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Executives

Patricia M. Williamson - VP. IR

Mark S. Newman - Chairman, President, and CEO

Richard A. Schneider - EVP and CFO

Analysts

Gary Liebowitz - Wachovia Capital Markets

George Shapiro - Citigroup

David Gremmels - Thomas Weisel Partners

Myles Walton - Oppenheimer & Co.

Peter Skibitski - Credit Suisse

Stephen Levenson - Stifel Nicolaus and Company

Steve Binder - Bear Stearns

Michael French - Morgan Joseph & Co

Yilma Abebe - JP Morgan

David Strauss - UBS

DRS Technologies Inc. (DRS) Q3 FY08 Earnings Call February 8, 2008 9:00 AM ET

Operator

Good day everyone and welcome to the 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 conference call is being recorded.

At this time, for opening remarks and introductions, I will turn the call over to Ms. Patricia Williamson, Vice President of Investor Relations with DRS. Please go proceed.

Patricia M. Williamson - Vice President. Investor Relations

Thank you, JD. Good morning and thank you for joining us on today's conference call to review DRS Technologies' financial results for the fiscal 2008 third quarter and nine month period ended December 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 website. Today's remarks may include some forward-looking statements and certain non-GAAP financials. For more information on the Company's definition of these non-GAAP financials and their usefulness in interpreting DRS's financial results, please refer to today's earnings release and our filings with the Securities and Exchange Commission available on our website.

In accordance with the Safe Harbor provisions, please note the risks and uncertainties related to forward-looking statements. 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 like to now turn the call over to Mark Newman. Mark?

Mark S. Newman - Chairman, President, and Chief Executive Officer

Thanks Pat and good morning everyone and thank you for joining us on the call today to discuss our fiscal 2008 third quarter and nine months results. As we reported in our news release this morning, we achieved record results for the three month period, demonstrating strong performance in all major metrics, including revenues, operating income, net earnings, and earnings per share.

The Company also generated a robust level of free cash flow, which we continue to apply to reducing our debt. New orders for products and services were $858 million for the quarter, bringing total bookings for the first nine months of the year to a record $2.9 billion, representing a 1.2:1 book-to-bill ratio. Funded backlog at December 31 was a new high at $3.6 billion and places us in a solid position going forward.

The Company’s results year-to-date have provided us with the confidence to raise our guidance once again for fiscal 2008, which I will discuss later. Earlier this morning, we were also pleased to announce a $0.03 per share quarterly cash dividend to stockholders of record as of March 14, payable on March 31.

Now, taking a closer look at the third quarter, revenues were approximately $837 million, 23% over the same quarter a year earlier. This increase was entirely attributable to organic growth. Operating income was 20% higher at $92 million than last year’s third quarter, and reflected an operating margin of 11%. Our interest expense was 9% lower than the year ago period, due to our focused efforts to pre-paying our outstanding debt.

Net earnings were at 21% improvement over last year’s third quarter at $43 million, brining fiscal ’08 third quarter diluted earnings per share to $1.3 or 20% above last year. Free cash flow for the third quarter of fiscal 2008 was $42 million. During the period we reduced debt by $50 million and have prepaid $125 million in borrowings year-to-date.

Taking a brief look at the first nine months of fiscal 2008, sales were 17% higher at $2.4 billion than the same period last year. Nine month operating income of $215 million was slightly above the nine month period a year ago, despite the $37 million pretax charge taken in the first quarter on the thermo weapon site’s program.

Net earnings for the nine months were $87 million and diluted EPS for the nine months was $2.11 compared with $2.01 for the same period last year. Fiscal ’08 nine month free cash flow was $70 million, significantly higher than the $24 million reported last year. As indicated in this morning’s new release, we raised our guidance for fiscal 2008. We now expect revenues to range between from $3.175 billion to $3.225. We also increased our diluted EPS estimate and we are now anticipating between $3.24 and $3.31 per share. Other details regarding our updated guidance are in included in today’s news release.

Before turning the call over to questions I would like to take a few moments to mention a few operational highlights in the quarter. During the third quarter our C4I segment began delivery of the next generation computer for the FBCB2 program. This new server provides multi-core processing, increased memory and better expansion capabilities. C4I segment also delivered over 2800 driver vision enhancer aid kits in the third quarter. The aid kits include the pan and tilt mechanism and controls, brackets, electrical cables and assemblies used to mount the DVE B kits which are the infra red display panels also produced by DRS.

