L3Harris Technologies Inc (LHX) — Q3 2015 Earnings Call Transcript

Thank you. Good morning, everyone and welcome to our third quarter fiscal 2015 earnings. I'm Pamela Padgett and on the call today is Bill Brown, Chairman and CEO and Mick Lopez, Senior Vice President and Chief Financial Officer. And before we get started, a few words on forward-looking statements. In the course of this teleconference, Management may make forward-looking statements, including regarding the acquisition we announced today. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information and a discussion of such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC. In addition, our press releases and on this teleconference and the related presentations, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures in respect of our third quarter fiscal 2015 financial results is included on the Investor Relations section of our website, which is www.harris.com. A replay of the call will also be available on the Investor Relations section of our website. And with that Bill, I will turn it over to you.

Okay, well thank you Pam and good morning. Our third quarter results were in line with our preliminary release issued April 21, which opened our debt financing window for the Exelis acquisition. We had a very successful bond offering and we're making progress towards an expected June closing and we'll discuss this further later in the call. So before turning to Slides three and four of the presentation, I'll point out that we're now reporting on both a GAAP and non-GAAP basis to call our acquisition related costs separately. In my comments today, it will center around non-GAAP performance, which excludes acquisition costs. Third quarter earnings per share was $1.32 and benefited from a lower than expected tax rate that added $0.07 per share. Earnings per share also reflected good operating performance benefiting from lower costs, excellent execution and a favorable product mix in RF Communications and government communication systems. Operating margin was 100 basis points higher than in the prior year even with higher R&D investment, which was up 8% in the quarter with some of the increase due to timing between the third and fourth quarters. Year-to-date, R&D investment is 5.6% of total revenue with a significant portion being spent in the Tactical Radio business where we're aggressively developing product offerings for upcoming army and SOCOM modernization procurements. Revenue for the company was $1.19 billion, down 6% with Tactical revenue growth more than offset by further weakness in public safety and a significant decline in integrated network solutions, primarily from the wind down of two major programs in IT services. As anticipated, revenue also declined in government communication systems, largely due to a tough prior year compare related to revenue from commercially hosted satellite payloads. Orders in the quarter were $1.2 billion, up 9% over the prior year and up 9% sequentially. Both RF Communications and government communication orders were up sequentially. Tactical Communications revenue was up 6% on continued international strength and some improvement in the U.S. market. Procurement activity picked up in March and April as GFY15 procurement dollars were allocated to our DoD customers including SOCOM where we received orders totaling $27 million to continue expanding their Wideband networking capability. And momentum continues to build for U.S. Tactical modernization. Just last week, Harris was awarded a 10-year $3.9 billion IDIQ contract for the rifleman radio with an $800,000 initial order for qualification and test units. The army expects to begin fielding rifleman before the end of GFY17. The army also recently kicked off their long awaited procurement for the Manpack. A draft RFP was released in April and was quickly followed up by an industry day as well as the first quarterly tactical networking forum, which had intended to provide the industry with greater insight into the army’s upcoming procurement requirements. The final RFP is anticipated before the end of September with an awarded second quarter GFY16 and full rate production slated to begin in the fourth quarter of GFY17. Preliminary information from the army indicates a 10-year multi-award IDIQ contract with a ceiling value between $12 billion and $12.7 billion. And at SOCOM, last quarter we submitted our bid on a $390 million handheld portion of SOCOM’s modernization program with an award anticipated in September and just a few days ago, SOCOM issued an RFI for their Manpack, which we currently expect will be awarded in the Spring of 2016. The total SOCOM modernization procurement, which will eventually include a high-frequency radio, could reach $900 million. Now winning rifleman radio on top of the mid-Tier MNVR radio a few years back and now having major procurement underway for both the army Manpack and SOCOM is the culmination of a multi-year, multi-pronged effort for Harris. Over the last several years, we worked hard to ensure army procurements are open to commercial competition and then more recently pushed for multi-vendor instead of a single vendor award to ensure a level playing field with the program of record. We invested more in IRAD when the rest of the industry was investing less raising R&D spend by more than 20% through the downturn and today we sell one of the best lineups of Tactical products and technologies that we’ve ever had. And with modernization procurements now underway and larger than anticipated, Harris is well-positioned to capture a significant multi-billion dollar opportunity. We also see continued strength in the international Tactical market where our business is now twice the size of our U.S. Tactical business. Recent orders include $25 million and $60 million from two NATO countries, highlighting our broad installed base around the world that allows us to be more competitive in supplying radios to allied countries where interoperability is a critical element for coalition actions. We also received orders of $22 million and $47 million from two countries in the Middle East and from a country in Africa, we received $15 million in the quarter plus $74 million following the close of the quarter through the next phase of modernization bringing orders to date to $486 million. The international market is healthy and our opportunity pipeline remains solid at $2.5 billion and continues to replenish quickly. In Government Communication Systems, we continue to build on our strong position with the FAA and received our third major next-gen award in the year $238 million single award IDIQ for the Common Support Service Weather Program to design and implement a system to provide real-time weather information across the National Airspace System. Also from the FAA we booked $146 million in follow-on orders under our long-standing FTI program to provide the ultra-reliable network backbone of the U.S. air traffic control system connecting 4,500 different sites across the country. Our DoD business within GCS continues to ramp with F35 and our strong intelligent franchise provides a platform for future growth. New classified contract wins in the quarter totaled $133 million including a three-year $23 million contract from a new customer for space situation awareness and support of air force mission. And also in the Intelligence area, Harris was awarded a five-year $300 million single vendor IDIQ contract to integrate various intelligence systems. Now I’ll turn over to Mick to comment on segment results and guidance before providing an update on the pending Exelis acquisition.

