Leonardo DRS Inc (DRS) 2003 Q3 法說會逐字稿

Good morning and thank you all for holding. All participants will be able to listen-only until the question-and-answer session of the conference. And I would like to remind all parties that this call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Mr. Mike Shanahan and thank you sir you may begin.

Thank you. Good morning everyone. Thank you for joining us on our call today. You have all seen earnings release for our third quarter ended July in which we reported a 46% increase in quarterly revenues to $155.7m and earnings of 72 cents per share. Most notably, these quarterly results reflect the results of the TAMSCO acquisition [they are in there] for the full quarter. Also, we are now seeing the favorable impact from a number of operational initiatives undertaken over the last two years in terms of rationalization and cost reduction. Also, we are seeing a significant organic growth. And we have developed some very effective inter-company synergies that are often sought but not as often achieved when making acquisitions. Based upon the successes being achieved, the long-term outlook for our company has never looked better and our management team continues to grow and improve. This management team stacks up quite well for the present and well into the future. On the call with me today are Jerry Daniels, Vice Chairman and Chief Executive Officer; Gerry Potthoff, President and Chief Operating Officer; and Gary Gerhardt, Engineered Support's Vice Chairman and Chief Financial Officer.

I am going to turn the call over to Jerry Daniels now who will share the discussions this morning. Jerry.

Thanks Mike. Rather than me talking now, I would like to turn it over to Gary Gerhardt and get right into the details of the quarter. Gary, would you take it from here.

Alright, thanks Jerry. Before I go into the quarterly results, I am required, of course, to read our standard disclaimer.

Statements made during the course of this conference call, which are not historical facts are considered forward-looking statements within the meaning of Section 27A of the Securities Act 1933 as amended and Section 21E 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 of 2003, we generated record net income from continuing operations of $12.4m or 72 cents per share. As you've realized, quarterly revenues and earnings exceeded our own internal forecast as well as Wall Street consensus by a significant margin. We will discuss the factors contributing to these positive variances in a few moments. The advancement in quarterly revenues and net income from continuing operations were due in part obviously to the inclusion of the acquired TAMSCO operations in the current period. For the third quarter, TAMSCO generated revenues of $34.6m and contributed net earnings of $2.1m. Several areas of TAMSCO, particularly its telecommunications and digitalization business, continue to show excellent forward growth trends. As significantly, we benefited from our unprecedented levels of organic, more than 60% above the prior year revenue and earnings growth at certain of our existing business units. For example, based largely on the strength of higher DPGDS power generation system production, our Radian subsidiary's quarterly revenues surpassed the $30m mark, more than twice that of the prior year. With increased revenues their incremental profit contribution was quite robust as well. In addition, with the level of U.S. Military deployment abroad we've seeing increased demand for several of our military support products including our FDECU environmental control units, tactical quiet generators, and Revetment kits. These higher production volumes led to increased profitability during the period, the trend which is expected to continue well into next year.

Partially offsetting these quarterly increases, revenues and earnings for the heavy military segment declined from their prior year level. Revenues for the segment were $10m lower due to the close down of the M1000 trailer contract in the second quarter of this year combined with lower revenues on the Tunner program as several related Retrofit and other modification orders were completed during the quarter. We expect the heavy military segment to finish the year with revenues of approximately $110m for entirety of fiscal 2003. The [diminished] top line led to reduction in quarterly operating profit for the segment; however, the segment's operating margin of 13.1% was fairly consistent with that of the preceding quarter. As we have previously informed our shareholders, we are in the process of transfer certain production on two key wide military programs to this segment's West Plains, Missouri production facility as part of our ongoing capacity utilization initiatives.

During the current quarter we ran $2.1m of inter-company work through this facility as an example with increased volume anticipated in the future. This additional inter-company work will allow for greater absorption of the facility's fixed overhead costs, resulting in solid profit margins for this business segment going forward. External revenues for this segment should approximate $80-85m in fiscal 2004.

Electronics and automation quarterly revenues and earnings were lower than their record levels experienced last year, as required production rates diminished in several of its key programs during the period. Less work was done on the Knight [eyepak] and MSTAR programs as compared to the prior year, due to variations in delivery schedules while other programs partially offset the trend. However, the E&A segment's earnings contribution and profit margin well exceeded that for the previous two quarters of 2003. We expect to finish the year nicely within the E&A segment near last year's level of annual revenues and surpassing 2002's performance in segment earnings contribution.