These are the first systems deploying electronic pan and tilt capability. On the Joint Tactical Terminals program, C4I completed a critical milestone to demonstrate an intelligent network system complying with U.S. Army requirements enabling us to commence low rate initial production deliveries. JCT will provide war fighters with near real time tactical intelligence targeting information.

In the third quarter, RSTA completed the system requirements review future combat systems small unmanned ground vehicle, short range electro-optical unmanned aerial vehicle and class one UAV programs. Each program has now progressed to the preliminary design phase.

For the nine months RSTA received over $100 million in contract awards for the mass mounted sights on the Kiowa Warrior helicopters, $50 million in awards for the ground infra red detector systems and over $320 million for ground vehicle infra red sighting systems including contracts on to the horizontal technology, improved Bradley acquisitions system and Long range advanced Scout surveillance systems programs.

Recently we were proud to learn that Dr. Michael Kinch [ph] a DRS employee was chosen to receive the 2008 military Sensing Symposium Levenstein [ph] award. This prestigious sward recognizes outstanding lifetime contributions and advancements in the field of infra red technologies. Kirby Taylor [ph], another DRS employee was elected as a fellow to the military Sensing Symposium. This is part of the military sensing information analysis center operated by the Georgia Institute of technology, under contract to the DoD. Mr. Taylor was elected as a result of his pioneering work spanning several decades in developing forward looking infra red technology. We are extremely proud of these outstanding individuals.

As our Sustainment Systems segment… at our Sustainment Systems segment, rather, a number of programs progressed through some very key development milestones during the third quarter. The modular fuel firm system for example completed a low velocity airdrop, the transportable decontamination system entered the low rate initial production phase and the Expeditionary warfare packaging system was deployed to Iraq for a field demonstration.

Our technical services segment won $150 million, five year IDIQ Omnibus three times right from the U.S. army. This is the third Omnibus contract awarded to DRS by the Program executive office for combat support and combat services support. Technical services also was awarded a $250 million multi year contract with initial funding of $50 million from the Space enabled warfare systems center for communications to support the morale of our troops. Through this contract DRS is providing satellite based internet broad band and voice access networks at more than 750 internet cafes so the deployed personnel can stay in contact with their families and friends overseas. Name the morale, welfare and recreation network that will provide phone service, e mail, internet access and video chat capabilities.

As you are aware earlier this week the President submitted to Congress a fiscal 2009 defense budget of $585.4 billion. About $515 billion was designated for fiscal ’09 baseline operations and $70 billion was allocated as a supplemental increment with combat support operations and the global war on terror. The ’09 baseline budget proposal is about 7.5% above the prior year end. And along with the current supplemental was generally in line with our expectations. While Congress will review the request in the coming months we anticipate that the final outcome will remain essentially strong through fiscal 2009 supporting the reset modernization and transformation initiatives of interest to us.

With that, I would now like to open the call for questions.

Question and Answer

Operator

[Operator Instructions].

Your first question will come from the line of Gary Liebowitz of Wachovia. Please proceed.

Gary Liebowitz - Wachovia Capital Markets

Good morning Mark and I guess Richard is there too.

Mark S. Newman - Chairman, President and Chief Executive Officer

Yes.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Good morning Gary.

Gary Liebowitz - Wachovia Capital Markets

Hi. Could you give an update on the Thermal Weapon Sights II program, how performance is going with respect to cost and schedule and when you might be able to start booking a positive margin on that program?

Mark S. Newman - Chairman, President and Chief Executive Officer

In terms of a general overview the program is going pretty well. As you know we are back into production and we have been ramping that up. So we are delivering now in the thousands of units. So, that’s very good news. The way we structured the program was basically to have it break even for the life of the existing contracts then as the new contracts come in we will start to see margin again on that program.

Gary Liebowitz - Wachovia Capital Markets

Okay and you don’t want to say when that might be?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Gary right now we don’t expect a positive contribution on that chart till fiscal ‘10.

