Leonardo DRS Inc (DRS) 2007 Q4 法說會逐字稿

Good morning, everyone. Welcome to DRS Technologies' conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) as a reminder, ladies and gentlemen, this call is being recorded. At this time for opening remarks and introductions, I would turn the call over to Ms. Patricia Williamson, Vice President of Investor Relations for DRS Technologies.

Thank you, Erin. Good morning and thank you for joining us on today's call to review DRS Technologies' financial results for fiscal 2007 fourth quarter and full year ended March 31, which were reported earlier this morning. Hosting today's call are Mark Newman, Chairman, President, and Chief Executive Officer of DRS Technologies, and Rich Schneider, the Company's Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind everyone that we are providing a simultaneous webcast of this call to the public. An archive of this webcast will be available later today on our web site. Today's remarks may include some forward-looking statements and certain non-GAAP financial metrics. For more information on the Company's definition of these metrics and their usefulness in interpreting DRS' financial results, please refer to today's earnings release and our filings with the Securities and Exchange Commission, available on our web site. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act, please note the risks and uncertainties related to forward-looking statements. These are more fully described in the news release and in the Company's SEC filings. The Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to Mark Newman.

Thanks, Pat. Good morning, everyone, and thank you for joining us on today's call to discuss our fiscal 2007 and fourth-quarter results. As we reported in our news release this morning, fiscal 2007 was a great year for DRS with substantial increases in key metrics over fiscal 2006. We also finished the year with record operating results for the fourth quarter.

During the fiscal year, we've secured a record $3.5 billion in new orders for products and services, and on March 31 we ended the twelve-month period with record year-end backlog exceeding $3 billion. These key metrics have placed us in a strong position to kickoff fiscal 2008.

I would like to take a few minutes to touch on some of the financial results and operational highlights of the reported periods. Then Rich and I will take your questions.

Looking at the fiscal year, revenues of $2.8 billion were 63% higher than last year and included strong organic growth, which accounted for 14% of the increase. Full-year operating income increased 60% from a year ago, reflecting the higher overall sales volume. The 10.9% operating margin, although slightly lower than last year's, was the result of the revenue mix, which contained a higher portion of revenues generated by our Technical Services businesses.

As we have mentioned, our services business typically carries lower margins than our products business. The operating margin for the product side of our business actually improved to 12.1%, compared 11.5% for last fiscal year. So we're seeing some positive results from the steps we took during the year to integrate and consolidate some operations and increase efficiency.

Net earnings, partially helped by discrete cumulative tax benefits, as noted in the release, increased 56% despite an 87% increase in interest and related expenses, due to a higher average outstanding borrowings associated with acquisition financing. Diluted earnings per share for fiscal 2007 of $3.12 was a 17% increase over the prior year. Our free cash flow for fiscal 2007 was a new record at $139 million, 22% higher than last year. It exceeded our target ratio of one-to-one with net earnings.

DRS captured a record $3.5 billion in new contract awards during the fiscal year, 61% higher than last year, providing a book-to-bill ratio of 1.24 to 1. At year-end, the Company's funded backlog of approximately $3 billion was 27% above backlog at the same time last year.

We made some important strides in fiscal '07 that are expected to have a lasting effect on our business going forward. Chief among our accomplishments during the year was the completion of the integration process related to the operations of Engineered Support Systems, which was acquired in fiscal '06, and the realignment of all our operations into four operating segments; The competitive win on the SBInet program as part of the team led by Boeing - SBInet is a key multi-year program that is part of the Secure Border Initiative of the Department of Homeland Security; and record bookings, which included several sizable multiyear contracts, such as FBCB2, Multi-National Forces-Iraq, and IFTP, a program that places our power conversion and distribution systems on the Navy's new DDG-1000 destroyers.

Earlier today, we were pleased to announce the Company's payment of $0.03 quarterly cash dividend to stockholders of record on June 15 payable on June 29.

Taking a brief look at the fourth quarter, the operating results were quite strong. We posted record revenues that were 24% higher than last year with 12% of the increase due to organic growth, driven mainly by our ground vehicle infrared sighting systems and tactical computer systems product lines. Consolidated operating income rose 27% on a strong 11.8% operating margin, and net earnings were up 58%. Diluted EPS of $1.11 was 41% higher than last year's fourth quarter.