Top line revenue growth in 2004 exceeded 10% combined with the impeding closure of the Sanford production facility near the end of this calendar year will allow our increased margins and profit contributions to this business area going forward. So far this year, EBITDA totaled nearly $56m, while free cash flow totaled $54m aided by the continued management of working capital. I will discuss further our revised revenue earnings gains for the remainder of 2003 and comment on our forecast for next year a bit later on this morning's call. Now I would like to turn the call back over to Jerry Daniels.

Thank you Gary, good report. The third quarter continues with tremendous growth pattern that EASI management team has developed over the last several years. I would like to take a few moments to comment on certain recent developments on our own company and within the defense industry. First of all, hats off to the TAMSCO team led by Dave Gust in putting up some outstanding revenue and earnings figures right out of the box. Performance like this validates the acquisition philosophy to buy accretive synergistic companies and allow them to execute on their strategy. Finally, the business plan put in place some years ago by TAMSCO's founders, Nick Innerbichler and Bill Bilawa, has been a solid platform on which to profitably grow. TAMSCO's strategic position in two of our key customer locations, the CECOM office in Fort Monmouth New Jersey and the Warner Robins, Georgia Air Logistics center provides them access to pursue a wide variety of projects to their defense customers. That combined with the contracts like FAST, Rapid Response, and their FMS Repair & Return programs will keep the attractive opportunities coming.

Incidentally, the experience and enthusiasm that Nick Innerbichler brings to us as a Business Development's Senior Advisor at EASI has already begun to pay dividends. As Gary pointed out, the third quarter brought us robust organic revenue growth, particularly in the light military area that is really unparalleled in our history. While we don't anticipate internal growth of 60% in this segment each quarter, we believe that the strong fundamentals surrounding our support equipment product portfolio will easily allow us to meet our long-term target organic growth rate of 5-7%. As we previously stated, our overall revenue and earnings growth targets are more aggressive and assumed the continued identification and acquisition of accretive businesses.

If our growth is our goal, we absolutely will not pursue acquisition targets merely for the sake of top-line growth. Profitable growth requires that we add firms with strategic and cultural synergy. Successful acquisitions don’t just happen; it takes time and careful examination to identify an acquisition partner, develop a business integration plan, and do ensure that both parties feel good about the marriage. Although this type of approach takes time, we believe it's essential to making a deal that makes sense of the over and all. Our experience and track record in this area is borne out by our financial performance since we began our strategic growth plan over five years ago. While we do not comment on specific acquisition opportunities due to their sensitive nature, I can tell our investors that we are actively pursuing several synergistic acquisition targets at the present time and are hopeful of being successful in this regard.

Now, Gary will comment on our expected financial results for the fourth quarter and discuss our guidance for 2004. Gary.

Thanks Jerry. As you know, we exceeded Wall Street consensus for third quarter revenues and earnings. While beating the Street on a regular basis is certainly not new to us, given the magnitude of the favorable variances, I'd like to comment on this significant factors contributing to this performance. Certainly after our acquisition of TAMSCO in May this year, we indicated that TAMSCO would add $55-60m to revenues in the second half of 2003. This was based upon their internal forecast and their calendar 2002 reported revenues of a $116m. Obviously, these figures proved conservative as TAMSCO generated $34.6m in revenues during the quarter as they experienced exceptional business growth in several areas. At their 2002 revenue level, TAMSCO delivered operating margins of approximately 8%, fairly typical for a government engineering services' IT logistics firm. Based upon these relationships, we were looking for contribution to net earnings, contribution of about 10 cents for the second half of 2003. However, with the increased revenue level for the quarter, TAMSCO was able to better leverage its relative fixed G&A cost base thereby producing enhanced profitability and operating margin of over 11% for the period.

After income taxes and interests, TAMSCO contributed net income of $2.1m, equivalent to some 12 cents per share in the third quarter alone. This is essentially 7 cents above our indicated guidance for the current quarter.

Revenues and profits for our existing businesses exceeded our forecasted guidance for the quarter as well. The incremental 2003 revenues from our Radian subsidiary of nearly $17m coupled with higher revenues in other businesses within the light military segment produced significantly increased net income. Radian, for instant, posted a net profit some $1.7m above the same quarter in the prior year and well in excess of its internal forecast for the quarter. Similar volume related profitability situations and other operations within the light military segment also produced better than expected results.

