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

Peter John Skibitski - Drexel Hamilton LLC Seth M. Seifman - JPMorgan Securities LLC Steven Cahall - RBC Capital Markets LLC Gautam Khanna - Cowen and Company, LLC Chris D. Quilty - Raymond James & Associates, Inc. Tais Correa - Goldman Sachs & Co..

Good day, ladies and gentlemen, and welcome to the Harris Corporation's First Quarter 2016 Earnings 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 conference may be recorded.

I'd now like to turn the conference over to your host, Pamela Padgett, Vice President of Investor Relations. Ma'am, you may begin..

Thank you. Hi. Good morning, everyone. Welcome to our first quarter fiscal 2016 earnings call. I'm Pamela Padgett, and on the call today is Bill Brown, Chairman and CEO; Mick Lopez, Senior Vice President and CFO; and Sheldon Fox, Senior Vice President, and Integration Lead. Before we get started, a few words on forward-looking statements.

Forward-looking statements made today involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information and discussion of such assumptions, risks and uncertainties, please see the press release, the presentation and Harris' SEC filings.

In addition, a reconciliation of non-GAAP financial measures discussed today to comparable GAAP measures is included on the Investor Relations section of our website, which is www.harris.com and where a replay of this call will be available. And with that, Bill, I'll turn it over to you..

a $113 million contract with an initial $39 million order from the U.S. Naval Sea Systems Command for radar modification kits; a two-year $49 million production contract for sonobuoy launchers used to conduct underwater acoustic surveillance on 25 U.S.

and eight Australian P-8 Poseidon aircraft; and a three-year $54 million single award IDIQ from the U.S. Naval research laboratory for the Advanced Decoy Architecture Payloads program, or ADAP. The ADAP award is a strategic win, allows us to enter a new market with a potential to grow longer term.

Our solution provides capabilities to address advanced maritime threats beyond what current decoys provide. And because our solution allows the customer to retrofit existing decoy shelves with our payload, it's cost-effective and it's quick.

As you know, Sheldon Fox is leading our integration effort, and as we promised investors and the board, Sheldon and his team are dedicated full-time to successfully integrating two companies.

So before Mick provides detailed results and guidance on the new segment basis, I've asked Sheldon to join us today to provide a status update and highlight one of our larger integration projects.

Sheldon?.

Thank you, Bill, and good morning, everyone. Our integration began with a running start at closing and within the first 70 days, we had 90% of the actions underpinning the savings completed or in process.

And we've continued along that aggressive path to quickly execute against our plan and expect to generate between $70 million and $75 million in savings in fiscal 2016. Well on our way to achieving $120 million run rate savings as we exit fiscal 2017. We're executing fast and executing with a great deal of focus.

Each cost synergy project has a dedicated team and a detailed plan which is tracked weekly. Bill asked me to provide a little color on a key project which highlights the value we're creating through integration. In July, we announced the closure of Exelis' Ft.

Wayne tactical radio facility and consolidation into our world-class Rochester manufacturing facility. In the first quarter, the last SINCGARS radio rolled off a line in Ft. Wayne and all manufacturing operations will wrap up by fiscal year-end.

Currently we're taking steps to ensure that engineering and manufacturing know-how is fully transferred to Rochester including moving key employees. Slide 6 shows the floor space in Rochester that's been designated and prepped for the transition.

The reduction in manufacturing square footage for SINCGARS production is significant, reducing the footprint from 90,000 square feet to 20,000 square feet and reducing 6 SMT lines down to 2. The entire facility in Ft. Wayne is about 300,000 square feet.

Once SINCGARS is transitioned, we will shrink the remaining space being utilized to about 30,000 square feet until the lease expires in December of 2017.

Our actions will begin to produce savings in the fourth quarter of fiscal 2016 with additional savings to follow through optimizing our supplier base and leveraging the scale and efficiency of the Rochester facility. But why is all this important, because SINCGARS remains an important communications capability around the world.

