Leonardo DRS Inc (DRS) 2003 Q2 法說會逐字稿

Welcome to the DRS Technologies second quarter conference call. At this time, all participants are in a listen only mode. At the conclusion of the presentation, we will have a question and answer session, and you will be instructed at that time how to signal to ask a question. At this time I would like to turn the conference over to Laura LeClair from Text and Company to introductions government ahead

Thank you, operator. Good afternoon. Welcome to the conference call to reviews the fiscal 2 on 003 second quarter of DRS Technologies. I'm 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.

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. I will read the safe harbor statement . 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 can cause actual results to differ materially from any such statement and include, without limitation, demand and competition for the company's products and other risks and uncertainties, details, and a companies' securities and changes commission filings. I would like to turn the call over to Mark Newman. You may begin.

Thank you. Good afternoon. I'm pleased to join you all today. I'm happy to be discussing the results of our second quarter of fiscal 2003. Earlier this morning we reported an outstanding second quarter, which included a quarterly record for revenues, operating income, net earnings and backlog. Diluted earnings per share of 44 cents exceeded last year's second quarter EPS on shares outstanding that were 33% higher than the same period a year ago, due to our equity offering we completed last December.

Revenues reflected the benefit of last year's second quarter acquisition of the Boeing sensors and electronic systems business and this year's second quarter acquisition of Eaton's Navy Control division as well as strong organic growth from two of the three operating segment. Operating income as a percentage of sales increased to 10.4% reflecting progress toward our goal of achieving a double digit operating margin. EBITDA of approximately $21 million was 56% higher than the 13.4 million recorded for the second quarter of the prior fiscal year.

Net earnings was 71% hiring reflecting our strong operating performance overall. The healthy order flow in the period raised funded backlog for September 30th to a new high of $652 million. These results place us in an excellent position for the second half. During the quarter, we completed the acquisition of Eaton's Navy controls division as we discussed in our last conference call with products on every service combatant and submarine in the US Navy this acquisition added major hull and mechanical equipment as well as computer controls systems to our already presence in the Navy tactical display workstation marketplace.

The combination of this business with our electronics systems group has positioned DRS as a total ship computing systems to the US Navy. In conjunction with it preeminent market position in electric driver and motor control products, DRS power and control technologies as it is now named has captured key positions on next generation programs, including the new Virginia class submarines and the CVNX future aircraft career and has played a significant role in promoting electric drive propulsion for the Navy's new ship design, the DDX.

After the close of the second quarter, we announced our acquisition of Nytech integrated infrared systems, a privately held company in Irvine, California as a market leader in uncooled thermal imaging systems for portable weapons, head gear, hand held devices, Nytech expands our capability to provide light weight thermal sites to the growing uncooled infrared military market. Nytech also specializes in the design of stabilized light weight gimbles (ph) capable of controlling numerous sensors. These can be mounted on a variety of land, sea and air platforms.

Nytech products are used in a variety of soldier systems for day and night vision during military reconnaissance, surveillance, and target acquisition operations. Nytech also produces flare cameras and thermal sensor model for unmanned ground vehicles, aerial vehicles and, missile guidance and collision avoidance. Over the past two years, DRS worked closely with Nytech through teaming arrangements which culminated in a number of strategically important military uncooled sensor programs, including the Bradley head track sensor suite and the cost effective targeting system.

These opportunities afforded us the advantage of working together and realizing the benefits of combining our operations, but the capability of uncooled infrared technology advancing, Nytech provides a base that strengthens our competitive pose for future uncooled sensor programs and strongly complements our core competencies in the cooled infrared technology and system integration areas.

I would also like to mention our recent announcement of our definitive agreement for the tender offer of Paravant.. Paravant is a leading producer of defense electronics for US and allied international military and intelligence agency applications with a strong market position in rugged computer systems and communications interfaces for military C4 ISR initiatives, Paravant is highly compatible with our goals to expand our core rugged computer systems business as well as increase our business in Air Force and intelligence agency programs. During our question and answer period today, we will not be taking any questions regarding this transaction but plan to discuss it further once the acquisition has been completed. For now, please refer to the information that's been made public. We look forward to discussing this more in the future.

