Harris Corp. F4Q08 (Qtr. End 06/30/08) Earnings Call Transcript

Aug. 6.08 | About: Harris Corporation (HRS)

Harris Corporation (NYSE:HRS)

Q4 FY08 Earnings Call

August 5, 2008, 05:00 PM ET

Executives

Pamela Padgett - VP of IR and Corporate Communications

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

Gary L. McArthur - VP and CFO

Analysts

Myles Walton - Oppenheimer & Co.

Jason Kupferberg - UBS

Mark Jordan - Noble Financials

Stephen Ferranti - Stephens Incorporated

Joseph Nadol - JPMorgan

Chris Donaghey - SunTrust Robinson Humphrey

Chris Quilty - Raymond James

Operator

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

Pamela Padgett - Vice President of Investor Relations and Corporate Communications

Thank you, operator. Good afternoon everyone and welcome to Harris Corporation's fourth quarter fiscal 2008 conference call.

I'm Pamela Padgett, Vice President, Investor Relations and Corporate Communications and on the call today is Howard Lance, Chairman, President and CEO; and Gary McArthur, 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 discussions on such assumptions, risks and uncertainties, please see the press release and filings made by Harris to 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 table through our press release on the Investor Relations section of the 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 call over to you.

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

Thank you, Pam and welcome to all of you joining us today for our fourth quarter fiscal 2008 earnings call.

I am pleased to report that Harris had another quarter of very good financial results. Revenue in our fiscal fourth quarter was $1.4 billion 19% above last year. Organic revenue growth was a strong 12% in the quarter.

Revenue increased in all four business segments. Orders in the fourth quarter were significantly higher than revenue, providing strong momentum as we enter fiscal year 2009.

Earnings were also strong even with absorbing the unexpected cost reported last week, by Harris Stratex Networks. Non-GAAP net income was a $128 million, $0.95 per diluted share, a 34% increase compared to the prior year.

Our full year results also reflected strong financial performance. Revenue was $5.3 billion, a 25% increase over fiscal 2007 and non-GAAP net income for the year increased 18% to $462 million, $3.39 per diluted share.

Let's move on to the segment results. The Defense Communications Electronics segment which includes RF Communications and Defense Programs reported another excellent quarter. Revenue increased 22% to $567 million, operating income increased 29% and operating margin was 30% of revenue. RF Communications revenue was very strong in the quarter at $441 million, a 36% increase compared to the prior year quarter and a sequential increase of about 13% compared to the third quarter.

Our success continued across both U.S. and international markets. Operating margins at RF Communications continued strong in the quarter at 33.8% of revenue. We believe that operating margins in fiscal year '09 will be sustained in 33% to 34% range. RF orders for fiscal year 2008 totaled $1.7 billion and significantly exceeded revenue. Backlog at year-end was about $1 billion significantly, higher than at the end of fiscal year 2007. This should clear up any misconceptions that the RF backlog has been declining, during the past several quarters.

During the fourth quarter we had a number of important orders. We received a $118 million order from U.S. Marine Corps for Falcon II multiband manpack radios, part of a $350 million IDIQ contracts. The Marine Corps strategic radio plan provides for a transition from legacy single-band radios to multiband, multimission software defined radios.

Harris is playing the central role in this transition plan, delivering Falcon II multiband and HF manpack radios as well as Falcon III multiband handheld radios. Harris also received a $42 million order from the Army in the quarter, to enable installation of our Falcon II manpack radios in their Mine Resistant Ambush Protected vehicles.

We've been reporting to you that the number and strength size of our international market opportunities has been steadily increasing over the last two years. These opportunities resulted in accelerating international revenue growth in the second half of fiscal 2008. During the fourth quarter, Harris received a $43 million follow on order from a major customer in Latin America for Falcon II HF radios. We also received an $18 million order for the Falcon II HF from the Iraq Ministry of Defense.

A $16 million follow on order for Bowman HF radios from the United Kingdom and a $15 million order from the Ministry of National Defense in Poland for Falcon II manpack radios.

And during the quarter we received our first order from South Africa. Demand for Harris tactical radios continues to be driven by multiple factors both at home and abroad. Communications monetization programs, force expansion, force restructuring, interoperability requirements, and requirements for a increased network centric communications.

We recently reached another very important milestone in the development of our Falcon III JTRS radio product line. In July, the Falcon III AN/PRC-117G multiband, manpack became the first wideband networking radio to be certified by the JTRS Joint Program Executive Office.

The Harris 117G significantly improves situational awareness like creating a wideband communications environment that supports network data intensive application such as real time video transmission. The 117G had previously received Type-1 encryption certification from the National Security Agency. This latest certification completely validates the design of the Harris Falcon III manpack, ensuring customers that the 117G is both interoperable with legacy radios and able to accommodate new JTRS platforms as there are created.

With the latest certification of 117G manpack and the certification last year of the 152 handheld Harris is the only company that have two certified JTRS radios in production now. At least two years in advance of the JTRS programs of record for scheduled low rate initial production.

Last quarter, we reported that we were showcasing the capabilities of the new Falcon III manpack with over 100 demonstrations scheduled at U.S. military installations. At this point, we are about half way through the demos. They have been met with widespread excitement from our customer base. The 117G is being used by a number of customers in current field exercises.