Free cash flow was a quarterly record of $116 million, 43% above last year's fourth quarter. This strong free cash flow allowed us to pay the outstanding balance of our revolving credit facility and reduce debt sequentially from the third quarter by almost $72 million. At March 31, cash and cash equivalents had increased to $96 million, and net debt was 8% lower than at the same time last year.

Operational performance continues to be a top priority for us. We remain extremely focused on program execution and on meeting our commitments to our customers.

There were a number of important milestones achieved in the fourth quarter that I would like to take a moment to highlight for you.

First, we formed a DRS majority-owned joint venture with Thales North America called DRS Sonar Systems. This partnership joins two global defense technology companies with the objective of becoming a preferred provider of undersea warfare system solutions for U.S. and international military forces. DRS has developed a solid relationship with the U.S. Navy over many years of providing high-quality system solutions that have enhanced mission performance, increased ship and crew survivability, and helped maintain a strong naval force. Our expansion into the undersea warfare battle space allows us to offer a broader spectrum of advanced solutions that meet the requirements of this growing naval market.

Also in the fourth quarter, we successfully completed the acceptance testing of the first SBInet tower for Boeing. These towers house infrared sensors, cameras and other surveillance devices that support the first phase of this program over a 28-mile stretch of land outside Tucson.

Additionally, we delivered the first units of the Manned Portable Surveillance and Target Acquisition Radar, or MSTAR, for the SBInet program during the fourth quarter. This proven radar system has been widely used by various Armed Forces for several years and is being incorporated as a key border surveillance asset for the SBInet program.

During the fourth quarter, we experienced strong demand for the UYQ-70 advanced naval display systems and booked about $26 million in additional funding for that program.

We are also seeing strong demand for DRS-produced Driver Vision Enhancers. Our efforts to expand the application of this product line are showing real promise.

During the fourth quarter, we completed ahead of schedule the reset of more than 90 M1000 Heavy Equipment Transport trailers for the U.S. Army and received an order for 240 more.

From Northrop Grumman, we booked a $24 million award for the next option on a five-year contract, valued at over $100 million, to provide replacement environmental control systems for the U.S. Air Force Minuteman III program. The DRS businesses supporting the Minutemen program have been doing so since the program's inception and have a long track record of success.

In the fourth quarter, we continued to receive contracts supporting our Army customer on the current Knight Precision Targeting System and also received funding to produce the next-generation Knight systems. The Armored Knight mounts the existing Knight mission package on the armored security vehicle. Knight is a good example of a program supported on a cross-segment basis by DRS. The Knight's Mission Equipment Package is being produced by our Sustainment Systems segment, while the common display terminals are being produced by our C4I segment.

During the quarter, were also pleased to be invited to join the Raytheon-led team to contribute to the design and development of the Silent Knight tactical radar for special operations rotary- and fixed-wing aircraft. Ultimately, this radar will serve as a common multimode terrain-following and terrain-avoidance radar for a variety of air platforms, including the program's targeted lead aircraft - the MH-47G special operations helicopter. This radar will assist special operations forces in safely entering and exiting dangerous areas at night while flying at low altitudes. In addition to helping develop this technology, DRS will provide other services and equipment during the design process.

On the Technical Services side of our business, we were awarded an IDIQ task order under a rapid response contract from the Army valued at $288 million. For this order, we will provide communications systems to support the Afghan National Police in their mission to provide border security. The contract has initial funding of $52 million.

Building on our success supporting the U.S. Coast Guard in their Homeland Security missions at Elizabeth City, North Carolina, we were awarded a follow-on $31 million contract to continue the overhaul, support and maintenance of C-130 aircraft and to provide logistics services. DRS continues to receive enthusiastic recognition from the Coast Guard for the excellence of our work.

Now I would like to address our initial guidance for fiscal 2008, which was included in today's news release. At this point, we are estimating $3 billion to $3.05 billion in revenues and diluted EPS between $3.10 and $3.20. On an apples-to-apples basis, we're forecasting 6% to 8% top-line growth and EPS growth of 9% to 13% over fiscal 2007. Our operating margin is expected to be approximately 11%, and free cash flow is estimated at this point to be $110 million to $130 million.

