Leonardo DRS Inc (DRS) 2002 Q3 法說會逐字稿

All sites standing by, today's conference is beginning. Hello, welcome to the quarter earnings released for Engineered Support Systems call. After the opening statements, a Q&A session will be held. Until that time, all lines will remain in a listen only mode. I would like to turn the meeting over to today's host, Michael Shanahan, CEO of Engineered Support Systems.

Thank you everyone for joining us on our called it.

You have all seen the earnings release for our third quarter in which we reported net revenues every of over $106 million, a 17% increase above last year. Earnings from continuous operations of a record 64 cents per diluted share. During the third quarter, we successfully completed two acquisitions, Radian and UPSI, which are already starting to contribute significantly to our organization. Last month, we also announced the neighboriation of our facilities consolidation plan, wherein, we will be curtailing manufacturing prayings at our engineered air St. Louis plant and Ohio plant and relocating the work to alternate facilities. Although Gerald Potthoff will explain later on in the call.

I would like to make a couple of brief on comments in this point. Facility rationalizations are never easy since they involve a certain number of jobs. Nevertheless, it's necessary to remain competitive and use our resources. For instance, once completed, these moves will generate after-tax savings and overhead costs of between $1.5 and $2 million annually. This critical project will occur over the next nine to 12 months with minimal destruction to our ongoing operations anticipated.

As has been customary in the past, joining me on the call are Gerald Potthoff, our President and Chief Operating Officer, and Gary Gerhardt, Vice President and Chief Financial Officer, who will now recap the third quarter financial results. Gary if you would, please.

Thank you, Mike.

I will read our standards a claimer. Statements made during the course of this conference call, which are not historical facts are considered forward-looking statements within the meaning of sections 27-A of the Securities Act of 1923 and amended and section 21-E of the Securities Exchange Act of 1934 as amended and are intended to be covered by the safe harbor provisions created thereby.

For the third quarter, we generated record net income from continuing operations of $6.9 million, or 64 cents per share. This is up almost 50% from the third quarter of last year, resulting in a 46% increase in earnings per share from earnings per share from continuing operations. It should be noted that third quarter earnings results excluded an after-tax restructuring charge of $900,000, or 8 cents per share, related to the facilities consolidation plan that Mike mentioned a moment ago. Adjusting for this one-time charge, earnings per share from continued OPS would have totaled 72 cents for the third quarter. Year to date earnings per share from $1.81 were 41% above the prior year.

As you recall, we are planning to dispose of our commercial plastics business. We have reclassified the statement as a discontinued operation within our financial statements, including the results of the plastics operation we reported net income of $6.7 million, or 62 cents per share for the quarter. Strengthened by the results of the recently awarded Radian and UPSI businesses, third quarter revenues increased 17% to $106.6 million, the highest quarterly level in our history. Of this total, Radian and UPSI collectively contributed 13.7 million in revenue, approximately 2 1/2 months for Radiant and 1month operation for UPSI. Excluding the impact of acquisitions, the light military segment had a quarterly revenue decline of 4.7 million, related to temporarily lower CBPS and tactical generator revenues during the third quarter, although our year-to-date revenues on those programs are commensurate with last year's levels.

Our quarterly and military revenues were similar to last year. We did see a dramatic $5.3 million or 26% increase in our electronics segment revenues during the current quarter. Most notably higher production on the Striker program contributed $5.7 million of the up-tick, aided by various air-born and ground-based radar systems, which were partly offset by lower revenues and the often discussed decline in the U.S. postal service revenues.

Operating income from continuing operations for the quarter improved by 35% to 12.2 million, up from 9 million last year. This figure is net of $1.4 million pre-tax restructuring charge that was booked in the third quarter due to our facility consolidation plan. Increased revenues and higher gross contract margins in all defense business segments were primarily responsible for the growth and operating profit, increased production effort, notably in our electronics segment and an improving mix of programs under long-term production led to an overall 358 basis point improvement in gross margins.