We have already received 117G orders from a number of DoD and other U.S. government customers and it is being operationally deployed around the world. We also recently announced another important new product from the RF Division. The Unity XG-100 land mobile radio, the XG-100 is the first products in a new family of mutiband software to find radios directed at the growing federal public safety and home land security markets.

These radios provide direct interoperability between federal agency officials and state and local first responders, using a single radio operating across multiple frequencies.

The radios also provide interoperability with National Guard users who are already equipped with the Harris Falcon III mutiband radio.

The XG-100 extends the covered frequency range to include the 700 MHz bands and 800 MHz bands. It will begin field trials later this calendar year with product shipments beginning in early 2009.

Moving on, revenue in defense programs declined 7% in the quarter compared to the prior year, in large part due to lower levels of production on the F/A-18 and F22A aircraft programs. Revenue was also impacted by the JDAM weapon program nearing its completion. Revenue increased in the quarter on several ongoing programs, including the Lightweight Multiband Satellite Terminal program for the U.S.Marine Corps, the F-35 Joint Strike Fighter program and the next-generation U.S. Air Force Global Positioning System Program.

We achieved two significant new wins during the quarter for multiband SATCOM terminals with a combined potential value of $162 million over five years. These new terminals will augment the navy's existing military and commercial satellite communications capabilities, as well as provide high speed Internet access.

Moving on to Government Communications Systems, revenue in the Government Communications System segment, and again that's comprised of Civil Programs, National Intelligence Programs, and IT Services increased by 24% to $512 million in the quarter. Organic revenue growth was about 6% in the quarter. Operating income increased 57% to $52 million and operating margin was 10.2% of revenue.

The strong rebound in operating performance in the quarter resulted primarily from progress made on the 10 commercial satellite reflectors that are in various stages of assembly, test and delivery.

In April we reached a significant milestone, when the first reflector successfully deployed in space on board the ICO G1 global communication satellite. We have since shipped three more reflectors to customers for spacecraft integration.

A fifth reflector was nearing completion when it sustained accidental damage in our factory. Harris and its prime contractor have agreed to a revised shipping date that meets the customers launch with no parameters. Harris maintains property insurance policies, covering accidental damage and related costs. So we do not expect any material financial impact as a result of this accident.

Now withstanding the accident a good progress was made in the quarter on all of the radial rip styled reflectors that we have in production, retiring much of our financial risk. The remaining four reflectors to this type are expected to ship by the end of our fiscal third quarter.

That leaves the two hoop styled reflectors which are still in the very early stages of manufacturing. As we previously indicated, the hoop design is more complex and carries our remaining risk in a commercial reflector enterprise.

Programs with higher revenue in the quarter included that field data collection automation program for the U.S. Census Bureau, the Global Geospace Intelligence program for the National Geospatial Intelligence Agency. The U.S. Air Force net sense IT integration and services program, the Navy/Marine Corps Intranet Program and the network space operations and maintenance program for the U.S. Air Force 50th, space wing.

Continued government outsourcing of IT and communications operations and port requirements is providing excellent growth opportunities for Harris. With our IT services workforce distributed at over 300 locations across the U.S., Harris delivers an unmatched level of service commitment and responsiveness to our military, government and commercial customers.

Important new wins, during the quarter included several new classified programs with a combined value of $113 million. Also during the quarter, Harris was awarded a potential seven year $58 million dollar communications contract for the next generation space suite supporting NASA's Constellation program, which will establish an outpost in the moon and lay a foundation to explore Mars and beyond in the first half of the next century.

We were also awarded a new three year $20 million IT services contract for tactical video capture systems to support pre-deployment training at Marine Corps basis across the U.S. and abroad. The system combines real time audio and video fleets from multiple cameras across multiple training events to create an integrated view of the exercise including the light movement of personnel.

And during the quarter, Harris won its second contract in the healthcare IT market. This one is a $12 million contract for the U.S. Army Dental Command Information Management and Technology Division. Harris will provide operations and support for the Army Dental Command headquartered at Ft. Sam Houston, Texas and at other army clinics and locations around the world.

Turning to the broadcast business, fourth quarter revenue and broadcast communications was $174 million, an increase set of 5% compared to the prior year quarter. Higher revenue in video infrastructure and transmission systems was partially offset by lower revenue from our legacy software products, new orders were higher than revenue in the quarter.

Non-GAAP income in the fourth quarter was $8 million, slightly higher sequentially than the third quarter but below the prior year quarter. Operating expenses increased compared, to the prior year as a result of investments in R&D, incremental investments in international sales and marketing and new IT systems.

In July, we announced a workforce reduction of about 140 personnel at the broadcast division, primarily in North America aimed at improving our profitability in this business going forward. We expect to incur severance and vacant facility costs of about $5 million in our first quarter of fiscal '09, as a result of these actions.

We expect to generate annual savings of about $14 million. So it nets up to about a $9 million expected fiscal '09 improvement in income on a GAAP basis as a result of these actions.

Highlighting some of our significant achievements during the quarter, was the continued traction at the Harris ONE solution is gaining in both domestic and international broadcast markets. Harris is in a unique position in the markets provide a full range of work flow solutions across the entire broadcast delivery chain. This has been especially important to many customers as they transition to digital high definition broadcasting operations.

