Pamela A. Padgett - Harris Corp. William M. Brown - Harris Corp. Miguel A. Lopez - Harris Corp..

Gautam Khanna - Cowen and Company, LLC Seth M. Seifman - JPMorgan Securities LLC Peter John Skibitski - Drexel Hamilton LLC Josh W. Sullivan - Sterne, Agee & Leach, Inc. Chris D. Quilty - Raymond James & Associates, Inc. Noah Poponak - Goldman Sachs & Co..

Good day, ladies and gentlemen, and welcome to the Harris Corporation Fourth 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. As a reminder, this call maybe recorded.

I would now like to introduce your host for today's conference, Pam Padgett, Vice President of Investor Relations. Please go ahead, ma'am..

Thank you. Good morning, everyone, and welcome to our fourth quarter fiscal 2015 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 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'll 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 also will be available on the Investor Relations section of our website. And with that, Bill, I'll turn it over to you..

Well, thank you, Pam, and good morning. Fourth quarter was productive for Harris and we ended the year with solid results. Harris standalone revenue and earnings per share met expectations and free cash flow was stronger than expected at 119% of non-GAAP net income exceeding our goal of 100%.

A significant accomplishment in the quarter was closing the Exelis acquisition on May 29, a bit sooner than expected, allowing us to accelerate a few key actions and speed up the pace of integration. On the day of closing, we consolidated headquarters activities between Harris and Exelis.

On July 1, we announced our new organizational model, creating four market focused segments and combining the top talent of both companies. And then two weeks later on July 15, we announced our intent to close Exelis's Ft. Wayne Tactical radio facility and consolidate production in our world-class Rochester manufacturing operations.

So, we're off to a good start and we'll provide a little more color on our integration efforts during the call. At the end of the quarter, we closed on the sale of our commercial healthcare business to NantHealth, providing the business the domain expertise and channel leverage to allow it to reach its maximum potential.

As we've expressed before, the Exelis acquisition provides us unique opportunity for portfolio shaping actions and in the context of our now larger combined company will continue to take a dispassionate view in evaluating what businesses are strategic and which are better served under a different owner.

Turning now to our financial results on slide 4 of the presentation, Harris earlier today reported non-GAAP earnings per share of $1.32 in the fourth quarter and $5.14 for the full year, both of which include a $0.09 benefit from one month of ownership of Exelis.

Excluding the impact of Exelis's operating results for the month of June, non-GAAP Harris standalone earnings per share was $1.23 in the fourth quarter and $5.05 for the full year, with full year revenue down 4%, all in line with prior guidance and reflecting good operating performance.

In the fourth quarter, higher revenue and continued margin strength for both RF Communications and Government Communications was more than offset by the anticipated weakness in Integrated Network Solutions.

Orders for Harris standalone are $1.28 billion, up 17% over the prior year and significantly higher in RF Communications and Government Communications. Book to bill for the quarter was just about one 1% and for the full fiscal year was 0.98%.

Strategically, we continue to increase our international footprint and invest aggressively in company-funded R&D to position the company for future growth. International revenue was up 2% in the quarter and 4% for the year increasing as a percentage of total revenue from 30% last year to 32% this fiscal year.

And we increased our investment in IRAD as a percentage of total revenue to 5.7% this year compared to 5.3% in fiscal 2014, and 4% just three years ago.

I was particularly pleased with our free cash flow results, coming in about a $100 million, above what we were guiding on Harris standalone basis, due to continued tightening of capital spending and improved working capital performance including higher accounts payable.

Before turning to Mick to go through the details of the financials, let me offer a few high level comments on the segments. Revenue at RF Communications was up 2%, driven by a 5% increase in tactical and a 4% decline in Public Safety. Within Tactical, continued strength in international more than offset a decline in the U.S.

which was a little lower than expected as a result of orders from two customers totaling $28 million, taking a little longer to finalize and missing the quarter cut. The majority is now booked and shipped. Regardless of the slip, back half for Tactical came in at a solid 6% growth with Q4 book-to-bill of 1.1% and 0.94% for the year.

In the international Tactical market, a highlight was a five-year $55 million order from Australia for technical and logistics support to ensure combat readiness of our JP 2072 Phase 2 products that we previously shipped, bringing orders to date in Australia to more than $700 million.

This latest win further strengthens our partnership with the Australian Defense Force and helps position Harris for Phase 3 of the country's multi-year battlefield communication modernization program that represents a $750 million opportunity that sits outside of our 12-month to 18-month pipeline. In the U.S.

Tactical market, we saw continued momentum for Army modernization. As you know, early in the fourth quarter, we were awarded a 10-year $3.9 billion IDIQ contract for the Rifleman Radio, and by late July, we completed qualification testing with the customer.