As noted in our third quarter press release, the net impact of the adoption of FASB 141 and 142 related to the accounting for intangible assets were negligible this quarter. The absence of goodwill amortization on existing balances of $800,000 per quarter on a pre-tax basis was largely offset by additional amortization of $700,000 pre-tax on customer contracts and identifiable intangible acquired in the Radian transaction. Pre-cash flow is continuing to be outstanding this year with approximately $35 million generated year to date. In addition, Ebitda from continuing operations totaled $43.3 million, or 13.4% of revenues, during the current quarter compared to 12.5% last year. We successfully deployed this robust cash flow to purchase Radian and UPSI this quarter, spending about $46 million in total on the two acquisitions, including assumed debt. With the debt to total capitalization ratio of just over 33% at quarter end, we have ample flexibility to pursue whatever level of capital resources is necessary to support future acquisition activity.

Now, I would like to turn the call back to Mike.

Thanks, Gary. As you can see, right from the outset, Radian and UPSI have contributed nicely to our revenue growth. We believe this is the beginning of a positive direction.

Radian has vast capabilities and logistics support, engineering services and security systems. Three high-growth markets, we're in the military outsourcing opportunities about. More specifically, I can tell you that Radian is in the midst of rolling out several new business initiatives that are avenues for accelerating growths. The first is a new access security system called the Radian access point screening system, or RAPS. This is know as an access technology system developed by Radian to provide vehicle and personnel screening with potential for use on 200 to 300 gigs win our military system. Current gigs security systems are cumbersome and labor and time intensive. With RAPS we hope to set the standard for automated data operation on U.S. military bases worldwide. This system is currently installed at [HANSCOME] Air Force Base in Massachusetts and being evaluated for expanded Air Force use. We're looking to install RAPS at another Air Force base within the next few months. Depending upon the desired level of base security and the resulting level of equipment required, the potential for the program is in the $60 to $100 million revenue range.

Another interesting new business area for Radian is their military parts reinvention network called [MILLPARTS]. This provides critical spare and replacement parts for specialized military equipment platforms, ranging from structural aircraft components to any required spare or replacement parts where engineering drawings and supply sources are not readily available. As you may be aware, due to budgetary and operational constraints, our military has a requirement to support its weapon and vehicle systems well beyond their original intended service lives. While many costly systems, multiple service life extension programs, have extended the operational lives of equipment to exceed that of the original manufacture and supply chain. The result in shortage of replacement parts has resulted in a reduced readiness throughout the military. Radian has a solution that utilizes its proprietary laser scanning technology and other state-of-the-art market technologies to redesign in a solid model damage to worn-out components. What they can basically do is create a part from old, defective parts, redigitize it and rebuild it. Once they're installed, military aircraft are placed back in the service at a fraction of the time and cost to taxpayers. As an example, prior to the acquisition of [MILLPARTS], they received a $3.7 million contract or replacement of parts for the Marines H-53 helicopter. Additional mill parts and warrants have been received on similar programs with more anticipated in the near future as this new initiative gains momentum, and we have to assure that it will.

Our most recent acquisition with UPSI, is also looking at new business opportunity with various military, government, and intelligence communing customers. UPSI, anticipates the award of a multi-million dollar contract from the Naval Service Warfare Center. The initial contract would call for the upgrade of up to 10 Navy Reserve center information facilities in the United States with our uninterruptable power supplies, which consistent of generators and ancillary equipment necessary to give them round-the-clock power availability. These sides are being upgraded to accommodate the need for reserve intelligent personnel in support of counter terrorism operations. This represents a significant win for UPSI , which has been a historically $6 million revenue company, that may well lead to similar facility upgrades with other branches of the military and intelligence organizations. We're also working together closely to identify other potential business opportunities that UPSI can now pursue with the support of ESSI's broader financial and operational resources.

Now, I would like to ask Gerald Potthoff to comment on several of our recent operationals.