Given our outstanding year-to-date performance, we now expect our 2003 revenues will approximate $550m, $5-15m above our previous guidance. Net earnings from continuing operations including any restructuring charges related to our previously announced facility rationalization program are forecasted at $2.40-2.45 per share. This represents more than a 35% increase in earnings per share from 2002.

For 2004, we are looking for revenues to come in between $620 and 630m or 12-15% higher than the current year. Majority of this advancement will obviously come from the inclusion of TAMSCO for the entire fiscal year with modest overall internal growth anticipated. Earnings per share should advance more than 20% to approximate the $3 level in 2004.

I will now turn the call back over to Jerry Daniels.

Ladies and gentlemen, that completes our remarks and we've been intentionally allowed some additional time this morning for your questions. So please go ahead.

And if anyone does have questions at this time, you can press “*” and “1” on your touch-tone phone. You will be announced prior to ask any question, again “*” and “1” on your touch-tone phone. Our first question is from Selman Akyol, your line is now open. Please state your company name.

Thank you, very nice quarter. Two question if I may; first of all, on TAMSCO, is there any particular contract that would account for the bulk of the revenue or anything particularly long-term contracts?

Well, I will start with the answer to that Selman. TAMSCO is very diverse relative to where they are located, the number of contracts, the different products associated with them. So they do not have one single large contract like Radian, the DPGDS, which contributes a significant amount of revenue, but they have been but they have been very successful in all areas; the two contracts that we have always said are very important in the TAMSCO acquisitions are the FAST contracts and the R2 contracts coming out of CECOM and Warner Robins, and those allows a tremendous amount of procurement by DoD through those instruments, but TAMSCO itself has shown significant growth over the last few years in all areas of business it is in.

Alright and then just a second question, is there potential performing military sales coming out of like military?

This is Jerry, Selman, good morning. There is some potential across the number of our division although we are taking that most of the time. I wouldn’t see that as a huge change to what would seem as our going forward organic growth, but yes there is some potential there.

Okay, great. Thanks.

Our next question is from David Gremmels. Your line is now open, please state your company name.

Yeah, thanks Thomas Wiesel Partners. The first thing I just wanted to confirm your old EPS guidance excluded the restructuring charges and the new guidance includes restructuring charges, is that right?

Yeah, David, this is Gary. That’s true, our understanding of what the SEC is looking for is more inclusion of that and not separation, and very candidly we will tell you, inclusive of those restructuring charges we will tell you what they are, but we won't add them together for you. But yeah that is a difference from the previous guidance, so those numbers are not comparable. Let me take, for example, for the year '03, and you take that out, you would be probably somewhere up around 250, just roughly.

Right, so the upward revision is actually greater than the 20 cents, it's more or like 25-30 cents on an apples-to-apples basis?

That is true correct.

Okay and then your revenue guidance implies Q4 revenue actually down from Q3, you know, sequentially which is not historical seasonal pattern we have seen, and I didn't really hear anything from your comments that would imply that there was any timing issues with revenue that was accelerated into Q3 from Q4. So, I was just wondering if you could comment on that?

I think what we said in there it's going to be at least 550 -- I think very candidly 550 is a kind of a round number. I think if we take the third quarter run rate, you're probably going to get in the range of where we should be at -- what we are looking at right now, and yes, that will put you a little over 550. We are probably not going to be greatly in excess of 560, but it's going to be in that range. As we have always said, and my famous word, we try to be conservative, and as I said 550 is a pretty round number. But I think the third quarter is really illustrative of the run rate you will see in the fourth quarter.

Okay, great, and then to further dissect your guidance a little bit more, for '04 that the guidance seems to imply like a 14% kind of operating margin, which is obviously quite a bit higher than the last several years at least and it's, kind of, [attitude] given that you have got more services revenue in the mix. Now what's -- I guess, I'm wondering what's enabling this margin expansion, is this the restructuring efforts or what’s happening there?

We -- hey David. This is Jerry Daniels. We -- Let's see, we -- pretty aggressive margins, but on the other hand consistent with what we are seeing in the results of our continuous improvement program going on and the project [EL] with the some of the restructuring we are doing internally. And in consistent to, you know, we have tried to say that our goal is to provide a 20% EPS growth year-to-year and that's consistent with that guidance.

