Harris' CEO Discusses Q1 2012 Results - Earnings Call Transcript

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 |  About: Harris Corporation (HRS)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Harris Corp. Earnings Conference Call. [Operator Instructions] At this time, I'd like to introduce Ms. Pamela Padgett, Vice President of Investor Relations. Please proceed.

Pamela Padgett

Good afternoon, everyone, and welcome to our call. We're very sorry about the delay. It seems like our conference call company had a little bit of a technical difficulty. So on the call with me today is Howard Lance, Chairman President and CEO; and Gary McArthur, Senior Vice President and Chief Financial Officer.

Before we get started, a few words about forward-looking statements. In the course of this teleconference, 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 the discussion of such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC. In addition, in our press release and on this teleconference and the related presentation, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in tables in our press release and on the Investor Relations section of our website, which is www.harris.com. A replay of this call will also be available on the Investor Relations section of our website.

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

Howard L. Lance

Thank you, Pam. I want to welcome all of you to our First Quarter Fiscal 2012 Earnings Call. Before I turn to the quarter's results, earlier this month, the Harris Board of Directors announced the appointment of William M. Brown as President and CEO to become effective on November 1. Bill joins Harris from United Technologies Corporation, where he most recently served as Senior Vice President of Corporate Strategy and Development. Previously, he served for 5 years as President of UTC's Fire & Security business, which has revenues of $6.5 billion and 45,000 employees. Bill has a proven track record of

driving growth, building and motivating teams and delivering financial results. I'm confident that his P&L management experience, his operating and commercial skills and strategic acumen will allow him to be very successful as he comes forward to lead Harris.

Moving now to first quarter results in Slides 3 and 4 in our presentation. We began fiscal 2012 with a number of important new wins and strong orders so we're off to a good start. Orders increased 23% compared to the prior year. They exceeded revenue, and that drove a book-to-bill for the total company of greater than 1 during the first quarter. Consolidated revenue was $1.46 billion. That increased 4% over the prior year. If we exclude the impact of acquisitions, then revenue declined about 2%. Expedited tactical radio shipments in the prior year of $235 million created a difficult year-over-year comparison to both revenue and income. And you'll remember these were for the expedited MRAP vehicle program. This was expected, the year-over-year change, and included in our prior guidance.

Non-GAAP earnings per share was $1.06 in the first quarter. Also during the first quarter, we repurchased $400 million in outstanding shares, reducing the share count by 8.6% and achieving our targeted share reduction that we had previously discussed of 8% to 9% for the fiscal year.

Moving now to the segment results, first on Slide 5. First quarter revenue for RF Communications was $497 million, comprised $373 million from Tactical Communications and $124 million from Public Safety and Professional Communications. Again the year-over-year revenue decline in RF Communications was as a result of the $235 million of expedited tactical radio shipments in the prior year quarter.

The worst of these year-over-year quarterly comparisons is now behind us, and our baseline for future growth is essentially reset. All that remains of the $1 billion in expedited MRAP shipments that occurred over 5 quarters is the last $80 million that shipped in the second quarter of fiscal 2011.

We believe the underlying performance in the quarter was strong, with segment revenue of $497 million. Excluding deliveries with the MRAP program shipments, U.S. DoD revenue and Tactical Communications increased significantly year-over-year, driven by continuing Falcon III adoption, supporting the DoD vision to deploy wideband networking to replace outdated voice-centric and line-of-sight tactical communications. International revenue growth was also strong in the quarter, increasing significantly over the prior year, driven by major deliveries to Australia, Kenya and other countries in North Africa and Central Asia. Revenue from Public Safety and Professional Communications was $124 million in the first quarter, and that was a 3% increase over the prior year. Significant new wins, including the province of Alberta in Canada, Oregon's, Department of Transportation, Floyd County, Georgia and Linn County, Iowa, which were all announced in the back half of fiscal 2011, are contributing to the seals ramp up and allowing us to maintain a healthy backlog in this business. For the segment, operating income in the first quarter was lower as expected, at $154 million compared with $229 million in the prior year.

Operating margin was 31% in the quarter and is expected to improve over fiscal year '12 as a result of more favorable product mix, continuing cost containment activities and lower manufacturing costs. Lean manufacturing improvements implemented as part of our facilities consolidation in Rochester, New York are expected to drive productivity improvements for the year in excess of 5%, and production cycle time reductions are expected at 10% to 20% across each of our product lines.

News on the orders front was very positive. Segment orders were $514 million in the quarter, with Tactical Communications orders of $398 million and Public Safety and Professional Communications orders of $116 billion (sic) [million]. That means that book-to-bill for the segment and for Tactical Communications were both greater than 1. And we're exiting first quarter with $800 million tactical radio backlog, and we believe that's very encouraging. New orders were especially strong in the U.S. market. Perhaps our most meaningful win in the quarter was a $66 million order from the U.S. Army as part of their Brigade Combat Modernization program, allowing them to outfit the first 8 brigade combat teams with their initial wideband networking capability. This is also known throughout the Army as Capability Set 13. This is not the full extent to which wideband will ultimately be implemented for each of the brigade combat teams, but it marks the beginning of the Army's modernization efforts. We consider the Falcon III 117G order a milestone event in our effort to become the preferred wideband tactical communications provider to the U.S. Army. A leadership position we've already achieved with the U.S. Marine Corps, Air Force and Special Operations Command, all of whom are already standardizing in the Falcon III family oftactical radios.

