Good day, ladies and gentlemen, and welcome to the Q1 2013 Harris Earnings Conference Call. My name is Sonia, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Pamela Padgett, Vice President of Investor Relations. Please proceed, ma'am.

Hello. Good morning, everyone. Welcome to Harris' first quarter of fiscal 2013 earnings call. I'm Pamela Padgett, and on the call today is Bill Brown, President and CEO; Gary McArthur, Senior Vice President and Chief Financial Officer; and Dan Pearson Executive Vice President and Chief Operating Officer. Before we get started, a few words on forward-looking statements. In the course of this teleconference, management may make forward-looking statements. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information and a discussion of such assumptions, risks and uncertainties, please see the press release and filings made by Harris with the SEC. In addition, in our press release and on this teleconference and the related presentation, we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in tables of our press release and on the Investor Relations section of our website, which is www.harris.com. A replay of this call will also be available on the Investor Relations section of our website. And with that, Bill, I'll turn the call over to you.

Okay. Well, thank you, Pam, and welcome to our first quarter fiscal 2013 earnings call, and I wish that all of you in Hurricane Sandy's path remain safe. I'll begin today's call by turning to Slides 3 and 4 in the presentation. Harris first quarter results were about as expected and represent a good start to fiscal 2013. Revenue was $1.3 billion and down 6% with earnings per share of $1.14, flat with prior year non-GAAP EPS of $1.14. Although lower revenue and income in Tactical Communications and IT Services resulted in a decline in total company results, we were able to hold operating margin essentially flat with the prior year, reflecting reduced costs across the company. We are tracking well to our productivity target of $75 million with cost reductions taking place across operating units and at corporate headquarters. Based on first quarter results, corporate expense is on track to be $70 million for the year, which is about $12 million lower than the prior year. But cost reduction is not coming at the expense of R&D investment and product innovation for the future. In the first quarter, total company-funded R&D increased 4%, and in RF Communications, by 6%. In Tactical Communications, we were especially pleased with our success in lowering costs other than R&D. Even with the significant revenue decline of 18%, Tactical operating margin held steady at last year's level. Total RF Communications operating margin was slightly lower as a result of business mix related to the revenue growth of 12% in Public Safety. CapRock's success in serving the international energy market with their global footprint continued to drive excellent result. CapRock's operating performance improved over the prior year, and we made good progress in Healthcare were our operating loss declined significantly year-over-year, moving us closer to…

Thank you, Bill, and good morning. Moving to segment results on Slide 5. Revenue for RF Communications was $445 million and declined 11% compared to $497 million in the prior year. Orders for the segment totaled $363 million and book-to-bill was 0.82. In Tactical Communications, orders were $254 million, backlog was $612 million and book-to-bill was 0.83. Tactical Communications revenue declined 18% compared to the prior year. As you are aware in the U.S. market, we are managing through a market transition from one that previously benefited from strong up-tempo to a multibillion-dollar modernization cycle, and we are investing in R&D and product innovations to be as successful in this modernization as we were in the last. As a result of the transitioning U.S. market, we expect tough year-over-year compares during fiscal 2013, but expect sequential improvement as we progress through the fiscal year. As Bill mentioned and as detailed in our press release, we have excellent new contract wins in U.S. Tactical Communications. And our 12- to 18-month opportunity pipeline in the U.S. is still well funded at $1.1 billion. In the international tactical market, orders increased over the prior year and the opportunity pipeline remained at $2.1 billion. And in Public Safety and Professional Communications, revenue growth was excellent, increasing 12% to $138 million. Our backlog in Public Safety is solid, we continue to have good wins and our opportunity pipeline is $3 billion. Operating income for the segment was $134 million, down from prior year on lower revenue. Segment operating margin, however, was 30.2%, slightly lower than the 31% in the prior year due to shift in business mix related to strong Public Safety revenue growth. Even with the steep decline in Tactical revenue, we were able to hold Tactical operating margin in the prior year level.…