The SINCGARS radio line has an installed base of 600,000 radios worldwide with about 550,000 of those in the U.S. In the domestic market, there is a very long tail of replacement and sustainment. So executing a seamless manufacturing transition will be important in supporting and eventually transitioning SINCGARS, SINCGARS users to new JTRS radios.

And in the international market demand for SINCGARS radios is still fairly strong. While one of the larger initial projects, Ft. Wayne is just one of the many projects in progress. Integration process will be a multiyear effort and we're still in the early innings but we're off to a terrific start. Let me turn it over to Mick..

Thank you, Sheldon. Glad to have you on the call. Good morning to everyone. Slide 7, we provide descriptions of the new segments. The following segment slide show prior-year pro forma results as if Exelis and Harris were combined for all of fiscal 2015. We believe this results in a more meaningful year-over-year organic comparisons.

Moving to segment results starting on slide 8. Communication Systems segment revenue was $454 million compared to prior year pro forma revenue of $469 million. An increase in Tactical Communications was more than offset by weakness in public safety where competitive pressures remain challenging.

Within the segment, Tactical Communications has been redefined at the combination of both companies ground and airborne tactical radios with Exelis night vision products. We've provided that detail in slide 8.

On this new basis, Tactical Communications revenue is up 1% primarily driven by a 7% increase in Harris legacy tactical, partially offset by lower expected revenue in Exelis legacy tactical and night vision product lines. In public safety, revenue was $92 million compared to $111 million in the prior year.

Communication Systems segment operating performance improved compared to prior year pro forma. Operating income in the first quarter was $138 million and operating margin was 30.4% compared to last year's operating income of $125 million and 26.7% margin.

Turning to Space and Intelligence Systems on slide 9, first quarter revenue was $435 million compared to prior year pro forma revenue of $455 million.

Higher revenue from two classified programs including the Foundation GEOINT Content Management program was more than offset by the completion of two other classified programs and a commercial space payload program. Segment operating performance improved compared to prior year pro forma.

Operating income in the first quarter was $68 million and operating margin was 15.6% compared to last year's operating income of $57 million and 12.5% margin. Turning to Electronic Systems on slide 10, first quarter revenue was $374 million compared to $378 million in the prior year.

Higher revenue from F-35 production ramp was offset by lower electronic warfare revenue. This was primarily due to a higher mix of programs in the development phase versus production phases. Segment operating performance improved compared to prior year pro forma.

Operating income in the first quarter was $69 million and operating margin was 18.4% compared to last year's operating income of $56 million and 14.8% margin. Turning to Critical Networks on slide 11. First quarter revenue was $566 million compared to prior year pro forma revenue of $644 million.

As anticipated, revenue declined due to continuing services weakness in the government and energy markets. Segment operating income was $63 million compared to prior year pro forma of $72 million, but operating margin held relatively in line with the prior year on lower revenue.

Moving to slides 12 and 13, fiscal 2016 guidance remains unchanged for GAAP EPS in a range of $5.25 to $5.45 and non-GAAP in a range of $5.60 to $5.80. Fiscal 2016 non-GAAP EPS excludes expected integration costs in the range of $60 million to $65 million and a $10 million charge related to inventory step up.

Non-GAAP EPS includes the intangible amortization from the Exelis acquisition of $133 million or about $0.70 per share. Revenue guidance is unchanged in the range of $7.67 billion to $7.83 billion, down 3% to 5% on an organic basis compared to fiscal 2015 pro forma of $8.09 billion.

And while segment have changed, our expectations for revenue drivers within the segments are consistent with the previous color we provided. In Communication Systems, we expect organic revenue to be down 2% to 3%. Public safety is expected to be down low to mid single digits.

Tactical Communications on the new basis, including the ground and airborne radios of both companies as well as night vision products is expected to be down low single digits. This aligns with our previous expectations for Harris legacy tactical, DoD flat to up low single digits, and international flat to down low single digits.

Operating margin for the segment is expected to be in a range of 29.5% to 30.5%, which assumes legacy Harris tactical margin in line with fiscal 2015 and consistent with previous expectations.

