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Harris (NYSE:HRS)
Q2 2018 Earnings Conference Call
Jan. 30, 2018 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Harris Corporation Second-Quarter Fiscal Year 2018 Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anurag Maheshwari, vice president of investor relations. Thank you. You may begin.

Anurag Maheshwari -- Vice President of Investor Relations

Thank you, Michelle. Good morning, everyone, and welcome to our second-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 a 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.

Bill Brown -- Chairman and Chief Executive Officer

OK. Well, thank you, Anurag, and good morning, everyone. Earlier today we reported solid second-quarter results with non-GAAP earnings per share of $1.67, up 21% on 6% revenue growth, including an incremental $0.21 benefit from the recently enacted tax reform legislation. Excluding the benefit, non-GAAP earnings per share was up about 6%.

Free cash flow increased 15% to $258 million and we returned $143 million to shareholders, including $75 million in share repurchases. We continued to build on first-quarter momentum to drive top-line growth, with orders up 13% in the quarter and 24% in the first half. So let me start with a little more color on growth drivers across the segments noted on Slide 4.Communication systems revenue grew 18% in the quarter, with tactical radio up 26% from strength in both DoD and international. DoD revenue increased 56% as the focus on readiness continued to drive demand.

We booked about $100 million in radio revenue in the quarter from the Air Force and the Army as part of a multiyear plan to equip their security forces as they increase their presence overseas. For the first half, despite limited modernization activity, DoD order nearly doubled and revenue grew 26% on the back of sustained readiness demand. Army and SOCOM tactical modernization programs continued to advance and remain well-supported. We'll start delivering HMS Manpack test radios as the Army prepares for field-based risk reduction in the spring of this year and we expect an initial production award toward the end of our fiscal 2018.

The protest on the Army two-channel leader radio was recently denied and we expect an order soon on the IDIQ while we work with the Army as it prepares for test. For the SOCOM two-channel handheld, we've delivered our first set of test radios and remain on track to complete development this quarter and begin product deliveries in the fourth quarter. Overall, all programs are moving forward and we continue to expect revenue to ramp starting in fiscal 2019.In international, revenue increased 9%, primarily from better-than-expected recovery in the Middle East, where revenue was up by more than 50%, driven by modernization of security forces in Iraq, delivery of SINCGARS radios to Saudi Arabia, and technology refresh for a long-standing customer in the region. In Iraq, our pipeline is over $0.5 billion and we're beginning to see several opportunities to break free as the country moves from the grant-funded counterterrorism to border security and eventually to command-and-control systems as they standardize across the forces and the Ministry of Interior.

The solid first-half performance in the Middle East combined with strength in Africa drove international revenue up 1% for the half and book-to-bill greater than 1, excluding Australia. Overall, for the first half of the fiscal year, tactical revenues increased 10%, orders grew 54%, and book-to-bill was 1.6, resulting in a backlog increase of 59% year over year to $884 million. More than 50% of second-half tactical revenue is covered in backlog, up 10 percentage points from this time last year, giving us comfort in achieving our increased segment guidance.In electronic systems, revenue increased 2% for the quarter, 6% excluding the $22 million impact of ADS-B. This was driven by strong double-digit growth in the avionics as we continue to benefit from higher volume and new content wins on F-35, the ramp up on the U.K.

robotics program, and growth in electronic warfare systems on legacy platforms such as the F-18 and international F-16s. Orders momentum continues to be strong in electronic systems and were up 37% for the second quarter. Similar to last quarter, avionics orders more than doubled compared with the last year as the ramp on F-35 continues, including the award of Lot 11 for release systems and block buy lots 12 to 14 for antennas. For F-35, in the first half, we received orders of $300 million, which is significantly more than what we achieved in all of fiscal 2017.

In addition to F-35, we've seen strong first-half orders on both F-18 and F-16, receiving a combined $300 million for avionics and electronic warfare systems. We expect the order momentum across these three platforms to continue in the second half. Overall, for ES, first-half orders grew 21%, book-to-bill was 1.3, and backlog increased 10% over the prior year.In space and intelligence systems, revenue was down 1% in the quarter as growth in classified programs and commercial reflectors was offset by expected headwinds on environmental programs. Orders continued to be strong in the classified arena, with additional funding receipt for our SmallSat program and a multimillion-dollar award for advanced ground processing.

And I'm pleased to note that our strong focus on program execution and operational excellence is strengthening our competitive position on key strategic programs. On GPS, we're executing well and we've established a proven and reliable production cadence, delivering our fourth GPS III navigation payload in October and tracking well to deliver the fifth payload by the end of March. We've also developed and tested a fully digital mission data unit, which puts us in a strong position to compete for the upcoming GPS III 11+ award and maintain our incumbency. Similarly, on the sensor program, the large ground radar sustainment effort for the Air Force, we continue to improve on-time performance, which has more than doubled since we acquired Exelis, resulting in improved customer satisfaction and positioning us well for follow-on opportunities.For space and intel, first-half revenue was up 1%, orders grew by 9%, and book-to-bill was greater than 1.

