Anurag Maheshwari - Harris Corp. William M. Brown - Harris Corp. Rahul Ghai - Harris Corp..

Jason Gursky - Citigroup Global Markets, Inc. Carter Copeland - Barclays Capital, Inc. Peter John Skibitski - Drexel Hamilton LLC Howard A. Rubel - Jefferies LLC Gautam Khanna - Cowen and Company, LLC Seth M. Seifman - JPMorgan Securities LLC Robert Stallard - Vertical Research Partners, LLC Josh Ward Sullivan - Seaport Global Securities LLC.

Good day, ladies and gentlemen, and welcome to the Harris Corporation's Third Quarter 2017 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. I would now like to introduce your host for today's conference, Mr.

Anurag Maheshwari, Vice President, Investor Relations. Sir, you may begin..

Thanks, Chanel. Good morning, everyone, and welcome to our third quarter fiscal 2017 earnings call. I'm Anurag Maheshwari. On the call today is Bill Brown, Chairman and Chief Executive Officer; and Rahul Ghai, Senior Vice President and Chief Financial Officer. First, 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 related discussion, 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 in the quarterly materials on the Investor Relations section of our website, which is www.harris.com, where replay of this call also will be available. With that, Bill, I will turn it over to you..

Okay. Well, thank you, Anurag, and welcome to your very first earnings call, and good morning, everyone. Anurag has recently taken over as Head of Investor Relations from Pam, who retired from Harris after 20 terrific years.

Anurag has been with Harris for about three years, leading business development in the Asia-Pacific region and previously worked in private equity in Singapore for about seven years. He and I also worked together at United Technologies in Singapore about a decade ago, and we're very pleased to have him here at the corporate office.

So earlier today, we reported third quarter results that extend our strong year-to-date performance as we continue to deliver on our strategy.

Our key priorities for the year have been to focus the portfolio on our core technology-differentiated businesses, deploy capital in a balanced and shareholder-friendly way, drive operational excellence, including flawless integration of Exelis, and continued invest- to position the company for long-term growth.

Last week, we achieved an important milestone with the completion of the sale of IT Services that we announced in late January. This transaction marks the fifth asset sale in the last four years, as we've shaped the company around our core franchises where technology differentiates our solutions.

The sale of CapRock and IT Services, along with year-to-date free cash flow, has generated $1.5 billion that we are using to buy back stock, deleverage, pay dividends, and pre-fund pension. We remain on track to execute $700 million of share repurchases in fiscal 2017, a record for Harris in a single year.

Between share repurchases and dividends, we will return about $950 million in cash to shareholders this fiscal year.

We still plan to use $400 million in proceeds from IT Services to pre-fund the pension, freeing up future cash flow, and we continue to deleverage as planned, paying down $575 million in term loans and other debt through April, and bringing debt repayment since the Exelis acquisition to $1.3 billion of our $2 billion goal.

Exelis' integration continues to progress well through the third quarter, with all projects near completion, as we generate an incremental $50 million of synergies in fiscal 2017.

We expect to exit the year at $145 million of run rate synergies, higher than our initial estimate of $100 million to $120 million, and a full year ahead of our original plan. Moving forward, we'll continue to drive productivity, lower cost, and improve program execution as we extend operational excellence, best practices throughout Harris.

Our progress on these strategic objectives is reflected in solid third quarter and year-to-date results. Despite organic revenue down about 3% in the quarter, operating margin was a strong 19%, and non-GAAP earnings per share was up 2%, to $1.38.

Year-to-date organic revenue was down about 1%, operating margin up 50 basis points, and non-GAAP EPS up 5%. Free cash flow was $164 million in the quarter and $410 million year-to-date, as we enter what is typically our strongest cash quarter. Total company book-to-bill was 1.0 for the quarter, and greater than 1 year-to-date.

As a result of our strong year-to-date performance, we're tightening our guidance for fiscal 2017 and now expect revenue down about 1%, the midpoint of prior guidance, and earnings per share of $5.50 to $5.55, slightly above the previous midpoint. Free cash flow remains unchanged at about $800 million.

And before turning the call over to Rahul to go through the details by segment, let me provide some high-level color. Legacy tactical revenue continues to trend better, up 1% in the quarter, with international up 8%, driven by strong growth in Europe and Latin America.

Europe remains a solid growth area following a record fiscal 2016, driven by a broad-based modernization effort across Eastern Europe, in particular in Poland and Romania in the quarter, and Ukraine earlier this year.

In Latin America, we continue to build on the momentum from the first half with an even stronger third quarter, resulting in significant double-digit year-to-date growth from modernizations and counter narcotics programs.

