L3Harris Technologies Inc (LHX) — Q1 2018 Earnings Call Transcript

Thank you, Sonia. Good morning, everyone. And welcome to our first quarter fiscal 2018 earnings call. On the call with me today is Bill Brown, Chairman and Chief Executive Officer; and Rahul Ghai, Senior Vice President and Chief Financial Officer. First, a few words on forward-looking statements. Forward-looking statements made today involve assumptions, risks, and uncertainties that could cause actual results to differ materially from those statements. For more information and related discussion, please see the press release, the presentation, and Harris’ SEC filings. In addition, discussions today will include non-GAAP financial measures, and the reconciliation of the non-GAAP measures discussed today to comparable GAAP measures is included in the quarterly materials on the Investor Relations section of our website, which is www.harris.com, where a replay of this call also will be available. With that, Bill, I’ll turn it over to you.

Thank you, Anurag, and good morning, everyone. Earlier this morning, we posted Q1 fiscal '18 results, and we are off to a good start to the year. Earnings per share was up 8% to $1.38 on flat revenue; margins expanded 70 basis points to 19.2%; free cash improved by $50 million; and we returned $144 million to shareholders through share repurchases and increased dividends, our 16th consecutive annual increase. The highlight of the quarter was orders increasing 33% to a record $2.3 billion with a book-to-bill of 1.6. Let me highlight a few of these key wins across the three segments indicated on slide four, starting with Communication Systems. We secured the much-anticipated $260 million order for Australia’s Phase 3 modernization, the first stage of a multiyear program with total potential value of over $1 billion. The Australian MoD has standardized on Harris networking technology, and to date, we have shipped about $800 million in radios and are leveraging that incumbency into developing and building a broader integrated network. This is part of an important strategic initiative to expand our addressable market, and we are replicating this in other geographies. In Eastern Europe, we received a further $52 million in orders from Ukraine as part of the Ukraine security assistance initiative to modernize communications to meet emerging threats in the region, building on very strong orders performance last year. In the Middle East and Africa, we anticipate a recovery in '18. In the quarter, orders more than doubled the prior year with a $39 million order from Iraq and $46 million from Kenya. Overall, international tactical book-to-bill was well over 2 and was still greater than 1, excluding Australia. In DoD, we also saw increased demand with orders growing about 40%, including more than $100 million focused on readiness. Notable awards include $36 million from the Air Force for upgrades of their legacy communications equipment to software-defined radios and $38 million from the Marine Corps for radios with MUOS capability for high-quality satellite communication on expeditionary missions. We received an order for 101 HMS manpack test radios from the Army at the beginning of Q1 and expect to start deliveries later this quarter. With the down-selected two vendors now accomplished, we are working with the Army as we prepare for field-based risk reduction in the spring of 2018. DoD tactical book-to-bill was above 1 in the quarter, and overall tactical communications backlog is now $879 million, up 66% from the prior year and 78% sequentially. Excluding Australia, backlog is up 25% sequentially and 17% year-on-year. Public Safety and Night Vision also had strong orders, resulting in Communication Systems having record orders of about $825 million and a book-to-bill of 2. Following the close of the quarter, we received a $765 million sole-sourced IDIQ award from the Navy for Falcon III and next-generation radios, replacing a contract that was completely exhausted in April. This value was more than double the previous contract and aligned with the Navy’s budget request to ramp up Marine Corps modernization efforts over the next few years. In Electronic Systems, we continue to see strength in our electronic warfare business and received a $133 million contract for U.S. Navy and Australian F-18s, continuing a 20-year relationship and enabling legacy platforms to perform more advanced missions. We also provide the EW system for international F-16s and in the quarter received $47 million in additional funding from Morocco to complete the upgrade of their entire fleet. We have several additional international opportunities in the pipeline. In the Avionics business, we continue to ramp production for the F-35, with a $63 million order for LRIP 10 release systems. We expanded our international footprint with key wins in Singapore and Turkey for smart carriage and release systems on international F-16s. In C4ISR, we leveraged our classified robotics expertise and were awarded a contract worth up to £55 million from the U.K. Ministry of Defense to provide robotic systems supporting explosive ordnance disposal missions. Our state-of-the-art product delivers real-time haptic feedback and unparalleled precision control. Overall, Electronic Systems book-to-bill was 1.5, with both electronic warfare and avionics above 2. In Space and Intelligence, we had several significant wins driving a segment book-to-bill of 1.4, with continued strength in a Classified domain and in a commercial reflector business. Let me provide some color on a couple of them. On our Q2 call last year, I noted a new franchise emerging from an $80 million Classified contract that we described as a ground-based adjacency. We knew this program had the potential to grow into several hundred million, and after a successful startup, we were awarded a $34 million follow-on contract in the first quarter, further solidifying our position in this new franchise area. Additionally, I noted last quarter that investing in R&D and innovating ahead of customer needs enables us to win two Classified small satellite programs. These pathfinder missions have proven successful as our customers move towards disaggregated, more affordable, and responsive space solutions. We received an award this quarter that has potential to grow to more than $100 million over the next two years. Finally, in our Commercial Space business, we received our largest order for a single commercial satellite covering four reflectors, bringing total orders to eight over the past two years. Our commercial reflector pipeline remains robust, and we expect these recapitalization and expansion trends to continue through fiscal ‘18. Overall, we are seeing positive momentum across the company, and I’m pleased with our strong orders growth driven by our sustained internal R&D investments over the past several years. This strong start to the year gives us confidence in our full-year guidance and reinforces our view that we are at the beginning of a multi-year growth inflection. Let me now turn the call over to Rahul for details on the financials. Rahul?

