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Harris Corp. (NYSE:HRS)

Q3 FY08 Earnings Call

April 29, 2008, 04:30 P.M. ET

Executives

Pamela Padgett - VP, IR and Corporate Communications

Howard L. Lance - Chairman, President and CEO

Gary L. McArthur - VP and CFO

Robert K. Henry - EVP and COO

Analysts

Jason Kupferberg - UBS

Stephen Ferranti - Stephens Incorporated

Larry Harris - C.L. King & Associates, Inc

Joe Nadol - JP Morgan

Chris Donaghey - Suntrust Robinson Humphrey

Jim Mcilree - Collins Stewart

Myles Walton - Oppenheimer & Co.

Operator

Good afternoon and welcome to the Harris Corporation Third Quarter's Fiscal 2008 Conference Call. This conference call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations and Corporate Communications. Please go ahead ma'am.

Pamela Padgett

- Vice President, Investor Relations and Corporate Communications

Good afternoon everyone and thank you for joining us. I'm Pamela Padgett, Vice President, Investor Relations and Corporate Communications and on the call with me today is Howard Lance, Chairman, President and CEO; Bob Henry, Executive Vice President and Chief Operating Officer and Gary McArthur, Vice President and Chief Financial Officer.

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, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures 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 of our website.

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

Howard L. Lance – Chairman, President and Chief Executive Officer

Thank you Pam and welcome again to all of you joining us today for the call. I'm very pleased to report that Harris Corporation's financial performance in the third quarter reflected continuing strong momentum for the company. Revenue was $1.3 billion in the quarter, 24% higher than the prior year. Organic revenue adjusted for the impact of acquisitions was a very strong 15% with year-over-year growth in each one of our segments. Orders were particularly strong in the quarter. They were higher than revenue for the total company and were also higher than revenue in each segment. New orders not only drove strong revenue growth but added significantly to our backlog. Orders are 32% higher in the latest 12-month period compared to the preceding 12 months. We believe orders momentum is a clear indicator of continuing revenue and earnings growth for Harris in fiscal year 2009 that begins in July.

On February 28, we announced that fiscal 2008 earnings would be impacted by additional charges for cost overruns on several commercial satellite reflector programs. We said we expected the charges to be partially offset by higher than expected income from operations, gains on the sales of securities of a technology spin-off, and a lower tax rate due to expected tax settlement. I am pleased to report that even after taking the $47 million charge in the third quarter we posted non-GAAP earnings of $0.81 per share and remain on track to achieve $3.45 in non-GAAP earnings per diluted share for fiscal year 2008.

Our management team is making good progress on the reflector programs and we are very pleased to report the successful deployment in operation of the first of these commercial reflectors in space.

In the Defense Communications Electronics Segment, which includes the RF Communications and Defense Programs businesses, performance was once again excellent. All indicators are pointing towards another strong year in fiscal 2009 to come. Revenue in the quarter increased 22% to $507 million. We expect to finish the fiscal year with segment revenue of about 19% higher than last year. Operating income increased 24% to $156 million. Operating margin was a very strong 31% of sales due to favorable product mix at the RF Communications division. Segment operating margin for the fiscal year should come in at about 30% of sales, slightly higher than we previously expected.

Defense Communications segment orders were significantly higher than sales, adding to our backlog and supporting our expectation for revenue growth of 10% in the segment in fiscal 2009. Strong demand for our tactical radio systems continues to be seen across a broad set of customers and markets. Revenue and orders increased in both US and international markets. We recently introduced our latest edition to the Falcon III family, the JTRS compliant manpack tactical radio with NSA approved Type I encryption. This radio is first to market with wideband networking capabilities.

Network-centric communications significantly improve situational awareness by creating a wideband data rich environment that supports real-time video transmission. We are currently showcasing these capabilities. We have over 100 demonstrations scheduled at US Military Installations during calendar year 2008. The Falcon III product line continues to gain momentum with nearly 40,000 radios now shipped to date.

In the third quarter, we received $97 million order for Falcon III handheld and vehicular radio systems from the US Marine Corp. This is the second major contract for Marines under its tactical handheld radio procurement utilizing the $2.7 billion consolidated interim single channel handheld radio contract vehicle. Also during the quarter we received $55 million in Falcon III orders from the US Air Force and the majority of those orders were also procured through the CIS/CHR [ph] contract. These orders from the Air Force were in addition to the $45 million order noted in our earnings release to supply a complete suite of Harris radios for the Air Force fleet of MRAP vehicles. International orders were very strong in the third quarter and included an $80 million order for Falcon II radios from the Philippines Ministry of Defense. These radios will have counter new threats in the most rugged areas of their country.

