Leonardo DRS Inc (DRS) 2003 Q4 法說會逐字稿

Good morning and welcome to the Engineered Support Systems fourth quarter earnings release conference call. All participants will be able to listen only until the question-and-answer session. This conference is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce your conference leader for today, Mr. Michael Shanahan, Chairman of the Board and founder of Engineered Support Systems.

Good morning everyone. Thank you for joining us on our call today. Hopefully you have all had a chance to review our earnings release for the fourth-quarter and year ended October 31, 2003, issued earlier this morning. As you can see, we finished the year on a high note, posting record quarterly revenues of $170 million -- that's a 44 percent increase above the fourth-quarter of last year -- and earnings from continuing operations for a record 52 cents per diluted share, resulting in nearly a 60 percent improvement. All earnings per share figures reflect our recent 3-for-2 stock split.

As our release stated, the inclusion of TAMSCO for the fourth-quarter, combined with solid organic growth, contributed to the sharp increase in quarterly revenues and profits. We wrapped up the year with nearly $600 million in total revenues and are on pace for an outstanding growth as we move forward. We will elaborate on these and other topics later on this call.

As has been customary, on the call today are Jerry Daniels, Vice Chairman and CEO; Jerry Potthoff, our President and Chief Operating Officer; Gary Gerhardt, Engineered Support's Chief Financial Officer; and Ron Davis, President of Business Development. I'm going to turn the call over to Jerry and he can kick off the report.

Thanks Mike. Let's get right into the fourth-quarter financial results, and our CFO Gary Gerhardt will take us through it. Gary?

Thanks Jerry. First I will 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 27 A of the Securities Act of 1933, as 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 fourth-quarter of 2003, we generated record net income from continuing operations of $13.9 million, or 52 cents per share on a post-split basis. Strong revenue growth resulting from the inclusion of the TAMSCO operation acquired earlier in 2003, combined with solid organic revenue expansion, contributed to our record results. We'll discuss additional factors contributing to these positive trends in a few moments.

For the fourth-quarter, TAMSCO generated revenues of $35.5 million and contributed incremental earnings from operations of $1.9 million before the allocation of corporate overhead. Several areas of TAMSCO, particularly its telecommunications and digitalization business, continue to show excellent forward growth trends. As importantly, during the fourth-quarter we benefited from a significant level of organic revenue growth, particularly within our support services segment.

Radian's revenues on the DPGDS generator program alone grew to nearly $24 million in the fourth-quarter, substantially above the prior year, and its security business advanced nicely as well. It's combined revenues of over $36 million during the period were nearly twice those of the same period in the prior year. Revenues for our support systems segment increased from the prior year to just under $100 million, as the completion of the M1000 trailer production contract midway through the 2003 year was offset by increases -- by increased revenues in several other defense programs, particularly the Knight (ph) target acquisition system and our field deployable environmental control system. Fueled by robust entered orders and a solid backlog, we expect that 2004 will see an acceleration of revenues in our core manufacturing segment.

With the consolidated increase in revenues of some $52 million during the fourth-quarter, our profit levels rose sharply as well. Gross profit contribution advanced 55 percent, bolstered by increased revenues in the services area and production cost reductions throughout the organization under our facility rationalization program. This led to higher earnings from continuing operations as SG&A expenses, as a percentage of revenues were held fairly flat. Free cash flow for 2003 was outstanding once again this year, with approximately $56 million generated, compared to $52 million in the prior year. For comparison purposes, it should be noted that the current year includes a relatively high level of capital expenditures at about $9.7 million, versus our $3.5 million last year.

Also, I would like to point out that free cash flow for 2002 did include the income tax benefit from deductible employee compensation from exercised stock options of approximately $15 million. Clearly, few of our industry peers can boast free cash flow generation of about 1.3 times reported net income. Supported by this strong cash flow, our year end net debt level was just over $70 million, yielding a debt to total capitalization ratio of 26 percent. With a solid track record of excellent financial results and a bullish outlook for the Company, we believe we have ample flexibility to avail ourselves of adequate capital resources necessary to support future acquisition or internal investment initiatives.