International tactical continues to trend to the upside, with revenue down about 10% year-to-date, versus down 19% in the first half. And we now expect international tactical revenue to be down mid single-digits for the year, versus the prior high single-digits guidance.

We expect a strong fourth quarter on an easy compare to prior year, with solid backlog coverage and line of sight to the remainder. DoD tactical revenue, as expected, was down about 20%, driven by an extension of the CR through April and cautious buying behavior.

With revenue up 1% year-to-date, we continue to see DoD about flat for the year, which implies Q4 being about flat as well, with a large part in backlog or funded with fiscal 2016 budget. Overall, we're now seeing legacy tactical to be down low to mid single-digits, an improvement from down mid to high single-digits in the prior guidance.

Army and SOCOM modernization programs are progressing and are well supported. In the pending omnibus package, the HMS program is fully funded at $274 million in GFY (7:24) 2017, up significantly from the prior year and matching the House Defense Appropriations Bill that was passed in March, indicating strong continued support for Army modernization.

On SOCOM, we submitted the Manpack proposal in February, with the decision expected this summer, and we remain on track to complete the development of the two-channel handheld and begin product deliveries in the second half of our fiscal 2018.

Electronic Systems was flat for the quarter and up 3% year-to-date, driven by the ramp of the UAE Battlefield Management System program and strong double-digit growth in electronic warfare.

Our outlook in electronic warfare remains positive, with a solid and growing pipeline of upgrade opportunities on international F-16s, where the installed base is over 500 aircraft plus upgrades and new builds on U.S. and international F-18s.

We also see strong growth in the avionics business, with two consecutive quarters of strong orders for long-term platforms like the F-35, F-18 and P-8. In Space and Intel, we were down 3% in the quarter, but still up 2% year-to-date with growth largely driven by classified customers where we continue to expand into new adjacencies.

Although, we had good growth in the first half, it's being offset by a few program transitions moving from development into sustainment in the second half and more recently by a few task orders and commercial opportunities slipping into fiscal 2018. As a result, we now expect revenue for Space and Intel to be about flat in the year.

With the pipeline that had grown by 8% to more than $11 billion over the past year and our continued the high win rate, we remain confident in the long-term outlook for the business. We're now in the final innings of fiscal 2017 and we're encouraged by our year-to-date results and confident in our expectations for the balance of the year.

Congress will be voting on an omnibus package later this week and I'm hopeful for a positive outcome. As we look to fiscal 2018, all of the components for top-line growth are coming together, forming an inflection point for Harris.

Fiscal 2017 share repurchases will offset much of fiscal 2018's dilutive effects from divestitures and our operational excellence agenda will continue to lower costs and contribute to earnings growth in 2018 and beyond. So, let me now turn the call over to Rahul to walk through our financial results.

Rahul?.

Thank you, Bill, and good morning, everyone. As a reminder, discussions today are on a non-GAAP basis and exclude Exelis integration and other costs. This quarter, we transitioned to a three-segment reporting structure and results and guidance exclude both CapRock and IT Services, which are reported as discontinued operations.

Turning now to segment details on slide 5. Communication Systems revenue in the quarter was $461 million, down 5% versus prior year. Tactical Communications revenue was also down 5%, but legacy tactical was up 1%, driven by international which grew at 8%. Year-to-date backlog for legacy tactical is up 5% to $421 million.

Operating income for the segment was $140 million, compared to $151 million in the prior year due to lower volume. Year-to-date segment revenue is down 9% with operating income down 10%. Year-to-date operating margin of 29% is down 60 basis points versus prior year due to lower volume partially offset by synergy savings.

However, operating margins have trended sequentially higher for three consecutive quarters. Book-to-bill was slightly below 1 for the quarter, with strong bookings in Public Safety and Airborne radios.

This quarter, we received a $36 million order for Small Tactical Terminal airborne radios, which will be integrated onto a growing number of diversified air platforms across an expanding customer base.

And following the close of the quarter, Public Safety was awarded a $75 million contract from a utility company to upgrade a legacy analog system to a P25 digital network. Space and Intelligence Systems on slide 6.

Segment operating income in the quarter was up 1% and revenue down 3%, compared to prior year as higher revenue from intelligence community was more than offset by few environmental and space programs that have transitioned from development to sustainment.

Year-to-date revenue is up 2% with operating income up 11%, resulting in margin expansion of 130 basis points from 15.2% to 16.5%, driven by solid program execution and higher pension income. Book-to-bill was more than 1 for the quarter, driven by strong bookings from our classified customers.