In a new application, Falcon III handheld radios are being used in US Army Shadow 200 Unmanned Aerial Vehicles. The radios are part of a relay system that extends the distance that communication signals can travel providing aerial communication links for soldiers on the ground who are operating in obstructed line-of-sight situations.

Other new products are also gaining traction in the marketplace. Our new Broadband Ethernet High-Capacity Line-of-Sight Radios were recently deployed by the Stryker Brigade Combat Team of the Army's 25th Infantry Division. The Stryker Brigade is using the high-band width, secured communications for wireless backbone connections between their battalion and brigade command posts, company outposts, and joint security stations.

During the quarter, we also introduced the first multi-band land mobile radio. This radio is directed at the growing federal public safety and homeland security markets, serving the critical need for real-time interoperable communications during emergency response and joint operations. And finally, we received a contract from the Defense Forces of Norway to provide several thousand of our new Secure Personal Radios. This lightweight wideband radio delivers secured digital communications to individual soldiers in difficult combat conditions.

In the Government Communications Systems segment, revenue and operating results in the third quarter were impacted by the $47 million charge for the commercial reflectors programs. Notwithstanding the charges, our core performance and trends in this segment are excellent. Third quarter revenue was $491 million, an increase of 27% compared to the prior year quarter and segment income was $6 million. Excluding the impact of the charges and adjusting for acquisitions, year-over-year organic growth was strong at 9% and operating income before charges was $53 million and operating margin of 10.4%. Significant revenue drivers in the quarter included the Field Data Collection Automation program for the US Census Bureau, the Patriot IT services program for the National Reconnaissance Office and IT services and product sales under the US Air Force NETCENTS contract, as well as a number of classified programs showing growth.

New contracts in the Government Communications System segment during the quarter included the $410 million, six-and-a-half year network and space operations and maintenance program for the US Air Force 50th Space Wing in Colorado Springs. Harris will provide operations and maintenance support for the Air Force Satellite Control Network and locations all around the world. We were also awarded a $6 million contract in the quarter to develop and integrate a National Health Information Exchange Gateway for use by Federal Healthcare Agencies. Secure Healthcare IT Systems is a new market for Harris and has significant growth potential.

Let me take a moment and give you a quick update on our commercial reflector programs beginning with the most significant milestone. The first one of our new design reflectors was launched recently with its ICO Global satellite on board in Atlas Rocket from Cape Canaveral. I am pleased to tell you that the Harris 12 meter reflector deployed flawlessly and is now fully operational. During our February 28th call, we noted that 10-commercial reflectors were in various stages of development, assembly, test, and the delivery. I am pleased to report the team is making good progress. They clearly understand the remaining challenges and have significantly tightened the program review process. A second reflector has been shipped for Spacecraft integration and our schedule indicates that total of five perhaps even six reflectors will be ready for delivery before the end of this fiscal year. Of course the ultimate timing of the shipments will also depend on customer's readiness for accepting our deliveries.

The Field Data Collection Automation Program for the US Census Bureau had several important developments during the quarter. Following the recommendation of a Department of Commerce appointed task force, the Census Bureau decided to pursue a more modest approach towards automation in the 2010 census. The non-response follow up element of the census will revert to paper-based processes. It will not utilize the Harris developed handheld computers. This decision was absolutely not a result of technology issues with the handhelds as some media have reported but rather it was a case of just not having enough time before the census begins to work out all of the processes and training required for success. Census Program Management was simply not able to finalize their requirements in time to use the full suite of automation available. While this element of the FDCA program has changed, the overall Harris scope on the program looks like it will expand significantly beyond our previous expectations. Recently awarded to Harris is a five-year $600 million program. Recent Congregational testimony indicated a current need for $1.3 billion in total FDCA program funding as a result of significant new requirements that have been added to the Harris program scope. We are currently working with the Census Bureau and with Congress to finalize the cost of the new requirements and to secure additional program funding.

We are presently very focused on the Automated Address Canvassing element of the FDCA program, which will occur in 2009. Address Canvassing will use over 140,000 handheld computers to verify addresses and domicile locations. We are also working on the Operational Control Systems element and supporting the regional census centers consolidated communications network. In summary, our Government Communication Systems business is robust and growing. We expect to finish the fiscal year with reported revenue growth of over 30% and with an operating margin of about 7.5%.