During the quarter the Harris ONE solution resulted in an equipment and services contract from a new customer called Seznec [ph], a widely publicized new entertainment services company combining traditional T.V. content, video-on-demand movies and Internet video into a single easy use consumer service. We're providing Seznec [ph] with traffic and scheduling software systems, videos servers and a full line of video infrastructure equipment.

Harris will also distribute content for Seznec [ph] and will provide network and IT managed services, provide network operation center located in Melbourne. On the international broadcast front our ONE solution led to several new orders during the quarter including Australia's SBS Network where we will provide end-to-end systems to rebuild their play up facility located in Sydney. Other important international orders in the quarter included Show Time, Arabia, Advanced Broadcast Corporation in Thailand and India's Kalaignar T.V.

Broadcast Communications is continuing to build an impressive list, customers and contracts. We're very pleased with our competitive position and the opportunities we see in the global markets. Continuing attention towards improving gross margins and reducing operating costs should result in improved operating performance in fiscal 2009.

I'll keep my comments on Harris Stratex Networks brief today since the company just held the conference call last week to provide comments on their preliminary expected fourth quarter results. As you know they ended the year with strong revenue growth. And orders that were significantly higher than revenue. Fourth quarter revenue is expected to be $187 million, an increase of 7% compared to the prior year and sequentially up 5% in the third quarter. Record orders for the quarter resulted in 1.6 book-to-build ratio.

This excellent revenue and orders performance highlights the progress that has been made over the last year in reorganizing and integrating the sales and marketing organizations and setting them on the right course for success. It also highlights that our product strategy is working. And customers have seen the value of the Harris Stratex partnership.

Global wireless transmission markets continue to be quite robust. The transition to IP based networks, the evolution to 4G technologies and bandwidth expansion in emerging regions continue to drive solid market growth. The challenge in hand for the management team is to focus on further integration of the two businesses, to expand gross margins and reduce costs. New CEO, Harold Brown [ph] and his team are working through detailed action plans to improve profitability for fiscal '09. And he will be sharing these plans during their fourth quarter earnings call.

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

Gary L. McArthur - Vice President and Chief Financial Officer

Thank you, Howard, good evening. Fiscal year 2008 was another very solid balance sheet year for Harris. We ended the year with $373 million of cash, cash equivalents and short-term investments. During the year we repurchased $225 million of our outstanding stock, paid off or converted $275 million of debt and received a ratings upgrade at Moody's bringing our current debt ratings to BBB plus BAA 1.

Return on invested capital as of the end of the year was 16.1%, nearly twice our weighted average cost of capital. Further we are entering fiscal year 2009 with nearly $1 billion of borrowing capacity and excess cash available for acquisitions, further share repurchases or higher dividends. As to the forward quarter, cash flow generated from operating activities was $197 million as compared to $150 million, $15 million in the fourth 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.

Operating cash flow for full year fiscal 2008 was $550 million as compared to $439 million in the prior year. Depreciation and amortization was $46 million for the fourth quarter of the current as well as the prior year. Depreciation and amortization for total fiscal year 2008 was $172 million.

Capital expenditures were $37 million for the fourth quarter as compared to $30 million in the fourth quarter of fiscal 2007. Our cap expense for the full year was $146 million. During the quarter we repurchased an additional approximately 438,000 shares of common stock bringing the total number of shares repurchased during fiscal 2008 to 3.95 million.

As of year-end we have $175 million of remaining availability under our $600 million share repurchase program. All of which is expected to be used to repurchase shares during fiscal 2009. Our full year tax rate for fiscal 2008 was 32% with an outlook for fiscal year 2009 of 33%, noting however that the tax rate for any given quarter could vary up or down.

Other areas of guidance for fiscal 2009 are depreciation and amortization of $170 million to $180 million capital expenditures including capitalized software are also $170 million to $180 million. And operating cash flow of $650 million to $700 million. This is $25 million lower on both ends of the range than provided during our third quarter earnings call.

In summary, fiscal 2008 was another very strong year for Harris with expectations for continued improvement in fiscal 2009.

Back to you Howard.

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

Thanks, Gary. Let, me wrap up by summarizing our outlook for fiscal year 2009. And, then discuss some recently announced organizational changes with you.

Revenue in fiscal 2009 is expected to increase by 8% to 10% compared to fiscal year 2008 with revenue growth expected in every segment. We're expecting 9% to 11% growth for Defense Communications, including within that 11% to 13%.growth at RF Communications.

We are expecting 6% to 8% growth in Government Communication Systems and 6% to 8% growth in Broadcast Communications. Earnings in the fiscal 2009 are expected in a range from $4.05 to $4.15 per diluted share representing a year-over-year increase of 19% to 22% above 2008.

We expect the second half fiscal year earnings to be stronger than the first half because that's where we will see the benefit of the first half cost reductions we are taking in Broadcast, Harris Stratex and Government Systems.

Segment operating margins in fiscal 2009 are expected to be as follows; about 29% in Defense Communications including within that margins of 33% to 34% at RF Communications. We are expecting margins at Government Communication Systems in a range of 10.5%to 11.5% and we're expecting 7% to 9% operating margins in Broadcast Communications.

On the organization front Bob Henry, Executive Vice President and Chief Operating Officer at Harris has announced his plans to retire following the end of fiscal year 2009. I have asked Bob to spent most of his time during this next year in Washington DC, where he will serve as a mentor to our many business teams located there; as well as he will provide executive leadership on the important feed cut program for the Census Bureau. He'll continue to oversee some of our corporate functions which include information systems, supply chain management and operations and security.