Our success at this summer's Army NIE event, and NIE is short in Network Integration Evaluation, led in a large part to the award that we received. The NIE evaluations are a critical element on how the Army's network acquisition strategy is evolving. These are expected to be semi-annual evaluations. They're designed to assess and qualify the Army's tactical networking capabilities and to promote enhanced competition among programs of record and viable commercial solutions.

Our radios clearly demonstrated the advanced capabilities of wideband networking in a challenging and real world formal evaluation environment, receiving high marks in both their reliability and their ease-of-use. At the same time, the NIE pointed out significant deficiencies and challenges yet to be overcome by our competitors as they struggle to deliver the basic program-of-record radios. The successful porting of the JTRS soldier radio waveform into the Falcon III, feedback from actual users, side-by-side comparisons and the fact that our Falcon III radios provide capabilities beyond what the program-of-record had promised, are all creating strong advocacy for our products. Also leading to this significant win with the Army has been our excellent performance in real battlefield situations in Afghanistan, where we've already outfitted 9 brigade combat teams with Falcon III radios in support of the Army's previous capability sets. Our success in the field, along with our performance at the NIE, are helping create a new model for Army radio acquisition. The latest $66 million order validates our leading position and our ability to win. TheDoD is clearly moving away from programs of record models and embracing Falcon III and the Enterprise Business Model as the new way forward in acquisition.

Now a recurring question has been whether or not the DoD will continue to have an appetite to invest in tactical communications modernization during the tough government budget environment going forward. Without a war and without OCO funding, we believe the answer is, yes, and that their commitment to modernization remains strong. Just 2 weeks ago in an interview with Defense News, recently appointed U.S. Army Chief of Staff Ray Odierno commented on modernization strategy in the face of budget cuts and priorities. He said, and I quote, "Networks is one of the most important things we do. Our ability to network and provide information from the highest level down to our soldiers is one of the things we're really working on. And the reason we are excited about this is we now have companies that have developed their own capabilities and are coming down to Fort Bliss to work these new technologies. We think there's a real potential here to lower the cost and to move us forward very quickly. We don't want to walk away from that. We have to continue to invest in that."

Clearly, our customers are pleased with our progress. During the first quarter, we continued to achieve several significant product milestones, creating new capabilities and features in the Falcon III family, and we'll demonstrate these at the fall of 2011 NIE exercises that are scheduled. We received NSA certification for the SRW waveform in our Falcon III 117G wideband networking radio. Shipment of this product have already begun, making Harris the first to market with an NSA certified radio incorporating the JTRS soldier radio waveform.

We also received NSA certification for and began shipping the Falcon III AN/PRC 152A handheld radio, also with wideband networking capability using the Harris ANW2 waveform. 152A is the only Type-1-certified wideband handheld radio on the market. Other major U.S. orders for Falcon III wideband networking radios included $29 million for the U.S. Air Force; $20 million to equip MRAP vehicles for the U.S. Army and the U.S. Marine Corps; and orders of $16 million and $15 million, respectively, from the DoD. We closed the quarter with a healthy opportunity pipeline in the U.S. market of $1.1 billion. Large opportunities continue to exist for Falcon III radios as the Army, Marine Corps and Air Force continue to upgrade their tactical networks. Also, the U.S. pipeline includes opportunities, which would be procured through IDIQ contracts that we expect to be awarded from the Navy and the Special Operations Command.

International tactical communications orders in the quarter demonstrate that demand for wideband networking capabilities is also increasing and spreading around the globe. Significant wins in the quarter included 2 orders totaling $52 million from a country in Southeast Asia for integrated command control and communications systems is in Falcon III and Falcon II tactical radios; a $38 million IDIQ win with an $8 million initial delivery order to supply military communications and field support services to international partners in the Caribbean and South America; and orders from Poland, Republic of Georgia and Kuwait.

Visibility in the international market has also improved. This is a key point. Last quarter, we talked about the political instability in North Africa, the Middle East and Central Asia and how that has impacted international orders. We're feeling much more optimistic about these areas as the political environment has improved and the opportunities have firmed up. The international opportunity pipeline is $2.4 billion and is highlighted by significant opportunities with the Iraq Ministry of Interior and Ministry of Defense, the Australian Ministry of Defense, the United Arab Emirates and a number of other nations in Africa, Central Asia and Southeast Asia. Orders in Public Safety and Professional Communications were $116 million in the quarter, only slightly below revenue of $124 million, and we think still at very solid orders quarter in what continues to be weak state and local spending environment. Backlog continues to be large, and our pipeline of opportunities remains robust at $3 billion. PSPC orders in the quarter included $16 million from one of the nation's largest electric utilities to provide advanced OpenSky data and voice communication systems; $7 million for a p25 LMR communication system and related radios for Beard County, Texas; and $4 million from Mobile County, Alabama for a P25 system.

