Leonardo DRS Inc (DRS) 2002 Q4 法說會逐字稿

Good day and Welcome to the DRS Technologies fourth quarter conference call. At this time, all participants are in a listen-only mode. After opening remarks from Mr. Mark Newman, Chief Executive Officer and Mr. Richard Schneider, Chief Financial Officer, there will be a question and answer session. At that time, if you have a question, press star one on your touch-tone phone. I would now like to turn the conference over to Miss Laura Eclair from Taxing Company for Introductions. Please go ahead.

Thank you, Denise. Good morning and welcome to today's conference call to review the fiscal 2002 fourth quarter and year end call for DRS Technologies. I'm Laura Leclair, with Taxing company. If you haven't received a copy of today's release, call me at 212-521-4859 and one will be faxed to you. Again, the number is 212-521-4859. Hosting today's call will be Mark Newman, Chairman, President and Chief Executive Officer of DRS Technologies. And Richard Schneider, the company's Executive Vice President and Chief Financial Officer. Before we begin, I will read the Safe Harbor statement under the private securities litigation reform act of 1995. Except for historical information discussed today, the matters discussed are considered forward-looking statements. The forward-looking statements set forth involve a number of risks and uncertainties that could cause actual results to differ materially for many such statements and include without limitations demand in competition for the company's products and other risks and uncertainties detailed in the company's Securities and Exchange Commission filings. I would now like to turn the call over to Mark Newman. Mark, if you're ready, you may begin.