Dan Peterson has been named Group President for the Government Communication Systems Division and he'll report directly to me. Dan is a 31 year Harris veteran and most recently was Group President for Defence Communications and Electronics segment. As part of this change with Dan we've moved the Defense Programs business back together with national programs, civil programs and IT services businesses.

So, beginning with first quarter fiscal 2009, we'll report our two government segments going forward exactly as we did prior to fiscal year 2008. That is, we'll report Government Communication systems and [indiscernible] Communications as our two separate segments.

So the Defense Communications and Electronics segment now reduced in fiscal 2008 will no longer exist. Of course, Dan may not continue as President of the RF Communications Division but he'll now report directly to me.

Jeremy Wensinger, who was previously Group President for Government Communication Systems will be leaving the company later this month to pursue outside opportunities. I want to take this opportunity to personally acknowledge Jeremy's many contributions to Harris during his 20 year career.

Following the filing of our 10-K, we'll file an 8-K that will provide you with both the Government Communications Systems and RF Communications quarterly financial segment results for our fiscal year 2008 for comparability purposes going forward.

With that I'd like to ask the operator to open the line and we'll take your questions.

Question And Answer

Operator

Thank you, sir. The question-and-answer session will begin conducted electronically. [Operator Instructions]. We'll take our first question from Myles Walton, of Oppenheimer and Company.

Myles Walton - Oppenheimer & Co.

Thanks. Good Afternoon,

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

Hi, Myles.

Myles Walton - Oppenheimer & Co.

You had mentioned that you had received some initial orders on the Falcon III thus far and but some of that is in backlog, you haven't seen actually any press release on them, I'm just curious is this a customer request that you're not disclosing new orders yet, or they just not get the material size giving you only have way through the demonstrations at this point?

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

Some of each.

Myles Walton - Oppenheimer & Co.

Okay and when would you expect to complete the demos and actually make kind of make those more visible to the outside community as to the market reception of the manpack?

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

I think they are scheduled through the remainder of this calendar year. So through the next five months or so we will get through those 100 hopefully, we'll I am sure we'll continue to have some going forward, but with the certification now behind us that's a major milestone and has... I think encouraged customers to use these currently on field trials. So we are very optimistic about what this significant market lead with the GTO as certified manpack lightband networking radio is going to do for us.

Myles Walton - Oppenheimer & Co.

Okay and Howard you talked about the re-acceleration of international growth within the RF segment in the second half, can you quantify that in anyway whether that's a percentage growth or percent sales of our RF in general?

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

Well we just saw Myles, significantly higher growth in revenue in the second half than the first half and we're just trying to remind everyone that international growth is going forward is going to be a significant driver for RF revenue individually to our continued success with U.S. customers.

Myles Walton - Oppenheimer & Co.

And as far as the percentage of your sales I think it was $1.5 billion for RF this year, what was international's component of that you could split.

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

That I don't have that spilt at my figure tips but our year-over-year increase was greater in international than it was in the U.S. So U.S. grew but the higher percentage growth internationally and we had record international orders in the year. So again I think we're set up pretty nicely as we start fiscal year '09 and the pipeline of opportunities is very robust.

I've been spending a fair amount of my time with RF team internationally and whether it's in emerging markets with strong U.S. allies that are receiving funding from the U.S. government or whether it's in strong allies who have lots of petrol dollars, the opportunity pipeline remains very strong.

Myles Walton - Oppenheimer & Co.

All right, that's really good color and then last thing on the other way. Relative to the reflector business, you talked about the hoop design being in the earlier stages of the development process or design process, can you map out over the next couple of quarters, and how that risk will be retired. And we will all be in a similar position and as to where we are with the radio design?

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

Well I think we'll know a lot in two quarters certainly all the risk should be essentially retired by the end of fiscal year '09 what we were not suggesting we are going to have any more issues but we do also want to just reiterate that we are now pretty much through I believe the risk related to the radio rip [ph] but we still have the hoop design the first one is coming along nicely.

I was out in our reflector factory and we've made a lot of progress but we do still have some of that reserve remaining that we attached to the hoop design, we have two of those that are just into be produced.

Myles Walton - Oppenheimer & Co.

Okay thanks

Operator

Thank you. We will take our next question Jason Kupferberg from UBS.

Jason Kupferberg - UBS

Thanks, good afternoon guys.

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

Hello, Jason, good afternoon.

Jason Kupferberg - UBS

Good afternoon. So nice to see the increase in the revenue growth outlook for fiscal '09 for RF can you give us an idea how we should think about the backlog figures here, obviously you're kind of flattish versus the last time we heard the number in September but you are up 23% on a year-over-year basis at June I believe that pretty significant acceleration versus the growth that you would seen in the prior on a year-over-year basis. So how should we think about the potential correlation of the backlog growth versus revenue growth not just in fiscal '09 but beyond?

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

Well we're certainly very pleased with how we ended up the year in terms of total orders and backlog at around $1 billion that suggests that we have continued very good momentum. What we continue though to encourage when I get a report orders every quarter because they do bounce around and we think it's much more instructive to look at the trends.