Solid second-quarter results for the company capped an encouraging first-half performance, with revenue up 3% and growth across all three segments, order growth of 24%, book to bill of 1.3, and a backlog increase of 15% compared to the prior year. This, combined with nearly 80% of back-half revenues and backlog or high-probability follow-on opportunities, a strong and growing pipeline, and $8 billion in proposals outstanding give us confidence despite a lengthened CR to tighten our revenue guidance to up 3% to 4% from 2% to 4% previously. We're maintaining company operating margin guidance of 19% to 19.5%, but within that range, we're planning an incremental investment of approximately $20 million in IRAD to strengthen our position and capture new market opportunities in areas such as SmallSat, software-defined electronic warfare systems, open system avionics, and robotics. These have been focus areas for several years but due to our recent success in customer pull, we're increasing investment in these initiatives to drive innovation and affordability for our customers.

We're also investing in human capital and making a one-time stock grant of 10 shares to all non-executive employees, our most important asset in driving long-term customer and shareholder value.And then, finally, we anticipate prefunding the pension plan by $300 million during our fiscal Q3. We're making these additional investments in the context of the recently enacted tax legislation, which is a net positive for Harris and for the U.S. economy as a whole. We expect tax reform to reduce our effective rate by about 10 percentage points next year, with about half of that reduction impacting this year and adding about $50 million to fiscal 2018 net income.

This benefit, combined with an improved revenue outlook and strong operational performance offsetting incremental investment, gives us confidence to increase fiscal 2018 earnings per share guidance to $6.30 to $6.50 per share and free cash flow to about $900 million.So let me now turn over to Rahul to cover financial results in more detail before he opens the call to questions. Rahul.

Rahul Ghai -- Senior Vice President and Chief Financial Officer

Thank you, Bill, and good morning, everyone. Turning now to total company results on Slide 5. Discussions today are on a non-GAAP basis, excluding noncash charges in the quarter from a $52 million one-time writedown of deferred-tax assets and a $12 million adjustment for deferred compensation, as well as prior-year Exelis acquisition-related charges. Revenue was up 6% during the second quarter and operating income was down $6 million, as higher volume and operational efficiencies was more than offset by contract adjustments in the mission networks business.

EPS was up 21%, or $0.29, including a $0.21 incremental benefit from tax reform. This benefit included a catch-up from the first quarter, resulting in 11-point reduction in the Q2 tax rate, since the tax reform impact must be spread across all four quarters of our fiscal '18. For the first half, revenue was up 3% and operating income was up 1% despite a $36 million unfavorable impact from the ADS-B program. Operating margin was 18.9%.

Free cash flow was robust in the first half at $330 million, a 34% increase over the prior year. On the last-12-month basis, adjusted free cash flow was $934 million.Turning now to segment details on Slide 6. Communication systems second-quarter revenue was $489 million, up 18% versus the prior year. In addition to strong growth in tactical, night vision revenue was also up double digits as the business continues to improve execution.

Operating income for the segment was up 19%, at $144 million compared with the $121 million in the prior year, driven by higher volume, operational excellence, and integration savings. Orders grew by 21% resulting in a book-to-bill of approximately 1 for the quarter. For the first half of the year, segment revenue was up 7% and operating income was up 10%. Operating margin of 29.1% was up 70 basis points versus the prior year.

Segment orders increased 44% in the first half and book-to-bill was 1.5. Notably, the book-to-bill was above 1 for each of the three businesses in the segment -- tactical communications, PSPC, and night vision. We've continued to include historical information for tactical orders, revenue, and backlog as supplemental information at the end of this presentation.On Slide 7, electronic systems revenue was $584 million, up 2% for the quarter. The $33 million decline in segment operating income was driven by contract adjustments in the mission networks business, including a $22 million headwind from the ADS-B program, increased R&D expense, and unfavorable mix, partially offset by strong performance on electronic warfare program and the benefit of higher volume in avionics.

First-half segment revenue was up 2% while operating income was down 14%, or $36 million, as the increase in volume was offset by ADS-B headwind and an increase in R&D. Operating margin remained strong at 18.7%.On Slide 8, space and intelligence systems segment operating income was up 7% on revenue decline of 1%. For the first half, revenue for the segment increased 1% and operating income was up 8%, resulting in 120 basis points of margin expansion from productivity and incremental pension income.Moving to Slide 9 and 10 for full-year guidance. As Bill indicated, we now expect revenue to be up 3% to 4% versus up 2% to 4% in the prior guidance due to increased strength in the tactical communications and in avionics.

We're increasing the EPS guidance from a range of $5.85 to $6.05 to a range of $6.30 to $6.50, driven by a better-than-expected operational performance and benefits of tax reform, partially offset by reinvestment into certain key franchises. Strong execution is expected to deliver an additional $0.13 to EPS on higher volume and strong program management, partially offset by unfavorable mix in electronic systems. We will reinvest $0.12 of that into innovation and affordability and bid and proposal activity across the corporation. Tax reform and other tax efficiencies will drive effective tax rate in fiscal 2018 down to approximately 23%.