On the much larger Manpack program, the final RFP was released on August 3, a bit earlier than the September timeframe we previously expected with bids due in 60 days for what will be a very sizable 10-year $12.7 billion multi-vendor IDIQ contract.

The Army now intends to award up to three IDIQ contracts in December, followed by qualification testing in March, and customer testing in mid-summer 2016 with full rate production delivery start dates in the first quarter of our fiscal 2018, pretty much as we expected.

The published acquisition objective is for 65,000 radios, and I continue to believe that we are well positioned to capture a significant portion of this multi-year, multi-billion dollar opportunity. And then finally, our mid-tier MNVR radio for the Army completed limited user testing at NIE 15.2, a significant milestone towards full rate production.

LRIPS (7:55) are expected to follow with operational test and evaluation at NIE 16.2 and a full rate production award in September of 2016. MNVR should begin to ramp in fiscal 2016 and together with Rifleman Radio should become a more significant revenue contributor and drive good growth for U.S. Tactical in 2017 and beyond.

Revenue in Government Communications was up 1% in the quarter and 3% for the year, which is an excellent result given the environment.

Major growth drivers for the year included our large classified win in geospatial imagery called Foundation GEOINT Content Management, continued ramping of F-35, wireless products, SATCOM terminals, and Highband Networking Radios for the Army, and mission radios for the airborne market.

I'll also quickly highlight a new strategic partnership with exactEarth that we announced in Q4. exactEarth is a market leader in satellite-based remote ship tracking. And in the fourth quarter, we received a $55 million order to place 58 commercially hosted payloads on the Iridium NEXT constellation to refresh the exactEarth network.

This is the same satellite platform that host Aireon and other payloads in which Harris has the prime role and it's a good strategic win for our team. Let me now turn over to Mick to provide some greater detail on the results and our fiscal 2016 guidance.

Mick?.

Thank you, Bill, and good morning to everyone. Slide 5 provides a detailed reconciliation of GAAP to non-GAAP and to Harris standalone non-GAAP earnings, highlighting $281 million in one-time deal and integration cost in FY 2015, which is in line with the $270 million to $290 million in our prior guidance.

We also incurred additional charges in Q4 of a net $32 million for restructuring and other items impacting Harris standalone business, with the largest part being an intangible impairment in Integrated Network Solutions for the NMCI contract. Excluding $0.09 per share contribution from Exelis in Q4, Harris full year EPS was $5.05.

On slide 6, we provide further detail on our ending cash balance and capital expenditures, which had $148 million for fiscal year 2015, include $4 million for legacy Exelis. Our tax rate for the quarter and year was as expected, ending the year with a non-GAAP tax rate of 30.2%.

The favorable fiscal 2015 rate, which we don't expect to repeat in fiscal 2016, resulted from foreign tax credits, the R&D tax credit, and other fiscal 2014 tax settlements.

Moving to segment results on slide 7, RF Communications orders in the fourth quarter were $530 million compared to $361 million in the prior year, and revenue was $505 million compared to $493 million last year. Tactical Communications revenue was $366 million, and increased 5%, while orders were $402 million.

In Public Safety, orders were $128 million and essentially flat compared to prior year of $129 million. Revenue was $139 million compared to $145 million last year. Non-GAAP operating income was $159 million, excluding restructuring charges related to Public Safety.

Non-GAAP operating margin was 31.6% for the quarter and a strong 31.1% for the full year. Turning to Government Communications Systems on slide 8, fourth quarter revenue was $485 million, up 1% compared to $480 million in the prior year.

Higher revenue from the Foundation GEOINT Content Management program, the F-35 program and Highband Networking Radios for the Army's WIN-T program was partially offset by lower revenue from two classified programs and the Navy's Commercial Broadband Satellite program.

Segment operating income was $66 million and operating margin was 13.7% in the quarter and a strong 15.8% for the full year.

Turning to Integrated Network Solutions on slide 9, fourth quarter revenue was $289 million compared with $373 million in the prior year, a decline of 23%, primarily due to the wind-down of two IT Services programs and continued end market weakness for both IT Services and CapRock.

Non-GAAP operating income was $16 million, excluding charges related to restructuring and other items compared to $33 million in the prior year, primarily due to the wind-down of highly profitable NMCI contract and continued weakness in commercial healthcare. Moving to fiscal 2016 guidance on slide 10.

Today, we're providing high level guidance on revenue and EPS with some color around fiscal 2016 expectations based on the legacy businesses of Harris and Exelis. Once we have pro forma historical information for fiscal 2015 recast into our four new segments, we'll provide an outlook by segment, as we typically do.