Gary Liebowitz - Wachovia Capital Markets

Okay. Thanks Richard. And one other if I look broadly at the performance in the former engineer support businesses I went back and when you acquired those businesses you talked about an 11% to 12% type operating margin including purchased accounting and looks like we are sort of in the 9% to 10% range. Is it a function of mix? Is it maybe order… it’s a mix or is it synergies or what is? What’s been the biggest factor there?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

The margins there are exactly what we thought they would be. We talked about the contribution to DRS. Remember that they are now absorbing portions of our corporate allocation that previously were being allocated to what we call it legacy DRS. So, those portions of the legacy DRS are more profitable as well. I mean it’s very difficult to actually calculate the actual contribution.

Gary Liebowitz - Wachovia Capital Markets

Okay. Thanks.

Operator

Your next question will be from the line of George Shapiro of Citi.

George Shapiro - Citigroup

Hi good morning.

Mark S. Newman - Chairman, President and Chief Executive Officer

Hi George.

George Shapiro - Citigroup

Couple of questions. Just Mark one for you on Thermal Weapon Sight, Raytheon was recently given a contract too. Now was that as a result of the problems you had? Or and how do you see the competition between you and them at this point?

Mark S. Newman - Chairman, President and Chief Executive Officer

Remember there are three people now involved in TWS, Ourselves, DAE and Raytheon In the initial contract it was just DAE and ourselves. I think because of the problems we were having when it came time to go into what they call the bridge contract, which is the next contract, they wanted to keep us in the running while we were working through the problems but Raytheon is also a knowledgeable supplier. So, I think what they did, because this is turning into such a huge program and we are talking about billions of dollars that are going to be ultimately be spent here, probably 150,000 sights. I think they saw it in their best interest to broaden the field into three suppliers, which originally we thought was going to happen anyway. So, I think partially what’s happening is… remember we have got all the DVE sights that we are making, plus the TWS sights and when you start to divide it up there is plenty of market for the three competitors.

George Shapiro - Citigroup

Okay. Another question maybe this probably better for Rich. Of the 23% organic growth Rich, if we looked at it in terms of how much the army grew with it I would assume the army grew even faster than the average of 23?

Mark S. Newman - Chairman, President, and Chief Executive Officer

Before Rich goes into that let me just say something. Keep in mind that when we did the Engineered Support acquisition we picked up a lot of army business. So, it’s not that all of a sudden army business is starting to flow in. I mean we have got all the computers that we are doing on FBCB2 which is not related, of course to Engineered Support but then we have to do all the support Sustainment business which was heavily army based. That’s why we are looking at such a huge percentage of army and then I will let Rich work on the 23%.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Yes. I don’t have a lot to add. I don’t actually calculate organic growth by branch of the armed service but my gut would agree with you but I can’t really quantify it.

George Shapiro - Citigroup

Okay. And then Rich there is a big jump this quarter in SS revenues, I mean is this a new run rate or this has been kind of been a lumpy business. Is there something you need this to happen in this quarter where it spiked up so much?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

It is a lumpy business, I mean it is lumpy on the [Technical Difficulty].

George Shapiro - Citigroup

…to being only about 9% year-over-year I mean I could agree with you 23 we are not going to get. But is there anything that hits you to why it dropped as low as 9% now.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

We are meeting all our customer delivery requirements and maybe it will be 11%. I mean, I don’t know where it’s going to come out. We are very satisfied with 9% organic growth.

George Shapiro - Citigroup

Okay. And then, one last one. The margin was lower than expected in this SS area. Was there a charge in there or was just reflective of a much higher volume of business where maybe the mix was a little more unfavorable.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

There was… we are having some issues with MES, the shelter business that we talked about in the second quarter and in the first quarter, and we did take a charge again in the third quarter. We think we have that business under control at this point, but we did take another charge that affected the margin. So, about $3.5 million.

George Shapiro - Citigroup

Okay. Thanks very much.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

You are welcome.

Operator

Your next question will come from the line of David Gremmels of Thomas Weisel Partners.

David Gremmels - Thomas Weisel Partners

Yes. Thanks. Good morning.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Good morning David.

David Gremmels - Thomas Weisel Partners

My question is on the MRAP program. It looks like the new vehicle production is going to be mostly complete by later this year. What’s your level of confidence that the customer is going to continue to buy FBCB2 and DVE at the same rates when MRAP is complete or is it inevitable that there will be some difficult comparisons next year?