Okay. So the, you know, that the higher margin rates looking at, you know, the -- in '03 and '04 relative to historical levels these are, I mean, these are new run rates to be taking about. There is nothing, you know, one-time nature that would cause margins to be higher in the very near term?

Well, we have some contracts that will be coming to an end. That we will be able to close out that will add to that. But those are pretty solid margins particularly with the mix of manufacturing and services that we have. And, again don’t forget we are getting some benefit from our internal restructuring and contentious improvement programs here.

I think even that to being a long story on it David, but you know we are also receiving some of results of some of the consolidation of manufacturing. Again, some of the products down at West Plains that the results we're seeing there are excellent. [Spring] and the DPGDS work that you remember when we bought Radian they had no production facility, that was all sub contract -- contracted out. We are starting to see some results in the third quarter there. And the other thing that we are seeing if you look at it, remembering the numbers I gave you before relative to TAMSCO, both TAMSCO and Radian are not real pure services type business, there is a mixture and they have been very profitable with -- very profitable and we would anticipate there continuing to be very profitable on a lot of their business. It is not just pure selling of man [hours] and so forth. So, those few companies are going to see some fairly good margins going forward, which won’t bring it down to the -- to diluted like a normal services business which may be 7% or 8% operating margin.

Is it fair to say that as you look at the savings from your restructuring consolidation efforts that -- that has at least met your expectations and may be a little bit better?

Yes, it meets our expectations. Yeah.

Yes, they have been very successful -- very successful and will continue as we said. We will continue to look at facility utilization and similar type of programs as far as getting bank [to the buck] and that will continue into '04 as we look into other areas.

Okay, and then the final question. In the past you talked about 5-7% organic growth in '03, obviously you're fighting the M1000 completion, but as you move into '04, you seem to have the opportunity for more favorable comparisons and particularly if you are going to do $580m in bookings this year, you know, is there any chance that 5-7% organic growth rate could be something better than that in the near term?

Yes, as the 5% is kind of going back to David, in what we have committed to our shareholders that like the bottom-line growth of 20% net income after-taxes that -- we make that commitment that obviously long-term is a number that we have experienced; we think we will experience long term and yeah, you are certainly going to see some periods in year right now; and maybe into some part of '04, you're going to see some numbers little ahead of that. But long-term, we think that is a realizable growth rate, it is reasonable, it is well within what you would expect within the Department of Defense business, and it doesn't go out and blow people away by saying we are going to do 15% continually, because that's pretty unrealistic [gradient] within DOD.

Yes, and David too, I remember a lot of our businesses driven by the number and the magnitude and the duration of military employments or deployments. And it is, you know, -- so, we will, in fact, now we've traditionally seen our business [like] by 6-8 months when these things occurred and now we're starting to see that. So yes, near term, we are going to see some additional orders and revenue. But if you want to take a long-term view of this -- that side to 7% in the part of the market that we occupy is a pretty realistic number, but yes, new term, I think we are going to see some things, we are already starting to see some increased bookings.

Great, thank you very much.

Thanks.

Our next question is from Eric Hugel. Your line is now open. Please state your company name.

Stephens Inc. Great quarter guys, can you -- I was looking at your cash flow numbers, can you first of all, I guess, give me what your CAPEX was in the quarter? And obviously, your free cash flow numbers, I guess, the guidance from before was, I guess, 50m plus; it looks like you've achieved that already. Can you sort of give us a revised guidance for free cash flow for this year and further what we can expect for next?

Okay, we are looking at the number for CAPEX for the quarter if you are real quick. As far as do we have in there some money,[inaudibleble]. Eric, we don’t have for the quarter right here and all the data we've got is 8.4 so far for the year, and remember that number is a little higher than we would normally run due to some of the facility changes that we have made during this year and so forth, that's why it's high and so on or are partially related to the capacity utilization and redoing some of the facilities. Relative to cash flow for the year, I don’t remember whether we gave any specific guidance, it will probably be north of 60. We can certainly get on the phone and go through little bit more detail with you as far as how we get into that number. Cash has been strong, it was extremely strong through the first half of the year, it was strong through the third quarter, and it will be strong through the fourth quarter. We are probably not going to see a percentage in the fourth quarter like we've seen in some of the earlier quarters this year and I mean that negatively it has been extremely strong as it has historically.

