Anurag Maheshwari - Vice President, Investor Relations Bill Brown - Chairman and CEO Rahul Ghai - Senior Vice President and CFO.

Pete Skibitski - Drexel Hamilton Seth Seifman - JPMorgan Gautam Khanna - Cowen and Company Carter Copeland - Melius Research Rob Spingarn - Credit Suisse Jason Gursky - Citi Noah Poponak - Goldman Sachs Sheila Kahyaoglu - Jefferies Robert Stallard - Vertical Research.

Good day, ladies and gentlemen. And welcome to the Harris Corporation’s First Quarter 2018 Fiscal Year 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 be given at that time.

[Operator Instructions] I would now like to turn the conference over to our host for today, Anurag Maheshwari, Vice President of Investor Relations. You may begin..

Thank you, Sonia. Good morning, everyone. And welcome to our first quarter fiscal 2018 earnings call. On the call with me 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, discussions today will include non-GAAP financial measures and the reconciliation of the non-GAAP 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 a replay of this call also will be available.

With that, Bill, I’ll turn it over to you..

Thank you, Anurag, and good morning, everyone. Earlier this morning we posted Q1 fiscal ‘18 results and we are off to a good start to the year.

Earnings per share was up 8% to $1.38 on flat revenue, margins expanded 70 basis points to 19.2%, free cash improved by $50 million and we returned $144 million to shareholders through share repurchases and increase dividend, our 16th consecutive annual increase.

The highlight of the quarter was orders increasing 33% to a record $2.3 billion with a book-to-bill of 1.6. So let me highlight a few of these key wins across the three segments indicated on slide four, starting with Communication Systems.

We finally secured the much anticipated $260 million order for Australia’s Phase 3 modernization, the first stage of a multiyear program with total potential value of over $1 billion.

As you know, the Australian MoD has standardized on Harris networking technology and to-date we have shipped about $800 million in radios and we are leveraging that incumbency into developing and building a broader integrated network.

This is part of an important strategy initiative to expand our addressable market and we are replicating in other geographies.

In Eastern Europe we received a further $52 million in order from Ukraine as part of the Ukraine security assistance initiative to modernize communications to meet emerging threats in the region, building on very strong orders performance last year.

In the Middle East and Africa, we anticipate a recovery in ‘18 and then in the quarter orders were more than doubled the prior year with a $39 million order from Iraq and $46 million from Kenya. Overall, international tactical book-to-bill was well over 2 and was still greater than 1 excluding Australia.

In DoD we also saw increased demand with orders growing about 40% including more than $100 million focused on readiness.

A couple of notable awards include $36 million from the Air Force for upgrades of their legacy communications equipment to software defined radios to support multi mission operations and $38 million from the Marine Corps for radios with MUOS capability to enable high quality satellite communication on expeditionary missions.

On omni modernization as I mentioned on the last earnings call we received an order for $101 HMS manpack test radios from the Army at the beginning of Q1 and we expect to start deliveries later this quarter.

With the down selected two vendors now accomplished, we are working with the Army as a prepared for field-based risk reduction in the spring of 2018. DoD tactical book-to-bill was also well above 1 in the quarter and overall tactical communications backlog is now $879 million, up 66% from the prior year and 78% sequentially.

Excluding Australia, backlog is up 25% sequentially and 17% year-on-year. Public Safety and Night Vision also had strong order resulting in Communication Systems having record orders of about $825 million and book-to-bill of 2.

Following the close of the quarter, we received $765 million sole-sourced IDIQ award from the Navy for Falcon III and next-generation radios, replacing a contract that was completely exhausted in April.

This value was more than double the previous contract and aligned with the Navy’s budget request to ramp up Marine Corps modernization efforts over the next few years. In Electronic Systems, we continue to see strength in our electronic warfare business and received a $133 million contract for U.S.

Navy and Australian F-18s, continuing a 20 year relationship and enabling legacy platforms to perform more advanced missions. We also provide the EW system for international F-16s and in the quarter we received $47 million in additional funding from Morocco to complete the upgrade of their entire fleet.

We have several additional international opportunities in the pipeline. In the Avionics business, we continue to ramp production for the F-35, with a $63 million order for LRIP 10 release systems. In addition, we expanded our international footprint with key wins in Singapore and Turkey for smart carriage and release systems on international F-16s.

These smart racks can carry two payloads of up to £1,000 each and have a innovative and patent electronics enabling direct communication between the aircraft and the payload. In C4ISR, we leverage our classified robotics expertise and were awarded a contract worth up to £55 million from the U.K.

Ministry of Defense to provide robotic systems to support explosive ordnance disposal missions. The U.K. MoD is a global leader in EOD and our state-of-the-art product delivers real-time haptic feedback and unparalleled range of precision control.

We are excited about offering -- about our offering and expect other countries to follow the U.K.’s lead as they upgrade EOD capabilities. Overall, Electronic Systems book-to-bill was 1.5, with both electronic warfare and avionics above 2.