Thank you, Bill and good morning everyone. Moving to segment results on Slide 5, RF Communications orders were $395 million, compared to $405 million in the prior year, and revenue was $451 million compared to $457 million last year. Tactical Communications revenue was $356 million, an increase of 6%. Total orders were $286 million and were about flat from the prior year of $285 million. In public safety, market softness and intense competitive pressures continued. Orders were $107 million, compared to $120 million in the prior year, and revenue was $95 million compared to $122 million last year. Operating income for RF Communications was $151 million and operating margin was a strong 33.5% as a result of favorable mix primarily in international and from lower costs. Turning to Government Communications Systems on Slide 6, third quarter revenue was $455 million, down 5% compared to $477 million in the prior year. Higher revenue from the U.S. Navy’s Commercial Broadband Satellite Program and the NGAs Foundation GEOINT Content Management Program was more than offset by lower revenue from space customers and from NOAA’s weather program, which transitioned to an integration and test space. Segment operating income was $75 million and operating margin was 16.4%, reflecting strong program performance and favorable product mix. Turning to Integrated Network Solutions on Slide 7, third quarter revenue was $299 million, compared to $348 million in the prior year with the decline primarily due to the roll-off of two large programs in IT services. Operating income was $12 million compared to $21 million last year primarily due to the wind down of the highly profitable MCI contract. During the quarter, IT services was awarded a 10-year $450 million single award IDIQ from the Defense Information Systems Agency to provide systems engineering and program management services for the crisis management system, a secured video and voice communications network for senior U.S. government officials. This award extends our 30-year relationship supplying this critical component of our national security infrastructure. Also in IT services, we were awarded a position on the $960 million multi-award IDIQ contract for network-centric solutions to application services. In CapRock, we strengthened our relationships with two longstanding energy customers. In the quarter we received a $35 million order from a major offshore oil and gas player for four-year extension of services across their fleet and two orders totaling $21 million from a leading energy services company extending services across United States and international locations. Turning to Slide 8, the company generated free cash flow of $150 million, up from last year's $120 million, as a result of lower CapEx with the completion of GCSS new engineering facility. Our non-GAAP tax rate was 29.9% in the quarter, lower than previously expected due to favorable 2014 tax settlement. As announced on April 21, we increased fiscal 2015 guidance for non-GAAP income from continuing operations per diluted share from a range of $4.95 to $5.05 to a range of $5 to $5.10 and updated revenue guidance from a decline in a range of 1% to 3% to an expected decline of about 4%. Fiscal 2015 non-GAAP guidance does not include any impact from the pending acquisition of Exelis. GAAP results will include potential post-closing revenue and income from Exelis, increased share count from the transaction, and acquisition-related costs that are expected to be in the range of $270 million to $290 million, including a $125 million in estimated makeup costs associated with the refinancing of Harris debt. In RF Communications, to reflect further weakness in public safety, we now anticipate revenue to be down 3% to 4% and expect to be at the higher end of our previous operating margin guidance of 30% to 31%. In Government Communication Systems, revenue guidance is unchanged in the range of up 2% to 4% with operating margin slightly higher in the range of 15.5% to 16%. In Integrated Network Solutions, revenues are now expected to be down 14% to 15% to reflect no improvement in the slow procurement environment for IT services and an incrementally softer outlook at CapRock due to the impact of lower oil prices on the energy market and, to a lesser extent, in healthcare due to a slower revenue ramp. We now expect fiscal '15 operating margin of about 6%. Expectations for free cash flow aren’t changed at about 100% of non-GAAP net income. The tax rate is now expected to be 30%, which adds $0.05 per earnings per share for the full year. Back to you, Bill.