Mark S. Newman - Chairman, President, and Chief Executive Officer

I personally think that we haven’t even scratched the surface on the FBCB2. And I think you are going to see DVE on lots and lots of vehicles. So, the MRAP was an anomaly. It came in. As you know, we don’t build MRAPs. We build systems to go on vehicles and they haven’t yet chosen some of those systems for MRAP. I think they are going to be putting those systems in a lot of other places. So, I think we are looking at a very, very large market for this kind of stuff. We got into the Uncooled business back in the early part of this decade. And we got into it, because we saw that that was where the market was going. And what’s happening because we can get the prices down on these sensors, they are finding use for these kinds of things all over the military. And it’s going to go way beyond I believe the army and even the Marine Corps.

So, I think MRAP was a big short in the arm. It’s going to work its way through the system. But we don’t label our systems MRAP, we just label them DVEs and FBCB2s. And I have to be sitting right now in Melbourne, Florida, and had an opportunity to tour the factory floor on the FBCB2 and DVE and TWS in the last couple of days. And I can tell you there is no slowdown that we are seeing.

David Gremmels - Thomas Weisel Partners

Okay. And along the same lines of Uncooled infrared. Mark, what’s your sense of the Army’s plan for driver vision? There is an RFI out for a family of DVE. Will these all co-exist? Will you compete for all of them and gave any sense for timing or size of these opportunities?

Mark S. Newman - Chairman, President, and Chief Executive Officer

I think that the market size is going to be very large. I don’t want to speculate how large, but it’s going to be very large. I believe we are going to play a major role in every DVE light system that’s procured. And there isn’t any question that everyone that is competed we are going to go after. We are building more DVEs certainly than anybody, because we are the only ones building them right now. And I think that puts us in a very good position in terms of our competitive strategy for winning future programs.

David Gremmels - Thomas Weisel Partners

Okay. Great. And then just one last one on SBInet. Obviously, you are in the Boeing team that won that contract a year, a year and a half ago. And you seem to have a key role there, but one of the things we hear about it, this tool box approach, that Boeing talks about where they have multiple suppliers of key components and no one’s guaranteed anything. So, given that, do you still have the same expectations of maybe 10% program content or is that now overly optimistic.

Mark S. Newman - Chairman, President and Chief Executive Officer

No, I think, that we have an excellent relationship with Boeing and I think we have an excellent relationship with the end user and I think, that we’re going to see a good program there. It’s all going to be a function of how much Boeing ultimately sees on this, but if the program goes as planned I think we’re going to have a nice piece of it. I think we’re a valued member of the Boeing team.

David Gremmels - Thomas Weisel Partners

There are no changes in your expectations there?

Mark S. Newman - Chairman, President and Chief Executive Officer

None.

David Gremmels - Thomas Weisel Partners

Great. Thanks very much.

Operator

Your next question will be from the line of Myles Walton of Oppenheimer.

Myles Walton - Oppenheimer & Co.

Thanks. Good morning. Good quarter.

Mark S. Newman - Chairman, President and Chief Executive Officer

Good morning Myles.

Myles Walton - Oppenheimer & Co.

On the… I guess I’ll be faulted to today’s line of questioning on the MRAP versus JLTV. Obviously there’s a desire to significantly lower the price point of the vehicle. By a quarter or a third toward the JLTV unit price, maybe, 300k or so. But the government furnished equipment including a big chunk of which you supply to MRAP I’d assume would also be envisioned on JLTV. So thing is, Mark, can you flush out, are the… is the customers pushing that great reduction in overall vehicle price down to the electronics providers such as yourself? And will it be a case of driving unit prices down or essentially leaving electronics off the next system of JLTV?

Mark S. Newman - Chairman, President and Chief Executive Officer

They’re going to need the electronics on the JLTV. There’s no point in having the vehicle without the thing that you want to put on it. In fact, part of the reason they’re going to JLTV from the Humvee is because they’re putting more things on these vehicles so they need a heavier vehicle basically to carry everything because the Humvee basically has run out of capacity. I think, that what you’re going to see is the JLTV will go through a… basically a development phase then it will go into a LRIP phase and then ultimately will enter production. In the mean time MRAP was being procured to meet a specific threat that we’re seeing in theater. It’s doing a good job from what I understand thus far and it’s a totally separate vehicle. I mean, its saving lives in Iraq right now. But JLTV has always been where the army has been and the marine corps, for that matter have been looking to go, so I think there will be a good JLTV program and I think DRS is going to play a role in that program.

