Harris Earnings Call Nuggets: 3-5 Year INS Outlook and International Tactical Communications Business

Harris Corporation (NYSE:HRS) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

3-5 Year INS Outlook

Carter Copeland – Barclays Capital: A big picture question for you, Bill, and then I want to kind of go off your comments you made right there at the end about being optimistic about the longer term outlook for the Company. I wondered if you might speak to the longer term, let’s call it, 3 to 5 year outlook for INS and not in terms of formal targets. But what you see for the pieces of that business in terms of returns on capital or margins or however you like to think about it but where you see that business – the pieces of that business ultimately heading sort of 3 to 5 years out if you can?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

William M. Brown – President and CEO: As you know INS is composed of a variety of businesses that were just – still in the mode of integrating, and I think we are performing very, very well. CapRock, I’m very, very proud of what they’ve done. They are growing at very high single-digit rates. The margins are coming up pretty nicely and I still think we’re in the early stages of integration and I am very optimistic about the long-term potential in that business. We talked about the three pieces that we compete in energy, maritime and government and I think we are very well-positioned in each. We are market leader in energy, and that’s growing nicely. We are growing our share in maritime, with the win with Royal Caribbean and you could imagine that there is more wins that are going to come down the path in that business, and I think we are holding our own if not gaining a little bit share on the government side. So, longer term I feel very good about CapRock. To me that’s sort of mid to maybe high teens margin business, but that’s going to take us some time to get there but I am pretty optimistic about where we are going in CapRock. The Healthcare business we’ve performed very, very well on the Government side. We’ve grown dramatically. We acquired Carefx. We’re integrating it. We’re turning it around. As you know we lost lot of money in that business last year. We expect to be profitable in Healthcare in fiscal ’13. I think we’re making very good progress in that direction. We have reaffirmed today, we’ll be profitable in Healthcare for the full year. And over time I see that business growing very nicely, that also can be a mid-teens type of business over time, once we look at how Carefx and software suite really takes hold in the marketplace. We’ve got a big event coming up at the end of February. We’re releasing new version of the software. So I think the back half of the year hinges on that, but I feel pretty good about our prospects longer term in Healthcare. In IT Services, we’ve been very well-positioned, strong double-digit margin based on a particular contract we have with the government. As you know that contract is being rebid. I think we’re well-positioned on that contract. It will be awarded probably sometime in the back half of our year. It’s really uncertain to us exactly when. But the reality is that business which has been a double-digit margin business is going to come down in margins, it will be mid-to-high single digit we expect that. Based on all of that, we see the margins in INS continuing to improve. You saw today, we’ve narrowed the range 9% to 10% of margin in that particular business in, that’s a double-digit margin business going longer term.

International Tactical Communications Business

Joseph Nadol – JPMorgan: I’d like to focus in on the RF – the Tactical Communications business internationally, if you could. I heard what you said in the comments about $150 million opportunity maybe flipping out. I was just wondering, if you could characterize the overall international business, or ex that one booking are things tracking in the way you expected six months ago or is there any other changes one way or the other? Then, last quarter, you characterized the businesses having a lot of small orders but no big ones, are there any larger fish that are starting to come into your profile?

William M. Brown – President and CEO: It’s a good series of questions. Let me sort of take it from a high point and then come back to specifically what happened in the quarter, why we adjusted the year for international. As Gary mentioned, we have a pretty robust pipeline in international, $2.4 billion. It’s still as I said last time, it’s in the tens of millions, not hundreds of millions of dollars over time. We don’t see any gigantic one off opportunities like we saw with Australia, but we see in series, lots of good opportunities in a variety of countries around the world. The Middle East remains, I think, still pretty robust. Iraq remains pretty strong, UAE, Saudi, Jordan all look very good for us over time, as does Northern Africa. That’s been a pretty good market for us and I think it remains to be important going forward. Central Asia, the countries in Central Asia that we’re referring to, a very, very strong potential, the political climate continues to improve. Brazil and Mexico are very, very promising and we’re winning orders in Brazil and we feel pretty good about our prospects there, and we’ve won some orders in Europe that we’ve talked about today and had some releases on very recently. So, I think overall, the pipeline looks robust. We feel very good about that. As you recall, our fiscal ’12 was very, very strong in international. We had very strong double-digit orders revenue growth in international Tactical radios. It remains a lumpy business but we’re still feeling pretty good about fiscal ’13 and beyond. Now, what happened just in the last 30, 60 days international? As Gary mentioned, we had a pretty large order for $50 million that just moved out. The FMS process for this particular country is taking a little bit longer than we had thought 30 to 60 days ago. We’re seeing the State Department in the DoD wanting to spend a bit more time scrutinizing exactly how the FMS funds are being spent within this country. That is different than what’s happened in the past. So, we are going through a bit of a transition. The orders we booked in Q2 and little bit in Q3, which totaled 42 million for this particular country were well in the process. There are long-term orders that we’ve been working at for quite some time. The 50 million follows on that and longer term we see the opportunity to be something like 400 million. So, this is a very big opportunity, it is a timing issue. It moved out of the year. It just didn’t move out of the opportunity set for Harris Corporation. Couple of other things moved around. We saw some ins and outs in the Middle East. We are seeing as Iraq convert from FMS process to commercial terms just taking a bit longer than we expected, but no big move we are seeing around other than the one I am referring to 50 million. We still feel pretty good about our prospects long-term in international, Joe, thank you.

A Closer Look: Harris Corp Earnings Cheat Sheet>>