And finally, in Space and Intel, we had a number of significant wins driving a segment book-to-bill of 1.4, with continued strength in a Classified domain and in a commercial reflector business. Let me provide a little color where I can on a couple of them.

On our Q2 call last year, I noted a new franchise emerging from an $80 million Classified contract that we described in as a group -- as a ground-based adjacency.

We knew this program had the potential to grow into several $100 million and after a successful startup, we were awarded a $35 million -- $34 million follow-on contract in the first quarter, further solidifying our position in this new franchise area.

In addition, I noted last quarter that investing in R&D and innovating ahead of customer need enable us to win two Classified small sat programs.

These pathfinder missions have proven successful as our customers move towards disaggregated, more affordable and responsive space solutions, and we received an award this quarter that has a potential to grow to more than $100 million over the next two years.

And then finally in our Commercial Space business, we received our largest order for a single commercial satellite covering four reflectors, bringing total orders to eight over the past two years. Our commercial reflector pipeline remains robust and we expect these recapitalization and expansion trends to continue through fiscal ‘18.

So, overall, we are seeing positive momentum across the company and I’m pleased with our strong orders growth driven by sustained our -- internal R&D investments over the past several years.

This strong start to the year gives us confidence in our full year guidance and reinforces our view that we are at the beginning of a multiyear growth inflection. Let me now turn the call over Rahul for details on the financial.

Rahul?.

Thank you, Bill, and good morning, everyone. Just a quick reminder that fiscal ‘18 results are compared with the prior year non-GAAP figures, which excluded acquisition-related costs. Total company results on slide five.

Revenue was about flat, with growth in Electronic Systems and Space and Intelligence offset by lower revenue in Communication Systems. Operating income was up 3% and EPS was up 8%. Free cash flow grew by $50 million to $72 million. Turning now to first quarter EPS bridge on slide six. EPS grew by $0.10.

The expected $0.08 headwind from the ADS-B transition was partially offset the disciplined capital deployment in fiscal ‘17. Strong segment performance delivered $0.12 of accretion from solid program execution, incremental integration savings, higher pension income and lower costs.

Benefit of higher volume in Avionics, Battle Management Systems and Classified Space was offset by lower Environmental and Communication Systems volume. Segment detail on slide seven, Communication Systems revenue was $410 million, down 5%. Tactical Communication revenue was down 5%, with DoD down 2% from lower airborne radios volume.

International tactical revenue was down 6%, as substantial growth in the Middle East primarily from Iraq was offset by the expected declines in central Asia and in Central and Latin America due to a tough year-over-year compare, and though, slightly down Europe remained strong driven by Eastern Europe.

Public Safety and Night Vision were both down mid-single digits. Segment operating income was flat at $118 million, but margin expanded 140 basis points to 28.8%, as lower cost and operational efficiencies more than offset the impact from lower volume.

Historical information for tactical orders, revenue and backlog is provided in the supplementary material. Moving to slide eight, Electronic Systems revenue was $540 million, up 1% versus the prior year. Excluding the impact of ADS-B program transition, revenue was up 5%.

This was driven by the ramp in UAE Battle Management Systems program and growth in Avionics across several platforms, such as F-35, F-22 and F-18.

Segment operating income was down slightly to $109 million and margin was down 50 basis points to 20.2%, as solid performance across the segment and ongoing focus on operational excellence offset a $14 million headwind from the ADS-B program transition.

Slide nine, System and Intelligence revenue was $466 million, up 3%, Classified business was up 8% and Environmental revenue decline double digits, in line with expectations as some programs trended down.

Segment operating income was up 10% to $87 million and margin expanded 130 basis points to 18.7%, driven by strong program performance and higher pension income.

Moving to slides 10 and 11 for full year guidance, guidance for fiscal ‘18 remains unchanged, with EPS in a range of $5.85 to $6.05, up 6% to 9%, including benefit from $150 million of share repurchases for the year, with $75 million completed in the first quarter.

Total company revenue guidance is unchanged in a range of $6.02 billion to $6.14 billion, up 2% to 4%. Communication Systems is expected to grow 3% to 5% with DoD tactical up double digits, from increased focus on readiness and incremental modernization volume.

International tactical is still expected to be flat to down slightly with growth in the back half of the year as the Australia modernization program ramps up. Electronic Systems is expected to be up 3% to 5% with growth in avionics, electronic warfare and battle management systems.

Space and Intelligence is expected to be flat to up 1% as strong revenue growth in the Classified area will be partially offset by the headwind from the Environmental programs. Total company operating margin guidance remains unchanged in a range of 19% to 19.5%.

We also continue to expect $850 million to $900 million in free cash flow for the full year. The first quarter tax rate of 27.7% benefited from the stock-based compensation accounting standard that we adopted in the first quarter of fiscal ‘17. We still expect a full year tax rate of about 28.5%.

The remaining three quarters are expected to average 28.8% within quarter-to-quarter depending on specific tax timing differences. And with that, I would like to ask the operator to open the line for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Pete Skibitski of Drexel Hamilton. Your line is now open..

