Good day ladies and gentlemen and welcome to the Harris Corporation's Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference call is Pamela Padgett, Vice President of Investor Relations. You may begin ma'am.

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

Okay, very good. Thank you Pam and good morning everyone. I want to start by expressing our deepest condolences on behalf of Harris to the family and friends of Joe Nadol an analyst who has followed Harris for almost a decade, and who tragically passed away earlier this week. So today we are announcing a transformational acquisition of Harris that will create significant and lasting value for our shareholders, our customers and our employees. With the acquisition of Exelis we are increasing our scale, broadening our technology base and expanding our customer set in markets where we had decades of successful performance. So before jumping into the transaction, Mick and I will briefly cover second quarter results and updated Harris guidance and then Dave shall walk you through the acquisition before opening the call for questions. So turning to our second quarter earnings presentation Slides 3 and 4, Harris performed well in the second quarter with earnings per share of $1.32. Operating results were solid reflecting good execution and lower cost. Earnings per share also benefited from lower than expected taxes including the 2014 R&D tax credit. Revenue for the Company was down 1% with growth in Government Communications Systems, International Tactical Radios and Commercial CapRock more than offset by continued weakness in U.S. Tactical Radios and by the previously reported wind down of two major IT services programs. International revenue was up 5% in the quarter and was 31% of total revenue, and the strategy of expanding already strong franchises within the government market is providing revenue strength for the Company. So touching briefly on the segments, Government Communications Systems posted its fifth consecutive quarter of year-over-year revenue growth and generated excellent operating income, demonstrating yet again the strength of its core franchise in Space and Intelligence, Avionics, Air…

Thank you much Bill, and good morning to everyone. We have included our typical segment detail and financial highlights in Slides 5 to 8. But instead of reading them in the interest of time I will go directly to Slide 9 for our updated fiscal 2015 outlook. We are increasing our fiscal ’15 earnings per share guidance to a range of $4.95 to $5.05 per share from previous range of $4.75 to $5 per share. Revenue guidance remains unchanged and is expected to decline 1% to 3%. Our guidance doesn’t consider the acquisition being announced today. In RF communications we have narrowed the guidance range, and expect revenue to be flat to down 2%. Within the segment we expect public safety to be weaker offset by higher international tactical. U.S. tactical expectations are unchanged. A bit stronger back half revenue compared to the first half due to the passing of a GFY15 budget and timing of funds flowing down to customers. In Government Communications Systems we now expect revenue to be up 2% to 4% and operating margin in the range of 15% to 15.5% and that’s a little bit better than before. We expect modest sequential revenue growth in the back half. In Integrated Network Solutions, first half revenue was generally in line with expectations. Strength in Commercial CapRock more than offset by program wind downs and IT services, while IT services are showing signs of bottoming we are no longer expecting any pickup in second half revenue and we are assuming that revenue pressure in the CapRock energy market materializes due to the impact of lower oil prices. As a result we now expect fiscal ’15 revenue to be down about 10% and operating margin up about 7%. We are still expecting free cash flow of about 100% of net income and a full year tax rate between 30.5% to 31% which translates into an average tax rate of about 33.8% in the back half, about half of the decrease in tax rate guidance is due to calendar 2014 R&D tax credit and the remainder from other favorable tax items. With that I'll now turn it over back to Bill to comment on the acquisition.

Okay, well thank you Mick. And as Pam mentioned earlier I am joined here in the room by Dave Melcher, President and CEO of Exelis, who will offer a couple of comments as well. So let me turn now to the separate acquisition deck and I'll begin on Slide 3. This acquisition brings together two engineering driven companies with similar cultures that value technology and innovation to solve some of our customers' toughest mission-critical challenges. The combined pro forma company has LTM revenue of $8.2 billion and EBITDA of about $1.6 billion. This powerful combination creates an industry innovator with much greater scale providing a broad spectrum of technology-based advanced communications solutions. Let me start by providing a high level overview of Exelis and reviewing the transaction details before diving a bit more into the strategic rationale. So now turning to Slide 4, Exelis has a number of leading positions across diverse markets. Electronic systems which is about 29% of company revenue is a leader in electronic warfare technologies for the air force and navy. The principle strengths are in electronic protection and onboard processing on platforms such as the P8, the B52 the C130, the Apache helicopter and the international F-16. Exelis' flagship product is the Integrated Defensive Electronic Countermeasures or IDECM for the F-18 a multibillion dollar decades long program with about 400 systems delivered to-date. About 21% of the Company is geospatial systems, a leader in space and airborne sensing. Exelis is well known for their world class space imaging business acquired about a decade ago from Codec, the weather sensors as well as your GPS technology. The imaging business has traditionally served the intelligence community but is more recently expanded to include commercial, international and unmanned vehicle payloads. Their products range from a 21 foot wide…