Moving on next to Slide 6. Integrated Network Solutions segment revenue in the first quarter increased 26% to $554 million, primarily as a result of the contribution from acquisitions. Organic revenue growth was 5% in the quarter, and revenue increased in each of the business areas included in INS. Segment non-GAAP operating income was $19 million compared with $29 million in the prior year quarter. The decrease resulted from a combined loss of $16 million in the new cyber and commercial healthcare initiatives, partially offset by year-over-year operating income increases at Harris CapRock Communications and Broadcast Communications. Across this segment, we're winning prime positions on a number of U.S. government IDIQ contracts, giving us better access to multiple agencies and the ability to sell a broader solutions offering. In the Harris IT Services, we received a 5-year, $25 million contract from the Air Force Space Command and Missile Systems Center under the Alliant IDIQ contract, to sustain the ground system for the Defense Meteorological Satellites Program. Also at IT Services, following the close of the quarter, we acquired an Encore II IDIQ contract from another company, securing a prime position to serve DISA, the Defense Information Systems Agency. Encore II is a broad procurement contract vehicle, enabling companies to provide network-centric IT solutions for command and control, intelligence and mission support. Also following the close of the quarter, IT services was awarded a prime position on the connections to GSA contract. This is similar to the FTI program for the FAA. A contract vehicle is used to procure broad telecommunications and network solutions.

At CapRock Communications, we were very encouraged by the leading indicators for increased demand in the energy market that we saw during the quarter. We experienced an increase in the request for proposals from customers anticipating more rigs being put into service. And on existing contracts, there was definitely an uptick in short-term, add-on communication services.

During the quarter, Harris was also awarded a 5-year $9 million contract from Farstad Shipping to provide managed satellite communications to their fleet of 53 offshore drilling ships and exploration vessels, and these operate in the North Sea, the Indian Ocean, the Pacific and off the coast of Brazil and Australia. In the government market, we received several awards totaling $52 million under the DSTS-G and FCSA IDIQ contracts. Where we'll provide managed satellite communications for DoD and national intelligence customers. Our integration efforts have resulted at Harris CapRock in consolidating 5 commercial network operation centers down to 2: 1 in Aberdeen, Scotland, 1 in Houston, Texas. We're also reducing costs by consolidating our teleport footprint and also bundling our satellite bandwidth purchases, all aimed at driving lower costs. All 3 of our vertical markets: energy, maritime and government, have significant overlap in their harsh and remote geographic coverage requirements. As a result, we've been able to establish new satellite capacity requirements under long-term contracts and repurpose this capacity as customers change their demand over time.

In Broadcast Communications, we continue to see revenue growth in international regions: the South America, Middle East and Asia. Orders during the quarter, included $3 million from TV Azteca for the first live 3D transmissions throughout Mexico. Harris also received a $3 million order from Svyaz Engineering, our Russian manufacturing partner, where we'll begin local production of digital television transmitters. Russia is only in the initial stages of their transition from analog to digital. This will ultimately include the replacement of 22,000 transmitters across the country. This will take place over the next several years, and we believe as Harris is well positioned to participate significantly in this revenue opportunity.

During the quarter, our Broadcast Communications team participated in IBC 2011 in Amsterdam, the industry's largest tradeshow. There were more than 50,000 attendees, making it the biggest show ever, and this is another encouraging sign for international market growth opportunities in Broadcast.

A final comment on Broadcast. We recently learned that one of our contract manufacturers located in Thailand has been impacted by the recent flooding. It's really too soon for us to understand the extent of the impact and what impact it might have on the second quarter results in broadcast. We're working feverishly to mitigate any impact. All of our finished goods have been moved out of Thailand, and our suppliers in the process of moving production and starting it at an alternate location.

Moving on, Harris Healthcare Solutions achieved a number of new government wins in the quarter. The National Cancer Institute awarded Harris a 5-year, $37 million contract under their CIO-SP2 IDIQ contract vehicle for comprehensive data management. Under this contract, Harris will continue to provide the expertise that has enabled the National Cancer Institute to enhance their research databases and systems used for clinical trials. Harris was also awarded a 5-year, $55 million contract under the recently won $199 million blanket purchase agreement from the Department of Veterans Affairs for a healthcare IT program called EVEAH, Enhance the Veterans Experience and Access to HealthCare. In this program, we will integrate and deploy a Surgical Quality and Workflow Manager tool, and we'll integrate a COTS solution to reduce surgery wait times and cancellations, increase patient throughput and improve the overall surgical experience for veterans and their families. The solution represents the first time EVEAH has used the COTS solution for an enterprise-wide clinical information system. It will operate in all 130 of EVEAH hospitals who perform surgery and support over 400,000 cases per year.

Four major academic medical centers went live this quarter with our Physician Insight Plus program, which is part of the Carefx performance management dashboard suite that's been developed in collaboration with the Cleveland Clinic. Dashboards are critical to the interoperability of healthcare IT systems. It connects dual-pipe [ph] databases, organize the information and apply analytics that help improve clinical and operational performance.

Also during the quarter, Healthcare Solutions was awarded a $10 million contract from Kaiser-Permanente to develop and support a health information exchange, providing interoperability between their legacy systems. As the largest commercial provider of veteran healthcare. Kaiser Permanente, a $43 billion health enterprise with over 35 medical centers and 400 medical offices serving 9 million healthcare plan members. This contract has the potential to reach $20 million and was a major win for this business in the quarter. Bottom line is we're continuing to integrate our recent acquisitions. We're winning prime positions on IDIQ contracts, maturing new initiative with major partners in our INS segment in order to drive growth and improve profitability going forward.