And can we expect these types at same levels or should -- for 2004?

Yes.

With regards to your acquisition campaign. I know you've said that you see number of targets out there. Can you comment on what you feel, you know, sort of valuations are? Are they in line with what you believe is reasonable or I mean, sort of, just an overall picture of what you see out in the market right know?

Yeah, Eric. This is Jerry here. Yeah we've -- without giving any specifics, we are sticking very much to the recipe that has brought this company where it is today and in terms of the mix we are looking for a culturally and the strategic set, we are looking for companies that have a business plan that promises good solid growth and their evaluations are about what you've seen us do in the past. I mean, we are cautious on these things, but there are other opportunities out there and we feel pretty good about.

Okay. On the light military side, if you sort of broke out the -- I guess, and maybe it's harder -- easy or hard [that] I am not sure, but the light -- sort of the manufacturing side of the business versus the services side of the business, can you sort of dissect that, maybe and give us a sense of what the margins were on the manufacturing side versus the services side?

Eric, we don't have that in here very candidly. You are saying at the light military breakout. Why don't you maybe call us, we can give you a little bit more info. We usually don't give that data and to be very candid, I -- we don't even -- there is a lot of data in front of us here but we don't have that breakout of what's in that third quarter between the two because we don't. One thing we don't do is, of course, we don't segregate cost necessarily to debt level due to the reporting and we certainly are looking at that subject as far as segment sector we are reporting right now is where we -- the breakout that we have is that still makes sense.

Okay. My last question with regards to TAMSCO, you said a lot of the boost to the margins looks like it came from their G&A being relatively fixed. So I guess we can expect one that this will-- this level of margins will be maintained as long as we continue to see this level of volume through it or is there specific contracts, the higher contract margins?

And clearly as Gary said earlier [on note] that the TAMSCO is a very diversified unit and the margins will, in fact, be affected by the mix of business they get between services and some of there more of their product-oriented things, but yet near-term, we expect that run rate to be consistent. But they can, you know, the more services tend to be on the lower margin end. Some of their other business has good solid operating margin.

Okay, thanks a lot guys, great numbers.

Thanks Eric.

Our next question is from John Snow. Please state company name.

BB&T Capital Markets. Good morning. Fantastic results, couple of question on TAMSCO again. Do you look at where the margins were a year ago or even a quarter ago and where they were in this quarter in 11% range? Did any of that improvement come from any elimination of overhead there or is just core business?

A combination of both, the business as far as the mix and some products that they have sold that have been at very good margins. There has been some cost reductions and so forth. One other thing, not to make a long story, but obviously when you buy these companies you can look at their overhead restructures; you can look at all their operating expenses. And once you get in there and you starting running the company, you will always find out there are few other obvious savings or things that didn’t happen and I think we have seen some of those.

Is there more of that to go or do you feel good where you are now?

I think we feel pretty good where we are now going forward. I mean, our history has been not to go in and make radical changes in company, as Jerry said before for those companies to continue their strategic plan. We have done that with TAMSCO and we will continue to do that and let them operate that business so successfully as they have historically.

Okay. And final question is, its look like the restructuring charges this quarter was about half of what I was expecting. Do you still have that $3m target for the year, is it going to -- can we see something larger in the fourth quarter? Is it going to slip into '04 or you guys just not going to spend as much on it?

Probably it is going to be a little less than we anticipated, probably closer to the low $2m range as far as what that is going to be at [completion in '03].

For the new --

I used that term we are fairly conservative in that, but we are seeing some excellent results in the consolidation effort. We have had some people out there and do really good things getting that done and save some money.

Okay so at this point you are probably done with that?

There will be a charge in the fourth quarter probably very little after that charge in the fourth quarter should be kind of similar to what was in the third quarter.

Okay. Terrific

And the only other thing different going forward remember now relative to the buildings. We are attempting to sell three buildings. We think we have got that taken care of and when those buildings get sold we may have to take a plus or a minus it could be either way on those buildings when they get sold. But as far as the operations being shutdown that Stanford operation is basically shutdown at the end of this fiscal year with a little stuff continuing into the end of the calendar year.

You have an estimate on how much cash that might generate on the sale of these buildings, in sum?