Thanks Bill and good morning to everyone. We at Exelis are very excited about this unique opportunity to bring these two great and complementary companies together. The combined enterprise is very well positioned to be more competitive in the marketplace and will benefit shareholders, customers and our employees. This transaction provides immediate value to Exelis shareholders as well as long-term upside potential from the equity ownership stake in Harris. We've made a lot of progress since the ITT spin to focus the company and we built a strong leadership team with talented and dedicated employees. I am confident about the long-term prospects of the Exelis businesses and even more optimistic about the future ahead of us in combination with Harris. This is indeed an exciting day for us all. And with that I'll turn it back to Bill.

Thank you very much Dave. Let's open the call to questions.

[Operator Instructions] Our first question comes from Carter Copeland with Barclays.

Just a couple of questions, one Harris specific and then one about the transaction, first off the comment about the CapRock guidance planning on weakness materializing there in the back half of the year because of oil and gas. Can you just help us quantify what kind of decline your, I guess I would say protecting for there? And then just with respect to the transaction maybe for Bill and for Dave. When you look at the customer and channel overlaps and the comments you made about them being complementary. If you could kind of rank order, what some of those are and what you think the best opportunities in various end markets, if they're space or if they are commercial and commercial communications? Any color there I think would be helpful. Thank you.

On CapRock, in the last call I commented a bit on the impact of oil prices at the time oil price was sitting around $75 a barrel plus or minus and we had not yet seen really anything running into our financials, we ended up having a very strong second quarter as I mentioned with orders very strong and revenue up solidly in energy double-digit. We feel pretty good about that, but with oil sitting today below 50 we're seeing a little more pressure coming in the half, it's coming in more in the form of pricing, we've quite a few long-term contracts in CapRock. But even under long-term contracts we will see, we do expect to see some pricing pressure and that’s going to pressure margins, it’s going to pressure top-line growth as well. So we have accommodated for that in our new earnings guidance for INS, and this is why we sort of sized of being revenue down about 10%. Mick did you want to offer any more on CapRock in the back half?

Yes, so what I would like to note is that it’s all relative, we were expecting some growth in the back half and now it’s more stable more than anything so it’s growth typically.

And on the transaction, I would say a couple of words about this and maybe ask Dave to jump in as well, but. Look as we looked at the mix of the portfolios here there is quite a lot of complementarity in the spaces that I talked it. In space, in traffic management, surely in the weather franchise we both are in the tactical radio business have been there for quite some time, and we do see a lot of opportunities to work together in the international market through the channels that we happen to have as I mentioned about perhaps providing some products through the pretty strong existing Exelis international sales channels. And I am very excited about the opportunities in value-added services taking some of the capabilities and unique data sets that come out of the sensors that we have and packaging them in a way that we can sell to a very large fragmented by growing quickly value-added services market. Frankly here Exelis is out ahead of us. They have got a very sizable business in this area, they have made a few acquisitions in this space, and we have started we have been working on this for a year or two our team down at GCS and I think the combination of what they have done and the capabilities that we bring I am pretty excited about the growth trajectory in value-added services, Dave anything to offer?

Yes, no I think we are both very excited about is that if this combination offers a full suite of capabilities across space, airborne, naval, ground and cyber domains, and with a number of leading positions in each of those. I echo Bill’s comment with respect to the international sales, we both have different products that we sell around the world and now we have a much more expansive international network in which to sell those capabilities. And I agree with the integrated end-to-end solutions comment for sensing communications, information process, and analysis and distribution. So, I really like the fact that the leadership positions that we have with organizations like NASA, FAA and our communications customers will only be enhanced by this deal.

Our next question comes from Howard Rubel, Jefferies.