Okay, thank you, Gary. As Gary explained, our guidance is unchanged and reflects what we believe will be another solid year in a challenging environment. The threat of sequestration is still on the horizon, and we'll have to let that play out before commenting on what impact it might have on our full year. We continue to prepare as best as we can without any real direction from the government. Should sequestration or additional budget cuts occur, we'll be ready to adjust our cost structure and capital spending plans as appropriate. In the meantime, we'll continue to focus on the things that we control. Over the long term, we strongly believe that the technology and innovation that Harris brings to the marketplace are well aligned with our customers' spending priorities. Communications and ISR capabilities allow our government and military customers to do more with less, and our uniqueness as a supplier that competes on a commercial basis puts us in a favored position to provide innovation in more affordable solutions than our competitors. And as we reduce costs and improve productivity, we'll continue to invest in R&D and the long-term success of our enterprise. Our strategy remains to execute in our core businesses and our growth initiatives, drive operational excellence to lower costs across the company, generate higher free cash flow and return capital to shareholders through share repurchases and dividends. And now, let me close by thanking Dan Pearson, Executive Vice President and Chief Operating Officer of Harris, for his many contributions to Harris over his 35-year career with the company. As you already know, Dan is retiring effective January 9, and this will be his last earnings call with the company. Dan has been instrumental to our company's success. He's developed and mentored a number of the senior leaders in the company today, and he's provided much guidance and counsel to me as I transition to Harris as CEO. He's going to be missed by all of us. And now, I'd like to open the -- ask the operator open the line to questions.

[Operator Instructions] Your first question comes from the line of Noah Poponak, Goldman Sachs.

I wondered if you could potentially just elaborate a little bit on what happened with the additional impairments with Cyber and Broadcast. Maybe if you can get a little bit more specific outside of just the broad strokes of financial markets. And if you could split out sort of how much was Broadcast versus how much was Cyber. And then lastly, if this, in any way, changes how you were thinking about capital deployment as a result of these actions.

Okay, well, it's good questions. First of all, on both of those, we're still deep in the processes, particularly on BCD, and we'll comment as much as we can. Our first quarter results in Broadcast were a little less than what we had expected, both because the market's a little bit tough and because some of the issues around us selling the business causes some of our customers to be a bit hesitant. So the results were a little bit worse than we expected, but process is pretty well advanced, as Gary said, due to some recent indicators of value, including those things that I've just mentioned. We've written down the business in the quarter. You'll see more in the Q that we'll announce or release at the end of this week. You'll see that we wrote down the value of the business to a net book value that's just under $300 million at $287 million. We still expect to use up to $200 million of cash proceeds from the sale of BCD and share repurchases. We still expect that to occur in the third quarter. On Cyber, again, Gary said we've signed an agreement on the building. We're going to work to close that over the next thirty-some odd days. We expect that'll be completed certainly by the end of the calendar year. Again, you'll see in the Q we'll release later this week the net book value of Cyber's now written down to $38 million, and that certainly implies some estimate of value that we expect from Cyber. The total impairment was about $222 million in total on a pretax basis, and the vast majority of that was in the -- in BCD. About $6 million, Gary, or so was in Cyber.

That is correct.

Did I get -- Noah, did I get all the rest of the questions?

Yes. I think that answers it and is very helpful. And then just one other one. Just wondering if there's any change within your thinking around mix by segment within your full year revenue guidance. RF and INS were light of what the full year target is whereas GCS was a little better. I don't know if that's what you're expecting or if there's any change to your thoughts on segments for the full year.

No, we've -- if you look on the last page of the webcast, we've -- we basically have held the top line guidance across all 3 of those segments. So no, our guidance for the year, overall and by segment, has not changed based on what we saw in the first quarter. But again, it's still early in the year, Noah, but right now, no, we're not seeing any change.

The next question comes from the line of Carter Copeland, Barclays.

Let me just be the first to extend the congrats and our sincerest congratulations on all your successes, Dan. You've done a lot for the company, and I'm sure they're going to miss having you around.

Thank you, Carter.