Let me now move on to Slide 7. Revenue in the Government Communications Systems segment was $444 million in the first quarter, 5% higher than the prior year. Underlying growth when we exclude the FDCA revenue for the Census Bureau -- that program finished in the prior year, our underlying growth was up 9%. We think this is outstanding performance given the tough U.S. Government spending environment. Especially positive in the quarter was a strong revenue growth in our classified programs business. Beginning in the fourth quarter of fiscal 2011, wins in classified programs area began increasing, and we continue to experience this pickup in the first quarter, where we won 5 large contracts totaling $125 million. Revenue growth in the quarter was also driven by the ramp up of a couple of large existing programs, including the GOES-R program for the National Oceanic and Atmospheric Administration and the MET program for the U.S. Army, which provides satellite ground terminals that make up their worldwide backbone for high-priority, military communications.

In the quarter, Harris was awarded the next 5-year, $51 million delivery order for MET to provide additional fixed and transportable X and Ka-band terminals, equipment racks, spares and operator training. This brings our total orders under the MET program to date to more than $200 million of the potential $600 million contract award value.

Revenue growth in the quarter also came from higher shipments of Highband Networking Radios, commercial satellite reflectors, wireless products and geospatial products. Partially offsetting this growth, as I mentioned, was a decline in revenue from the completion of the Cisco [ph] program for the 2010 U.S. Census and the completion to build-out [ph] of the FTI microwave network, the FAA.

Staying with FAA, Harris received a new program award from them in the quarter, a 10-year contract with a potential value of $85 million with the Alaska Satellite Telecommunications Infrastructure program. Under this new program, Harris will replace and upgrade the existing satellite communications network that links the Alaska Air Route Traffic Control Center in Anchorage with 64 other FAA facilities throughout the region. This demonstrates our continued strong relationship with the FAA, and we believe will benefit Harris as the large next-gen programs begin to be awarded over the next several years.

Segment operating income and government communications in the first quarter was $63 million, and operating margin was very strong at 14.2%. Strong execution across the segment, along with a favorable mix from our product-focused areas, continue to drive our above-industry average margins.

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

Gary L. McArthur

Thank you, Howard. As highlighted on Slide 4 and already mentioned by Howard, we repurchased $400 million in shares, reducing shares outstanding by $10.6 million or 8.6%. As of quarter end, we have $600 million remaining authorization under our share repurchase program.

Turning to Slides 8 and 9. We ended the quarter with cash on hand of $305 million. Cash flow generated from operating activities was $79 million in the quarter as compared to $295 million in the prior year. All 3 segments generated positive operating cash flow. Operating cash flow was weaker mainly as a result of lower operating income and collections primarily at RF Communications, wherein in the prior year, expedited shipments and collections on tactical radios for MRAP vehicles benefited income and cash flow, and in the first quarter of this year, the transition to the new factory, delayed shipments and ultimately collections. Our expectations for the corporation are that cash flow from operations will increase steadily over the next 3 quarters as operating income increases, and days sales outstanding declined from 56 days as of the end of the first quarter to the more typical low 50s. Though we are maintaining our guidance for operating cash flow at $825 million to $875 million. As a result of our slower-than-expected start to the year, we will continue to monitor this closely.

Depreciation and amortization was $63 million as compared to $47 million in the prior year. Our expectations for depreciation and amortization for fiscal year 2012 are unchanged at $280 million to $290 million. Capital expenditures were $82 million as compared to $41 million in the first quarter of fiscal 2011. Our current guidance for fiscal year 2012 CapEx is unchanged to between $265 million and $285 million. Our effective non-GAAP tax rate in the first quarter was 31%. Our outlook for the full year tax rate remains at 33%, again noting, however, that the tax rate for any given quarter could vary up or down as a result of discrete tax events. And finally during the quarter, we renewed our 364-day revolving credit facility at a level of $250 million, which combined with our primary revolver, provides us with $1 billion of short-term debt capacity.

With that, I'll turn it back to Howard.

Howard L. Lance

Thanks, Gary. On Slide 10, we're maintaining our previous financial guidance for fiscal 2012 both in total and for each segment. Consolidated revenue for fiscal 2012 is expected to be 4% to 6% higher than the prior year, with revenue coming in between $6.15 billion and $6.3 billion.

Non-GAAP income excluding acquisition-related cost is expected to be in the range from $5.10 to $5.30 per diluted share, a year-over-year increase of 4% to 8%. Adjusted EBITDA for the year is expected to be in the range of $1.28 billion to $1.32 billion, a year-over-year increase of 4% to 8%. For the RF Communications segment fiscal 2012 revenue is expected to be 3% to 6% lower than fiscal 2011. This includes a 10% decline in Tactical Communications revenue, along with double-digit growth in Public Safety and Professional Communications business area.

Segment operating margin is still expected to be 33% to 34%. For the Integrated Network Solutions segment, we expect revenue in the range 16% to 18% higher than fiscal 2011, with organic growth in the range of 7% to 9%. Non-GAAP segment operating margin is expected to be between 5.5% and 6.5%.

