Aerojet Rocketdyne Holdings Inc (AJRD) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the GenCorp fourth quarter and year end 2005 earnings conference all. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, February 9th, 2006. I would now like to turn the conference over to Miss Linda Cutler. Please go ahead, ma'am.

Thank you, Andrew. And good morning, everyone, and welcome to GenCorp's fourth quarter and year end 2005 conference call. Before I turn the call over to Terry, I'd like to remind you that during this conference call, GenCorp's management team may make forward-looking statements as defined by the Private Litigation Reform Act of 1995. All statements in this conference call and in subsequent discussions, other than historical information, are considered forward-looking statements. These statements represent management's current judgment on expectations for future operations. We encourage you to review the cautionary language regarding forward-looking statements, and the factors contained in our fourth quarter and year end 2005 earnings release, as well as management's discussion and analysis, and elsewhere in our most recent Form 10-K and other filings with the SEC. These statements and factors could cause business conditions and actual results to differ materially from those expected by the Company, or expressed in our forward-looking statements. Now with that, I'd like to turn the call over to Terry Hall.

Thank you, Linda, and good morning. Several years ago, the Company set out a strategy to focus on its 2 core businesses: Aerojet, which is in the Space and Missile Propulsion business, and to remediate and rezone, and ultimately monetize its real estate which is approximately 20 square miles of land just east of the City of Sacramento. In order to do that, the Company had to take a number of other actions, including shedding our non-core businesses, including Aerojet Fine Chemicals and GDX Automotive. We also had to manage a bunch of inherited legacy liabilities, including the environmental litigation that we had from General Tire, the Olin case, toxic tort litigation, retired medical litigation, and some owners contracts, including Atlas V.

In 2005, we addressed a number of these issues, including, as you can see in the fourth quarter, and we'll talk about later, paying a judgment on the Olin case of $29 million. We settled the, what we call the Southern California Toxic Tort Claims, which were personal injury claims relating to environmental issues from Aerojet's former Southern California operations. We also settled the Wotus litigation, which was General Tire retiree medical benefits lawsuit. And of course, we restructured the Atlas V agreement and took a $169 million charge. At the same time, we divested of our last non-core business, Aerojet Fine Chemicals, for $114 million. And also during the year, and somewhat encouragingly, we saw the growth of Aerojet and its revenues, up for the year by 25%, and for the fourth quarter up 38%. This was, for us, a clear indication that our strategy to grow Aerojet had worked, and was, and is continuing to work.

We also, on the real estate front obviously, today have in excess of 6,400 acres in rezoning application processes. That is over 10 square miles of property. We expect to see 2 environmental impact statements out this year, 1 for Rio Del Oro, and 1 for the Glenborough Easton Place project. And assuming that the corps of engineers timely respond to the City of Rancho Cordova on the Rio Del Oro project, we expect and anticipate that we should get final approval for rezoning in 2006. Now, it's been a lengthy process, and at times it's been a painful process. But we continue to move towards our goal of both a stronger Aerojet, and monetization of our vast real estate assets. Right now, I'm going to turn the call over to Yasmin, but I'll come back to you later and talk to you a little more about '05, and preview '06. Yasmin?

Thank you, Terry, and good morning to everyone. My remarks today will mainly address the 2005 full year performance, and mainly from our continuing operations. The fourth quarter results are included in the release that was issued this morning. Today the Company reported a 2005 total loss of $230 million or $4.21 per share, compared to a 2004 loss of $398 million or $8.82 per share. Which in 2004 loss, included a $279 million loss associated with the disposition of GDX Automotive, and a $29 million tax provision that we took in that year to reflect the uncertainty of realizing deferred tax benefits, given historical losses. The Company today reported a 2000 (sic) loss from continuing operations of $206 million or $3.78 per share, compared to a 2004 loss of $86 million or $1.91 per share.

As Terry discussed in his comments, the 2005 results include a number of unusual items, mostly driven by the resolution of a final or an interim settlement on a number of matters. Certainly, the most significant and the most disappointing being the Atlas V inventory write-off of $169 million. We also recorded a charge for the Olin litigation of $29 million. We recorded a charge earlier in the year for $18 million for our recapitalization efforts that we commenced in late 2004 and concluded in 2005. We settled our toxic tort cases in Southern California. We recorded a net charge for $2 million for that. And then, finally, we settled our retiree medical litigation, which consisted of several hundred cases, and we settled that in 2005 for a charge of less than $1 million in 2005. There may be additional charges incurred in connection with the Wotus case, or the retiree medical case, in future years over a number of period, and the range that we have given for that is 12 to 18 million as previously disclosed.