Myles Walton - Oppenheimer & Co.

Okay. So, as maybe you envisioned the electronic portion of that program and that conceivably could be, roughly the same content?

Mark S. Newman - Chairman, President and Chief Executive Officer

I think we might even see more content. I mean it’s really… it’s a function what ends up happening with JLTV. Nobody knows yet. So we have to just watch that as it goes into the bid stage. Nobody’s in on it yet. But… the other thing as far as the pricing comes down, the good news about military equipment when it gets into production is that… and it’s good news for the tax payer, is that we can get prices down because we have bigger volumes. And as we get the prices down what we’re finding is, they want to use this equipment in more and more places. So that’s a good thing for us.

Myles Walton - Oppenheimer & Co.

Fair enough. And then, maybe on, this is the last one kind of nitpicking I guess on book-to-bill out of Sustainment Systems on a trailing 12 months or even a year-to-date level. Looks like book-to-bill is running just at one times or maybe just a touch below one times. Is there something in the fourth quarter or bigger, lumpier bookings that are to come in that business or is there something that’s preventing some growth there in the overall backlog and bookings?

Mark S. Newman - Chairman, President and Chief Executive Officer

Well, we’ve never… we’ve always looked at our bookings on a one to one basis. That’s what we have always tried to achieve. Sometimes because you get some large items that come in it grows faster than that and certainly if it grows faster than that you can build a backlog and you have more to produce. But I think the fourth quarter will be decent. What we’ve been able to do is book throughout the whole year actually we’ve been doing a great job of booking. I think you’re going to see Q4 bookings are going to be good too.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Let me also point out that while the book-to-bill is one to one the organic growth is 26%. So there’s nothing wrong with a one to one book-to-bill when your organic growth is 26%.

Myles Walton - Oppenheimer & Co.

I definitely appreciate that Rich. I was more wondering in the terms of the backlog at Sustainment in particular?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

That was Sustainment book and we’re expecting some good bookings there in the fourth quarter. But I’ll take a one to one any day if we can grow at 26% organically every year.

Myles Walton - Oppenheimer & Co.

Yes. That good enough. Thanks.

Operator

You next question will be from the line of Rob Spingarn of Credit Suisse, please proceed.

Peter Skibitski - Credit Suisse

Yes. This is Pete Skibitski actually. Nice quarter guys.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Thank you.

Mark S. Newman - Chairman, President and Chief Executive Officer

Thank you.

Peter Skibitski - Credit Suisse

Mark, I want ask you now that we’re three quarters of the way through fiscal ’08, I was just wondering if you can give us an early read on how fiscal ’09 is shaping up for you guys.?

Mark S. Newman - Chairman, President and Chief Executive Officer

We don’t forecast ‘09 at this point. Because we’ll do that when we release… at the end of the year, we’ll give a look-see into ’09. But certainly we’re going through out planning and it’s certainly looking like it’s going to be a good year for us.

Peter Skibitski - Credit Suisse

And then, just a follow-up on the mobile shelter line there, if I think about it, it seems like that probably one of your least technologically advanced product lines, I would think so. Just wondering if you could give us a little more color on what the problem is there and how confident you are that you have it under wraps at this point.

Mark S. Newman - Chairman, President and Chief Executive Officer

I had the same reaction when I heard of the problem; I'm saying gee they’re building shelters that should be a piece of cake. But really the problem that they’ve had is, there were two distinct businesses that have to have been almost across the street from one another. And what we did after we had acquired engineer support was on one business things were very clean and running pretty well. The other business was a whole different factory and because we saw the kind of work that was coming down we went to integrate those two businesses and even though they were in the same corporate park they had different cultures and so now you're trying to integrate two businesses with two different cultures. You want to introduce new processes and that would have gone pretty smoothly if it wasn’t for the… nice to have problems that the volume of work started streaming into the place. So, with all thin additional work we had to go out and hire a lot of temporary workers to help out and it became a snowball that just started running downhill and they ran into some problems. So, we put a dedicated team on this thing. We’re going to get our arms around it. I think, we have gotten our arms around it at this point and the most important thing for us is that the customers are sticking with us, we have a good booking stream that’s coming in there and it's going to be a good business.