Good morning, guys. Nice quarter..

Hey. Good morning, Pete..

Hey.

Bill is revenue kind of line with your expectations or it was a little bit light or it was just timing or maybe CR -- related?.

Yeah. It -- look, I think, we are pretty pleased with where we happen to be in the first quarter coming at about flat. I am very, very happy with where we were on orders.

Orders were very, very strong and as look at the balance of the year we have got fair amount of the backend of the year is now covered in backlog or in firm or follow-on high probability follow-on orders. So it’s actually quite good.

When I look just across the businesses, CS came in a down 5%, so we saw a couple of opportunity shift in the Q2, but we see though the balance of year being very, very strong. Electronic Systems came in at 1%, but when you exclude the impact of ADS-B it would be up 5%.

So that’s a pretty substantial drag in the quarter and we will see that again in Q2. And then Space coming in at 3% for the first quarter is above the full year guidance and again reflects some good trends that are happening at business. So, overall, I think, we are pretty pleased with where we happen to be in the first quarter..

Okay. Fair enough. And then just last one Bill for you, I was wondering if you can make some comments on some of the consolidation we have seen in the Space. UTX buying Collins, North buying OA, obviously, is going to have some impact on the Communications market, small satellite that kind of stuff.

And so I am just wondering how you see it as it put in a competitive advantage or disadvantage rather as some of these big guys get bigger or you feel like maybe just more nimble and then can maybe move faster than those guys, just curious on your comments?.

Yeah. Pete, look, I think, from my perspective at Harris, we don’t see any change to our game plan. We have a healthy amount of respect for the competitors we have in the space and the moves that they are making. But we feel we have got good skill position in the franchise areas, we haven’t been participating in.

We spent the number of years investing in our franchise and focusing our businesses where we know we could be successful and winning based on technology, so while we -- we feel pretty good. We watch what’s happening in the industry.

But we feel good about the position of Harris Corporation and where the budget happens to be going and I think the future is a very bright for Harris..

Okay. Thank you..

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

Hey. Good morning. Thanks very much..

Hey, Seth..

Bill, we had a lot of development in the tactical Comms area over the last couple months.

I wonder if you could address just broadly kind of two of them, one being how you think the changes in start of the upper end of tactical and having to do with WIN-T and what that sort of means for Harris over time? And secondly, or the comments that the Army has made recently basically suggest that they are looking to incorporate more capability into their Communication capabilities faster and how you think that Harris can address these capabilities and whether you see the Army kind of looking at all to new entrants to try and deliver any of this capability and if there are any new entrants who can?.

It was I think very, very good questions. I think you’re referencing a lot of the discussions gone over the last six months to eight months, maybe little bit longer than that led by the Chief on the future of the Army architecture, the resiliency, the concerns about maneuverability and variety of other things. They commissioned a study.

The study came out with the findings. The Army has elaborated on that over the summer. That engage industry and lots of ways and conversations around that and it was some recent testimony in September in front of what is subcommittees of the House of Services Committee talking about some directions the Army wants to move in.

First of all in the upper tactical system mainly relates to WIN-T. We are provider of some components on WIN-T. We provide the high-band networking radio, as well as an H&W waveform which we’ve develop.

Frankly, as I look for ways of making that that system more resilient, more maneuverable, that could slow down some opportunities to Harris to upgrade its H&W waveform and each in our radio, which we are proceeding with today. In terms of the Army wanting to put more capabilities into the tactical radio with the tactical Internet faster.

Frankly, works directly in our favor in many ways and I think is a strong footstep on the commercial model that Harris has been known for.

The ability to quickly embed commercial technologies, continuously innovate, developing new capabilities, fielding them very quickly, investing ahead of the curve and building headroom on our radios, so that you can onboard new waveforms, new technologies based on where the market is moving or threats are changing.

So that works very much in favor of the model that Harris I think it’s been known for is very, very strong at. So, I think, overall, I think, this is a -- this will eventually be a good outcome for the company. There’s been some deliberation over last six months, but I think, it started to come, become clear as to where the Army wants to move.

They clearly have made a strong statement in support of the manpack radio. They made a strong statement in support of the two channel leader radio. They want to become more SOCOM like, which shall again goes back in support of Harris. I think, overall, this could shake out to be good news over time for Harris..

Great. Thanks. Thanks very much..

You bet sir..

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

Yes. Thanks.

Couple questions, first, I am wondering, could you give us the legacy RF tactical orders and sales in the just so we have?.

So we have not tracking, as we’ve mentioned, I think, on the last call, we are not going to track it that, we just going to provide now combined results for the tactical radio business between Harris and Exelis. As we have combined and integrated the business, operationally we’re running it as one. Our sales forces are now combined.

So we have -- even internal we are just soft tracking between Exelis and Harris and just tracking it as -- just as the tactical radio business and we have the details in the supplementary material for the overall business..