On the favorable side, we did record tax benefits of $29 million, and you see those reflected in the income statement. We also resolved some insurance cases, and then we also settled some monies due our customer for tax refunds that we received back in 2001. These settlements resulted in $12 million of income, and that benefit is reflected on the $37 million charge you see included for the full year in the 2005 results. On the good news side, we closed our Fine Chemicals transaction, which certainly took us longer than we had hoped. But we did close it on November 30th, 2005, for a total purchase price of $114 million, which consisted of $88 million of cash received on closing, and a seller note of $26 million. We received $88 million of cash on closing.

In addition, we received another $20 million, which represented capital expenditures incurred in 2005, and certain working capital investments made. This purchase price and these proceeds are obviously subject to post-closing adjustments. On the seller note, we recorded a reserve against the $26 million of note, and we'll record income in the future as we realize collection of that note. And lastly, on the good news side, as part of the GDX restructuring that we announced in 2003, we closed 1 of our French plants that was owned by GDX, and was not part of the disposition of GDX. We actually sold this plant in November, 2005 and recorded income of $2 million received cash for that, which is reflected in discontinued operations. As you can see, a number of significant issues, a number of uncertainties dealt with in 2005. And we believe as a result of these, that the Company, going forward, and the number as we go forward, will be much more reflective of the 2 core businesses, Aerospace and Defense and Real Estate.

Looking at the numbers for continuing operations in a little more detail, in 2005 we generated sales of $624 million compared to $499 million in 2004, with Aerojet driving the increase. Aerojet's sales were $617 million in 2005, compared to $492 million in 2005 -- 4, representing a 25% increase. Now, included in these sales numbers are the Atlas V sales of $84 million in 2005, and $13 million in 2004. Aerojet's operational performance in 2005, excluding the Atlas V write-off, retirement benefit plan expense, and the gains -- unusual gains of $10 million was solid, at 10.5% return on total sale, excluding the Atlas sales.

Switching to the Real Estate segment, we didn't have any significant Real Estate sales transactions in 2005. The segment performance was $4 million, reflecting the on-going leasing activity, which is fairly steady state. 2004 segment performance had included the sale of the light rail station, the land for the sale of a light rail station, and certain mining rights that we had entered into in 2004. Operationally, looking at the Real Estate side, we continue to make steady progress in reaching our entitlement goals, I think which Terry will comment on further in his comments.

The other major element of our income statement is certainly retirement benefit plan expense. In 2005 we recorded $48 million in total, which as previously I've talked about, these expenses are mostly non-cash expenses. Interest expense in 2005 declined to $24 million, from $35 million in 2004. This improvement reflects the impact and the proceeds from the sale of the GDX business primarily, which we received in 2004, and also the recapitalization activity that we undertook in late 2004 to reduce our interest expense.

Next, I'd like to turn my comments to debt and cash flow. Our debt position at the end of November-- net debt position at the end of November -- end of the year at November 30th, 2005, was $353 million, compared to $308 million at the end of last fiscal year, representing a net cash use of $45 million. I'd like to take you through the major elements of this cash use. First of all, we had an Olin payment of $30 million, a discontinued operations used cash of $41 million, some of which we recovered upon the disposition of AFC as I previously talked about. Our recapitalization costs cost us 16, and we used $66 million in continuing operations. This 153 usage was offset by 108 million of proceeds upon the disposition of AFC, netting to a net use of $45 million.

Continuing operations cash flow of $66 million big picture, consists of $20 million used in capital expenditures, $29 million for interest payments, $14 million associated with retiree medical matters, legacy matters, and also some legacy environmental matters that are not recoverable under the Aerojet Global Agreement. The net $3 million of remaining cash used in operations primarily reflects cash Aerojet and offset by corporate uses, and Real Estate was close to break-even. While on the topic of cash flow, I think I'd like to comment a little bit more on Aerojet's cash flow, and why it's not at the level we would like it to be, and we would certainly like it to be cash flow at level of EBIT. And I think as we've previously talked about in Aerojet, we're dealing, we've been dealing with certain legacy issues there too, which should see resolution in 2007. And certainly in 2006 we're making progress to that. As we've talked about previously, some of Aerojet's cash has been hampered by payment of advances that we had received in earlier years, primarily on the Titan program, where we're working those off. And that's cost us probably somewhere in the range of 5 to $10 million.

