Good day, ladies and gentlemen, and welcome to the Harris Corporation Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Pamela Padgett, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. Good morning, everyone, and welcome to our Third Quarter Fiscal 2014 Earnings Call. 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. 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, on this teleconference and the related presentation, we may discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included 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 it over to you.

Okay. Well, thank you, Pam, and good morning, everybody. Third quarter results were solid with revenue and earnings per share above prior year, which was impacted by the triggering of sequestration. Government Communications Systems and international tactical radio within RF Communications had excellent revenue growth in the quarter, and both segments produced strong bottom line performance. Our strategy to lower costs while increasing R&D to drive growth and international expansion is serving us well in this constrained government budget environment and was evident in this quarter's results. Company-funded R&D was up 10% in the quarter and for the year is expected to be up high single digits similar to last year's 8% increase. Total international revenue for the year for the company was up 39% in the third quarter and up 15% year-to-date. And we're on track to increase international revenue for the company from 26% in fiscal '13 to around 29% this year. Turning to Slides 3 and 4 of the presentation. Revenue was up 5%. Income from continuing operations was up 10%. And earnings per share was up 13% to $1.27. Earnings per share included a $0.02 net benefit from out-of-period adjustments, and Mick will describe the impact by segment. It's also worth noting that the prior year quarter benefited from a retroactive R&D tax credit of about $7 million. Orders in the quarter were about $1.1 billion, and book-to-bill was 0.88. Year-to-date, book-to-bill remained above 1, and we ended the quarter with strong funded backlog of $3.3 billion, down a bit from the previous quarter's $3.4 billion but up 4% year-over-year. Strong international revenue growth drove revenues up 21% in Tactical Communications. International orders were up over the prior year and included 2 significant orders of $82 million and $49 million from countries in Asia that are…

Thank you, Bill, and good morning to everyone. It's a real privilege to join the team at Harris. Moving to segment results on Slide 5. RF Communications orders were $405 million compared to $486 million in the prior year. Revenue was $457 million, up 9% from $418 million last year. In Tactical Communications, orders were $285 million compared to $297 million in the prior year. Tactical revenue was $335 million, up 21% from $276 million last year. In international, revenue and orders were strong and higher than in the prior year. In the United States, both revenue and orders were weak but in line with our internal expectations. Public Safety orders were $120 million compared to $189 million in the prior year. Revenue was $122 million compared to $142 million last year. The Public Safety market was weaker than expected. Operating income for the RF Communications segment was $144 million with a 31.4% operating margin. Excluding the out-of-period adjustment, operating margin was 30.8%. For the full year in RF Communications, we continue to expect flat revenue for the segment. Tactical Communications revenue is up mid-single digit, which is slightly higher than previously expected on strength in international but offset by weakness in Public Safety. We now expect operating margin to be in a range of 30.5% to 31%. Let's turn now to Integrated Network Solutions segment on Slide 6. Despite growth in the commercial side of the segment, both orders and revenues were down compared to the prior year as a result of continued government market weakness. Revenue decreased 7% to $348 million and was down across the segment in IT Services, CapRock and Healthcare. Excluding the out-of-period adjustment, revenue would have been down 6% with government weakness more than offsetting a double-digit increase in commercial CapRock revenue. Segment operating…

Okay. Well, thank you, Mick. The core of our company is providing mission-critical, advanced communications that are differentiated through innovation and technology. This is reading through in our solid results this quarter and our expectations for the year. Our commercial business model gives us a competitive advantage in the speed in which we develop and field new products with attractive margins. Our commitment to innovation will continue to bear fruit as the DoD adapts to operating under constrained budgets and relies more on industry to invest in new technologies that create affordable solutions that can be delivered quickly. And with that, I'd like to ask the operator to open the line for questions.

[Operator Instructions] Our first question is from Lucy Guo of Cowen and Company.

This is Lucy Guo calling in for Gautam Khanna. So I wanted to ask about your opportunities in the Middle East. You have talked about continued progress toward a multiyear for Falcon III radios and upgrades in Iraq. And then similarly, Saudi is another area of opportunity. Do you have a better idea on the timing of these?

