Leonardo DRS Inc (DRS) 2005 Q1 法說會逐字稿

Good morning and welcome to the Engineered Support Systems first-quarter earnings release. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections you may disconnect at this time. (OPERATOR INSTRUCTIONS) I would like to turn the call over to your host for today's call, Mr. Michael Shanahan, Chairman. Thank you. Sir, you may begin.

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 first quarter ended January 31, 2005 issued earlier this morning. I am sure you all agree we posted a very good first quarter with revenues of more than $223 million. That's a 20 percent increase above the first quarter last year, and net earnings of a record 73 cents per diluted share. Now, that's a 28 percent improvement. As our release stated, organic revenue and earnings growth contributed to the sharp increase in quarterly revenues and profit. And with the future contributions from our two recently-completed acquisitions, PCA and Spacelink, we're looking forward to a very successful remainder of 2005 and beyond as we close in on $1 billion of annual revenues. Our team is continuing to build a strong business base through organic and acquisitions for the future, at no sacrifice to the near term. I think this is the key and how we will continue to grow and prosper.

I should mention that the executive producer of our call today is Ron Davis, who is President of Business Development, and the producers are Dan Crear (ph) and Steve Laman (ph) for the program this morning. Joining me on the call today are Gerry Potthoff, Vice Chairman, CEO and President; and Gary Gerhardt, our Chief Financial Officer, who will now briefly recap the quarter's financial results.

I will go ahead and read our standard disclaimer before I begin.

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.

As we reported earlier this morning, during the first quarter of 2005 we posted net income of $20.6 million, or 73 cents per share. Strong quarterly organic revenue growth was experienced in a variety of production programs, including vehicle uparmoring, nearly $12 million for the quarter; M1000 trailer refurbishment, up around $7 million; and additional generator set deliveries. These gains were partially offset by lower revenues on the Tunner cargo loader as production winds down in the first half of this year, as well as reduced MSTAR deliveries. In addition, telecommunications support activities and related ODCs, combined with ramp ups in depot support and asset protection work, contributed to our record results. Incremental contributions from Pivotal Power and PCA accounted for $1.3 million of the quarterly increase in revenues for the quarter.

The higher revenues produced similar gains in operating income as well. Consolidated gross profit grew to nearly $57.5 million, or by 24 percent, with related increases in operating income and EBITDA of 26 percent and 27 percent respectively. Net income increased to $20.6 million, or up at 31 percent in the current quarter, which was also benefited somewhat by a reduction in the Company's effective income tax rate to 38 percent for the quarter, coupled with reduced interest costs.

As expected, free cash flow for the first quarter of a negative $4 million (technical is a result of temporary investment in working capital related to contractual requirements and other seasonal factors. For the full-year operating cash flow of at least $80 million is anticipated, which would begin to turn around in the second quarter of the year. If you recall, we began 2005 with a much larger free cash flow deficit and ended the year very strong as well.

In conjunction with funding the Spacelink acquisition we have amended our banking agreement during the first quarter, taking the base amount up to $200 million with a $100 million accordion feature included. Under the new agreement certain fees have been reduced and we received another 0.25 percent reduction in our interest rate. This new facility will help support additional ongoing acquisition activities.

Now I would like to turn the call over to Gerry Potthoff who will discuss a few of our most recent developments in the defense industry.

Thanks, and good morning and thanks to you all for your interest. I have to say that our first-quarter financials mark a great beginning to what we expect to be another outstanding year for our Company. This morning I would like to comment on just a few of the more recent developments in the defense industry and assess the ongoing impact than they will have on our Company.

First off I would like to discuss a matter that was announced in the press just last week. The contract for contractor logistics support to the Tunner 60-K loader program, earned by ESSI's subsidiary, SEI, in 2002, is generally considered to be a model of success in the DoD acquisition process. SEI received a sole-source award to serve as a depot for the Tunner program. The contract, totally supported by the Air Force, is actually a series eight one-year contracts which are negotiated each year based on the submittal of cost information. And this contract has been allotted as a great example of the partnership between the DoD and the contractor community.