In the Broadcast Communication segment, revenue was $159 million in the quarter, 14% above the prior year quarter. Revenue growth in the quarter was across all business areas in both the US and International markets. Sales of Transmission Systems grew double-digit in the quarter as a result of strong demand in the US for the remaining Digital TV build out. Double-digit growth also continued in infrastructure and Digital Media for our routers, video servers, graphic [inaudible] and in multi-viewers. Year-over-year sales of software solutions where traffic and billing systems also improved particularly in international. Orders at Broadcast were very strong in the third quarter and higher than revenue but a number of orders come in too late in the quarter to turn them into revenue.

As a result, we ended the fourth quarter with more backlog and expect higher sequential revenue and operating results. Non-GAAP operating income in the quarter was $7 million, compared to $5 million in the prior year quarter. Gross margins were about flat with the prior year, as margin improvements in transmitters and servers were offset by margin reductions in video infrastructure and networking products. We expect to begin to see gross margin improvement in our fourth quarter with more significant improvement in gross margins expected next year. Operating expenses at Broadcast were 12% higher than the prior year in this quarter as we continued to aggressively invest in R&D for new products as well as invest in additional sales and marketing resources in international markets. We have initiated a number of new cost reduction actions that are expected to reduce operating costs, including operational improvements, facility consolidation and expense reductions in slower growth product areas. We expect fiscal year 2008 reported revenue growth of about 7% to 8% with operating margins about on par with fiscal year 2007.

Our Broadcast markets in general are strong and growing, driven by the continuing global conversion to digital and high definition content and operations. The weakening US economy is impacting advertising revenue with our customers and this is having a modest effect on their capital spending. However, the international markets are showing significant strength, especially in Brazil, China, throughout the Middle East, and Australia. While, we will not achieve all of our financial targets in fiscal 2008 for Broadcast, we are making significant strides in establishing our global broadcast market leadership position. This progress was clearly evident at the recent National Association of Broadcasters trade show. Harris is the only supplier that offers a complete range of digital hardware and software solutions across the broadcast enterprise.

Our competitors are faltering, both financially and in their ability to execute. Our global customers will increasingly come to Harris Broadcast Communications as the one source for their digital and high definition technology needs. We have assembled a powerful combination of technologies and expertise to serve the global media markets. I continue to believe that we will create significant long-term shareholder value from our investments in this market as we continue to grow and as we improve our execution. [Audio Gap] GAAP operating income of $4 million in the prior year quarter. North American revenue was $57 million in the third quarter, a strong increase of 16% compared to the prior year. International revenue was also strong increasing by 27% to $117 million. Sales to the African continent were particularly strong increasing 49% year-over-year. Capital spending rebounded in that region following a number of operator consolidations that we have talked about in previous quarters. Internationally revenue was also strong in Europe, the Middle East and Russia.

During the quarter, Harald Braun was appointed President and CEO of Harris Stratex Networks, succeeding Guy Campbell. Harald is an industry veteran with significant international experience. I believe he is an excellent choice to move this young company into the next phase of its growth and development. You will be hearing from him on the Harris Stratex call immediately following this one.

With that let me turn you over to Harris' CFO, Gary McArthur.

Gary L. McArthur - Vice President and Chief Financial Officer

Thank you, Howard. Good afternoon everyone. Q3 was another very solid balancing quarter for Harris. We ended the quarter with $295 million of cash, cash equivalents and short-term investments. During the quarter, we repurchased $100 million of our outstanding stock and paid off an additional $99 million of 6.35% coupon debt that was put to us. Return on invested capital as of the end of the third quarter was 16.6%, nearly twice our weighted average cost of capital. Cash flow generated from operating activities was $164 million as compared to $141 million in the third quarter of fiscal 2007. All four operating segments generated higher operating cash flow during the quarter as compared to the same quarter a year ago with both Harris Stratex and Broadcast Communications our two most challenging cash flow segments posting good improvements on both the sequential and year-over-year basis.

Our expectation for cash flow from operations for fiscal year 2008 continues to be in the range of $550 million to $600 million. Depreciation and amortization for the third quarter was $43 million, as compared to $34 million for the third quarter of 2007. Our expectations for depreciation and amortization for fiscal year 2008, continued to be in the range of $165 million and $175 million. Capital expenditures were $41 million for the third quarter as compared to $36 million in the third quarter of fiscal 2007. Our guidance for fiscal year 2008 for CapEx remains between $140 million and $150 million.