Thank you, Bill, and good morning, everyone. Just a quick reminder that fiscal '18 results are compared with the prior year non-GAAP figures, which excluded acquisition-related costs. Total company results on slide five. Revenue was about flat, with growth in Electronic Systems and Space and Intelligence offset by lower revenue in Communication Systems. Operating income was up 3% and EPS was up 8%. Free cash flow grew by $50 million to $72 million. Turning now to first quarter EPS bridge on slide six. EPS grew by $0.10. The expected $0.08 headwind from the ADS-B transition was partially offset by disciplined capital deployment in fiscal '17. Strong segment performance delivered $0.12 of accretion from solid program execution, incremental integration savings, higher pension income, and lower costs. Benefit of higher volume in Avionics, Battle Management Systems, and Classified Space was offset by lower Environmental and Communication Systems volume. Segment detail on slide seven, Communication Systems revenue was $410 million, down 5%. Tactical Communication revenue was down 5%, with DoD down 2% from lower airborne radios volume. International tactical revenue was down 6%, as substantial growth in the Middle East, primarily from Iraq, was offset by expected declines in Central Asia and Central and Latin America due to a tough year-over-year comparison. Though slightly down, Europe remained strong, driven by Eastern Europe. Public Safety and Night Vision were both down mid-single digits. Segment operating income was flat at $118 million, but margins expanded 140 basis points to 28.8%, as lower costs and operational efficiencies more than offset the impact from lower volume. Historical information for tactical orders, revenue, and backlog is provided in the supplementary material. Moving to slide eight, Electronic Systems revenue was $540 million, up 1% versus the prior year. Excluding the impact of the ADS-B program transition, revenue was up 5%. This was driven by the ramp in the UAE Battle Management Systems program and growth in Avionics across several platforms, such as F-35, F-22, and F-18. Segment operating income was down slightly to $109 million, and margin was down 50 basis points to 20.2%, as solid performance across the segment and ongoing focus on operational excellence offset a $14 million headwind from the ADS-B program transition. Slide nine, System and Intelligence revenue was $466 million, up 3%. Classified business was up 8% and Environmental revenue declined double digits, in line with expectations as some programs trended down. Segment operating income was up 10% to $87 million, and margin expanded 130 basis points to 18.7%, driven by strong program performance and higher pension income. Moving to slides 10 and 11 for full year guidance, guidance for fiscal '18 remains unchanged, with EPS in a range of $5.85 to $6.05, up 6% to 9%, including the benefit from $150 million of share repurchases for the year, with $75 million completed in the first quarter. Total company revenue guidance is unchanged in a range of $6.02 billion to $6.14 billion, up 2% to 4%. Communication Systems is expected to grow 3% to 5%, with DoD tactical up double digits, from increased focus on readiness and incremental modernization volume. International tactical is still expected to be flat to down slightly, with growth in the back half of the year as the Australia modernization program ramps up. Electronic Systems is expected to be up 3% to 5%, with growth in avionics, electronic warfare, and battle management systems. Space and Intelligence is expected to be flat to up 1% as strong revenue growth in the Classified area will be partially offset by the headwind from the Environmental programs. Total company operating margin guidance remains unchanged in a range of 19% to 19.5%. We also continue to expect $850 million to $900 million in free cash flow for the full year. The first quarter tax rate of 27.7% benefited from the stock-based compensation accounting standard that we adopted in the first quarter of fiscal '17. We still expect a full year tax rate of about 28.5%. The remaining three quarters are expected to average 28.8%, with quarter-to-quarter differences depending on specific tax timing. With that, I would like to ask the operator to open the line for questions.