Well, Lucy. First of all, thank you very much for the question. As I mentioned, the pipeline overall for international -- and I think you're referring specifically to the Tactical business, so let me just clarify that. The total pipeline is $2.3 billion. It was $2.2 billion last time. So it's still pretty good, and we've got about $900 million that are in the sort of the final stages, closure or proposal stage. So we're feeling pretty good about the advancement of opportunities through the pipeline. To your point about the Middle East, well, more than half of our pipeline is for the Middle East and Asia, and it really does relate to those issues I've talked about in the past, the security issues we do see, the U.S. pulling back from those markets. Iraq is a very big opportunity for us, and we've been working on this for a number of years. We've got an extremely good dealer in place there. It's probably one of the biggest multiyear opportunities that Harris and Tactical faces. We just yesterday were able to confirm that we received our very first order in the last couple of years in Iraq. It's for $15 million. So that is going to be booked in the coming days. We received confirmation last night. So that to me, Lucy, is good encouragement that these opportunities that we've been talking about for quite some time in Iraq are progressing, and we do see opportunities that are quite a bit larger than that in the near-term pipeline. We continue to have very, very strong business with that country in Northern Africa that we've talked about before. The UAE is a very big opportunity for us, as is Saudi, and we booked a number opportunities over the last year, year and a half. And we see more coming down the path. And that's a little more than half of our total pipeline for international. The other 25% or so is coalition countries that are deploying wideband. That's gaining some strength. We see continued -- about 15% of our pipeline in Latin America, in Brazil, Columbia, Mexico, remain the biggest opportunities in those marketplaces. But of course, there's other opportunities really around the world that are a little bit smaller in nature. But clearly, the biggest opportunity is in the Middle East, and I'm glad to be able to say that we've seen one come through the pipe late last night in Iraq. So thank you, Lucy.

So as a follow-up, the SRW opportunity that you had booked an IDIQ contract on, how shall we think about that going forward?

Well, I think we're very well positioned. As I mentioned in my prepared remarks, we were 1 of 2 that have actually been selling SRW appliqués to the Army. They've been tested. We have actually 2 solutions that were bid. Of course, as you saw in the press release, there's 4 companies that received IDIQ awards, but we feel very good, very well positioned. And frankly, we're encouraged about the size of the IDIQ, $988 million total contract value, total possibility. And we're also encouraged by the fact that it is now finally out in the street and awarded, which means that there's some intention to place some orders against it, Lucy. So we're encouraged.

Our next question is from Yair Reiner of Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Nice growth year-over-year. If I look at the guidance implied for the fourth quarter, it suggests less of a sequential increase than you typically see. Was there anything unusual about the third quarter results that make the fourth quarter compare more challenging this year? Is the seasonality in that business changing? Just if you can give us some sense of kind of what's been happening below the surface there.

Yair, are you talking about revenue or operating margin? Yair Reiner - Oppenheimer & Co. Inc., Research Division: Revenue. But if you want to speak to operating margin, that will be helpful as well.

Well, the revenue was up quite a bit in the quarter only because -- partly because of the easy compare, and I think we acknowledged that in the prepared remarks last year around third quarter. You remember, with sequestration being triggered, that caused some disruption in the business. But tactical international was extremely strong in the quarter, and that was the big driver in our third quarter. On the margin side, we did see very, very good margins over the course of the first 3 quarters of the year sort of on average for RF Comm in the 31.5% range. Of course, Mick did mention that we had a modest out-of-period adjustment that did help us in Q3 in the RF Comm segment. We've been saying before, and I'll mention it again today, that we do see our R&D investments, sales and marketing investments, ramping quite a bit. It didn't ramp as much in Q3 as we had anticipated, but they certainly will ramp pretty steeply in Q4 primarily for these modernization opportunities in the manpack and the MUOS developments that we've been focused on and I mentioned in my prepared remarks. So we do see a pretty substantial ramp in investment coming in Q4. And also, we're a little bit impacted in the quarter by mix in the international side. So through the year, we're still in that 30.5% to 31%, and we feel pretty good about where we happen to be. And I think if you look at the numbers closely, you'll see that we're going to be up sequentially in Q4 from Q3. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it, okay. And then just another one on RF. In terms of the U.S. pipeline, can you reconcile the comments on the one hand in terms of the pipeline being up a little bit quarter-on-quarter? On the other hand, if you look at the 5-year budget for the DoD, it looks like there are pretty significant cuts in the forecasts in terms not just of JTRS but also of the MNVR radio.

Yes, I would say, look, we -- we're floating around $900 million to $1 billion. And frankly, we're encouraged it's stable. I wouldn't read too much versus into $900 million versus $1 billion. Of course, you know that we get funding not just for those -- from those typical line items you see. At the high level, in comes in lots of line items buried in budgets, including from some O&M accounts. So I wouldn't -- yes, we're aware of some of the push-out of some of the bigger things that we've talked about in Army modernization, but there's lots of line items that drive it. So we feel comfortable at about $1 billion of pipeline. We are seeing, with the drawdown of activities in Iraq drawn down and Afghanistan drawing down, that there are some reset opportunities that are coming to bear. There are some modernization opportunities outside of the Army that are entering the pipeline. More than half of our pipeline itself is Air Force, Marine Corps, SOCOM modernization. And we've said before, they standardized on the Falcon III technology. So that still remains robust. And -- but if you go into the line item details, SOCOM funding remains pretty strong. We only see about 10% of our total pipeline related to Army BCT modernization. We do see a lot of other Army programs unrelated to modernization in our pipeline. So overall, about $1 billion, floating between $900 million and $1 billion. But again, I'm encouraged that's remaining about flat in the environment we happen to be in here.

