Leonardo DRS Inc (DRS) 2003 Q1 法說會逐字稿

Please stand by. Good day and welcome to the DRS Technologies first quarter conference call. At this time all participants are in a listen-only mode. After opening remarks, there will be a question and answer session. At that time if you have a question, you will need to press star one on your push button phone. I will now like to turn the conference over to Ms. Laura LeClair from Text and Company for introductions. Please go ahead.

Thank you, Rob. Good afternoon. And welcome to today's conference call to review the fiscal 2003 first quarter financial results of DRS Technologies. My name is Laura LeClair and I am with Text and Company. If you have not received a copy of today's release, please call me at 212-521-4859 and one will be faxed to you. Again my 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 from any such statements and include, without limitation, demand and competition for the company's products and other risks and uncertainties detailed in the company's security and exchange commission filing. I would now like to turn the call over to Mark Newman. Mark, if you are ready, you may begin.

Thanks, Laura. And good afternoon. I'm pleased you could join us for the conference call and our results for the first quarter fiscal 2003. In the news release issued this morning, we reported an excellent first quarter, which included record first quarter revenues, operating income, net earnings, and backlog. Diluted earnings per share of 31 cents exceeded analysts' estimates and last year's first quarter EPS on shares outstanding that were 35 percent more than the same period a year ago due to our equity offering completed last December. Operating income as a percentage of sales increased 9.7 percent--or 29.7%, reflecting progress toward our goal of achieving a double digit operating margin. EBITDA was $15 million, 22% higher than the 12.3 million reported for the first three months of the prior fiscal year. A strong order flow in the period raised funded backlog of June 30th to an all-time high of $610 million. This places us in an excellent position as we move forward into the next several quarters providing us with a solid business base.

Our strong performance in the first quarter was lead by our electro optical systems group and our flight safety communications group. This was driven by increased sales in Army, ground and airborne systems, ship and data communications products, mission data recorders and the higher demand for electronic manufacturing services.

On July 15th we completed the acquisition of Eden's Navy controls division. This was an important transaction for us because it added major Navy ship hoe and mechanical equipment, as well as computer control systems to the tactical command and control products offerings of our electronic systems group. This combination has positioned DRS as a total ship computing systems provider to the U.S. Navy. With an experienced management team and focus on ship networking and automation capabilities this new operation is strategically significant to our long-term goals for growth. In the defense related electronic systems business. We view this transaction as a major step in our growth. DRS power and control technologies as it is now called, enjoys a leadership position in high performance power conversion, electric drive and control systems for the U.S. Navy surface and submarine combatant fleet including nuclear powered and conventionly powered ships. It also provides reactor plant products to specialized industrial customers. DRS power and control technologies has a major installed base of electronic equipment in the Navy's fleet and we expect it to benefit from the Navy's back fit, transformational conversion, and modernization initiatives.

The addition of its two operations in Milwaukee, Wisconsin and Danbury, Connecticut to our -- oh, I'm sorry. To our electronic systems group strongly compliment our naval advance command and control computer display systems and other sensor systems we already provide for ships. DRS power and control technologies has a long history with U.S. Navy customers, having provided products to the Navy for nearly a century under the Cutler Hammer brand name. The propulsion plants of every nuclear powered ship ever sailed by the Navy have utilized their products, giving this unit a substantial incumbent position. Since it has products installed on virtually every U.S. naval surface ship and submarine.

In addition, it's the only supplier to the nuclear Navy for flat panel displays and specialty detector equipment. Employing about 630 people, DRS power and control technologies also has the most diverse variety of power electronics equipment deployed or under development in naval propulsion systems. This operation has captured key positions on next generation programs including the Virginia class submarine and the CVNX future aircraft carrier, and has played a significant roll in promoting election trick drive propulsion for the Navy's next new ship design, the DDX.

For fiscal 2003, the business is expected to contribute 60 million to revenues and 12 cents to diluted earnings per share with immediate acreation. With the completion of this transaction, we've enhanced our position in the defense industry as a mid tiered defense technology leader, and are strategically well positioned to book orders from both government and large prize. This acquisition is a good example of our participation in the industry's consolidation and our success in identifying business combinations that add value to our existing core business base. We have a strong proven management team that is adept at identifying, acquiring and integrating new businesses. And our acquisition program will remain an integral part of our strategic plans for growth.