Now I would like to turn the call back over to Jerry Daniels.

Thanks Gary. Thanks for a good report. Fiscal 2003 represented yet another financial year -- a record financial year for Engineered Support Systems and an indication of the Company's bright future in the defense industry. The entire team should be proud of its accomplishments during the year. I will briefly comment on a few of them this morning.

Our major accomplishments in fiscal 2003 include the acquisition of TAMSCO, EEi, and just last week, Pivotal Power. Similar to our Radian acquisition last year, TAMSCO represents an outstanding addition to our company. It opens up a wealth of new business opportunities in both the high-growth logistics services and support equipment arenas. As the integration of TAMSCO within our recently established support services group continues, we expect to leverage our key customer contacts and well funded flexible contract vehicles throughout our organization.

Further, the addition of TAMSCO's seasoned defense industry professionals to our team will yield great benefits. In particular, Mick Interdicler (ph), recently named to head our support services group, will help us build a solid business platform from which to broaden our services business both organically and through further acquisitions. Engineered Environments, a $15 million manufacturer in Cincinnati, is a great complement to our environmental control systems product line. The synergy it provides in the design, engineering and technical sales areas will supplement our recently expanded Keco Industries production operation in Northern Kentucky. In addition, it will allow us to make further inroads with the top tier defense prime contractor community which comprises their primary customer base.

As our first international defense acquisition, Pivotal Power, based in Halifax, Nova Scotia, is a perfect fit with our existing uninterruptible power supply business out of UPSI. As makers of full MIL-SPEC power supplies and conditioning equipment, primarily used on naval weapons platforms and ground vehicle applications for the large primes in the U.S., UK and Canada, Pivotal expands both our UPS product offerings and prime contractor market penetration. We welcome Pivotal to the ESSI team and look forward to a successful future together.

In 2003, we also completed the divestiture of our non-core commercial plastics operation during the year, allowing us to refocus our time and resources in alternate high return areas of the Company. 2003 marked an all-time high in contract wins, with entered orders topping 658 million for the year. This was 55 percent above the prior year and translates into a book to bill ratio of 1.15 to 1. It's helping to raise our contractual backlog to a record 1.5 billion at year end. Large orders for generator sets, air-conditioners, spare parts, and certain electronics programs -- including the recently awarded MSTAR radar subcontract with Northrop Grumman -- were particularly strong this year. This robust order flow led to significant organic revenue growth in many business areas this year, which reached 14 percent for the fourth-quarter and over 10 percent for the year, on a consolidated basis. Both figures are clearly above our long-term level of 5 to 7 percent internal growth.

Operationally, we completed both phases of our project leverage facility rationalization initiative during 2003. Production work and our Engineered Air, Blue Ash and Sanford facilities has been successfully transitioned to other company locations within our planned timeframe without a disruption in product deliveries to our military customers. All involved with this difficult process are to be commended for their efforts on this important project. In addition, we continue to see advancement in the implementation of lean manufacturing initiatives throughout the Company, resulting in increased efficiencies, lower costs and reduced inventory levels. The impact of project (indiscernible) and lean are clearly being borne out by our current and forecasted financial results.

Our ESSIbuy online logistics support business also hit several milestones in 2003. The operation posted an operating profit for the first time in its brief history, and generated positive cash flow. The majority of the Company's (indiscernible) orders are being quoted and filled electronically through ESSIbuy's electronic storefront, but we are now marketing its capabilities for logistics support directly to military customers. The receipt just last month of the $14 million contract from the Sierra Army Depot through TAMSCO's R2 contract for the replenishment of petroleum distribution systems, marks a major milestone in ESSIbuy's history.