Our effective tax rate in the quarter was lower than the US statutory rate as a result of favorable tax settlements for fiscal years 2004 through 2006 totaling $11 million. Also beginning in the third quarter of fiscal 2008, we began recording state income taxes that are reimbursable by the US government in engineering, selling and administrative expense rather than tax expense. Our outlook for the full year tax rate for fiscal 2008 is now at 32% with an outlook for fiscal year 2009 of 33%. Noting however that the tax rate for any given quarter to vary up or down as a result of discrete tax events.

Other areas of guidance for fiscal 2009 are as follows. Depreciation and amortization in a range of $170 million to $180 million, capital expenditures including capitalized software also at $170 million to $180 million and operating cash flow of $675 million to $725 million. In summary, we expect to finish fiscal 2008 on a very solid financial foundation with expectations for a continued improvement in fiscal 2009.

Back to you Howard.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thanks, Gary. Let me conclude my prepared remarks by summarizing our outlook for you. All of our major markets are showing continuing strength, we're experiencing strong orders, a growing backlog and we see a healthy new opportunity pipeline. We are having continued success in addressing our growing markets with new and innovative communications products, systems and solutions. We have confirmed our fiscal year 2008 non-GAAP earnings guidance of $3.45 per diluted share. In addition we have increased our fiscal 2009 guidance from the initial guidance range of $4 to $4.10 per share that we provided on March 5 to a new range of $4.05 to $4.15 per share. This new range represents year-over-year earnings per share growth of 17% to 20%. We now expect revenue in fiscal 2009 to be 9% to 11% above fiscal year 2008.

The Defense Communications and Electronics segment is expected to deliver growth next fiscal year as a result of increasing demand for our new Falcon III tactical radios and other new products. As previously expected, segment operating margins will be maintained at very strong levels at about 29%. Revenue in the Government Communication System segment is also expected to reach double-digit growth levels in fiscal 2009. That will be driven by our core group of communication systems integration and IT systems programs; FTI, FDCA, Patriot, NETCENTS and NMCI and by our growing National Intelligence Programs business.

Operating margins at GCS are expected to return to historical levels at 10% of revenue or slightly higher. We expect year-over-year revenue growth to continue at Broadcast Communications and Harris Stratex Networks with improving gross margins and expects… expense reduction actions combining to improve our operating margins in each business. In conclusion Harris is very well positioned to achieve another consecutive year of growth and earnings per share improvement as we head into fiscal year 2009.

Operator, with that, if you could please open the lines, we will take questions.

Question and Answer

Operator

Thank you sir. [Operator Instructions]. And your first question comes from Jason Kupferberg from UBS.

Jason Kupferberg - UBS

Hi, good afternoon guys.

Howard L. Lance – Chairman, President and Chief Executive Officer

Hello Jason.

Jason Kupferberg - UBS

Just wanted to start the question on RF and can you tell us what the growth was specifically in the March quarter the year-over-year growth in the RF division?

Howard L. Lance – Chairman, President and Chief Executive Officer

Not specifically in RF we've provided growth for the overall segment. I think though it’s fair to say the trend continued with RF growth being slightly above the segment number and Defense Programs growth being below that number.

Jason Kupferberg - UBS

Okay. You still expect RF orders to exceed revenues this fiscal year?

Howard L. Lance – Chairman, President and Chief Executive Officer

Absolutely.

Jason Kupferberg - UBS

Okay, okay and as far as the OTM year-over-year order growth you cited I think 32% overall corporate wide?

Howard L. Lance – Chairman, President and Chief Executive Officer

Right, that would just simply be the sum of our last four quarters over the previous four quarters, just trying to give you a sense of momentum. You’ve heard me say before that orders in any given quarter can bounce around, because sometimes you get very large order that distorts it. So we are looking at kind of that trailing four quarters to try and give you sense of the trend line, obviously it includes acquisitions but acquisition results are showing up in our reported results.

Jason Kupferberg - UBS

Okay. Any more granularity on the fiscal '09 RF outlook, I know you said double digit growth last quarter, is that what you are sticking with here or anything more precise?

Howard L. Lance – Chairman, President and Chief Executive Officer

Yeah. We are very comfortable in reiterating the 10% growth. We think that the segment has a very solid outlook and again RF dominates the results in the segment. So we are very comfortable with the direction and the momentum, we had a very good order quarter. We are going to finish the year strong, the opportunity pipeline for our new products as well as for international is particularly encouraging and all of that gives us a reasonably next year is going to be a very, very strong year for Defense Communications, in total certainly fueled by continued growth in RF.

Jason Kupferberg - UBS

Okay congrats on the momentum here.

Howard L. Lance – Chairman, President and Chief Executive Officer

Yeah thanks.

Operator

Our next question comes from Steve Ferranti from Stephens Incorporated.