Good morning, guys. Nice quarter.

Hey. Good morning, Pete.

Hey. Bill, is revenue kind of in line with your expectations, or was it a little bit light, or was it just timing or maybe CR-related?

Yeah. Look, I think we are pretty pleased with where we ended up in the first quarter coming in at about flat. I’m very happy with where we were on orders. Orders were very strong, and as I look at the balance of the year, we’ve got a fair amount of the back end of the year covered in backlog or in firm or follow-on high-probability follow-on orders. So it’s actually quite good. When I look just across the businesses, CS came in down 5%, so we saw a couple of opportunity shifts in Q2, but we see the balance of the year being strong. Electronic Systems came in at 1%, but when you exclude the impact of ADS-B, it would be up 5%. So that’s a substantial drag in the quarter, and we will see that again in Q2. Space came in at 3% for the first quarter, which is above the full-year guidance and again reflects good trends in that business. Overall, I think we are pretty pleased with where we ended up in the first quarter.

Okay. Fair enough. And then, just last one, Bill, for you, I was wondering if you could make some comments on some of the consolidation we have seen in the Space. UTX buying Collins, North buying OA, obviously, is going to have some impact on the Communications market, small satellite and that kind of stuff. I was just wondering how you see it as it puts in a competitive advantage or disadvantage rather as some of these big guys get bigger or do you feel like you are just more nimble and can move faster than those guys? Just curious on your comments.

Yeah. Pete, look, I think from my perspective at Harris, we don’t see any change to our game plan. We have a healthy amount of respect for the competitors we have in the space and the moves that they are making. But we feel we have good positions in the franchise areas we haven’t been participating in. We have spent a number of years investing in our franchise and focusing our businesses where we know we could be successful, winning based on technology, so while we watch what’s happening in the industry, we feel good about the position of Harris Corporation and where the budget happens to be going. I think the future is very bright for Harris.

Okay. Thank you.

Hey. Good morning. Thanks very much.

Hey, Seth.

Bill, we had a lot of development in the tactical Comms area over the last couple of months. I wonder if you could address broadly kind of two of them, one being how you think the changes in the start of the upper end of tactical, having to do with WIN-T, and what that sort of means for Harris over time? And secondly, the comments that the Army has made recently suggest that they are looking to incorporate more capability into their communication capabilities faster and how you think that Harris can address these capabilities and whether you see the Army looking at new entrants to try and deliver any of this capability and if there are any new entrants who can?

Those are very good questions. I think you’re referencing a lot of the discussions gone over the last six to eight months, maybe a little bit longer than that, led by the Chief on the future of the Army architecture, resiliency, concerns about maneuverability, and a variety of other things. They commissioned a study. The study came out with the findings. The Army has elaborated on that over the summer. They engaged industry in lots of ways and conversations around that. There was some recent testimony in September in front of subcommittees of the House Services Committee talking about some directives the Army wants to move in. First of all, in the upper tactical system mainly relating to WIN-T, we are the provider of some components on WIN-T. We provide the high-band networking radio, as well as an H&W waveform which we’ve developed. Frankly, as I look for ways of making that system more resilient and more maneuverable, that could slow down some opportunities for Harris to upgrade its H&W waveform and radios, which we are proceeding with today. In terms of the Army wanting to embed more capabilities into the tactical radio with the tactical Internet faster, that works directly in our favor in many ways and I think is a strong reflection of the commercial model that Harris has been known for. The ability to quickly embed commercial technologies, continuously innovate, and develop new capabilities, while fielding them quickly, investing ahead of the curve, and building headroom on our radios so that you can onboard new waveforms or new technologies based on changing market threats. So, that works very much in favor of the model that Harris is distinctively good at. Overall, I think this will eventually be a good outcome for the company. There’s been some deliberation over the last six months, but it is becoming clear as to where the Army wants to move. They have made a strong statement in support of the manpack radio and the two-channel leader radio. They want to become more SOCOM-like, which again supports Harris. Overall, I think this could shake out to be good news over time for Harris.