Thanks, Laura. And good morning and thank you for joining us today. Earlier this morning we reported record financial results for the March quarter and 2002 fiscal year. New records were established in the fourth quarter revenues, operating income, ebitda, earnings and bookings. Our core defense business areas were strengthened with sizeable new orders, especially in our electro optical systems and display work stations product line. We ended the period with almost $600 million of funded contract backlog, a new year-end high. Fiscal 2002 was an outstanding year by all measures. We met or exceeded our performance targets and continued to deliver higher margins in addition to robust top-line growth. Revenues exceeded the half-billion mark for the first time and we achieved record operating income, ebitda, earnings and bookings. Diluted EPS was $1.41, with strong profitability contributed by each of our operating segments a record amount of new orders included multi-year contracts for development and production Work. Many of these new programs have long-term potential and strategic significance for the company's future. In some cases we went up against some formidable competition. These awards speak highly of our people, our technical expertise and our customers confidence in our ability to develop, build, integrate and deliver critical military systems. During the year, we completed a major acquisition and realized the benefit of sales and income from sales on associated with the transaction. We look forward with great anticipation to completing the integration of DRS sensors and targeting systems, former Boeing business into our electro-optical systems group in fiscal 2003. We also saw stronger operating performance in our flight safety and communications group enhanced by increased sales and ship and data communications products, high-speed digital cameras and higher demand for space-related manufacturing services. Facility consolidation and efficiency measures to improve systems during the year, also benefited profitability. Noteworthy for the fiscal year was our effort to focus on increasing operating margin overall, which improved 9% over last year. Our equity offering in december placed $3.8 million additional shares of DRS common stock in the marketplace and provided net proceeds of $113.6 million to the company, strengthening our cash position and providing the necessary resources to continue our ongoing acquisition program. A key component in our strategy for growth. This, along with the aggressive steps we took to expand our borrowing capacity with a new, lower rate, a $240 million credit facility has positioned the company for the next phase in our growth. Without question we have entered the new fiscal year from a position of strength. Our record year end backlog provided a solid base of core defense technology business with which to start the new fiscal year. And fiscal 2003, look for us to remain active on the acquisition front, given that large defense contractors are continuing to spin-off non-core or non-essential businesses unrelated to their strategies and that the defense industry is still populated with specialty companies looking to join forces with greater resources. We believe many opportunities exist for us to supplement our organic growth with acquisitions. After the close of the fiscal year, we announced our acquisition of the u.S. Portion of the unmanned aerial vehicle businesses of mega defense systems, Texas. Though a very small acquisition it allows us to participate in the growing UAV markets, supporting special military and civil applications. This new business provides us with an opportunity to build platforms and incorporate our own technology in computer display systems, targeting systems, high-speed digital cameras and data recording and communication systems. It is generally believed that UAV's will see increasing use in this decade, for penetrating hostile environments, Significantly redefining the role of aerial surveillance, intelligence gathering and combat missions. Also in April, we were pleased To announce our move to the New York stock exchange. This is a good step in enhancing our visibility in the marketplace as well as giving us a more competitive and attractive currency that's help to achieving our vision for growth. Outlined in the news release this morning were the major contracts booked during the fourth quarter.I would like to take a moment to provide a little more information about some of them now. First, the US Army awarded DRS several sizeable orders during the quarter to provide advanced infrared sighting systems on a variety of military platforms. These included $29 million in contracts for the improved Bradley acquisition sub system. $17 million for the long range advanced scout surveillance systems and $29 million on the horizontal technology integration program to update the Bradley fighting vehicle, and the Abram's main battle tank, which are considered the most advanced ground combat vehicle in existence. The leading edge technology we provide to the platforms continues to the strategic responsiveness and capabilities of the US Army, These core ground systems programs position DRS as a primary army supplier of high performance infrared detectors and clearly recognize DRS as an industry leader in advance folic plane or ray technology for the defense, electronics marketplace. These three programs form the basis of our ground electro optical systems business and directly support the Army's battlefield strategy for the 21st century. Secondly, we were awarded approximately $19 million in new orders on the mass mounted site program. For these contracts, DRS is building the thermal imaging sites installed on the Army's [INAUDIBLE] warrior helicopters. They provide target detection as greater ranges, allowing around the clock missions and also keep the helicopter outside the acquisition range of threat and greatly enhance the survivability factor of air and ground troops. This production, service and support program is expected to be well-funded for many years to come. Work on the mass amounted site, along with contracts to place forward-looking [INAUDIBLE] sensors on the Apache helicopter have securely placed DRS and the airborne infrared sensor systems market. Lastly, we received approximately $30 million in new contracts from Lockheed Martin to support the US Navy UIC-70 advanced display systems program. The tactical computer work stations built under the new awards are slated for [INAUDIBLE] surface combattants and other ships, like the Navy's new Virginia class attack submarine. Significant engineering work for the contracts is focusing on providing life cycle support and product improvements for existing Q-70 systems and peripherals. Key technology upgrades are providing -- we are providing include new internal and secure and non-secure communications , thin client work stations and new computer aided [INAUDIBLE]tracers to replace first generation and older [INAUDIBLE] tracers. These upgrades will support internal ship communications and the display of navigation and integrated warfare information. The Q-70 work stations provide rapid data exchange between cooperative forces and are the cornerstones in the modernization of the Navy's network center tical warfare environment for sea land and airborne application. These systems are for the ideal approach to cost-effective combat system evolution, our long-term participation on the program positioned DRS as the leading world supplier for combat display systems and advanced ship technologies. Before going to Richard Schneider, I want to mention last month we were honored to receive the 2002 [HERSAL] award. We received the award for our vertically-integrated {INAUDIBLE}infrared technology. The award highlights the importance of our EO technology to the department of defense, particularly as used in such products as the Javelin Missiles launch unit, the standard advanced [INAUDIBLE] or Sata-2. It also underscores our leadership position as a significant supplier to the US Military for high-performing infrared detectors. The technology is critical to the development of large, staring focal planetaries as well as two colors and avalanche photo dialed infrared solutions for future missile warning and missile systems. The [HERSAL] award represents an outstanding endorsement of achievements for the development and [INAUDIBLE] technology in the last several years. The receipt of the prestigious award is a real tribute to the people at our DRS infrared technologies unit in Dallas, Texas. Now I'd like to turn the call over to Rich.