As DRS continues to build critical mass through the implementation of our acquisition strategy, we are expanding our support in targeted areas of defense by adding new programs to our contract base and strengthening our competitive standing in important new technology initiatives. We expect the contributions of these acquisitions to have a lasting impact on how we define the company.

During the second quarter we achieved a number of accomplishments. I would like to take a moment to highlight a few of these for you. In our electronic -- excuse electro-optical systems group we successfully completed the transition of the mass mounted site program for our Anaheim, California facility to our Palm Bay, Florida, engineering and manufacturing plant receiving government approval to produce the program's associated hardware at the new location.

For the program DRS produces the infrared siding system for the US Army's Kiowa warrior helicopters. This accomplishment is a key milestone in our integration of the Boeing business acquired last year. We also received government approval on the preliminary design of our cost effective targeting system. You may recall we announced the second phase of this competitively awarded contract in July. SETS as it is called is a corner stone sensor system capability being developed for unmanned ground vehicles utilizing uncooled sensored technology, the system supports the Army's combat program which would provide increased troop survivability and mission effectiveness by removing personnel forces from high threat, high risk environments.

At the electronics systems group, we successfully completed the preliminary design review for the SBF 67 single processor upgrade. This program focuses on improving the interface of the MARCK 86 gun weapons system with the SBF 67 radar system also produced by DRS. This system upgrade will be introduced on the Navy's Aegis class destroyer, the DDG 105.

In the second quarter, ESG also completed the development of the display control module for the driver viewer enhancement system which supports the efforts of the electro-optical systems group to develop an uncooled infrared system that enhances driver's vision on light military ground vehicles. This is a great example of the benefits of leveraging capabilities across our operating segments to provide leading edge customer solutions.

Our flight safety and communications group we completed the manufacture of two first article units for the secure voice system. This unique shift communication system uses 3D audio technology to separate channels and also adds acoustic enhancements to lower fatigue over extended listening periods. These systems are very effective in fast pace joint combat and ready operations.

Also during the second quarter the Canadian Army carried out trials of the DRS produced long range night observation device which features the same focal plane array sensor technology used in the infrared camera supporting the US Army's Antas 4 upgrade. The Antas 4 supports the toe weapons systems on ground battlefield platforms.

As you know the Senate recently signed off on a 355 billion defense appropriations bill in addition to approval 10.5 billion in funding for military construction and 14 billion for homeland security. Procurement funding of 72 billion was more than 4 billion higher than requested. Overall these increases were not surprising and represent good news for DRS and the defense sector as a whole. As the budget continuing to be defined as a line item we expect to see solid funning in key defense programs that are supported by our core technology. I would now like to turn the call over to Rich.

Thank you, Mark. DRS achieved second quarter record revenues, operating income, EBITDA, net earnings, earnings per share and backlog for the period ended September 30. Revenues were up 39%, operating income and EBITDA increased 56% and net earnings improved 71% over last year's second quarter. The revenue growth was fueled by 4.2% organic growth and the addition of sales from two acquisition. The Boeing sensors and electronic systems acquired on September 28th last year and the Eaton Navy controls division acquired on July 15th of this year.

Higher sales in our electro-optical systems and flight safety and communications groups were partially offset by lower organic revenues in our electronics systems group combined with the sale of DRS ahead technology earlier this year. The company made progress toward improving the operating margin which increased to 10.4% in the second quarter from 9.2% for the same period a year ago. The increase was due to higher sales overall, strong program performance at our electro-optical systems and flight safety and communications groups and a net favorable contract adjustment in electro-optical systems segment partially offset by lower margins at your electronics systems group.