Okay. Thank you, Mick. When we began fiscal 2015, we anticipated that the constrained budget environment and slow procurement would create some revenue challenges. In Government Communication Systems, we are on a path to revenue growth for the fiscal year, our strategy of expanding an already strong franchise helped overcome government budget constraints. In RF Communications, the strength in international tactical markets has continued and we have a healthy set of opportunities, and while it's premature to call a bottom to the U.S. tactical market, we’re seeing the back half improvement we expected and the momentum building on the large DOD monetization procurements is encouraging. In both Government Communication Systems and RF Communications, bottom line performance is excellent. So while we see positive indicators in our two largest businesses, our revenue challenges in fiscal '15 have been greater than anticipated in public safety and in integrated network solutions. In public safety, the market is soft and competition is aggressive. We’re focused on recovery and making measurable improvements in quality and execution and we continue to build our Leadership Team and invest in new products. This quarter, we introduced our new XG15 portable radio, which extends our full suite of product offerings and provides public service workers with P25 capability at a competitive price. We’ll continue to focus on execution and delivering innovative products for our customers, which we believe ultimately will bear fruit as the market improves. In CapRock, while orders were up 24% with energy orders up 27% in the quarter, we now expect first half revenue growth to turn into a revenue decline in the back half. Our customers are reacting to the persistently low oil prices and are taking actions today that even they didn't contemplate just a few months ago. We’re responding by not only working to lower costs but also to provide technology that will improve the competitiveness and stickiness of our managed communications offering. In Q3, we launched what we call CapRock One, a multiband antenna and software that transparently switches between C, KU and KA bands to provide the most optimal and cost-effective transport medium and is getting great responses in the marketplace. The acquisition of Exelis builds on the stronger parts of Harris and is an exciting, transformative new chapter for the company. We've now secured debt financing for the acquisition at very favorable terms, which we've outlined on Slide 10. A $1.3 billion variable rate term loan is in place, which provides us a path for quickly deleveraging post-acquisition and we recently issued $2.4 billion in bonds, a portion of which will fund our redemption of $750 million in existing higher coupon Harris notes to take advantage of low interest rates and to extend maturity. The $2.4 billion in new bonds are at a weighted average coupon of about 3.7%. As anticipated, we significantly reduced our weighted average cost of debt, including the variable rate term loans to about 3.5%, 240 basis points below our previous weighted average cost of 5.9% and with two years longer time to maturity. We now expect year one net interest expense of $180 million to $190 million and our balance sheet will retain ample liquidity with about $300 million of remaining cash on hand and an existing revolver of $1 billion. While we received a second request from the Department of Justice, we don’t expect any trust clearance to require the divestiture of any business or asset. The request for additional information is related to intellectual property needed to update the inscriptions in Singar’s radios to meet an NSA 2024 requirement for secret communications. The army is considering whether to upgrade the encryption capabilities of these older radios and much of the information requested is intended to help determine if the army has all the intellectual property it would need to enable other companies to compete for that encryption modification work. We anticipate resolving these concerns promptly. The Exelis shareholder vote has been set for May 22 and we continue to expect the transaction to close in June. Integration planning is well underway with a full-time, highly experienced team led by Sheldon Fox, Group President of Government Communications Systems. Sheldon is a 31-year veteran of the Government market with deep experience in key areas where Exelis and Harris have complementary businesses such as in space and intelligence, advanced weather systems and air-traffic management, and of course, I am personally deeply involved and will spend a significant amount of my time over the next several years to ensure we capture the full value of this acquisition. Since announcing the acquisition, the additional work we've done has only given us more confidence in delivering the previously estimated savings of $100 million to $120 million, which you'll remember is net of what flows back through to our government customers. We're working hard to accelerate synergy capture and be at a running start on day one following the close. And with that, I would like to ask the operator to open the lines for questions.

Hey good morning, guys.

Good morning.

Just a couple of quick ones. First on the CapRock decline, I know last quarter you had sort of outlined that you were protecting for weakness in that market, but not really knowing how to size it just yet, but obviously, we're a quarter on now. What sort of declines are you expecting now at this point and do you think you'll hit a sort of run rate decline by the end of the year that levels off? And how should we think about how much of that is price versus volume and is there any EBIT related impact from unsold bandwidth you can't sell on some of the current contracts right now? How should we think about the weakness there?