First, I would like to provide insight to our recently-announced facility consolidation plan. As our press release noted, over the next nine months or so, we will be curtailing manufacturing operations at Keco's Blue Ash Ohio facility, and at Engineered Air's St. Louis facility. These difficult decisions stem from our need to better leverage our existing infrastructure cost and to remain as competitive as possible at our individual operating locations, specifically in the case of the Blue Ash, Ohio, consolidation, a decision relatively uncomplicated. A little bit of geography, the main Keco facility is located 30 miles across the Ohio River in Florence Kentucky. Certain piece part production work takes place at Blue Ash and goes to Florence for completed assembly and shipping. As part of our plant utilization study, we found we can eliminate over $100,000 in annual transportation costs alone if we curtail this practice and modified our operations. In addition, we reduced the redundancy of staffing, duplicate production management administrative teams in both locations. Upon further review, we confirm we expand our Kentucky facility and receive certain ongoing local and state tax advantages for making an additional investment at Florence. In addition, we believe that Blue Ash is located in a desirable industrial office development corridor, and we could expect to receive an attractive offer for the property when sold. Also given the close proximity of the two Keco facilities, we should not have costly turnover in the transition from blue ash to Florence as many of our workers will move with the work. Given those factors, the decision was a rather simple one. Work at blue ash will continue until next spring, and then we'll be transitioned to the expanded Keco facility. Blue Ash property will then be sold.

The engineered air division consolidation decision was more complicated. This division as you know is the flagship of the engineered systems platform since beginning 20 years ago. As part of our ongoing facilities utilization process, we assess the capabilities of each of our existing manufacturing locations with the assistance of outsiders. We looked at plant layout and efficiency, physical age of building and equipment, and other factors to get a complete assess myths of our capacity of our utilization. In assessing the capabilities, it was clear that the physical characteristics and age of the plant were not optimal. The operating efficiency and quality measurements were not satisfactory, and the production information systems were inadequate to support our business growth as we move forward.

Frankly, alternate company facilities proved more capable of handling increased production levels in a more efficient and profitable manner. We made a difficult decision to curtail manufacturing operations as an engineered plant next bring spring with production transitioning to our Florence Kentucky operation in west plains Missouri plant. Although its manufacturing work will transition to alternate company facilities, Engineered Air will continue as a separate operating subsidiary with the engineering, program management and administrative functions moved to locate what the company's headquarters here in St. Louis. Based upon current real estate market conditions, the company expects to sell the facility in fiscal year 2003. Further, we will continue to look at our overall capacity utilization in the symbol, capabilities as we continue to grow both internally and externally to determine the appropriate allocation of our resources.

We also gain production requirements for Radian and UPSI as part of our ongoing acquisition integration process. As we stated previously, Radian primarily a professional services company possesses no internal production example rather, their manufacturing work on a new power generations systems outsourced to third parties. We're making plans to fabricate and produce certain components of this system at internal company locations having large capacity. This will better allow us to leverage our fixed overhead investment on enhancing our overall profit margins on this already very successful program. We will give you specific details once our evaluation process is completed. And then in addition, in closing comment, our new manufacturing initiatives at all operations divisions will effectively complement our consolidation planning.

So we have a lot of productive projects on the way from an operation point of view. Now, back to Mike.

Thanks, I would like to go on record to say Gerald Potthoff, Gary Gerhardt and a number of others have worked hard on a number of these operating procedures and policies and projects that we have had, and they're making great progress. Before I ask Gary to come back on with information on our financial outlook, I would like to make a few comments on the status of new major programs that represent substantial internal business growth prospects.

We have been advised by TRW, the prime contractor on minuteman facility refurbishment that we're selected as the contractor for the ECS replacement program. Phase 1 will be the redesign of the environmental systems of all the missile silos and test facilities as well as the eventual supply of the replacement hardware, developed and built in the later stages of the program. It's noteworthy that Engineered Air was the original designer of the equipment and provided the hardware for 500 of the 1,000 original silos. In all the potential for this program approaches 200 million. We continue to see the emphasis of all the branches of our military services towards lighter, faster, more rapidly-deployable, and better-equipped military. As such, many major opportunities are being worked with the services in areas of fuel and water distribution, [INAUDIBLE] supportive equipment, and environmental control systems. We anticipate final procurement awards on many of the programs within the next 12 to 18 months.