In summary, we completed a strong fiscal year with a strong fourth quarter. Our results reflect the solid performance of our operations across the Company and our continued emphasis on the importance of customer focus, program execution and a culture that supports the drive for continual improvement. Expect us to continue to implement strategies that improve efficiencies and encourage coordinated business pursuits between our operations.

These efforts continue to be a part of our ongoing initiative to remain competitive, adaptable and responsive to our customers, ensuring we are always aligned with their priorities. We intend to continue to work hard to capture new business as a leading total solutions supplier with broad capabilities in defense products, systems, services and subsystems integration. Equipment reset, readiness and long-term force modernization are a primary focus of the President's initial budget request, and we believe there will be strong ongoing support for these areas, which bodes well for DRS.

Now, I would like to open the call for questions.

(OPERATOR INSTRUCTIONS) Myles Walton, CIBC World Markets.

Mark or Rich, I was wondering if you could comment a bit on the top-line guidance for revenue and trying to flow that back to what had been a great bookings year for you, is there a bit of conservatism built into that top line outlook and/or is the backlog getting longer in the tooth? It looks like backlog is up maybe 27% year over year. You had one of the best book to bills and 6% to 8%, while very healthy, still looks like it might understate what actually happens.

I think it is a good observation. The backlog is coming in very strong. I think what you saw was a big fourth quarter and you could see that at $2.8 billion and change, we beat the previous guidance that we had for revenues. So, obviously, we started pulling stuff in that would have been shifted in the first quarter, we pulled into the fourth quarter.

As we look at the business flow for this year, on the one hand, we're starting with a healthy products backlog, but on top of that, we are also starting with a very healthy services backlog. It is actually probably almost double what it was last year. But when you add it all up, we still have to produce it all, and you've got to get product out the door.

I think what is very important is that we do not try to over forecast, so what we have put together is I think a very, very solid forecast for this year. And I think we've got a good shot doing that and maybe doing a little better.

Okay, then Mark or Rich, could you comment on the severance and integration costs that were in '07 and I guess you're looking for about flatfish, maybe up slightly on margin line. I am just curious why you would not see a little bit better than that, given a lack of integration or severance charges? Does it play to mix, what you just mentioned, or something else?

Let me start and then if Rich wants to add something, he can add. When we look at our business, we look at a 10 to 12% operating margin. If you are operating in that range, you're doing very, very well in our business. Obviously some parts of business do better, some parts do less.

We have made some very interesting adjustments over the year, cuts as you term them, and that made us more efficient, and it also made up for the fact that the initial forecast last year was for a $2.9 billion year, versus the $2.750 billion that we ended up forecasting down the road, if you recall in August of last year. So, what we did was we brought the cost structure back in line so that we can do that 10 to 12% operating margin. So that is what we're aiming towards, and what we showed was that we were able to adapt to a change in the business and take out costs that would have hurt that 10 to 12% operating margin. So remember, we got (technical difficulty/music) Does that mean your question is almost over? Are you still there?

That's quite all right. That wasn't me.

I shouldn't say this, but I thought Liberace was kind of coming in from heaven.

Okay, I think to push it a little bit further, though, what were the integration and severance costs? Were they $3.5 million or thereabouts in '07?

They were about $5 million in '07 and, Myles, I would not assume that it would go from $5 million to zero. We're going to continue to do pruning to improve our efficiencies and competitiveness throughout the organization.

Let me just add one other thing. The reason we talk about a 10 to 12% margin is that we are also investing for the future, here. You cannot forget that. And what we're doing is, in some cases, we eliminated overhead costs, and we flipped them into R&D costs and bid and proposal costs, which are going to help secure our future. That is why we try to bring the year in in that 10 to 12% range.

Okay, I will get back in the queue. Thanks.

Ferat Ongoren, Citigroup.

A couple of quick ones for Rich and Mark, then I'll have a longer-term strategy question for you. Rich, if you look at the tax rate last quarter, you guided for 39%. If I just apply -- you know, I calculate $0.96 earnings. You are talking about $0.12 benefit. Is there something we're missing here?

I'm not sure I totally understood the question, but what I said on the last call was that we knew there would be an additional tax benefit, but we did not have it quantified and that the guidance that we provided assumed a tax rate of about 39% and that any additional tax benefit would be incremental to that guidance.