We're initiating guidance for GAAP EPS in a range of $5.25 to $5.45, and for non-GAAP in a range of $5.60 to $5.80. Fiscal 2016 non-GAAP EPS excludes about $60 million to $65 million of integration cost and a $10 million charge related to inventory step-up.

It includes about $133 million, or about $0.70 per share, of Exelis acquisition intangible amortization. Fiscal 2016 non-GAAP EBIT margin is expected to be in a range of 16.2% to 16.7%.

Putting aside for a minute the cost synergies and other impacts related to the acquisition, guidance reflects segment level operating margin for legacy Exelis slightly lower than the prior year fiscal pro forma of about 12.5%.

Harris segment level operating margin is expected to be about flat with the prior year, based on legacy RF continued margin strength similar to a prior year, a more normalized operating margin in legacy Government Communications of about 15%, and for IT Services and CapRock together, an operating margin of around 9%.

Other P&L guidance details are outlined on slide 10. I'll start with an update on expected synergy savings and integration cost. Our integration team has moved aggressively to capture cost synergies and is ahead of schedule. As a result, both integration costs and savings are occurring sooner than what we previously expected.

We're now on track to achieve fiscal 2016 savings of $70 million to $75 million, and expect to be at an annual run rate savings of $120 million as we exit fiscal 2017, a year sooner than our original estimate and at the top end of our prior range. The $120 million in savings is net of savings that will flow immediately back to the government.

Integration spending was $112 million in fiscal 2015, and we expect another $60 million to $65 million in fiscal 2016. Total integration cost is now expected to be $150 million, the higher end of our prior range, and net of about $25 million of expected reimbursements from the U.S. Government which are not anticipated to begin until fiscal 2017.

As we move to our greater standardization in processes, policies and operations, we'll continue to look for opportunities for further integration savings. Revenue is expected to be in a range of $7.67 billion to $7.83 billion, down 3% to 5% on a pro forma basis compared, with a fiscal 2015 of $8.07 billion.

Legacy Harris is expected to be down 2% to 4%. This reflects our initial expectations for Tactical Communications of flat to down slightly, with DoD flat to up low-single digits and international flat to down low-single digits and continuing weakness in Public Safety, with a few percentage point decline.

In legacy Government Communications, we expect another growth year of up 2% to 3%. For IT Services and CapRock together, we expect revenue to be down 13% to 15% as a result of continued end market weakness.

Legacy Exelis pro forma standalone revenue is expected to be down 5% to 6%, with lower revenue from night vision and communication products and lower revenue from information systems, primarily from the $85 million roll-off of the Spacelift Range System's contract that was lost last October.

Slide 11 provides some additional pension information, including an anticipated FAS pension income of about $25 million and ERISA cash contributions of $173 million this fiscal year. With cash funding remaining roughly flat at $170 million in 2017 as a result of pension smoothing provided for under the HAFA and MAP-21 legislation.

Our unfunded pension liability has declined by about $200 million to $1.9 billion at the end of fiscal 2015, principally due to the mandatory funding of the legacy Exelis SERP. The effect of modestly higher discount rates and lower expected return on assets largely offset each other.

So let me please turn it back to Bill for a few wrap-up comments before we open the call to questions..

Chris Young with 33 years, Carl D'Alessandro with 31 years, and Bill Gattle and Ed Zoiss each with 28 years. We've taken our two most senior leaders, Sheldon Fox and Dana Mehnert and focused them on driving greater cost and operational efficiencies and reigniting revenue growth across our company.

I also believe we delivered on our promise to put the best of the best from both the Harris and Exelis organizations into the top jobs in the combined company with nearly half of the top 50 positions now filled by a former Exelis employee.

I think the energy and enthusiasm across the entire company is very high with a lot of excitement about our future. So as we enter the fiscal year at a running start on integration and focused on exceeding our synergy goals and driving good earnings growth in 2016 with even higher accretion in fiscal 2017 and fiscal 2018.

To conclude on slide 13, we're executing very well on all critical integration success factors from my deep personal ownership of the integration program to the full time dedicated team led by Sheldon Fox, that's driving a disciplined process with speed and precision to the close oversight of the board and the constant communication with employees.

The result is that we're now at the high end of our prior range of run rate savings achieved about one year sooner than previously expected with 90% of the actions underpinning the savings completed or in process in just 70 days since we closed.

I'm really proud of what Harris has accomplished this past year and I'm optimistic and confident about what our new team of over 23,000 dedicated employees can deliver in the future. Together, we're committed to solving our customers' most complex challenges and driving value for our shareholders.

With that, I'd like to ask the operator to open the lines for questions..

Thank you. And our first question comes from Gautam Khanna from Cowen and Company. Your line is now open. Please go ahead..