That said, as DoD continues to review its acquisition processes in the wake of the high-profile Darlene Druyen matter, the acting assistant Secretary of Defense for acquisition technology and development last week requested a DoD inspector general review of eight contracts that were under the decision-making purview of Air Force acquisition manager Darlene Druyen during her tenure, one of these being the SEI contract for Tunner contracted logistics support.

The DoD announcement noted that these contracts were selected for review not because of any question about the contractors or the quality of their work, but because they are examples of contracting actions that were different from the standard process for military procurements; for instance, a sole-source award. The DoD is looking hard at the Air Force's overall acquisition decision process to identify potential vulnerabilities and/or improvement areas in its contracting practices, a prudent action in light of recent events. We've been informed that in no way will this investigation negatively affect that future status of our performance under the Tunner CLS program, and we will of course cooperate fully with the DoD review.

A much more significant matter on the minds of most following the defense industry is the recently released fiscal 2006 DoD Budget and related $82 billion supplemental spending bill. In short I can tell you that we believe our procurement-related manufacturing programs fared very well within the '06 budget. And robust on M (ph) spending, coupled with the high operational tempo of our forces, will keep our services businesses (indiscernible) for the foreseeable future. However, as many of you realize, few of our programs actually show up as individual line items in the DoD budget, and are a bit more difficult to track in sum. Regardless, the '06 budget did not contain any negative surprises for us with the knowledge that any nominal reductions in support of equipment procurement for deployed troops will be more than made up for in the '05 supplemental and subsequent appropriations.

In regards to the supplemental itself, we have of course been peering (ph) into the various briefings issued by the DoD over the past few days, and we're very encouraged by what we've learned so far. As we start through the numbers of the total 81.9 billion, it appears that as with previous emergency spending bills over the past couple of years, the majority will go to fund military personnel and operations and maintenance costs associated with day-to-day operations. Procurement and RDT&E funding included in the bill is a sizable 16.6 billion, or about 20 percent of the total, with more than half of these dollars earmarked for the Army. Certainly a good portion of these funds will go to replace and upgrade big-ticket weapons platforms such as Abrams Tanks and Bradley Fighting Vehicles. Variants of the latter, by the way, are supported by our target acquisition equipment and other integrated systems. Additional dollars are also being made available to refurbish a number of transport systems such as our M1000 trailer concurrently under contract, and other unspecified military trailers. Spending from vehicle uparmor is a high priority force protection need. It is also provided for in the bill, while we continue to discuss other vehicle army armoring needs with army leadership. We could also see substantial procurement dollars being earmarked to replace other ESSI products such as small to mid-size generator sets, water and fuel systems, many of which we have previously provided to the military, and a host of other support equipment.

Within the near future we expect the specifics of these requirements to become more apparent once solicitations are put out and contracts for these items begin to be awarded later this year. We have also met with several US military leaders in conjunction with our attendance at the recently completed Army Winter Show (ph). Our discussions focused on supporting other critical needs in a variety of areas throughout the world. Opportunity is emerging within the telecommunications services and logistics support arenas to support ongoing operations, several of which have outstanding growth potential. Although we cannot publicly comment on the content of these discussions, it is safe to say that our broad manufacturing and support capabilities continue to be in high demand for US forces deployed around the globe. Personally I could not be more enthusiastic about our Company's prospects for the foreseeable future.

While ongoing military operations are understandably receiving much attention, two other important initiatives are also looming on the horizon -- BRAC and the QDR. Base Realignment and Closure, or BRAC, activities are heating up with a list of affected military installations due for a submission to Congress and the White House within the next few months. Certainly which bases emerge as the winners and losers of the BRAC process is open to much speculation. But in addition to simply saving some dollars, it's clear that the military is quite serious about reducing a number installations and promoting the concept of jointness as the key to military readiness and relevance in the 21st century.

Regardless of what transpires with BRAC, the essential military functions will continue to go on, albeit at a fewer number of fixed locations around the country. We believe that a key offshoot of BRAC will be the spread of the outsourcing of logistic activities and support services to contractors such as ourselves with uniform personnel increasingly focused on war fighting activities. This trend has been going on for some time at the DoD, and frankly within all of the federal government. And work force demographics and spending priorities will only accelerate the need for outsourcing activities and initiatives in coming years. Clearly this is a long-term positive for our business.