To support our continued expansion, we have completed the reorganization of our business reporting units this year into a more logical structure. Now, we are organized between the support systems group, led by group President Dan Rodriguez, and the support services group, headed by Nick Interdicler (ph). Support systems essentially encompasses our key product design and manufacturing entities, including Engineered Air, Keco, Marlo, SEI, Fermont, UPSI, EEi, and now Pivotal Power. Support services includes TAMSCO, Radian and ESSIbuy. We believe that this reorganization will yield substantial benefits in realizing cross company synergies, sharpening our focus and helping to lay the foundation for organic and external growth opportunities. Once again in 2003, we ranked highly on both Fortune and Forbes Magazine's list of small cap high-growth firms, and more significantly, our shares posted an 84 percent gain during fiscal 2003 and our market cap broke the billion dollar threshold.

So a very successful fiscal 2003 is in the books. How does 2004 look? Well, we intend to continue our growth by posting another year of record revenues and earnings, and Gary will return shortly to provide the specifics on that. You know, the fundamentals that have fueled the strong performance of ESSI continue to be valid. We benefit from the transformation of the armed services to a lighterm, more mobile force. The number and duration of military deployments will add to our business, and the current tendency to outsource nonessential operations to the private sector will provide opportunities for our services business. At the same time, we expect to increase opportunities from the large cap defense primes. Consequently, we still believe moderate organic growth is a valid and very achievable goal. To achieve the bottom-line growth targets we discussed with you in the past, we will continue to identify synergistic and accretive acquisition opportunities.

In summary, we intend to stay the course that has brought us the success you are witnessing today. So now I'd like to turn it back over to Gary, who will discuss our forecasted financial guidance for 2004. Gary?

Thanks Jerry. Obviously, we've had a very successful fourth-quarter and fiscal 2003, and we'll continue the execution of our growth strategy over the coming year. In our release, we provided an updated revenue forecast of between 740 and $750 million for 2004, roughly a 30 percent increase over the current year and substantially above our previously issued guidance back in August of this year. As stated in our release today, this upward revision is primarily due to the impact of the recent acquisitions of EEi and Pivotal Power, which account for approximately 25 million of this increase, and several new military contracts and/or orders received within the past few months. New contracts, such as the MSTAR Perimeter Security Project with Northrop Grumman at almost $60 million, ESSIbuy's contract with Sierra Army Depot at $14 million, and others, represent outstanding new business opportunities to benefit both next year and beyond. This level of forecasted revenues for 2004 equates to an internal revenue growth rate well in excess of 10 percent.

Supported by a strong stream of revenues, we expect to easily exceed our stated long-term goal of increasing net income from continuing operations a minimum of 20 percent annually once again in 2004. Earnings are expected to advance more than 40 percent to between $2.40 and $2.45 per share on a (indiscernible) post-split basis in 2004, based upon our net income that should exceed $65 million. Consistent with past practices, we will not be providing specific quarterly revenue or earnings guidelines for 2004. We do not manage our business in that matter on a quarter to quarter basis, and do not believe that measuring our company's future performance against those temporal benchmarks is necessarily indicative of our overall financial performance, our long-term prospects as an investment.

That being said, due to the timing of order receipt and required customer delivery schedules on several larger contracts, we expect that the second and third quarters of fiscal 2004 may be our strongest in terms of revenues and earnings, with relatively lower figures in the first and fourth quarters of the fiscal year. Free cash flow levels for fiscal 2004 should continue to equal or slightly exceed reported net income for the year. Now I'd like to turn it back to Jerry for his remaining remarks.

Thanks Gary. Before we open up the call for your questions, I would like to take a minute to express my appreciation to my fellow partners within in the office of the Chairman -- Mike Shanahan, Jerry Potthoff, Gary Gearhart, and Ron Davis. These guys have made my transition into the Company a great experience, have given me a tremendous amount of support, and have provided valuable insight into the organization and our enduring business strategy. My appreciation goes out to our other senior executives, the operating management, and all of our valued employees throughout the Company for a job well done in 2003. I see a very bright future ahead for Engineered Support Systems.

Now we will address any questions that our call participants may have.

(OPERATOR INSTRUCTIONS). David Gremmels, Thomas Weisel Partners.

Good morning. I wanted to ask about the MSTAR contract and this $58 million contract. I'm just wondering if you can give a little color as to the background there, how you came to win this thing? Was it in your plan previously, and what's the period of performance?