Steve Ferranti - Stephens Inc.

Hi good afternoon guys and congratulation on the successes in the quarter.

Howard L. Lance – Chairman, President and Chief Executive Officer

Thank you,

Steve Ferranti - Stephens Inc.

I wanted to follow up I guess on some of the RF questions that were asked, do you have sense for if you look ahead into fiscal '09. Some of the... where the drivers are coming from in RF, is it more related to Falcon III, is it international orders or kind of follow through on existing Falcon II or do you have any sense for kind of proportionally how that shapes up?

Howard L. Lance – Chairman, President and Chief Executive Officer

Well, certainly Falcon III, and other new products that we are introducing are going to each year be a higher percentage of our revenue. We are still going to sell lot of Falcon II Radios next year from orders and backlog that we have and will sell a lot of those internationally ongoing from orders that were going to get. I think, we talked at our Analyst Day about our expectations, regarding our HF radio mix, that mix going to decline slowly over the next three years, think we showed a couple of charts on that and so that's playing out pretty much as we expected based on our current order flow and order pipeline. So, clearly we are in good shape with our Falcon II products, the Falcon II Multi-band manpack is going to be continued to be sold for a long time, but we are very excited by the introduction of the new Falcon III. Obviously, we have got lot of shipments in the handheld and vehicular configurations of that. We are very excited about the launch the Falcon III manpack. The feedback that we are getting from the initial demonstrations with customers is extremely positive and to us that's what that matters and these are comments from people who are going to use these radios. These are people in the field that have the experience of not being able to have high level of situational awareness and as they are seeing what we can do not just with a brochure or slide, but we can do with the real-eye demonstration of streaming real-time full motion video and data from multiple radios across the net, I think is raising a lot of eyebrows and we have been very pleased by the initial reaction and hopefully that will turn into the adoption of these two technologies going forward. We certainly think it will and we’ve gotten some initial orders. So encouraging progress at this point.

Steve Ferranti - Stephens Inc.

That's great and could you give us a sense for, it seems like you have got sort of window of opportunity here before sort of the official JTRS program is really at a stage where it could be fielded, what is your sense of traction? It sounds like you are gaining some fairly significant traction here and you have got... obviously the IDIQ in place, which supports that traction? I mean is it fair to say that you are comfortable with the momentum you are seeing there?

Howard L. Lance – Chairman, President and Chief Executive Officer

Yes, I think we are very pleased with the momentum and I don't believe any of those introduction dates is even for LRIP, their limited production have changed throughout in 2011. So, I think we have… my view as three years of opportunity to gain significant adoption and acceptance and our hope is that the market standardizes on the Falcon III JTRS compatible radio at a minimum because our customers lots of options and we think the JTRS program executive office is equally excited about that having given us a approval for the handheld and we expect kind of formal approval. It does meet all the requirements for the manpack. So, we are very excited about the progress, obviously we have got to execute and get the word out and that's what we are doing with these demonstrations.

Steve Ferranti - Stephens Inc.

Terrific. Thanks guys and good luck.

Howard L. Lance – Chairman, President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Larry Harris from C.L. King.

Larry Harris - C.L. King & Associates, Inc.

Thank you. A couple of questions, one I was intrigued by the recent announcement of the RF-7800W for airborne applications. Do you see an opportunity perhaps to over time enter the airborne radio market or is this a single application?

Howard L. Lance – Chairman, President and Chief Executive Officer

Larry, we have certainly in the long run an expectation to go airborne, exactly how we do that is a work in progress. This was a very interesting application and I think will allow us to start being associated with airborne applications not just tactical applications on the ground. It's also important that this is an army program and gives us an opportunity to have them sequenced [ph] and Falcon III performance, which we think is very important.

Larry Harris - C.L. King & Associates, Inc.

And then on the Census Bureau… I know there’s been a lot in the paper but it look like as you mentioned the scope so that it increased to significantly larger amount here perhaps $1.3 billion. Should we anticipate significant increase in revenues on this program, potentially over the next couple of years and your thoughts about fixed price versus cost plus type contracts?