The postal service area, the USPS remained hand-cuffed by the anthrax problems of 2001. We're pleased to say our SEI subsidiary has been working closely with the postal service to provide an automated sorter that can detect contaminated mail before it gets into the postal system. We have completed successful test on the system and are awaiting the customer's direction prior to moving into the production phase. When the anthrax problem is basically behind them, we anticipate the postal service will return to their ongoing initiatives to reduce cost in mail handling, which includes the anticipated purchase of our direct connect mail handling system. The contract, as you will recall, with the initial award value approaching $120 million.

Now, I would like to cut you on a spade of a new corporate government ruling and proposals that have been issued. In general, I believe that these measures are good for public companies and for investing public. I think they serve to remind corporate management teams and boards of directors of their significant fiduciary and legal responsibilities and safe guarding and deploying the capital with which they have been entrusted by their shareholders. We must deploy our given resources prudently while also trying to earn a suitable market return for the shareholders. I personally feel that these recently enacted measures are more for peace of mind for the investors than to readdress any widespread abuses of trust on the part of public company officials. With our upcoming 10 Q filings, Gary Gerhardt and I will be signing an affidavit attesting to our third quarter results as we reported today. Our names have always stood behind the company's financial statement, so I really don't regard this as an additional level of testament as anything out of the ordinary. We have always accounted for our company's result in a very conservative manner. We're routinely scrutinized by the department of defense auditors from the DCAA and have none of the esoteric financial schemes or structures engaged in by other corporations. We generate revenues, earnings and more importantly cash flow from diversified portfolio of operating companies, whose primary customers are directly affiliated with the United States government. That's about as simple as it gets, and the proof of the performance is in the bottom line.

Before Gary discusses guidance issues, I want to mention that -- well, I'll let you go ahead and do the guidance issues and I'll make a couple of commenting.

Thanks.

Obviously, we have had a very successful quarter, and look forward to wrapping up fiscal 2002 on a good note. In our release, we provided an updated estimate of net earnings are from continuing operations from the fourth quarter of approximately $8 million or 72 cents per share. This is based upon forecasted revenues of $120 million to $125 million for the fourth quarter of 2002, while generating profit margins at or near the current levels. For the full year we're now looking at EPS from continuing operations of approximately $2.53 per share, and 8 to 13% increase above the earnings guidance provided in last quarter's call. This represents a 40% increase above fiscal 2001 earnings levels. We believe this positive revision is warranted, our solid operating margins have been driven higher by the outstanding performance of major long term production programs. The guidance, of course, excluding the results of of our discontinued plastic segment that will hopefully be sold at its current caring value by year end.

At this point, we continue to expect 2003 revenue growth of between 5 and 6% to approximately $435 million without any additional acquisitions. Earnings per share from continuing operations are expected to advance approximately to -- approximately 10% from the current year level. As is customary, we'll be going through our corporate wide financial planning process in the September-October time frame where the long-term outlook will be refined.

Any guidance on fiscal 203 will be provided on our earnings call for the 2002 fourth quarter in December. Now, Mike, back to you to wrap it up.

Yeah, what I was going to say was I don't want anyone to think that we're taking the new affidavit testings lightly. All I can say to you is that for the people in this room from our corporate finance, we have Steven Landmann, Ron Davis, and myself and Gerald Potthoff -- we rely on the presidents in our division. They feed the information up along the line of corporate, and this has been happening since we began the company. We have such strong belief in faith and how we operate this company that the only point I wanted to make was that I don't see it as a major step to signing those documents because we believe in the voracity from day one. I wanted to clarify that, and also thank the presidents of the divisions and all the employees for yet another great quarter and for all their efforts in their successes on behalf of the company, and behalf of our shareholders, so, thank you teammates one and all. Now, we'll entertain your questions.

Thank you. If you would like to ask a question at this time, simply press star-1 on your touch tone telephone keypad. If you're using speaker phone equipment, please pick up the handset before pressing star-1 to ask your question. If you would like to cancel your question, press star-2. Stand by, sir, while any questions may register. Yes, sir, our first question is from Steve Wortman with the Sidon Company. You may begin.