Let me sort of describe what's happening at CapRock and then come back to your question about the unsold bandwidth piece. I think we had a really good start to the year frankly in the CapRock business. Revenue in the first half was up driven in the 3% or 4% range double-digit low double-digits on the commercial side. Somewhat weak on the Government side, but overall 3%, 4% in the first half. And we’re pretty pleased with what's happening in the Maritime space and frankly in the energy side, the orders in the last two quarters were quite good and surprisingly good, up about 25% in Q2 and again a little bit better than in Q3. We do see revenue deteriorating sequentially and year-over-year in the third quarter and we expect that to continue, Carter, into the fourth quarter as well. It will be down probably double digits in the fourth quarter on the energy side. We do see CapRock as a whole being flat to down for the year and down in the back half. With oil that’s now sitting in the $50 to $60 per barrel range, I think customers today continue to react quite aggressively to what’s happening in the global oil market to try and anticipate where pricing is going to be. They're taking very, very aggressive actions and like I said in my remarks, somewhat unpredictable where we were and what they were going to do back in the early part of February. They were doing a lot of restricting. Capital spending is coming down. They're parking and may be scrapping some rigs. They're delaying the awards and acceptance of new rigs, and that’s certainly having a pretty big impact on our business. When we look at what’s happening in this downturn versus last several downturns in this global oil market, we see rig count down about 30% by the end of March. I would say we’re halfway through the downturn, so we do expect further erosion. We do expect it's going to carry into '16 and be a tough '16 for us. We think the road here is going to be slow in terms stabilization and the long recovery, but I would say for CapRock as a whole, recall we've talked about the size of the energy business at about $400 million. So it's about 8% of total Harris as we speak today, even smaller when we combine it with Exelis. So it's not a big part of the company, but we do expect further pressure in the fourth quarter and the next year on the energy side, and that’s going to drag down CapRock. Now in terms of the bandwidth, fortunately, we do see quite aggressive growth in the Maritime space typically in the cruise industry and that's offsetting some of the pressure that we’re seeing in the energy space and some of the bandwidth that we procure for the energy side.

So you believe that we will find the bottom in both revenue and margin terms in fiscal '16.

We're not going to call '16 yet, but we do see '16 being softer than we’re seeing right in '15, Carter.

Okay. And then just a quick follow-up just to switch gears quickly on the Exelis synergies you briefly mentioned, you talked about accelerating the synergy capture there on the $100 million to $120 million. Now that you had a couple extra months to go through this, do you think there is upside to that number over time or any color in the work you’ve done in identifying and kind of sizing those opportunities?

No Carter, no more color today. We still feel very comfortable at that $100 million to $120 million by year three net of what’s going to be flowed back to our government customers. We’re working hard at it and we’re doing a lot of pre-closed planning independently on our own with some outside advisors at key root type approach. We do expect to be running that at closing and we want to pull forward as much as we can. But no more color today working right now and it’s getting to a close.

Great. Thanks a lot, Bill.

You bet, Carter.

Hi, good morning everyone.

Hey, good morning.

Good morning.

Bill, can you just go back to that detail you’re providing on the second DoJ request and it sounds like they’re thinking about a technology upgrade and checking if they have a certain amount of IP. I guess what would happen if they did want to do that and they didn’t have enough IP like can you maybe just give us a little bit more detail on how concerning those two or not?

I can’t really give a lot more detail on this call. There has been, as you would expect, there is active conversations going on with the DoJ. And this could go in a variety of different ways. I think a couple of things I would say and not to just reiterate what I said in my prepared remarks. But I think the good news is that it is narrowly contained in the Tactical Radios side, it specifically relates to IP and ownership rights for IP. It does not and we don’t believe it will require any divestiture of businesses or assets. So we think we can get our arms around the concern this issue relatively quickly and we’re working and providing the DoJ the necessary information that they require to work through and resolve this question that they happen to have. We’ll have more to say over the coming weeks as we take this issue forward to DoJ. But nothing I can’t really speculate on what the outcome or solution may be on this call.

So they just require you to give IP to the army? Could it be that simple?

There could be a variety of responses; we certainly that could be one, but I won’t even speculate as to where they want to go in terms of addressing their particular question given that it’s a very active conversation that’s happening today with the DoJ. I think I could provide anymore color to that, Noah.

Okay. In the legacy business with when we look at before you’re layering in some of the new business you’re winning in the domestic Tactical Radios market with DOD, how do we think about how much of what you have today, you’ll still have two, three, four years down the road when you’re also layering in all of those new business versus how much of what you have today is replaced by that new business?