But if you apply 39%, don't you come up with a lower earnings number?

No, the earnings were $3.12.

Okay, I'll take that off line. The other question I had on quarter was the Sustainment Systems. Last quarter, it seems like they had the unusual margin of 17.7%. You mentioned it will be around 14%, if it was over 14%. I'm trying to figure if there is a one-time benefit in the quarter or is it just the mix?

14 versus 14.7? Come on, are you serious?

That wasn't me. I don't know who said that. We were 14.7 for the quarter. I'm not sure I understood your question.

What I am trying to figure is, is there a particular benefit or is it just the mix?

It is mix. It's going to vary a little bit each quarter.

Okay, and Mark, if you basically look forward for '08, what kind of growth rate do you expect for individual segments? Should we expect C4I to be the slower-growing business given what is going on with the LCS and Bowman?

No -- going on with Bowman and what?

LCS. I guess Lockheed's program is gone now and you had more content in --

We are still producing for Lockheed's program, because they do have the first ship, and it is still up in the air as to what is going to happen to their second ship. Even though it was canceled, some of the literature I've been reading says they may actually reinstate it. I don't know.

That is only -- that only has an impact of $10 million to $15 million, in the worst-case, to us. On the other hand, parts of their business are doing very well. So, we are looking at a modest growth in all of the operations. I don't think you can single one or the other. What we do is we start the year with initial guidance based on an initial plan, and then you see how things start to come in and how things go out the door. That is going to change as the year progresses. But I think that if you look across the board, all the businesses right now are in pretty strong condition.

Would we expect the infrared business to be the faster growing in the year?

I think that you will see some good growth on infrared. I think you also see some good growth in the Services business.

Okay. And then, it has been over a year since Engineered Support has closed. What are your thoughts on M&A and what are some of the lessons learned from Engineered

Actually, in terms of where we're going with M&A, that has always been part of our strategy. So what we have been doing is integrating the business that we had, because, as I have said over and over again, that we actually bought 14 businesses there. So that was a nice integration job that we had to do.

We're not adverse to looking at things, and we are looking at things all the time, but it has got to be for a reasonable cost. And right now some of these things are going through very high multiples, so we have to have a very disciplined approach to the M&A. You had a second part to that question, and it fell out of my head.

Lessons learned from Engineered Support.

I think that we are very, very pleased with the integration of Engineered Support. In fact, we integrated that business faster than we had ever integrated anything else.

I think what we learned from that was, basically, you take a look at a forecast, and you've got to maybe question the believability of that forecast at the front end. What I subsequently learned was that they had baked in acquisitions, because they knew they had always grown at 20% a year and that included acquisitions.

The truth is, when you look Engineered Support, they did a very healthy growth rate for the year. Their bookings came in just about where they were supposed to be in the original plan, they just got delayed a little bit because of some of the slippage in the supplemental last year.

So I am very, very pleased with Engineered Support, the people there, the work we're doing there, the acquisition of the business. I think it has added a whole dimension to DRS that we never would have had. So I think has been great.

Okay, thanks a lot.

Steve Binder, Bear Stearns.

Can you maybe just touch -- you touched on the $5 million of related charges, consolidation charges in fiscal year 0'7, but I guess your original guidance was above 11%. You came in 10.9%. Arguably, you had reasons for that shortfall, but if you look at the fourth quarter, would you say that from an execution standpoint, where there any EAC adjustments? Were there any charges to speak of in the fourth quarter in any of the segments?

Yes, there were just a couple of things that we have been working on and I think caused a few million dollars here and there. But you're going to have that anyway. You shoot, as I say, for 10% to 12%. We came in at 10.9%. The margin actually for the quarter was still pretty good, but there were some one-time charges, but that was one time for the quarter. On any given quarter, you could have one-time charges. So yes, all things being equal in a perfect world, maybe we would have seen a few more cents.

Can you just shed some light on what those charges were for?

There's a number of little things that add up to a few things. I don't know. Do you have any color? I don't. I was asking Rich.

I thought you were asking me. No, I just wanted to know, is it performance-related issues or would say it's just conservatism or how would you characterize those small charges?