It's Jerry Daniels. This was not in the plan. We have been working on this as part of our two initiatives, really -- trying to improve our business base in the security arena and asset protection and in working with the primes. And we have had some real good experiences with Northrop Grumman. We're working with them on some other things. This thing actually took off. We teamed up with Northrop Grumman in about, I guess, early to mid year, and this thing really took off in the third and fourth quarters. So it was not in the plan when we gave those third quarter numbers. Anyone else want to add anything on this?

This is Jerry Potthoff. Only that its technology that we have been working with for ten years. We licensed initially the radar back in the early '90s from a UK firm, and we have been improving upon the product in such a way that it could provide (ph) for both homeland security and homeland defense. And so it really works well, and the investments that we have made and the improvement of the product is really bearing some fruit. So we're excited about what it might do in the future as well as the more recent (indiscernible).

My understanding is that this contract covers the Air Force only. Do you anticipate potential for additional sales to the Air Force? And what are our prospects for sales to other branches of the military?

I think, again, (inaudible) the background for the product, and we have supported the military in Canada, in Poland, in various other parts of the world with the MSTAR product. In this particular case you're correct; it is for the Air Force. There is opportunity for the product in other branches of the service, and we are working on some of those opportunities right now. But I think it's premature to give you more definition. But certainly, the product has a lot of applications these days. We have tried it with border patrol; we've (indiscernible) the products in the Mideast. So it's a hell of a product and it has broad applications.

How about more commercial homeland security applications, things like nuclear power plants? Are there any -- is the product being deployed to those applications to date? Are there any prospects there?

I think the foundation for our security products really is our Radian division. As you know, they support the Pentagon and their upgraded security system. We see MSTAR as just another product within the whole set of services and products that we have to support homeland security and homeland defense.

Okay. And I wanted to ask you about -- one of the opportunities that you've talked about in the past is taking on more work with the prime contractors, specifically in the area of logistics support, some work that maybe you can do in a more efficient or cost-effective way than they can? I'm wondering if you have anything to report along those lines?

It's Jerry again. No, we don't have anything to report at this moment, although we are making progress with a few of the large cap primes. And I think we will see some successes in this coming year. No big breakthroughs to tell you about right now, though.

But I think, David, that Jerry Daniels really brings to us, with his background and connectivity with the major primes, a wealth of experience, and it's helping us (indiscernible) a group such a way that we now understand what is required to provide logistics support to the primes. So we are pretty excited about the future for that.

Is there much of that kind of business assumed in your current plan, or would that tend to be more upside?

No, that will be upside.

If I can ask more of a longer-term kind of question. If there is a concern among investors regarding the Company, it's that a lot of this growth is related to the war and could be onetime in nature. So first, how would you respond to that? And second, given the tough comparisons in '05 and the completion of (indiscernible) in '05, do you expect positive organic growth to continue in '05?

David, let me take (indiscernible). First, the war itself. Interestingly enough, we started seeing some orders that one could say are related to the activities in Afghanistan and Iraq, actually, late in the third quarter and fourth quarter. It's still not what I would consider to be a super substantial part of our business. We saw increased orders for (indiscernible) for generators. We did win this Sierra Army Depot contract worth $14 million. And as we've talked in the past, I don't believe that is a good way to look at our business. The fundamentals of a military that is changing to be more mobile, lighter, deployable, the track record of deployments both in number and duration -- those are the kinds of things that are driving us in general. But clearly, in this last quarter and in '04, there are some things that are a direct result of the activity in the Middle East. And I've talked long enough that I forgot the second part of your question, I'm sorry.

The second part of the question was, given that there is at least some kind of onetime type of business and the completion of, I think, one of your larger programs in '05, can you maintain positive organic growth in '05?

Too early to say what the organic growth will be in '05. Clearly, we've known forever that we'll lose (indiscernible) about midway through that fiscal year, and we have -- like the current MSTAR contract, actually, we deliver those units in '04. So we know we have some holes to fill. I would tell you that the picture is no different than it was about a year ago when we looked at '05. I guess the plus side is we have the addition of companies like TAMSCO, EEi, Pivotal Power; so the opportunity is there. I'm not overly worried about '05. We have all known the day is coming on Tunner, and a combination of acquisitions and internal growth from the other units ought to take care of us. Jerry?