Before turning the call over to Rich, I'd like to take this opportunity to let you know "Aviation Week" and "Space Technology" recently published their annual feature on the top performing aerospace and defense companies. It was encouraging to learn that DRS came in as the number one most improved small aerospace and defense company, and as the second top performing small aerospace and defense company. This is an important industry indicator to us demonstrating our steady climb over the past few years in the defense electronic sector.

As you know the Senate passed the fiscal 2003 Defense Appropriations Bill. While the Bill still needs to go to conference before it becomes law following the congressional August recess it provides additional funds for defense spending as expected. This is good news for the defense sector as a whole and reflects recognition of the importance of upgrading the country's defense capability. DRS is well-positioned to continue to provide vital support for U.S. and allied forces for the unique challenges facing today's military. Especially in surveillence, reconnaissance and intelligence defense--defense missions. The budget increase and level of funding supporting the initiatives of interest to us should create solid future opportunities for organic business growth. I'd like to now turn the call over to Rich.

Thank you, Mark. As Mark mentioned, DRS achieved first quarter record revenues, operating income, EBITDA, net earnings, EPS and backlog for the period ended June 30th. Revenues were up 27%, operating income increased 31%, EBITDA rose 22% and net earnings improved by 39% over last year's first quarter. The 27% revenue growth was fueled by 6% organic growth with the balance from the two acquisitions completed last year. The Boeing sensors and electronic systems business acquired on September 28 and the Lockheed Martin electro mechanical systems unit acquired on August 22. Revenue growth was partially offset by the sale of the DRS Ahead technology unit on May 27 this of this year. The sale of DRS Ahead, a small commercial unit operating at a loss, should be viewed as a positive development. The company made additional progress toward our ongoing goal of improving operating margins which increased to 9.7% in the first quarter up from 9.4% in the same period a year ago. We expect continued operating margin improvement throughout the year and are confident that we can meet our goal of a 10 percent plus operating margin for this fiscal year.

Now, I would like to briefly review first quarter performance at each of our three operating groups. DRS' electro optical systems group posted record results across the board, turning in higher revenues, operating income, bookings and backlog compared with a year ago. Revenues were up 65% to $69 million. 20 percent of the increase was organic, and the balance was attributable to the addition of last year's acquisition of the Boeing business. Operating income increased 121 percent to 9.9 million over the prior year period, reflecting a very strong operating margin of 14.3%. Contributing to this increase was strong performance from the group's [ground] and air borne infrared sighting and targeting systems, detectors and commercially electro optical manufacturing services. New orders valued at $71 million in the period, boosted backlog 44 percent above last year's level to a record $327 million.

Our flight safety and communications group also reported higher revenues, operating income, operating margin, bookings and backlog as compared with the first quarter last year. The sales increase was all organic, up 20% to $25.5 million. Higher sales were reported in the electronic manufacturing services, ultra high-speed digital cameras supporting domestic and international customers and mission recorders. Operating income improved to 2.3 million reflecting a stronger operating margin of 8.9%, as compared with 3.8% last year. Higher margins were due to improvements at each of the group's operations and reflect the benefits of the facility consolidation last year.

Last year's results included charges related to the closing of the group's Santa Clara, California engineering and production facility and the relocation of its mission recorder product line to other company facilities. The group booked $32 million in new contract awards, led by $11 million for electronics manufacturing services and $14.8 million for surveillance systems for an international customer. Our flight safety and communications segment posted record backlog of 132 million at June 30th, up 15% from the same time last year. Electronic systems group generated 35 million in sales and 1.3 million in operating income from the quarter. Organic revenues were down 17 percent from the same quarter last year. Sales declined in rugged computers and peripheral products supporting government agencies and international customers, and were also low in display work stations.

During the quarter we recorded additional charges at DRS Rugged systems Europe, a cost associated with employee reductions and other downsizing expenses. We expect to see improvement from the restructuring efforts during the second half of fiscal 2003 and anticipate the unit will operate at break-even during the second half of the fiscal year. Operating results for ESG were favorably impacted by DRS surveillance support systems as a result of the acquisition of this unit on August 22, 2001. The group booked 34 million in new contracts and posted backlog of $149 million at quarter end. EGS's results for subsequent quarters will reflect a positive impact of the Eaton acquisition adding $60 million to sales for the year and profitable programs in the operating margin range of 9 to 10%. The total value of new contract awards received by DRS during the first quarter was $139 million, essentially the same as last year. And we ended the quarter with $610 million in record backlog. Free cash flow for the quarter was a negative $3.1 million, slightly better than our expectations. Free cash flow was adversely impacted by $5 million in nonrecurring expenditures relating to the integration of the Boeing business acquisition and a legal settlement accrued in the fourth quarter last year. We expect free cash flow to improve in subsequent quarters and we expect to end fiscal 2003 with strong positive free cash flow. We remain comfortable with the guidance previously given for fiscal 2003, which includes the positive impact of the acquisition of Eaton's Navy controls division on July 15th.