No, there are certainly going to be some replacement of current business, but I think it’s on the margin frankly it is going to happen over a long period of time, Noah. Please keep in mind that all the radios that are in the DOD inventory, it’s less than 10%, maybe 5%, 6% that are Y-band capable. So I think it’s a long-term path to replace all of those Narrowband radios with Wideband radios and I think that’s going to happen over multiple years, not multiple quarters.

Got it. And then anything you can tell us about rifleman, I guess in terms of trade in your bid and how we can think about margins on new business revenue compared to the current margins at Harris?

Even though I really like the position that we’re in today, it’s something that didn’t happen overnight, it happened over multiple years ensuring competition was open to competition, we can compete for those procurement dollars that we invested in radio that met the requirement, was in some ways more advanced than we’re program of record was at the time, which caused some change in the competitive landscape for the rifleman radio. We are bidding on commercial terms, it’s a competitive procurement, it looks much the same as what happened on the social program a number of years back, where it was an IDIQ shoot-out between us and Talas on task orders. It was completely commercial. Initial awards for rifleman are going to be LPTA Lowest Priced Technically Acceptable and over time there are going to be some best value type opportunities for us. What’s interesting is that the ceiling value is quite high at about $3.9 billion and in the rifleman, the RFP it was both the single channel rifleman but also they say two channel handheld over time and how that gets kicked and when that’s being brought in is still all to be determined. So I like our position, I like our scale, I like the advantage our technology brings. I like the fact that our commercial model allows us to continue to invest to advance our technology and compete with whatever we have, and our margins today on the handheld look great and it’s even after competing with players around the world on this switch program. So I can’t help but like what we have in the outlook for our business both top line and bottom line.

Okay. Thanks a lot.

You bet.

Good morning guys. Nice quarter.

Thanks, Pete.

Hey Bill, you sort of anticipated my question on U.S. DOD radio volume and whether or not we were kind of at the trough in fiscal 2015. The volumes have come down quite a bit, you won rifleman, you mentioned MNVR, what else are you kind of looking for to kind of seem at the trough? I mentioned SOCOM win, if you could get that would help quite a bit, but are you worrying about the CR next year; what else is kind of going into your thinking?

Well, we feel really good about we’re happy frankly in just the fact that the rifleman IDIQ was awarded last week and I don’t think you’ve ever heard me saying sooner than we expected, when I talk about government contracting. It was sooner than we expected by a number of months and that’s because of the changes that happened in the industrial base for the rifleman radio, I believe. And it came in a lot higher than we thought and it’s encouraging to see Manpack moving forward, it’s encouraging to see the SOCOM monetization moving forward and an RFI out last week for the Manpack part of SOCOM. So we’re starting to see some movement here and as I said in my remarks it is up to call to bottom and we’re seeing both sequentially and year-over-year improvement in the second half and we expected that would have happened at the beginning of the year. If you look at the budgets, there is still a lot going on, I see the outlook I think looks good for us. It’s improving a little bit, we’re looking at what’s happening coming out of the house from services. We see what the mark-up is that with last week I guess, was it really last week. We showed the base at the BCI cap but a substantial amount of OCO funding in total at $585 billion in line with the President happens to be in and did it follow the way we have seen past years in terms of how that budget flows down to Tactical Radio line items. I think if it follows that, it will follow where the President happens to be and if the President puts in a budget that showed good funding growth on the MNVR product, good funding growth on HMS and good funding increases in the other services then I think that’s quite encouraging. For the HMS, which is the rifleman and the Manpack, there is a lot of unspent fund still available and if you look at the ramp, it ramps relatively quickly over the next two to three years to close to $0.5 billion a year against in the President’s budget. You know in a couple of years, which I think is quite encouraging, so you put the fact that the Army is moving forward with the budget next to the fact that the funding appears to be ramping pretty nicely over the next three or four years, you put those two pieces together and then I think the outlook for business at DOD is pretty positive.

Okay. It’s very, very helpful. Thank you. And I want to ask another question about the transaction; do you guys still plan on paying off roughly half of what you incurred over five years? Is that still the plan?

Our plan is to go from 2.9 to 1.5 times net leverage over the first three years, which would require us to pay roughly $2 billion a day, plus or minus, in the first three years.

Okay. Got it. And then on the acquisition related cost roughly $280 million, are those all cash first of all and will you get about $125 million of that in the fourth quarter on the refinancing cost?