This quarter, the classified business received a $500 million, single-award IDIQ contract from National Geospatial Intelligence Agency, with an initial task order of $15 million to perform search and retrieval services for geospatial products. We also received $28 million and $18 million in follow-on contracts to support U.S.

missile warning, missile defense, and space surveillance missions under the SENSOR program. Electronic Systems on slide 7. Electronic Systems now includes the financial results of the air traffic management business that remains with Harris after the IT Services divestiture.

Segment operating income in the quarter was up 4% on flat organic revenue compared to prior year as higher revenue from electronic warfare solutions and the continued ramp of UAE integrated battle management system was offset by lower revenue from wireless products and the ADSC (13:36) program transition from build-out to sustainment.

Year-to-date revenue is up 3%, with operating income up 12%, resulting in margin expansion of 170 basis points from 20% to 21.7%, driven by solid program execution, a contract adjustment in the second quarter, and higher pension income.

Book-to-bill was slightly below 1 for the quarter, with strong bookings in avionics and air traffic management, including a $72 million follow-on contract to provide engineering services for next-generation air traffic management weather initiatives, and a $72 million follow-on contract for Sonobuoy Launching Systems for the U.S.

Navy's P-8 antisubmarine aircraft. Additionally, we've received a $25 million follow-on contract from the U.S. Air Force for electronic warfare demonstrations. Moving to slide 8 and 9 for fiscal 2017 guidance.

Given our year-to-date performance, we now expect organic revenue down about 1% for the year at the midpoint of the previous guidance, excluding prior-year revenue from the Aerostructures business.

Full-year non-GAAP EPS guidance, which excludes Exelis acquisition-related integration and other charges, has been narrowed from a range of $5.40 to $5.60 to a range of $5.50 to $5.55. As previously communicated, full-year EPS guidance reflects about $700 million in share repurchases for the year, as well as an effective non-GAAP tax rate of 28.5%.

In segment guidance, margins now reflect the reallocation of FAS pension income, stranded cost and the accounting of discontinued operations related to the CapRock and IT services divestitures. These reallocations differ by segment resulting in modest impact to segment margins.

In Communication Systems, we now expect revenue to be down about 7% versus down 7% to 9% in the previous guidance, with Harris legacy tactical now down low to mid-single digits. Segment operating margins are now expected to be about 30%.

In Space and Intelligence Systems, we now expect revenue to be about flat versus up 1% to 3% in the previous guidance. While classified business remained strong, it is offset by some task orders and commercial awards that have shifted to their right (16:10). Segment operating margins are now expected to be about 16.5%.

In Electronic Systems, we now expect revenue to be up about 3% at the midpoint of the previous guidance. We continue to see strong growth in electronic warfare, F-35 UAE battle management programs, partially offset by softness in wireless products and the ADS-B program. Segment operating margins are now expected to be about 20.5%.

Free cash flow guidance of approximately $800 million is unchanged. This guidance excludes pension pre-funding, which will be reported in operating cash flow. This pre-funding is in addition to our annual contribution of approximately $188 million for a total pension contribution of approximately $588 million for fiscal 2017.

As I mentioned last quarter, this contribution fully funds our pension on an IRS basis and eliminates mandatory contributions of about $200 million for the next few years. During the third quarter, we launched a $350 million accelerated share repurchase or ASR program and we'll initiate an additional $250 million ASR program in the fourth quarter.

We remain on track to repurchase about $700 million of shares this fiscal year. On slide 10, we have provided historical financials of the business on a continuing operations basis that reflect reallocations of stranded cost and FAS pension to the three-segment structure. We will also be filing an 8-K with restated total company financials.

And with that, let me turn to the operator to open the line for questions..

Chanel, we are open for questions..

And our first question comes from the line of Jason Gursky [Citigroup]. Your line is now open..

Hey, good morning, everyone..

Hey, Jason. Good morning..

Thanks for taking my questions. I was wondering if you could spend a few minutes discussing, with a little bit more detail, the comment that you made about the Space Systems pipeline of $11 billion.

Can you just talk a little bit about where that pipeline is from an end market perspective, and the cadence that you expect on those awards over the next couple of years, and when that revenue stream might actually begin to accrue to the company? Thanks..

Sure, Jason. Thanks for the question. Yes, so we're very pleased with where the pipeline happens to be. It's pretty significant. Again, it's up about 8% year-over-year. Keep in mind that Space and Intel business is about two-thirds in the classified space, and those budgets are just becoming revealed as we see what's coming through the Omnibus.

So, we know that there's been strong support for the program that we happen to be on. Opportunity will come to fruition over the next several years. Our win rate in that segment is very, very high. It's north of 70%. So, we feel good when we see the sort of size of the pipeline growing, with us entering new mission areas.