Good afternoon. In terms of the backlog, how much did Radian, the 2 acquisitions provide on a sequential basis?

Um, roughly total -- this is Gary Gerhardt, Steve. About 300 million, roughly in total backlog. Of the 1.2 billion.

Okay. Okay. And at the heavy, heavy support segment, the margin there has been running second quarter in a row that it's been above 16, so you guys have been doing a good job there. You referred to three programs. I would assume one would be the M-1000, um, where do you see this margin going forward, trailing back down, I would assume a little bit as some of these contracts expire?

No, not necessarily. I think the margins in the heavy military foreseeable future will either remain at the current level, they might decrease a little bit, but we don't see substantial potential decreases on them. We're having tremendous result relative to some of the things that Jerry talked about, lane manufacturing and other initiatives and it has increased substantially on all of those programs.

Okay. And, moving to the electronics segment a bit, you referred to the margin do you to efficiencies and product mix. Do you see the product mix changing at all from this quarter? Going forward?

not too much. We're seeing more activity in some of the radar programs, some of which is just repair work, upgrade work, and that's very profitable, the striker is very profitable. See a little less of the high pocket in there, Steve, which we have discussed before is a less profitable program, therefore, you put more of the striker and the radar programs less high pocket. You get good margins in that segment.

Okay, thanks a lot.

You're welcome.

Thank you, sir. Our next question comes from Michael Braig with A.G. Edwards. You may begin.

Good afternoon. Question, I guess, on where and how we might see the impact of radiant, specifically where are they in the ram-up for the DPGDS and will that show in the light military segment?

I'll start and if we don't fulfill, we'll get Jerry pick it up in general. They started production on that last year, last year being calendar year 2002. And before we bought them, they had recognized about 18, $20 million worth of revenue. The annual buys for the DPGDS, as all programs happen, most of those have happened this year, and they are in production on units right now. The significant revenue and deliveries associated with that will come mainly in the first quarter of next year. Maybe a little bit in the second quarter. Just a little bit in the fourth quarter. But, again, the way the orders come in on the program, and it looks like they're going to continue in the future, deliveries will happen significantly in the October to roughly January, February time frame.

Hey, Mike, just to follow up comment to Gary's. The base business is air force business, and Radian just go the initial army business and as I indicated my comments, we're in the process of analyzing that program to see if we can -- what we can do for them, and so the west plains facility is going to start doing some of the production for their, handle, army contracts, so that's very encouraging. We'll be in the position really, to take advantage of any opportunities we have there because that summer is the foundation for -- certainly is the foundation for requirements in our military. We're excited about that.

Am I incorrect in believing that the -- that contract is the largest component of Radian revenues?

Yes, it is, by a sizable amount. Yes. It's estimated to be 300 million by the government, by D.O.D., and the latest insight and G-2 we have indicates that that number is very conservative.

Mike, also, this is Michael Shanahan. I'm going to ask the boys to sort of put that in perspective, not in any way to change Gary's answer to but to identify Radian as a service company. You would normally see the contracts not nearly as extended as the hardware contract. This is not to say the service business is not equally important to us there. The contracts are just not of that long-term nature.

Right.

They're done mostly in what are called task orders and things of that nature. You can't get -- I don't know how to say it -- your arm around the service part of the business as much as the hardware part of the business.

Okay.

One of the significant things from raid apt was technology, and a lot of that came on the service's end, the DPDGS is a fabulous contract without question, but it's a production contract. It works great, but the technology, ideas, context -- we can go on with a million different words, a lot came out of the services, and the production contract, DPDGS evolved out of the services part of the business.

As well as the security systems, there is a big fight for future for that, too. Not to say it's the overwhelming part of their future.

Okay. And I just want to make sure that I understand the sector that DPDGS is going to into. It will remain in light military even though it's produced in West Planes, which generally tied to the heavy military sector?

Yes, yes. We right now are putting it in light military -- Mike, we will certainly continue to review that as any public company should relative to being all the guidelines, requirements for, um, sector accounting and reporting and continued a review and make sure that's the appropriate way to provide results.