The QDR, due out later this year, is another central factor that will help shape US military priorities for years to come. Since the last QDR four years ago both the worldwide security environment and American military activities have changed markedly. The Iraq war and the ongoing insurgency, the spread in terrorist activities abroad, revamping the US intelligence community, and the creation of a Department of Homeland Security are just a few of the things affecting our markets that have occurred during this time. Although the military will likely remain structured to adequately handle conflicts with aggressive nation states around the globe, an increased emphasis will undoubtedly be directed towards equipping and training our forces to not only win the war on the battlefield but to win the peace in its aftermath. Engineered support does play a major role in certain aspects of combat operations. But, more commonly our products and service offerings are central to the ongoing support of our ground troops (technical difficulty) Marines and airmen and their sustained (technical difficulty) long after the battles have ended.

In summary, we believe the growing capabilities of our now 13 subsidiary units are well matched with the evolving needs of our customers who defend freedom around globe, and we cannot be more proud to be part of it.

So Gary will now discuss our forecast of 2005 financial guidance, including the impact of our most recently announced acquisition, PCA.

Obviously we have had a very successful first quarter and will continue the execution of our strategy over the remaining of the year. In our release we provided our revised revenue forecast of between $990 million and $1 billion for FY 2005, about $15 million above our previous revenue forecast. The difference basically accounts for the inclusion of PCA's results for 10 months of fiscal 2005. Our revised guidance represents a 12 to 13 percent increase in revenues over the exceptional growth achieved in 2004. As we indicated last quarter, the 2005 forecast includes approximately $70 million of revenues from our recently completed acquisition of Spacelink International, with identified organic growth opportunities comprising the remainder.

At this early stage of the year, the level of organic revenue growth included within our existing guidance for 2005 is admittedly somewhat below our normal expectations. This reflects the well-documented revenue reductions in the Tunner cargo loader and MSTAR radar programs which serve as somewhat of a headwind in 2005. As Gerry discussed a few minutes ago, however, we're only one-quarter of the way through the year and there are many new opportunities that could come our way yet in 2005. We will update our forecast accordingly should any of these material upsides occur.

In fiscal 2006 there were a variety of new production programs such as Minuteman, environmental control, RIFs (ph), and others, as well as significant telecommunications support services and logistics opportunities slated to come online that will provide substantial organic growth going forward. The potential impact of the '05 supplemental is another positive factor on the horizon.

In 2005 we now expect our earnings per share to advance 15 to 17 percent to between $3.13 and $3.18 per share, based upon forecasted net income of approximately 90 to $91 million. We do not plan to provide specific quarterly revenue or earnings guidance for the remaining of 2005, consistent with our historical practices. However, I can tell you that we expect that revenue and earnings levels will remain solid throughout the next three quarters of the year with the second half of 2005 providing more then 50 percent of our forecasted revenues and earnings, impacted by the Spacelink acquisition and many other activities.

Operating cash flow levels for fiscal 2005 will exceed $80 million as working capital levels reduce from current levels. As we told you last quarter, capital expenditures will be higher in 2005 and nearly $20 million, primarily due to the construction of the aircraft integration facility under contract with the Coast Guard, combined with the ongoing investment in updated IT systems throughout the Company.

Now I would like to turn the meeting back over to Mike Shanahan for his final comments.

Thank you Gary and Gerry. I guess you all realize that things don't just happen; it's our team that makes them happen, and I'd like to congratulate right from the office of the Chairman team right down to the last employee. It's an excellent report. I would like to thank the 3500 employees of the ESSI family. Each of you out in some 13 divisions, and most of you in the combat areas are what makes ESSI work successfully. Thank you all for what you do for our Company. We are building the solid Company we set out to build with your efforts. We thank our customers for their continued support, we thank our employees, and we thank our shareholders for their interest in our Company.

With that, we will open it up for questions.

(OPERATOR INSTRUCTIONS) Steve Levenson, Advest.

Great to see the continued progress that you all are making. Obviously the market isn't taking the news all that well. I guess I'm wondering -- in your guidance you've been conservative, and saying since you don't know about the timing of potential orders from the supplemental, that you're not going to speculate there. But is there a possibility you can quantify sort of low, high ranges or for example how many trucks in the FMTV family you think remain to be armored where you might benefit from that supplemental funding?