Yeah. I don’t think the adding an Exelis really changes a trend very much, frankly..

All right.

Couple of things, one, I was wondering if you could give us your -- the guidance then change on a net basis, but are there any puts and takes within that like Australia you are expecting $60 million of sales this year, is that still the expectation and any comment on kind of permit the actual net numbers, there has been any changes of consequence?.

Yeah. I think, we -- again, you are about right on Australia that should be about the flow-through in the year. Overall, we still see good growth on DoD, up double-digit for the year and international, as Rahul said in his prepared remarks, flat to down slightly. We still see a very strong pipeline. It’s about $2.3 billion.

We see the Middle East and Africa region, perhaps, being a bit incrementally better in the year than we thought just a couple of months ago. It’s going to be up significantly double-digit and little bit better than we have thought. And again we are seeing good opportunities flow-through in Iraq.

We are seeing that almost doubling over the course of the year. The U.S. government support, there is actually quite strong. We know Saudi is going to come up off a very low base from last year, mainly because of the [ph] reef product (23:04) or SINCGARS product that’s going to flow-through this year. North Africa looks good.

We see Kenya looking pretty good. The UAE is pretty strong. The only place is really soft in the Middle East would be in Jordan, but again, overall, Middle East is a little bit better. Asia-Pacific just a little bit better as well than last time, again, up significantly double digits. Australia is a key part of it.

There is a couple of other markets in Southeast Asia that are quite strong. So APAC a little bit better. Maybe Europe is about the same, maybe a little bit worse over the course of the last couple of months. We had a good start. We booked in Ukraine was a big deal for us. But Romania is going to be some pressure in the year.

Poland is going to be some year-over-year pressure in the year and in Cal -- in Central Asia, both look a little bit weak and we knew they will be weak, but probably, incrementally, but weaker than we thought before..

Okay. And Bill, following up on Pete’s question about consolidation and you guys has been buying a lot of stock. I am curious what is the M&A pipeline looking like for you guys as an acquire and now that the balance sheet a lot better shape and the Exelis integration is effectively completed..

Yeah..

Are you looking at stuff and it’s still kind of -- what types of property interest you in terms of size capability, any color you can give?.

I really can’t give you much color. We -- you are right. We have completed Exelis integration. Our balance sheet is getting stronger. We’ve got a little more debt to pay down at the end of this year about another $550 million in fiscal ‘18. We’ve -- I think we’ve proven our credit if you will on how we bought a company at a good part of the cycle.

We are discipline in what we paid and integrated very, very well. So the team is looking at a variety of different opportunities none of which are must haves that could help us accelerate in some of our key franchise areas. But I don’t believe today that we need to acquire to be successful. We are going to be opportunistic.

We will be very focused on where we buy. But we are just starting to look a little more. But, again, it won’t be an area that’s outside of our core Space..

Okay. Thanks for that guys. Good luck..

Thank you. Our next question comes from Carter Copeland of Melius Research. Your line is now open..

Hey. Good morning, guys..

Good morning, Carter. Welcome back..

Hi. Thanks. Good to be back. Couple questions for you, one, Bill, I just want to ask, Seth’s question another way, just to get at the kind of risk here.

As you think about the deliberations that the customers has had here, are there factored bookings, I would say in your plan, at the latter part of this year that has some sort of risk, if the customer moves slower than expected in terms of deciding what the network architectures supposed to look like holistically.

Just trying to get a sense of whether there is incremental risk here to the inflection that you’ve talked about in growth?.

We think the armies, first of all, across the DoD, they are moving money into some of the current accounts. We see readiness picking up. This is a bit more aggressively than we thought just a couple of months ago. There is a lot of conversation about equipping new security forces and that is going to we believe help us in the year.

The -- we have very little in the year on monetization. It’s up from last year. We had a good start to the year on selling the MUOS waveform. We expect this year to be about $50 million and 80% of that are so was booked in Q1. So that’s pretty strong. But we’ve sort of derisk what we expect to see coming out of the Army manpack.

It is largely just a test radios that we have shipped. We do see the SOCOM handheld radio beginning to ship in the back half of the year. That’s going to ramp into ‘19.

But as I sit here today and based on as I look at our backlog and backlog roll off in the tactical business largely, we probably have about 50% or just about 50% of the back into Q2 through Q4 revenue that’s now in backlog and will flow out.

So we feel better today looking at the backend of the year, Carter, than we did last year at this point in time. So what I think we are relatively well calibrated in the year..

Great. That’s great color. And then, Rahul, just two quick ones, with respect to the margin strength in ES and Space and Intel, were there any net favorable EAC adjustments to note in those? And then the second one is, given the potential for tax reform, how you guys thinking about potentially prefunding lot of pension? Thanks..

Yeah. Good question, Carter. So on EAC adjustments, overall, it’s kind of similar to where we were last year same time, so really no difference.

I think both Space and ES had good operational performance and kind of Space had little bit of award fee timing that -- those things fluctuate quarter-to-quarter and ES had some a slight favorable fixed price content mix and some close out on fixed price programs.