If you wouldn’t mind either Bill or Dave kind of talk for a couple of minutes on some of the deal metrics and I have sort of one or two questions and if you could help that would be appreciated. First, you talk about some of the cash investment cost, did you include in that some of the refinancing in there? And then second, if I am thinking about the cost of funds based on sort of where rates are today and I know they can move, we are looking is a 4% kind of range a reasonable number? And then last related to that, while you have some terrific synergies you also have from the GAAP perspective my guess would be some either amortization or some intangibles and some of that’s going to be frankly non-cash so there is some real benefit there that GAAP will mask and it will also create some tax shelters. If you wouldn’t mind sort of providing a little bit of structure to that I would really appreciate it?

It’s a quite a mouthful Howard, thank you. And I am going to start I think got most of the points but perhaps between Mick and I will hit your points and if we miss one let’s keep going on with that. So in terms of the structure we expect we will close in June. So there are going to be a number of transaction-based costs that will hit in June and will be impacting our fiscal ’15. As we go into fiscal ’16 we do see the transaction to be slightly accretive. We do expect that of course while the Exelis EBIT coming in, in our fiscal ’16 so that’s going to be a positive. We see integration cost which are going to be a little bit more front-end loaded, in fact a lot more front-end loaded, hitting fiscal ’16 and there will be more than the savings we get from integration. We do see in the first full fiscal year some benefit from the pickup of unamortized pension losses that we know exist at Exelis and it's going to be offset by deal amortization which will be substantial and that will be in fiscal '16. So all of those pieces come together and we do see a very slight accretion in our fiscal '16 again hinging on a close in June should that move into July there about our fiscal '16 of course would be impacted by that. You asked the question about the cost of borrowing about 4% we do expected to be lower than that and we were thinking Mick on our weighted average basis it will be sort of between 3 and 4 about 3.5%, so Mick, any other comments Mick on that?

Yes, absolutely. I think in FY15 we will have refinancing cost which are not included but we will also incur some deal costs, some financing fees, and a little bit of restructuring. Moving on to the cost of funds the way we hope to finance this as alluded beforehand is 30% of equity and 70% of debt we're taking the opportunity to refinance some of our short-term debt and in order to have rapid prepayment about half of our debt is going to be within five years and more than half of that would be term loans that which are very easily prepay. So, the cost of debt for the company will go down as we alluded to about 200 basis points that will be at or about or below 3.5% though.

So, Howard did I hit all the comments or the questions that you asked?

More or less I mean I just think the thing that is striking and very impressive is that the cash of synergies overtime are going to be very strong and it is very complementary I mean if anything my observation is I was slightly higher but I guess you want to be start out conservative but no Bill this is great, thank you very much.

Our next question comes from Peter Skibitski with Drexel Hamilton.

And I'd echo Carter’s comments about Joe and I guess though first question on the pro-forma of free cash flow approaching 1 billion in year four, just wonder what kind of top-line assumption you're factoring into to get to that?

We do see that the business together will start to grow on the top-line probably in fiscal '16 more likely in fiscal '17 or still we sort of put together our plan we're not giving guidance today on fiscal '16 but I think all indications are for top-line growth but frankly when you just look at the free cash generation of our combined companies today, you look at the cash contributions which are more smooth going in the future for Exelis associated with the pension and then the cash return from synergies being generated by year four, we do see ourselves approaching about $1 billion in free cash. And that is also looking at there will be probably some opportunities in capital spending since we do have very complementary businesses, it's very likely we'll have some opportunities to take a hard look at how we each spend capital and look for opportunities as well. So all those pieces together Pete come together to drive us about $1 billion in about four years.

And then just on the, I must have missed your comments about the cash investment cost of 130 million to 150 million, so those aren’t transaction cost, those are restructuring cost maybe or something else?

That's correct, they're synergy cost, investments to capture synergies and again I want to be very clear, those investment costs and the savings on that chart are net of what we would be working with our government customer on. So that is what is accruing to our shareholders.

And then I guess my last question just I mean obviously you guys are one of the few companies in the industry to kind of utilize the commercial pricing model and I was wondering if you had any thoughts as you were looking at this deal surrounding, an opportunity to take your commercial pricing model to certain of Exelis’ products or is that just not applicable?