Let me start. I just want to emphasize the fact that as you say the market being -- not as reacted (ph) as positively as we would all like, but historically we have not gone in and provided a lot of changes in our guidance in the first quarter. We just think it's too early unless something specific happens -- a major acquisition or anything like that -- at the present time to speculate on a bunch of things.

We think there are a lot of positive things out there and I'm going to let Gerry Potthoff EDI about two minutes on that. We think there's a lot of upside that has great opportunity in 2005. But looking at individual occurrences at the present time would yield our upgrading or changing guidance literally every week and so forth. And we prefer getting a little bit stronger hand on it, and we will look at it strongly at the end of the second quarter and provide more insight at that present time. So anyone who considers the fact that not upgrading guidance significantly at the present time is a negative has the wrong impression of how things are going currently within engineered support.

Gerry, you have any comments (multiple speakers)?

Excellent question, and I think again it wouldn't be prudent for us to provide ranges. Historically we've worked quarter to quarter and I think provided an awful lot of information. But I don't think we want to get into a speculative range; it just isn't prudent.

I can tell you that there are so many, many things that are positive for us for this year and the future. You touched on, for example, the uparmoring. Again, we know that there are thousands and thousands of vehicles that the military would love to have uparmored. We know that we're going to get a substantial portion of that. We heard recently at the show that the Army intends to, if you will, go beyond what their theater commanders are really requesting for uparmor. But the details associated with that are still to be determined. So we think there's a lot of opportunity beyond that which we have, but we believe it's premature to actually develop those opportunities into real numbers.

When we think about '05 and we think about '06, I think we all need to recognize that we have a large host of next-generations programs which we're working. There are in such things as decontamination; there's next-generation power generation; there's next-generation environmental control units; there's the next-generation combined air-conditioning and generation unit; there's refrigeration; there are trailers; there's fuel distribution.

Telecommunications has become a significant part of our business with the acquisition of Spacelink. We're currently involved in a host of new opportunities for telecommunications opportunities, particularly when we leverage our TAMSCO and Spacelink subsidiaries. The reset opportunities that we talked about in December at our last earnings call are still to be determined.

As I think I said just earlier, we've never been more optimistic about our future. But I think at this juncture we want to make sure that we do what we've done historically, and that is outperform. But we're not in a speculative position.

Excellent question, Steve. Thank you.

Thank you very much. I think you've addressed the concern. Thanks a lot.

Eric Hugel, Stephens, Inc.

I just wanted to sort of check something in my mind. In terms of looking at the vehicle uparmor, in terms of what's in the backlog, what's not, I guess if I go back and add up all of the awards of the contracts that you guys have received in the first quarter, it adds up to something like in the $80 million range, of which about maybe half of that is funded. So is only the funded portion in your backlog?

Yes.

And the funding for that would -- the rest of the funding comes from the supplemental?

From the supplemental. Yes, you're correct.

And included -- I just want to refresh my memory. I think it was in the guidance that you gave last quarter when you went through and sort of -- I guess there was a lot of focus on the uparmor in terms of what is baked into your numbers for '05. Is that still in the 30 to $32 million range? Is that a good number?

The last review we had, we said we had an expectation of 30 million in fiscal '05. But we said we could double that; we could be in the 70 to $80 million range in. We still believe we have that potential, and we think it's an excellent potential number for us. But as we discussed, the second half of that portion will come from supplemental.

I've heard the Army talk about they want all of their vehicles uparmored by the end of July. Is that what you're hearing?

They have said that they want all of the vehicles uparmored by the end of July to fit the actual requested need by the commanders in theater. But beyond that, they said they intend to provide funding to exceed those requests so that they can arm a heck of a lot more in the whole cross-section of vehicles that are out there.

But since you already have these uparmor under contract, as soon as that money gets funded in the supplemental they would just plow it right into those contracts, correct?

Right (multiple speakers) takes us through July.

Okay. Also, I wanted to sort of get some detail here. I am looking through the details of the supplemental, and I'm looking here -- can you sort of just broadly (indiscernible) upgrades and might systems and some generators. It looks like most of this -- a lot of the programs that are here more on the Army modularity side rather than on the -- because my thought is that the Army modularity, it looks like they're going to be using about $5 billion a year over the next several years. So are a lot of these the Bradley? Is that more of a recurring revenue stream than sort of a onetime pop, do you believe?