We expect a continuance of healthy operating margins throughout the second half and are confident we can meet our stated goal of 10% or more for the fiscal year. For the first six months of fiscal 2003 revenues were up 33%, operating income increased 44%, EBITDA rose 40% and net earnings improved 56 percent over the same period last year. Primary drivers for the record sales were the same for the second quarter, the major acquisition mentioned combined with higher shipments in the flight safety and communications group. Records six month operating income was due to the sales increase and stronger program performance at our EOSG and flight safety groups. As a result, the operating margin for the six month period increased to 10.1% compared with 9.3% last year.

Now, I would like to briefly reviewed second quarter segment performance. DRS electronics systems group recorded increases in revenues, operating income, bookings and backlog for the second quarter. Sales were $69 million, up 30% from last year reflecting the benefit of the addition of the DRS power and control technologies unit as a result of the acquisition of Eaton's Navy control division. Organic revenues were down 16% from the same quarter last year due primarily to decreased shipments of display work stations.

Operating income of 4.3 million was slightly higher than the year before due to the higher sales volume. Continued progress was made toward our goal of returning our UK subsidiary to profitability. We expect to see improvement from the restructuring efforts during the second half of the year and anticipate the UK unit will return to profitability during this time.

The group booked 69 million in new contracts in the second quarter. For the six months, ESG generated 103.9 million in sales, up 14%. The group reported 5.6 million in operating income reflecting an operating margin of 5.4% versus 9 million in operating income and a margin of 9.9 percent for the first half yeast ear. Organic revenues were down 17% compared to the first half last year.

Bookings for the six month period was 103 million and backlog was it 233 million as of September 30th. DRS's electro-optical systems group posted excellent results across the board turning in higher revenues, operating income, bookings and backlog for the second quarter compared with the same quarter a year ago. Revenues were up 67% to 67.5 million. Organic growth was 21.8% with the balance attributable to last year's acquisition of the Boeing sensors and electronics business. Operating income increased 92% to $10.3 million resulting in a strong operating margin of 15.2%. The group's operating income reflected the contribution of profitable programs from last year's acquisition as well as a net favorable impact from contract modifications and adjustments to our estimates to complete in certain contracts in the net amount of $1.9 million. The group booked $34 million in new orders during the second quarter. For the six months, EOSG generated 136.5 million in sales, up 66%, and 20.1 million in operating income, reflecting an operating margin of 14.7% as compared with 9.8 million in operating income and a margin of 11.9% for the first half last year.

Organic sales growth for the six month period was 20.8%. Bookings for the period were 105 million contributing to backlog of 285 million at September 30th . Our flight safety and communications group posted improvements in second quarter revenues, operating income, operating margin, bookings and backlog over the second quarter last year. The sales increase with organic up 14.7% to 24.2 million due to higher volume in the surface ship communications airborne, and electronic manufacturing services areas. Operating income improved 2.7 million, up 84% from last year, reflecting a strong operating margin of 11.3% compared with 7.3% a year ago. The higher margin was due to a favorable revenue mix with a greater proportion of revenues derived from higher margin programs in particular those associated with communications products and electronic manufacturing services supporting space applications.

The group booked 26 million in new contract awards during the three month period. For the six months, the flight safety and communications group generated 49.7 million in sales, up 19%, and 5 million in operating income up 119%, reflecting an operating margin of 10.1% as compared with 2.3 million in operating income and a margin of 5.5% during the first half of last year. These increases were all organic.

Higher sales were attributable to an increased demand to electronic manufacturing services coupled with higher shipments of airborne mission recorders and digital imaging systems for the United States and international customers . Higher profitability was driven by improved program performance overall in each of the group's operating units. Comparatively the group's operating performance benefited from last year's closing of the Santa Clara, California, engineering and production facility and the relocation of its mission recorder product line to existing company facilities. Bookings for the six-month period were 58 million contributing to record backlog of 131 million at September 30th, 8% higher than at the same time last year.