This combined with operational changes results in a $0.45 EPS increase. Total company margin is still expected to remain robust at 19% to 19.5%. We're tightening free cash flow guidance to approximately $900 million from a range of $850 million to $900 million, reflecting the cash benefit from tax reform.Turning now to outlook at the segment level. In communication systems, we now expect revenue to be up 5% to 7% versus up 3% to 5% previously, driven by strength in tactical communications and night vision.

Operating margin guidance range of 29.5% to 30.5% remains unchanged. In electronic systems, we now expect revenue to be at the top end of the previous range, up 4% to 5% versus up 3% to 5% previously from better-than-expected outlook in avionics and electronic warfare. Operating margin is now expected to be between 18% to 19% versus 19% to 20% previously, due to increased R&D and bid and proposal investments and unfavorable mix shift from products to program businesses. Space and intelligence revenue guidance remains unchanged at flat to up 1%.

Operating margins are now expected to be between 17% to 18% versus 16.5% to 17.5% previously, driven by higher productivity and strong program execution, partially offset by reinvestment in R&D.On Slide 11, we're updating the guidance for tax and share repurchases. We have completed the $150 million of share buyback we had initially planned and now expect to repurchase an additional $50 million in the second half for a total of $200 million in share repurchases for the fiscal year.And with that, I'd like to ask the operator to open the line for questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press *-1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

You may press *-2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key. One moment please while we poll for questions.Our first question comes from the line of Robert Stallard with Vertical Research Partners. Please proceed with your question.

Robert Stallard -- Vertical Research Partners -- Analyst

Thanks so much. Good morning. Bill, obviously a very strong order intake in the first half of the year. I was wondering how sustainable do you think this sort of order intake is as we roll forward into the future and whether you're seeing any change in the lead time between when the order is placed and when you expect to ship the product?

Bill Brown -- Chairman and Chief Executive Officer

Well, we started out with a very good first quarter because we booked Australia, recall, in Q1. So, very strong book-to-bill in Q1, which really led into a good first half. For the year, as we said last time, we do expect a book-to-bill of greater than 1. And as we see a CR turn into a healthy budget into what we hope to be a very healthy defense spending line in fiscal '19, my expectation is we'll continue to see orders grow beyond '18 into '19 and hopefully beyond '19.

So we've got a good start. We're building some good momentum. We're seeing lead time in order conversion, opportunity-to-order about the same. I know there's an important effort focused on shortening the acquisition timeline both in U.S. DoD as well as on the FMS side. We haven't seen anything yet except for a couple of pretty quick-turn investments in readiness that were for more urgent requirements but I know the department is focused on both accelerating DoD purchases as well as getting FMS contracts done a lot faster than had been before.

Robert Stallard -- Vertical Research Partners -- Analyst

Just a quick follow-up, you mentioned that the Middle East had come in better than maybe you'd been expecting in the second quarter. What about some of the other regions? How did they fare?

Bill Brown -- Chairman and Chief Executive Officer

Well, certainly the Middle East was very good. We anticipated the year to be up probably 40 percentage in the Middle East. It was a little bit stronger in Q2 than we expected. We're seeing the pipeline velocity in the Middle East a little bit faster than we had expected, which I think is good news and hopefully we'll see that trend continuing into the back half.

So the Middle East has been very strong. Again, keep in mind, it's coming off of a relatively low base. So that's going to be pretty good. It's pretty broad-based.

Iraq is very important in the Middle East. Saudi has been a good opportunity. We see good opportunities in northern Africa as well as sub-Saharan. So overall, pretty good trajectory in the Middle East.

We will see the Asia Pacific region grow pretty aggressively this year, probably not the same, about 40% principally due to Australia but also because of some other countries in Southeast Asia. So, again, good momentum in Asia. We'll see a check-down this year in Europe. It will be down probably double digits off of record year last year and record second half in Eastern Europe.

And then in Central and Latin America as well as Central Asia, we will likely be down pretty significantly this year. So overall, international on a revenue basis, we still see it where we did before, flat to down slightly although the DoD business will be stronger this year.

Robert Stallard -- Vertical Research Partners -- Analyst

That's great. Thanks very much.

Operator

Thank you. Your next question comes from the line of Jon Raviv with Citi Group. Please proceed with your question.

Jon Raviv -- Citi Group -- Analyst

Hey, guys, good morning. Can you provide us something of an update on some of your free cash flow goals post the tax reform act? I think [Inaudible] previously talked about $1 billion. You're approaching that. Any thoughts on where that might go over the next two years?

Bill Brown -- Chairman and Chief Executive Officer

What we will see this year is, we went up by, at the center point $25 million, from between the $850 million to $900 million so now we're guiding at $900 million. Tax reform this year is [Inaudible] 50, because of elongated continuing resolution, some of our revenue will probably slip to the back end of the year, and what that means is we might have a little pressure on collection, which is why we conservatively boosted our free cash guidance to about $900 million. Going into next year, with tax reform we see an incremental $50 million to $75 million of free cash just on tax itself. So, that puts us in the $950 million to $975 million range with earnings growth and working capital performance.