And the high level of our successive win rates, we feel pretty confident those opportunity to materialize over the next several years. I really can't characterize exactly when that might happen, but we do know that those will happen over the next several years. They come in a bunch of different areas.

There's a number of classified programs on the ground side, and we talked about winning a pretty significant ground adjacency very recently. There's been a lot of attention and a lot of focus on space superiority, significant investments in protecting our overhead architecture, and Harris is in the middle of that.

We've also had some substantial wins in our ground sustainment program, we call SENSOR. That's coming through performing exceptionally well on the task orders. We bought Exelis as a program that was legacy Exelis, the delivery rate was something like around 30%. This past quarter, it was about 100%, so we feel very, very good about that.

So, there's been lots of really good performance, and I think we're executing very, very well. And on the commercial side, we've seen a couple of the reflectors that had slipped out of the year going into fiscal 2018; but our commercial space, the reflector business, also looks pretty robust.

We see at least 10 different opportunities over the next 24 months coming to fruition. Our win rate there is actually quite high as well. So, that's maybe a little bit more color, Jason..

Yeah. That's great. And then, maybe just one number-related question is, when you get close to return to growth here over the next year or so. Can you talk a little bit about the impacts of that growth on working capital, and whether we should expect working capital to become a source or a use of cash as you return to growth? That's it for me. Thanks..

Sure. Well, thank you for that. In fact, we've seen – so far, year-to-date, we've seen working capital build, even though our revenue is down a little bit. We do expect in our fourth quarter fiscal 2017 for that to reverse, which would get us to our $800 million target for the year in free cash flow.

And that's with about – in the high-40%s in terms of days of net working capital, so pretty good step-down from where we were at the end of Q3, but in line with, or maybe a little bit better than where we were ending in fiscal 2016.

And we do see a little bit more opportunity with that so, it will be important for us to keep managing our working capital levels very, very aggressively as we return to growth over the next three years..

Thank you. And our next question comes from the line of Carter Copeland of Barclays. Your line is now open..

Hey, good morning, guys. And congrats on getting all these transactions done..

Hey, Carter. Good morning. Thank you..

Bill, I wanted to just ask a clarification to start off. You may have commented about fiscal 2018 being an inflection point, and the repos offsetting the divestiture, dilution, and cost savings.

But I just want to – just wanted to clarify that you still expect to organically grow EBIT as we transition to next year, and that's part of that inflection? And the other thing I wanted to ask about was, just in terms of the order momentum in legacy tactical, I know the revenues have been strong in Europe, but maybe if you could speak to the – what the book-to-bill looks like there, and maybe also hit in international, the kind of the latest color on Australia, which I know is still sitting out there? Thank you..

Carter, I think you covered quite the gamut on that one. So, let me start with the first one. Yeah, we do expect to return to top line organic growth next year, and there's a number of contributors to earning per share next year. Certainly revenue's going to be one, we continue to drive hard on our OpEx agenda.

We typically take out 2% to 3% net of cost every year, in terms of normal operational excellence and that will be a contributor – certainly the share repo that we're doing now will be a contributor going into next year. We don't see as much pension tailwind. We don't see as much synergy tailwind as we saw this year.

So there's lots of puts and takes, but we do expect to grow earnings per share into fiscal 2018. Maybe I'll start, and maybe Rahul can jump in a little bit on the tactical side. We saw a very good momentum through the year in our legacy tactical business.

Europe has been a very, very strong performer for us this year and it keeps getting incrementally better. A lot of it is in Eastern Europe. I mentioned a few countries that were important in the quarter. Poland, Romania, they remain important. Ukraine was in the earlier part of this year. So, we feel very good about that.

The Central American and Latin American region also remains very, very strong for us. The offsetting areas remains Central Asia, where it's in a transition period. It's very low. It's a lot of headwind for us this year. Not seeing that that's going to (25:45) turn around into next year.

The Middle East has been soft, but we're starting to see some glimpses as some orders flow through there, we saw some even in early April some movement and some good support on what it seems so far in the Omnibus. So, we're seeing good support for our international business, and I'm encouraged with the trends.

We do expect for a company to end with a book-to-bill about one, as well as NCS (26:13) as well as within the tactical business. And an important part of that is Australia. As Australia comes through at the back end of the year, you will be well above one in the tactical business. We still think we get about one even with Australian doesn't book.

So in Australia, the opportunity is just under $300 million. So, that $250 million to $300 million range is part of the $1 billion-plus multi-year opportunity in Australia. We're deep in contract negotiations with them. It's going to happen right at the back end of our fiscal year, so the end of June, and we're tracking towards that.