Okay, and then just a brief follow-up on radiant, is there anything in the nature of their progression payment practice that would change their progress-payment practice that would change the working interest, common capital psyche snell.

Not relative to progress payments. The significant major contracts will have progress payments in them, which are basically the same progress payments that we or any other contractors see some of their services, things, services contracts are time and material, there's two sides to that. The plus side is that you build monthly for those, for actual costs, so you get call your costs and it's not at 90% or something in, which is 100%. Sure usually the payment term date is outstanding or longer relative to the services side. Again, you get a hundred percent, takes longer to get it, so, when we bought them, we saw a little bit larger working capital, fragment relative to receivables and we started some working with them on that to improve that, and I think long term we will show some improvements. But the services will always have longer days outstanding, but, again, you get a hundred percent there, and every month you get the bill for all actual costs.

Uh-huh. Okay. Thank you.

Thank you, sir. Our next question is from Selman Akyol with Stifel, Nicholaus & Company. You may begin.

Thank you. A little follow-up on Radian. First of all, I mentioned army. Is that in addition to the $300 million contract or was that always part of the backlog?

That is, it's to be determined. At this point in time, as I said, the basic contract was Air Force. There are still a number of projects outstanding that would be part of the army acquisition process that could be added to that, but we want to be conservative in that number and stick with that, that overall projection, $300 million.

Okay.

There are a couple of other projecting that we're looking at now that could be added.

Right.

We're looking again, we're looking at a program that will run from the next five to 10 years, so, maybe that will determine the absolute of the expanse of that program.

The $300 million really is over the next five years?

Yeah.

Okay. Under the outlook section, Mike referenced two programs, number one, with the TRW with the silos. When would you expect phase I to see orders?

We expect so to see the initial turn-on. We're visiting this week, our customers are visiting this week. We expect it next month or two for the first two-phases, which is the design and transition phase, and so that one activity under way during '03.

And I assume that's minimal dollars?

again, they're finalizing the structure. It's -- the initial. phase I was 1.5.

Yeah, I think their dollars started -- stopped flowing in January or something like that. They're turning us on. We know we're part of it, um, something that, as you recall, the history was designed and by engineered air, the environmental control systems were designed by the corporation, we ended up having that design and I guess did an outstanding job, the TRW in the presentation, brought back expertise the company's had for years and years and years, some out of retirement, so we feel strongly that we can perform at a high level there where we left off, so, that program has a great potential.

Fantastic. Then the other item you talked about was the postal shortage. You said you completed successful testing and are waiting and I don't want to put words in your mouth, but instructions from the customer? Does that mope you anticipate an order or --

Well, we chose those words carefully so that we do not get out in front of our interference that if we very successfully passed it. We successfully passed the test, and we now await a response to our passing that test in doing what we do -- what they had asked us to do, so it looks like that -- that problem might be behind them. But we're just awaiting, I guess, some sort of go aheader.

Let me ask it a little differently. Do you know of anyone else who passed the test also?

No, we were the only ones doing that. It was not that kind of thing. It's just they have had real trauma there, and I think they're being very, very careful as they proceed, as well they should be.

We're talking about passing a test on some redesigned modifications that we make on existing -- that we made on existing equipment, much of which we have produced for the postal service, so, it was a design that really would prevent contaminated mail from getting into any operation in the postal service. Our machinery that we made for them the last 10 years is the initial of all kinds of mail to go in postal services. We feel good about that, and under the circumstances, we're talking about putting in a position, not protection you can be started so they can do a detection process, which they really can't now. We should know something the next few months.

And the key it that is you know the initiative was to reduce the cost in mail handling up until the anthrax, and then the anthrax problem problem hit, and then there's no initiative to move faster because you don't know if it's contaminated. So, they had to back off of that, so, the logic would possibly dictate that once you solve the contamination problem, then you go back to looking at reducing the cost and mail handling, which leads us back to our connect-the-dot mail-handling systems. That is our hope, and that is the way we would see the future unfolding.

Okay, the last point for clarification. None of this stuff is sort of in the 270 estimate that you guys gave guidance for next year.

That is true. There is basically no postal service. No. 2002 or 2003 numbers that we have given out.