Atlas has certainly been a user of cash in prior years. That's behind us now. We don't expect it to be a user of cash going forward, other than what we've talked about when with issued the press release on Atlas, saying we may incur up to $10 million of cash in 2006 and 2007 on Atlas. Aerojet also, on its environmental side, also has to fund the 12% of environmental expenditures that are not reimbursed under the Global Agreement. And that costs us a little bit in cash, especially as we're running at a fairly high environmental expenditure in the last couple of years, as we spend a significant amount of money to get our site remediated. The next investment in Aerojet is we're investing a little bit in working capital, as Aerojet's sales continue to grow, and it's been somewhere in the range of $5 to $10 million in 2005.

Looking forward at 2006, I think, as I talked about, we incurred a favorable settlement on some monies due to the customer as a result of refunds that we had received back in 2005. The good news was that it was a good recovery. The bad news is we will pay that cash out in 2006, and expect that to be in the range of 12 to $14 million. At the end of our fiscal year, we had cash balances of $91 million, and an undrawn revolver of $80 million. We believe that the existing cash balances and available borrowings under our revolver are more than sufficient liquidity to support our cash needs as we go forward, and as we make progress towards positive cash flow, and certainly our Real Estate entitlement objective.

Next I'd like to spend a few minutes commenting on the internal material weakness we discussed in the release that was issued this morning. This will certainly be discussed in the 10-K that we hope to file in the next couple of days. The primary issue that gave rise to this, was as we were integrating and migrating our ARC acquisition to common Aerojet policies and disclosure statement basis, which is certainly a very complex process, there was a miscommunication that occurred that will result in us requiring us to restate Q1 of 2005, to report $2 million less in sales and $2 million less in profit. This all turns around in 2005, and the full-year 2005 numbers are not affected, in that all of the 2005 numbers that are reported here to you today, reflect this. The next thing, unfortunately, that happened, was as part of our GDX divestiture and wind down of that business, we should have reported $1 million more in currency gains in the discontinued operations in Q2. We will be restating Q2 in the 10-K that we file, to reflect this adjustment as well. Again, this is a number that corrects itself in 2005, and the numbers, as reported to you today, certainly reflect that.

Given these 2 issues that occurred in assessing the effectiveness of our internal controls of our financial reporting, we concluded that the control structure to communicate information in sufficient detail, as it relates to these complex, non-routine transactions, was inadequate and resulted in the noted material weakness. We take this very, very seriously, and have implemented a number of efforts to assure that this does not occur in any future periods, and as we go forward we are stronger. With that, I would like to turn my call back to Terry for further comments.

Thank you, Yasmin. I'm going to spend a few minutes talking about '05, and then we'll move on to talking about what we see in '06. In '05, obviously it's impossible not to talk about the legacy liabilities. And while Yasmin's gone through them, I want to spend a couple minutes just making a few brief comments on them. Obviously, this is something, and these liabilities are something, we've had to live with for a number of years. A lot of them occurred in the period between 1963 and 1999. We had satisfactory conclusions to a number of them, including the Southern California toxic tort litigation, and the Wotus litigation. We had unsatisfactory conclusions to, obviously, the Olin environmental litigation that dates from the 1960's, and Atlas V. So I'm going to spend a little time on Atlas V.

The Atlas V contract, as some of you know, was signed in early 1999 and actually negotiated in 1998. At the time, the contract was deemed extremely important to Aerojet, simply because it was Aerojet's last chance of remaining in the large, solid rocket motor business, both strategic missiles and strap-on boosters. Strategic missiles are things like intercontinental ballistic missiles. That's a market that is dominated by Alliant Techsystems. At the same time, the Company apparently was also worried about being able to cover environmental liabilities, and therefore had an extremely aggressive bid on Atlas. That bid assumed lower development costs than we actually experienced; it assumed that we would see velocity and scale, in terms of all 96 motors being manufactured. The scale -- the velocity of deliveries would give us a reduction in cost, and the scale would give us 96 motors over at which to amortize the costs of development.