We could see a path to get into $1 billion in fiscal 2019. And as we think about how we deploy that, we don't see much of a change to our overall philosophy on capital deployment. We will continue to remain balanced and shareholder-friendly, making sure we maintain a healthy balance sheet. Rahul did mention that in the near term we're going to increase our share repurchases this year from $150 million to $200 million.

We will pay a debt that's due, about $0.5 billion in April. We're going to prefund our pension. We anticipate doing that here in our third quarter. We will borrow to do that and as we go into '19 and beyond, longer term, not much of a change in our overall priorities.

We will continue to fund all the great investments we have internally in R&D and capital spending. We're going to continue to pay a very good dividend, which we've been paying pretty aggressively over the last decade or more. And any balance that's remaining on free cash will be deployed to M&A or share buyback. And if you think about the numbers, we will be generating probably a couple billion dollars between '18 and '19.

Gives a lot of firepower for both share-buyback as well as potential M&A.

Jon Raviv -- Citi Group -- Analyst

OK, great. Thanks for that. And then also on the CAPEX question, you mentioned that the allocation priorities might not change too much. We're seeing some other companies really get ahead of what they anticipate to be greater growth in terms of ramping CAPEX.

How are you guys thinking through your capital investment [Inaudible]?

Bill Brown -- Chairman and Chief Executive Officer

Yeah, John, the difference with Harris is that over the last five or six years we have invested in capital in the company. To go back six years, we were over $300 million, this year we're at $130 million. So, a lot of the investments that we've made were to upgrade our infrastructure and upgrade our capacity. We've got a relatively brand new tactical radio facility up in Rochester.

It's running at 60% or so utilization. So we don't have any internal capacity constraints relative to satisfying the increasing demand but what we have done is step up over last five or six years in R&D and we're doing that again, internal investments in R&D. Harris spends more on a relative basis relative to revenue more than anyone in our segment and we're taking it up even further. We've been running at about 5% of revenue, and this year we'll take that to 5.2% to 5.3%.

So we continue to invest very heavily in both R&D and over a period of time in capital spending. Our capital this year of $130 million is about 2.2% of revenue and we feel pretty good about that.

Jon Raviv -- Citi Group -- Analyst

Thanks so much.

Operator

Thank you. Our next question comes from the line of Rob Spingarn with Credit Suisse. Please proceed with your question.

Rob Spingarn -- Credit Suisse -- Analyst

Hey, good morning. I wanted to see if we could just go to your Slide 12 on the tactical comm history. You talked about, Bill, your strong first-quarter intake. You've now got record revenues in the second quarter and combining that in with the DoD backdrop you just talked about and the Mattis push on readiness, how do we see tactical comms going forward? Do you think quarterly revenues can move up from here, given that your backlog is still at record levels?

Bill Brown -- Chairman and Chief Executive Officer

Yeah, we do see quarterly revenue increasing in the back and we see continued strong growth in DoD. We had a very good start, very good orders here in the second quarter, again, a lot of it driven by readiness, quick-turn orders. As we look into the back half, we see continued strong double-digit growth. We were guiding to be up mid-teens last quarter.

We're now going to be up in the low-20s on tactical revenue with DoD, and that feels like a pretty good spot to be and we probably have what overall for tactical more than half of our second half that's currently in backlog flowing out in backlog into back half. But keep in mind on the international side, we've got a few orders in there that are longer duration, like Australia that will be rolling out over the next couple of years and we'll see part of that moving into back half. So we will see growth in the back half in international on a sequential basis. Year over year it'll be down a little bit because we're coming off pretty strong comparisons last year with good performance in Eastern Europe.

I think, overall, that's how I see us tracking over the back end of this year.

Rob Spingarn -- Credit Suisse -- Analyst

OK. So we don't see a peak in tactical comms anytime soon. That's kind of where I was going. Then I've a similar question on F-35 on your long-term outlook.

Bill Brown -- Chairman and Chief Executive Officer

We're not at a peak by any stretch on the tactical business. I think we're, in my view, certainly on the DoD side, we're at the front end of what we hope to be a steep curve that's coming and based on just what we see happening in modernization both in the Army, DoD, eventually in the Marine Corps, out of couple of years, if you look at the five-year budget and that, by the way, has not been changing very much, you'll see good ramp in DoD. We expect to capture a good chunk of that. On the F-35, we're still in low-rate production and we're on lots 11 and 12 and we're still ramping up.

So we think that that's going to continue to grow over the next couple of years.

Rob Spingarn -- Credit Suisse -- Analyst

I was going to say do you have an idea of timingwise when you would get up to the 150 ship sets per year, which I believe is what Lockheed is targeting as the mature peak rate?

Bill Brown -- Chairman and Chief Executive Officer

It's probably about a year or two from now. We're probably at the front end. Certainly on the common component side, the stuff that goes in the aircraft, we're probably on the front end. And on the release systems, we're probably on the back end, we're a lot 11.