You'll be given any big international opportunity. It could slip into July or August, but we're right on the edge of that. We're in deep negotiations. It's going to come to us. We know the size. The scope has been now well defined, so we feel very good about the progress now in Australia. So, I think I hit on the points..

Yeah, you did. And I'll say on Communication Systems, Carter, the other part of the growth next year would be in the Electronic Systems space. Bill mentioned the opportunities on the EW platform with F-16s and F-18.

So we expect electronic warfare to continue to grow and the C4, the battle management system win in UAE is going to drive growth in our C4I business, so those would be the other two contributors for growth in fiscal 2018..

Great. Thanks for the color, guys..

Sure..

Thank you. And our next question comes from the line of Pete Skibitski of Drexel Hamilton. Your line is now open..

Hey, good morning, guys, nice quarter..

Thank you, Pete..

Hey, Bill, one top level type of question. I'm just curious as to your thinking as you kind of finish up fiscal 2017 here as a more focused defense electronics company. And it seems like the budget is starting to improve your visibility.

Why is it so? I'm just trying to get a sense from you in terms of how you think about the company growth-wise, just notionally over the next few years whether or not we'll get the DoD budget outlook.

And do you think you can outgrow the DoD budget growth more in line or for whatever reason below that? I'm just curious as to how you think about the company at this point?.

I think I would say once we see where the President is going over the next five years, what we've seen so far is a 2017 Omnibus that's apparently going to go to his desk at the end of this week and some indicators, some high-level indicators for the shape of a budget in 2018, which certainly shows the DoD with substantial growth, DHS with substantial growth.

We think the Intel budget is going to comp a lot, at the offset of some other parts of the government. So, there's a lot of room between now and then and really understanding the 2018 budget, how it's shaped and then beyond that.

But I would say, Pete, given everything that I've seen, in fact, anything was viewed (29:04) of the budget even under the sequester (29:05), we'll see the DoD budgets getting better. So we're at a great point.

We've worked very, very hard as a team to streamline our portfolio into businesses where technology can differentiate where we have good strong positions in businesses that are aligned very clearly with where the DoD and our customers are moving with key mission needs. So we feel very good about where we happen to be. I mentioned this last time.

I think the fact that the portfolio is more streamlined allows the management team to focus more on businesses where we know we can drive shareholder value. And I don't want to understate that. I think that's a very, very important part of this whole dynamic of shaping of our portfolio. So we all feel good.

We feel good we're set up to grow in 2018 and beyond. We still have opportunity to do better on productivity. That's an everyday event, but I'm pleased with how we've executed on the portfolio of transformation.

I'm pleased with how we've executed on Exelis integration, the investments we've made in R&D to position ourselves for growth at the time when the budgets are inflecting. So, I think all things are looking very positive for the company..

Okay, great. And I'll just ask one quick program – question. I'm not sure if you mentioned enough.

This new one, the SOCOM wideband HF Manpack, do you have kind of a sense of a schedule for that program?.

It's going to follow the SOCOM Manpack program, which we are now in – we put in our final offer very, very recently. We expected award on that this summer. The HF program will come behind that. It's part of three different programs for SOCOM, handheld, the Manpack and the HF radio that it's been estimated that will be $900 million of opportunity.

Obviously, we won the sole-source single – two-channel handheld. We're in the mix on the Manpack. And frankly, on the HF side, Pete, that's a position where we've launched some products recently with NSA certification. We have a very, very high share of the global market on HF, so we feel very good about our prospects on that radio as well.

More to come as we get through the Manpack..

Got it. Thank you..

Thank you. And our next question comes from the line of Howard Rubel of Jefferies. Your line is now open..

Thank you very much. Bill, now that you've finished with – or you've largely finished with Exelis, I recognize you don't rest and you're going to do something next. How do you – and these other reshaping of the enterprise.

So how do you think about some of the operating targets that you won? And where do you expect you might be able to find some incremental synergies or other operational efficiencies in the enterprise?.

Well, look, I mean in terms of just our focus right now is delivering against guidance here in 2017 and making sure that we're set up to deliver growth in top line and bottom line in cash next year and capture all of the opportunity that we think we can capture within the budget as they're being shaped.

I really like where the portfolio happens to be. Going back five years, I think the step we took to invest more in IRAD, when most people are pulling back, if you just go back five years, we're up about $100 million a year incrementally in IRAD in this company and that is in all the different franchise programs that we're now set up to perform on.

In fact, a lot of the wins we're seeing come from some of the investments we've made over the last three years to five years. So, I feel very good about where we happen to be. There is always more to do on the cost side, as I mentioned a minute ago. Our operational excellence agenda is maturing.