The total value of new contract awards received by DRS during the second quarter was 131 million, 24% above the same period last year and we ended the quarter with a record backlog of 652 million. Free cash flow for the quarter was a very strong $18.4 million and was $15.3 million for the first six months of fiscal 2003. Free cash flow was favorably impacted by a temporary increase in customer advances of 2.3 million for the second quarter and 7.2 million year to date.

With strong first half results behind us, I would like to turn to the next six months. Let me begin by saying the guidance given today does not include the anticipated positive impact of the Paravant acquisition. We intend to revise our guidance after the transaction is completed. Without consideration for Paravant, we remain comfortable with our previously guidance for fiscal 2003 reflecting revenues in the 635 - 645 million range and now expect to be near the top end of that range.

Operating margins should be slightly higher than 10% and net income should grow in the high 30% range with diluted EPS in the 1.57 to 1.60 range compared with 1.41 last year. We expect average diluted shares outstanding for the year to approximate 17.6 million. Previous guidance projected a free cash flow range for the full year of 8 to 12 million. We are keeping with that guidance but feel more comfortable we will be near the top end of that range. It is expected that capital additions for the year will still approximate 20 to $25 million, and that advanced payments from customers will show a net liquidation during the balance of this year.

For the third quarter of fiscal 2003, we are providing guidance of 160 to $165 million in revenues, as compared with 141million for the third quarter last year. Again, this is without any consideration to the Paravant acquisition. Net income should grow between 35 and 40% depending on the sales level and diluted EPS should be in the 40 to 42% range, on 17.6 million shares outstanding.

We close the second quarter with a strong balance sheet. Cash and cash equivalents were $40.2 million. Total debt was 139.5 million, compared with 162.5 million at September 30th last year, and net debt was 98.4 million, compared with 157.1 million a year ago . Our debt to equity ratio was .51, well below our stated target of one to one. Trailing EBITDA was $72.2 million with a debt/EBITDA ratio of 1.93, well below our comfort range of 2.5 to 3. The company has a revolving credit facility of $100 million. As of September 30th, after consideration of outstanding letters of credit, about $84.3 million was available. I would now like to turn the discussion back to Mark.

Thanks, Rich. We are pleased with our strong performance in the second quarter and year to date with two acquisitions completed in the first half of the fiscal year, we are well positioned to turn in a strong second half. This conclude our prepared remarks for today and will be happy to take questions.

Thank you. Our question and answer session is conducted electronically. If you would like to ask a question, it is star 1 on your touch tone phone. If you are using a speakerphone, please make sure you are not muted. That will block your signal. We will pause a moment to give everyone a chance to signal . Gentlemen, our first question comes from Sam Pearlstein at Wachovia Securities.

Good afternoon.

Hi, Sam.

Hi. I was wondering if you would talk about the cash flow. It seems to be nor advances. Is there anything in the capital accounts receivables or inventories that are timing that would reverse out in the second half of the year?

Sam, let me give you some of the details. I will talk on a year to date basis . Our net income as we reported was $13.1 million. Depreciation and amortization and other noncash type items was about 8 million. Our working capital actually came down a little bit, about 1.5 million. Then we had capital expenditures now, this is excluding Boeing which I will talk about separately, of about 4.6 million. Okay. So what we would call free cash flow from normal operations was about 18.4 million. Then we add a couple items that are a little unique. One was the large increase in advance payments of 7.2 million.

Then we had additional cap ex related to the Boeing integration we have been talking about the last few conference calls of 4.7. Additional Boeing integration costs of about 3.1, and then as we talked about last year, we had this legal settlement we disbursed in the first quarter of this year of 2.5 million. That's how we arrived the free cash flow number of 15 million.

Now, going forward the second half of the year, as I said in the prepared text, we expect the advanced payments to be negative on a year -- in other words, to liquidate in the second half of the year. We expect our capex to increase significantly over the first half level.

