for example, we can’t disclose the customer that is not U.S. government funded. Australia is not U.S. government funded. I don’t that believe that Mexico is U.S. government funded. So, U.S. government is certainly still involved in places like Afghanistan, Pakistan. But you know, going forward in Iraq that will be locally funded, sometimes they run the contracts through the foreign military funding process because they don’t have all the processes in their own country. But that doesn’t mean it really being funded by U.S. government dollars. So, in general more of it is being funded by local national funds.

Mark Jordan - Noble Financial

Okay.

Pamela Padgett

Okay, operator, I’ll take one more question if it’s quick, running little bit longer than we usually do.

Operator

Your next question comes from the line of Josephine Millward from Benchmark Company. Please proceed.

Josephine Millward - Benchmark Company

Thank you. Howard, your guidance assumes we’ll have a defense budget in the spring. Now, can you talk about how your outlook might be affected if the government runs on a CR for the remaining of the fiscal year, which I think is a possible scenario?

Howard Lance

Yeah. I don’t think when it comes to earnings it would be material, Josephine. It could have some negative effect at the revenue line in our government systems and services businesses. But I don’t see it as being material in a big picture in earnings.

Josephine Millward - Benchmark Company

That’s very helpful. Thank you.

Howard Lance

Thank you.

Pamela Padgett

Okay. Thank you everyone for joining us. And make sure you get our March 9th and 10th Analyst Meeting on your calendars and come down for some warmer weathers and I am sure you are experiencing. I thank everyone.

Howard Lance

Thank you.

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