Howard L. Lance – Chairman, President and Chief Executive Officer

Okay. On the second point first, this contract is a cost plus contract. There are either no or de minimis fixed price elements to it. Second, I don't believe that our customer is treating it as a cost overrun. They are acknowledging that the requirements are significantly different and while the spending on the non-response follow up part will be at less than half of what it was going to be with us before I should with handheld just going to be less than a half. There is scope on

every other aspect to this program has gone up by three or four times in terms of some of the work scope. We will see some of that in our fiscal 2009 revenue, we will see a bigger chunk also in our fiscal 2010 revenue. In the fiscal '09 guidance we have given double-digit growth, we have baked in some but probably not all the revenue we could see because it's a little bit of a moving target at this point, because funding has not been finalized and because the government’s fiscal year is different than the Harris fiscal year, we don't want to get out ahead of that funding process and certainty. But I do believe we are comfortable there’s going to be upside and the program is going to be far more than the original $600 million potential that we recently announced.

Larry Harris - C.L. King & Associates, Inc.

Understood, all right. Thank you.

Pamela Padgett

- Vice President, Investor Relations and Corporate Communications

Thank you.

Operator

Our next question comes from Joe Nadol from JP Morgan.

Joe Nadol – JP Morgan

Good afternoon.

Howard L. Lance – Chairman, President and Chief Executive Officer

Hello.

Joe Nadol – JP Morgan

First question is just on RF. I have got a couple questions on this but your backlog at the end of September was about $1 billion and I am wondering if today it's a higher or lower than that? And do you expect to exit the year at above or below that level?

Howard L. Lance – Chairman, President and Chief Executive Officer

We expect to exit the year with more revenue than or more orders than revenues. So book-to-bill greater than one, and whatever that number is we will determine what the end of year specific backlog is Joe but it's growing and that's what's important and the pipeline and acceptance of these new products we think is very strong. So we are comfortable with the growth guidance that we have indicated in the segment for next year based on orders already received and orders we expect to receive not only in the next quarter but throughout next year. I think we continue to try and highlight that this is not a single source growth as a driver or funding, of particular note is the large order received by the Philippines, international continues to play every year in a larger and larger role in total revenue and in growth and we are expecting next year to also be a very strong growth profile for RF.

Joe Nadol – JP Morgan

You said that your [inaudible] CapEx guidance for next year indicates about 20% growth over this year and I am wondering where you are putting that and where you are targeting kind of growing your capacity?

Gary L. McArthur - Vice President and Chief Financial Officer

Joe, this is Gary McArthur. About $30 million of the increase is being targeted towards modernizing some of our buildings here in the Florida area and that is the majority of where the spend is.

Joe Nadol – JP Morgan

Okay. You increased your EPS guidance, this may be splitting hairs a little bit by a nickel, just for next year, I am just wondering on the margin, where you are feeling better about your operations or is it sort of little bit here, little bit there?

Howard L. Lance – Chairman, President and Chief Executive Officer

Yes, I think a little bit here, little bit there. I think we are feeling very confident in the two largest Government segments, they drive the majority of revenue growth in income, so, as we see another strong quarter in DCE and good momentum coming out of this year and as we see the opportunity to get back on our margin track next year at GCS, have the reflector problems behind us and to see good growth in these core programs and upside opportunity at the FDCA program census all that together gave us confidence in increasing the guidance at this time by another $0.05. We’ll have another bite at that Apple of course as we have come out of our fourth quarter and see exactly what those backlog levels are and the like as we ended the year.

Joe Nadol – JP Morgan

Okay and then just one more over at Broadcast, you said that you I guess you lowered your expectations for this year and I'm wondering is it more a sales issue you said that you are seeing some modest impact from the economy over this expense issue or may be more specifically what exactly led to the change in guidance?

Howard L. Lance – Chairman, President and Chief Executive Officer

Primarily it's been driven by our revenue from US customers. It's a little bit lighter than we had expected. Having said that, this is a business that we are going to invest appropriately in new products. I come back from the National Association of Broadcasters show even more convinced that we are in a position to win this game. And when I look at the financial difficulties and profit problems that all of our major competitors are having across this industry and I see where we are, I see the booth traffic that we get, I see the high level customer meetings that we are having, the major international opportunities in the pipeline all of those are very positive. In the short run our customer ad revenue in the US stations is not where they had hoped it would be, they track a lot of it to the election, the general election money not really going nationwide yet because of the democratic competitions still occurring in primary states. And so, we are expecting a little bit more strength in the fourth quarter. But internationally it is very strong. I have never seen in my ten-year pipeline with more big program opportunities internationally and I've been spending a lot of time with those customers not only here but outside the country.

And we are in very good position, I think given what we have put together here. And our expenses are up, but we are spending money in the right way and I'm not going to manage this kind of on a short-term basis. So, we are going to continue to invest. We are not happy with our profit margins. Tim Thorsteinson and I are implementing another round of appropriate cost actions in cost trimming, where we need to, but we are not going to take any actions that are going to hurt the top line in our growth. Because ultimately that's where we are going to win. And as we continue to have that success in the top line and as we execute better we are going to deliver significantly more profits on the bottom line. So, we are continuing to work the issues, would we like to get there faster absolutely, but we are going to stay in the course in that business.