Great. Thanks very much.

You bet, sir.

Yes. Thanks. A couple of questions. First, I am wondering, could you give us the legacy RF tactical orders and sales just so we have?

So we have not tracked that, as we mentioned, I think, on the last call. We are not going to track it that. We are just going to provide now combined results for the tactical radio business between Harris and Exelis. As we have combined and integrated the business, operationally we’re running it as one. Our sales forces are now combined. Even internally, we are just soft tracking between Exelis and Harris and just tracking it as the tactical radio business, and we have the details in the supplementary material for the overall business.

I don’t think adding Exelis really changes a trend very much, frankly.

All right. A couple of things. I was wondering if you could give us your guidance then. Change on a net basis, but are there any puts and takes within that like Australia, you are expecting $60 million of sales this year. Is that still the expectation, and any comments on kind of permit the actual net numbers there, has been any changes of consequence?

Yeah. I think you are about right on Australia that should be about the flow-through in the year. Overall, we still see good growth on DoD, up double digits for the year and international, as Rahul said in his prepared remarks, flat to down slightly. We still see a very strong pipeline. It’s about $2.3 billion. We see the Middle East and Africa region perhaps being a bit incrementally better in the year than we thought just a couple of months ago. It’s going to be up significantly, double-digit, and a little bit better than we have thought. We are seeing good opportunities flow-through in Iraq, almost doubling over the course of the year. The U.S. government support is quite strong. We know Saudi is going to come up off a very low base from last year, mainly because of the reef product or SINCGARS product that’s going to flow-through this year. North Africa looks good. We see Kenya looking pretty good. The UAE is pretty strong. The only place really soft in the Middle East would be in Jordan. Overall, the Middle East is a little bit better. APAC is a little bit better as well than last time, again, up significantly, double digits. Australia is a key part of it. There are a couple of other markets in Southeast Asia that are quite strong. So APAC a little bit better. Maybe Europe is about the same, maybe a little bit worse over the course of the last couple of months. We had a good start. We booked in Ukraine, which was a big deal for us. But Romania is going to be under pressure in the year. Poland is going to be under pressure in the year as well, and in Central Asia, both look a little bit weak, but we knew they would be weak, probably incrementally weaker than we thought before.

Okay. And Bill, following up on Pete’s question about consolidation and you guys have been buying a lot of stock. I am curious about what is the M&A pipeline looking like for you guys as an acquirer now that the balance sheet is in a lot better shape and the Exelis integration is effectively completed. Are you looking at stuff and what types of properties interest you in terms of size and capability? Any color you can give?

I really can’t give you much color. You are right. We have completed the Exelis integration. Our balance sheet is getting stronger. We’ve got a little more debt to pay down at the end of this year, about another $550 million in fiscal '18. I think we’ve proven our credit if you will on how we bought a company at a good part of the cycle. We are disciplined in what we paid and integrated very, very well. So the team is looking at a variety of different opportunities, none of which are must-haves, that could help us accelerate in some of our key franchise areas. I don’t believe today that we need to acquire to be successful. We are going to be opportunistic. We will be very focused on where we buy. But we are just starting to look a little bit more. Again, it won’t be in an area that’s outside of our core Space.

Okay. Thanks for that, guys. Good luck.

Hey. Good morning, guys.

Good morning, Carter. Welcome back.

Hi. Thanks. Good to be back. A couple of questions for you, one, Bill, I just want to ask, Seth’s question another way, just to get at the kind of risk here. As you think about the deliberations that the customers have had here, are there factored bookings, I would say, in your plan at the latter part of this year that has some sort of risk, if the customer moves slower than expected in terms of deciding what the network architecture is supposed to look like holistically? Just trying to get a sense of whether there is incremental risk here to the inflection that you’ve talked about in growth?