And so certainly at least one time a year, we'll be talking about where we stand but don't expect necessarily that'll happen every single quarter because it might give a signal that's really not accurate, but at $1 billion we are heading into this year with significantly more backlogs than last year, to make our expectations obviously we still need to get new orders and we want to make sure that, that book-to-build ratio for FY09, stays above one. That's our goal, so that we are continuing to grow backlog, going forward.

That will come Jason, as a result of our continued success with U.S. government programs primarily, being the certified JTRS radio in the market, it'll come from the international growth that I was describing earlier on the call and then thirdly from our entry in the new markets, such as the Land Mobile Radio, the high capacity Line Of Sight Radio, we've talked about before that sold your personal radio which has been launched in international markets and so on.

So we continue to see lots of new products coming out of the RF R&D pipeline as a result of our investments and all of those together, we think are going to continue to give us good momentum going forward. And not only satisfy our need for growth in '09 but hopefully in fiscal year '10 and beyond.

Jason Kupferberg - UBS

Do you have a sense of what percent of the fiscal '08 RF com orders are expected to served in fiscal '09?

Jason Kupferberg - UBS

I don't know the precise number but it is a majority typically, we ship the vast majority of backlog that we have at the beginning of a year... in the year but I don't remember the precise percentage but its well over to 50%.

Jason Kupferberg - UBS

Okay. And then strength to Stratex for second they made some reference to additional restructuring and integration charges in fiscal '09. Can you help us quantify those at are, I'm assuming those are in your guidance but any additional details there?

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

Yes, I really can't speak to any details, I want Harold to do that on his call what I will say is that we have to make some assumptions for purposes of our guidance. We have done that and our guidance going forward is intended on to be on a GAAP basis, meeting that we have included the cost of our estimated restructuring in the guidance that were currently provided in the case of broadcast. I kind of detail that for you. We're expecting in the first quarter for example, to take $5 million worth of charges to get savings throughout the year of about $14 million, so the net GAAP benefits the P&L of that action will be about $9 million.

There is a similar kind of set of assumptions related to Harris Stratex, but the details of those will be disclosed by Harold when he has his earnings call but we have made some assumptions in our guidance and we plan to not exclude those for non-GAAP purposes. We would plan to continue to exclude items related to acquisitions, other than that I think it will take a very unusual item for us to exclude that for purposes a non-GAAP, does that make sense?

Jason Kupferberg - UBS

Yes that's good to hear and just my last one Howard if you can just set the record straight in terms of how senior management and the Board view take out overtures given on the format [ph] top of this past quarter?

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

Well I'm not sure there is anything more to say than as already been said. We are approached from time-to-time. That did occur in the timeframe that we were speaking of our last fiscal year. The Board carefully considered the initial indications that were provided. Discussions were never particularly advanced discussions. But I think you should conclude that the Board seriously considered the approach, the Board determined that the prospects of the company going forward to generate value for shareholders as well as how those indications compared with other market multiples on comparable transactions, that those were inadequate compared to what we believe we could do going forward.

I suspect I don't know, but I suspect we'll continue to have approaches as we have in the past, and I want to reiterate takes things seriously, and objectively looks at the validity of what we're receiving, and we'll continue to do that going forward.

Jason Kupferberg - UBS

Thank you.

Operator

Thank you. We'll take our next question from Mark Jordan from Noble Financials.

Mark Jordan - Noble Financials

Good afternoon, Howard. On the third quarter earnings call, you stated that you have $200 million left, your buybacks program you're able to buyback $25 million in the quarter. It was I believe stated that you wanted to complete this program by the end of the quarter. Was that M&A conversation restrict your ability to buyback stock during the quarter, and that's why you didn't complete the program, and secondly, how do you view that buyback program with the stock here in the high forties?

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

I don't believe that we said we're going to complete the program in fiscal year '08. So I don't believe we ever said that, when we announced the program, it was $600 million, $200 million in the first quarter of '07, $200 million when expected over the '08 and '09 fiscal years at around $50 million a quarter. We had accelerated some of the purchases in fiscal year '08, so this quarter we didn't have a lot left. With regard to going forward, I don't want to speak for the Board, but we will continue to look at our dividends and share repurchase has a viable use of free cash flow, at the same time, we continue to look for a strategic acquisition that would be a good fit with our businesses, and allow us to create value. I'm sure that at upcoming Board meetings will be talking about our future plans beyond the $175 million that's left in the share repurchase that's currently authorized.

Mark Jordan - Noble Financials

You stated in the press release which you saw lower revenues out of the F-18 and F-22 programs. When does the aggregate F-22, F-18 and F-35 programs sequentially start to grow in aggregate again?

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

I'm not sure about the specifics, I think we're expecting at least to be flat in those avionics programs in fiscal year '09 compared to '08 and as opposed to having them declined. I don't know that we're expecting them to grow a whole lot, you got the F-22 that has... we're kind of through our phase and you've got the F-35 ramping up. In the long run, I think the 35 Joint Strike Fighter is going to generate a lot of production volume for us. But I don't think we have much in a way of increases in avionics in '09 over '08 Mark.

Mark Jordan - Noble Financials

The final question if I may, what kind of seasonality should we plan, at RF you guys obviously saw a backlog going into the new year, will you be flat sequentially, down sequentially, up sequentially in the first quarter?

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

I think we expect sequentially in the first quarter to be down at RF compared to the fourth quarter without providing any specific numbers, but sequentially we were just looking here of my notes; we were down a little bit last year even on revenue growth that was up something like 20% in the quarter. So with our guidance this year 11% to 13% sequentially in the first quarter would normally be down.