Joe Nadol – JP Morgan

Thank you.

Operator

Our next question comes from Chris Donaghey from Suntrust Robinson Humphrey.

Chris Donaghey - Suntrust Robinson Humphrey

Hi, congratulations on the quarter, Howard.

Howard L. Lance – Chairman, President and Chief Executive Officer

Thanks.

Chris Donaghey - Suntrust Robinson Humphrey

I wonder if first of all you mentioned in the press release that you had seen your first deliveries of the FALCON III handheld or the FALCON III manpack. Can you talk about may be who those customers are and may be quantify or at least provide some insight into what the pipeline looks like at radio right now?

Howard L. Lance - Chairman of the Board, President and Chief Executive officer

I am not sure Chris that I can give you any color on deliveries other than they are small numbers across a pretty wide customers set what I recall so across DoD lots of customers taking quantities to try them out put them into some of their tougher field deployed applications. So that's about all the color I can provide on that. I think the pipeline is very strong and we expect to see kind of a gradual ramp up of the manpack over the next four quarters next year and four quarters the following year. So I don't see anything at this point to suggest we are not going to be very, very successful with that radio. Like I say the feedback from the demonstrations, I think has even surprised our people with regard to how positive it’s been. At the same time we’ve got to execute, we don't have any capacity limitations. I think we are geared to ramp that up as fast as the customers want, so we are trying to make sure we have plenty of headroom in our factory capacity. We don't envision making big investments to get there. I think we have all the capacity essentially we think we are going to need. So we are in a pretty good shape and now it’s just a question of waiting for the customers to get comfortable, go through their testing and move forward from there.

Chris Donaghey - Suntrust Robinson Humphrey

And may be a different way of asking the question. Can you detect, can you tell based on these early deliveries, is this… is there any kind of waiting towards existing customers with Falcon II manpack or these historical SINCGARS type users or these new users just experimenting with the new technology?

Howard L. Lance – Chairman, President and Chief Executive Officer

I mean I don't know for sure. I think it's the traditional customer base. I wouldn't want you to get the impression that its people don't know Harris or have been trying radios. I think it's just a broad cross section at this point. Certainly the opportunity is there for them to make networking a reality using this radio. And clearly [inaudible] can do that, clearly the JTRS programs of record can do that. So there is significant period of time here, where they are going to have the ability to do this with our radios to prove out the viability and yet we think very comfortable with our radios and their performance. So time will tell that, I think it's a cross section and I don't know any more specifics at this point or I would share that with you.

Chris Donaghey - Suntrust Robinson Humphrey

Okay that's fine. And just quickly if you can, it seems like once again, you know the margins in Harris Stratex and Broadcast seem to be struggling and obviously sounds like additional cost reduction expenses going on in Broadcast, you kind of you wouldn't provide specific margin guidance for us in 2009, how should we think about the margins in those businesses for next year?

Howard L. Lance – Chairman, President and Chief Executive Officer

You should think that our current guidance allows for modest improvements that we are a bit tired of over promising and under delivering on those margins and that the focus in my mind in both those businesses on the top line first and ensuring that we are gaining market share that we are introducing a new products in both those businesses and strategically positioning ourselves to win the game in the long run and not to focus quite as much on short-term quarter-over-quarter improvements because in the big scope of our company they don't matter all that much but in the long run both of those businesses are going to create shareholder value by reaching positions that are entrenched and allow for more pricing pressure, a more pricing power and more and better margins in the longer-term. But quarter-by-quarter it's just not the way that I am going to focus on it. We are going to do better next year than this year but we have pretty modest improvements in our current guidance and you will kind of get a sense of that as you run through and update your model based on the pieces, the big pieces of pi we have given you.

Chris Donaghey - Suntrust Robinson Humphrey

Okay. Great and thanks again, good quarter.

Howard L. Lance – Chairman, President and Chief Executive Officer

Okay. Thank you.

Operator

Next we will move to Jim Mcilree from Collins Stewart.

Jim Mcilree - Collins Stewart

Thanks. Good afternoon. Gary, the quarter-to-quarter increase in SG&A that was primarily driven by the re-classification of the state income taxes. Is that correct?

Gary L. McArthur - Vice President and Chief Financial Officer

Had some impact from that, yes.