Peter Skibitski - Credit Suisse

Okay. Got you. And I just want to follow-up on our… can you update us at all on progress in terms of increasing your international sales there?

Mark S. Newman - Chairman, President, and Chief Executive Officer

Well, I'm about to schlep halfway around the world. I'm on my way to ultimately end up in India. There’s a big ground and naval show there and I'm taking a team with me and we're really… we want to open up the world, we've started to increase our business in Israel, we've got some business we're working on in Germany. Certainly our U. K. business is beginning to expand along with some of the infrared work that we're doing and then other parts of the Middle East. So, I think, we will start to see that business pick up as time moves on.

Peter Skibitski - Credit Suisse

You think you could… I mean, our understanding is that we might hear an announcement in the coming months out of the Middle East. So, you think maybe pretty soon we might hear something from you… along those lines from you guys as well or

Mark S. Newman - Chairman, President, and Chief Executive Officer

Yes. I mean, it will be nice but I never speculate as you know on new contract awards. But quite obviously there’s a lot of activity going on.

Peter Skibitski - Credit Suisse

Okay. Fair enough. Thanks a lot guys.

Mark S. Newman - Chairman, President, and Chief Executive Officer

You’re welcome.

Operator

Your next question will be from the line of Steve Levenson of Stifel Nicolaus. Please proceed.

Stephen Levenson - Stifel Nicolaus and Company

Thanks. Good morning Mark and Rich.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Thanks, Steve.

Stephen Levenson - Stifel Nicolaus and Company

Going back to the Driver Vision Enhancers for a minute. Can you tell us in dollars how many dollars worth you shipped and what you think the opportunity is on the new contract? Total, not necessarily what you get. But try to size the contract.

Mark S. Newman - Chairman, President, and Chief Executive Officer

I don’t… you might have that actual number.

Stephen Levenson - Stifel Nicolaus and Company

Yes.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Actually it’s in out top ten programs but I can't tell you what we shipped cumulatively to-date. I don’t have that number in my head, It's tens and tens of millions.

Stephen Levenson - Stifel Nicolaus and Company

And for the new contract. Do you think it will be similar to the TWS II and the bridge contract? Where it was about 2.5 tons larger?

Mark S. Newman - Chairman, President, and Chief Executive Officer

I think. Yes. I think, that’s a very good call.

Stephen Levenson - Stifel Nicolaus and Company

Okay. Thanks. Sorry. Go ahead.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Well it will be a pretty big program. We're doing very, very well on that program.

Stephen Levenson - Stifel Nicolaus and Company

Okay. Thank you. And then on Mask Mounted Sight. I know you just recently got the order for additional work and I guess what the Armed Reconnaissance Helicopter being delayed and potentially cancelled. What's the outlook for Mask Mounted Sight? Can you put a time frame on that and again try to size what might be out there for you?

Mark S. Newman - Chairman, President, and Chief Executive Officer

Well, there’s no question that, that’s a vehicle that’s being utilized and that they have to keep supporting. So, we are in the process now of negotiating the next five year support agreements for that. Which I think will be on the order of the last five years. So, I think, that’s becoming a very healthy program as some of these other things are slipping out and yes. The fact is that helicopters doing an excellent job.

Stephen Levenson - Stifel Nicolaus and Company

Great. Thank you very much.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Welcome.

Operator

Your next question will be from the line of Steve Binder of Bear Stearns.

Steve Binder - Bear Stearns

Good morning. Good quarter.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Thanks Steve.

Steve Binder - Bear Stearns

Rich, can you maybe just touch on how much of the growth came out of the DV kits and FBCB2 in the quarter out for C4I, what percentage of the growth?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Yes. Hold on Steve. Let me just take a look. The FBCB2 revenues were year-to-date are probably up about 50% year-over-year.

Steve Binder - Bear Stearns

And the kits?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

The kits…

Steve Binder - Bear Stearns

Well, that’s all incremental, but I'm saying… Okay. I meant for the quarter, just year-over-year?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

For the quarter? About the same.

Steve Binder - Bear Stearns

Okay. And then, can you maybe just touch on the sellable inventory that… I think back… for TWS, what’s still left?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Yes. We started out at the end of the first quarter when we talked about the TWS program we said there was $30 million in inventory. That number is $21.5 million at this point.

Steve Binder - Bear Stearns

And when do you think you will be a finish?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

I don’t really know. There is a significant amount of what is out there that we expect to procure over the next six to 18 months that should deplete that inventory.