And finally, for the Government Communication Systems segment, we expect revenue for fiscal 2012 to be 2% to 4% higher than fiscal 2011, and segment operating margins of about 13.5%.

Let me close my final earnings call as Harris President and CEO by saying it's been a real privilege for me to serve this great company and our shareholders. I continue to believe in the future growth prospects for Harris. The company is well positioned to outperform in our core U.S. government and defense businesses, while benefiting from a growing number of growth platforms, including international tactical communications, public safety, broadcast, satellite communication services, healthcare information systems and cyber-integrated solutions. I believe Bill Brown will do a great job taking over from me in the leadership role, and I want to wish him and the entire Harris team my very best.

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

[Operator Instructions] Our first question comes from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

My first question is, I'm wondering what you think the post-GMR Army wideband radio procurement structure will look like? Do we continue to see these steady smaller contract awards? Or at some point, do we get some larger onetime award that covers a lot of what the Army wants to do over a longer period of time? Any insights you have into how this is likely to play out.

Howard L. Lance

Well, I wish I could be specific, but we really don't know. I'm expecting both. In the short run, I think we will continue to see smaller orders released. But I do think at some point to fully fill out capability set 13 across all the brigade combat teams. 42, I think, is the total number we talked about previously. And at a level of penetration of wideband networking, which would be more than this initial tranche, that they'll probably create some sort of a large IDIQ contract vehicle to accomplish that. But certainly, I don't have any specifics on the timing of that any more than we did last quarter. We're very pleased obviously with this first award. Our performance in the NIE, our performance in the field, the advancements we continue to make in the technology that are further distancing our performance in the radios from the programs of record, ultimately, have made this an easy decision, I think, for the Army and one obviously we're pleased with.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. One other question related to that. We've seen the Army discuss your ANW2 waveform technology as sort of critical to the process. But it looks like they've been saying that they're going to try to bring that in to their own repository, as they put it, and make it available to others who are also competing. Can you talk about whether or not that's true? And if it is, if you would -- if you're selling the technology and would -- and gain a royalty on other contractor wins or just what might happen there?

Howard L. Lance

It's my understanding that your statement about what they want is correct. We have definitely expressed a willingness to provide the ANW2 waveform to the library, but we have not negotiated the terms for providing that waveform at the current time. We're certainly not going to give it away. We're going to make it available as part of returning appropriate value for the investments that we've made. I don't know what form that will take, whether it would be a royalty or onetime payment or some of each. At this point, those negotiations are ongoing, and there's nothing to report of a final nature.

Operator

And our next question comes from Mark Jordan with Noble Financial.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

The buyback, you stated that you completed what I assume is basically baked into your -- into the estimates and guidance for the year. You have $600 million left. Does that mean that any incremental purchases from here would be additive to expected profitability? And secondly, should we be looking at approximately 115 million shares as your share base for Q2?

Howard L. Lance

On your second question, I'll have to ask Pam to tell me if 115 million is a reasonable number for the share count. I don't recall. Offhand, she'll look that up. As it relates to our strategy, we committed to repurchase 8% to 9% of the shares. We said when we announced the share buyback program that we thought that would be about $500 million. Given the lower level of share price, we were able to get that accomplished with $400 million, which means we have additional money that we could spend to buy back shares, and it would be incremental to our EPS guidance. The question becomes whether or not we do that. That decision has not been made. As Gary said, our cash flow in the first quarter was lower than expected. We're going to monitor this and make that decision at some future date going forward. We're also going to continue to manage our debt-to-total-capital ratio from a ratings standpoint. You'll recall, the ratings agencies reaffirmed our debt ratings when we announced the share buyback and our plans. And at this point, we don't have any plans to do anything that would change that. So that's kind of the color around what we have done. We're certainly continuing to look at it. Pam?

Pamela Padgett

We stand at 113 million. We always have a little bit of dilution but I'm sure we'll probably offset that with the purchases. And then the rest of it will go to earnings.

Howard L. Lance

Does that answer your question, Mark?

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Yes, it did.

Operator

And our next question comes from Carter Copeland with Barclays Capital.

Carter Copeland - Barclays Capital, Research Division

Let me just reiterate, Howard, our congratulations. It's certainly -- this company has seen a lot of earnings growth over the years under your watch, and we just want to wish you the best in your future endeavors. Hopefully, you could see an equal of rounds of golf played as EPS. That probably would be a success.

Pamela Padgett

A lot of golf.

Howard L. Lance

Well, I'll work on that. Obviously, as a shareholder, I'm also very interested in the company's success going forward. And I'm very sincere when I say, I think the Board made an excellent choice in Bill Brown, and that there will be a very smooth transition here.

Carter Copeland - Barclays Capital, Research Division

Wonderful. Just a couple of quick ones. First, sort of a bigger picture, just question on INS. Obviously, there's a lot of moving pieces here, whether it's in commercial healthcare or whether it's in cyber, where you're losing money and hopefully hope to turn that around here relatively soon. And there's obviously some restructuring on the cost front. It really seems like 2012 is a real rebuilding year. Is this -- is it your view that you'll get through most of those activities and we can see the money-losing businesses moving to profitability in '13 and the restructuring largely being behind you in '13? Or is this going to be a process that drags on further than that based on what you're seeing today?