So, they come in different pieces and ramp at different rates, but I would say on the common components, we will probably hit that a little bit faster than would be on the release systems.

Rahul Ghai -- Senior Vice President and Chief Financial Officer

Generally, we are a little bit ahead of Lockheed because, as Bill mentioned, we're [Inaudible] 11 on the release systems and 12 on the avionics. So, generally, we are ahead of the normal ramp-up [Inaudible].

Rob Spingarn -- Credit Suisse -- Analyst

OK. And then just wanted to ask, you mentioned a couple of times reinvestment. And while you said there's not a big sea change in CAPEX plans, you do have some higher R&D here and there? Could you just review the franchises that you're putting that money into? Where should we look for Harris to really be developing any incremental strengths beyond those you already have?

Bill Brown -- Chairman and Chief Executive Officer

Look, we've been investing pretty aggressively in our tactical business over the last number of years and that probably is about 35% of our IRAD spend. So, that has remained high and will continue to remain high and it will be fully funded, very, very good return. But where we're stepping up is in electronic systems as well as in the space and intel segment and both segments. They were a little bit below tactical and they're coming up quite dramatically over the last couple of years and it's going to be in like open system avionics.

So, we have opportunities to change out avionics to newer platforms as well as next-gen platforms in avionics. We're developing software-defined electronic warfare systems both for legacy platforms but also perhaps on-boarding onto the newer-generation aircrafts. We're investing in robotics. We won a pretty good-sized contract for EOD in the U.K., and we think that it's good opportunity to grow robotics beyond the U.K. to other international markets, maybe even into the U.S. DoD over time as well. And then on the space side, we've been penetrating the market for small satellites and hosted payloads. We've been winning some awards in the classified community and we're going to continue to invest to win in those areas.

These are very, very clear trends that we're seeing and we're investing ahead of the curve.

Rob Spingarn -- Credit Suisse -- Analyst

That's great. Thank you so much for the extra color.

Operator

Thank you. Our next question comes from the line Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Sheila Kahyaoglu -- Jefferies -- Analyst

Good morning and thanks for taking my question. I was hoping if you could maybe revisit communication systems and the longer term margin profile of the business. As you ramp up on new opportunities and also new business wins, how do you think of the puts and takes for the longer term margin profile?

Rahul Ghai -- Senior Vice President and Chief Financial Officer

Good morning, Sheila. So the margin, we feel good about remaining in the range that we have, that we've guided to this year. There are a couple of things that we'll kind of move around. As the volume ramps up, there will be incremental benefit from [Inaudible] just given the tactical margins being higher than the segment margins but also the mix is skewing a little bit toward more program business like that in Australia and also the fact that the DoD modernization is going to come in lower at least in the initial stages than the margins that we currently have.

So, put all that together between volume benefit and some mix shift and lower-margin DoD business relative to where we are right now in the initial phases, we feel good about where we are right now. I think that's where we expect at least '19 to be.

Sheila Kahyaoglu -- Jefferies -- Analyst

OK, got it. Thank you. And then just one more. Think, Bill, you mentioned $8 billion of proposals outstanding.

If you could elaborate on some of the big opportunities. The big one was $500 million within Iraq. If you could talk about some of the other items. Thanks.

Bill Brown -- Chairman and Chief Executive Officer

Well, it's really across the business. When I look at what's happening in electronic systems, we've got a very strong pipeline to upgrade, for example, international F-16s for EW Systems. We've got opportunities to continue to grow our business in traffic management. We've got opportunities on the avionics side.

On the space side, there is tremendous opportunities in growing in the classified community. The budgets on the classified side are growing mid single digits. In the areas where we have been competing, they're slightly better than that. We have found a good way to penetrate that and be competitive and we're seeing a lot of opportunities starting to enter our pipeline on the classified side.

So, it's pretty broad-based across the company when I look at it and of course we've got good opportunities sitting in the tactical side. The tactical pipelines are running around $2.5 billion, on the international side about $4 billion, $5 billion on the DoD side. So, look, Sheila, it's really across the company where we see good strength in the pipeline.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Gautam Khanna with Cowen and Company. Please proceed with your question.

Gautam Khanna -- Cowen and Company -- Analyst

Thanks, guys. Good morning. A couple of questions. First, I was wondering if you could give us some direction or color on cash pension contribution in fiscal 2019.

Rahul Ghai -- Senior Vice President and Chief Financial Officer

Gautam, with the prefunding that Bill just mentioned, the $300 million that we're thinking of doing in Q3, we don't expect any pension contributions now until 2025 so that we'll prefund the pension for the next several years.

Gautam Khanna -- Cowen and Company -- Analyst

OK. And just the cash flow guidance for the year, free cash flow guidance, does that exclude the $300 million?

Rahul Ghai -- Senior Vice President and Chief Financial Officer

Yes it does.

Bill Brown -- Chairman and Chief Executive Officer

No, sorry, the $900 million does not include a pension prefunding, just to be perfectly [Inaudible].