Again, I think it's all to be determined because their wishes and what they actually do will be two different things. But you're right on in terms of modularity, and it really affects us in our sweet spot. More recently they're talking about providing funding to support ARISTA (ph) integrated package for the Bradley, which is reconnaissance, surveillance and target acquisition. But again, those are things being worked, and until such time as we get a little better idea where we're headed we're reluctant to put actual numbers on them. But we think they will be, to your point, recurring activities for the next three or four or five years.

Do you have sort of a round dollar number on what you're -- because you make basically the sensors and all the equipment that turns the Bradley into a BFIST, which is sort of the prime component. What sort of a dollar content do you have on (multiple speakers)?

If you turn a Bradley into a BFIST just for target acquisition, it is in something of the neighborhood of 10 to $20 million a year. If you take it beyond target acquisitions or reconnaissance and surveillance, it's somewhere between 20 and $30 million a year.

Do you know what it would cost, like what the per unit revenue would be?

(multiple speakers) because they're so many variations. It's very difficult.

Okay, very specific. Okay, great. Thanks a lot guys.

Chris Donaghey, SunTrust Robinson Humphrey.

I just want to get some clarification. Is there any impact of the supplemental included in your guidance right now?

Certainly, I think the first part of our uparmor is coming that we said that we have now got in our contract. I think that was assumed to be taken care of by existing supplementals. I think it carried us through the first half of this year in terms of absolute funding. That's my understanding of it.

But no impact from the supplemental that was proposed last week?

(multiple speakers) that's why we're over and over saying we are reluctant (multiple speakers) because you don't find -- for most of our stuff you don't find specific line items. Most of that comes from O&M in the subset of a supplemental.

(multiple speakers) when we go to a show, we go to talk to our customers. That high on their list of priorities -- the uparmoring, anything associated with reset, anything associated power generation, anything associated with (indiscernible) to make sure that our customer has better telecommunications in a niche area, our whole idea with our telecommunications businesses of being bandwidth on demand. So those are the high-priority things, but hey are in a work process to being developed as we speak.

Just looking at some of the specific items that were in there, some of the generators, the water purification or fuel distribution systems, is there going to be any -- is there any potential impact of having to restart cold production lines from what you have seen so far in the supplemental?

Yes. There some discussion of that going on right now. Whether it be decontamination, some discussion about trailers, a number of things that we have produced over the past years.

One last question, just on the operating margin variability that you expect to see this year in the systems business. Obviously it was low first quarter of last year and then it spiked in the second quarter probably due to MSTAR deliveries, but just what you're expecting on the operating margin in the systems business this year.

We expect long term it to be approximately the same as it was for the year last year. You're going to see the upper, upper-teens and so forth. With what we see right now that is sustainable, and don't see any difference. The first quarter was off just due to program mix. Each quarter is going to vary a little bit just based on program variability and what is in there and so on. With some really good, strong profit programs, we're looking at some increased revenues later in the year that that number will come back up a little bit.

Thanks guys.

Robert Stallard, Banc of America.

Just a couple of quick questions, inevitably on the supplemental. What's your sense on the uparmoring situation of how far the Army is through this process?

I'll take a shot that, and then I think it's -- interestingly enough some of the best assessment you'll find in things like USA Today, and that gives you a good idea of where the process is. I think I will go back to what four-star (ph) told Ron Davis and I just last week, and that is once again that they expect to provide funding to support more uparmoring than what the theater commanders are asking for, because among other things there are many other threats out there around the world that have potential. And so I don't know how to answer it any better than that.

I think that the development, the specifics associated with supplemental are really just getting started. And there isn't a hotter -- there isn't a hotter item right now. There has been some discussion about potential foreign needs for uparmoring. There has been discussion regarding uparmoring vehicles that are not part of the military inventory, but that are provided by a number of commercial contractors in theater who have to protect their employees and the military personnel that they're working with. So the whole subject really is just taking on a real head of steam but without a lot of definition.