In Space and Intelligence Systems, revenue is expected to be flat to up 2% with growth in intelligence areas, partially offset by lower revenue from space payload programs. Segment operating margin is expected to be in a range of 15.5% to 16.5%. Electronic Systems revenue is expected to be down 1% to up 1% driven by the F-35 production ramp.

Segment operating margin is expected to be in a range of 18% to 19%. In Critical Networks, revenue is expected to be down 10% to 12% due to continuing services weaknesses.

With an operating margin in a range of 11% to 12% as we keep the focus on lowering costs, we continue to expect free cash flow for the year greater than 100% of GAAP net income, adjusted to add back the $88 million after-tax impact of the amortization of acquisition intangibles.

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

Okay, thanks Mick. So I won't repeat the budget details that all of you already know. But suffice it to say that a two-year deal will be a positive for Harris as well as the industry signaling a long awaited budget bottom in the rise in government spending. Overall, we had a good start to the fiscal year.

We're capturing integration savings which will continue to ramp through the year and benefit earnings. And while we continue to expect a soft top-line environment to persist in the second quarter partially due to Exelis' relatively strong prior year-end December quarter results, we're encouraged by the orders rebound in the first quarter.

Momentum for U.S. tactical modernization is building and the recent SOCOM award on top of the early awards at Rifleman Radio and the Mid-Tier Radio are a testament to the strength of Harris's commercial model and the positive return on our sustained investments in R&D through the market downturn.

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

Our first question comes from Pete Skibitski of Drexel Hamilton. Your line is open..

Good morning, guys..

Hey, good morning, Pete..

On the book-to-bill of 1.24, I think it's one of your strongest quarters ever.

Is the SOCOM STC, is that win in there in the orders or because of the protest is it not in there?.

No. It's not because of the protest either, but SOCOM is not in there, but it would be an IDIQ. So we would not be booking that in – as a funded order. Basically, the strength, principally, comes from very strong results in our tactical radio business, as I mentioned up 30% and pretty broad-based across both DoD as well as in international side.

And we saw very good orders growth in electronic warfare and space superiority in our proprietary business and a couple of other areas. And that's really what drives that big strong orders growth in the quarter..

Okay. That's great. That's great.

And then, Bill, can you give us like you have, in the past, the size of the international radio pipeline?.

Yeah. The international pipeline remains pretty robust and we're very pleased with that. It's about $2.4 billion.

The shape moves around a little bit, but not a whole lot, it's been fluctuating between $2.4 billion and $2.5 billion over the last number of quarters, but given our very strong orders growth in Q4 – remember, orders are up 73%, book-to-bill was 1.1% which was very, very pleasing to end Q4.

We had another strong orders growth in Q1, so the pipeline remains pretty robust at $2.4 billion, and again, it's like the comments I made before in terms of its shape, it's primarily a little more than half Middle East, North Africa, Central Asia, a couple of other areas that we saw very, very good growth.

And in fact, the orders growth in the quarter, as I mentioned in my comments, were pretty broad-based across the geographies outside the U.S..

Thanks, guys. I'll get back in queue..

Sure..

Thank you..

Thank you. Our next question comes from Seth Seifman of JPMorgan. Your line is open..

Thanks very much and good morning..

Hi, Seth..

I just wanted to go back to one of the last comments that you made about the second quarter and I know you might want to shy away from giving quarterly guidance, but just in terms of the guidance for the year, 22% roughly, a little over 20% of the revenue in Q1, it sounds like, it's a little bit more back-end weighted whereas last year about half the sales for the combined company were in the first half.

Could you talk a little bit about your level of visibility and level of confidence in the second half sales pickup?.

You're right in those comments, we do think it's more back-half than front half loaded. That's the way we built our plan for the year, so it's not surprising we had – we were a little light in Q1, down 6% organically. We know that bringing Exelis into our business, we showed our numbers on a pro forma basis.