Okay . Thank you. In the EOSG segment, it looks like book to bill was relatively weak. Can you talk about that in turns of the orders. Was there any change in terms of the bookings with respect to some of the decisions with Raytheon disputing programs. I'm trying to get a sense as to why that was weak in the quarter

You have to remember that a number of the programs that EOSG has are multiyear programs. They have booked some big items already on I-Bass (ph) and HTI (ph). These are things that will be shipped down the road. They just happened to have some very strong bookings for multiyear kind of awards, which you wouldn't see, you know, every quarter. They have a good backlog right now from an organic standpoint. Do you want to add anything, Rich?

You really need to -- I don't you can in our business, and I know you know this, to look at a quarter by itself. If you want to look it at in halfs, which I'm not sure that's the right way to do it, the book to bill for our operations was a little less than one to one at .92. We expect a very strong second half of the year in bookings and feel very comfortable that for the year the book to bill in each of our three operating groups will be better than one to one

Okay. That's great. One last question. Rich, with the Eaton acquisition did that add any of the defined benefit obligation like you, I guess, added in since the Boeing acquisition. Can you update where you stand with regard to the pension obligation?

Okay. We did assume a pension obligation with the Eaton acquisition. It came fully funded. From the time that the acquisition closed, we still actually don't have the pension funds. They are controlled by Eaton at this point but are in money market certificates. Probably it was invested better than we would have based on what the market did since that acquisition, excluding the last two weeks. So that plan is fully funded as was the Boeing when we assumed that obligation .

Our next question come from David Gremmels, he's at Thomas Weisel Partners

Thanks. You mention you are looking forward to strong booking the second half of the fiscal year . Could you add color to that? Are there any particular programs we should keep an eye on or contracts, particularly competitive contracts, that are important to the company?

There aren't that many competitive contracts in the second half. A lot of the bookings are going to come from existing programs we have. We're going to pick up some additional I-Bass, L-Ras, HTI. Our mass mounted site is very strong, much stronger than we thought it would be when we acquired the Boeing business. We are getting tremendous bookings out of Eaton. Most of what we're seeing and what you will see in the second half has nothing to do with competitive procurements. There are a few but nothing significant. That's why we are confident that the second half bookings are going to be beyond the target that we originally called out. So, you know, we're going to have a very strong second half. Keep in mind when you are looking at big individual contracts, you know, a booking can come in a month after the close of a quarter and has zero impact on revenues but has an impact on the total bookings that you record and the backlog you have at the end of a quarter. As we see it now, everything is looking very, very strong for us

Okay. Great. The question on the acquisition pipeline, obviously, the acquisition program has been very active in the second half of the calendar year. Looking forward, do you expect to continue this kind of aggressive acquisition pace or can we expect you to take some time to digest Eaton and Paravant before taking on a larger size acquisition?

Right now, first of all, we don't feel we have been very aggressive at the rate we are going. These happened to have been some good opportunities. They are very, very solid business that is we bought and Paravant, which I'm not talking about, is also a solid business . We have a few smaller potential acquisition that we're looking at, but, number one for us is always acquisition integration. So we will take the time we need to make sure, you know, we are absorbing all of those acquisitions. Keep in mind we have a very dedicated staff within the group level that we run that actually handles the integration of those acquisitions. That gives us in the corporate staff the ability to go look at other things and see whether they fit in.

So, for example , ESG is going to absorb Eaton, which doesn't take a lot of integration because it is a good stand-alone business. Paravant is a strong business. It won't take a lot of integration, and going forward, you look at Nytech, which we're in the process of integrating. That slips right into EOSG. Maybe we will find something that flight safety can absorb. We have a lot of room in the management structure to absorb companies. What is important is that we are, basically, conservative in nature. We make sure that we keep a strong balance sheet at all times, and we make sure that we have these things under our belt before we jump into something else. So we have been doing this for a long, long time, and we do it in a very controlled way.

And then along those lines, just wondering if you could give an update on the Boeing SES integration . I think in your comments you talked about 7.8 million of capex and integration costs related to that. I guess that's out of a total of 10 million that's expected. Where do you stand on that integration there?