We think the Army, first of all, across the DoD, they are moving money into some of the current accounts. We see readiness picking up a bit more aggressively than we thought just a couple of months ago. There is a lot of conversation about equipping new security forces, and that we believe will help us in the year. We have very little in the year on monetization, it’s up from last year. We had a good start to the year on selling the MUOS waveform. We expect this year to be about $50 million, and 80% of that was booked in Q1. So that’s pretty strong. We’ve somewhat derisked what we expect to see coming out of the Army manpack. It is largely just test radios that we have shipped. We do see the SOCOM handheld radio beginning to ship in the back half of the year. That’s going to ramp into ‘19. Looking at our backlog and backlog roll off in the tactical business largely, we probably have about 50% or just about 50% of the back end of Q2 through Q4 revenue that’s now in backlog and will flow through. We feel better today looking at the back end of the year than we did last year.

Great. That’s great color. And then, Rahul, just two quick ones, with respect to the margin strength in ES and Space and Intel, were there any net favorable EAC adjustments to note in those? And then the second one is, given the potential for tax reform, how are you guys thinking about potentially prefunding a lot of pensions? Thanks.

Yeah. Good question, Carter. So on EAC adjustments, overall, it’s kind of similar to where we were last year at the same time, so really no difference. I think both Space and ES had good operational performance. Space had a little bit of award fee timing, those things fluctuate quarter-to-quarter, and ES had some slight favorable fixed-price content mix and some closeouts on fixed price programs. So those things helped in the quarter, but overall we feel good about where the margins happen to be. And on your second question on the pension, we contributed $400 million last year, so we had about 80% funded. We have to be relatively good about that. Given that we are going to keep an eye out as interest rates move up, about 25 basis points, our pension deficit cuts down by like $160 million. So, one point of interest rate movement will cut our pension deficit in half. We are going to continue to monitor that and think about what that means on when we made pension contributions if we chose to do so. Given our fiscal year ending, we have a little bit more time than others in terms of if we have to do something extra on pension. But right now we feel good about where we are in terms of funding.

And I think, on tax, well, Carter, I think we are hopeful that tax reform does occur. I think everyone point on the effective tax rate is worth about $0.08 for us. So I think if that moves forward, it will be a positive for Harris.

That’s great. Thanks, guys.

Sure.

Good morning.

Good morning.

Good morning.

Rahul, I have a couple of clarification questions I wanted to ask you. The first one being in the Space and Intelligence business, what is the Classified growth and guidance if you remove the headwind?

So our Classified growth is roughly mid-single digits, around 5% year-over-year in our Space guidance.

Okay. And then, just in the cash flow you had, I think, it was a source of around $107 million in other cash from ops. I can’t recall if you described what that was already, and I just wanted to follow up on that? And then, Bill, I have a radio question for you?

Sure.

Yeah. So on cash, listen, good start to year. We are up $50 million year-over-year in the quarter. As expected, we had some working capital headwinds as we over-delivered $51 in Q4. We kind of expected that and that got offset by some refunds on tax payments made last year and some cash tax timing differences. But on the last 12-month basis, we are about $900 million of free cash flow and feel good about delivering $850 million to $900 for the year.

Okay, Bill, moving back to the discussion that Seth and Carter were having, I wanted to ask for more information about JTRS. Considering we just completed a network vulnerability study with the Army and my recent visit to AUSA, it seems that we are hearing concerns about the tactical radios being vulnerable. There's also a scalability issue, as it appears that only a limited number of radios—around 31—can be examined in field tests before issues arise. What are your thoughts on this? How is the technology developing, and is there a general concern about whether the hardware is sufficiently advanced to support the software-driven radio? Are we facing challenges in this area as we work on this program?

No. Look, it’s a very complicated question that you’re asking. We’ve been in the business for several decades delivering radios and have been nearly standardized across the DoD on 117G and 152 Alpha radios, field proven. We have been developing and working on the next-generation manpack radio, the single-channel rifleman radio, the two-channel handheld radio, the mid-tier radio. We are selling them all around the world, even some of the newer products are being sold within and outside of the DoD. The technology continues to move, the threat environment continues to change, and the radios have to be adaptable over time given those current trends. The Army has realized that you cannot take a JTRS program, set a specification five years before the first iPhone is launched, and hope to field it 11 years later and have it be relevant. It has to be a very nimble, agile, flexible procurement process that must be able to upgrade frequently. In fact, that’s where the Army is moving, and that’s where SOCOM has moved. That’s really the commercial model that Harris is very good at. We develop headroom in the hardware of our radios such that when new threats arise, or new waveforms that could be low probability of interception or low probability of detection are needed, you can onboard them into that radio with existing hardware. It’s exactly what we did by putting the MUOS waveform onto our existing 117Gs. MUOS was not even contemplated on 117G eight years ago. Our engineers were able to customize that waveform with a simple software download. That’s the beauty of this particular model. So to address your comments and concerns, yeah, there’s been a lot of questions around this. The threat environment is changing, technology is moving. We believe that the adaptability of our model and our engineering investments in our products will position us well, no matter where the Army or fragmented in any of the other services go. Hopefully, I’m addressing your question. It’s a very complicated one, but I do believe that this ultimately reflects back on the value of the commercial model that Harris excels at.