So those things helped in the quarter but overall we feel good about where they had margins happen to be. And on the -- on your second question on the pension, we contributed $400 million last year, so we had about 80% funded. So that’s -- so we have to be -- which is -- which we feel relatively good about.

And the second part is, so given that we are -- we will keep and as interest rates move by about 25 basis points our pension deficit cuts down by like $160 million. So point of interest rate movement is going to cut our pension deficit by half.

So we are going to continue to monitor that and think about what that means on when we made pension contribution if we chose to do so. We have -- given our fiscal year ending, we have little bit more time than others do in terms of, if we have to do something extra on pension. But right now we feel good about where we are in terms of funding..

And I think on -- I think you might have mentioned about tax, well, Carter, I think, we are hopeful that tax reform does occur. I think every one point on effective tax rate worth about $0.08 for us. So that I think if that moves forward, I think, it will be a positive for Harris..

That’s great. Thanks, guys..

Sure..

Thank you. Our next question come from Rob Spingarn of Credit Suisse. Your line is now open..

Hey, Rob..

Good morning..

Good morning..

Good morning..

Good morning. So Rahul I have a couple of clarification questions I wanted to ask you.

The first one being in the Space and Intelligence business, what is the Classified growth and the guidance if you remove the headwind?.

So our Classified growth is about roughly mid-single digits around 5% year-over-year in our Space guidance..

Okay. And then, just in the cash flow you had, I think, it was a source of around $107 million in other cash from ops.

I can’t recall if you describe what that was already, in just wanted to follow up on that? And then, Bill, I have a radio question for you?.

Sure..

Yeah. So on cash, listen, good start to year. We are up $50 million year-over-year in the quarter and as expected we had some working capital headwinds as we over delivered $51 in Q4. So we kind of expected that and that got offset by some refunds on tax payments we made last year and some cash tax timing differences.

But on the long -- last 12-month basis we are about $900 million of free cash flow and feel good about delivering $850 million to $900 for the year..

Okay. Okay. Bill, moving back to where, Seth and Carter were going, I just wanted to ask a little bit more about JTRS, just given that we’ve just have this network vulnerability study with the Army and having just visited AUSA, et cetera.

One things we are hearing is that the radios, the tactical radios vulnerable examine and that there’s a scaling up issue, where only a certain -- you can only get to a certain number of radios, I think, it’s something like 31 before they begin to examine in the field? And so I wanted to ask you, where -- what’s your comment on that, where are we technically and is there generally an issue with the hardware being able or mature enough to process the software driven radio or are we not quite there yet, is that really the core of the issue in developing this program?.

No. Look, it’s very, very complicated question that you’re asking. But effectively we’ve been in the business for several decades delivering radios and have been nearly standardized across the DoD on 117G 152 Alpha radios field proven.

And we have develop -- we have been developing and working on the next-generation manpack radio, the single-channel rifleman radio, the two channel handheld radio, the midtier radio, we are selling them all around the world, even some of the newer product is being sold with both within and outside of the DoD.

Look the technology continues to move, the threat environment continues to change and the radios have to be adaptable it over time given those current trends and what -- I think what the Army has realized is that you cannot take a JTRS program in 10 years or 11 years ago set a specification five years before the first iPhone is launched and set a specification and hope to feel it 11 years later and have it be relevant.

It has to be very nimble, agile, flexible procurement process and has yet to be able to upgrade frequently. In fact that’s where the Army is moving. That’s where SOCOM has moved. And that’s really the commercial model the Harris, I think, is distinctively good at.

We develop headroom in the hardware of our radios such that when new threats come up or new waveforms that could be low probability of an interception or low probability of detection or APJ waveforms that you can onboard them into that radio in the existing hardware. It’s exactly what we did by putting the MUOS waveform on to our existing 117G’s.

MUOS was not even contemplated on 117G. We first started fielding it eight years ago. But great waveform engineers up in Rochester were able to customize that waveform with a simple software download on drive -- drop it into 117G. That’s the beauty this particular model. So to your comments and concerns, yeah, there’s been a lot of question around this.

The threat environment is changing, the technology is moving. What we believe that the adaptability of our model, our engineering investments in our products, we think we are going to be well-positioned no matter where the Army or fragmented in any of the other services go. So, hopefully, I’m addressing your question, Rob. It’s a very complicated one.

But I do believe that this ultimately reflects back on the value of the commercial model that Harris is very good at..

Well, you are, Bill, and it is very complex.

With all that said and I think you started to this, you answered out to Carter’s question, do you have a sense of how many manpack radios you’ll ship total this year and next year, is there way to quantify this and can we figure out when the annual production lot competition will begin?.

In terms of specific number that will ship this year. Again, we were under contract on the multichannel manpack for 100 units -- 101 units and they are going to ship back into this quarter, in its early Q1 -- Q3’s, early first quarter of calendar ‘18.