Thank you, Mark. As the news release indicated this morning, DRS results for the fourth quarter and fiscal year were very positive, establishing new records for the company in all significant metrics,[INAUDIBLE] in both strong revenues, increased profitability and improved margins over last year. Record revenues were 21% higher for the year and 20% above the fourth quarter compared with prior year periods. Primary drivers were the addition of sales from programs related to the acquisition of the Boeing business and overall increases in product deliveries in each of our operating segments, especially in ground vehicle and EO sighting systems. Our continuing focus on increasing operating margins throughout fiscal year 2002 yielded a significant improvement over last year's fourth quarter and the previous fiscal year. Operating margins rose from 9.1% to 9.9% for the quarter and from 8.8% to 9.6% for the year. Record operating income jumped 32% in the fourth quarter and 33% for the full year compared with the prior year. These increases were due to higher sales volume overall and improved margin program performance in flight safety and communications group. Ebitda increased 26% and 18% for the three and twelve-month periods respectively over last year. Significantly, net earnings increased 51% for the quarter and 70% for the year. While diluted EPS rose 20% for the quarter and 40% for the year, compared with the same period last year. Both periods in fiscal 2002 were impacted by the 3.8 million shares issued in the company's December, 2001, equity offering.Taking a look at the results of our three operating groups, I'm pleased to report that all three groups reported significant increases in revenues and operating income. Revenues in the electronic systems group increased 11% to $207 million for the fiscal year, due in part to the addition of $8 million in sales from DRS surveillance support systems as a Result of the acquisition of this operation in the second quarter. Operating income was up 18% to $18 million, reflecting an improved operating margin of 8.7%, up from 8.2% last year. The group booked 195 million in new contract awards for the fiscal year, which included strong orders for Navy tactical work stations, rugged computers used by the US Army and electronic manufactured services for the Bradley fighting vehicle. For the quarter, sales were $62 million, 8% higher than the is same three month period in fiscal 2001. The group's operating income was lower by 10% for the quarter, reflecting a $1.5 million loss at the group's rugged systems unit in the United Kingdom, offset by strong margins at all of the group other operations. Backlog at the end of the quarter was down slightly due primarily to lower orders in rugged products and radar systems. The company's UK unit captured new awards during the period for multi-functional sonar consoles with long-term potential on European platform Upgrades, including European mine hunters. These new programs coupled with the facility consolidation and cost reduction measures implemented during the year should return this unit's profitability in fiscal year 2003. The electro optical systems group posted record sales, operating income and bookings for both periods and entered the first quarter of fiscal 2003 With a higher backlog than ever before. Revenues and operating income for the year were up 41% and 16% to $208 million and $27 million respectively with a healthy operating margin of over 13%. These results reflected the addition of six months of sales and income from programs associated with the acquisition of the Boeing sensors and electronics systems business. Also contributing to the increases were strong performance in the groups ground sighting systems product line as well as electro optical technology product development. Orders valued at $264 million were received during the year, pushing backlog to a high of $325 million on March 31st. Fourth quarter revenues were $66 million, up 59%. Operating income was $10 million, up 76% over the fourth quarter a year ago. The group's operating margin Improved 11% over the same period last year, rising to 15.7%. Strong operating performance in the quarter reflected additional sales and income from programs related to the acquisition, in addition to favorable margin on ground vehicle sighting systems programs. Bookings were up substantially to $111 million for the quarter, compared with $32 million last year. High demand in the quarter for electro optical products and services, especially in the ground and airborne infrared sighting systems lines, resulting in record bookings. $94 million of the $325 million in backlog was associated with the acquisition. Our flight safety and communications group reported record revenues and improved profitability, along with record bookings and backlog for the fiscal year. The group hosted a 12% Increase in sales to $93 million for the year and $5 million in operating income, representing a 5.5% margin compared with a $747,000 loss last year. Improved performance was the result of higher shipments of data communications products and ultra high-speed digital cameras as well as increased demand for manufacturing services. The group's performance also reflected the benefit of reduced expenses and operating efficiencies as a result of facilities consolidation during the year. Bookings were up 11% to $109 million over the prior year and backlog increased 15% to $121 million at year end. In the fourth quarter, the group reported sales and operating income of $26 million and $170,000 respectively. As announced on Friday, DRS Photo electronics, which reports its operations is part of the flight safety group, recorded a one-time charge of $2.5 million during the quarter, relating to a litigation settlement. Without the charge, the operating income would have been $7.6 million and Operating margin at 8.1%. The $23 million in new orders for products and services in the fourth quarter pushed year-end back logs to a new high of $121 million, 15% Above last year. The total value of new contract awards received by DRS during fiscal 2002 was a record $577 million, 21% higher than last year. These orders boosted funded backlog at March 31st to a year-end record of $595 million, 30% above the $457 million in backlog reported at the same time one year ago. The balance sheet at year-end reflected a stronger financial position than at the beginning of the fiscal year. Cash and cash equivalents of $118 million at March 31st compared with $2.3 million at the same time last year, reflected the favorable effect Of the equity offering completed in December. A portion of the proceeds was used to re-pay existing debt associate with our revolving credit facility. Total debt at March 31st was $140 million, compared with $83 million at the end of the last fiscal year. The increase was primarily attributable to the acquisition of the DRS [INAUDIBLE} electric systems operations at the end of the second quarter. Stockholders' equity increased 130% to $257 million, primarily as a result of the equity offering in December, which placed an additional $3.8 million shares in the marketplace. The company's ratio of total debt to trailing 12-month ebitda at March 31st was 2.3. Well within the comfort range of our bank credit group. Our debt to equity ratio improved to .5 as compared to .7 at the same time last year and our net debt to equity ratio was less than .1, Free cash flow, defined as cash flow from operations less capital expenditures was $10.8 million in the fourth quarter and $13.7 million for the entire fiscal year. I'd now like to turn the discussion back to Mark.