They had a fiscal year last year which ended in December, so their fourth quarter was now our second-quarter. They had a pretty strong run at that quarter as a lot of companies do in the last quarter of their fiscal year. So that does give us some year-over-year headwind. And keep in mind we are still under a continuing resolution.

There's no appropriations budgets yet. And that still does drive some stickiness in the funding outlays for what is now our second quarter. We do expect given the budget deal and more favorable comparisons to see a recovery in the back half of our fiscal year..

Okay. Great. Thanks.

And then just as a follow-up, wonder if you could talk about trends in the Critical Networks business, I mean that's one business where it seems like the sales that you booked in the first quarter are kind of, on par with kind of, a run rate that you are looking for through the year and kind of – are things kind of stabilizing there? I know there's two markets there where there's a couple of challenges in the government services and in energy and kind of, what's the latest there?.

Yeah. It has been – it's a business that has – it came out of the gates a little soft and we're guiding down 10% to 12% for the full year. Q1 was down 12%.

Very pleased that we're protecting the margins, I think we're doing a good job in taking cost out in spite of the pretty weak revenue environment, but Seth, you hit the nail on the head, its two soft markets. One is government IT. That we see down in the mid-teens for the year.

Not different than what we talked about last time as both our IT services business as well as the Exelis IT business. Q1 was a bit down worse than that in government IT services. But we do expect that the revenue will be roughly flat sequentially over the balance of the year.

The book-to-bill in Q1 was about – was over 1% and we expected to be about 1% for the year. So I think that feels pretty good. Keep in mind in IT services, we have a couple of unique dimensions happening here. One, Exelis lost the space launch range system contract prior to the acquisition, happened just over a year ago.

And that's rolling through the numbers and that's about $85 million. And there's a couple of other programs that we are transitioning out of at Harris, specifically the NMCI contract and a pretty large VA program that ended last year.

So there's a couple of different things, dynamics that are happening that are relatively unique in that government IT market for us. We are refocusing on the intelligence community. We think that there's an opportunity to differentiate ourselves in that space. Some of those awards are moving a little bit to the right.

But I think that's going to start to see some stability through the balance of the year, as at least in terms of sequential growth. The other one that has an impact in the quarter is, as you suggested, is in the CapRock energy business. We expected that to be weak in the year. It's going to be down on a full-year basis sort of mid-teens in Q1.

It was a little bit worse than that. We know that oil is still relatively weak. We saw the results from a lot of the oil service companies and majors over the last quarter. Rig count remains pretty weak. It's down about 40% year-over-year. And some of the oil majors and service companies are announcing more restructurings and CapEx cut.

So, we do see continued pressure in that business. We're watching it very, very carefully. We think we've calibrated our year. But again, the market is pretty volatile at this point and we keep watching it. The piece in that, in Critical Networks is relatively stable and we feel good about it and that's on the FAA side.

We've got a good portfolio of businesses with the FAA. It's pretty broad-based. And we feel very good about our position in the funding pattern for the FAA programs within Critical Networks. So, Seth, when you put all of these pieces together, a long-winded way of saying it, that's where the Critical Networks is down about 10% or 12% in the year..

Great. Thank you very much..

You bet..

Thank you. Our next question comes from Steven Cahall with Royal Bank of Canada. Your line is open..

Yes. Thank you. Good morning..

Good morning..

Good morning..

Maybe just a first one on margins, if I'm reading the slides correctly, and we're looking at the pro forma margins at the segments, you had big step- ups in three out of the four segments, so is there anything to read across from that in terms of how they phase through the year or is it just a seasonally strong quarter for margins?.

Well, we don't typically see seasonal strength in Q1, it moves based on things going on in the businesses quarter-to-quarter. But I would say we do expect to see synergy savings ramping over the balance of the year. I mentioned in my comments, we had $11 million in Q1. Sheldon talked about $70 million to $75 million in the full year.

So, of course, that is – it's going to happen in the bulk of that – that's yet to come and not in our numbers. So you will see some strength coming in the numbers simply because of integration savings which are booked within the segments.