Couple of quick ones. Bill, on RF, the margins there, in terms of Tactical holding the line, obviously you said R&D went up. So as a percentage of sales, that was higher. Obviously, the volumes were down. I'm wondering if some of this could be the resiliency and the margin could be mixed-related. And I wondered if you might speak to the growth differentials, domestic versus international, and whether that played a role in the resiliency in the margins in the quarter.

No, the -- as we had signaled several months ago, we knew, because orders were a bit higher last year in international and domestic, we knew that going into FY '13, international was going to be a bigger -- a bit bigger than U.S. DoD, and that's in fact what we're seeing in terms of size of orders, size of revenues. But that mix shift is not what's impacting the margins holding steady in Tactical Communications. In fact, I think it really comes back to, I think, very, very good productivity, tight cost controls that Dana and his team have executed up in the J. Road [ph] factory and throughout their business. We talked in Q4 about some restructuring that we did, some of which was in RF. We talked about some of the contractors leaving the business. We talked about very tight controls on marketing and G&A expenses, all of which Dana executed on very, very well. And it offset what was a little bit higher R&D in the quarter. So it comes down to just good execution on the cost side.

Great. And Gary, on the Government Systems, the margin performance there, I know you made the quick comment that it was all performance-driven, but obviously really good performance despite the sales year-over-year. I wondered, when you said performance-driven, was there anything sort of onetime-ish in nature on any particular contract, or was it just good mix across-the-board and good performance that's sustainable on a go-forward basis?

It really was just good performance across-the-board. We looked at the net ups and downs from any kind of reserve releases, and if anything, it was net negative. So it was just great program performance, great execution, good award fees across a broad range of programs.

The next question comes from the line of Michael Lewis, Lazard Capital Markets.

I have a question on orders with regard to the year-over-year comparable. It was stated in last year's Q1 report -- or release that you had $1.62 billion in orders and it looks like it's been revised down to $1.48 billion. I guess, the question is did you de-book the $140 million? And if so, where it did it come from, what segment?

I'd have to look into that, but I'm pretty sure it was just removing the Broadcast division from our continuing operations, but not aware of any de-booking of any orders.

I think you may be looking at last year's including BCD before it was moved into disc ops, Michael.

Okay. And that's exactly what I was wondering, if it was all Broadcast.

I'm pretty sure that's the case, but let me double check and get back to you.

Yes, I'm pretty -- I think we're confident that we didn't go back and restate any Q1 orders from FY '12. So I think we can say it definitively today.

And then just a quick question. The 5-year Navy IDIQ, at the time of the award, did the Navy also provide any initial funded orders on that contract? And if so, how large were they?

Gary?

The orders that we got off it were very small to date. So we still have the other contract running off, and most of those orders are expected to come in the future.

Okay, okay. And then just -- okay, so if you're still working on that prior contract, what's left on the ceiling on that one?

Very limited. In fact, I think we're just about down to a few million left.

The next question comes from the line of Gautam Khanna.

And I echo Carter's sentiments, Dan. Congratulations.

Thank you.

A couple questions. First, Gary or Bill, could you just tell us what you need in terms of Tactical book-to-bill to get to the guidance this year? I mean, what should we be looking for sufficient to hit the guidance?

Well I think, as you know, let me just say we were not going to -- we don't typically give guidance on book-to-bill and don't sort of give guidance on a quarter-to-quarter basis. But if you follow the company long enough, you sort of know where we ended last year on backlog. You think you know generally how much we convert of that backlog in the course of the year, typically it's around 80%, 90%. We know it's going to be a little less this year because we got Australia and a few others. We typically book and ship over the course of the year between 55% and 60% within the year. This year it'll be a little bit higher than that. And if you run all those numbers with the guidance that we've given for the overall segment, I think you can infer that it's going to be about or a little bit higher than a 1 book-to-bill. So I'm obliquely coming back to answer your question.

No, that's fair. I appreciate that. Second thing you mentioned, I think in your prepared comments, about the HMS developments and it only removed $50 million from the pipeline. Is that what you see as -- you said there's a little bit more risk to the RF guidance, is it just that -- around that $50 million that was contemplated originally, or is it something beyond that?