It turns out that those assumptions were wrong. And what we have been -- what we attempted to do was renegotiate the price to get affirmation of the number. And obviously, we had hoped for a greater velocity of motors coming through our plant. We were only successful in getting a price increase. Obviously, the market has not demanded the amount of motors that were originally contemplated when this contract was entered into. We have negotiated a contract, which going forward, does not, in our belief, expose us to losses as long as we perform on the contract. We're not assuming cost reductions, based upon learning curve or based upon velocity. And therefore, we think that we have improved the Company's position. However, obviously, it is very painful for us, and it continues to be, to take a $169 million charge.

Having said that, let's turn to what we see at Aerojet. At Aerojet, really 2005 was the breakout year, or the year that they really affirmed that our strategy of growing Aerojet through acquisitions, and where we had positioned Aerojet in the marketplace, was working. We saw Aerojet grow by 25% year-over-year, in terms of revenue, and 38% year-over-year in terms of fourth quarter, compared to the fourth quarter of 2004. Why is that occurring? We think we are extremely well positioned in the marketplace. We are in, and have attempted to position ourselves in areas which are somewhat insulated from the budget risk in the budget cycle.

Now, I think all of us in the Defense business were somewhat pleased by the President's proposed budget that came out. But I think it would be unwise for any of us to expect that Government spending will continue to increase at those kinds of rates over the long-term. Therefore, it's been our strategy to put Aerojet in strong positions on platforms and programs that will -- the Government will continue to be required to spend on, even if the budget, the Defense budget, has to get reduced. And those areas that we have focused on, obviously, are tactical missile, and in-space propulsion.

On the tactical missile systems, we basically are on programs which are, and products which are, being used, so we're seeing replenishment. Things like TOW, [HACMS], ATACMS, Javelins, Tomahawks. We also seem to be winning most new generation, more flexible, tactical missile programs. We're on MLRS, NLOS, joint common missile. And we're on a number of very, very good programs that are being upgraded. Things like Patriot, Standard Missile and [THAD]. At the same time, we seem to be getting most of the Government's funding on hypersonic programs, programs such as SSST, HyFly, and our focus on hypersonics has not been going 10 times the speed of sound, but trying to get to 3 to 5 times the speed of sound. Things that in the short-run will be useful, and more likely to get funding from the Government.

In terms of our commercial business, we see some recovery in the satellite, commercial satellite program, but it's going to be slow and not dramatic. At the same time, obviously the big opportunity for us is NASA space exploration, both manned and unmanned. We see opportunities in exploration. And you saw our hardware on Cassini, on the Mars, on Deep Impact, on almost -- on every program that NASA flew this year. In fact, on the Pluto mission, which just launched last month, we had over 36 motors and engines on that platform, which is the most we've ever had on any robotic exploration mission by NASA. We continue to watch closely the manned part, the replacement for the Shuttle, the Crew Exploration Vehicle. We think we have a great opportunity to increase the share of our NASA business on manned space. Currently, we're about $5 million a year on the Shuttle, and we see opportunities that should increase our content on the new replacement for the Shuttle as it goes forward. Having said that, the pace at which the CEV, or Crew Exploration Vehicle, will come into fruition and how it will affect our revenues has been slow. And we are carefully watching what NASA is doing. And hopefully, we'll see some small incremental growth in our revenues from that for this year.

In terms of '06 guidance for Aerojet, we historically have not given specific guidance. I think it is fair to say that we do not anticipate that sales will be up year-over-year in '06, primarily driven by the no Titan launches in '06, and lesser Atlas sales. We expect post-'06, that we'll continue to see a growth in Aerojet revenues, based upon what we can see today, and what we can see from budget proposals and suggestions from the Government.

Now, let's turn to Real Estate. Obviously, in Real Estate we are dealing with both remediation of land, and removal of environmental restrictions, and getting rezoning authority for commercial and residential mixed use developments. It is a lengthy and sometimes frustrating process in California. However, we all recognize that the key to us seeing and realizing the value on our property, is getting entitlements or getting rezoning. Where we are on our projects, let's talk about Rio Del Oro first. Rio Del Oro is the 2,700-acre project where the zoning authority is the City of Rancho Cordova. We are waiting for the EIR to be released from the city. It is past our original schedule. The delay has been driven by, not the city, but by the U.S. Corps of Engineers, who are required under federal law to issue an environmental impact statement as part of the environmental impact review. We are waiting for that.