Our next question is from Carter Copeland of Barclays.

Just a clarification and a couple of questions for you, Bill. The comment you made around the JTRS appropriations being down, yet the unspent funds, I think you implied, providing a bit of support. Does that kind of point to flattish overall funding profile or work profile there? Or is it just too uncertain with the procurement delays you talked about before?

Yes, no, it's -- well, first of all, it's still very, very uncertain because in the President's budget, it assumes sequestration resolved, as you know, in GFY '16. That's still a wildcard out there. We know that. We recognize that. If you look in his budget for '16, all of the funding line items come back, snap back up. But we'll see, as the next year or 2 go by, whether that's actually going to take place. There is -- there are unspent funds in the JTRS procurement line items from prior years. It's in that range of $300 million, plus or minus. And there's -- I think with a little bit more coming in GFY '15, about $185 million, I think, is what's in the President's budget, we feel pretty good about the overall level of funding. The -- when we'll -- we talk about our own profile here, we've said that the JTRS Army modernization opportunities won't be impacting our fiscal '15. If anything, they're going to start to roll in, in our fiscal '16, and we've said that in our last call as well.

Okay, great. And on the INS side, Mick, I wondered if you might help us clarify. With respect to that 6% adjusted decline in revenues, how did the pieces compare to that average in terms of above or below at IT Services and Healthcare and CapRock?

Yes, let me give some clarification about the out-of-period adjustments. As we noted, there were 2 of them. Neither is significant for total Harris and especially when netted out. And as we said, in total, they provided only $0.02 of earnings per share. For INS, there were the 2, where one was on post-employment benefits adjustment and the other one negatively affected their revenues and cost. The one for post-employment benefits positively impacted ESA, which is engineering sales and admin expenses, for all the segments. And for INS, we had some of that, but we also had about -- a drop in the revenue and a small increase in charges for the cost, and that dropped their margin by 1.2%. [Indiscernible].

Yes, within -- yes, within INS, most of the positive benefit affected the IT Services business, and most of the negative benefit was booked within the CapRock segment.

Okay, but with respect to -- you highlighted the downward pressure on the government SATCOM piece at CapRock. Was the CapRock piece the low -- the largest decliner in the quarter of the sub-groups?

Go ahead.

I'm not sure I'm following the question, Carter.

Within -- I was saying with respect to the whole group's sales growth, I'm trying to figure out, which one of the sub-groups within there was the largest decliner. I'm just trying to put some numbers around the comments around the declines at each one of the businesses.

Yes, I think HITS was -- the IT Services business was down, as well as the government part of both CapRock and Healthcare were both down. And they were down pretty substantially in the quarter HITS. So in the sort of the in the 10%-ish range. And the other 2 businesses are down in -- north of 20%. But what we're encouraged by was the growth on the commercial side of CapRock, which was up in the quarter by 6% reported. When we adjust for this out-of-period adjustment that Mick mentioned, that affected revenue as well, CapRock commercial was up about 12% in the quarter. So hopefully, that hit the question, Carter.

Yes, that totally helps. And then with respect to the comment in Healthcare that you made about scale, I mean, obviously, you've been through quite a restructuring process there and product rollout and whatnot. When you think about the scale you need to have to reach the kind of levels of profitability that you've outlined in the past, how does that compare to where you are today?

Well, look, we've -- we have to grow the business. What I was encouraged about over the last 3 or 4 months is that the solution that we call FusionFX now, that the solution that's now installed and operating at 3 different customers, 29 hospitals, is stable, is performing well. Customer are excited about it. There's more clinicians coming on to the system, more patients coming on to the system. And I'm encouraged by this very complicated piece of software is stable. And that was our first hurdle to get over, was getting a piece of technology that worked, and I think we have something. Now what we have to do is find partners to help us grow and scale the business. This -- Harris is not -- does not have deep domain expertise in commercial health care. We don't have a robust channel that's built. And we're going to need some support, some partner help in growing our business. It will need to grow pretty substantially on the commercial side for us to reach profitability. But it's more important -- not so much the size, but as -- the mix has to shift from installing systems to converting to license revenue. And that will happen, Carter, as we bring on more customers and start to grow the business and scale the business.