The other side is, we're pushing very very hard on our legacy operational excellence, Harris Business Excellence program and we do see opportunities that continue to protect margins in each of the segments, because of that.

So three of the segments, very strong margin expansion, one that we feel pretty good about holding margins in spite of a pretty significant revenue downturn. So I think from Harris, good control in our cost structure so far..

Great. Thank you. And then second question maybe on a couple of the big programs. I was wondering if you can give us maybe what your view is on the manpack contract as to how you see the field growing out.

Do you think like Rifleman it will be yourselves versus a competitive field of an additional one or could it perhaps be more than one? And then similarly with what you've been able to do on the domestic programs, do you see a big opportunity to change the scope and direction of the UK's Bowman replacement and is that a major opportunity going forward, if you can get them to think outside of their current provider..

Well, on the first one on the manpack, its bids are in, so it's still in the source selection process. So I really don't have insight into who else has been coming to the table more than what has been rumored in the press. As I mentioned in prior comments, the Army does expect tuition award could be as early as December.

We're thinking more it's early next calendar year, depends upon who comes to the table. They are expecting to issue up to three IDIQ awardees and that's what we see at this point. We do know that it's going to be a very large $12 billion plus ceiling value IDIQ and I think we're very, very well-positioned for that.

So I feel very good about where we happen to be on the manpack and not much more to say at this point given the status of that opportunity. Relative to Bowman or MORPHEUS, I think that could be a pretty interesting opportunity for us. Exelis is an important player there as Harris has been. So we together are more a formidable player in the UK.

We have been working with other partners in the UK. That's going to be shaking itself out over the next several years, not several quarters. So I really don't want to say too much more about how we might position ourselves for success in the UK.

But Steven, Dana Mehnert who now is Head of our Global Business Development group and built tactical radios to what we do today is leading our global BD organization and I can assure you, he is focused on the UK..

Great. I appreciate that color..

Thank you. Our next question comes from Gautam Khanna with Cowen and Company. Your line is open..

Thanks. Good morning..

Good morning, Gautam..

Bill, can you quantify the run rate eventually on programs like MNVR, the Rifleman program, and manpack as far as you can tell, I mean, if there are eventually two awardees on that? And then what is sort of the run rate? I know what the budgeted dollars are, but what do you actually anticipate what is a mature their run rate today?.

It's really hard to put a number on it outside of what's in a PBR, Gautam, to be honest with you. I'd be speculating and, boy, I hate to do that on these kinds of calls, so I won't. As we said before, MNVR last year was sort of $8 million to $10 million, $12 million in revenue.

This year it will be a little more – twice that, $20 million to $25 million. We see that could grow to $40 million to $45 million. Again, it depends upon what the Army wants to do and how they are going to field the radio in their BCT structure and also it's a lot of the dynamics that come into play.

We do know that between the Rifleman and the manpack that we've been told could be a procurement up to about $0.5 billion. If you look at the PBR, that's what it says. We don't have any more insights relative to the total market opportunity for us.

What our job is to do is to put forth our most aggressive approach of fantastic technologically advanced and innovative products and we're 100% sure of that business, whatever it happens to be and that's what we're focused on..

Can you comment on what the Rifleman is running at in the current fiscal year?.

Well, Rifleman won't be any revenue in this year or next. It will start to ramp in – at the end of fiscal 2017 is when the Rifleman will start to ramp. It's probably the second half of our fiscal 2017 and it will become a little bit more meaningful in fiscal 2018..

Got it. In terms of the – you mentioned the recent minimum requirement of $173 million to the pension.

Can you comment on any initiatives you've undertaken to reduce the ongoing cash burden of the pension?.

Yeah. Thanks, Gautam. I'll pass it to Mick and let Mick comment on that..

Yeah. Thank you very much. I think as we've said, there have been multiple actions taken in the past from – in 2011 freezing the new hires and lump sums liabilities given out. And we actually froze the benefits in the end of 2016. So moving forward, we see that we're trying to address the asset side and the liability side.