Yes. Thanks. Good morning..

Good morning..

Good morning..

I had a couple questions. First, Bill, I was wondering if you could expand on your earlier comment about looking at things that could be non-core. If you could just talk about what your return metrics are for making that evaluation..

Well, the first thing we're doing is, I mean, we're looking very hard at what fits strategically or not and we're also looking at what pieces perform well within our company.

And I think you've seen over the last couple of years our willingness to take on some tough challenges on businesses that either weren't strategic or core to our company or offer good returns to our shareholders and I think we've made good decisions that add value to our shareowners and we'll do the same thing going forward.

We really don't have any more today to report, Gautam, but we continue to look at the portfolio and we'll let shareholders know and you know as we make decisions..

Okay. And can you talk a little bit about the pension at Exelis? I know you – in the slide you mentioned the $170 million minimum payment this year.

Are there – do you have plans underway to minimize that cash payment as we move forward? Any different approach to the Exelis pension problem that you can talk about?.

Yeah, certainly, we can talk about that. A lot of work has been done on the pension in the past. As you may know, in 2011, the pension was frozen to new hires. In 2011, there was an enhanced defined contribution plan that decreased participants. In 2012, we had a lump sum program that decreased another amount of participants.

And looking forward, we're taking an approach of obligations not just for the pensions, but also for some of the other obligations we have out there. And we're looking at certainly de-risking the asset portfolio, which is a concern in order to have more traditional investment matching to liabilities.

But looking at the obligations, we have to stratify the pension years and future pension years and be able to offer lump sums, so we're looking at some of that for the term vested and that traditional approaches.

So right now, we have a comprehensive study going on, we're using consultants and actuaries to determine what is the best course of action going forward. But we will take an approach towards the pension both on the asset side and on the liability side to de-risk it and to lower the obligations..

Okay.

And last one, sale synergies, can you talk about any opportunities that you're seeing that are contemplated in the guidance or not? I don't know, does it include any sale synergies or have you seen (24:01)?.

Yeah. First of all, it does not include any sale synergies. Right now, we're focused on the cost side that we've got out of the gates very, very quickly. As we've talked before, the deal was justified on cost savings, not revenue upside. We clearly do see revenue opportunities over time.

We have a very good team focused on that, we're organized in a way to go and capture some of the revenue upside by the four market focused segments. I think, importantly, we put one of our most seasoned executives that you know well on Dana Mehnert.

On top of global business development, one of his key responsibilities is to identify and go out and capture some of those revenue opportunity between the company. So, something we'll say more about over the course of fiscal 2016, maybe not next quarter, but certainly over the course of the year..

Well, congratulations on the great results, guys, and good luck..

Thank you. Gautam, thank you..

Thank you..

Thank you. And your next question comes from Carter Copeland from Barclays. Your line is now open. Please go ahead. Pardon me, Mr. Copeland, please check your mute button. We'll move to the next question. Our next question is from Seth Seifman from JPMorgan. Your line is now open. Please go ahead..

Hi, thank you. Good morning and congratulations on a successful transaction. I was wondering as you look ahead and I know it's obviously very early to start talking about what might happen beyond next year.

But when do you think about the overall company and maybe Exelis specifically moving to top line growth?.

Well, look, we're entering a fiscal 2016 where we still have some friction in the system with the government budgets. We do expect ACR to go through the balance of the year.

It could extend beyond that, we'll see over the next several months as to what's happening in DC and that does put some challenges in our business and certainly with Exelis as well. But we do see, even under a sequester budget, budget is improving in fiscal 2017, 2018.

I'm very, very encouraged that we are seeing some of the modernization spending on Tactical radio start to move. And I feel good about where we're at on Rifleman, I'm really glad to see the Manpack RFP come out a couple of days ago.

I'm glad to see that they are moving quickly with a 60-day proposal time period and expected to make awards in December, if all things go smoothly in negotiation.

So these, I think, are good signs that there is money moving or will move over time and I do feel pretty optimistic that that'll allow our company to grow maybe not next year, but certainly in years beyond that, Seth. Thank you..

Great, thanks. Thanks. And then maybe just as a quick follow-up on the international radios, and can you talk about maybe being flat to slightly down next year, you could just talk about the – anything shifting in terms of the regional dynamic.

And I know you mentioned the Australia opportunity that comes beyond the pipeline portfolio, but anything that's kind of shifting it in the portfolio and then the pipeline, and if there is any kind of trajectory, the outlook beyond this year for international radio?.

Sure. I mean, the international business process, as you know, has been very, very strong and we ended....

Yeah..