And also want to do the field-based risk reduction, probably, in the April, May timeframe, that’s sort of the current operating model.

Now the down select really effectively happen us and Rockwell Collins and we are both aligned and moving the Army forwarded ready to go and I think that voice common from two competitors in the Space, I think, it’s resonating with the Army. So if anything that could encourage that procurement to move faster rather than slower.

So, I think, that’s kind of where we see at the moment..

And your plan -- do you have a sense of when that production work would start the two of you?.

In terms of the full rate production?.

Yeah. Yeah..

Well, it’s probably the backend of our fiscal ‘18, maybe into early fiscal ‘19. Look, I think the Army still wants to field, your right out of the gate, 60 BCT’s and that could happen in two and four, could happen all six, we don’t really know exactly what they are going to end up doing.

But that’s probably more like we have fiscal ‘19 revenue event for us as opposed to fiscal ‘18, the order could happen, in the best of cases towards the backend of fiscal ‘18. That’s kind of where we see it right now.

But when you look at the budget and where the Army wants to move, even the recent testimony it has in September, always in favor of moving forward at significant quantities of the HMS manpack. So, I think, it’s very encouraging what we are seeing in the last couple of months..

Okay. Thank you..

You bet..

Thank you. Our next question comes from the line of Jason Gursky of Citi. Your line is now open..

Can you hear me okay..

Sure. Jason, good morning..

Okay. Great. Good morning. Bill, I wanted to go back to the Space business for a moment if we can and then you talk a little bit about some of the dynamics that are going on there, both on the Classified and in the Commercial side of things.

On the Classified just give us a sense of where you are seeing longer term growth trends going maybe the scope of those growth trends here over the next few year? And then, on the Commercial side, DoD has been discussing moving towards a more commercial procurement model, particularly on the Communication side of things.

I was wondering how Harris is going to potentially play in that and kind of what that dynamic means just in generally speaking for the satellite industry. Thanks..

Sure. Yeah. Let me maybe hit a couple of key points and if Rahul, do you have anything add jump in. About two-thirds of the Space business is in the Classified domain. We see the budgets up sort of single digits. We see that continuing over the next number of years as far as we can see as a visibility to it.

The Classified budgets are coming up and we get a little bit of color within the topline, we can see where the money is being spent and I feel that it is growing faster in areas that Harris has developed capabilities. So our high-end exquisite sensors, as well as our pretty innovative creative small sat type solutions, and so -- I feel very good.

Rahul said, for the year the Classified business will be up mid-single digits in Q1. It was up a bit stronger than that. We continue to see good solid order trends and the pipeline here is quite good.

The Commercial business of the Space and Intel business which mostly commercial reflectors and GPS, that business will also be up pretty strong this year about double-digit. And again, we talked about -- some of the awards we’ve seen. In that commercial reflector business we have got a strong global share.

It’s a commercial model driven business where we invest our own R&D to develop that offering. We sell it into the marketplace. It performed exceptionally well on orbit, almost no failures with very, very high margins. And we have been running at about two reflectors a year over the last six years and over last two years we were at about four per year.

So it’s kind of double and we see another five or so that were bidding opportunities in our fiscal ‘18. So we continue to see that commercial reflector business ramp. The place that we are seeing some softness in the year is really in the Environmental Solutions business.

We’ve talked about that over last couple of quarters, part of it is program transition where we’re moving from the build of the GOES-R satellite systems, so the -- the onboard optics as well as the ground processing system is moving in a sustainment.

And there we are seeing just some budgetary pressure from where the Trump Administration wants to go an environmental scientist. So we factored that into our guidance. We see the Environmental business, which more or less is about $350 million to $400 million in size being down mid-teens for the year. So we saw that in Q1.

We see that over the balance of the year and beyond kind of stabilizing a little bit. So that’s kind of where we sit today. The pipeline overall for that Space and Intel business is pretty robust. It’s up about 4%, 5% year-over-year, $11.5 billion to $12 billion.

So we continue to see good health in that Space and Intel business, and again a lot of it’s from Classified and lot of it is that based on the last five year, six years of investments in IRAD that position us in some places that, frankly, where -- the -- our Classified customers are moving towards with disaggregated resilient response of solutions.

So Jason that answer part of your question, let me stop there and see if there is anything else you want to have clarify..

No. That was great. I appreciate the color. That’s it for me..

Thank you..

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

Hey. Good morning, everyone..

Hey, Noah..

Can you remind me, so the Environmental programs that are declining in Space and Intel, what quarter does the start going against you?.

They started in Q1. So we saw in Q1 the Environmental business rolled down about 10% to 15% and that -- about 15% and we see that about the same for the balance of the year..

That’s little bit worse, about the same for Q2 and then maybe little bit worse in the back half of the year..

Lot of it’s, Noah, is the roll-off of the GOES-R program which was last year, plus we’ve got a couple of sensors that we are developing for these NASA NOAA satellites. They call the JPSS, the joint polar satellite system and then the 3 and 4, I think, they call Polar Follow-On, so they change the name on it.