No, no. It's entirely related to the LRIP. We had about $50 million in our opportunity pipeline for fiscal '13 associated with that LRIP. And as we pulled that out, again, just -- I think, as you know, Gautam, the way we look at forecasting, we've got a pipeline. There's probability weightings on the pipeline. They move in, they move out, they get bigger, they get smaller. And this one happened to move out, but what moved in behind it is some opportunities with SOCOM, Marine Corps, some encryption products for the Army. So that's basically what's happened. There's nothing else that's behind that. We've been able to sort of offset about 1/2 of it, but we still have got about 1/2 to go in the next 3 quarters.

Okay. And I may have missed this in response to Noah's question about the impairment charges, but are you still expecting about $200 million net of -- a little bit north of $200 million net of tax leakage from the sale of Broadcast, or could you ballpark how big that...

Yes, the -- what you'll see in the Q is the net book value of the business has been written down to just under $300 million, which gives you some indication of the value we expect to receive. This tax leakage, as we brought it down a little bit, we thought months ago was between 5% to 10% of net proceeds. It's now less than 5%. So we still, based on where we stand today, expect north of $200 million of cash proceeds, again following just what I said before, 200 -- up to $200 million being used for share buyback in Q3.

Okay. And last question, if you don't mind, on [indiscernible] for fiscal '14 and beyond just given now HMS and all the JTRS programs appear it'll be open to full and open. What do you think happens with respect to pricing and your ability to kind of hold margins now that you might have a more competitive landscape out there given GD is given entry into those?

First of all, we won't -- we're not going to get beyond fiscal '13 in terms of guidance. But look, we always have assumed, and you heard Dana talk about this in June, that the program of record would be a competitor overtime in this space. That was we never assumed we'd get 100% share. They went with an LRIP. They're going to be a competitor as well other people over time. So we never assumed that we'd get 100% share. When the order came out for LRIP around $250 million, we know that about 1/2 of it is going to be deployed in capability set '13. We know 1/2 is going to be used about in testing and further development. But if you run the numbers in terms of the numbers -- the quantities and the dollar values, it's a pretty healthy price. And frankly, if the price comes in at that level, I think we'll have good news to talk about it in terms of our margin performance in tactical radios.

The next question comes from the line of Joe Nadol, JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Dan, congratulations to you. On RF, guys, I guess starting out, can we speak a bit about the international pipeline near term? And it seems like a lot of the U.S. orders or potential U.S. orders are -- and those competitions are in the -- certainly in the back half and maybe the fourth quarter of your fiscal year. So international, I think, would be more prominent in your bookings this quarter and next quarter. Is that fair? And is there anything chunky in the near-term pipeline?

Well, international is always going to be a little bit chunky. That's -- this year won't be any different from the past. And keep in mind, we've got a big chunk of the backlog that is Australia, and that's going to roll out over the course of this year going into FY '14. So we know we can count on that. That's actually going to happen. But Joe, we're coming off of a very strong fiscal '12 in terms of the international business. We had both double-digit revenue and orders growth through fiscal '12. I think we're well positioned competitively in the marketplace. We continue to invest in new products and capabilities. We're expanding the market. So we're doing, I think, relatively well. It's a pretty healthy pipeline, but the reality is we don't see a lot of big Australia-sized opportunities out there that are going to be hundreds of millions. They're going to be more like tens of millions of dollars of opportunities that lead to large opportunities for multi-year modernizations, but no big Australia-like opportunities on the horizon. We see, as I said at the Q4 release, we talked about Pakistan, that still looks pretty good. The political climate still appears to be improving. We see opportunities in Iraq firming up. We think Jordan is still pretty solid, and the pipeline there has gotten a bit bigger over last 3 to 6 months. Brazil is looking pretty attractive to us, still in the early stages, but we think it's progressing pretty well. I think we're well positioned in the Middle East, particularly in Saudi as well as in the UAE. And we're seeing some opportunities in the Philippines, in Poland, a little bit in Denmark. So we see in lots of different pieces, but again, not the big Australia-sized opportunities, but still we feel very good about prospects for the year as a whole. I think as we talked before, it's tough to predict a particular order in a particular quarter. But overall, for the balance of the year, we think international's going to end up being pretty good. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And just one other one on the Broadcast situation. I mean, obviously just by definition, you guys are going to get a bit less -- significantly, you're going to get a little bit less than you'd hoped when you started out the process. And so my question is, is there a price at which you wouldn't sell the business, or are we firmly committed on this track 100%?