I'll again summarize our guidance for you. We expect revenues to be between 635 and $645 million. Operating margins should be just north of 10 percent and net income should grow in the high 30 percent range with diluted EPS in the 1.53 to $1.57 range as compared with $1.41 last year. We expect average diluted shares outstanding for the year to approximate 18 million. By year's end we expect to see 8 to $12 million in positive free cash flow, even with about $25 million in capital expenditures and other anticipated one-time expenditures as a result of the Boeing acquisition integration.

I want to remind you it's been our recent history that our fiscal year is back end loaded with stronger performance overall in most metrics during the second half of the year. And this year will be no different. Keeping that in mind for the second quarter of fiscal 2003, we are providing guidance of 145 to $150 million in revenues as compared with 116 million for the second quarter last year. The operating margin will be better than last year's 9.2 percent and slightly better than or the same sequentially as our first quarter of this year. Net income should grow between 35 and 40% depending upon sales, and diluted earnings per share should be in the 35 to 37 cent range on 17.7 million shares outstanding.

Second quarter free cash flow is expected to be positive in the low single digits. We remain on track to meet our second quarter and full year goals. [And] we closed the quarter with a very strong balance sheet. Cash and cash equivalents were $114.5 million as compared with 117.8 million on March 31st, our previous fiscal year end. Total debt was 139.9 million and net debt was 25.4 million. Our debt to equity ratio improved to .5 to one from .7 to one at the same time last year. Trailing 12 months EBITDA was down to 2.16 times debt to trailing 12 months was down to 2.16.

As I mentioned we completed the Eaton transaction on July 15th for a purchase price of $92.2 million which was paid from existing cash balances. The company has a resolving credit facility of $100 million. And as of June 30th, after consideration of outstanding letters of credit, approximately $81 million was available. I'd now like to turn the discussion back to Mark.

Thanks, Rich. We're very pleased with our strong performance in the first quarter. With a significant acquisition completed early on in the new fiscal year, we're off to a great start for 2003. This concludes our prepared remarks for today and we'll be happy to take your questions.

Thank you. And to reiterate to our phone audience. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touch tone telephones. Once again that's the star key followed by the digit one on your touch tone telephones. We'll take as many questions as time permits and in the order that they are received. We'll pause for just a moment to assemble our roster. We will hear first from Sam Pearlstein with Wachovia Securities.

Good afternoon.

Hi, Sam.

Hi. I was wondering if you could talk a little bit more about the UK operations? It looks like you said that you took a charge. I'm wondering if you can quantify that? And really kind of talk about what you're going to be doing with that charge?

Well, let me just talk in general, then I'll let Rich give you the exact numbers. As you know, we were working towards downsizing that operation after the Bowman program that we were hoping to win about a year and a half ago kind of went away, as we teamed with the two teams we thought were going to win and a third team actually won. So we knew we had to down size the operation. And then they began to transition from a product house back to a systems house, which they were awhile back.

So we've had a number of layoffs, we down sized the operation to below 50 people. And programs that should have come in started coming in later in the quarter, and certainly in last fiscal year and in the quarter than we anticipated. So now we're at a point where they've got a nice healthy backlog. And they'll start delivering on programs. So we expect to see the operation really start to turn in the second quarter, and become profitable by the third quarter. I really believe we're out of the woods on that. Do you have anything you want to add, Rich?

Yes, Sam, the charge that we took for the quarter was $800,000. You know call one-time charges. And we feel pretty comfortable about the projection that they're going to turn to profit---profitable this year. In the first quarter they booked in excess of $5 million in new orders. And they've done a great job of transitioning their business from a products type business into a systems business. And they have gone along way towards establishing a very strong position in the UK in the work station market.

Okay, was that all cash that $800,000?

No. No. About half of it was cash outlay and half of it was inventory charges.