Jim Mcilree - Collins Stewart

And what was that on a dollar basis or what will that be on a dollar basis going forward?

Gary L. McArthur - Vice President and Chief Financial Officer

We basically have done it as kind of a percent of the tax rate and I think in the guidance that we gave you we took the overall tax rate down by 1% in '09 so on a go-forward basis it will about 1%. And this quarter there was some catch up with what we did so in looking at the quarter if you look at the tax rate was about 26%. So the 34% to 26.8% about a third of it came from the state income tax area and two thirds of that came from the tax settlements with the IRS.

Jim Mcilree - Collins Stewart

Then Howard the cost reduction efforts that you are going to take in Broadcast will that result in more charges or you just talking about kind of slowing the growth rate of expenses but no, you have no specific facility charges or risks?

Howard L. Lance – Chairman, President and Chief Executive Officer

Yes. If I had the specific number, Jim, at this point we’d shared it, it’s a work in progress and so any significant headcount reduction in our facility actions usually has some amount of charges associated with it but at this point I don't really have a number. But what we are focusing on is redeploying resources form the slower growth parts of the business into the higher growth parts and getting expenses under control where they have perhaps gone a little faster in some areas than we deemed appropriate. But you should think of it more as trimming around the edges rather than some kind of a major wholesale across the board restructuring.

Jim Mcilree - Collins Stewart

Fine. Thanks a bunch.

Howard L. Lance – Chairman, President and Chief Executive Officer

Okay.

Pamela Padgett

- Vice President, Investor Relations and Corporate Communications

Operator I think ... do we have any more questions?

Operator

We have one more question.

Pamela Padgett

- Vice President, Investor Relations and Corporate Communications

Okay.

Operator

That question comes from Myles Walton from Oppenheimer.

Myles Walton - Oppenheimer & Co.

Thanks. Good afternoon.

Howard L. Lance – Chairman, President and Chief Executive Officer

Hi.

Myles Walton - Oppenheimer & Co.

Howard, in the latest selected acquisition report from the DoD, they significantly reduced the production outlook for the JTRS HMS cost I know that you are not a teammate on that one but wondering is there a read through for your business positive or negative maybe on the manpack side that you are seeing out of that?

Howard L. Lance – Chairman, President and Chief Executive Officer

Myles, I am not sure. Bob, do you have any other inside on that?

Robert K. Henry - Executive Vice President and Chief Operating Officer.

Not yet. We haven't seen anything yet; it could be I guess I don’t know, we will see as we move forward, but nothing yet.

Myles Walton - Oppenheimer & Co.

Okay.

Howard L. Lance – Chairman, President and Chief Executive Officer

I guess on the surface I take it as a positive, but production is so far out that I think we have clearly a first mover advantage here and we are doing everything we can to take to get the full benefit of that.

Myles Walton - Oppenheimer & Co.

Okay. You know the full radar, I just didn’t know if you had additional color, also within the RF segment it sounded like your growth there was about 25% for the year, was international growth above or below domestic growth this quarter?

Howard L. Lance – Chairman, President and Chief Executive Officer

I don't remember specifically in the quarter but I know that over the last three years, international is being growing at a rate north of a 20% CAGR or compound annual growth rate and going forward we certainly have expectations of that continuing. So I don't know about this quarter but that certainly tells you that going forward we are expecting a faster rate of international growth than we are domestic growth based on our overall guidance of around 10%.

Myles Walton - Oppenheimer & Co.

Okay and may be last one, the JTRS AMS I see on the winning team there, but I am just wondering what's the next entry point, is there an entry point on the production pipeline downstream?

Robert K. Henry - Executive Vice President and Chief Operating Officer

Yeah, this is Bob Henry. We are working with the JPL and there is a chance that we can get some other production down the line. With that said we are all working on airborne applications starting with the UAVs and that I believe might give us an entry point down to be a viable supplier in the airborne community later on.

Myles Walton - Oppenheimer & Co.

So coming back to I guess, Larry's original question, I mean could you essentially do almost what you are doing at the manpack with JTRS HMS, could you do you something similar on AMS?

Robert K. Henry - Executive Vice President and Chief Operating Officer

Yeah, yeah we could… we surely could do that and whether that's in our strategy or not I really don't want to discuss at this point in time.

Myles Walton - Oppenheimer & Co.

Okay, great. Thank you.

Pamela Padgett

- Vice President, Investor Relations and Corporate Communications

Okay, everyone thank you so much for joining us, appreciated it.

Operator

That concludes --.

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Source: Harris Corp. F3Q08 (Qtr. End 03/31/08) Earnings Call Transcript

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