Gautam Khanna -- Cowen and Company -- Analyst

OK. How would you size the initial JTRS Manpack production award that you're expecting in fiscal Q4? How large do you think it might be between the two suppliers? Any color on how that may [Inaudible]?

Bill Brown -- Chairman and Chief Executive Officer

It's still working its way through Army acquisition and it would be for a couple of BCTs and my understanding is it could be in the range of about 3,000 units. We don't price that but it'll be about 3000 units and we do expect that it'll be split basically 50-50 between us and the other player on the IDIQ in that range. Again, it's still working its way through Army acquisition. So, we'll know more as that decision is made.

Gautam Khanna -- Cowen and Company -- Analyst

OK. And then in subsequent years what do you anticipate that to be? If it's going to be 3,000 units per year, what do you think?

Bill Brown -- Chairman and Chief Executive Officer

We think it's going to grow from there. When you look at just where the '18 budgets at, $355 million up from, I think, it was only $275 million or so last year, so the budget for HMS includes the rifleman are on an upswing. So, I would expect that revenue will ramp in '19 on the Manpack and continue to grow thereafter as really on the front end of sort of the recapitalization and the modernization of the tactical radio franchise within the Army.

Gautam Khanna -- Cowen and Company -- Analyst

I know you didn't want to talk about price but in the fiscal '18 request, you can see the government's estimate of price of around $62,000 or so per unit. Should we expect it to be far off of that mark or there's a reason to think it's going to be a lot lower?

Bill Brown -- Chairman and Chief Executive Officer

I think what you don't see is what the Army builds into those cost estimates. Sometimes it's just the radio plus accessories plus Army program-management cost, it could be vehicular adapters, it could be a variety of things. So it's not a pure number, Gautam. So I would take it with some grain of caution.

Gautam Khanna -- Cowen and Company -- Analyst

OK. Last question, on the F-35 you mentioned picking up some more content on it. Could you refresh us on what your revenue per F-35 stands at today?

Bill Brown -- Chairman and Chief Executive Officer

Yeah we're sitting today roughly at about $2.2 million per ship set and we have a number of pieces. One is the release system, so the bomb release or [Inaudible] release systems for the F-35. We have a variety of common components, meaning they're common across the three different variants -- liquid [Inaudible] and power supplies. We do the antenna as well and we very recently within the last year won the electronic unit for the panoramic cockpit display.

That was about $320 million. That's the front end of its development. So that'll on-board probably several years from now, and then we won about a year ago or within the last years, the aircraft memory system upgrade with a contract valued about $140 million. So, overall, we're running $2.2 billion, but we do see opportunities to drive that up if we're successful in winning the open system mission computer, which will be down-selected again to a final winner, one of the three down-selected companies today but the final one probably within the next couple of years.

So, we're pretty hopeful about additional content on the F-35.

Gautam Khanna -- Cowen and Company -- Analyst

I said that was my last. I wanted to sneak one more. You mentioned cash-deployment opportunities. Exelis now is well-digested, I would say.

What do you think in terms of acquisition priorities? Is there much of a pipeline as you think about valuations? Any color on what the next five years look like the company?

Bill Brown -- Chairman and Chief Executive Officer

I think, look, M&A is going to be part of what we want to do longer term. I think we did a good job at buying Exelis at a good part in the cycle, good point in the cycle, and we integrated well. We paid down debt. We paid down our pension obligation -- we're going to be at probably 85% funded.

So, we've done a very good job, I believe, in integration, managing our balance sheet. Now, we're generating very strong cash. The working capital turns have improved pretty dramatically both for Harris as well as for legacy Exelis and we're seeing that come through in our free cash guidance. As we get into next year, we'll have a little bit of debt to pay down.

It depends upon the length of time we borrow to fund the pension but it does leave quite a bit of capacity for buybacks, for M&A, and the way I look at it is, we'll evaluate things very, very carefully. The prices are relatively high. We don't need to buy anything to be scale and we think we're scale in the places we want to be. We like the position we happen to have but we'll continue to evaluate opportunities to bolt on or add to the company in the key franchise that we're in today.

Other than that, I don't think we have much more to say.

Gautam Khanna -- Cowen and Company -- Analyst

Thanks, guys. Good luck.

Operator

Thank you. Our next question comes from the line of Pete Skibitski with Drexel Hamilton. Please proceed with your question.

Pete Skibitski -- Drexel Hamilton -- Analyst

Good morning, guys. Would like to talk more about communication systems, Bill, if we could, from a different perspective and I kind of have a compound question. Well, a lot has been written on kind of the incremental Russian military threat, the ground threat and it sounds like the U.S. Army as well as Congress are pretty concerned about that.

So, I'm wondering, are you sensing recently more kind of threat-driven incremental demand in radios and, at the same time that's going on, we're hearing recently that the fiscal '19 budget could be really attractive, maybe approaching 7% growth per year over the next couple of years if you kind of average it out. So between the incremental threat out there and the inflecting budgets, communication systems, would you err on the side of the outlook for comms being close to the high single digits now than prior mid-single-digit outlook you gave or is international side, is there just not enough visibility on the international side right now?