Okay. And then were there any significant EAC adjustments in the electro optics business to get that kind of a margin?

No. No. It's a very favorable mix at this stage of that business.

Okay. And then the last question, and I'll turn it over. Is there anything else in the backlog, itself, that were any adjustments? 'Cause I know that there's the DRS Ahead adjustment and then adding in the MEGET business, was there anything else that would have also increased the backlog?

No. There's some foreign exchange adjustments, but it should roll. Are you trying to --

Well, if I'm just taking the last backlog, plus sales, you know the sales and orders. It looks like there's still [at] 5 or $7 million. And is that what the foreign exchange adjustment would be in that order of magnitude?

We had -- there was a program that was put into -- that was protested. And while the protest is ongoing, we decided to de-book it. So that took a big chunk of that as well. Then what we'll do is when the program comes back, we'll add it back again.

Okay. All right. Can you update us in terms of what's going on? I'm assuming that's the [INAUDIBLE] protest that you've disclosed before?

Yeah, that's what I'm tying it to. Obviously it's hard to talk about what's going on because that's in, you know, it's in the army legal world. But basically there was a protest, and there was a re-compete and then they won, and then we protested and right now everybody has stopped work. So the program has, in effect, gone into limbo for the last 9 months. And hopefully it will get resolved shortly. The good news is that we are actually becoming a very, very strong competitor in this EO business.

Okay, great. Thank you very much.

You're welcome.

We'll move next to Steve Binder with Bear Stearns.

Good afternoon. Maybe you can touch from a high level standpoint. I mean for the fiscal year '03 guidance, you obviously exceeded sales by a good $10 million from your previous projection for the first quarter. You've not altered guidance for the full year. And looks like the second quarter sales you are [targeting] a bit below. Some timing issues. Can you maybe touch on where the timing issues are on the programs?

Well, basically I think there was a lot of momentum that got going by the end of the fiscal year. Last fiscal year. That kind of poured over into the first quarter. So we ended up doing more in sales than we anticipated in the first quarter. It was just the way the mix went out.

Then we've a couple of other programs that have, and we knew this actually when we put our plan together that would move more towards the back end of the year. Especially in the electronics systems group. These are very strong programs and it's just a question of timing. So that's why we say that we're really on track for the year, and what we saw was just a little bit more in the first quarter and maybe a little less, you'll see in the second quarter. But all totaled, we're gonna be right on target, if not a little better from where we expected to be for the first half. And then, as we always anticipated, we're gonna follow-up with a strong second half. So the year's in very, very good shape. None of this stuff has been a surprise to us. It's all been planned. The only small surprise is that we are doing a little better than we thought.

Mmmm-hmmm. And so what you mean, Rich, you mention the charge in the European operation. But I mean, if you look at the -- what was the actual loss in the quarter?

The actual loss was 1.4 million. Revenues at 2.1 and an operating loss of 1.4.

What was the --over in flight--I mean [to have them make] money in the quarter.

Yes.

All right. Was there any one-timers in nature in flight at all to put you up at those margins, or is this the continuation of the performance in the fourth quarter?

Continuation of the performance. Right now everything in flight safety is operating well. The consolidation of precision echo that we went through last year is now almost fully complete, and the cost growth that we saw on that one big program last year has stopped, and all those losses were picked up last year. You know that operation is just break-even, but at least it's not losing money.

All right. and then can you maybe touch on the 5--2.5 million, I guess was, you mention 5 million including legal settlement right, as far as--with respect to the cash items --I imagine 2.5 was for the SCS consolidation? Is that correct?

Correct.

Alright, so of the 2.5 million how much was Cap Ex versus, you know any severance related items or any other one-time costs that would have been reflected up in cash flow from operations?

Um -- about a million and a half was Cap Ex. And the balance was transition and severance.

So I'm just backing that out. It looks like there's $4 million in working capital growth if I guesstimated here? So, I mean, do you have -- where did the growth come from in the quarter, Rich?

In--in working capital?

Yes.

Mostly in a reduction in our liabilities. When you see the queue, you'll see that our accounts payable and other accrued expenses came down about $23 million for the quarter.

Was that mainly payables or is that accrued expenses?

[INAUDIBLE] payables.

Oh it was. So it's a timing issue? [INAUDIBLE] year.

Absolutely.

Yeah, okay. Thanks a lot.

You're welcome.