Yes, most of those are cash. The $125 million we mentioned for the makeup, along with the $715 million for refinancing, includes approximately another $75 million that will be related to acquisitions, severance fees from Exelis, lease cancellations, and restructuring. The rest primarily covers fuel costs and financing for the bridge, along with some negative impacts, so most of it is cash.

And I would also just say that again presumes a June close; we expect the June close but that will presume a June close.

Okay, great. Thank you very much guys.

Sure.

Thank you. Good morning.

Good morning.

Bill, could you comment on what effect, if any, the strengthening dollar and softer oil prices have on your foreign pipeline at RF?

On the price of oil, I think it’s a bit hard to say, we haven’t seen any significant impact at the moment. We do know that more than half of our international pipeline is in the Middle East and Northern Africa region. What’s interesting is that even though the price of oil has come down quite precipitously over the last six to nine months, that piece of our pipeline on a percentage basis and the dollar basis is where it was six to nine months ago, even after booking a number of large orders including one that came out just a couple of weeks ago in Africa at $74 million. So we feel pretty good about that, we do know that we have a large opportunity coming over the next several years in Iraq. We do know that the country doesn’t have a lot of foreign currency reserves; oil is going to be a bigger impact on Iraq, but likely, fortunately, it’s sort of underpinned by U.S. funding both in the fiscal 2015 budget as well as in the fiscal 2016 proposed OCO funding. So that does backstop us a little bit for any oil-related concerns in Iraq. So overall, not a concern today, it doesn’t mean that it won’t come in front of us over the next number of quarters. On FX, I think you know we do business around the world in U.S. dollars and we compete against, in some markets, Euro-based competitors, so over time that could have some marginal effect if we don’t adjust price and if the Euro doesn’t improve. We’re seeing, in the next couple of weeks, the Euro getting a little bit better. But today, no big effect but again if the dollar strengthens considerably from where we are today, there could be some effect or we have to react with pricing.

Okay. And just two others, given the book-to-bill as taxable assets under one again, I just wonder, can you give us a sense for what you anticipate over the next couple of quarters? You mentioned the improved procurement environment since the quarter; what should we expect book-to-bill to trend out in the next couple of quarters?

So year-to-date book-to-bill was about 0.87, so I think given the current U.S. government environment and some of the pretty healthy shipments we’ve made internationally, I think it’s a pretty good result at 0.87 and in order to get our numbers for the year and our guidance for the year, book-to-bill for the year needs to come in pretty close to one. So we do know that there are some big opportunities that are coming our way in Q4 and good again went out that we received a pretty good size award on the international side: $74 million just a week or two ago. And that’s I think a good positive sign. From I am not sure going to fiscal 2016, but certainly as we look out for the balance of the year, which is only a couple of months away to the end of our fiscal year, we’re down year-to-date about 1% on Tactical revenues, obviously to be up low single digits on the year, call it a couple percent. We do see some good growth in the fourth quarter. That’s going to come with some good orders that we do expect and international side has been trending pretty well; it’s up high single digits. We expect it to be up high single digits for the year, which means Q4 is going to be about that same level of performance. On the DOD side, it has been softer. On a year-to-date basis, we are down sort of in that 20% range, we’re guiding to be in our guidance that we expressed a little while ago on where RF as a whole is embedded, in that is DOD down 10% to 12% and probably on the better side of that maybe down about 10%. That requires Q4 to be quite good; we typically see our Q4 being stronger sequentially from Q3 and we saw that last year, our Q4 revenues were about double what we were in Q3 last year. We did see some positive movement in DOD in Q3 and it was reassuring to see positive growth after a number of quarters in a row being down year-over-year on DOD. Also glad to see that the pipeline for DOD is getting a little bit better than we were three months ago. Last time, we spoke, it was about $900 million or so in size; today it’s about $970 million, you know there is more that is weighted towards proposal closure finalization. So the nearer term pipeline is looking a little bit better and that gives us a bit of more comfort. In Q4, we will be better year-over-year and better sequentially in Q3 and we’re accounting on that to hit the guidance and to again come back to a full year of close to a one on book-to-bill. I won’t speculate at the moment going into fiscal 2016; I have more to say about that once we close Exelis and report our earnings in late July.

Okay. One last one on the eligible environment we’re seeing on the jitters programs, can you comment on what you anticipate, I mean how is this going to drive margins as these programs mature, I presume much likely in the contracts you will see substantial price reductions over time? And I’m just curious, I think Noah asked the question of cannibalization earlier. I would like to maybe if you could just more broadly address it not just in terms of the new programs replacing the single-channel 117G sales that you win Manpack for example, but also just broadly on pricing. Are we going to see a big price drop on the business that is going to take your view on RF Tactical margins much lower than where they are today?