Is it your sense that this process could last easily through fiscal '05 and into '06 and maybe '07?

I think it's -- unless you decide that the threat that we're now seeing goes away overnight, I think it is ongoing for the next two to four years as they try to assess actual uparmoring needs.

You mentioned exports. Could you talk to the topic of what other opportunities you have? You have talked in the past about MSTAR and other opportunities. How do you see that progressing as we move through the year?

When we talked MSTAR the previous quarter, our expectations were I think entered orders of 35 million. That continues to be our expectation. The guys are working a lot of opportunities; all types of applications, whether they be perimeter security for various military installations, border patrol, discrete NATO opportunities for the same kinds of things. The product was developed and enhanced over the years to be a potential factor in a whole number of applications.

Are there any other exports we can look to possible enhancements?

Other export opportunities? I don't know. We have been so doggone busy taking -- seriously we've been so doggone busy taking care of our domestic customers, we have been so active that I personally don't have my attention on what we could export. Matter of fact, it's just the opposite. We get almost daily inquiries from foreign defense contractors trying to figure out how to tap our market. So our thrust is make sure we take care of our best customer first.

I know there are some things developing, but beyond MSTAR I'm not really conversant. There may be some trailer activities. Some of the things that we are working on that are next generation may provide some export opportunities for us in the future.

Just finally on the acquisition front, you've made a couple of deals recently. What do you see as the market out there? Are there many more opportunities and how do feel about the prices being asked?

There are a lot of other opportunities that we're looking at. Some companies we're seriously looking at right now that make a lot of sense. We haven't seen a lot of change, I would say, in the general level of activity in our segment to any great degree. We went for some period of time without making an acquisition because we didn't find a company that really fit all of our criteria, and that will happen. I would say right now the plate is pretty full as far as potential going on out there.

Pricing kind of remains kind of the same. We're still dealing with those top NIT companies that are still selling and trading at unbelievably high margins. A lot of those, even though they don't strategically make sense for us financially, they don't make sense at all because I don't know how they work.

So in general we will never be the highest payer. The last two acquisitions we made we were probably not the highest payer, and that's not the way necessarily to do business. We put a lot of emphasis on what we call bolt-on on acquisitions. That been very prominent in our philosophy over the last year, I would say. And both PCA and Spacelink kind of that the criteria to some degree, again a bolt-on to an existing subsidiary to subsidiary helps us in identifying a need or an area where they can expand their business. And someone out there that they can kind of work very closely with and do that -- what we always say, that classic 1 plus 1 equals 3 -- you bring those two companies together, and together they're going to do better than they were separately. And we're looking heavily at a bunch of opportunities just like that.

So not to make a long story, but it's very important to us. A lot of things going on out there, and a lot of good things going on right now in the acquisition area.

Thanks very much.

Tyler Hojo, Sidoti & Co.

I was wondering -- most of my questions have been asked, but I wondering if we could talk about bookings for a little bit; $220 million in the quarter. That's up from 190 million in the fourth quarter. I was wondering how much of that is based on the two most recent acquisitions.

Let me get my head together. Nothing basically. There's nothing in the first quarter relative to that.

The bookings to date through the first quarter, I would tell you, we're very happy with where we stand. We track -- at the beginning of the year we look at bookings on a month-by-month basis. We are considerably ahead of our original forecast for the year. And as we always try to remind everybody, don't look at it quarter to quarter because it's to vary year-over-year, quarter-to-quarter; next year the second quarter will be the best, the following year the fourth quarter will be the best. So dependent on so many variables out there that relative to the procurement cycle and everything else, so you can't really grab it quarter-to-quarter.

We're kind of looking at a number 1.1 billion just roughly concluding the new acquisitions as far as bookings next year. So you have got about a 1.1 book-to-bill ratio. That number looks good (technical difficulty) ahead that schedule right now. I'm not going to tell you we're going to beat it, but so far we're ahead of what we originally forecasted for the first quarter.

Again, back to back you can't take the quarter-to-quarter numbers and put a lot of sensibility in it. You have got to go really long-term.

That's fair.

Did I answer it fully for you?

You did. Thank you. Just one more thing, quickly. Just as far as your guidance for this year, what is the tax bracket that you have baked into that?