In total the three buildings together are worth somewhere around $10m, just roughly.

And would you keep that money for working capital or pay down debt or what do think?

Continue the same way we have done before. We will pay-down debt and use it then to acquire additional synergies to companies.

Terrific. Okay. Thank you guys.

Our next question is from Robert D'Alelio. Please state your company name.

Neuberger Berman. How you doing?

Fine Rob, how you doing.

The M1000 it sounds like you had a little bit of revenues in this quarter and then that sort of goes to zero, I am curious what the total revenue contribution from that is like would have be in fiscal '03, and on assuming zero on '04, is that correct?

From what we see right now, yes the total revenue that we will record in '03 is going to be somewhere 10 or 12. It's about 10, I think and so forth. I think there was a maybe a little bit of revenue in the third quarter but it was pretty much finished in the second quarter.

Okay.

We think there is going to be some amount continuing work on that going forward, repairs, upgrades, and everything, but we really don’t have anything in our forecast right now.

Okay. And if I look at TAMSCO and the DPGDS specifically within TAMSCO. What do you think you are looking at for revenues from that particular effort this year and what your best guess for next year at this point?

Well, the DPGDS remember is in Radian.

Yes, I'm sorry.

Yes. And we are looking at revenues on an annual basis right now. I think its $60-70m just roughly on the DPGDS at Radian, on an annualized basis.

And what do you think in next year is there --?

I think our forecast at that point is approximately in that same range. I think there is some opportunity for growth, but right now we are kind of looking to say that’s a going-forward number for several years.

Okay. Where I was headed is, if you look at your projected revenues of 550 this year and you take your range for next, maybe this isn't the right way to look at TAMSCO, but if they did $34m in the quarter and that was the first quarter you had them right?

Yes and they weren't there for the whole quarter, just one quarter.

Right, and if I just sort of totally straight line that out at $34m, it's an incremental $68m from TAMSCO next year just by virtue of having them in for the full year, and [that's a] massive seasonality in the business. We think there would be an upward bias to the numbers there which gets you, kind of, to the low end of your targeted range, which kind of implies extremely conservative internal growth to me, even beyond lower than your 5-6%, is that -- am I doing something wrong or is there something else rolling off other than the M1000 that's handicapping it internally?

As far as how you did the calculation -- I think we -- the number that we provide out with our guidance is a conservative number, but there is a lot of other factors that get into what actually will determine all [inaudible] foreign revenues.

That's fair. And you've always made the comment that the length of deployment is a key to you guys in your business flow and certainly looks like Iraq is currently a [inaudible] deployment at the moment. Is there -- I mean you shipped all the stuff over there. You also set up a lot of [tents] to stay there even after that everything is said and done. Do you have visibility, you know, just from what's going on in Iraq so far, even if this were to end tomorrow? Can you foresee a pretty decent flow of business either to replace or repair or what have you -- what's already been used there?

We -- you know, we obviously don't have any more insight and any view to vibe on --

Right.

What this is, but it's the duration of the -- the number of the employments and deployments and the duration is what drives up our business but even if it were to end tomorrow, yeah, there will be certain reconstitution of these divisions and of these forces that will go on. We are just now seeing that and quite honestly even our customers we lost them to -- to try to put a number on some of those things, you know, they have here more expensive equipment, mainly there is some [depot] type of repair work or [inaudible] for us, whereas the lighter more expendable stuff mainly the replacement work. We are talking to those customers constantly as you might imagine but we don’t really have our arms around it, nor do they right now. It's -- we are sort of a [pay] as you go on this thing.

You should have thought of -- maybe Jerry just shot at that -- with recognition that we now have tremendous service capabilities, you know, we are working on a concept called virtual prime vendor where we can essentially provide a lot of equipments and the reconstitution that Jerry is talking about and then all the services that are necessary to support that product in reconstitution and so that's something that we are just getting into and it had lots to do with this large spectrum of capability we now have.

Great.

You know, I am really excited about what we are going be able to do and I -- we guess learned here last week and that our military is now in over 130 countries. So, as long as we continue to be the peace keeper of the world, our products is going to be everywhere help them support those troops and we don’t need in Iraq and we don’t need in Afghanistan do very well and if you couple that with as I said the broaden capabilities we got we are also in re-invention of parts and [inaudible] lessons, which is big problem with military. [inaudible] another virtual plans under thought process. So, we got a lot of things going on that we are really excited about that we believe we will be able to sustain or excel the organic growth targets that we have.