We're sort of four years, five years into it with a decade-long journey. There's lots of more things that we can do including streamlining and simplifying a lot of our systems across the company. So there's a lot more that we can do. I think we're set up to continue to perform into the future..

And just to add to that, Howard, where we're focused on the Exelis side is driving integration. I think the next part of the journey would be taking this HPX culture.

The build's been (33:20) driving on the legacy Harris side now into Exelis, and we see some really good opportunities to continue to simplify operations and streamline the business there on the Exelis side. So there should be some cost take-out opportunities on the Exelis side going forward as well..

I mean I think the SENSOR program is probably one of the best examples of that whole process, and my guess also is moving Fort Wayne to Rochester is similar. Just as a follow-up, now that you're – just on two products, one on FAA.

As you transition to ADS-B to maintenance, I mean I believe you have the opportunity to sell the data, and then also could you just talk for a moment about the evolution of GPS III and the opportunities there?.

Yeah, sure. Let me start on the FAA side. So you're right. I mean the ADS-B system, we own about 640, 650 towers. It was built by the Exelis team. That build-out is complete. It's now in a sustainment mode and we do own the data rights on ADS-B.

The equipage today, I think, is just over 2,000 aircraft right now, so it's not – and all the aircraft have to be fully equipped by early 2020, so we're still on the front end of the evolution of that business and that marketplace.

I think where there's an opportunity going forward is now trying to use that broad array of towers to enable the UAS into – UAVs into the North American airspace system. That I think could be an important and distinctive technology for allowing UAVs into NASA (35:11). So I think there's some encouragement on that piece.

On GPS III, as you know, Howard, we're under contract for space vehicles 1 through 10. 9 and 10 were awarded late last year. For long-lead materials we see some other opportunities for 9 and 10 coming up very shortly maybe this quarter. 11 through 32 is being competed. It's a two-phase process. There's three different bidders on that.

We partnered up with Lockheed who is our – who will be providing the payload today on GPS III. So again, it's in two phases. There's a first phase, a production readiness with some small amount of money and then it goes to a more substantial competition.

I think the award is some time out in the spring of 2019 and it's likely to be of those 20 space vehicles, 10 awards, maybe 10 auctioned.

We are developing a fully digital payload for that, so it's not – we'll provide today to GPS III not fully digital, but we're investing in that, and we expect to be a player and supporter for Lockheed on 11 through 32..

Thank you very much..

Sure, Howard..

Thank you. And our next question comes from the line of Gautam Khanna of Cowen and Company. Your line is now open..

Yeah. Thanks. Good morning..

Good morning..

I was wondering if you could talk a little bit more about the Australia award and how quickly you expect it to convert to revenue, A); B), given you now have more color on the scope, what the anticipated margin profile of that program is going to be relative to the rest of the legacy tactical comms?.

Look, the Australia program, first of all, is, we've been in some very detailed negotiations with them for some period of time. We're in the phase 3 of a multi-year phase. It's a broader systems offering. We have a number of people on our team. I mean, again, we're expecting an award on this and order booking towards the end of our fiscal year.

It'll be again $250 million to $300 million. We'll see revenue flowing off on that program over the next, probably three years or so. And the margins are, I think, pretty strong. So I don't really want to say specifically where we happen to be.

But they remain pretty strong in that program, and really any of the systems programs that we happen to have inside the company. So I don't see any sort of pressure on the CS segment going forward because of the Australia margins..

Okay. And so, to your point, though, it will deliver over three years. It's not like a quick turn type of order..

It would be. Gautam, it's something that the pieces – there are two pieces. There is system integration and then providing the radios as well, in that order. So – yeah, so I think we should be able to get revenue from that in 2018..

Okay. Secondly, could you give us – in prior periods, you've sometimes given your pipeline figures for DoD and international, RF tactical.

Do you have those numbers?.

Do you have them handy?.

Yeah. So on the international side, Gautam, our pipeline is pretty steady. I mean it's around the same $2.4 billion-ish where it has been. It kind of keeps moving in and out with opportunities coming. So there is really not a lot of change to the international pipeline. And the typical areas that it comes from is also kind of the same.

Iraq continues to be one of our bigger opportunities. And then Australia, we're still tracking that. As we mentioned before, that's a – long-term, that's about a $1 billion opportunity with, obviously, the upfront award. So the geographical distribution has not changed much. The size overall has not changed much.

And I think, on the DoD, the pipeline is up slightly over where we were. I think it's now north of about $1.2 billion, $1.3 billion. And so that's where that thing is, and I think that's up over where we were last time..