And as a reminder, if you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touch tone telephone. John Riley with CJS Securities has our next question.

Good afternoon.

Hi, John.

Focusing on the EOSG group for a moment. You mention that you saw a particular strength in the commercial manufacturing services. Could you mention -- could you quantify that amount, first of all? And also mention which particular services you saw strength in?

John, the electronic manufacturing services related to flight safety and communication, Rich said. That's--that's stuff that we do up in Canada.

Right I'm focusing on the commercial electrical optical manufacturing services.

Oh, okay. That would just relate to --

Yeah. The -- you know our major programs in there are ground and air. There's no commercial. I'm not sure what you're referring to.

We have the later vision which did well in the quarter. So maybe you're referring to that.

Okay.

Some of those assemblies out, so that was strong in the quarter.

Maybe it was a typo in the press release. Also folks, you also mention that you saw particular strength in our airborne infrared sighting, does that mean to say that the Kiowa program was--a-- contributing more revenue than you anticipated?

Yes, the Kiowa is doing very well. Much better than we thought. That also accounted for some of the sales increase in the quarter. And that may have been aided by what's going on in the world.

Okay. And being the first entrance into an airborne, your first entrance into an airborne infrared system, do you see further development into new airborne platforms?

Absolutely. I mean that will be an ongoing push. It's actually not our first entrance, it's our first complete entrance in terms of a total system. Because remember we are already on the Apache upgrades, you know the [FLEER] to the Apache program. We are doing the upgrade with the [FLEER] with Lockheed-Martin. But yes we think that's an area that we're gonna be able for expand on in the future. Right now, you know, even without that, you are looking at a very very solid future for the Kiowa warrior right now.

Switching to the NCD acquisition for a moment. The division's already operating with pretty healthy margins in the 9 to 10% range. Do you see any expansion of that margins?

Well, we're not gonna forecast that at this point because we really want to get our arms around it. You know, and as we start running the business, we'll be able to tell better. So right now we are going to stick to the story. And then we're gonna have to get in there and see, you know, what the effect of our cost structure is versus the cost structure that they were living under.

Okay. Thank you.

You're welcome.

We'll move now to Steve Warpman with Sedonia Company.

Good afternoon.

Hi, Steve.

Rich, you indicated that the EOCG product mix was favorable in the quarter. Do you see this changing during the year at all?

Yeah, actually I do. Those margins will not hold up for the year. We had a favorable mix in the first quarter. I would expect for the year that the margin will come closer to about 12%.

All right. That's for the full year, not for the last three quarters?

That's right. That's correct. That's for the full year.

Okay.

I see a big improvement in the ESG margins. Right.

That was my next question. Okay. Okay, that kind of answers that whole thing. In terms of the problem in the UK, I mean I think you said it would be break-even in the second half. Then I heard Mark say it might be profitable. I think it is going to be break-even. And then do you expect profitability next year?

No.

What we have been saying is, we expect it to be break-even by the third quarter, which is the December quarter. Okay.

And then we expect it to start making money in the fourth quarter.

Okay. So next year, then, all things being equal the tax rate should be coming down, as long as that's profitable?

Yes. Yes. I --the, the tax rate in the first quarter was 46%. That's before incorporating acquisition of Eaton. We're gonna go through that again. I would expect that that tax rate will come down a little bit once we incorporate Eaton into the model going forward. And then there will be a significant decline in the tax rate once Rugged systems returns to profitability.

Okay. Also DNA looked a little low in the quarter. I was wondering if you could for modeling purposes, give us a full year number in your model?

That's a good catch, Steve. I'll tell you what we have built into our model. Depreciation for the full year will be 13.5 million in that range. And amortization of intangibles will be about 4 million. So the DNA for the year should be about 17.5.

Okay. That also is going to account for why the margin in 2 Q won't be up from 1 Q even with this charge, the absence of the charge, essentially, correct? 'Cause DNA's gonna be at least a million higher?

DNA and mix.

Okay. Thanks a lot.

Yeah, you're welcome.

Next is Joseph Bellick with Jefferies and Company.

Thank you and good afternoon.

Hi.

I had two questions. One, could you talk about your acquisition program, how many companies are in the pipeline, what the range of revenues might be on those companies? And what areas of interest you have? That's my first question.