You are, Bill, and it is very complex. With all that said, and I think you started to address this, do you have a sense of how many manpack radios you’ll ship total this year and next year, is there a way to quantify this, and can we figure out when the annual production lot competition will begin?

In terms of specific numbers expected to ship this year, we are under contract for 101 units of the multichannel manpack that are scheduled to ship in this quarter, during the early first quarter of calendar 2018. Additionally, we aim to conduct field-based risk reduction around the April to May timeframe, which is our current operating model. The selection process has effectively taken place between us and Rockwell Collins, and we are both aligned in advancing the Army's objectives. I believe that joint communications from these two competitors resonate well with the Army, potentially encouraging a quicker procurement process. Overall, this summarizes where we currently stand.

Do you have an idea of when the production work would begin for both of you?

In terms of the full-rate production? It’s probably in the backend of our fiscal '18, maybe into early fiscal '19. The Army still wants to field, I think, 60 BCTs, and that could happen in two and four, could happen all six, we don’t know exactly what they will do. It’s more likely that we have fiscal '19 revenue event for us as opposed to fiscal '18. The order could happen, in the best of cases towards the backend of fiscal '18. But when you look at the budget and where the Army wants to move, even the recent testimony in September is in favor of moving forward with significant quantities in the HMS manpack. Overall, I think it’s very encouraging what we are seeing over the last couple of months. Good morning.

Can you hear me okay?

Sure. Jason, good morning.

Okay. Great. Good morning. Bill, I wanted to go back to the Space business for a moment, if we can. Can you talk a little bit about some of the dynamics that are going on there, both on the Classified and commercial side of things. On the Classified side, just give us a sense of where you are seeing longer-term growth trends going, maybe the scope of those growth trends here over the next few years? And then, on the commercial side, DoD has been discussing moving towards a more commercial procurement model, particularly on the communication side of things. I was wondering how Harris is going to potentially play in that and what that dynamic means just generally speaking for the satellite industry? Thanks.

Sure. Let me hit a couple key points, and if Rahul has anything to add, jump in. About two-thirds of the Space business is in the Classified domain. We see budgets up sort of single digits, and we see that continuing over the next number of years as far as we can see. As far as visibility, the Classified budgets are coming up and we can see where the money is being spent, and I feel that it is growing faster in areas where Harris has developed capabilities. Our high-end exquisite sensors, as well as quite innovative small sat type solutions, I feel very good about. Rahul has said that for the year, the Classified business will be up mid-single digits. It was up a bit stronger than that in Q1. We continue to see strong order trends, and the pipeline here is quite good. The Commercial business of the Space and Intel business is mostly commercial reflectors and GPS, and that business will also be up pretty strong this year, about double-digit. We talked about some of the awards we’ve seen. In that commercial reflector business, we have a strong global share. It’s a commercial model-driven business where we invest our own R&D to develop that offering. We sell it into the marketplace, and it performed exceptionally well on orbit, with almost no failures and very high margins. We’ve been running at about two reflectors a year over the last six years; over the last two years, we’ve been at about four per year, so it’s doubled. We see another five or so that are bidding opportunities in our fiscal '18. We continue to see that commercial reflector business ramp. The place where we’re seeing some softness in the year is really in the Environmental solutions business. We’ve talked about that over the last couple of quarters, part of it is program transition where we’re moving from the build of the GOES-R satellite systems. The onboard optics and the ground processing system are moving into sustainment. We are seeing some budgetary pressure from where the Trump Administration wants to go with environmental science. We factored that into our guidance. We see the Environmental business, which is roughly about $350 million to $400 million in size, being down mid-teens for the year. We saw that in Q1 and see that over the balance of the year and beyond stabilizing a little bit. Overall, the pipeline for that Space and Intel business is pretty robust; it’s up about 4% to 5% year-on-year, $11.5 billion to $12 billion. We continue to see great health in that Space and Intel business, and again, a lot of it is from Classified and a lot of it is based on the last five or six years of investments in IRAD that position us in locations where our customers are moving toward disaggregated solutions. So Jason, does that answer part of your question? Let me stop there and see if there is anything else you want me to clarify.