As well as the TRW contract.

that's pretty much true.

Okay.

Well, if we stick with what our belief is that phase I is a minimal amount of funding, that would be the case, but they're looking at accelerating phase, too. If that were the case, then, we could get additional clues.

It's some -- excuse me, it's not in there right now, I think Jerry's point, which is well-taken and one of the reasons, you know, we were always extremely optimistic on this program with TRW, but the original forecast never had a lot of revenues in '03 as far as the program forecast, okay. Now, it looks location there could be some exoneration of that program, there could be additional revenue in '03. We don't know that yet.

All right, thank you.

thank you.

Thank you, sir. Our next question comes from Walter Kirchberger with UBS Warburg you may begin, sir.

good afternoon guys, very nice quarter.

Thank you, Walter.

I have a question partly answered. I was trying to get some idea of the shape of the $435 million, looking at the fact that you're going to do arguably $122 million in the fourth quarter. Obviously the 435 is not at that run rate, so, and based on what you said about the Radian business, probably the first quarter is going to be relatively large. Is that where you're going with all this?

You know, we have not, Walter, broken it down by quarters yet. Our first indication would be that radiant's going to have a very good first quarter. We historically seem to have lower first quarters in some of the other divisions for a whole bunch of reasons. There seems to be some amount of seasonality, that makes no sense but it's there, number one, number two. It's minor but it's a relative shortage relative to we go off a lot of percentage completion revenue calculation, and there is about, by far, the shortage number of work days, hours in that quarter due to the holidays and vacations and everything. So, that in itself makes it a smaller quarter and, so, everybody else we think is going to be less and we have yet to establish the exact numbers, where all of that DPDGS revenue will fall off the Radian, or whether it's all in the first, the second, but again possibly a little bit of it will be in the fourth quarter of this year.

Okay. The other question I had, which is completely unrelated, how many options are there out there nowadays and have you considered whether or not you're going to expense them?

Well, to start out, as previously required within the annual report, the MD&A section, that item is discussed. I don't have the exact number of options in front of me right now, nor are we actually given, I think that number here at that time frame, and for right now- I'll try to make this as brief as I can Walter- but there are people that stepped up to the plate and done that. One of our concerns is method, is Black-Shoals the method for evaluation, I think everyone who is doing that is using that. We're legislated to do that by whomever does that, be it SEC, Nasdaq or Congress. They may very well pick a different method. The people who are ahead of the game quote unquote, may have some earnings numbers out there that don't make sense after somebody comes back and tells you to start doing it. That's kind of the consensus we get out of a lot of people.

In addition, we're not sure if we agree with the Black-Shoals calculation. One thing it does is gives you a one-time value at the time of granting and that's it forever. Say, no one ever exercises any of those options, they never have any effectivity, you still have a hit on the income statement, even though nothing happened. We're not sure the methods that are currently out there are appropriate, and our discussion with the people, you know, within the accounting profession and everything else, we may very well be required to do that in the future, but the method that will be imposed upon us is probably going to be different than what everybody's looking at now. Therefore, we don't feel any advantage or anything else in doing it. Again, it's been in the annual report for several years. The numbers.

Yeah, and first, my question is at expensing was not either PRO or CON expensing. I wanted to know what you guys were doing about it.

We're not expensing them right now.

With respect to the options, and I might be all confused about all this, but seems to me there was an option proposal in connection with the annual meeting and then it was revised and redone and I'm not sure that I'm totally up to date on where you are with options on all of that, none of those things that occurred in that time frame would have been in the annual report that was based on a 1031year end.

The option plan that was part of the proxy, year-end, that, of course, was voted down based upon, I'm going to tell you how the requirements, as far as approval, I think as far as number of votes got over 50% of the votes, that option plan was trimmed down as far as number. We went back out and it was fairly significantly approved here within the last two months.

Okay, thanks a lot.

Okay Thank you all.

Thank you very much. That's pretty much completes our question and answer session. I guess at this point, we thank you all for your interest and for your support and we'll see you soon.

Thank you for participating in today's teleconference call.