Thanks, Rich. Now, fiscal 2002 was a great year for DRS. We met or exceeded performance targets, delivery higher margins and growing our top line. Strong demand for our products and services provided a solid base of backlog as we enter fiscal year 2003, a backlog more diversified today than ever before. As the number one or number two industry leader in our most important core technology areas, DRS is responding well to our our customers, Interest in our products and services. We're competing for and capturing important new contracts, several of which are related to sizable, long-term programs. Defense spending is increasing in areas in which DRS is participating. We believe our prospects for internal growth in fiscal year 2003 and beyond are excellent. In addition, the defense industry remains rich with acquisition students opportunities. With our cash position and credit facility, we have sufficient resources to continue to evaluate and consummate transactions to supplement our organic growth and provide winning business combinations, acquisitions remains the key part of our growth story. This concludes our prepared remarks and we will now be happy to take your questions

Today's question and answer session will be conducted electronically. If you would like to ask a question, do so by pressing the star key followed by the digit one on your touch-tone phone. Again, that is star one to ask a question. We'll pause a moment to assemble our roster. We go first to Sam Pearlstein, Wachovia Securities.

Good morning.

Hi, Sam.

Hi. How much did the boeing sensors business actually contribute in the quarter,terms of revenues?

Since we did it, if was

What, about $40 million? )) Roughly.

Yeah, roughly $40 million in revenue.

You mean in the six months.

Yes, six months. So, it's probably, you know, 50/50, maybe a little more in the fourth quarter.

That means your internal growth in the quarter, I guess, was probably 8% to 9%. Is that fair?

Growth rate for the entire year, sam washington about 7% and for the fourth quarter it was negligible.

Okay. And do you expect -- obviously last quarter was extremely strong in terms of internal growth. What do you see in terms of next year? Do you still see that in the single digits or does it get closer to the double digits Looking into '03? )) We're still projecting at 7% internal growth rate, Sam.

Okay, And in terms of the electro objects, margins, were there any profit adjustments in the quarter that result made such a strong margin?

there's lots of EAC adjustments, every two months, the EAC get adjusted. In the aggregate, nothing significant.

In terms of the Boeing integration and the cash cost, what did you actually absorb in the quarter and are you still on track for completing that by Q3 of this year?

The cash impact was roughly $3 million. A little less than we were projecting, which is why our free cash flow was a little higher than we were projecting. Due to some delays and some Cap-X. We expect that integration to Be completed in the fourth quarter, not the third quarter, Sam.

Okay.

And we are still on track budget wise.

Okay, great, thank you very much.

You're welcome

We'll go next to Steve Binder, Bear Stearns.

Good morning. Can you maybe touch on rugged systems Europe first as far as what the revenue, you know, how much revenue did you generate in the fourth quarter? You mentioned, Richard you lost a million and a half dollars,

Yes. For the -- for the quarter rugged systems reported revenues of about $2.8 million.

So, you know looking at the fiscal year '03, join, getting back into, you know, the black, are you assuming revenues are going to be closer to the $15 million range? Is that what you're assuming, $15 to $20 million? Or what for fiscal year '03?