The -- we always have a lot of things in the pipeline, and, you know they range from tens of millions of dollars to hundreds of millions of dollars. And there's an ongoing number of companies that we're looking at. You know probably if you had to add them all up, it's got to be 10 or 12. You know, we actually added them all together and if you added the sales of everything we are looking at, it's about $1.5 billion. And obviously, we are not buying them all. But, there's plenty in the pipeline. It's just a question of going through the different processes and making some of these deals happen.

Your areas of interest?

It's all related to our current business. What we are doing is we want to make sure that anything we buy is closely related to the other areas of business that we are in so that we can expand our position with our customers.

The only exception I would take to that, and there's nothing imminent in this area would be if we found somebody that was involved in the Air Force world and I've said that before. Only because in the long run it would be nice to get a mix of -- an increased mix of Air Force business. For no particular reason, except for the fact that we don't do a lot with the Air Force right now and it's obviously a very important service.

So, you know, that would be something that might be a little different even though a lot of the technologies would be similar. We're not trying to build a defense conglomerate. What we are trying to do is to build a group of companies that can work closely together as we expand our prominence in the industry.

Okay. My second question is could you address the issue of contracts? What percent are sole source and what are competitive win in your mix?

Um -- well, if you -- you know, even if you win something competitively it can become sole source down the road. So if I had to look at the sole source business, I don't know if I've got that number off the top of my head. Do you have any idea, Rich?

Maybe at least half. Maybe more than half of our business is probably sole source. Then there's a lot of business that is just dual source.

My question is, when -- so it's maybe like 60/40, is that sort of that range? 60/40, 60 sole source, 40 competitive?

Yeah--that's--without having the exact number in front of me, that's probably a good bet.

And what happens -- what's your win rate when a sole source comes up for renewal as opposed to a competitive win coming up for renewal?

When a sole source comings up for renewal it's 100 percent, because it's soul source. But if it's, if it's like dual source, what we usually find is what we've been doing recently is we're sharing the business. So a lot of the contracts that we go after, there's -- you know you win sometimes we win the line share, sometimes the competitor gets a bigger share. Some of them are 55/45. In programs that we go after where, you know, we're not a sole source provider, and its something we've decided to bid on, we've had a fairly good win rate. Probably in the 70% range. But that's because we don't bid on just anything. We tend to bid on things that we feel we have a good shot at winning. And that keeps our bid and proposal expenditures within a reasonable limit. And that way we get our people working on things that will give them a, you know, [INAUDIBLE] of success. So keep in mind, in most of the nitches that we're involved with, we are a leader or we're number two in that nitch. So we're not really playing in areas where you see a lot of competitors. It's generally two or three competitors.

One of the other things I would point out just to make it clear. If you take a look at our backlog which we said was around $610 million at the end of June, that's what [INAUDIBLE] funded backlog. So that's only programs for which options have been exercised and the customer is fully committed. You know, we've estimated in the past that there's a three to four times tail on that backlog if you were going to put in only unexercised options or things like that. And I don't know if you consider that sole source when those options get exercised. We look at that as very high confident add-ons to our backlog over time.

If I understand you then when you are competing for a contract, when it's not sole source, a competitive proposal, you have been running recently a win ratio of about 70%?

Right.

And my last question. How does that win rate compare to what it would've been six months, 12 months, two years ago?

It's always been about the same. As I'm telling you, you know, we basically rifle shot these things. So we don't go after things that we don't have a good chance of winning. So we have a very high percentage of wins. And I think what you're alluding to before, sometimes you have a sole source program that gets recompeted.

Right.

You bid the sole source for awhile. And so far we have 100% win rate on those. Where we've been an incumbent, we tend to keep the business.

That's an impressive number. Thank you--Thank you very much.

You're welcome.

We'll move now to Barry Vogel with Barry Vogel and Associates.

Good afternoon.

Hi, Barry, you didn't get lost.

What do you mean I didn't get lost?

I'm glad you're here. I haven't heard your voice in awhile.

I have been around. I'm calling from Cape Cod.

Good.

First for Rich. You mentioned $25 million in capital expenditures into the year. And then you said plus Boeing expenditures. What is that plus Boeing expenditures?

Yeah, Barry, we've said, ever since we did that acquisition that there would be some significant expenditures related to Boeing for severance, relocation packages, the cost of actually moving the businesses. Because as you remember the Anaheim facility we're taking the production and moving that down to Palm Bay, Florida and to Dallas, Texas. So we've estimated in the past about $10 million in those type of expenditures and then some additional expenditures for Cap Ex.