... the year in Q4 very strong. The orders were extraordinary. I'm very glad to see the revenue was up for the full year, was at the high-end of what we're guiding to, nearly 10%. So we feel very good about where we ended the year. The pipeline is still pretty robust at about $2.4 billion, last quarter it's $2.5 billion. I wouldn't read a lot into that.

It was around a little bit time-to-time, but it's still very solid at $2.4 billion.

The shape of the pipeline looks pretty much like it has over the last couple of quarters, more than half of it is in the Middle East, Northern Africa, Central Asia and that does seem still to be pretty robust though we do see in the Middle East in two specific countries some stretch out of some opportunities which we believe over time are very big for the company, one is in Iraq and the other is in Saudi Arabia.

In Iraq, certainly, the price of oil that's with WTI shifting just a little bit below $45 a barrel, that's causing some impact on direct commercial sales. We do know that Iraq sales for us back stopped by U.S.

government foreign military funding but there were some new commanders in Iraq and that's taking a bit slower for some of those sales into Iraq to take place. So Iraq is slipping a little bit. And in Saudi, oil is causing a little bit of a problem there.

There's a new leadership team in Saudi Arabia and certainly the strife in Yemen is causing some shifting around of priorities. Those are the two things that shifted a little bit further to the right. We do see multi-year opportunities in the hundreds of millions of dollars in both Iraq and Saudi Arabia. So we feel good about those.

Australia is very strong for us. I mentioned in my remarks a $750 million Phase 3 opportunity that's outside of our pipeline, but it's real. We were participating in that and that's going to end up happening. So longer term, we do see good opportunities in international.

If you recall, at the beginning of fiscal 2015, we started international tactical with relatively modest guidance of up low-single digits and we ended up at about 10%. And I hope, going into fiscal 2016, we're being similarly conservative..

Okay. That's great color. Thank you..

You bet, Seth. Welcome, by the way..

Thanks..

Thank you. And your next question comes from Pete Skibitski from Drexel Hamilton. Your line is now open. Please go ahead..

Good morning, guys..

Hey, Pete. Good morning..

Good morning..

Hey, Bill, I guess, just on the prior target of $1 billion in free cash by year four, can you update us? Are you sticking with that? And what year should we think of as year four at this point?.

Year four will probably go out from four years when I first made the comment, so I wouldn't want to accelerate that from here, but I still feel confident on $1 billion of free cash flow.

When I look at just where we happen to be guiding this year, at more than 100% of adjusted GAAP net income, excluding amortization – the after-tax amortization, when you run the math on that, it's sort of in the $750 million range, with a lot of moving parts and we're just getting started.

You add on top of that run rate savings, some improvements of working capital, some more tightening down on capital spending and other things, and I do see that, over the next three years, four years we could definitely get to $1 billion of free cash. So, no, I'm not backing off that target..

Okay. And then just on capital deployment, it looks like you're turning off the repurchase program at least for this year.

Is that right? And then maybe, what's the right level of debt pay-down to factor in this year?.

Yeah, that's as we signaled before, our number one priority, outside of funding our own internal requirements, which of course is embedded in free cash flow, and making sure that we continue to pay an attractive dividend. Beyond that, our number one priority is debt pay-down, and that's what we're going to do, and it's important for us to de-lever.

We still have the targets out there, going from 2.9 times net leverage to 1.5 times over the next three years, and that's our number one priority. So, for the course of fiscal 2016 in our current guidance, we've assumed no share buyback..

Okay, got it.

And then just last one, maybe more for Mick, but the deal amortization of $133 million, is that the same level in 2017 and 2018, or does that run off pretty quickly? And can you help us with how it loads across the quarters for 2016?.

Yeah, sure. Of the $1.6 billion, about $1.4 billion is in customer relations, the rest is in technology, trademarks, brands and so forth. But there is a little bit which is for the Exelis brand, and that gets amortized over two years.

So we expect to have $133 million for the next two years, and then it's $125 million, or a little bit less, in the others..

Okay, thank you..

Thank you. And our next question comes from Josh Sullivan from Sterne CRT (32:05). Your line is now open. Please go ahead..

All right. Good morning..

Hey. Good morning, Josh..

Good morning..

What kind of impact does a quarter point raise in interest rates have on the pension obligation?.

Yes. So the sensitivity for quarter point is – and there's convexity here, right? So 25 basis points up is a decrease of $171 million, and 25 basis points down is an increase of $208 million on our liability. On the income, 25 basis points, it's about $8 million.

That answer your question?.

Yes. That's helpful, thank you.

And then just on the healthcare divestiture, how much was it losing a year? And then, did you receive any compensation for the transaction?.

We did. And you'll see in the tables that we are presenting, and you'll see in our K, that we received about $43 million net cash in in the fourth quarter for the sale of healthcare. The transaction was about $50 million, there's some that's sitting in escrow. The cash in was about $43 million. It gave us a pre-tax gain in the quarter about $8 million.