Could I just elaborate and try to address a little bit more of the future and '05? Having to do with the environment that we're supporting right now in the Mideast, it is recognized that -- let's assume that at some point in time that major conflict ends. When it does, you've got 4 major divisions that will be coming back. Let's just assume they'll be coming back in the latter part or the mid part of '04 into '05. We know that they're going to be needing support. We know that they're going to be needing refurbishment of all that product. So regards '05, we have every expectation that if there is a small hole, such as Tunner, it will be more than amply filled by virtue of the need to, if you will, recondition and redevelop the kinds of support that the military needs for its next conflict. I think the other thought is that we have talked often about the fact that being the policemen of the world, our military is in 70 to 80 countries. We were saying that until recently, (indiscernible) it's so expanded that our military is now in 120 to 130 countries. So our strategy continues to be the same, that our military has to have readiness; it has to have infrastructure support that we provide in terms of logistics services, in terms of product. So, I think I agree with Jerry, we don't really have a concern about '05.

Michael Braig, AG Edwards.

Let me begin, if I could, with an obvious housekeeping question, perhaps of Gary. When might we get historical back data regarding the new sector definitions?

With the filing of the 10-K we go back, and we will provide, I think it's 3 years worth of historical data, at that time. If you look at the break, it's not going to be that exciting, very candidly, relative to the fact that on the support side, we have TAMSCO, which has been with us for six months. The rest of it is mainly Radian. That goes back for about roughly 18 months. ESSIbuy has been a small contributor (inaudible) until recently. So there's not going to be anything that is going to jump out at you at that time that's going to be surprising and so forth, but it is a requirement of the 10-K.

Will that be available for quarters also?

Historically?

Yes.

You're talking (indiscernible) when we filed the 10-K, when we have that by quarter? I think we just do that annually.

Okay. Thank you.

It will be in future Qs, though, going forward, historical data. I mean, there will be a comparison there as required in the queue. (indiscernible) quarter to quarter.

Okay. And then perhaps a general question on acquisition interest? You have been on both sides of the sector definition. Is one preferred over the other?

(indiscernible) I'll start -- I think one of the keys that we've had in our success historically has been good acquisitions that have strategically fit, and they haven't necessarily been identified to be part of one of those two sectors. And I think that's what's important going forward. We like the mix of business percentage-wise (indiscernible) we continue to say, about 25 percent of our business, 30 percent of our business should be support. And that kind of makes sense going forward. We're not going to become a totally support business or an IT company or anything like that. But again, it's very important to us to look at companies individually (inaudible) strategic synergies that we can identify relative to how they fit in with us are important, and regardless of whether in the services end or in the manufacturing (indiscernible). To make a final comment, (indiscernible) Radian -- a very important acquisition to us. They are identified in the (indiscernible) and so forth, but they have a significant amount of presence in the manufacturing portion of it. The DPGDS contract is one of our most significant contracts out there. But they're still a services company; so again, you've got to look at each company individually as far as what it brings to the party, and that probably would exclude some of the pure IT (indiscernible) some stuff like that. (indiscernible) people like that. That is outside of the (indiscernible) we're looking at as far as growth.

Mike, it's Jerry. I think, as Gary said, we like that general split between heavily weighted on systems as opposed to services. At the same time, when we look at these companies we look for a strategic synergy, we look for a cultural synergy. We look for a solid track record with accretive earnings, and for growth paths ahead. So we wouldn't pass up an opportunity just because it might screw up our preconceived ideas of where the numbers ought to be at the moment. But that is kind of where we are at. We do like that 70/30, 75/25 split; it gives you a good balance on the margins that keep you strong (inaudible) across the board.

Any guidelines as to size? As you grow larger, are the smaller opportunities likely to fade in significance?