Steve Binder - Bear Stearns

Right and then just back on the margin of TWS, you touched on I think fiscal year ’10 when you said you are start booking margin again, I think, couple of quarters ago you said that your zero margin backlogs runs out in May of ’09. But any new bookings you get, aren’t you going to be… are you going to be recording margin on that in ’09?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Absolutely.

Steve Binder - Bear Stearns

Yes. So, there will be some margin on the program in ’09, right?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Remember the bookings probably won’t start shipping till fiscal ’10. I mean we will run out in May of ’09.

Mark S. Newman - Chairman, President and Chief Executive Officer

May ’09 is fiscal ’10.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Right.

Steve Binder - Bear Stearns

No, I know that. I am saying will you get some bookings in fiscal ’09?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

I mean our goal is to ship under the existing contract as fast as possible and this margin in backlog, but that backlog won’t ship until we finish this first contract.

Steve Binder - Bear Stearns

Okay.

Mark S. Newman - Chairman, President and Chief Executive Officer

All the new stuff we are getting probably won’t ship for at least another year.

Steve Binder - Bear Stearns

Right. And then Mark can you just touch on… it looks like I mean, I am just guessing the army portion on backlog was little bit consistent like you got some agency backlog, agency orders and some air force and navy stuff this quarter. Can you just maybe talk about strategically how important it is to diversify to the other services going forward either from new campaigns or from acquisitions?

Mark S. Newman - Chairman, President, and Chief Executive Officer

Well we don’t look at this as something that we have to strive to do. We have always looked to diversifying and we just happened to do a lot of work for the army, but they also buy a lot of things, so we are on a campaign to work with the air force a little more and we are starting to see some growth there. Certainly, our navy stuff, once we figure out what kind of ship building program we are looking at going forward, I think we will continue to grow and then there is going to be a big back-fit program that’s going to into DDG 51 modernization and I think we are going to play a role there, so I am satisfied we have a number of initiatives going with the navy that can provide additional growth. And our intelligence business is doing pretty well, so overall I think we are pretty well balanced. It just so happens some of the things that we purchased, some of the companies that we purchased over the last few years as I said before happened to be heavy army so that’s how we picked up a lot more army business, but the army is looking pretty strong, certainly for a number of years to come, so I am pretty pleased with the progress in the army. Trust me.

Steve Binder - Bear Stearns

Rich, any reason why you got the… you got a strong quarter for cash and traditionally fourth quarter by far and away is your strongest quarter. Any reason why you are not particularly guidance?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

No. No negative reasons, Steve, it’s just a… I am conservative on the free cash flow generation as you and I discuss every single conference call.

Steve Binder - Bear Stearns

Okay. Good quarter. Thanks.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Thanks Steve.

Operator

[Operators Instructions]. Your next question will come from the line of Michael French of Morgan Joseph. Please proceed.

Michael French - Morgan Joseph & Co

Good morning everyone.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Hi Michael.

Michael French - Morgan Joseph & Co

You mentioned that bookings for fourth quarter look like they are going to be good. What particular program, sir are you expecting a decision during the quarter?

Mark S. Newman - Chairman, President, and Chief Executive Officer

I think, probably if you have to look at one part of the business, I think it will be in the Sustainment Systems area, but the thing is that you never know exactly what month the bookings are going to come in. I mean I know so far the quarter’s looking pretty good from the early parts of what I have seen booked, but if we can achieve even one to one for the quarter, I think we are doing pretty well when I think of all the stuff that we booked thus far this year, so no matter how you are going to slice up this year, it will be a great bookings year for us.

Michael French - Morgan Joseph & Co

Okay. Right. I was just wondering what particular programs you might be looking for, you talked a couple of quarters ago CADS was the big thing, we are expecting. And obviously you have so many programs, not many that are big ones, but…

Mark S. Newman - Chairman, President, and Chief Executive Officer

Well, that’s the thing and what it is, there is nothing from a competitive standpoint that’s hanging out there that is going to make a big dent. What it is, is really more of the same of stuff we’re already producing. And it’s just a question of when they award the contract. They’re going through their procedures right now. So, there are a number of things in the pipeline that we’re just waiting to actually get a contract inked for. So, it’s not like we’re sitting out there worrying about 15 different competitions.