So when you look at a year-over-year basis, it's worth about $12 million delta between fiscal 2015 and 2016 in terms of the healthcare impact..

Okay. Thanks..

You bet..

Thank you. And we do have a follow-up from Pete Skibitski from Drexel Hamilton. Your line is now open. Please go ahead..

I'll hop back in.

Hey, guys, on the segment guidance – the updated segment guidance, do you contemplate issuing an 8-K intra-quarter with the pro formas, or was there some other plan there?.

We've got a lot of work to do here on just restating the historicals and I would say that, I'm looking to Mick, but I think we'll be able to provide outlook guidance in the segment historicals restated, certainly in our Q1 release. We can't commit today that it'll be any sooner than that, but it will be at the latest at our Q1 release..

You're absolutely right, Bill. We're working to finish the K, and we look forward to re-segmenting, providing the information to you as soon as possible..

Okay, got it.

And then on the $37 million – I think it was $37 million – restructuring at INS in the fourth quarter, is that a go-forward cost take-out for IT Services and CapRock? Is that what's going on there?.

Yeah, there is a piece of it, about $19 million, that's, as Mick had mentioned, is the write-down of an intangible associated with the NMCI contract that went away over the course of fiscal 2015, and that's about half of it. The balance is restructuring at CapRock..

Okay, okay.

And then, lastly, just – Bill, some of the other big opportunities, the SOCOM STC and I think the Air Force had a big program and there was SANR, anything looking like it's in the 12 months pipeline in terms of a potential award there?.

Nothing in the 12-month pipeline. STC, we have a baffle win and the award is expected in September. If they move on in the path, they say they're going to move on and that's on the two-channel handheld.

There is a bigger program that's going forward in the Manpack and in HF radio that you will see RFPs on later than September, but that's the current trajectory on STC. And then SANR and SALT, they're going to make some decisions on these programs over the coming months, we believe. And it really depends upon what happens in the fiscal 2016 budget.

But we currently are shipping our STT radios for what is considered as SALT, the small airborne link 16 terminal program, and we're already shipping our STT product in concert with ViaSat. And on SANR, it's hard to say what's going to go, that is a WNW SRW two-channel radio for a bunch of military rotary aircraft programs.

But I think they wouldn't expect any production awards on that until something like GFY2019. So it's pretty far out there in the future and it's not in our horizon..

Got it. Thank you very much..

You bet..

Thank you. And we do have a follow-up from Gautam Khanna from Cowen and Company. Your line is now open. Please go ahead..

Bill, can you comment a little about how you're going to preserve profitability at the RF tactical business unit given you have some LPTA type bids coming up? So, if you were to win Manpack, for example, presumably pricing will be under some pressure.

And I just wondered if you could talk about some of the levers you have, be it R&D, year-to-year, what are your expectations and other factors?.

Well, first of all, I think the team has done a really outstanding job not just in the last three years or over the last decade in taking cost out of the product and I've given some examples on prior calls on what the team has done on 117G to take costs out every year post its launch.

And I would see that we'll be able to do the same thing as these new products start to come into the portfolio and mature. At the end of the day, we've got probably the largest Tactical radio facility in the world. It's going to become even more utilized as we bring in the Tactical radio business from Fort Wayne.

It's both the international and the DoD business running in the same facility, it's 0.5 million square feet of world-class manufacturing, huge supply chain leverage.

And on top of that, we're spending, give or take, $100 million a year on Tactical radio innovations, which I do believe, will continue to put features into our products over time, which will allow us to continue to drive what we hope to be premium price versus our competitors.

I think all of those things will allow us to maintain our margins in tactical and that's what we certainly expect at Harris..

And can you help size the MNVR opportunity, what it's been running at and where you think it's going to go on an annual run rate basis?.

Yeah. It's been in the – about $10 million or $15 million over the last year or two. I think we booked between $15 million to $20 million worth of orders or thereabouts. We expect in fiscal 2016, Gautam, about $20 million worth of revenue and it will ramp a little bit beyond that, probably up maybe two times or three times beyond into fiscal 2017.

Again, it depends on what happens as to when they issue the full rate production award, how they want to field it, because that's changing a little bit in some of the BCT (38:40) changes that are happening in the Army.

As that settles down, we do know that 2017 is going to ramp from 2016, and we think 2016 is around $20 million of revenue more or less..

Okay. And one last one, if you could just also help size HMS Manpack should you win it, I just wondered you do sell some 117Gs now, and if you could just talk about cannibalization, if there is any, if you were to prevail on Manpack..