So I think its fair to assume that'll be the case. I'm very pleased with our ability to maintain the margins in the RF business, maybe we're going to see maybe 50 basis points of erosion now this year. So we're feeling very good about that and that's not due to price, it's really due to mix of the new products coming in. But as I said in my prepared remarks we are expecting EPS in the second half to be higher than the first half, little more so in terms of the percentage of the total year, than we had this year because we got the cost reduction, we're taking cost now in first half of the year, we're going to see the benefits in the second half. So that's not to RF but that's talking to the consolidated results or expectations.

Mark Jordan - Noble Financials

Thank you very much.

Operator

Thank you. Next we'll go to Todd Koplin [ph] with Lehman Brothers.

Unidentified Analyst

Evening guys.

Operator

Hi.

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

Good evening.

Unidentified Analyst

Just a quick question to expand a bit on the profitability in RF I mean we've run, you obviously had a pretty high development spending for the past couple of years and we've been running in this comp 33 to 34 margin guidance for as long as I can remember. Despite all that development expenditure, I wondered if you'd provide a little bit more color on as you think about that business long-term, we've obviously put a lot of R&D, into our bunch of products presumably where there is a little bit tailwind as that begins to moderate if it does, and then there is obviously some mix issue with the newer products which are probably slightly lower margin. I mean is there a longer-term margin opportunity in this business or this development spending stay high to continue all the product introductions?

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

By margin opportunity do you mean it's an opportunity for margins to be higher than--

Unidentified Analyst

Yes it's higher than the 33, 34 that we have come to sort of expect annually.

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

Anything is possible certainly in individual quarters you know we bounce around depending around the mix and exactly what's being spent. But, I think the way I look at the business today is as long as we have a backlog of projects we want to fund that have an excellent return on capital, an excellent return on the R&D dollars and the various metrics we look at, I don't think we wanted to go a whole lot higher, we want to continue to spend.

So our spending as a percent of revenue on R&D going to be about the same in '09 as it was in '08 which means on higher revenue it will be higher absolute dollars and we would expect to continue to develop more products in a way, as you get larger you have the bigger appetite, that you have to feed to maintain your growth rights. So I don't see a lot of change going forward. It would take something, I think different than we're expecting, and I don't see a big reduction that I'm interested in taking. Right now, we still have more desire to spend money in the queue then we're funding.

So as additional dollars would become available, I would probably reinvest those back in the business, I think the return on capital in this business is just huge. And so it's probably the best single thing I could do with available additional profits will be put back into RF and generate after tax returns, I don't know Gary, 80% or 90% or whatever the number is. So that's my current thinking.

Unidentified Analyst

That's very useful color. Thank you.

Operator

Thank you. Our next question comes from Steve Ferranti from Stephens Incorporated.

Stephen Ferranti - Stephens Incorporated

Hi, guys. Nice job on the RF strength this quarter. I wanted to see if you might be able to just walk us through the thought process that led to the shift back to the old reporting structure?

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

Well, we accomplished... organizationally we accomplished our objective, which is we spent two years, '07 and '08, with defense programs and RF reporting to one group executive. So, we could really start delivering the collaboration there. I think that's going to happen now regardless of how it reports. So, it's clearly defense programs reside in largely in Florida with those other businesses. They operate from a common cost pool and it just makes more sense for us to report it that way.

Organizationally, the change primarily started with Bob Henry's decision to retire at the end of the fiscal year and an opportunity to look at the organization and to get the business reporting back directly to me, which I wanted to do for some time with RF, and with Dan Pearson now running GCS. So that's really all that was to it. And I think to last point is it's clear that our shareholders and investors who wanted more clarity on RF reporting, that's what we have always done previously. And so this allows us to do that. So I think it puts us back in a position that investors would like to see with regard to financial reporting and it aligns us with a more natural organization structure to business.

Stephen Ferranti - Stephens Incorporated

Okay, very good. That was helpful. And I guess look... just looking at historical trends in the RF business, it seems like your visibility entering '09 is probably as good has it's been in recent years. I mean, can you just comment on how do you feel about visibility entering fiscal '09 sort of relative to prior years?

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

I think it's very good visibility with regard to feeling like we have a lot of downside risk. You always have certain amount... you always have to get a certain number of orders and convert them in the year. But I think we feel pretty comparable to last year with regard to that.

With regard to upside, the last several years we've outperformed our forecast, at the beginning of the year our guidance. So we don't have perfect visibility to the upside, nor do I have any better visibility this year to the upside. So I think it has a lot to do with funds, how those funds are available, how they get moved around, but certainly our pipeline for opportunities is very strong. And it's really just the question of... especially internationally which one of the orders are closed this year versus the next year.

Overall, I think visibility is about the same starting with significant amount of the year in backlog and that's always very positive.

Stephen Ferranti - Stephens Incorporated

Okay. And last one for me. Wonder if you could just comment on where you guys might see the tipping point approaching when the DoD might begin adopting these interim JTRS solutions that you have available now in the market. Do you see ground being broken there in terms of momentum growing in that regard?

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

I feel like every quarter we make good progress. We've clearly, at least in my mind, kind of broken through at the Marine Corp. and Harris and the Falcon III have become very much standardized products with them.