It is actually going very well. As I mentioned, we were able to move the mass mounted site program to Florida, basically, in flawless faction the we moved the Dircum (ph) program to Texas in a flawless fashion. The only place we have gone a little slower is in the uncooled focal plane. That's a very difficult technology. In fact, if you recall, you saw a lot of advertisements about a year or so ago that GM ran for Cadillac for night vision. You don't see those advertisements any more.

We made a very controlled decision to get our Dallas plant up and running with uncooled focal plane technology in a perfect fashion before we closed down the foundry that exists in producing the same kinds of devices in Anaheim. Those devices are not easy to build, and the machinery that we inherited and we knew they were inheriting in Anaheim was not good. However, we have customer demands to meet. We made a conscious decision to keep the foundry going in Anaheim until such time as we can not only meet the existing customer demand but do better. Right now there is a huge app appetite for uncooled sensors. We can only provide about half of what the market is asking of us right now. So that's where we've seen a little bit of slow-up in integration. That's been because we're being extra conservative. Otherwise, I say Boeing has gone flawlessly. We have some incredible people that came with that acquisition. They are doing a fine job

By leaving Anaheim open longer than you expected does that impact $10 million on Boeing integration costs you talked about previously?

It has an impact, but we have had savings else where so the net impact will come in under budget

Great. Thank you.

We go to John Reilly. He's with CJS Securities

Good afternoon.

Hi, John.

Focusing on the favorable adjustment in the EOSG group, is that from one of the acquired Boeing programs or existing programs?

That was one of our existing programs. It was tied to the Apache program. We do the flares for the Apache, the upgrade to the Apache siding system. Basically, it is a cost-type contract. We reached the cost limit on the contract. The customer asked us to keep spending, guaranteeing us that they would get us the funds because it was a cost-type contract. We got some of those funds. We are in a strong position now

Could you repeat the numbers of impact and well as earnings to share

the net impact pretax was $1.9 million. It was really 1.875. It was 5 cents a share

Thank you. Second, could you give us the nominal contribution from NCD in the current quarter ? The actual dollar amount?

In revenues?

Yes. Revenues and margin contribution.

I'll give you revenues, John. We're not going to talk about separate . From NCD the revenue was $24.7 million.

Got it. Organically ESG has been struggling in first half. What with can we expect from that group the second half?

They're going to do a lot better in the second half. We told everybody this at the beginning of the year. In the case of ESG, a lot of bookings and sales was going to come in the second half. That was just due to some slowdown on some of our core programs like CHS 2 and Q70, which are very strong and well funded. You have to remember that a lot of these programs are solid, programs you can turn out a certain amount of sales every year. Like I said many times, you take something like the Q70 program, that's a hundred million dollar a year program on average. Some years may be 75, some years 125. It all depends on how the funding goes at any point in time. Overall, it is a solid hundred million dollar program on average. What we saw this year was work actually getting pushed for that program into the second half of the year. Bookings were pretty good in the second quarter. So that bodes well for some improvement for the third and fourth quarter this year. We are not concerned about ESG. They are doing just fine.

Thank you. Last question, just regarding your balance sheet. Assuming that you are successful in your completion of the Paravant acquisition, would you look to expand your current credit facility and you bank lines and could you discuss what possible financing activity you are looking at?

We don't discuss financing activities. In general, I will tell you, you can count on us to run a strong, conservative ship. We're going to do all the right things for the future.

Thanks. Great quarter. Thank you .

Once again, that is star 1 if you want to signal to ask a question. If you are on a speakerphone, make sure you are not muted. Next question comes from Steve Binder. He's at Bear, Stearns

Good afternoon.

Hi, Steve

Good quarter.

Thank you.

NCD, could you maybe touch on -- you touched on sales. When you look at the 130 million booked in the quarter, how much was NCD?

The bookings and revenues were about the same, Steve

Okay. And then if you could maybe touch on the second half to get to the organic growth target you have. What are the key drives you see program wise ?