Howard L. Lance

I would say, yes, that's our current view. Whether that remains the case going forward, I don't know. But right now, we expect to see improvement as the year goes on. And we are not expecting to take that negative 60 to a positive number next quarter, but we are expecting progress in the commercial healthcare business we bought, as well as the cyber business that we have started from scratch. So I think that's a reasonable expectation, that the drag from those gets eliminated in '12, and that they are breakeven or above in '13. The other thing just to remind you of is there's a significant amount of amortization intangibles and depreciation of the assets invested in cyber that are really dragging down and creating a much bigger gap between operating income growth and EBITDA growth year-over-year. On a cash basis, these businesses are doing much better than on a fully amortized and depreciated basis. Having said that, we understand that that's the way we're reporting numbers. That's what you should focus on. I think you got it about right, by '13, these 2 contribute. We continue to see improvement from the Harris CapRock acquisition and their growth and in broadcast and continue to feel very positive about the INS segment as a major driver of revenue growth and margin expansion in '13 and '14 to help us get up to the higher levels of EPS that we're striving for.

Operator

And our next question comes from Joe Nadol with JPMorgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

On the RF business, I was wondering if you could break out domestic versus international bookings for the quarter and for the year and what your book-to-bill expectations are for the year. And then just a quick one for Gary. Where are the receivables? Or where did they build in Q1, which part of the business, which products, et cetera?

Howard L. Lance

Well, as it relates to the orders, for the year, we still expect that international orders will be slightly greater than U.S. orders, and that international revenue will be slightly higher than U.S. revenue. I'm not going to comment on any specific book-to-bill forecast. We're off to a very good start. We're over 1:1. And obviously, our goal is to keep that going. Gary, do you want to comment on receivables question?

Gary L. McArthur

Yes, Joe, the receivables increased primarily at RF. Their days sales outstanding increased by about 7 days. That was really as a result of the impact of the factory coming online in July, with most of the build and shipments taking place in August and September and then not having time to collect that in the quarter. So we don't see this as a long-term issue. We see this as a timing issue, and we should get back to more normal days sales outstanding at RF and in the company going forward.

Howard L. Lance

We'll collect those dollars, Joe, in the second quarter instead of the first quarter. That's essentially the point.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Got it. I mean, they were late billings as opposed to international customers that aren't paying?

Howard L. Lance

Yes.

Pamela Padgett

Yes.

Gary L. McArthur

Correct.

Howard L. Lance

Yes, absolutely. Normally, you'd have the full 3 months to be building, and we really didn't build anything, ship anything in July because that's the month that we moved everything and started the factory up. We were up and running by the time we had our call. I think it was August 1, August 2. But we really didn't ship anything in July. So we shipped it all in August and a lot of it in September, and those bills weren't due yet. So this is not a question of quality of receivables at all.

Operator

Our next question comes from Michael Lewis with Lazard Capital Markets.

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

If I could just circle back to the cyber operation, qualitatively, what type of -- are we seeing more clients starting to participate in the operation? And are you getting more traction from the government customer?

Howard L. Lance

I think the answer is yes. Across both government and commercial customers, we're getting a lot of traction. But as we've discussed before, the traction is around pilots and the kind of demonstration programs rather than the scale at which we had hoped we'd be able to get people to convert to cloud computing and hosting services. But we are seeing that the pilot activity continue to pick up, and it's across both government and commercial clients.

Operator

And our next question comes from Pete Skibitski with SunTrust.

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Yes, I was just wondering if we can get more clarity on the 8 BCT manpack order, the $66 million order. Is it your understanding that, that basically fills out completely the 8 BCTs for now, and then we'll have to sort of wait for that future competition before we see further BCT-related orders or penetration there?

Howard L. Lance

I view it as initial order against the 8 BCTs. It certainly does not fill them out at a level of penetration of wideband networking for either manpack, vehicular or handheld that they ultimately will want.

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So you expect to see more orders before the kind of the follow-on formal competition?

Howard L. Lance

I don't know that we can be specific on the timing, but I expect more orders, absolutely.

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then on the recent notice on the $20 million order for the 117Gs for MRAPs. It seemed like you guys kind of called attention to that as well in terms of -- I'm not sure if most of the MRAPs had Falcon IIs, and now we're beginning maybe a Falcon III migration into the MRAPs. But do you guys see it that way as sort of a tech refresh opportunity for you?

Howard L. Lance

Yes, the answer is, most of the MRAP vehicles that were deployed out of that $1 billion in orders were using Falcon II technology, because the contract vehicles were not in place to allow them to use Falcon IIIs. It sounds counterintuitive. Why wouldn't you put the new radios in? Because you're going to have to replace them. But we will have a significant opportunity to upgrade all those vehicles as they need wideband capability.

Operator

And our next question comes from Chris Quilty with Raymond James.

Chris Quilty - Raymond James & Associates, Inc., Research Division

Circling back on the JTRS opportunity. I think one of the other requirements for whatever is going to replace the GMR is that it'd be a 2-channel radio. And at this time, Falcon III platform is a 1-channel radio, though I know you've talked about an appliqué that would take it to 2-channel. Can you talk to us about what your thoughts on whether they actually want or will need a 2-channel radio, and how long it would take you to position your product for that opportunity?