Obviously, it gets harder to move the needle the bigger you get. (indiscernible) no, it's not driving us. I think we are working on -- we're working hard to look at the market areas of interest to us, and we will start getting focused on some of those. But I think right now, obviously, we would like to see larger acquisitions; but again, if the companies meet those four criteria that I just discussed, we are going to take advantage of that. Because if they meet those criteria, we found that the integration of them into the operation is really not nearly as difficult. But yes, we would love to find the big guys if we could do it.

Are there limits on the top-side?

There's probably limits; I don't know, Gary -- it's a matter of what your balance sheet can carry.

What's out there, obviously -- there's a lot of peers that, obviously, we look at; they look at us on a day-to-day basis -- that's nothing new; everyone knows that and so forth. But do they make sense, back to the (indiscernible) basic strategic fit and so forth? As far as our ability to finance the deals, yes, we could probably finance a deal that effectively doubles the size of the Company. But strategically, it's got to pay us (ph) first and so forth. (inaudible) the size when we look at it -- TAMSCO was a fairly significant acquisition. That increased our revenue by -- if you look at '04 numbers -- about 25 percent. So that was a significant acquisition. But the two that we tucked in in the middle there, EEi and Pivotal, are really tremendous opportunities. Those two together is 25 million, but they have absolute fantastic growth, and the strategic fit is just tremendous. So those are important to look at. Those are the ones that long-term -- even though they don't move the needle quite as much -- but long-term can really get you rolling and fitting in with the rest of the existing corporation.

Eric Hugel, Stephens.

Good morning guys. My first question -- it's hard because we don't really have a frame of reference -- but in looking at the margins for your different business segments, just intuitively, the support system margin at just over 18 percent. If you just sort of look back at the way we have historically looked at the business, it would seem -- and, I guess, if you look at it over the whole year, seems very high. And the 7.3 percent margin for the services business seems very low, given what we know about what we discussed last quarter about what your expectations were from TAMSCO. Can you sort of discuss that? Are these sort of -- I mean, I know there's always mix shifts and things like that. But if you wanted to look at it in terms of what is the margin generation potential of each of these different businesses, are these sort of good thing, good numbers, good run rates to look at, or they are sort of individual things in here that are boosting or lowering what we could expect over the future?

The first thing is that the fourth quarter results, you've got to look at them relative to one thing that's in there, and that's the fact that we did a final allocation of corporate G&A to TAMSCO in the fourth quarter. So it was not included in the third quarter, so you see a little bit of a lower fourth quarter operating income percentage than then you will see going forward. Going forward you're going to see on that services end high single digits. That is brought up by virtue of the DPGDS which is in there, which is considerably more than that, versus the standard services type business is going to be somewhere in the six to eight percent range. So again, high single digits. On the manufacturing side, you're going to see mid-teams operating income percentages. And those are changed or assisted by virtue of the change in the segments, because all of a sudden we have some significant businesses on the services side that as a result of the allocation of the G&A, are going to get a little bit greater portion of that corporate G&A going down to them, which makes the other subsidiary or other segments a little more profitable. So that is something that changes going forward -- but in summary again, single high single digits on the services side going forward; mid-teens on the manufacturing side going forward in operating levels.

Can you talk about CapEx requirements going forward?

CapEx -- I've always said that we're not a CapEx driven company, and I think that's very valid in that in a very dull way, we are the replace the roof/fix the 25-year-old machine (indiscernible). We're just not that driven, relative to high CapEx expenditures. This past year we had a higher number than we have experienced before, a higher number than we probably will have going forward. And a lot of that was due to plant extensions over at Keco as a result of the project leverage opportunities, and also some facility renovation here at Evans Lane. The prior year to that, I think we had spent 3.5 million (indiscernible) '03, I think we had 9.7 or something. The 3 to 5 million range, I think, is a going forward number (technical difficulty) kind of top in and so on.

3 to 5 million for going forward, is what you said?

Yes.

Can you also fill us in on -- you talked about your -- the restructuring or the closing down of facilities. Can you sort of give us a timeline as to where we are now, and sort of where that process -- where are we now in that process and where do we we still have to go? What kind of benefits do we still have yet to accrue?