No. That was great. I appreciate the color. That’s it for me.

Thank you.

Hey. Good morning, everyone.

Hey. Good morning.

Can you remind me, so the Environmental programs that are declining in Space and Intel, what quarter does that start going against you?

They started in Q1. We saw the Environmental business roll down about 10% to 15% in Q1, and we see that about the same for Q2, maybe a little bit worse in the back half of the year.

Lot of it’s, Noah, from the roll-off of the GOES-R program, which was launched in November of 2016, calendar '16.

I’m curious about your segment's growth of 3% in the quarter despite the challenges from environmental programs, and your guidance for the year is flat to a 1% increase. This suggests that you would need to maintain a flat performance for the remainder of the year to stay within that forecast. Essentially, you would have to slow down from the growth in the first quarter, even though you performed well under those challenges and the year-over-year comparisons will be easier in the second half. Will the headwinds intensify for the year, or are there other factors that could negatively impact you later that did not affect you in the quarter?

No. I think, Noah, I think you’ve got most of it. The headwind does accelerate a little bit on the Environmental side. The Classified business is expecting about 5% for the full year. It grew about 8% in Q1, so there’s not as stronger growth in the Classified side on the back half of the year.

Okay. Okay. Great. So then one other question on the, I guess, in the legacy Harris domestic tactical radio business. I had sort of always brought up the model as the legacy base business, which I estimated made it to about $300 million last year. And then, we are layering on all the new program wins and assuming and hoping that the $300 million legacy base before new programs would just hang on to $300 million, because there is some reason to believe there could be cannibalization of that as new programs came online? When you announced this Navy win about a month ago, it made one come to the realization that actually about a $50 million piece of that $300 million, if the IDIQ conversion holds, now is multiplying. Why, I guess, is that true of that maybe piece of that business? And then, two, in the remainder of that $300 million, is there anything that is going to shrink considerably over the next one year, two years, three years, or is there anything else in there that has the potential to grow in size as much as that Navy business just for you?

I agree with your estimate of $300 million in base funding, which has remained stable over the past few years. There is a question about the $100 million readiness investment we noted in Q1—should that be included in the base or considered additional? It's a bit of both, but your assessment is largely accurate. The Navy IDIQ award is promising, as it was sole-sourced from Harris to replace an expiring contract. The previous contract vehicle was fully utilized. If you look at the slide deck, you'll see an indication of how the Marine Corps plans to modernize, starting in fiscal year '19 and '20, which will result in significant growth. The IDIQ vehicle is structured to accommodate this modernization for the Marine Corps, extending beyond fiscal year '18 into '19 and '20. Noah, I find this encouraging for our business growth beyond fiscal year '18.

Is there anything else in the remaining $250 million of the $300 million excluding that Navy fee? Is there anything else in there we should be watching out for that has a contract renewal coming up or that has some meaningful potential to grow a lot going forward?

There’s nothing specific to highlight. The situation is expected to remain fairly stable, with routine repairs and standard maintenance. We will have a number of 117Gs in stock, along with 152As and SINCGARS radios that have shown some progress. Over the next few years, we plan to invest in the crypto MOD upgrade. However, not all radios in the DoD inventory will be replaced by the NSA certification deadline, which is set for 2021. This means we will need to invest in upgrading the cryptography for the existing legacy radios. In summary, there’s nothing concrete to address at this moment, and we will provide more information as it becomes available, but we anticipate stability in these areas.

Got it. Okay. Thank you.

You bet, Noah.

Hi. Good morning. Thank you for taking my question.

Good morning.

Just on ES, could you provide a follow-up? It's currently trending above the high end of your segment guidance. What factors are influencing the balance for the remainder of the year?

Sorry, Sheila, could you…

Are you talking Sheila on ES, if I hear that right?

Yeah. Exactly. Just the margins trending better in the quarter and what changes throughout the year?