Howard L. Lance

Best of my knowledge, they still want a 2-channel radio. We are clearly working on turning the Falcon III 117G into a 2-channel version to accomplish that. I don't think you should view it as an appliqué, but rather a full radio system that would have 2 channels. So that's the best of my understanding. But I think what's important to keep in mind is that this is a fluid situation in terms of requirements. The good news, Chris, is that we have been able to shape the requirements and actually enhance them because we have features in our radio beyond the program of record. So I don't think that requirement is necessarily cast in stone at this point. But my latest understanding is, it still is a 2-channel request.

Chris Quilty - Raymond James & Associates, Inc., Research Division

Okay. And then sort of a follow-on to that. You have integrated wideband networking waveform into the 152, I believe?

Howard L. Lance

We have integrated our ANW2, and we, as we said last time, we're working on also integrating SRW in. And we expect to have that in, in time for this fall, in the fall NIE evaluation.

Chris Quilty - Raymond James & Associates, Inc., Research Division

So SRW, I thought you had that certified on at least 1 platform?

Howard L. Lance

Yes, SRW has been certified by the NSA on the 117G.

Chris Quilty - Raymond James & Associates, Inc., Research Division

Okay. And so the question is, to get the WNW certified, is that something that you would anticipate a long lead time? Or can that be done on relatively short order?

Pamela Padgett

[indiscernible].

Howard L. Lance

Yes, I think the real key to Pam's point is the -- WNW is not ready for primetime, and that was clear in the summer NIE evaluations. So -- how long does it take once it is in the library and ready? I don't know. I wouldn't be too precise. A lot of it has to do with NSA testing and requirements. I'm going to throw out, it's a year probably process, but there's not much we can do until it's really finished. And that to the earlier question, that's why they're very interested in the ANW2 waveform, which performed, I think, up to 30-node network at -- in Fort Bliss and in the testing, which they were very, very pleased at. That's many more nodes than the SRW can do and much wider, larger bandwidth, wider pipes.

Chris Quilty - Raymond James & Associates, Inc., Research Division

So the ANW2 is battlefield proven, but does it need to get NSA-certified in order to get into the repository?

Howard L. Lance

Well, it's already NSA-certified in now both of our products, the 117G manpack vehicular, as well as the 152A. So it has to get in to the repository when we choose to give government purpose rights to it. So it's really up to us and the government to negotiate something. We're not opposed to doing it, but we've invested a lot of money from our shareholders to get here. And we certainly expect to return on that investment.

Operator

And our next question comes from Larry Harris with CL King.

Lawrence M. Harris - CL King & Associates, Inc.

Question about the Public Safety business. The other day, you announced alliance with AT&T on the LTE front. And, of course, Motorola Solutions is working with Verizon. And are you still working with Nokia Siemens in terms of their base stations? And what do you think is the timing for the deployment of LTE within the public safety arena?

Howard L. Lance

Yes, we're still working with Nokia Siemens. I think this process is going to be what I'll describe as long term and not necessarily linear. I think it's going to be lumpy. A lot of it has to do with funding. Everybody wants to have the ability to pass data over an LTE network that is robust and private and secure. It's a lot more efficient than -- and lower cost than what they do today where they're basically using cards in laptops over these public networks, commercial networks. The issue is all about funding. The FCC and Congress are trying to move forward on this national broadband plan. $5 billion continues to be talked about. But it's just not something that is apparent is going to be available in the budget for a couple of years. So I think up until this time, you're going to see trial systems out and essentially proving out the technology. I'm very pleased with our progress. I think LTE, as a technology, is going to be ultimately pervasive in both the public safety, as well as in the DoD market. And ultimately, our advantage, I think, in being in both of these, both tactical radios, as well as public safety radios is we're going to be able to develop integrated networks between tactical and LTE and public safety and LTE, so that from our customers perspective, the network traffic and how it's all being managed, is just going to all happen behind the curtain. They're not going to care, but it's going to seamlessly be able to move traffic over those networks, but still give them the secure, private, control of the networks that they need. So I'm still very bullish on the technology, but it's going to be a long, long road before it's adopted in any scale, in our view.

Operator

Next question comes from Michael French with Morgan Joseph.

Michael K. French - Morgan Joseph TriArtisan LLC, Research Division

On the subject here of the transition, Bill Brown has a lot of M&A experience. So it seems it's safe to assume that there won't be any change to the company's acquisitive nature. I'll go ahead and ask the question since you didn't mention M&A in the opening remarks. How important a consideration was that in selecting him for this role? And should we expect any changes with your outlook towards acquisitions in the near or longer term?