38 percent. (multiple speakers) 38 percent. We look at the quarterly, though. We do a great job relative to that and we will continue to look at it, but right now we don't see anything changing in that long-term. We will see. We will continue to long, long, long-term hopefully improve that, but right now that's the number.

Okay, great. Thanks.

Alec Mutamud (ph), Thomas Weisel Partners.

I just had another quick questions on bookings. I know you said not to look at it quarter-to-quarter, but was there anything you might have been expecting in this fiscal first quarter that didn't come through?

No, we got pretty much everything.

I think we're essentially on or ahead of our forecast.

Another quick one. On free cash flow, was there anything from asset sales that you expect coming up in the year?

Asset sales?

We have one facility remaining over at engineered air that is for sale, and we have had discussions with various buyers. But we're putting no projections right now as far as when that sale will occur. Other than that we will continue to work what we have called historically project leverage, and look at what I've always called facilities utilization. The classic is you buy acquisitions, you have got to go back and see do we really have the best facilities at the best places and everything else, and sometimes that's not easy. But you look at it and see if there's any changes. But we have nothing right now as far as projections and changes.

Great. Thank you very much.

Larry Callahan, Huntleigh Securities.

I was wondering if you could give us the cash flow in the quarter from stock option exercise proceeds, and whether you have an expectation for how that's going to compare to the 2004 number?

I don't think we've got that right here. I hate to tell you that. You might give us a call later or something, but we don't have it in here.

Not for the first quarter either?

No, we don't have it for the first quarter. (multiple speakers) I'd give us a call back. I can tell you yes there were some stock options exercised during the first quarter and there was some cash flows resulting from that.

I will call back. Thanks.

Selman Akyol, Steifel Nicolaus.

First of all, on support services, you guys had 38 percent growth there, but that obviously was driven by (indiscernible) in the uparmoring. Can you just say what that would have been without the uparmoring?

In there -- we gave you numbers in there, and I'm going have to search through here and so forth. The uparmor in revenue in first quarter was $12 billion; '04 was 0.

Okay, so I can back into it from there.

(multiple speakers) back into it basically. Yes, there was a lot in the communications end that would support growth. And the reason I'm kind of stuttering is I was thinking in our verbiage we gave some more insight into that relative to the growth when I talked before. (multiple speakers) $12 million before and $7 million worth of M1000, which of course is not in the services side, but strongly driven by the communications end of the business certainly, plus the (multiple speakers)

(multiple speakers) I'm sure was up. Our depot support we're doing out of ESSIbuy.com was up quarter-to-quarter.

But I guess the point that I would be driving to is the TAMSCO. That is really going to end up being much more multi-year kind of work ongoing. I mean, that's sort of like an evergreen.

(multiple speakers) Radian had a tremendous quarter. TAMSCO had a tremendous quarter. But if you look back since we have acquired TAMSCO, the growth has been fantastic. And that's one of the reasons we bought Spacelink, was to complement TAMSCO. That's going to be -- in our (indiscernible) that's going to be truly a 1 plus 1 equals 3 when you put the communication portion of Spacelink with that of TAMSCO, and they're going to grow like crazy.

Just going back to the financing, you said you had 200 million and then $100 million accordion feature, so in total you have over $300 million potential financing?

We've got a standard line that's $200 million, and then the accordion feature which would take it up to 300 basically. So on the 200 it is the old classic you can write the check tomorrow, it takes probably 24 hours to write the check and 300 million. That's the current facility.

Just lastly, just so I have this -- I fully want to understand this. In your guidance there is nothing coming out of the $82 billion supplemental, so everything from there would be upside?

Yes. We have not put anything in there that currently is coming out of that, other than -- some of the -- and I'd have to get into the details. Some of the M1000 trailer effort that we knew about going into the beginning of year is in there and some of that funding may be coming out of there. But anything new or anything that we had speculated that we think maybe is going to happen is not in any guidance at all.

Thanks.

Robert Winslow, Wellington West Capital Markets.

Just want to circle back to the MSTAR briefly. Last quarter you gave sort of a range of potential MSTAR over the next five years of 100 to 150 million. Would it be fair to say that that sort of potential remains intact?