On the liabilities, we are considering some cash balance for the actives, perhaps some lump sum for some of the term vested employees to take advantage of the IRS rulings and insofar as moving forward to matching our assets to the obligations longevity. So we will derisk through defined glidepaths and with specific trigger points..

Is it fair to assume that in your $1 billion free cash flow, you are targeting four years out that you're not expecting a meaningful decline in the ongoing cash contribution of $170-or-so million?.

We see a modest reduction in cash contributions go into next fiscal year, fiscal 2017 sort of in the $170 million range. But we do see the 2019, 2020 period down could be quite less than that, so in the fiscal 2019.

So when you sort of think about three years out, fiscal 2018 hitting $1 billion, hitting that $1 billion of free cash flow target three years out does not include really any reductions in pension contribution, it really happens beyond that horizon..

Got it. Okay. One last one. On the foreign pipeline, the $2.4 billion..

Yeah..

Are you anticipating any significant single contract awards in that or is it a fairly lumpy thing or is it diverse across many smaller opportunities, if you could just give us some sense if we should be expecting like a huge Australian win or a huge Saudi win, what should we be looking for?.

There are certain markets and you hit on a couple that are quite large in a longer-term pipeline and we do see our position in Australia strong. There is a procurement on the horizon, it goes out beyond 18 months that is quite substantial and we're in the midst of that, but it's not in that 12-month to 18-month pipeline.

It really is pretty broad-based. It's across a lot of different markets, through the Middle East, through North Africa into Central Asia.

It was very, very good to see FMS funding through OCO accounts continuing to bolster what's happening in Iraq through the Train and Equip Funds, through ERI, which flowed through into some opportunities in the Baltics. We saw some good opportunities surface in Latin America this past quarter and are still in our pipeline.

So, Gautam, it is pretty broad-based. There's not any big substantial orders that are in our 12-month to 18-month horizon that I'd want to single out. Beyond that, there is some big opportunities in markets like in Saudi as well as in Australia, but nothing as gigantic in the next 18 months..

Thanks. I'll get back in the queue..

You bet, Gautam..

Thank you. Our next question comes from Chris Quilty of Raymond James. Your line is open..

Thanks. Wanted to touch on the two legacy Exelis programs. You mentioned within the Space and Intel a downturn in some commercial space payloads, I assume that's the old Kodak camera manufacturing business and there have been lots of changes in terms of the space imaging business.

Can you give us a sense of what you think the prospects for that business are on a go forward basis?.

Chris, hey, thanks for the question, Chris. And I'll take the first and maybe turn to Sheldon on the second and he can elaborate a little bit. The downturn in the space payload really is more legacy Harris than legacy Exelis. Remember a couple of years ago we booked an opportunity with Aireon for putting hosted payload on an Iridium NEXT constellation.

That work has been through the pipeline. We're delivering vehicles. We're pretty far down the path of recognizing revenue and opportunity. And that's started to move back off. So that's more on the legacy Harris than legacy Exelis perspective. Let me turn it to Sheldon maybe to give a couple of comments on outlook for space imaging..

Yeah. Chris, the outlook up in Rochester for Exelis' legacy imaging business is actually very strong. They've had an upturn in the number of new orders and new programs they have. They are hiring up there in Rochester.

And they've developed some exciting new technologies that we believe have application both in their traditional market spaces and in this new emerging commercial market imaging space. So we're very bullish on their imaging business in Rochester..

Got you. And the other legacy Exelis question. The counter IED programs, it seems like you had a nice order this quarter.

What's the longer-term prospect in that area?.

Well, certainly, this year it's going to be pretty solid, and it's going to be a driver of growth in 2016 over 2015. It remains to be seen what happens beyond 2016, but right now we feel pretty good about the opportunity we saw come through the Department of State and that's going to drive growth this year, Chris..

Great. Thank you..

You bet..