Well, for example, we have this Thermal Weapon Sights program and what we found all of a sudden, there were some production start-up problems that we had to get our arms around. So, we internally stopped work on the program to look at some issues that we had. So when you start to do that, you end up with some delays and then you have to project out where those delays would go and what it will cost you. You have to eat that, so then you would make an estimate for that. You add it to your estimate to complete, so that is a good example.

With respect to the CapEx outlook, your cash flow was exceptional for the quarter and for the year. You could go out with higher CapEx for fiscal year '08. Where are you spending the increased capital?

Steve, it is going to be a couple of areas. One is in upgrading our computer systems, both software and hardware. As we continue to grow, we need to bring all of our ERP systems together. And at the same time, in facilities costs. Those are the two major areas.

Okay. Can you shed some light on the organic growth expectations for '08 by segment?

Not really at this point.

Last thing is do you expect the delay in the FY '07 supplemental, does that affect first-quarter bookings at all, do you think? Or do you have a sense on what book to bill should look like in the first quarter?

I don't think it will have a big impact on our bookings in the first quarter. Actually, our bookings in the fourth quarter came in stronger than we had internally forecasted, so the workflow is coming in and a lot of the stuff that we are working on is so vital that sometimes they move other parts of the budget to try to get those things under contract. So right now, we are not seeing a big impact from that.

Great, thank you very much.

Steve Levenson, Stifel Nicolaus.

Are you finding that your cross-segment cooperation is generating and, if you can tell us, if it is meaningful, quantifiable savings on the bid and proposal process?

Well, I don't know if you can address savings. I will tell you that it has given us capability now that we have never had before to go after programs. Obviously, if two different operations have been going after the same program and now they can go after it jointly, there is a savings associated with that.

The good news is I am seeing a lot of cross collaboration and cooperation with the different segments. And I spend a lot of time in our Washington office, and I am seeing a very, very healthy interaction among all the segments. The same thing is true when you go out to the trade shows and you see them all working together. But I think that we are going to see some good potential there.

Okay, thanks. Do you find the split between where you are acting as a prime or subcontractor is changing at all with your increased size, and do you think that will have a positive impact on margins or no real change?

No, I think that we are shooting for the margins we're shooting for. But I think in terms of becoming a more valuable team member, we're seeing a real positive there as we work with some of the large prime contractors, because we can bring a lot more capability to bear for them. We are not trying to take over their prime role. We're trying to be a solid team and partner, team member and partner with them. Now, because we can offer a lot more capability, we're seeing that pretty well received by the large primes.

Okay, thanks. Speaking of the trade show, are you going to bring the pianist to the air show? Thanks very much.

Now everybody thinks I bring a pianist with me.

David Gremmels, Thomas Weisel

Mark, you have historically had a lot of content on Marine Corps and Army ground vehicles. Obviously MRAP is looking like it is going to be a big deal. You have any opportunities to provide some of the electronic systems, the infrared, FBCB2, Driver Vision, that kind of stuff on MRAP?

Yes, I think we're going to have opportunity to do that, and it is certainly something that we are pursuing.

Have you received any orders at this point or is there any quantification you can put behind that?

We have probably gotten a few million dollars in orders so far and that is usually not very meaningful at the beginning of a program like this, but I think there is going to be a role that we will play.

Is the -- I mean, is this something that could be -- is the something that is built into your plan? Could it be incremental to your plan as the potential size grows?

That is actually a good point. It could be incremental in a positive way to the plan. We have not baked much in for that.

Then, I noticed in your prepared remarks, you mentioned the DVE program and some efforts to expand that product line. I was just related if -- maybe that was related to MRAP or if you could just touch on your efforts there with what's happening?

Certainly you could see that DVE would have a real relationship to that MRAP, so we are seeing DVE being very, very, very well received across the board. We even got involved with an urgent request in the UK, we are delivering stuff. I think there is going to be a great future for that product.

Great, then switching gears, the Mast Mounted Sight program, I am just wondering with all the delays to the armed reconnaissance helicopter, does is that provide any incremental opportunities for MMS?

Well, considering in our original plans we have started to phase out by now, we are seeing that it is really continuing on a very steady basis. So there is no question, with delays in the ARH we're the only game in town. So, I think that product is going to be around for a long time.