This is Jerry Potthoff. I'll try to answer that. As I think both Gary and Jerry mentioned earlier in the opening comments, we are just about to complete Phase II, and we will have that wrapped up by the time we get into the holidays (inaudible) project leverage and that whole rationalization. So part of the results that we have reported and what we are forecasting includes some of the benefits that we're getting from that activity. We just recently launched what we're referring internally to as Phase III. And really it is just a reestablishment of the whole process whereby we have (indiscernible) people, that are now going out and canvassing our new properties, our new divisions, subsidiaries -- such as TAMSCO and UPSI -- and they're out there attempting to define the capabilities at cost, square footage, all of the good things you need to know in such a way that you can then draft up your next major plan for this whole activity. And so we are going to continue to do that, I think, as long as we grow and as long as we acquire companies -- we have got a process established now that will ensure that we maximize our assets. And so that hopefully answers your question. I don't think you're looking for specific numbers stemming out of that, but we have talked about that in the past.

My last question is, of the facilities that you have closed, did you sell any of them this quarter? Did you sell any of the land or the building?

None of them have been sold. We have had -- we have a very, let's call it active, offer on our (indiscernible) facility right now, which could result in something happening there. We have activity on our (indiscernible) facility here, as we call it in our price road. And then of course, the Keco facility we basically have just gotten out of that. So the activity -- we haven't pushed that yet and so forth. But they're all three good prime properties, and we think they're all salable at numbers that we have accounted for or better than that. So we really don't anticipate any further losses associated with that or any write-downs as a result of that.

And our cash flow has been excellent, so we haven't had the need to get in any fire sales. Those properties that the economy improves will be worth more improved value. And as Jerry said, they're excellent properties. So we really expect to be able to sell those when the timing is right for us.

Can you give us sort of an around figure as to what kind of dollar amount, if you sold all the properties, you could --

All three properties together are worth 10 million; that's just a real rough number.

Chris Donaghey, SunTrust Robinson Humphrey.

Good morning. I was wondering from a longer-term growth perspective what impact you would expect to see from a restructuring of our forward deployed forces out of Europe and possibly into the Middle East?

I think it's -- Chris, this is Jerry Daniels -- not a whole lot different from what you have been seeing all along, is this emphasis -- there's two things going on. There is a general push back to permanent basing in the continental U.S. At the same time, there's somewhat -- there's another trend going on of sort of contemporary, although temporary could be fairly long-term based in going on at the forward sites. We think that all plays favorably for everything we do. It is the same story of the lighter, more mobile, more deployable armed force. We think that will work favorably for us. You know, we are watching that just like you are, in terms of where does the money really get spent on these things.

Right. From a -- I have been trying to track the progress as much as possible, but as we go to these smaller, rapid deployable types of units, what types of equipment are they taking with them?

If the -- really, it's the same stuff that you see when they prepare for deployment. I would say it probably opens the door for some hard shelters that wouldn't be part of a deployment set, if you will. And things smack of a little more permanent installation. But at least what we have seen today is not much different from what we have been delivering to those customers all along.

Herb Tinger, Advest.

Thank you. Good morning. You commented that you expect the system to see an acceleration in system sales in fiscal '04. Given what you commented about Q2 and Q3 being stronger revenue quarters would you expect that there will be a shift in the sales mix towards systems in those 2 quarters?

Yes. A little bit. We don't want to overdo this quarter to quarter thing, it's just we get nervous that you guys are going to take a look at a quarter and start multiplying by funny numbers. So that it's a bit -- what I would call a gentle bell-shaped curve over Q2 and 3, and it is driven -- to a larger rate it's really driven by MSTAR deliveries that are happening in that time frame. So yes, it is more heavily systems and services that tend to be flatter throughout the year, I think. Gary, is that fair?

In general, yes.

So then if we look at a sales mix for the year, would it be kind of in the 60/40 range that it was in Q4?

No.

I think it's a little higher on the manufacturing systems side. I think it ends up being something around -- don't have numbers in front of me -- I think 65/35.