But we have got some sensors on that and there had been some funding pressure around the Polar Follow-On mission, which is JPSS-3 and -4..

GOES-R was declining in the back half of last year?.

GOES-R was kind of overall flat, Noah, ‘16 to ‘17 was kind of flat and then it declined substantially this year..

Yeah. Historically, this year we have little bit the back end of fiscal ‘17, I remember the satellite launched in November of 2016, calendar ‘16..

All right. Yeah. I guess, I am wondering, is just, you grew, the segment grew 3% in the quarter despite the Environmental programs headwind and the guidance for the year is flat to up 1, you have to be basically exactly flat for rest of the year to be in that range.

So you would have to decele from the first quarter, even though you grew in the first quarter with the headwinds and even though the year-over-year comparisons in the back half of the year are much easier? So does that headwind accelerate for the year or is there something else that goes against you later in the year that didn’t in the quarter?.

No. I think, Noah, I think, you have got most of it. So the headwind does accelerate a little bit on the Environmental side. Classified we are expecting about 5% for the full year. It grew about 8% in Q1, so not as stronger growth in the Classified side on the back half of the year..

Okay. And then, similar question on the margin and the segment, I mean, you are sort of 100 basis points above the high end of the range in the first quarter, you would have to be much lower the rest of the year to get into the low -- certainly the low end of the range.

What changes in the margin for the year in Space and Intel?.

Yeah. And those margins, typically fluctuate quarter-to-quarter, depending on the mix and we have some lot true-ups on a couple of program and that helped margins in Q1.

Having said that, the margin was strong and -- in the first quarter and you really feel good about where the margins -- where -- about the full year guidance for the segment or margins..

Okay. Okay. Great. So then, one other question on the, I guess, in the legacy Harris domestic tactical radio business.

I had sort of always brought up the model as the legacy base business, which I estimated and maybe even said made it to about $300 million last year and then we are sort of layering on all the new program win and just sort of assuming and it felt like even hoping that the $300 million legacy base before new programs business that just hang on to $300 million, because there is some reason to believe there could be cannibalization of that as new programs came on line? And then when you announced this maybe win about a month ago sort of made one come to the realization that actually about $50 million piece of that $300 million, if the IDIQ conversion holds, now is itself tripling and so why, I guess, is that true of that maybe piece of that business? And then two in the remainder of that $300 million, is there anything that is going to shrink considerably over the next one year, two years, three years or is there anything else in there that has the potential to grow in size as much as of that Navy business just that for you?.

Yeah. I think, you are about right on the $300 million in terms of base funding and that that has been relatively stable over last couple of years. We do see depends on what -- where you characterize some of the readiness investment we saw in Q1.

Of about $100 million in order, so does that sort of go into base or is that an upsize sort of the mix of the two, but you are largely about right. The Navy IDIQ award is very encouraging coming in and it was sole-sourced Harris to replace something that expires, so it was fully exhausted the prior contract vehicle.

And what I think it reflects is, if you look in the slide deck and you will see out of a couple of years the Marine Corps is going to start to modernize.

It happens in, I think, it’s in the fiscal ‘19, fiscal ‘20 timeframe and its start to grow quite large and I think the IDIQ vehicle is size such that it compensates for, it allows us for that modernization at Marine Corps to happen. So that will be beyond our fiscal ‘18, it will start in ‘19 and ‘20.

That, I think, Noah, is actually encouraging for us overall for where we see the business growing to beyond fiscal ‘18..

Yeah.

Is there anything else in the -- so in the remaining $250 million of the $300 million ex that Navy fee, anything else in there we should be watching out for that, has the contract renewal coming up or that has some meaningful potential to grow a lot going forward?.

No. Nothing to point to. No. It’s going to be relatively stable. It’s going to be reset in spears and repairs and things that we typically do. There is a number of [ph] 17TGs (47:33) in the inventory. There is 152A. There is SINCGARS radios that had some flow-through. It is not big but flow-through there.

There are going to be some investment over the next couple of years in terms of this crypto mod upgrade. They won’t replace all the radios in DoD inventory by the NSA Cert -- the deadline which I think is in 2021 is the timeframe. So there have to be some investment to upgrade the cryptography on the legacy radios that are sitting in there.

So there is really nothing specific to the point to, Noah, and we will talk more of that that as we see it over time, but we see it relatively stable..

Got it..

Yeah..

Okay. Thank you..

You bet, Noah..

Thank you. Our next question comes from Sheila Kahyaoglu of Jefferies. Your line is now open..

Hi. Good morning. Thank you for taking my question..

God morning..

Just on ES if I could, maybe follow up, is there -- that’s also trending above the high-end of your segment guidance.

What sort of driving the balance for the rest of the year?.

Sorry, Sheila, could you….

Are you talking Sheila on ES, if I hear that right?.

Can you hear me better..

Okay..

You are asking Electronic Systems, I didn’t break it the front….

Yeah. Exactly.