Then lastly, I know that you don't like to talk about quarters, but you did mention that you pulled revenue into Q4. I am just wondering if that implies anything with respect to what we should be thinking about for June revenue.

Well, you see, that is why we don't talk about quarters, because you go through an effort to pull things out of Q1 into Q4, which is really, it's not that you're really pulling, it is just that is how it shows up as they try to enhance the year. Then you get off to a slower start in the first quarter, which, when you look at our history, always happens.

What I always say is, then, why can't you pull something out of the second quarter into the first quarter? That is what they began to do, so you can't quantify those things. That is why we are finding you can look at a full year and say this is what you're trying to achieve a full year, because a lot of that falls out depending on how the production is going for any particular program.

So, certainly, what we try to do every quarter is to figure out how to get stuff from the next quarter into the current quarter. But if you look at our history, we always start off slow. There were a lot of naysayers this year that did not think we would come anywhere close to what we did in the fourth quarter. And we said last year, it was going to be back-end loaded. I think we proved that we were right. We knew what we're doing in the business.

Right. Okay, thank you.

Sarah Thompson, Lehman Brothers.

Just a very quick question on your debt and your expectations for this coming year. It looks like you guys reduced that by about $71.5 million sequentially this quarter and about $46 million over the past fiscal year. Your guidance is calling for about $110 million, $130 million in free cash flow. I was just hoping that you could talk a little about what your debt reduction expectation, if any, for 2008?

It is still our goal to take that free cash flow to reduce down the debt. We have, right now, the revolver balance at the end of the year at zero and we'll start paying down the term loan.

Okay, thank you.

Alok Chopra, Oppenheimer Funds.

It is actually Oppenheimer Capital. You have had Engineered Support now for over a year, and I presume it is pretty much fully integrated. Could you comment on what you see margins looking like next year in the Technical Services Segment? I realize this is a lumpy business, and it looks like we're running in mid- to high-single digits, kind of, range. Is that where you expect it to come out in fiscal '08?

I do not think there will be big changes. We always run -- we're seeing that as a 7% to 8% margin business, but the advantage to that business is the tentacles that it has given us into new business opportunities in other parts of the business. So, we are finding that this has done a lot for us in terms of increasing our stature around the world and in the U.S. with the U.S. military. So, I am absolutely delighted that we have now finally gotten into the services business in a big way.

That's it. Thank you very much.

Peter Arment, JSA Research.

I think he was waiting for the piano music. Quickly, just back to Steve Binder's question on your book to bill and the supplementals, Mark, could you give us your sort of thoughts, big picture, on if there is any risk to your current or potential upside to your current top line guidance, given the delays we've seen in supplementals?

Right now, it is hard to quantify what the delay is going to be in the supplemental. There is a lot in there for us, but I think most of the impact of that you'll see in fiscal '09. Obviously, there will be some things that could impact '08, but there is nothing of a very serious nature right now. The supplementals are only one piece of the budget. They still have next year's budget that they've got to pass, but I think they're going to do what they have to do. The supplemental will come out in short order, and we will get on with business.

The fact is, both sides of the aisle in Congress care about the troops. At least they say they care about the troops. So, the troops need this money, and I think that the money will come. So right now, I don't see from anything going on, anything that is going to have a major impact on us, as we sit here today.

Okay, that's helpful. You have been able to maintain a very strong book to bill over the last five years, well over one to one for last year, so our expectations are even with, excluding the supplemental, when that eventually gets past, book to bill should probably remain over one this year, correct?

You know, we kind of look at it on a -- when we do our forecasting, it is generally on a one-to-one. You just do not how the stuff is going to come in. I said at the end of the third quarter -- in the third quarter, we booked $1 billion. I said if we were going to book $1 billion every quarter, we would be a $4 billion Company. So, obviously some things came in this year that maybe would have come in next year. But I think in general terms, if we looked at a one-to-one book to bill for this year, that should be pretty comfortable.

Okay, great. Thanks, Mark.

Greg Alexopoulos, Morgan Stanley.

Can you give us a sense as to the percent of revenues that are in backlog right now?

You mean percent of forecasted revenues that are in backlog? It is about 75%.

Is that what you typically run at this stage of your forecasted revenues? Is it always around 60, 70%?