Okay, one last question for Gary is the $50m of free cash flow were there substantial sort of what I recall unusual changes in networking capital there and also is there any [option-related] positive impact theory that from the tax impact to the actual exercise [themselves] and that --?

Not much-- not much option business in '03 okay. Most of that came in prior years, relative to working capital, we have some significant working capital, positive changes earlier in the year there was virtually nothing in the third quarter.

And should we -- in terms of trying to straight line numbers here or try and extrapolate out, is that working capital change that you saw kind of given the business level that you are talking about going forward, is that unlikely to recur, is there likely that the swing to be from a [shorts] to use kind of thing fiscal '03 to fiscal '04?

I don’t think it will go into use. We will continue to work working capital -- I think there is some areas where we can still see some improvements. I doubt that we are going to see the magnitude of working capital increases that we saw in '03 on a recurring basis basically, but we'll continue to watch that very closely and we got a good plan there and we'll continue to find reductions I think but not probably the total magnitude of '03 though.

And how much were you be able to pull out of working capital so far this year? Just roughly.

About $25m.

Wow, that's net -- net in all, you know, receivables, inventories, payables, all together.

Yes.

Okay. Alright. Thank you.

Our final question comes from Michael Braig. Please state your company name.

A. G. Edwards. Question regarding the transfer of inter-company production. I think in the past you have offered some guidance as to how that kind of revenue and profit potential shifts or does not shift relative to segment identity? Could you clarify just what has happened to date, and what is likely to happen as work shifts from light to heavy military sectors?

Yes it's -- Mike, let me try and give my [inaudible] in a easy way, of course. We are in a very controlled environment, obviously how we account for that in respect to doing business with the Federal government, but the revenue -- let us take an example, Radian is having SEI due the DPGDS and so forth okay. Result of that is several things; one is the revenue will be going through Radian just kind of like normal so to speak okay. The SEI division will see increased profitability as a result of greater absorption of overhead at that facility by virtue of the fact that we're going to have additional labor hours down there. In Radian, we'll also see increased profitability due to the fact that the labor cost and material costs are less than what they were showing by sub-contracting that DPGDS. So, back to your -- basically [abating] your question, it says the [rest of] the revenue stay with the original company Radian, but we do see some savings as a result of that; for example, [Dan] explained, you would see increased margins on the [counter] by virtue of greater overhead absorption.

Okay, and then as a follow-up, is there any thought or any likelihood of changing sector definitions, as perhaps your way of managing and looking at these various acquisitions, changes, the nature of existing sectors?

Yeah, we are looking that very seriously, Mike. You know, the SEC certainly has a lot of controls relative to how you define and so forth. It relates a lot how do you manage and how you control costs and everything else. So, there is a lot of guidelines out there in respect to what -- how you can define the sectors or segments. But we think it's very timely right now to kind of look at that as a result of TAMSCO and Radian and some of the other acquisitions. May be it makes more sense to put a different break on the sectors out there.

And are any of the SEC guidelines on sector definition in conflict with what your primary DoD customers require by way of contract management?

There are two separate subjects; we would segregate cost by contract at a division, specifically for purpose of progress payments and everything else and that would not be in conflict at all. Those are two different subjects and we are pretty much locked into what DoD requires. That system is in place, and we will continue going forward in that and then it's kind of like how we bring all those costs up and how we've been bringing them together in next number of new sectors, it may or may not be similar to what we had before.

Okay, thank you.

Hey Mike. You know, just one -- you and I have talked often over the years about our peer group activity and relative to your question about trying and understand one of our segments versus the other, those peer groups continue to work very, very actively and as a result that's a pretty dynamic environment that we are in. For example, acquiring TAMSCO we found that we have got an excellent light electronics manufacturing operation in Polson, Montana, excellent manufacturing capability. So we'll be transferring some work there, and in fact we are in the process of transferring some of the SEI work to that facility. So, the point being that, you know, tying to lock down these various segments and understand them, you just need to accept it. You know, we are in constant movement to really rationalize our operations and get the strength that our peer groups come up with.

Okay. Thank you very much.

Thank you Mike.