So looking just at Cap Ex, roughly, how much of that BA Boeing expenditures is going to be Cap Ex for this year?

For this year, we're estimating about $5 million in Cap Ex related to Boeing.

So if we added 25 plus 5 you get--the consolidated company would have 30 million in Cap Ex?

When I gave you the $25 million figure that was including the 5 million.

Okay. Okay, I'm sorry. And as far as these moving costs and severance costs I'm presuming that you're taking some of these hits in your P&L as the year progresses?

That's correct.

Could you give us some idea of, roughly what the total of these costs will be hitting your P&L this year?

Yeah. I mean that's already built into the model.

Yeah, I know, but can you give us some idea of how much it is, approximately?

Yeah. Probably about $2.5 million.

Okay. Would that be finished at the end of fiscal '03?

Um -- most likely not. Mostly. Some will probably leak into the first quarter of next year.

But it will be less than 2.5 million, probably?

Yes.

Okay. Then you said something about, when you're talking about ESG there was some combat display systems timing issues. Can you tell me what combat display systems we're talking about? Can you explain the timing issues there?

All right There was, on our UYQ-70 program which is a very healthy program, there was some back fit awards that we were looking for where they were going to back fit some existing destroyers. And that hasn't gone away. It just got pushed out. You know, into the new government fiscal year. So some awards that we expected to have already got what we call slipped to the right. So there's no business that's gone away, there's only business that's moved a little bit to the right. And we knew that when we put our plan together for the fiscal year.

In addition, we are involved in some work stations for the battle field. A program called CHS2 that we sell to General Dynamics. And some of that got slipped a little to the right, also. But is going to happen. So these are things that we plan. There were no surprises in the quarter except a few pleasant ones that we did a little bit more business than we anticipated. And that's why when we put a plant together, we have to carefully look at what the mix of business is going to be in any quarter.

The UIQ is that the original Lockheed Martin sharing [INAUDIBLE].

Right.

That big long ten year contract?

Right.

[INAUDIBLE] you know 'cause I always get confused. So that's [INAUDIBLE]

So very, very healthy. [INAUDIBLE] A very healthy program. We still have backlog. And we're gonna see a lot of business there for this fiscal year. It was just the timing of the awards.

Okay.

Remember that's more like a book and bill kind of business as opposed to long-term contracts.

Gotcha. Now, as far as Eaton's backlog I presume that was not in the $610 million figure?

Correct.

Can you give me --

They had about 60 million in backlog.

Alright so pro forma it'll be about 670 million?

Right.

That's not a bad backlog.

No. Because pro informa we're probably running in a run rate of, you know, 700 million.

Okay. Now, as far as organic sales growth, you said that revenue in the first quarter organically was up 6%.

Correct.

Am I correct?

Yes.

Okay. Could you give us some idea of, roughly what you are looking for for the year in organic growth?

Barry, we're sticking with the guidance that we've given, 7 to 10% organic growth.

All right. Which means that your organic growth should rise as the year progresses?

That's correct.

Okay. Gee, you guys are doing a great job.

Well thank you.

And you really, you know your funding is spectacular. I love your balance sheet. [ LAUGHTER ].

Well, we always listen to you.

Yes, I'm sure. Just like -- okay. Thank you very much. Keep up the good work.

Thanks, Barry.

Alright, bye.

Bye.

As a final reminder to our phone audience, if you would like to ask a question, you may do so pressing the star key followed by the digit one on your touch tone telephone. And Steve Binder with Bear Stearns has a follow-up question.

[INAUDIBLE] I was just wondering if you could touch on, you know, there's been talk about possibly in the '04, you know, proposal coming out of the army there might be some cuts in the M1 and Bradley programs. I'm just wondering, do you have any take aways at this point?

We don't see anything at this point that's gonna hurt our business. So there's nothing there that we should be concerned about.

Mmmm-hmmm.

For the things that we're doing. For the upgrades that we're doing.

Right. Okay. That's about it. Thank you.

Okay.

And at this time there are no further questions. Mr. Newman, did you have any final remarks, sir?

Oh, I just want to say that we really are pleased to start the new fiscal year with a record first quarter. We're looking forward to another year of exciting accomplishments. And I want thank you all for joining the call today. I look forward to speaking with you again real soon. Thank you.

And that does conclude today's teleconference. Thank you for your participation.