Sure does, and as I think I said earlier, our forecast for this fiscal year was something in the neighborhood of 30 to 35 million. We still believe we're on track to do that.

Last quarter we also talked about the US Army trialing the device; that that trialing, we believed, would extend into Q2. Any update of that front in terms of timing and potential?

I think it continues. We really don't have any update. They continued to do that. Again, there are so many applications. And it is a little bit like Selman's previous question, trying to determine exactly where the money comes from. Is it existing procurement funding? Is it supplemental? Sometimes you're a trade-off.

So that's what the Army has, what the military is going through right now. They have a large list of things to include. All these next-generation things we talked about certainly include existing products like MSTAR. And I think it will take us a little longer just to work out some of the details consistent with what they really want to do with their money.

Thanks very much.

Eric Hugel, Stephens, Inc.

A couple of follow-ups. One, in terms of thinking about the inter-segment eliminations in terms of the models, I guess we were looking for something like around 20 million for the quarter. What's really the drivers of that, because it's much lower than expected? Should we expect that to expand rapidly in the back half of the year?

Could you give us just a little that bit more clarification?

The inter-segment eliminations in the sale line. Basically what flows through the services business and some systems.

Oh, I see. What flows from the services into the systems business.

Yes, that for the year -- Eric, I'm not sure we are answering your question -- it will be north of 20 million as far as that amount of work. Of course there is hidden within the services still, or within systems, within those two segments themselves are some amount of inter-company that than doesn't -- you don't see in the financials, but we have companies working together for one another that a Keco and an Engineered Air and an SEI, for example, may be working on the same project.

You asked some interesting questions earlier. And one of the things I failed to comment on, but I think it's significant in terms of future, and it's something that is being pursued by our head marketing and business development people just talking recently, Dan Jura and Ron Davis, who head up that for the Corporation, there's a new concept called LPSI, it's lead product support integrator. And when you take a look at what we are and what we do, almost without exception we're an integrator. And when you think of all the different things that we provide in a support or sustainment role, it just suggests that that concept has a lot of potential for us. And you couple that with the planned addition of 10 new brigades, we really think that's going to evolve into something. Again, it's just initial incubation stage, if you will. But those are the kind of things that we talk to the top brass of the Army about to see if there's real validity, and to make sure that they understand that we have a fit.

Do you have any sense as to terms of what the impact of option expensing, sort of just a general range as to how big and when that's going to --?

Let me answer the questions asked before just for information’s sake as far as option exercise. In the first quarter there was $18.9 million worth of cash from option exercise. And that is not in operating cash flow, remember. So that's a positive on top of that.

As far as option expensing, it's in the Annual Report every year as far as what it would have been. It is a requirement of the MD&A, I guess it is. And that number for '04 was -- the valuation it was based upon was $8 a share, so basically if a guy gets an option, you can calculate it based upon that.

Right now, of course, we will have to expense options starting 1 August. Management and the Compensation Committee have not made a final decision relative to where we go with that issue forward. There is part of the proxy additional shares out there right now that are set up mainly for -- they are set up for non-insiders that would be for options that obviously would just to avoid the expensing, would be done before 1 August. And we will have to see going forward with 1 August. I can tell you we're not going to be driven by any large expense hitting the P&L as a result of options being exercised, I can tell you that for sure.

One last question. It might be a little too early, but I know you guys have had some contracts previously mainly in the telecom area to the domestic Iraqi and Afghan governments in support of their telecom or operations. There is kind of a big slug of money, I think like $5.7 billion to Iraq and about 1.3 billion or something like that going to Afghanistan for their security forces in terms of beefing them up and buying equipment and all that, and training them. Are there opportunities that you have identified or begun to look at in terms of that?

Yes, there are. They're very large. There are opportunities that we're just currently getting involved or reinvolved in, or really being involved in from an escalation basis. Again, it's making sure that the funding is in place to support that. As you know, the funding for that comes from various sources. But we have some very large programs that TAMSCO and Spacelink folks are just getting into, and we hope to be talking about that within the next quarter.

Thanks a lot guys.

That concludes our questions for today. I'd like to turn it back to Mr. Shanahan for closing remarks.

Thank you Bridget, and thanks gentlemen for a great report. Thank you all for calling in, and we will talk to you next time. Thank you.