Yes, for the last few years, yes.

Then, can you give us a sense as to, in terms of the backlog, what percentage of that is Army and what percent is Navy and Marine Corps?

Right now, the Army is the largest portion of it and that is about 60% to 65%. The rest of the business is kind of divided up equally, probably a little more on the Navy and Marine Corps, so there's probably 7 or 8%. Don't hold me to these numbers. I'm just doing it off the top of my head. There is probably about 6% or 7% Air Force and the rest is intelligence agencies and what have you. But that is because the Army is doing what they are doing right now. But we have got tremendous initiatives on the other side that will start to grow the other parts of the business, as well. So, it is just that, right now, a lot of what we offer is going to the Army.

The sales probably break out differently. In sales, you probably see more Navy, for example, in the sales than we have in the backlog. The services business tends to turn over pretty quickly. We were actually surprised to close the year with almost twice the backlog in services that we had when we went into the year. And that's because they booked a lot of stuff in the fourth quarter that services different parts of the military. I think all totaled, we've got a very healthy mix in the business.

How about on the international front? I know that in the past it has run to around 7% to 8%. Is that still the range, or has it creeped up?

It is probably still in the 8% range, but we are starting to see that start to move in an upward direction. That is a big push that we have, as well. We're trying to open up markets.

I suspect those margins are typically higher than domestic DOD for you?

Well, historically they were, but I will tell you that the international buyer is a lot more sophisticated that he used to be, and there's a lot more competition to American weaponry than there used to be. So unless a country is told they have to buy a specific U.S. product, you are in the world competing, and you do the best you can. So it is not always the case that just because it is foreign that you are going to see huge margins anymore.

Right, and can you touch on the priorities on cash deployment into '08?

There is one priority. It is to continue to reduce debt.

Rich, you have talked about what level of debt you would need to get to before you start maybe looking at M&A a little bit more. Can you refresh our memories on that?

Sure. We're looking at M&A today, as Mark said, so it is really a size question, as opposed to pulling the trigger on doing an M&A transaction. What we said is, we're not uncomfortable. Right now, our debt to EBITDA, which is the main metric that we use, is about 4.6 times. We would like to get under four times, which we expect to do by the end of this fiscal '08. But we're not uncomfortable in the range that we are at, so if we saw a piece of property that looked interesting that had very predictable EBITDA, that would factor in what debt we would be willing to take on.

But it would be safe to say that if you were to make a larger acquisition, it probably would not be until into next year, into the calendar year?

Right now, we're not looking at anything very large, so that would probably be a good bet right now.

Finally, RSTA margins in fourth quarter were fantastic at 13%. Can you give us a little bit of color on that and kind of the run rate we should expect?

Those margins will vary a bit. As we said, we believe 10 to 12% for the business is the norm. We've been above that range for a while. I think you'll see that, as the new contracts start to kick in, I think you'll see that margin actually start to come down a bit.

Great, thanks very much.

Howard Rubel, Jefferies.

A couple things. First, we know how important the Bradley is to your business. Are you yet at the point where you are seeing a very steady run rate for volume, or is it still on a fairly steady increase?

I would say it is probably steady to increasing. So it is definitely steady, but we're seeing a little upward momentum.

Are you seeing bookings just consistently, now, shipping at the same rate? Can you help me a little bit with, is it like a stair-step function that you still see out there with the schedules? Or is it --?

You know, what is happening is we're now meeting the schedules, so everybody had to tool up and get ready to get stuff out at a certain pace, and now we're doing that. So, we are supporting them as they need product from us. I would say that there is still I think some growth, but it is steady. I would not call it a stair step, but I would not call it huge growth.

The second thing is if I -- I realize that you're always off, everybody is off cycle relative or off synch, relative to the defense budget, but if I go back and I look at the FY '07 budget versus '06, it is up, kind of apples-to-apples, up 11%. And when we look at your growth for '08 versus '07, I'm trying to allow for the bleeds and lags. You are only up 8% or 9%. Is there something specific about you might be able to call out to say, gee, why is -- you have consistently grown faster than the DOD budget. Why is there something that you see that is a real difference?