Well, I think we on our commercial pricing model or commercial model at Harris is mostly in our RF business and I think when you look at the NVCS business from Exelis it follows a largely the same model, I think on the rest of Exelis it looks more like what we see at GCS which is sort of more typically government type, permanent record type programming. So, I think that's what I think would look very similar from that perspective Pete.

Your next question comes from Gautam Khanna with Cowen.

I wanted to ask if you could just help quantify what you anticipate the intangibles amortization to be, because this deal actually does look a heck a lot of more accretive at first flash than you are indicating. So I am trying to understand if you could quantify intangibles maybe some of the other items that we are not thinking about in year one and two?

Yes look maybe just a little bit more color, I mean we just -- we are announcing it today, we have got a lot of work here to do to sharpening the numbers and we will do that between now and closing, provides you a little bit more guidance as we understand the pieces quite a bit more. I would say of the total investment it’s going to be more front-end loaded, it will be more in fiscal ’16 sort of on the order of two-thirds will come up in the first year then it will flow down in the second year maybe a third with little trickling into the second year and then a little more trickling into the third year. We see the intangible amortization to be in the range of about $130 million to $140 million is our estimate today. We do see savings starting to flow in, in fiscal ’16 but as I mentioned integrated cost will be higher than the savings and then it starts to flip as you get into fiscal ’17, so more savings than cost and you start to hit more run rate into fiscal ’18 where cost of integration are relatively low. I think those are the major pieces that I think I could probably comment on here today, Mick anything?

A couple of accounting nuances, first and foremost just based on the latest 10-Q Exelis has about $24 million in intangible amortization per annum and the purchase accounting that will go away so the 130 is that we mentioned before here 130 to 140 is what we will incur. So you have to take into account when you combine both firms. And then also of import in their pension they have a net of converted actuarial loss which with purchase accounting also goes way and you can calculate that. I think the last reported number for that was $2.3 billion as of the end of ’13 and the amortization of that is in the range of around $80 million to $100 million per year.

Okay, so that’s 80 million to 100 million of sort of additive to the P&L or…

Probably on the lower-end of that, yes.

Okay, so the EBIT that you guys are assuming from Exelis is an excess of the $400 million or so that they report, is that what you are suggesting, to be clear?

Yes.

And then with respect to the cash investment cost on Slide 11 that is specifically for what? If you could just give, is it the three buckets that you talked about on the left there? Or is that inclusive of other deal costs that you haven’t called out.

Yes we should be very clear about that, it really refers to what’s on the left. There are no deal costs that are in the 130 to 150, those are investments that specifically yield a return or savings of synergy.

And so what order of magnitude are we talking about with the deal cost you have yet to quantify?

I think we are going to maybe sort of use that as an opportunity to communicate a little further down the path to investors on what that happens to be at this point Gautam. They are going to be in our fiscal ’15, we will come back to you and others over the coming weeks with a little bit more shape around what those costs happen to be.

Our next question comes from Josh Sullivan with Sterne Agee.

Just given the move with the INS headquarters and now with the Exelis assets, are there other areas in the legacy portfolio such as healthcare which may not be as strategic going forward. I think you might have mentioned portfolio optionality?

Yes, well clearly when you take the two combined companies and put them together, we will take a hard look as we have done and I know Dave has done in his portfolios to the strategy and the strategic rationale of holding on to assets. Of course we will have a broader look across our broader portfolio and we will continue to do what we each have one individually on the broader portfolio, that’s not our near-term focus certainly our near-term focus right now is on getting from sign to close, closing the deal, launching integration, making sure of a successful post-merger integration period. And that’s what we are laser focused on at the moment. Clearly there is going to be a realignment of the way we are organized in this transaction and what we've decided to do with the INS headquarters is a relative to what Harris was doing standalone but also relative to what we're preparing ourselves to do in a close. So it's completely along that same direction and that's as far I would comment today on any portfolio shaping.

And then maybe just I have other question, what’s the DOD’s position just on M&A transactions such as these right now?

Well look I think our defense customers in fact all of our customers are going to be excited about this transaction I think they're very interested in a vibrant stable industrial base, they're interested in enterprises that invest in innovation and technology and we've demonstrated a willingness and ability to do that, they are interested in innovation but affordable innovation and they'll be sharing in the savings associated with the consolidation of these companies. They're stimulating competition in the industrial base and I think we'll be a more competitive franchise. So in my belief all of our customers including our defense customers will be quite excited about the transaction.