Michael French - Morgan Joseph & Co

I mean, I don’t mean to infer that. I am just wondering what those things are in the pipeline that you are waiting for that you think like that here.

Mark S. Newman - Chairman, President, and Chief Executive Officer

We don’t lay that out. So, because then somebody looks at one particular program, they said did you get it, you didn’t… and that one didn’t come in till April and the it looks like you didn’t give them the right answer. So, we try not to forecast individual programs.

Michael French - Morgan Joseph & Co

Okay. Fair enough.

Mark S. Newman - Chairman, President, and Chief Executive Officer

It’s just we don’t do that.

Michael French - Morgan Joseph & Co

Okay. All right. Fair enough. Moving on to Navy stuff, which you were mentioning. It seems that your marathon domain awareness offerings are… a hit with the Navy out here, afraid so here in San Diego and the question I have, are these the kind of capabilities that you could package and market to other entities whether local or state governments for Homeland Security or perhaps international customers?

Mark S. Newman - Chairman, President, and Chief Executive Officer

Yes. The answer is yes. Now, whether we can work those customers state and local is very different than dealing with the federal government. International is a different story. And there are some capabilities that we are working on the international arena. So, there is no question and I think we have some good capability in that MDA area.

Michael French - Morgan Joseph & Co

Yes, like I said, it definitely seemed like it was a hit with the Navy folks here in San Diego. Well, good luck with the program and talk to you next call.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Thank you.

Operator

Your next question will be from the line of Yilma Abebe of JP Morgan.

Yilma Abebe - JP Morgan

Thank you. Good morning. In the past, you have said debt pay down has been a priority for you. And your leverage has come down, and with leverage based on my calculations under four times now. When do you start looking at perhaps other use of cash, share purchases or anything of that nature away from debt pay down?

Mark S. Newman - Chairman, President, and Chief Executive Officer

I will let you field that Rich.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Right now, we still have about $145 million of repayable debt, and our top priority right now is to continue to pay down debt. we have made no secret of the fact that acquisitions are part of our growth strategy and we continue to explore that area. And I would assume in the next 12 months some of our free cash flow will go in that direction.

Yilma Abebe - JP Morgan

Thank you. That’s it from me.

Operator

Your next question will be from the line of David Strauss of UBS.

David Strauss - UBS

Good morning. Thank you.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Hi, David.

David Strauss - UBS

Looking at your backlog, how do you feel about the margin profile of the backlog? Moving forward, I guess, mix of business and exposure to the different services relative to what we see. And then also on margins, just maybe talk about the fourth quarter margin profile, obviously, your guidance implies pretty significant sequential margin improvement.

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Yes, two questions there. Let me take the backlog question first. On a consolidated basis, we are still in that 10% to 12% range that we talk about. Clearly, we said that the TWS backlog there with 0% margin. I talked that little bit early about MES. That has some backlog there that we have to run through. So, I would say, the backlog right now is around 11%, maybe a little south of 11%. It’s not north of 11%.

As far as the fourth quarter goes, it is going to be a strong margin quarter, fourth quarter always as. Last two year, if you go back and look historically, the margin has been just under 12% in both of those quarters. The implied margin in the guidance that we gave here, it’s going to be a little bit north of 12%, and I am not uncomfortable with that, implied margin.

David Strauss - UBS

On MES, how are you booking that, Rich. Does that 0% and if so, how long does that run for?

Richard A. Schneider - Executive Vice President and Chief Financial Officer

The new business is margin… it's the business that's in backlog at 0% margin. And that will run out… it will run out next year, but it will take a while, at least, the first two quarters.

David Strauss - UBS

Okay. Great. Thanks a lot for the color.

Mark S. Newman - Chairman, President, and Chief Executive Officer

You are welcome.

Operator

And we have no further questions at this time. I would turn it back to management for closing remarks.

Mark S. Newman - Chairman, President, and Chief Executive Officer

Thank you. I think the strong operating results today have position the Company well. So, we expect to remain on track with our objectives through the fourth quarter. And we expect fiscal 2008 to be another record year for DRS. I want to thank you for joining us on today’s call, and I look forward to speaking with you again on our year-end earnings call. Good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.

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Source: DRS Technologies, Inc. F3Q08 (Qtr. End 12/31/07) Earnings Call Transcript
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