We're assuming their run rate is about what it was in the fourth quarter. What we've done is we've downsized them significantly to be break-even at about $10 million. The difference as to why we're Saying break-even in '03 versus '02, we're just about at the end of unprofitable jobs and the current backlog and new programs we expect to win will be profitable.

Was there any severance-related costs in fourth quarter there or was it just the actual -- you know, did you take any in the quarter?

Just a little bit in the quarter, but a significant amount during the year.

Okay. And then, I guess, for the [INAUDIBLE} settlement, do you reserve half a million dollars or so prior to -- is that right? Or what did you have reserved for that.

Going into the fourth quarter?

Exactly.

Yes, yes, half a million.

Okay. And Mark, do you want to touch on DDX, you know, how do you see that playing out for the company down the road, for the electronic systems group? Will there be any role there down the roll? York 70 -- DDX 51 has been a big platform for DRS in the past. How does this kind of effect you?

As you know, Steve, the government or the Navy buys the Q-70. I think what they would be looking for is a variant of the Q-70 finding its way onto DDX. So, we weren't on either team going after this because we're really working with the Navy, you know, obviously through Lockheed Martin, but it's a separate program and working through the Navy on this. And what we would anticipate is that down the road, when they start thinking about what work stations they're going put in this, that Q-70 will have a good chance of being on DDX,some variant. As you know everything is changing. So, you know, we're looking at thin clients and things of that nature that will be exciting technologies and end up.

Ray Ban has always been historically been a big producer displays.I was just wondering, I mean the Navy will make the decision, but is Ray Ban a competitor on the program potentially or not?

It's a good question. right beyond was a team member on the Q-70 program, anyway, when the last award was made back in 98. I think that when you look at the fact that the government has put over $100 million into the development of Q-70, it's going to be a who of them to use it for DDX. So, I don't think that's a big issue right now, anyway. I mean we're so far away from that, but I think there is a pretty good chance that you're going to see Q-70 on the ships.

Mark, you know, when you look at the acquisition pipeline and what you're looking at right now, with you say that based on the opportunities out there, are they diversification moves for the company or allow you to pretty much stick to your knitting?

Both, we're looking at an incredible population of opportunities and I would say that there's both diversification, you know, and extensions of current things that we're working on. I think that no matter how you slice it, there is a very, very significant Opportunity for this company to grow rapidly over the next couple of years, through acquisition. And enhance our position. No matter what we go into, we've decide that he did, you know, we have to still be a leader in that particular niche. So, whether it is diversification or extension, we have to make sure that the companies that we're looking at are, you know, fulfill that requirement. So, I think you will see both.

All Right, Thank you.

You're welcome

Next we go John Riley, CJS Securities.

Good morning,

Good morning.

What did SES contribute to funded backlog at year-end?

About $95 million, John.

$95 million. So, what was organic growth in backlog?

I'd have to calculate that, John, I don't have the number in my head.

Okay. Also, you -- impressive margins in the flight safety and communication group in Q4, What's a normalized run rate for the segment?

You know, the guidance we give, John, is that for the entire company we expect our operating income in FY03 to be a little bit north of 10%. Over time there is no reason all three groups shouldn't be at about that rate, but, you know, I'm not going to try to give you guidance in any individual group for a single year.

Thank you.

Once again, it is star one if you have a question. We go next to Steve Wartman with [INAUDIBLE].

Good morning.

Hi, Steve.

Regarding ESOG, the 15% margin; there a big discrepancy in the margins from the Boeing unit and the Core EO unit?

Not really.

So its just a function of cost consolidation.

Cost consolidation and just mix. You know, we do have some jobs that are very profitable at this point.

How long do you expect those jobs to continue running.

Into mid FY04, you have to remember Boeing has cost-plus jobs too that will be a little bit lower. In that group right now we have a terrific mix of -- of fixed price jobs and cost-plus jobs and development jobs and mature production jobs. And that's -- we're benefiting from that right now.

Okay. And going into next year a little bit,terms of a tax rate guidance for '03?

Right now we're looking at about a 46% effective tax rate. The -- you know, the key play there is if -- if rugged systems does return to profitability as we expect it to, that tax rate will start to come down. But right now we're not taking A benefit to those losses, which is why the effective tax rate is so much higher than one would normally expect.

Okay. And on Cap-X plans for next year, as well?

Cap-X for next year right now is the -- is roughly $25 million projected.