The Corps basically has to comment on mitigation requirements for endangered species. And on our property, we have 2 species that are on the endangered species list. One are fairy shrimp, which live in mud puddles, when there are mud puddles. And the second is the valley -- the long-horned valley elderberry beetle, which lives in elderberry beetle trees or bushes. The issue is always how much land will have to be set aside for these species, and where will that land be set aside. The city has told us they expect to get those comments this quarter, and they expect to be able to put out more comments of the EIS by the end of March. If that occurs, then we still anticipate that we will see entitlement approvals by year end.

The next project that is scheduled for entitlement is the Glenborough Easton Place project. It's approximately 1,385 acres. It is in the County of Sacramento, as opposed to the City of Rancho Cordova. So the county is the rezoning authority. Where we are on that is the county started preparing the Environmental Impact Review required by state law in June of '05. Typically, these things take about a year or so. We expect the EIR to come out for comment the last half of 2006, and we're still expecting entitlement approval for that some time in 2007. So far, we've not seen any large issues come up on that project between us and the county, and we are quite hopeful that that's going to proceed at an appropriate pace.

The third project that we're working on is what we call Westborough. It's another 1,654 acres. There, the rezoning authority is again, the City of Rancho Cordova. They tell us they expect to begin drafting the EIR in the next few months, which, if you follow the schedule, would put out the EIR in 2007, with entitlement occurring in 2008. We also mentioned in our press release that we are in discussions, along with a number of other land owners, with the City of Folsom, which is the municipality that is just to our east and north of our property. They are talking about, in total, annexing an additional 3,500 acres into their city, of which 625 acres are our property. And while it's too early for us to give you any estimation as to how long it will take to do an annexation and a rezoning, it is now in the pipeline, and in total, increases the amount of property that we are processing. It is something in excess of 6,400 acres, which if you put in square mile terms, is approximately 10 square miles in property.

So we've come a long way from all our property being environmentally restricted and none of it being zoned, or in the process of being zoned for development, to the point where we believe we're the largest project, certainly in California in progress, at this time. Now, obviously, we don't control the city entities or the county. We don't control the Corps of Engineers. But we continue to push along for rezoning, and we continue to see that we believe our schedule can be met. It has been already a long and lengthy process, and we have more time to go before we get zoning that we need in order to develop the property. We can not predict the future, but we have made a great deal of progress towards our goals in the last 12 months. We expect to see even more progress going forward. And with that, I would open up the call for questions.

Certainly. [OPERATOR INSTRUCTIONS] Joseph Nadol, JPMorgan.

Thanks. Good morning, Terry and Yasmin. I'll group my questions into 2 categories, 1 financial and second real estate. So, starting on the financial side, you've given us sales guidance, rough sales guidance for 2006. I was wondering if you could help out with margin outlook and cash flow outlook?

Joe, I think when we're looking at margin, we've obviously, if you take a look at the Atlas sales and exclude the Atlas sales, our margin performance was solid for '05. We are certainly going to aspire to double-digit margins, excluding the Atlas sales. Now, whether we can get there or not, is really depends a little bit on what we see coming out of NASA to some extent too. And our mix is a little bit different coming into '06, okay? Because we've got more R&D work coming in in '06 too. And as you know, when you've got R&D work, generally your margins are a little bit lower than on fixed price production contracts that has been around for a long time, like the Titan contract. So that's kind of what our objectives are, in terms of the margin.

I think in terms of cash flow, looking at cash flow, we're still continue to be what I would call as being challenged in 2006, in that we've got Aerojet not producing cash, where we would like it to produce to, given some of these issues that I talked about, payment of this monies back to the customer, continuing to incur a high environmental expenditure, that hurts us a little bit in the non-allowable part. And then also payment of these advances going on. And then essentially, you've still got your corporate expense, you've got your interest cost to cover, and you've got your retiree legacy medical costs to cover. So those are the elements.

So when you net it all out, can you give us a range of operating cash flow, or free cash flow, outflow and for the year?

I think if you look at the net range, it's going to be fairly broad. Certainly any kind of, absent any kind of real estate transaction, which as you know, we're looking into, it's going to be negative quite a few million. But if you look at it, Aerojet is the cash provider, you've got the elements of Aerojet, and then they've got to cover interest, and interest runs about 6 to $7 million a quarter. You've got legacy retiree medical costs running 10 to $12 million a year, and then we've got the monies due back to the customer, so. If you balance it out, we're probably looking, north of negative cash flow, north of 30 to $40 million in total.

That's after CapEx, too?

Yes.

Okay. And then in terms of pension cost running through the P&L in 2006, do you expect that to remain roughly flat, or up, or down?

It should be about the same.