Thank you. Our next question comes from Noah Poponak of Goldman Sachs. Your line is open..

Hi. Good morning, all. It's actually Tais Correa from Noah's team..

Good morning..

So, we were curious actually on how you see the new budget deal helping short cycle defense, if you could give us a little bit of color on that?.

Well, look the two-year deal is pretty encouraging to us. It's encouraging to the rest of the industry. It's going to eliminate some of the overhang of uncertainty and all that's, I think, good news. I think you know the budget like we do. DoD is up 5% fiscal 2016, maybe another 2% in 2017. So that's pretty good.

We were very pleased with the size of the OCO accounts, because some of the funding that we use for international comes out of OCO accounts like ITEF and ERI and a couple of Counterterrorism Partnership Fund, other things that will help us definitely in 2016 and going forward into 2017. But look, it's a deal. There is no appropriations bills yet.

That needs to flow itself out and that will happen between now and hopefully December 11.

But judging by what was in the NDAA that was unfortunately vetoed by the President, but it's going to flow back through, I think a lot of the Harris programs seem to be well supported both in the tactical, normal tactical line as well as in other things that affect Harris Corporation.

So I do think that the budget deal and the certainty and the level of funding is going to be good news for Harris both short cycle and medium cycle opportunities as well as rest of the industry. So I think net-net it's good news..

Great. That's helpful. And just if I may another question, if you could break down the $2.2 billion in orders that you have by the new segment, it would be helpful too..

I don't think we're going to do that today. I'm sorry. I gave the comments on where we saw some strength and I gave some comments on where we saw a little bit of weakness. But I think we'll stay at that relatively high level of color at this point..

Okay. Thank you very much..

Sure..

Thank you. We have a follow-up from the line of Pete Skibitski of Drexel Hamilton. Your line is open..

Hey, Peter..

Yeah, guys. Couple of follow-ups.

Can you share with us your expectation for cash taxes for the full year?.

Yeah..

I'm going to turn it to Mick on cash taxes..

Yeah. Look, our tax rate is as we said is going to be about 34% for the year. First quarter was a slight lower. The timing of the cash taxes depends from quarter-to-quarter, but I think for the year it will be slightly lower than 44%. We have some credits from last year..

Okay. And then, on operating working capital, you guys are normally really good on a full-year basis on operating working capital, it looks like in the first quarter there may be some timing items.

Do you expect to kind of, make that up as you go through the year or just you're going to be more of a use of cash for working capital?.

No. We do expect to make up for what we knew was going to be some snapback that happened in Q1, you recall in our Q4 release, we had some "overdrive" on AP on payables and we said about half that was going to snap into Q1, it did. But we're focused on improving working capital over the course of this year.

That's an important driver for our free cash flow guidance that we've given to investors..

Okay. Great. And, I guess, if I could sneak in a last one..

Sure..

I wanted to hit the legacy Exelis product lines. If I do the math, it looks like Exelis night vision radios is down probably on the order of 20% or so. Should we annualize that? Is that business dropping off that quickly? I was kind of expecting it had already troughed kind of after the war drawdown..

Look, I won't give color so deep into the businesses at that level, but I would say that on the night vision side, five years ago, it was quite big based on what was happening in the wars. It's come down.

It is starting to bottom out and flatten out and we are doing, I think, an outstanding job in our Roanoke facility to improve quality and meet delivery schedules with the Army, regain credibility with – I think we're doing a very, very good job. And I do see stability in that business.

As Sheldon mentioned in his remarks, on the Exelis side, there is a very large installed base as SINCGARS radio in the U.S. and outside the U.S. And in fact, there are lots of countries that have standardized on SINCGARS and they'll continue to buy that.

So we do expect to see growth opportunities in SINCGARS, and hopefully, we can leverage more of the existing Harris channels to open up some new opportunities that hadn't been there before. So I wouldn't give any more color than that. There has been some downturns in that night vision comm systems business.

But we feel pretty good about the prospects going forward..

Great. Thank you..