Our next question comes from Noah Poponak with Goldman Sachs.

On the business if I look at RF on the top line for the remainder of the year, it looks like you have to have a pretty nice acceleration going from a revenue decline to revenue growth there. And the comps aren't much easier when comparing to last year and order of momentum is a little bit stagnant. So can you maybe just talk about what's picking up in the back half within RF?

We do see a little bit of a softer public safety outlook, we do see DOD strengthening a little bit, because there is a budget and there is flow down of funding, we see that picking up and we're seeing a lot more activity on the DOD side, but frankly we're very encouraged by the strength and resilience of our international tactical pipeline, it’s strong, remains about $2.5 billion even when we continue to book orders it continues to refresh quickly. I have talked at some length about what's in it and the prospects on the horizon, a lot of activity is moving in the pipeline and we feel very good about what's happening in the back half in international tactical radio. So today we see international tactical up a little bit more than we thought a quarter ago offsetting a little bit of the softness we see in public safety. Our DOD outlook for the year really hasn’t changed since we started the year. So what kind of full year international growth rate are you looking for now?

So what kind of full year international growth rate are you looking for now?

I don’t think we're going to talk about sort of the international business tactical on a standalone basis. But we do see that to be up. Last time we were saying it's up low single-digits it’s probably up a little more than that like mid to high single-digits in that range. As last time we said DOD was going to be down low double-digit, it's about the same sort of -- as I mentioned them before down 10% to 12% so that hasn't changed. PSPC where we thought it was flat is more of down mid single-digit. So hopefully that characterizes a bit more how we see the full year in RF.

And then kind of the same question on the margin in the segment, can you maybe elaborate a little bit on what was weaker in the quarter and then to get into the range for the full year of the back half has to pickup pretty nicely versus the trend of kind of ongoing pressure we've seen there, so what drives that in the back half?

Yes and that is a good question, I mean look overall we’ve been pretty consistent at that margin guidance for the year in RF business 30% to 31%. In the first half we're a little light we're at 29.5% roughly for the first half, came in at around 29 in Q2. In Q2 we had some adverse mix we had a lot of systems business, we had some additional R&D expenses that rolled through in the quarter in Q2. And I have been very-very clear on these calls about our willingness to invest more in our RF business, particularly in tactical radios and you've seen those investments flowing through. And of course in Q2 we had given the volume slightly lower margins in public safety than we had anticipated earlier in the year, the second half is going to get stronger because we will see much stronger product mix coming through the business and we feel very confident that will come in at between 30% and 31% on a full year basis.

And then could you similarly update us on the pieces of INS for the full year in terms of a growth rate in the IT services business and in CapRock?

What we're seeing in these businesses as particularly in HITS on a year-to-year basis, they've lost two major -- wind down of two major programs we know about the NMCI and so that is a significant year-on-year. When I look at the revenue for HITS what you'll find is declined in low double-digits but the commercial is continuing to do well. On healthcare it continues to grow year-on-year and all-in-all it's up macro environments right, we're having energy issues, oil prices are affecting that.

And then if I can just ask one more on the transaction, could you guys talk a little bit about what your diligence found on the ADSB program over at Exelis, seems like a large long opportunity but also seems like the type of thing that can take longer than expected or kind of easily slide to the right and so I was just curious how you were thinking about that program?

Well, I'm not going to go into specifics on what we found in diligence I think Dave and his team have talked a lot about the strength with the FAA, the maturity of the ADSB program and the confidence that the administrator has placed in ADSB, the commitment to it, the drive and the mandate on equipage by 2020 holding firm on that and we feel good as I think Dave and his team feel about ADSB, it's a great program, they're performing very-very well. I think the FAA is very pleased and it's going to fit very nicely with the things that we do today with the FAA as you know we were on the FTI program we've been on that for 15 to 20 years we have been envy the next-generation voice switch program as well as datacom, so I think the programs that we work on with FAA and the strong reputation we've there with the FAA is going to be augmented by the very strong reputation that Exelis enjoys on ADSB with the FAA as well so I think we feel very good overall with our position there.

Okay, I appreciate it. I think it wraps us up for today. Thank you everyone for joining us and let me know how I can help you.