Yeah, it is – first of all (39:10) sorry to interrupt you. On Manpack, it's not going to affect our revenue until our fiscal 2018, that's what we're thinking at the moment. Based on the schedule as we see it, if you look at just between Rifleman and the Manpack, the PBR is about $0.5 billion per year for that HMS program.

And over a decade, that's a $5 billion between Rifleman and Manpack and that's our best guess on a decade-wide opportunity. Obviously, our revenues can depend our share of both Rifleman and the Manpack, but it will affect our fiscal 2018 revenue on the Manpack, probably fiscal 2017 for the Rifleman.

In terms of cannibalization, we've given a lot of thinking to this and we believe that it will be mostly incremental to our base business today. Because it's being bought, the modernization it being bought by different parts of the service than what are buying (40:06) the replacement Gs, spares and other things.

So our sense is that it will be mostly incremental with not so much cannibalization, Gautam..

Okay. Thanks a lot. I appreciate it..

You bet..

Thank you. And your next question comes from Chris Quilty from Raymond James. Your line is now open. Please go ahead..

Thanks, gentlemen.

I haven't yet made it through the whole 689-page Manpack solicitation, but can you comment on any puts and takes you see in the document relative to your design and competitiveness? And can you comment specifically on the proposal for the light version and how well you are positioned for that?.

Yeah. I didn't get through 689 pages, Chris, either but we had a really, really, good tactical team that summarized it brilliantly in four pages or five pages. And I think, look, nothing – not much has changed from the very good dialog and interaction we had with the Army during the draft RFP process. It was a couple of industry days.

I mean as you know, this has been percolating for quite some time. There's been a lot of active dialog, a lot of conversation on range, power, weight, it was radio weight, mission weight, is MUOS in, is it out. There have been a lot of puts and takes. At the end of the day, the final RFP is in line with what we had expected.

What I think is very interesting is that what they are going to do is look for at the time of award you have to meet certain threshold requirements, and one of which is a 16-pound machine weight, they are going to give you some additional, if you will, leverage for MUOS and some antennas and other things.

Then they have a deferred threshold set of requirements that have to be met by June of 2017. And then a series of objective requirements that will fold in over time based on how industry evolves to capture some of these opportunities, again, like around power, weight, et cetera. So that's the way we see it shaking out.

This whole light Manpack opportunity is going to be kind of interesting, and I don't know where it's ultimately going to go. They are looking for a lower weight Manpack. It maybe features some of the Manpack. It could potentially, Chris, be something like a two-channel handheld that would go to SOCOM (42:31) maybe over time go into regular Army.

So we're unclear as to how that's going to evolve over time, but that's essentially the way we see 689 pages in a nutshell..

Thanks.

And with regard to the 13% to 15% decline in IT Services and CapRock, can you break it out between the two businesses and comment specifically on where you see the CapRock, the energy business trending relative to where you thought it would be six months ago?.

Sure. Yeah, on IT Services, we see down about 15%. We see CapRock as a whole down about 10%. And in CapRock down about 10%, we are seeing the energy business down about 20%. Let me just give you a little color on this. Back in Q2 and Q3, the orders were quite good, we did expect the second half revenue in CapRock to turn down, and it in fact did.

We came in spot-on what we thought we would be in terms of the CapRock revenue for the year. We were down in Q4 about 13%. Of course, we're seeing now price of oil just below $45, there is a potential deal with – there is a RAND issue that could drop price of oil down even further.

We've calibrated, going forward into – for CapRock energy in fiscal 2016 down about 20%. We did see in the last quarter a lot of the oil – major oil service companies have done more restructuring. Rig count is down globally around 36%. We think we've calibrated for current events in CapRock being down about 20% next year.

But again, we're watching very, very carefully what is happening to the price of oil, but more importantly, the behavior of our major customers in response to the price of oil and we're simply reacting to what they're doing..

Great. Thank you very much..

You bet, Chris..

Thank you. And your next question comes from Noah Poponak from Goldman Sachs. Your line is now open. Please go ahead..

Hi. Good morning, everyone..

Hey, good morning, Noah..

Good morning..

Good morning..

Bill, so, I guess, what are the prospects for eventually moving above the $120 million synergy run rate? It's obviously quite impressive that you were able to move it forward a full year in such a short period of time.

But I guess how much is this you had identified everything and have just been able to do it much faster versus finding new things or there being potential to find a lot more opportunity to go even higher than $120 million?.

Well, first of all, Noah, our diligence was very, very good. And we're finding that most of the opportunities that we thought we would capture we have captured and not much has changed. We knew right out of the gate the first thing we would attack would be the public company cost and we did that right out of the gate.