Well, we book faster and that is why there was some of the other questions about the backlog and the bookings. We have X capacity and what we do, what we try to filter, the work with the capacity that we have. Some stuff is just going into production now, and you don't know exactly when it is going to start to reach full level production, that kind of thing.

So, I don't think that our 6% to 8% guidance is something that is really tied to the defense budget. I think that was basically an attempt to take a look at where we are and what we think is going to go out the door during the fiscal year. Now remember, we put these budgets in from our planning cycle. Our planning is generally completed by the January/early-February timeframe, and we begin to implement the budget that started April 1.

So, when you do that planning, you do not know what is going to happen at the quarter finishes up. As you saw, a lot of stuff came into the fourth quarter, so you try to take your best guess at the beginning of the year of how production is going to come off the line. As time goes on, if it looks like we should revise that, we will, but I think that it is conservative to say right now that a 6% to 8% growth is a proper growth for us on a top-line basis. That was our best guess based on the data that we have. If something happens, if there is more supplemental money, or it comes in faster, or it has to be turned around faster, that could change.

I think we're very early into the year right now, and so the best way to look at this is here is the guidance that we gave. This is what we think we're going to do for the year. Then let's see what happens as the year progresses.

I know you're doing a lot more bottom up, and we can only to a little bit of that, on the C4I Group, revenues were flat year over year. We have seen, as we've talked to other companies, similar phenomena in parts of that market. Are you seeing any change in the environment that might help you in the upcoming year?

I think that we don't know. It is not that we're looking at what change is going to happen. There were parts of C4I that had some holes in them. If you look at the intelligence stuff, that got off to a very slow start during the year. It started picking up in the second half of the year nicely. It never got back to where we expected it to be when we planned out the originally, but they're still starting to reach a better level.

There are other parts of the business where you could have individual program that is starting to wind down, and you have got to replace that with something new. Lots of things happen. I think when you look at the book to bill, it looks very good in '07 going forward. If you take a look at what we received in there, in terms of bookings, I think there is some potential for improvement in C4I.

Okay, and then the last thing and maybe this will just help us for a tagline, is there any way for us to think about the dollars per mile that you have in terms of opportunity for SBInet? Or the dollars per tower? Why not? That is sort of the way we kind of think about things sometimes.

No, no, I understand. It's actually a good way to look at it. We have not quantified that, so for me to try to take a guess -- especially when we are in the very early stages of that program, and there is a lot of negotiating that has to be done in terms of what is going to happen, even starting on the southern border, with Boeing and us -- I think it would be premature to come out with that kind of forecast.

Thank you, anyhow. I appreciate it.

(OPERATOR INSTRUCTIONS) Michael French, Kaufman Brothers.

Congratulations on a strong performance. A question on your CapEx projection of $70 million to $90 million for '08. What types of factors would cause it to come in on the low end compared to the high-end?

In most cases it will be timing. A lot of purchase orders get placed towards the end of the year and not everything comes in. We will try to manage to the low end of that number, as we did this year. This year, we were pretty successful at doing that, but we also do not want to inhibit the growth and potential of the business. So, it is an ebb-and-flow-type thing.

Okay, and the tax rate projection, is this something that is going to scale up or will it jump up in the first quarter? How should we be modeling the tax rate?

I would model it at a 38% rate, because that is my best estimate as today. The rules have changed, and if you expect adjustments to come in in different quarters, you cannot reflect that earlier. So I think, on the average, we're going to do 38%, and I think if you are trying to do it by quarter, if you use 38% you will not be off by a lot.

Okay, great. Thank you and good luck.

Gary Liebowitz, Wachovia Securities.

Just one quick one, Rich. If you annualize the fourth-quarter interest expense, you get to $116 million for the year and that is where your guidance is, but you're going, again, with the lower debt balance, and clearly your preference remains for debt reduction. Can you just reconcile that?

Yes, I'm just projecting that there will be some higher interest rates as the year goes on.

Okay, thanks.

At this time, there are no further questions. I will turn the conference back over to our presenters for any closing or additional remarks.

Thank you. I think you could see that given the strong bookings that we had and the strong end to the fiscal year, it bodes well for the new year. We will see what happens. I just want thank you all for joining us on today's call, and I look forward speaking with you again next quarter. Take care.

Once again, that does conclude our conference call today. We thank you for your participation.