Or even 70/30, I think. It's tending that way.

Regarding systems, what is your outlook concerning a possibility of seeing a contract for the heavy transport (indiscernible) to refurbish some of the units that might have been damaged over in the Middle East?

I think we are going to see that. It's almost inevitable because of the units -- I'll ask some of the guys to help me here -- but I think we delivered over 2000 of those units, and over 1000 of those were actually in theaters -- right? Everybody is nodding yes. So we know that there's going to be a significant amount of work there, and we're working with our customers to capture that.

If you had to guess could you put a time frame as to when the interest might start coming through in terms of a proposal stage, and how long the effort might be to refurbish some of those (multiple speakers)?

I think the general view I'm getting is in the spring.

Okay. The rest of my questions have been answered. Congratulations on an outstanding job.

Selman Akyol with Stifel, Nicholaus.

Thank you. Good morning. First of all, very good quarter. What caught my eye -- your SG&A seemed to tick up pretty good over Q3 to. Is there anything going on there?

No, not really. At year end there's always some adjustments relative to catch up and so forth; if you look over the years and so forth, you go back historically and so forth, but as far as general growth within SG&A, no. We pick up additional companies and so forth, but as far as an overall growth pattern, we still think as we go forward, we will continue to leverage that SG&A number. And we'll continue to see it to be a decreasing percentage of sales going forward over the years.

Any target on that, or (indiscernible) is an $80 million run rate where you are at?

That's kind of what we're looking at going forward guess, yes. Somewhere in that 80 -- low, low, low 80s and so forth going forward. Until we make out any other significant changes within the Corporation, that is probably the continuing run rate for the future.

Also, the minuteman silo refurbishment program, when does that get underway, or can you give us an update on it?

It's still in the initial development phases. I think production is -- I believe it's like '06 and goes in probably to about '09 (indiscernible) just for updates and so forth. We are currently looking at some other opportunities relative to that, so some of the other divisions, which has shown the -- going back to the strategic initiatives within the division (technical difficulty) in communications that may involve additional business, not in there forecast. We will see. The environmental control units which we are on contract for development now, that program will go forward. That's sole source to engineered air right now. And again, they'll be in development through some portion of '05.

Just refresh my memory -- was that 200 million in total?

Yes, that is the rough number we have got out there. It's for the ECUs, yes.

Your last question comes from David Gremmels with Thomas Weisel.

Thanks. Two quick follow-ups. The first -- just in the segments that support services growth rate, obviously, kind of flattish because of the headwind from the completion of M1000. I'm just wondering if you can give us the M1000 revenue in the year ago quarter?

That is in the systems side David, and what (multiple speakers)

(multiple speakers)

We've got numbers here; hold on, hold on -- somewhere, March is when we shipped the last M1000 in '03. There was 11 million worth of revenue total, in '02 there was 28 million worth of revenue.

Do you happen to have the year ago quarter?

No, we don't have that in front of us, David.

And then you mentioned previous question that some of the M1000 refurbishments could happen as early as the spring of this year. Is that something that is in the plan you have laid out for us, or is that incremental?

We have that in there as a probable listening event. Trying to guess at what level that might be. So we have some of that in the plan going forward.

My last question. There was an announcement in the last week or two, a big missile defense contractor at Connecticut energy interceptor. And your SEI unit is producing the mobile launcher there. Your teamed with, I think, the Northrop team. I'm just wondering how significant that could be for the Company, and when that starts to ramp up?

It's strategically very significant, although low revenue level in know for. The overall funding for that program was reduced by the government, so I mean it's real low-level next year. But in the '05 '06 time frame, we will see that pick up. Jerry? (multiple speakers)

(multiple speakers) (indiscernible) a long-term program. (multiple speakers) development finished for the next three or four years.

But strategically, that was a nice (indiscernible) --

Had you participated on both teams, or just the Northrop team?

We were just on the Northrop team.

Nice win. Thanks a lot.

We would like to thank you all again, and I guess we will see you next quarter. Bye, everybody.