Thank you. We have a follow-up from the line of Gautam Khanna with Cowen and Company. Your line is open..

Hey, Gautam..

Yeah. Thanks again. Hi. So, you mentioned in the foreign pipeline Australia and the Middle East are big kind of opportunities and I just wondered, those are commodity-linked economies, the U.S. dollar obviously has strengthened.

I just wondered are you seeing any incremental price pressure or delays in terms of procurement RFP to actual contract signing..

Yeah. We do see price pressure all the time in our international business, because it's very competitive and that has been the case and it's one we continued to deal with through a lot of cost reductions and bringing technology. We sell our product in dollars and that does cause some headwinds with non-U.S. providers, some competitive pressure.

But we respond aggressively to that. On the other commodity side, which is on the oil side, we have seen some stretch outs in a couple of markets.

We talked about this last time that remains the case today in Iraq and in Saudi where we have seen some stretch out in some of the opportunities, that's factored in our pipeline, it's factored in our guidance for the year.

We do know that in Saudi, they have prioritized investments for their military for – to combat the border strife with Yemen, but again those things have already factored into our guidance..

Okay.

And one other thing, if I recall the Exelis pension, I think the majority of it related to non-Exelis employees and I'm wondering could you update us on that and how much of that pension is actually recoverable via cash reimbursement?.

Yes. There is about 47,000 participants in that pension and insofar as the number of employees, it's about almost 50-50. But the majority because of the activeness of the retirees is mostly defense-related. And I think we mentioned that last year the CAS recoverability for Exelis was about $129 million.

We expect that to be a little bit higher in FY 2016..

And how does that relate to the FAS, just remind us?.

The FAS is a positive income of $25 million..

Okay.

And just in terms of as we look forward at fiscal 2016, 2017, 2018, could you just give us a sense for what the downturn is going to be between FAS and CAS?.

They are going to be fairly constant, as you all know a lot of it depends on your expected return on assets on your discount rates. Looking out at year is, I would say going to be very, very constant not large changes. We've actually done some sensitivity analysis for what happens if the market gyrates up or down and it's not that significant change.

It does materially impact you in the further out years and that's way we like to keep our guidance to current year..

Understood. Thanks a lot..

Thank you. We have a follow-up from Seth Seifman of JPMorgan. Your line is open..

Thanks very much. Just one quick follow-up.

The booking strength in the first quarter was very impressive and I know it's not something we can expect every quarter but how would you think about the possibility to end the year with book-to-bill greater than one across the company?.

Well, it's a good question, Seth and that's certainly what we aspire to do every year – is to build our backlog. So that certainly would be our goal for the year as we see where we are at today. But you are right, we had a good start to the year. 1.24 book-to-bill is pretty good, the backlog coming up is pretty good.

I was very pleased Seth as you could imagine with the growth in the tactical business and increasing in tactical backlog and I think if that holds through the year, I think we'll be in great shape..

Excellent. Thank you very much..

You bet, Seth..

Operator, I think we have one more question..

Thank you. Our final question comes from Steven Cahall of Royal Bank of Canada. Your line is open..

Thank you. Just a follow-up on the portfolio. I think in the last quarter, you talked about taking a dispassionate approach and possibly seeing some opportunities for portfolio shaping.

So I was wondering if you could just update us with that and are there any specific businesses, where you think you might be subscale be that some of the legacy Exelis businesses like the structures or PSPC or Critical Networks, and should we expect to see a discontinued operations line at some point in the relative near future?.

Well, Steven, we continue to take a very dispassionate view, so thanks for remembering that. We have said that as we're now an $8 billion company with a broader set of businesses we have an opportunity for some portfolio shaping. We're really taking a hard look at that. We're looking at across all of the different businesses.

You threw a couple of names out there which we're obviously not going to comment on any specific plans today. We're not ready to do that. But it's something we continue to look at. And as we have things to announce or discuss with investors we'll be certain to do that..

Okay. With that last question, I think we'll close the call for the day. Thank you everyone for participating..

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..