Bill Brown -- Chairman and Chief Executive Officer

Well, I think we'll wait until we see where the '19 budget action drops and what the FIDEF looks like to say if we want to change any perspective for long-term growth in communications. I saw the same reports about the '19 budget but, again, until that actually drops, we don't know the size of it and even more importantly the mix across the different programs. But to your point about what's driving communications, tactical radio revenue, certainly last year it was a lot around investments in Eastern Europe in comms to help drive interoperability across the NATO forces with U.S. forces and that was a big part of the surge we saw last year in Eastern Europe and it continues at a pretty good pace even this year.

And when you step back and look at some of the investments that the DoD is making now today in radios and maybe even some of the hesitancy in going forward is really rethinking exactly what kind of radio comms they want, what sort of waveforms they need, what's the bandwidth, are they anti-jam, are they at low probability of interception and detection? They're thinking about it and it spills from not just communications but also to electronic warfare business, and it's a fundamental driver for why we're seeing increased investment and growth outlook in electronic warfare. It's all around how do our forces and our partner forces compete in places like Europe, given the Russian threat. So, that is the backdrop for a lot of the trends that we've seen in the business and, frankly, a lot of the investment that we're talking about that we made and are making now in our business to enhance our communications and spectrum warfare capabilities and drive opportunities here to communicate broadly, convey information but having the anti-jam so they hop very quickly as well as the LPI/LPD. So, long answer, Pete, but that's really the backdrop to what's happening, driving an important trend across all of our comms and EW businesses.

Pete Skibitski -- Drexel Hamilton -- Analyst

That's helpful. Let me ask a couple ancillary questions to that. The new WIN-T strategy as of today versus last quarter, do you have any greater clarity as to kind of what comes next post-WIN-T, if there would be an incremental benefit to Harris or same as last quarter for the most part?

Bill Brown -- Chairman and Chief Executive Officer

It's about the same as last quarter. We're working very closely with the Army as they rethink what they want the structure of the network, the architecture of the network to look like. It was a good result that they've separated the upper tactical network, meaning WIN-T from the lower tactical, meaning the radios, and they're moving forward with the radio purchases. We do have components on the upper tactical WIN-T system.

We have the radio, the high-band networking radio. We have the waveform, which is H and W. We have a new version of the waveform that's sitting out there now in the repository. I do believe that no matter what they do on the upper tactical network, there's a role for Harris to play.

I think it may be increasing as opposed to decreasing. The radio we've developed and the waveform that's been developed gives you a much faster rate of transmission. There's more nodes, it's a more mobile system, solving a lot of the issues that the Army had with WIN-T. So, Pete, on balance, I think, we're probably as good if not better-positioned on WIN-T now than we were before.

Pete Skibitski -- Drexel Hamilton -- Analyst

Very helpful. Thank you. If I could sneak in one last one, I apologize, on the EW front. This next-generation jammer, the low band, starting to see more out there on that.

Is this still early there in terms of award date and sizing and is this clearly maybe one of the bigger competitive opportunities for ES?

Bill Brown -- Chairman and Chief Executive Officer

This is one that we looked at for some time and we continue to look at it. I don't have much to say in terms of when that procurement will likely come through. It's been talked about for the last, at least, a couple of years that I've heard about it. So, we'll stay back, we'll look at it and evaluate do we participate directly or with another party in this space as we've done before on a prior opportunity on that platform.

Pete Skibitski -- Drexel Hamilton -- Analyst

Got it. Thanks very much, guys.

Operator

Thank you. Our next question comes from the line of Seth Seifman with JP Morgan. Please proceed with your question.

Seth Seifman -- JP Morgan -- Analyst

Thanks very much and good morning, everyone. As you start delivering Manpack radios to the Army and they go through risk reduction and testing, are there any sort of outstanding technical challenges and if so, what are they? Or do you feel like you've kind of gotten through all that and it should be pretty smooth testing period?

Bill Brown -- Chairman and Chief Executive Officer

I think the requirements are likely to get changed a little bit over time. Seth, to be honest with you, I think the fundamental hardware of the radio won't change but the beauty of these radios is that they are software-defined. Their features, their functionality could be changed and upgraded over time with software downloads, and we've seen that happen on the 117 G and we'll see the same thing happen on our version of the Manpack. So, the capabilities will change over time.

What we have demonstrated, and our competitors in this space have demonstrated, through the customer tests is, basic functionality of the radio, the waveforms, and what they're now testing are some of the deferred threshold requirements like the ability for the radio to use the MUOS waveform, a very complicated waveform. Now, we've perfected that in putting into the 117 G. I don't expect that to be a problem and how it works in the Manpack. So, they're just going to test on the deferred threshold requirements is what's happening right now.

But I do believe over time these requirements will continue to shift as the threat environment shifts.

Seth Seifman -- JP Morgan -- Analyst

Great. And then maybe last one, Bill, when you look at things you're considering for the organization's space acquisition in the Air Force and moving that into sort of its own dedicated area, how do you think about the implications for Harris?