Okay. And on Iraq, in prior years, I remember, I think, it was the December quarter a couple – a year ago – you had a $66 million order.

Could you frame for us how big the Iraq opportunity still remains to be, and what you anticipate booking in the next 12 months with Iraq?.

We do see a couple of opportunities moving down the path in Iraq, Gautam. I mean, I'm not sure we'll give you specific to a country in the next couple of months. I mean, I think, just to step back a little bit, Iraq is still a very big opportunity in our large pipeline, and Rahul just went through about $2.4 billion.

Iraq is on the order of about $0.5 billion, so it's a very big opportunity. Those – you know, they're starting to move through the pipeline.

I was very encouraged to see, in the Omnibus, continued support for, they call it now, counter ISIL train and equip (40:24), but there's also an Iraq train and equip (40:26) fund that was set aside, with substantial amount of money that expires at the end of this fiscal year. So by September, it was something like $300 million.

So, there remains good support by the U.S. Government for equipping in Iraq. So we still see that to be a big opportunity, and it's going to materialize over the next – probably couple of years, that's really the shape of our pipeline. I don't think I want to call it anytime in the next couple of months..

And just last one, do you have any preliminary view on how much legacy RF tactical could grow in fiscal 2018?.

I don't think we're going to comment on 2018 as a whole, or even a specific sub-segment of the company. As we said before, we do expect that 2018 will be a growth year for the company, and I'll leave it at that. I think you could see the trends in what's happening in the DoD budgets and where we happen to be as a DoD tactical business.

But I don't think we'll comment on a specific business until we get out and close on 2017 and shape the whole company..

All right. Thank you very much..

You bet..

Thank you. And our next question comes from the line of Seth Seifman of JPMorgan. Your line is now open..

Hey, thanks very much, and good morning..

Good morning..

Bill, I heard you say that you're still expecting a selection on Manpack in the summer.

Are you still expecting orders and shipments by late in the calendar year?.

Yes, Seth, there's two – I use the word Manpack loosely, there's two Manpacks. One is one for SOCOM. And we have put in our final proposal the award we expected this summer, it will go into a developing phase and we see revenue coming off of that more likely in our fiscal 2019, not 2018.

On the (42:23) Manpack, is now into customer testing and there's three vendors on that. We think our offering has performed and performing very, very well. The Army has recently told us that there will be now two steps.

They expect that they're going to have an interim field-based risk reduction step in order to verify some of those deferred threshold requirements, and we expect an order of about 150 units more or less in our fourth quarter, same order for (42:57) the other two players in the space, it will get delivered at the end of the calendar year or go into some additional testing.

And then what now they're expecting is that there will be an order for now up to six but Brigade Combat Teams, or BCTs, versus the original two that will be split between two vendors. So it's a total of 3,800 radios, 1,900 apiece.

That will be awarded sometime in the February-March of calendar 2018 period, which will be revenue for us as being one of the two vendors at the back end of our fiscal 2018. So, a little bit of a shift on the Army Manpack program, again, very, very encouraging that the testing goes on, we're performing very well.

The money is in the budget which is very encouraging, what we saw in the Omnibus, as well as a substantial increase in the number of BCTs that are going to be fielded by the Army from the Manpack program. So I think that's very encouraging news to us..

Great. Thanks. That's very helpful.

And second question on air traffic control, how do you think about the impact of potential privatization on Harris, or is there any impact?.

Yes, well, Seth, well, thanks for that question. The FAA is one of our biggest customers across the company. It's more than $0.5 billion. It's a very large partnership, significant partnership we've had with them and it's been for the last couple of decades. As you know, we have the base FTI program which has been very stable.

They've been (44:29) for a long period of time performing exceptionally well and then a number of NextGen programs. I think, look, there's been a lot of debate. It's not a new debate. It's been happening over the last, probably, couple of decades. I think what's different now is, it appears the administration is now getting behind privatization.

I think if it goes in that direction, the transition period is probably at least five years because of the size and complexity of the FAA system, the North American Air Traffic Control System. So I think it's a multi-year transition.

We don't think that there's going to be any near-term impact mainly because the programs that we're on are essential programs. There's very strong support for the NextGen programs, including in the recent Omnibus. All of the airlines even support the NextGen programs.

So, we feel very good that we will not be impacted, certainly not anytime in the near-term, by any discussion on privatization, but I can tell you there's a lot of distance between now and having that finally approved. There's a lots of different voices in this including from the general aviation community, the DoD.

A lot of people who have airports in their backyard that won't let them (45:44) impacted. So there's a lot of room between now and something being definitize on privatization, so we'll watch and see how it plays out and keep you posted on it..

Great. Thank you..

Sure..