Look, we made the decision to divest the Broadcast business because we didn't fit -- think it fit strategically with where we want to take the business. It's now our job to maximize value for share owners and as we dispose of that business, and that's exactly what we're doing. I don't think it's appropriate to talk about where's the sort of the walk-away price. We're committed to sell the business and do the right thing for share owners, given the fact it doesn't fit strategically and that's what the management team has got a bead on right now. So we'll tell more, we'll have more of an update towards the end of the year as we announce the sale of Broadcast and clearly more to say as we announce our Q2 results.

The next question comes from the line of Yair Reiner, Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Just a couple of housekeeping questions. First, taxes came in a little bit below your full year guidance. Can you give us any update there?

This is Gary. As we've always said, tax rates in any given quarter jump up and down because of discrete tax events. We still feel very good about the 33% rate for the year. If the R&D credit comes in as expected, we probably are going to do a little bit better than that. But that's where we're at currently. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Great. And then it looked to me like the adjustment for participating securities was lower than typical. Can you give us an update on the guidance there?

Well, we did buy, again, about 1,078,000 shares in the quarter. I think that's what you're referring to. The decline in shares outstanding actually went up a little bit rather than declined because of the exercise of options and awards that came out in Q1. There was a lot of activity by employees exercising stock, but that would be the only reason the decline wasn't as great.

The next question comes from the line of Mark Jordan, Noble Financial.

A question relative to the international backlog. Is there a way or do you have it segmented by geographic region so we'd have a sense of what is Middle East, what is Australia, what's Western Hemisphere?

Well, we do, actually. We have a very good sense of where the backlog is by not just hemisphere or geographic region, but by country and specific opportunity within a country. And Dana and his team know it very well. They track it day-to-day. They probability weight it. They have their salespeople chasing it. But that's just a level of detail that we're not going to get into on an earnings call. Certainly, that has some competitive sensitivity to it clearly so -- but yes, we do know the detail very, very well.

Okay. Secondly, relative to the what is the competitiveness in the international market with regards to people that you would be bidding against? Is there effective competition there or do you -- or are you finding it more a decision of a specific country going to exercise a purchase order and you're the only game in town?

No, no. Typically -- look, there's a lot of competition in the international markets and -- but clearly, based on what we've seen in terms of market share growth over time, we're performing very, very well. You have to understand though, in a market -- in a given geography that has standardized on a Falcon II and then a Falcon III product, clearly we've -- we're in the catbird seat to win future generations of radio purchases. And so I think we're well positioned in places where we've been established for some period of time. But in any place, in any country we happen to go in, especially with the fiscal constraints we see almost in any place we operate, yes, there is going to be competition. There's going to be a desire to get a good radio at a lower cost over time. And we meet our customers' expectations as best we can.

The next question comes from the line of Chris Quilty, Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: I wanted to follow up. You had mentioned the certification on the 152A handheld and wanted to clarify. I know the Rifleman Radio program has also been opened up to full and open competition. Does the 152A meet all the specs there? And if so, how would you stand competitively with that product?