We knew there was an opportunity on the Tactical radio side between the two facilities that we had and we went at that very, very quickly. So, most of the things that we had anticipated, we were executing on.

As I said, about 90% of the actions that we've contemplated going after $120 million are completed or in process, so we feel pretty good about that. But look, as I said, we're 70 days in and we're at the high end of the range we gave before. As we go forward, we continue to find new opportunities.

Will there be some things that work against us? Sure, without a doubt. But I do believe that we have a good opportunity to continue to drive it above $120 million. Today, our best guess for where we stand today is $120 million..

Okay. And the cost to achieve synergy that I believe was previously outlined as $130 million to $150 million. Has that moved? I'm not 100% sure that I'm squaring that up with slide 10..

Let me give you some color on that because, first off, the $120 million on the savings, as Mick had mentioned, we reimbursed the government directly in the year immediately on the $120 million.

On the cost to achieve, it was $130 million to $150 million, that was net of expected government reimbursement, and that was going to happen over a two-year to three-year time period. We had $112 million worth of integration and project cost hit us in fiscal 2015. We have another $60 million to $65 million hits in fiscal 2016.

You put them together, it's about $175 million. We do expect about $25 million reimbursement by the government some time in fiscal 2017 or beyond, and that's what gets us to the $150 million..

I see. Okay. That's helpful. And then, just to follow up on that CapRock question, down 20% is not insignificant, but you mentioned what rig count has done and it's more. And you mentioned what the actual fuel price has done, and it's more.

What is it about CapRock that would make it outperform the broader industry?.

Well, it's really the mix of the rigs. When we say rig count down 36%, that's land, that's near offshore, it's deep offshore, ultra-deep, and we are – because of the assets, the value of deep offshore rigs are so great for the oil companies, they tend to stay in production longer.

We're more disposed to offshore and deep offshore, that's where the revenue happens to be. So even though rig count is coming down like on land quite a bit more than 36%, not a lot of revenue for CapRock going into the land side, a lot more on the offshore and deep offshore..

I see.

And then, any color or comment you could provide on what potential you see in the legacy Exelis business base margin beyond this year? Should we think of that as pretty flattish over time? Or is there opportunity for that to change? Or does it have headwinds going forward?.

Well, it's coming down slightly in fiscal 2016 from 2015, and that's partly due to the revenue coming down a little bit, we're guiding to down 5% to 6%. When you go back to the old segments of Exelis, we do see the Electronic Systems and the night vision comms business both being down in fiscal 2016 about a mid-single digits.

The IS business, information systems, will be down about 10%, with the largest piece of that, seven points or eight points roughly, that's from the loss of a contract, this range support contract, that was lost in October of last year.

We do see the aero business up mid-teens, that's growing pretty nicely, with content with Boeing, with Airbus, with the F-35 ramp, they're on (49:22) the 53K with Sikorsky. They've got some good programs there.

So when I look at all of the pieces and how they are moving around and what's growing, the aero business does have lower margin, so when that grows faster than the others, it does depress the overall margin rate a little bit.

But I do see that there is some softening in the margins for night vision comms, and I do see some softening in the Electronic Systems business as they transitioned from what were production programs to some more development programs, and that's sort of a natural transition. So, they were down.

I think we're at about 12.5% pro forma last year, if I remember right, and we're guiding to be slightly less than that in fiscal 2016..

Okay. Okay, thanks very much..

You bet..

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

Thank you. And our last question comes from Pete Skibitski from Drexel Hamilton. Your line is now open. Please go ahead..

I just wondered if you guys had a funded backlog at year-end for Exelis. And then, Bill, Exelis has had some top-line headwinds for a long time. And the question of when the trough would come is, I guess, still out there.

Do you have a sense for when all these programs trough for Exelis?.

Well, maybe – somebody is grabbing the funded backlog, I think it ended around $2.5 billion, $2.45 billion, $2.5 billion, just under $2.5 billion....

Yes, right..

... on funded backlog. But look, I think there's a lot of programs here, Pete, on – in Exelis, there's a lot of moving parts. I think we've tried to take a look across all of them and make our best assessment to where the revenue is on, if you will, a pro forma Exelis business into fiscal 2016, and again, we see that down about 5% or 6%.

I provided a little bit of color by each of the segments. And I don't think I will go out any further than 2016 as I wouldn't do for the core business either for Harris, but that's basically where we stand on the revenue outlook for Exelis.

I think – do you have the backlog here, Mick, handy?.

I have the year-to-year total backlog was down 15%, the funded was down 17%. The orders were weak in the quarter and, of course, it's hard to gauge how much of that weakness is due to the disruption..

Okay. Thanks, guys..

Okay..

All right. Thank you very much, everyone, for joining us and let me know how I can help. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day..