Thank you. And our next question comes from the line of Robert Stallard of Vertical Research. Your line is now open..

Thanks so much. Good morning..

Good morning..

Bill, you mentioned that there'd been some impact of the CR in the quarter.

It might be tough, but can you sort of size what you think the impact could have been across your various businesses over the last three months? And then perhaps, more importantly, when do you think it could be caught back up?.

Well, look, we've calibrated pretty well in the year based on the CR, so we felt our tactical business was well calibrated and coming in today, keeping the DoD about flat for the year sort of is testament of the fact that it was reasonably well calibrated. In our Electronic Systems business, we have our wireless products.

(46:46) more of a short-term product type business, has seen a little bit of an impact but not enough to take us off our game in Electronic Systems. So we feel that our business and where we happen to be has been well calibrated.

We originally guided at the beginning of the year flat to down 2 (47:05) as a company and now we're down about 1 (47:07), so right in the middle of the range. So I think we have been well calibrated and I think that remains the same today..

Okay. And then a quick follow-up on the numbers, it looks like the Exelis integration costs have moved up a little bit by $5 million for the full year. I was wondering if you could comment on what's behind that.

And then looking into next year, what sort of level of integration costs you might be expecting for the next 12 months?.

Most of the integration costs are going to be behind us by the end of the year. The total for the program is about $250 million. Most of that's now spent. Net is going to be about $200 million. So it's up a little bit. It was $35 million and now it's about $40 million. It's restructuring.

It's integration costs and a little bit of restructuring around the stranded cost reduction activities, but we think we're pretty well captured in that $40 million estimate..

So, just to make a final point on that, Rob, the step-up is not due to Exelis integration costs going up. But we'd mentioned last quarter that as we were taking some stranded costs, now there'll be some restructuring costs, that we'll need to spend to get the stranded costs out and that's what you see the change from $35 million to $40 million..

Okay.

And any more of this activity still to go on next fiscal year?.

We should be pretty much done by the end of this fiscal year, so we do not expect any integration costs too for next year..

Okay. Thank you very much..

Sure..

Thank you. And our next question comes from the line of Josh Sullivan of Seaport Global. Your line is now open..

Good morning..

Good morning, Josh..

Just on international radios and I guess particularly in Europe, I know you mentioned Eastern Europe is a source of strength, but are you seeing any increased fly activity from other core native allies, maybe as they look to increase defense spending?.

A little bit. It's not a lot we do – I think that directionally it's – the words from the administration are good, as there's pressure on NATO to spend more, we do see some incremental opportunities coming from our allies in Western Europe. We have a few small orders, nothing big at this point coming from Western Europe.

And that market is fairly stable year-over-year, so not a lot of change on the Western Europe side..

But over time, we know that there will be a substantial upgrade in the UK, this Morpheus program, and we're going to be right in the middle of that. There's been some recent progress on that. That is going to move forward.

It's probably not in the next two years, but certainly in the next three years or four years, we'll be able to start (49:58) to be some meaningful revenue for Harris and that will happen and that's going to be a big opportunity. It was estimated as a £3.5 billion total upgrade. About 20%, 25% is going to be radio.

So we think we've got a good position on that because we've 40,000 radio there today, legacy radios, so a good opportunity for us. Over time, it's probably in the back end of the three-year period that we're thinking when it's going to start to hit us..

Okay. Thanks for that. And then just on electronic warfare.

You mentioned some expectations for growth, but how do you balance between maybe some of the legacy programs and the F-35, if there were any changes to production volumes on either legacy programs or the F-35, are you more exposed one way or the other?.

I think more broadly, so just electronic warfare, we do have substantial content on F-35. It's not the EW system, it's on F-35, so very substantial content with opportunities to grow that content over time because we're performing very, very well.

And as there's a broad multi-year drive in the DoD towards open systems, we do have some opportunities to perhaps get a little more content there. We also have significant content with the F-18. So, as there's a contemplation certainly in the Omnibus of additional F-18 aircraft, that works for us.

We do have the IDECM system for the – the Defense Electronic Countermeasure System for the F-18, so that will be good news for us.

And then what we're seeing is across all of the legacy platforms, because of new threats, all of the legacy platforms, both fixed wing and rotary, need to be upgraded, and we've got strong positions on many of those platforms, and that's really what's behind a lot of the strong order growth and revenue growth now in electronic warfare..

Great. Thank you..

Sure..

Thank you, everyone. Go ahead. Chanel....

I'm showing no further questions at this time..

Thank you, again, for joining us on the call today, everyone. If any additional questions, I'm available at 321-727-9383. Thank you, again, and have a great day..

Thank you, everybody..

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