Bill Brown -- Chairman and Chief Executive Officer

Well, look, we're an important player in the space side and we work very closely with our Air Force colleagues. We have very good relationships there and I think, frankly, since we bought Exelis and expanded our capabilities there and by the way improved dramatically our performance on GPS, I think our relationships there, our credibility has improved. We got a very, very strong team in Colorado Springs. It's a pretty broad-based set of capabilities, both on the unclassified as well as the classified domain and I think we're well-positioned.

If they consider moving and creating a separate space force, the way I look at this is, if you wanted to make improvements and really drive something like improvements of our space infrastructure, space architecture, separating that and making it the sole function of a part of the Air Force or separate from the Air Force, it could only drive good benefits, cause that'll drive more investment in the area and I think we would see some of the results of that. So, I think, if anything, that would be a positive for Harris over time.

Seth Seifman -- JP Morgan -- Analyst

Great. Thanks very much.

Operator

Thank you. And our final question comes from the line of Josh Sullivan with Seaport Global. Please proceed with your question.

Josh Sullivan -- Seaport Global -- Analyst

Hey, good morning. I think you had mentioned on electronic warfare side upgrades for the international F-16s. Is there any way to the size that? Is there a similar opportunity for maybe F-18s?

Bill Brown -- Chairman and Chief Executive Officer

Well, we do provide what we call, the IDECM system for F-18 that's both for U.S. as well as international variants of the F-18 and we've been receiving some pretty healthy orders very recently on F-18s for U.S. Navy and Australia, and we do see opportunities to continue to grow that. On the F-16, it'll go through the FMS process.

There is probably eight or 10 different countries around the world that use F-16s and we are the legacy EW provider on international F-16, not domestic ones. So we do see quite a long tail of opportunities to well over $0.5 billion to upgrade international F-16s.

Josh Sullivan -- Seaport Global -- Analyst

OK. And then on night vision, up double digits. It's been a legacy technology. Just what's driving that and is that sustainable going forward?

Bill Brown -- Chairman and Chief Executive Officer

Yeah it's come off a pretty long decline going back five or seven years with the wind-down of some of the wars, and I think last year we hit a bottom in fiscal '17, we were down probably 10% or so in fiscal '17, but we've seen through '17 and now into '18 very, very strong orders. Good book-to-bill backlog is coming up. In the first half, we're up double digit, Q2 was strong, we'll be up double digit for the year. A lot of it is, I mean, there are some new technologies that are being played.

A lot of it's refreshed and reset. So, tubes and goggles for the DoD as well as international partners. And there are some new technology investments that we have made and are making that will continue to see some, I think, good traction in the marketplace but I think a lot of it is refreshed upgrades of existing goggles.

Rahul Ghai -- Senior Vice President and Chief Financial Officer

And where we are seeing growth, part of the reason why we are seeing growth is because we improved our operational performance. So, our throughput is higher and we've been able to take the costs lower. When we bought Exelis, we couldn't ship the product for about a year because that thing was under Cure Notice. We've been working very hard to resolve some of the operational issues and that helped us win a very large share both domestically and some of the international opportunities.

That's driving the growth.

Josh Sullivan -- Seaport Global -- Analyst

OK, [Inaudible] that's I'll just switch over to [Inaudible] for the last one. You mentioned the Rochester facility is about 65%. How long do you think it takes you to get to the kind of 85% level?

Rahul Ghai -- Senior Vice President and Chief Financial Officer

Well, it depends on how quickly the volume ramps up and the DoD modernization kicks in. That's what's going to determine. I think the point that Bill made earlier was the fact that even with incremental DoD volume we don't see a need to make a capital investment in the facility. Business is still off its peak.

I mean, I think we did $7 billion, $8 billion back a few years. So we still have a ways to go before we reach 100% capacity utilization there.

Bill Brown -- Chairman and Chief Executive Officer

And even as we fill up the factory today, if we do hit a limit, there's things that we do in the factory that we can always outsource to effectively increase capacity in the building. So we don't have any constraints that we see in the near term or in the medium term.

Josh Sullivan -- Seaport Global -- Analyst

Thank you.

Anurag Maheshwari -- Vice President of Investor Relations

Thank you, everyone, for joining the call this morning and please do not hesitate to get in touch with me for any additional questions. Have a great day.

Duration: 53 minutes

Call Participants:

Anurag Maheshwari -- Vice President of Investor Relations

Bill Brown -- Chairman and Chief Executive Officer

Rahul Ghai -- Senior Vice President and Chief Financial Officer

Robert Stallard -- Vertical Research Partners -- Analyst

Jon Raviv -- Citi Group -- Analyst

Rob Spingarn -- Credit Suisse -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Gautam Khanna -- Cowen and Company -- Analyst

Pete Skibitski -- Drexel Hamilton -- Analyst

Seth Seifman -- JP Morgan -- Analyst

Josh Sullivan -- Seaport Global -- Analyst

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