Is there some major plans that you guys are having there?

Well, as we talked about with the Boeing integration, we expect to spend roughly $10 million in -- in Cap-X on the Boeing integration. So, that's why, you know, the guidance we gave and continue To give for pre-cash flow for next year is roughly 8 to $12 million and Boeing has a Significant impact on that number because of the integration costs from an acquisition standpoint and just the actual costs of moving operations.

Okay. Thank you.

We will go next to Barry Vogal, Barry Vogal and Associates.

Good morning, gentlemen. Congratulations on a great year.

Thanks, Barry.

Three little questions. First of all, what's the DNA projection for this coming year?

You know, Barry, I knew you were going ask that. And in fiscal '02, just to give you a perspective in fiscal '02, the depreciation expense was $10.7 million and amortization was $3.1 million. In total it was $13.8. For FY03 we projecting depreciation expense in the range of about $13 million and amortization at about $4 million. So, a total of $17 million.

Okay. And I missed what the loss was for the rugged systems last year?

For the -- for the quarter it was $1.5 million and for The entire year it was about $4 million.

And you're projecting break-even for this year?

We're projecting break-even for the year, yes.

So you will pick up $4 million relative to last year?

That's the math.

Okay. And as far as shares outstanding at the end of the year, what were they?

Shares outstanding for the end of the year were $16.8 million. I'm sorry, 16.8 million shares.

Okay, and on potronics, you had a one-time charge of $2.5 million in the fourth quarter. What -- what -- what was the total negative impact of [INAUDIBLE]last year, including the litigation charges?

Including the litigation charges, about $3.2 million.

What do you project this year?

As far as litigation?

No, the entire fhototronics?

It will be profitable as They were this year. You know, exclusive of that charge.

But that $3.2 million, was that the negative -- total negative impact of fhototronics last year?

No, the total impact of the litigation settlement.

And what did they earn last year?

We're not giving numbers on individual divisions, Barry, but they were profitable.

So you expect not to have the $3.2 million litigation again, expense.

That's correct.

So you would pick up a minimal of $3.2 million on P&L from [INAUDIBLE]tronics, correct?

Again, the math is correct.

Thank you very much. )) You're welcome

It appears there are no further questions. At this time, I turn the call back over to Mr. Newman for additional or closing remarks.

Before I close, Rich has a few more things to comment.

I wanted to give guidance on the year and on the first quarter. I expected you ask me that, Barry. So, I'm sure that was your Next question! For the year we're -- I'm Sorry, for the quarter we're projecting revenues in the Range of $115 million to $125 million. We expect margins to be better than last year's 9.4% but probably lower than the 10% guidance that we're getting for the year. We expect net income to grow between 14% and 28%, again, depending on where we come in on our revenues. Diluted shares outstanding will be $17.8 million for the quarter, roughly, versus the $13 million from last year. So, if you do the math, we're projecting EPS at a range of twenty-five cents to twenty-eight cents for the quarter. For the full year, we're Projecting revenues in the range of $575 million to $585 million. That's sticking with our previous guidance of 7% internal growth and then, obviously, we get the benefit of a full year of the Boeing acquisition. We're not projecting any other acquisitions, obviously, in this guidance. As I said earlier, we expect margins to be north of 10%. We expect net income to grow In a range mid-to-high 20% range. Diluted shares outstanding will come in at around $18 million versus the $14.5 million this year. And again, if you do the math, that brings us to an EPS range of $1.42 to $1.45. I will now turn it over to Mark.

Thanks, Rich. You know, DRS is a growing company and an important industry that's captured a lot of attention in the past several months. The challenges facing today's military operations are formidable. U.S. And allied military organizations are looking to the defense industry to provide innovative, reliable and cost-efficient solutions to help them face difficult challenges, solve new problems and succeed in critical missions. DRS embraces such challenges. This company is on the leading edge in many technological areas, we're proud of that and ready to stand by the equipment we produce. Our people put their best into every system they deliver and we have a strong base of satisfied customers and users. The most essential ingredient for any business achieve success. We are looking forward another year of exciting accomplishments. Thanks for joining us today. I look forward to speaking with you again next quarter

Thanks for joining us for today's conference. You may disconnect at this time. )). )). )). )). )). )). )). )). )). ))