I think the -- and I'm going to start and then probably get beyond what I really know and maybe ask Gary or Dan to step in. But no, the 152A can meet those requirements, but it's probably a little bit beyond the requirements of what's typically for the Rifleman Radio application based on its clearance and classified data traffic it can handle. So we are developing a new product generation, which will be ready when Rifleman goes to full and open competition by the end of fiscal '13. I think Dana talked about this in early June with the 330E and we'll be ready with a very, very good product that is competitive on size, weight and power and at great cost point relative to Rifleman. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And also on the RF business, with the 2 recent contract awards, both large contracts but both IDIQ, so you can't count those towards the backlog in a way that you would traditionally, and I know you have some granularity there. Can you give us a sense -- I mean, a little bit disappointing on the book-to-bill here on the radio, on the contract for the quarter. Are you carrying a much higher level of IDIQ business than you might have been in years past that sort of offset the lower traditional book measures?

No. This is Gary, Chris. We're not really. In fact, those vehicles are very similar to the contracts that were in place. We continue to see a lot of opportunity with those different agencies of the government, the Navy, Marine Corps are pretty much standardized on our products. We see lots of opportunity coming from that. But you're correct, we don't book IDIQ vehicles in our backlog. The only thing that's in backlog are funded orders. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And final question. On the Manpack, I think the actual award for the HMS program was closer to $250 million. You're pulling $50 million was all you had in your particular forecast, but does it not imply that there's maybe a bigger chunk of follow-on business that might not be available? And can you also talk about, if you can specifically, I mean these are known items, where you think you stack up in terms of size, weight, performance, pricing, battery life and other metrics that are going to be used to eventually determine which way the orders go?

Well, I think on the first one, I briefly referenced it, but let me hit it a little bit more directly. You're right, the order for the LRIP was about $250 million, but our understanding is that only about 1/2 of that LRIP is going to be fielded. And keep in mind that the LRIP radios are coming at a much higher price than what we would have had in our pipeline for $50 million. We also assumed that the next 3 BCTs were going to be mostly light versus light and heavy BCTs. They also added a fourth in Fort Carson coming out of the DAB, which sort of made the purchases a bit more. So all of those factors come into play in what happens, why it's $250 million versus what we only expected to be about $50 million. I think the biggest piece of it is 1/2 of it only -- only 1/2 is going to be fielded, and it is a much higher price than what we've put in our own opportunity pipeline. And I think relative to the Manpack, in our ability to compete against that, look, we're working very hard on and we plan to offer a 2-channel Manpack when it goes to full and open -- integrated 2-channel Manpack when it goes to full and open competition by the end of the fiscal year, and I think we're going to be very competitive versus where the program record happens to stand.

Chris, as we said when you asked a question on MNVR, we'll have a 2-channel competitive solution, and we're not going to get into what it's going to do right now. Chris Quilty - Raymond James & Associates, Inc., Research Division: Is that the appliqué that you demonstrated a couple years ago?

No.

No. Chris Quilty - Raymond James & Associates, Inc., Research Division: And you can have a 2-channel radio, but the process of getting an NSA certification typically takes about a year, so does that put you behind the competition?

No, we'll get there.

We do have a question from Gautam Khanna of Cowen.

I just had a quick follow-up. You guys talked about the foreign RF pipeline. You mentioned Pakistan. I just wondered, I mean, does sequestration and just -- does it matter who is elected President? I mean, how much of a moving train is that order and orders similar to that in the Middle East, say? How dependent are they on kind of congressional approval whether it be something that has already been approved, or is it something that you think you're going to need buy-in from Congress before it can happen? And does it matter who wins the election in terms of the likelihood or non-likelihood of those orders happening this fiscal year?

Right, right, right. Look, we -- first of all, our pipeline, it doesn't really hinge on who takes the White House and who's in Congress in November or not. I think it's -- I mean, I won't talk specifically about the opportunities and how they're being funded. But in general, from what we saw in the President's budget, the FMS funding line looks pretty good. It's sort of flat, maybe up a little bit in GFY '13. But also the amount of our international business that is coming from countries that require FMS funding is declining over time. Two years ago, it was north of 40%. Last year, it was about 1/3 or a little less than that. This year it's sort of down towards 20%. So it's coming down over time, and therefore, it is less dependent upon U.S. government funding for those kinds of opportunities. Hopefully, I answered that question. It's...

Yes, it was very helpful.

All right. Thank you, everyone. Appreciate it.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.