And our next question is from Joe Nadol of JPMorgan. Christopher Sands - JP Morgan Chase & Co, Research Division: It's actually Chris Sands on for Joe. I was hoping you could elaborate on kind of the outlook for Public Safety. It was kind of down again sequentially in the quarter. You talked about orders being up in the first half, but they wouldn't translate soon enough. When can we expect that to kind turn?

Well, look, as we talked about last time, the -- in Public Safety, the issues that we're seeing is both market and execution. And I talked a lot about last time some of the sort of executional issues that we're seeing. Some of it is delayed rollouts of some systems. There are some customer issues that are associated with that. Some of it is getting in early enough on large procurements so we can shape the RFPs where we're adding sales and marketing resources, we're adding resources to improve our product offering. All of those things, we're working on. We've got some new leadership in place. We're augmenting our teams. But as I cautioned last time, these things will take time. They won't fix themselves over 1 or 2 quarters. It'll take a little bit of time. What we're also facing now today, though, Chris, is a weaker environment, and that is a little bit worse than we expected last quarter. And I think as our peers and competitors in the space will report, we're all seeing a bit of weakness. Part of it may be some of the rebanding that happened 1.5 years, 2 years ago and the effect it had on the overall market. We are seeing municipal budgets be better, but it's not flowing through into an uptick yet in Public Safety communications. That will over time, but we're not seeing it at the moment. It could be -- and I think it -- we have to believe that the prospect and uncertainty around how LTE will roll out has to be having some impact on how customers are thinking about investments in LMR digital technology with the prospect of LTE down the path. So we don't know how this is all going to shake itself out.…

Yes. I wouldn't get too far ahead of yourself on 16%. I think we had a very strong quarter. Again, it was 16.2%. But again, keep in mind, it was -- when you adjust for sort of the onetime, it was on the order of about 15.2%. So pretty much in line with where we've been year-to-date and what we're guiding to for the year. So again, we're still in that 15% to 15.5% range. The team in GCS continues to execute very, very well. The award fees, certainly in the front half of the year, were very, very good. We see -- we continue to see margins in this 13% to 14% being sustainable over time in GCS. Keep in mind as you know the market very, very well, as you roll on new programs, they tend to come in at lower margins. And over time, as you work and you drive efficiencies, you can try to extend the margins is what we've seen. So it will depend upon the mix of new programs. As we see, like the DCIS, the NVS, programs in FAA roll in, they tend to come in at lower margins, and that's going to impact GCS over time. So I'd keep in my mind 13% to 14%, not 16%.

Our last question is from Josh Sullivan of Sterne Agee. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: I'll just go back into that government operating margin question. You guys, obviously, did a lot of restructuring last year, and it's obviously having an impact here. But can you maybe give us an idea of the longevity of these actions just given your fixed contract mix and these re-competes coming up? I mean, how should we think of timing-wise that rolling through?

Yes, look, the -- clearly, 15%, 15.5% margins this year are positively impacted by some of the restructuring activities. It's impacted by some of the activities in driving operational excellence at GCS. A lot of it is they just have been performing very, very well. They've got tremendous customer intimacy. And that -- when you perform well on time with that focus on the customer mission, what ends up happening is the award fees tend to be relatively strong, and that's, in fact, what happened. In operational excellence, when we provide guidance to investors in this area, we do it specifically knowing that some of what we say needs to go back to the customer when we have cost-plus-type programs. Roughly half of GCS is fixed price and roughly half is cost-plus. So a lot of what we see in restructuring and operational excellence programs does roll through and affect our ROS. And that is what you're seeing this year, in fact last year in the growth over the last couple of years. Again, as we go out into next year, we'll provide guidance in late July on what we see to be the revenue and market environment, the ROS for GCS into fiscal '15. But again, I keep in my mind in that 13%, 14% range over time as opposed to the very strong performance we're seeing this year of around 15.5%. Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division: Okay. And then one last one on CapRock. The government weakness, how much of that is related to just OPTEMPO in Afghanistan versus, say, sequestration?

It's some of that but not the bulk of it. A lot of it has to do with 1 year or 2 ago, the -- there was a contract vehicle that was opened up and competed on with some of the satellite owners, and they won a contract vehicle and they are basically providing some bandwidth directly to the U.S. government, which in the past went through "brokers" like our CapRock government business. So that is now going direct, and it's impacting our business. We're seeing some pricing pressure in our terrestrial business as well, which has been opened to competition as well. We're seeing some pressure on that side. There is some related to the drawdown. That's not bulk of it.

All right. Thank you, everyone, for joining us.

Ladies and gentlemen, this will conclude today's conference. Thank you for your participation and have a wonderful day.