We are still working hard on the Army. I think we are making progress there as a result of our success in our Marine Corp. and are trying to establish ourselves as viable, attractive, immediately available lower cost solutions versus perhaps product they'll get from the JTRS programs record down the road.

So I like our position, but clearly we are still working to displace legacy products like SINCGARS, we clearly don't understand and many others don't understand why you don't want to put out a radio into production today that is really not compatible standards going forward.

Similarly, we think that the model that the purchasing and procurement model that have been put together by the JPEO as part of the JTRS program offers customers ultimately a better prices, more competition while getting the latest most advanced radios. We think that's a pretty compelling proposition and over time I continue to feel like more people step on our side of the line at the Army. But everyone is not there yet or we're beginning a high percent of the Army's business.

So we're not there yet, but I think we're making progress every quarter and I don't see any impediments that are standing in our way. And as long as we continue to advance the product, which we will, as I said to some investors on a recent trip, you don't compare us today against what a competitor in the JTRS program might have two years from now, not like we're going just sit still. We're going to continue to invest R&D dollars to advance the technology. And unlike our track record and I think it's a very solid one with regard to doing what we say we're going to do and be able to compete very effectively. Our commercial model is a real advantage, and we're going to continue to use it we think.

Stephen Ferranti - Stephens Incorporated

Very good, that's all I had. Thanks and good look going forward.

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

Okay, thank you.

Operator

And we'll next go to Joe Nadol with JPMorgan.

Joseph Nadol - JPMorgan

Thanks. Good afternoon,

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

Good afternoon, Joe.

Joseph Nadol - JPMorgan

My first question is actually a technical one, which is that my understanding is that Harris Stratex won't be filing for a little while and I'm wondering if you're going to able to file fourth quarter results without them having filed since of course they are consolidated.

Gary L. McArthur - Vice President and Chief Financial Officer

Joe, this is Gary. Yes, we will file our 10-K timely and Harris Stratex is still working towards filing their K timely. It's a goal, they're working towards that, they have not given up on that. But them not filing on the same timeframe as us will not prevent us from filing our 10-K.

Joseph Nadol - JPMorgan

Okay. And then secondly on the same topic, I guess it wasn't quite clear on their call, but it seemed as though the legacy system that was responsible for the accounting error was a Harris system. Correct me if that's not correct. And if it is correct I'm wondering if that same system is used elsewhere in Harris and if you gotten back and kind of just make sure that's not affecting any of other the businesses?

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

Thanks for question because I do want to clarify what was said on the Harris Stratex call. The answer to your second question is no, this IT system is not used anywhere else in the company. It has been upgraded and replaced everywhere else that it was used previously.

This was not an IT system error or problem. This was a process problem with people in finance and accounting not doing reconciliations that had previously been done. So the IT system they're using was functioning, and it's not a world-class, but it functions the way it's been functioning probably for the 20 years it's been used before and after the merger.

So nothing changed there. What changed was people not following the process, and it is somewhat a manual process to reconcile lots of accounts and lots of work in process project orders. So that's what wasn't done, nothing with the system changed.

Joseph Nadol - JPMorgan

Okay. That's helpful. And then just finally on FDCA, I'm wondering if you could give us an update how we're going and what's happening there? There's been some various press reports of ongoing negotiations, no award fee, and obviously you're looking at potentially... have been looking at that contract getting bigger. So where are we today?

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

Well, we're still in discussion. So I don't have anything to report. As I indicated, Bob Henry is spending a fair amount of his time leading this effort at this point. I will tell you I don't believe that in our fiscal year '09 that what we've provided in the way of guidance for Government Systems, I think we're feeling pretty good about the FDCA component that's in that guidance.

The question is how much if any upside will there be, and that's ultimately going to be up to the Census Bureau as they decide to replan and rescope the program. So I just... I don't know. I know what they've said in their public statements as you do, which is they certainly envision continuing to utilize Harris for the next phase of the program, which is called Address Canvassing, and that runs essentially throughout our fiscal year 2009. I don't envision any change to that based on what I know at this point. How much work we do beyond that as they move into then the rest of the center stage is what is under discussion right now. And just as soon as that's completed, I don't exactly know when it's going to be completed, I hope it's within the next 30 days or so. But I am sure they well announcing that and discussing it with Congress and then we will in a position to announce it, Joe.

Joseph Nadol - JPMorgan

Okay. And then just one more need to Gary, you changed your cash flow guidance very slightly for the next year, just wondering what was the moving part there?

Gary L. McArthur - Vice President and Chief Financial Officer

Really what happened was we did get to 550 million, which was the lower end of our range, but it was lower than our internal working capital improvement targets at three out of four of our divisions in the fourth quarter. We have a little higher inventory, lower collections. And with that in mind, I just thought it was prudent to take the guidance down for next year.

Joseph Nadol - JPMorgan

But if the working capital was higher, that would give you more opportunity there going forward, wouldn't it?

Gary L. McArthur - Vice President and Chief Financial Officer

Yes, but I thought really where we ended up were our target metrics were a little lower than we expected to be at the end of this year. So the bridge to get to where I had hoped was a bigger amount, obviously. And I just thought at this point in time it was prudent we hadn't made as much progress as we hoped. I do want to say thought that we made substantial progress over where we were at last year. I think you're aware that we've said that free cash flow as a percentage income was 79% in '07, we finished this year at 87%. Every one of our working capital measures improved over last year. They just weren't as high as we had hoped. And I thought it was prudent with that to take the guidance down for next year.