Key programs driver wise would be the programs Mark talked with the bookings. The ESGs Q70. In ESOG it's I-bass, HTI, mass mounted site. In the flight safety group, it is a bunch of programs.

Okay. Mark, could you maybe touch on -- there obvious have been developments in the '04 budget with respect to the Bradley upgrade program and the M1 CEP() and question whether we will see those programs beyond the '04 fiscal time frame and with respect to the protests you lost and the outlook for Q70 looks relatively stagnant, I gather.

When you look at the organic growth targets you've been on, do you think they're really sustainable beyond the '04 time frame?

You're talking about our 04?

Yes.

We know 04 is looking good. Certainly, anything can happen with programs. If anything, we see Q70 picking up because the stagnation took place this year. We see some strong stuff going forward because you're going to see back fit programs initiated. As far as the Bradley and the Abrams, it depends who you talk to, I believe we have to maintain a strong legacy force as well as work towards transformations. The good news is that the kinds of products we make work in both arenas, so if you start to see a slow up in Bradley and Abrams then you will see a pick up in some of the other things we are doing.

We're not too concerned right now. There will be a lot of work that goes on in those programs in terms of the platform manufacturer themselves and what the future of the upgrades are going to be. From the kind of products that we make, everything looks pretty strong. Our uncooled business, we think, is going to take off. There will be a lot of organic growth associated with that as we get into our '05 time frame. That will make up for a lot. I think that sitting here today, we're still feeling pretty good about the future. We don't make platforms. As far as what went on with Raytheon and the protest some of you are aware of, one of the contracts was lost, the other contract we turned back on for. The IPSS now went to them, but the FEP program, we were turned on actually at a slightly higher amount than we had before. I think when you look into the future, what you're going to see is that it will be in the military's best interest, especially the Army and Marine Core, to have two very, very strong suppliers in that areas, both us and Raytheon. In the long run, the business base will be just fine.

Any update with respect to DDX and what your role might be in that program?

Well, we are working diligently there. I don't want to give up any competitive angle or edge we might have. It is not a good thing to talk about. In general, we think we will play a role on a number of fronts. You know, that's really all I want to say at this point

Maybe a different way of looking at it, when you look at the Q70 program and DDX on a combined basis, do you think the revenues will actually grow over the next couple of years?

There is no question if you combine the two, the revenues will be up. So I think that we're -- DDX is nothing but upside opportunity, and we think we've got a long, strong future on Q70

Okay. Thanks very much.

You're welcome .

We go to Trey Snow at BB&T Capital Markets

Hi. Good afternoon. Could you tell us what your tax rate was for the quarter and how you are prying to bring that down?

47%. That's also the tax rate we expect for the full year. We, obviously, will take a lock at that at the end of the third quarter. If it needs to be adjusted, it will be. If it was adjusted, it would be downward. I don't anticipate that. I mentioned during the prepared text that we expected our UK subsidiary to return to profitability in the second half of the year. If it goes as we expect and if next year looks as good six months from now as it appears today for that subsidiary, we would expect that next year we would be able to drop our effective tax rate at least 1 point, maybe 2 points

Great. Thank you. Could you give us more color on what you are doing there to improve the business, particularly in this quarter, that might have impacted results?

I think what Rich is alluding to is the fact that we spent the last year and a half or so right sizing that business. We finally got it at a level where they can make money on what they produce. The other thing we did was put on a big marketing push by improving their marketing and giving them some good support from the US, and they won a number of programs so they built their backlog. Backlog translated into sales and profit. So we helped them on two fronts. We helped them right-size the business and helped them get new business.

Terrific. Thanks. Good quarter.

There are no further questions. Mr. Newman, I will turn it back to you for closing comments

Thanks. Having turned in a record quarter for the first hatch, closing the Paravant transaction as well. I think we are in excellent position for continued growth, and we remain focused on turning in another great fiscal year. Thanks for joining the call today. I look forward to speaking with you the next quarter.

Thank you. That does conclude the call. We thank you for your parts paying. At this time, you may disconnect. Thank you .