And funding level at the end of the year?

Yes.

Was?

We've incurred $48 million in '05, in total.

Right, but were you fully funded at the end of 2005?

Yes, yes, yes.

Okay. And then 1 final financial question. You mentioned that you're taking actions on the internal controls to sort of resolve that issue. Can you give us any color in terms of implementation of any new systems that you're looking at, just where you are there?

We have recently announced the hiring of a Vice President Controller for Aerojet. We're looking at adding a few more people to it, and just evaluating all of the processes and controls, and looking at them to make enhancements and see if we have to make any enhancements as necessary. But in terms of systems at this point, we're not looking at doing a major overhaul of any kind of ERP systems, or anything like that.

Okay, and then just a couple questions on the Real Estate side. We've seen the press release you issued before on Rio Del Oro conversations, and you reiterated that again today. Terry, is there anything you can tell us in terms of, I guess one, is this exclusively Rio Del Oro? Or does it possibly involve the other pieces of land that you have in the pipeline? And secondly, any other sort of color in terms of any kind of structuring that you can give us?

Joe, I can't say a whole lot. I think where we are is obviously, we are getting very close to entitlement. And either prior to getting entitlement or post getting entitlement, we are going to have to do something, or partner with someone who can help us going forward, in terms of infrastructure and actually monetizing the property as it becomes available. And so we are at that point in time in our strategy where we're starting our discussions with a number of people, and we haven't put anything or taken anything off the table, or put it on the table, other than we want to get the most value that we can for our shareholders on the property, and we'll see where it leads to. Obviously, we think we have an asset that has value, and there is a fair amount of interest.

Okay. Can you give us any color on your degree of confidence that the EIR will be released in March? I mean, you a month now you've given us. So clearly you've gotten some sort of more specific guidance than you've gotten before.

Here's the issue that we see. The city has told us that they will release the EIR at the end of March. The question will be whether the EIS portion of it, the Federal portion from the Corps of Engineers, is included in it or not. They have been, much more than us - and I have to compliment the city - has been pushing the Corps to provide the information that the Corps is required to provide. How successful they'll be, will drive whether we have both the EIR and the EIS out in March. They've had meetings with our Congressmen and Congresswoman in the area. They've had -- Congresspersons have had meetings with the Corps. So they're taking a very active role, the city, in pushing this. And we will obviously assist in any way we can. But it's ultimately, whether we meet the schedule or not, is ultimately going to be driven by the Corps of Engineers, and whether they're responsive or not to the city.

And even -- they're going to release it by the end of March either way. But state law requires you to have this EIS no matter what the city does, that's-- ?

That's right.

Okay. Okay, I'll let others ask questions. Thank you.

Doug Francis, Sowood Capital.

I just had a quick question about any progress that you might have made on the tax ramifications of the land, and exploring more tax-efficient structures, as we get to the point where we're actually going to start to monetize this land?

Well, it obviously weighs heavily on our mind, as we discuss any of those potential transactions with anybody. I think we've told you in the past, and it's still true, that what we have is, we have a capital NOL. And so in part, for us to utilize that, we will have to make sure that we have a capital gain or capital transaction, and that is certainly a top priority in anything that we do. Other than that, there's not a whole lot I can say about it, at this point in time.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Eric Stevenson, Hunter.

Would there be any impact on your audit opinion from this internal reporting issue?

No, Eric. We don't expect as far as the audit on the financial statements, we get 2 opinions. One is the audit on the financial statements, and we don't expect any opinion on that.

Well -- .

The other is we give an opinion, management gives an opinion, on the internal controls over financial reporting, and then E&Y opines on that. And that's where we, in that opinion which we will report the material weakness. And then E&Y will give an opinion on our opinion.

So what we have is an unqualified opinion on the financials, and on the Oxley Sarbanes 404, basically, we have this other issue.

Good. All right. Thank you.

[OPERATOR INSTRUCTIONS] And at this time, sir, we have no additional questions. Please continue.

All right. Since we have no additional questions, I will thank all of you for being on the call. We will talk to you at the next earnings call. And we look forward to what we see coming in 2006. So thank you, and good day.

Ladies and gentlemen, this conference will be available for replay after 11:30 a.m. Pacific Standard Time today, through February 23rd, 2006, at midnight Pacific Standard Time. You may access the AT&T Executive Replay System at any time by dialing 1-800-475-6701, and entering the access code: 817986. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844. Access code 817986. That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.