Joseph Nadol - JPMorgan

Okay. Thank you.

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

Thank you.

Operator

Thank you. We'll go next to Chris Donaghey with SunTrust Robinson.

Chris Donaghey - SunTrust Robinson Humphrey

Hi, good evening, Howard. Want to circle back to the acquisition speculation from a few weeks ago and presumably on those board discussions, you looked, you have to have looked beyond just fiscal 2009, but I wonder if you can characterize for us the discussions around the three-year outlook for the business and how those discussions went?

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

Well, we do a three-year strategy plan that we presented to the Board each year and we did that again this year. And the timing just happened to kind of coincide with this approach. So I think the Board had the latest view that senior management has about the future. Obviously, the forecast has arranged possible outcomes and we talk with the Board of the plan, we also talk about upsides and we talk about risks. We get through all of that and consistent, I think, with appropriate practice, they brought in outside legal counsel and financial counsel to also hear what we were saying and look at the analyses. So I think they have the best possible input that we could provide. And it was not only a point estimate, but a range of potential outcomes because we certainly don't have perfect visibility even into fiscal year '09 as any company would say and certainly we don't in '10 and '11. So, we tried to lay out the range of possibilities. And again, the conclusion was for really for two reasons based on our internal plans and how they felt about the likelihood of those being completed. And I would say they were influenced, I think, by our performance the past several years where we've typically beat our plans and exceeded them. But they are were influenced by looking at what is fair value based upon various market multiples and metrics of comparable transactions. And in the Board's judgment and their business judgment, it fell short on those counts. And so there was no discussion or no decision to proceed with further discussions.

Chris Donaghey - SunTrust Robinson Humphrey

Great. Thank you for that color, I appreciate that. One last question sort of the macro topic as well. With the issues that Harris Stratex Networks this quarter and margins that at least in broadcast coming in below my expectations, how are you thinking about those commercial segments in terms of their strategic value to the company going forward?

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

Well, as I've said before, I view or equate strategic value with what can those businesses do to create value for our shareholders. And on the one hand, I am still very optimistic and very positive about both of the businesses' ability to create value because they are not nearly at their potential margin levels. So from where we are to aware where they could go, they have the potential to create a lot of value. The question that we will continue to ask ourselves and discuss with our Board is what is the likelihood of them achieving it because just having potential, but not achieving it doesn't create shareholder value. Instead it ties up our capital in these businesses that could perhaps be redeployed and create value more efficiently in some other way.

So, clearly we did not meet our expectations this year in either one of those businesses and we will continue to have discussions about variability going forward. Right now we are firmly committed and believe that those will do better in '09. And if they accomplish the objectives that are embedded in the guidance that we've provided, they are going to create value for shareholders and I think returns some optimism and some positive view on their long term role in the company. If they don't, then I think it is going to be subject to us looking at various alternatives. But I am certainly not signaling that today.

We think both of them are going to provide improved performance. Having said that, we've said that before. And it hasn't always come to fruition. So, the Board has to look at the likelihood of that and compare it to other potential alternatives that we might have. Today, we are very optimistic. And part of the optimism, I don't think is blind optimism. It's driven by the fact that both businesses are doing very well in the top line. That's says that they are doing a lot right with regard to customers and product strategy and business strategies.

Execution has to improve in both businesses and they got to continue to both take costs out. And they are both taking actions on that in this quarter and I talked with you about broadcast. Harold will talk in detail about Harris Stratex.

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

Okay, great. Thanks again, Howard.

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

Okay.

Pamela Padgett - Vice President of Investor Relations and Corporate Communications

Operator, we will take one really quick question and we will then have to wrap it up.

Operator

Thank you. Our final question comes from Chris Quilty from Raymond James.

Chris Quilty - Raymond James

A fine quick question.

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

Go ahead, Chris. You have got the floor.

Chris Quilty - Raymond James

Okay. I would strain myself. You didn't mention the WIN-T program in the defense area. And that's something you seem to have been excited about a while back?

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

I am still excited about battle-space networks. I think the WIN-T program per se has morphed a little bit into early fielding for the JNN program. I don't think we've seen a lot of year-over-year growth in the program. So I probably don't know enough details to go into any more than that. But I will have someone look into it and we'll give you a call.

Chris Quilty - Raymond James

Okay. And did I just... I can track the transcript later, but, Howard, did you say that international orders were greater than domestic in your RF Comms business?

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

I said international orders growth. So the percent increase in orders in '08 over '07. So the percent increase was higher in international and international was a significant record.

Chris Quilty - Raymond James

And was it also the sales growth was also greater?

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

In the second half of the year, yes, it was.

Chris Quilty - Raymond James

Okay. And final part of my short --

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

Not to confuse you, but there was growth domestically in the second half as well, but international growth was just higher.

Chris Quilty - Raymond James

Okay.

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

Okay.

Operator

Thank you. We'll turn call back to our speakers for any additional or closing remarks.

Pamela Padgett - Vice President of Investor Relations and Corporate Communications

Thank you very much everyone for joining us, appreciated.

Operator

And ladies and gentlemen, that does conclude today's conference. We appreciate your participation and have a wonderful day.

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