Yeah. So, Sheila, again, the margins kind of, same thing on Space. The margins do fluctuate quarter-to-quarter, and that’s why we don’t provide quarterly guidance on margins. The fact was that we are makes a little more skewed toward fixed-price programs that helps. Also, there were some closeouts on fixed-price programs in the quarter that helped margins as well. So again, really good start to the year, and we feel good about where the year guidance is for the full year.

Thank you. And then, just F-35 program, how do we think about if you could size it for us or how do we think about the build rates and potential content wins and what that means for the Harris growth rate for that program for '18?

Yeah. Look, we have good content on F-35. It’s just over $2 million for shipset that we provide, including the common components, avionic components like backplane and liquid-cooled racks. The antennas for the F-35 multifuncation data link are also a part of that. We also provide release systems, the carriage and release. We talked about an award we received in Q1 associated with F-35 release systems. Overall, it’s just over $2 million. We’re on, well, I think, LRIP 10 on the release systems and LRIP 12 on the avionics systems. There has been a lot of conversation around block buys. We are working with our partners on how that might flow through and get shaped over the course of the year. But we’ve won some recent content. We own the aircraft memory system, which was a big important win for us. We won the panoramic cockpit display electronic unit, so the head-down display electronic unit, which adds about 5% to 10% roughly to the content for chipset, and that will flow in over time. We are performing very well. We have very high delivery rates. We’ve been working strongly with our partners, taking costs out, and driving improvements for the reliability. We’ve invested in open system technologies, so we have an opportunity to compete for a new mission system over time and we are very competitive in that space. Overall, we think F-35 has been and will continue to be a good story for us, Sheila.

Thank you. And then, Bill, just a last one, you mentioned later radio program?

Yes.

If you could just provide RFP timeline for that and just a sizing of that opportunity?

Sure. The RFP is out. The proposals are in. We expect an award sometime in early calendar '18. It will build off of the existing rifleman radio IDIQ, which was originally contemplated at $3.9 billion to include the possibility of a two-channel radio. That is happening, and we will provide some small number of radios for testing in the early part of next year and will ramp for us in fiscal '19.

Thanks so much. Good morning.

Hey. Good morning, Rob.

Bill, you commented already, but one thing I thought was worth asking, and you highlighted a very strong book-to-bill in Q1. I was wondering if you sort of think pull forward into the first quarter and whether the assuming continued resolution might have any impact on DoD orders in the quarter?

Not particularly. There were, obviously, Australia was an important component to that in the CS business, but even excluding that we had very good book-to-bill internationally in DOD. We saw a couple of things that moved out of September and October that we had hoped would happen in September. But we are on a good track for them in Q2. Again, similar good trajectory right now in Electronic Systems, as well as Space and Intel. So nothing in particular that I would characterize as a pull forward because of the end of the fiscal year. We normally see that at the end of the fiscal year in September; that tends to be a big booking month and was again, but nothing unusual this year relative to the prior years.

Just to put a final point on that, even so, our overall book-to-bill was 2.3, sorry, 1.6, and even if you exclude Australia, it was 1.45. So compared to last year, it was about 1.20. So even excluding Australia, the book-to-bill was really good.

Okay. I have follow-up to ask, the attempt to nail this down annually than quarterly, are you still confident that you will have a book-to-bill over one times for the year?

Yes. We believe it will be more than one. In fact, it should be, I wouldn’t substantially, but because of Australia and the CS segment, we are much more confident there in larger book-to-bill for the year.

That’s great. Thanks so much.

Sure. Thank you, everybody. Before we end the call, I would like to make sure we thank the Harris team for delivering a strong quarter despite the impact of Hurricane Irma on our Florida operations, which, as many know, has more than 6,000 employees. The storm passed early on a Monday morning. We partially restarted operations on Tuesday and were back to nearly 100% by Wednesday. This remarkable accomplishment was achieved within 48 hours, and I am very pleased and proud of the team's performance. I am also proud that our customers experienced no significant disruption of service, including the FAA, which relies on our network operations center here in Florida to monitor air traffic across North American airspace, as well as the first responders we support throughout the state of Florida. We responded very well, and I’m very pleased and proud of the team. Overall, we had a good start to the year. We are confident in both our fiscal ‘18 and medium-term outlook. We are in an environment where defense budgets are coming up; the technology solutions we provide are aligned with the mission priorities of our customers, and very importantly, we have a dedicated team that’s geared toward exceeding customer expectations and delivering shareholder value. Thank you, everybody, for joining the call, and we will speak again next quarter.