This has been a highly competitive market for several years, and during my time here over the past three years, I've seen the nature of competition and the mix of DOD and international change. We are growing our systems business while maintaining over 30% margins in that segment. Despite increased spending on R&D and changes in public safety, we are still finding ways to cut costs, maintain pricing, and uphold strong margins. I expect that we will become more price competitive over time, as the nature of our competition may evolve. However, our scale advantage in our RF facility in Rochester and our ability to innovate technologically will be key factors in sustaining margins above 30% for the RF Com segment. We acknowledge the dynamics at play but I trust in our team's capability to identify opportunities to reduce costs and invest in differentiation, which will help us maintain a robust pricing environment and preserve strong margins in this segment.

All right. Thank you.

You bet.

Good morning.

Hey, good morning.

One of your targets with the Exelis transaction is to achieve a $1 billion in free cash flow by year four, can you just walk us through the cadence from year one to year four and maybe what are some of the gauging factors just given today’s results?

Well it starts with it’s a very, very high level. It starts with what we believe our own ability to generate free cash on a standalone basis, this year if we look at our guidance, 100% of the net income is center point of our 5 to 510 earnings per share. Our free cash will be not dramatically under $530 million. Where Exelis has been guiding for Counter 15 is in the $250 million to $275 million range is what they’ve guided toward. So you just put those two numbers together; it is $280 million on a pro forma basis just putting two companies together. You didn’t add on top of that next synergies again we’re expecting $120 million net by year three, you roll that in on an after-tax basis and then adding working capital improvements, capital efficiency perhaps the modest adjustments over time in the cash, pension cost and you start to approach $1 billion by year four. And that’s what we expect and that’s what we communicated back in early February.

Okay, great. And then in the public safety business, is the pressure more on market demand or increased competition and then is that competition coming from existing or new entrants?

Well there is a lot of shift happening in that public safety space. There is some consolidation. There are some shifts happening in technology and we have a very large competitor who is very focused, very aggressive in a market that’s flat to down a little bit. So those are the dynamics that are happening in this particular market space we compete in the North American LMR market that’s where we are at. A big competitor has more of a global perspective in terms of their footprint around the world. The market is soft. It is very competitive. I think that we've had internally within Harris some execution challenges, which we're quickly working to solve. They're going to solve themselves over the course of a number of months or quarters. It's going to take some time. We're really focused on this and we're seeing execution slowly improving. We do see quality improving. We do see customer satisfaction coming back up. We’re making progress in developing and expanding our product offering. Our team, our Leadership Team is getting better. So overall, I see us improving and you'll start to see the benefits of those investments and performance showing through in the markets starts to go back. Longer term we will see some growth in this marketplace. More than half of the market is analog that we will go digital. We do know over the longer period of time, the market will shift to LTE. It's good to see that FirstNet with the spectrum of options has been well funded. It's well more than $7 billion raised in spectrum auction. I know it's going to happen over time. It's not going to be in the next two to three years but beyond that there is going to be an impact on Harris Corporation. And I think it we will be prepared and well positioned to compete as the market shifts to LTE. So those are the dynamics that are really happening in the North American space that we’re facing and we’ll start to see some improvements over time.

Okay. And then just one last one. Within IT services, are there any other large holes in the tent such as the NMCI contract over the next 12 months that we should just keep an eye on?

Well NMCI was a pretty long and tall pool within and it was the vast majority of the profit in our IT space and as you know, we were either going to compete and win it at very low margins or it was going to go away and unfortunately it went away. We have no more revenue or profit coming in IT services from NMCI, but we do still see the year-over-year impact and as we look over the next couple of quarters or year, there is no single big IT service profit generator that looks anything like NMCI.

Okay, thank you.

You bet.

Operator, I think we have one more person in the queue.

Thanks Bill. I think you guys ramped up the draft RFP for the Manpack type program late last month. Were there any surprises puts or takes on that process in terms of specifications or requirements?

No, I think what the Army is doing is wisely drafting objective and threshold requirements that enable strong competition based on those objectives. They are creating incentives for companies to invest their own funds to enhance their offerings to meet the threshold requirements over time, such as reducing weight. They are particularly focused on various factors including heat and range, but weight is extremely important. If I recall correctly, the objective requirement was set at 14.6 pounds, but they clearly want it to be significantly less than that. We have been intensely focused on this and have been working on it for a couple of years, and we do see chances to reduce weight considerably in the near term, potentially going below the objective requirements and even exceeding some of the threshold requirements for weight. One surprising aspect was the ceiling value on the IDIQ, which is set between $12 billion and $12.7 billion. This is much higher than we anticipated, and it includes services, spares, sustaining costs, and many other elements that extend beyond the immediate opportunities for Harris. Nevertheless, a ceiling value of more than $12 billion is quite an impressive figure for the Manpack.