Howard L. Lance

I think, Michael, that M&A was only one of a number of preferences in the requirements for the new CEO. It certainly was not at the top of the list, but it's a wonderful skill and experience that Bill has in not just doing acquisitions but in integrating them. And I think that his focus in fiscal '12, as we've said previously, will be on integrating the acquisitions that we have, getting them fully up to speed both from a cost standpoint, as well as driving revenue synergies. In the longer term, we certainly would expect acquisitions will continue to be, as they have been in the past, a part of our growth strategy, filling in holes for vertical markets, product or technologies or geographies. So I think all those are going to be positive, and certainly Bill's experience in those areas will be a great help. But I don't think you should read into this too much. He was in the M&A corporate development job only for a few months at UTC. His primary background is in running businesses and growing businesses organically. But he's got a lot of experience in allowing acquisitions to fit and to fit effectively. So it will be a great added value that he'll bring to the company by having that experience. But I don't think you should read into that it's going to somehow change Harris' strategy or that the Board is going to go out and charge Bill of doing a big deal, like the UTC-Goodrich acquisition. That's just -- that's coincidental. And in fact, it hadn't even been announced when they were talking with Bill. So that was not why they went out and found him.

Michael K. French - Morgan Joseph TriArtisan LLC, Research Division

Very good. And a follow-up is on the NIE, the test for the Falcon III that's coming up in the fall. Can you discuss some of the capabilities you're looking for, how the radio is performing? And if I understand, this is just a technical evaluation. They're not looking at economic considerations such as the cost of the radios. Is that correct?

Howard L. Lance

Yes, that's my understanding, that the NIE doesn't really look at cost. Although I think General Odierno's quote that I read clearly says that he's interested in cost and speed and capability. And I think that's where we win this game. We really are offering all 3 of those, and no one else can do it. In terms of additional features, I think it's more of the same. I think it's very much about the network and the network effectivity. We'll be able to use radios now from Harris at that NIE in the fall that will have both the SRW and the ANW2 waveform. No one else is going to have both of those in the radio. And -- so we just have such a significant lead, but I think it's just -- it's more of the same. The last one was the first NIE. Part of it is just getting, I think, a tempo of doing this a couple of times a year. But I can't really speak to any specific requirements they have added over the last one at this point, Michael. So I'm just not aware of anything significantly different. But I know what we're going to be bringing are the lessons learned and continued enhancements we've made since the last one and the integration of the SRW2 -- SRW waveform into both the 117G and the 152.

Operator

Our next question comes from Josephine Millward with The Benchmark Company.

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

A bunch of your RF orders were actually announced in October. Is there a reason why you're including them in your September quarter?

Howard L. Lance

We're certainly not including October orders in the September orders booked. We're talking about them because we think they're significant. They occurred after the quarter end. So when the orders booked is what determines what quarter it goes into, sometimes -- in fact, in every case, there's usually a gap of at least a few weeks between when we get an order and when the customer approves a press release allowing us to announce it. So those don't always line up when we issue it. It's normally weeks. As Pam said, sometimes it's longer. But we can announce an order in October, but the order may have been booked, received and appropriately booked in September. It would have been included in the first quarter numbers. But we don't include anything in the quarter that doesn't meet our requirements as a bookable order, and that's got a pretty high threshold and E&Y [indiscernible] reviews that.

Michael K. French - Morgan Joseph TriArtisan LLC, Research Division

Okay, that's what I thought. So the $66 million Falcon III order for brigade combat team was received in September, but you didn't press release it until October.

Pamela Padgett

Right.

Howard L. Lance

That's correct.

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

Okay, great. I was wondering if you can -- now that the government is operating under a CR again, can you comment on whether you're seeing any impact on your order activities so far?

Howard L. Lance

I don't think we've seen anything immediately. We've tried to look at this every which way. We don't believe that the CR would have a meaningful impact on our fiscal '12 operations. We have tried to bake into our outlook what we think may be some impact. Now it's always possible, it could be worse. But I don't feel like, today, there is much downside for Harris Corporation if we stayed on a continued resolution for the rest of fiscal year '12. '13, '14, '15, there's lots of question marks out there regarding budgets and so on. So I'm not going to comment on that because I don't know what's going to happen anymore than you do. Bottom line is, I think our '12 guidance is solid, and the continuing CR shouldn't have much downside impact this fiscal year. I think that, again, our level of diversification in programs, in customers and now across a number of government and commercial vertical markets should allow us to continue to outperform the market. Will we outperform at a level we're all happy with? I think that time remains to be seen whether we do that. But I really like our position, and it's much stronger than it would have been if this had happened several years ago, where we were much more dependent only on a couple of growth initiatives.

Operator

We do have a follow-up from Pete Skibitski with SunTrust.

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Yes, just a couple of quick follow-ups. I think you guys have a large Veterans Affairs multi-award IDIQ called T4. Is that on protest? Or is that in the clear now?

Howard L. Lance

I'm not aware that we have anything with the VA under protest.

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then the classified wins in GCS, can you just maybe characterize them? Are those space-related?

Howard L. Lance

No, I can't really talk about the details. Our work in classified generally has kind of 3 categories. It's space systems, it's mission systems and it's information systems. And I think we're seeing a strong progress in all 3 of those areas. So I don't think it's any one particular area. This part of our business has been a little cyclical, and we're very pleased to see it coming back. We have great long-term relationships with customers, and our teams' performance on these very, very difficult technologies has just been superior over time.

Thank you very much. And, again, I want to thank all of you for your interest in Harris, and I hope that you will stay tuned. I think this company has a very, very bright future.

Pamela Padgett

Thank you, everyone, for joining us. And, again, I'm sorry for the late start.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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