We have a question from David Gremmels. Please state your company name.

Thanks. Thomas Weisel Partners. Just a follow-up on the internal versus external revenues, you know for the heavy segment, I think last quarter you talked about, you know, something like 30m revenue in Q3, Q4. It now looks like the numbers are more like 23, 25. Is that shift from -- to have more inter-company revenue versus external revenue in West Plains?

No, it would just be the -- basically the run rate of the contracts down there right now. As far as the revenue or let's call it the work that has been done at West Plains for Radian, again those numbers revenue wise would be run up back to Radian in light military.

Okay, so then what’s changed then between last quarter and this quarter in the heavy support segment? I mean, do I have the right -- the numbers in the second half of the year are going to be a little wider than you originally expected?

Than we originally expected -- I don’t have in front of me the guidance, but, obviously, one of the differences would be the M1000. M1000 ran through roughly March into the second quarter and those revenues have stopped since then. I have to look at the specific,, you know, this specific, you know, the Tunner is controlled by specific governmental delivery schedules. So, that I don’t think changed all, I think there's really been any other change down there.

Okay, and wanted to ask you about postal service opportunities, is the post-office yet starting to ramp up it's capital spending or, you know, are they still kind of sitting on the funding and, you know, what kind of opportunities are you pursuing there?

Hi, it's Gerry Potthoff; I will take a shot at that. You know, if you read the news you'll find that at macro level the postal services is getting a lot of threats to marketplace. Their volume just net is down, and so they are going through a lot of cost reduction activities. Matter of fact they announced recently that they are going to be closing in our facility even though, you know, by Congress they required delivery of mail. Having said that, what we continue to look at some very niche areas in the postal services, areas where we can use technology that we developed in military. They continue to examine the Anthrax subject. They still haven't provided, but just, if you will, engineering guys to pursue solutions to that particular problem. But what we currently see is [out year] opportunities or some postal service work and then some more legacy kind of dollars for the kinds of things that we've done for them historically. But nothing that of substantial nature at this point in time. I think, you know, they have got to get themselves, and their whole cost base is straightened up before really expect any impressible increase in business in postal service. But I think it is significant enough that overt the years we have been, you know, one of their outstanding quality supplier and getting tremendous recognition. So as that market redevelops itself, I think in years to come they we will again be an excellent customer.

But you wouldn’t expect any real revenue contribution from the post office in the current fiscal year?

No. It's very limited.

And is there anything baked into the '04 guidance or will that all be upside, you know, if any of this did start to --?

That will be upside.

The earliest, I think, we can see anything would be some amount. This thing has straightened out as Gerry said, [entered] orders in '04, but there would be very little if any revenue in '04.

Okay. And then if I get to just ask one final question on the contract actually awarded last night called integrated base defense security, this is a $500m ID IQ contract with things like base security surveillance, access control, you know, things I think are doing at the Pentagon. Just wondering if that's contract do you competed for?

It's a contract that Radian group has been involved in, in recurring basis and has competed for over years and as you [inaudible] will define the activity, good example of that would be Perimeter Security, as you know, they are doing a lot of work in the Pentagon, but there is number of excellent opportunities that could be executed under that contract that we are looking at for various security demands that all of our military installations have; one you are looking at more recently is some [Kenbio] securities systems that our guys are going to be taking on that.

[inaudible] with Radian?

Yeah, Radian would be [itself] in that, defined that Radian would be [itself] in that particular contract that you talked about.

Okay. So even though they weren't specifically mentioned as a prime, they will be benefiting from that up to $500m of funding?

Yeah, they will be significant part of that and the key to it is how much funding they actually put in place on their contract. But there systems and solutions that the Radian has and the cross section of bases where they already exist are significant.

Are you guys still there?

Yes.

Okay.

Okay. Very good. Thank you.

And now we'll conclude the Q&A session for today.

Okay let me just wrap it up quickly and say we are proud of the results of the quarter obviously, you've seen the benefits of the TAMSCO acquisition, we are proud of them. And I think for me personally this quarter, the improvement we've had with our continuous improvement program and some of the internal restructuring and things that we've done -- really has done by just short of 3000 wonderful folks that have gone out there and are showing up and are doing a great job day in and day out. So, when we cut through all the numbers, this quarter is really a tribute to those folks because that's where it came from. Thank you all for joining us.