Got you and just to quantify with the rifleman program that was originated as an Army program when you look at the value of that contract is that expand beyond the Army in terms of other services? And I guess the same for the Manpack because right now you’ve got customers at SOCOM, Navy, Airforce buying Manpack and I believe those are funded separately.

Yes, in fact we, interestingly the Manpack, the multichannel Manpack that was developed to compete for Army procurements is being slowed outside of the Army within DOD first and we'll sell the Manpack within the Army if we win a position on the IDIQ over the next several years. So we're already selling the CMP outside of the Army. On the rifleman, it's starting off as a single channel radio, but interestingly SOCOM is a two-channel radio and I would expect that as the Army introduce a potential two-channel into the rifleman competition, that whatever is being sold into SOCOM could eventually work its way to regular army over time and I see more of that shift happening as opposed to from Army out at least from the way I would see today.

And so to clarify are those changes or increments would be inclusive of the $3.3 billion to $3.9 billion contract as it stands today?

My understanding is as the trailing value of $3.9 billion on the rifleman, it would include a transition to a two-channel over time, but again what the acquisition objective is going to be restated to be, what’s the mix of a single channel two-channel is still to be determined and we will know more about that as the Army really starts to rethink the way they want the network to be given a lot of technology changes. I think the same thing is probably going to happen on the Manpack. I guess when I step back and I look at the size of where the rifleman is there almost $4 billion and the size of Manpack is north of $12 so $16 billion or $17 billion with a ceiling value between these two contracts, it's far above, I think the opportunity set over 10 years for Harris. Another way to look at this is just looking at what’s in the President's budget 4, 5 years out at close to $0.5 billion per year for HMS, which is rifleman and Manpack if you just pick that over a 10-year basis, $5 billion in terms of opportunity set that’s sort of in line with what we had thought before about the opportunity for Harris in terms of HMS for both Manpack and rifleman. That's sort of speculation on my part but that’s the way I would like at sizing the overall opportunity for the company.

Okay. And you haven’t mentioned it in a while, but you’ve also seem to made some good progress with regard to some of the airborne programs that are all getting reorganized?

Yeah, well we have a fantastic offering in the STT, the Small Tactical Terminal with ViaSat, which has Link 16 and UHF/VHF capabilities and the team at GCS is doing a very good job in selling that product. The army is evaluating whether they move forward with what they're calling assault in the small airborne Link 16 terminal competition. I think they spoke to the size sometime this summer, which would have Link 16 with SRW in it and that will have a play in that if the Army goes in that direction and that’s still to be determined. The other one that's on the drawing board is SANER which is the small airborne networking radio which is SOW and WNW and that I think the army is still evaluating that. I think I saw in the President's budget, I don’t know if it's in the house room services markup, but it's a small amount like $6 million to push forward that competition on SANER. We’ll see when the budgets are actually set if that's happening but if there is a small amount of money that will be an encouragement that the Army is moving forward putting SOW and WNW into a SANER product for the airborne side and if that happens I do think that we’re going to be very, very well positioned to compete there. And also quite frankly with Exelis with up to one product that they have, there is an opportunity to actually put some of our own technology into that box if you will and offer greater capability for the airborne Tier as we combine ourselves with Exelis. So I think there are a lot of different ways of looking at how we might be able to extend our strong presence on the ground to the airborne Tier.

And to clarify these are again collectively a couple $1 billion incremental programs?

I don’t think that they are going to be billions of dollars. I don’t know the exact number Chris. They're still deciding whether to move forward with this competition. So I think the jury is still out; last I had seen it was centered at something like $600 million and ASSAULT was sized at something like $200 billion, but it could grow over time depending upon the platform to get put on. So could it be a billion maybe, but again I think we need to wait until we see exactly how the army wants to move forward with those two programs.

Billion here, billion there, pretty soon you're talking about real money.

Yes, in terms of not just there, but also what we've seen on the ground side as well Chris. So yes, there are lots of big opportunities for Harris and again multi-billion dollars worth of opportunities over the next 10 years for our company.

Great. Thank you.

You bet, Chris.

Okay. Thank you everyone for joining us. I think that wraps this up for today.