Just the margins trending better in the quarter and what changes throughout the year?.

Yeah. So, Sheila, again, the margins kind of, same thing on Space, the margins do fluctuate quarter-to-quarter and that’s why we don’t provide kind of quarterly guidance on margins.

But the fact was that we are makes a little bit more skewed toward fixed price program that helps and also there were some closeout on fixed price programs in the quarter that helped margins as well. So, again, really good start to the year and we feel good about where the year happens to be or guidance happens to be for full year..

Thank you.

And then, just F-35 program, how do we think about if you could size it for us or how do we think about the build rates and potential content wins and what that means for the Harris growth rate for that program for ‘18?.

Yeah. Look, we have good content on F-35. It’s just over $2 million for shipset that we provide the common component -- avionic components backplane, liquid-cooled racks, things like that. We also provide the antennas for the -- they call the metal the multifunction data link.

And then we also provide release systems as well, so the carriage and release. We talked about an award we received in Q1 associated with F-35 release systems. So, overall, it’s just over $2 million. We are on, well, I think, LRIP 10 on the release systems in LRIP 12 on the….

Avionics..

… common components and the avionics systems, there’s been a lot of conversation around block buys. We are working with our partners on that is to how they might flow in and get shaped over the course of the year. But we’ve also won some recent content. We own the aircraft memory system, which was a big important win for us.

We won the panoramic cockpit display electronic unit, so they head down display electronic unit and that adds, call it 5% to 10% roughly to the content for shipset and that will flow in over time. So we are performing very, very well. We have very high delivery rates.

We have been working strong with our partners and taking cost out and driving improvement for the liability we’ve invested in open system technologies. So we have an opportunity to compete for a new mission system to open system over time and we are very competitive in that space.

So, overall, we think F-35 is going to be a good -- has been and we will continue to be a good story for us, Sheila..

Thank you.

And then, Bill, just a last one, you mentioned later radio program?.

Yes..

If you could just provide RFP timeline for that and just a sizing of that opportunity?.

Sure. The RFP is out. The proposals are in. We expect an award sometime in early calendar ‘18. It will build off of the existing rifleman radio IDIQ was -- the IDIQ was contemplated originally at $3.9 billion to include the possibility of a two-channel radio. That in fact is happening.

And we will provide some small number of radios for testing in the early part of next year and will ramp for us in fiscal ‘19..

And our final question comes from Robert Stallard of Vertical Research. Your line is now open..

Thanks so much. Good morning..

Hey. Good morning, Rob..

Bill, you commented already, but one thing I thought it worth asking, and you highlighted a very strong book-to-bill in Q1.

I was wondering if you sort of thing pull forward into the first quarter and whether the assuming continue resolution might have any impact on DoD orders in the quarter?.

Not particularly. There were, obviously, Australia was an important component to that in the CS business, but even excluding that we had very good book-to-bill internationally in DOD. We actually saw a couple of things that moved out of September and October that we had hoped would happen in September. But -- we are on good track for them in Q2.

And again similar good trajectory right now in Electronic Systems, as well as Space and Intel, so nothing in particular that I would characterize as a pull forward because of the end of the fiscal year.

I mean, as we normally see, as you know we normally see that at the end of fiscal year September that tends to be a big booking month and was again, but nothing unusual that we saw this year relative to the prior years..

So just to put final….

Okay..

Sorry, Rob, just to put a final point on that and even so overall our book-to-bill was 2.3, sorry, 1.6 and even if you exclude Australia it was 1.45. So and compare that last year it was about 1.20. So even excluding Australia the book-to-bill was really good..

Yeah. Yeah..

Yeah.

I have follow-up to ask, the attempt to nail this down annually than quarterly, are you still confident that you will have a book-to-bill over one times for the year?.

Yes. We believe it will be more than one. In fact it should be, I wouldn’t substantially, but because of Australia and the CS segment, we are much more confident there in more substantial book-to-bill for the year..

That’s great. Thanks go much..

Sure. Okay. Well, thank you, everybody. Before we end the call, I would like to make sure we thank the Harris team for delivering a strong quarter despite the impact of Hurricane Irma to our Florida operations, which as many know has more than 6,000 employees. The storm passed early on a Monday morning.

We partially restarted operations on Tuesday and we are back to nearly 100% by Wednesdays and this remarkable was within 48 hours and I am very, very pleased and proud of the team performance.

I am also proud that our customers experienced no significant disruption of service, including the FAA which relies on a network operations center here in Florida to monitor air traffic across North American airspace, as well as the first responders that we support throughout the state of Florida.

So we responded very, very well and I’m very pleased and proud of the team. Overall we had good start to the year. We are confident both our fiscal ‘18 and medium-term outlook.

We are in an environment where defense budgets are coming up, the technology solutions we provide are aligned with the mission priorities of our customers and very importantly, we have a dedicated team that’s geared towards exceeding customer expectations and delivering shareholder value.

So thank everybody for joining the call and we will speak again next quarter..

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