Good day, ladies and gentlemen, and welcome to your Kratos Defense and Security Solutions fourth quarter, 2011, earnings conference call. At this time, all participants will be in a listen-only mode, but later we will conduct a question-and-answer session, which instructions will be given at that time. [Operator Instructions]. As a reminder, today’s conference is being recorded. And now I would like to introduce your host for today, Laura Siegel, Vice President and Corporate Controller.

Good afternoon, everyone, and thank you for joining us for the Kratos Defense and Security Solutions fourth quarter earnings conference call. With me today is Eric DeMarco, Kratos’ President and Chief Executive Officer, and Deanna Lund, Kratos’ Executive Vice President and Chief Financial Officer. Before we begin the substance of today’s call, I’d like to make some brief introductory comments. Earlier this afternoon, we issued a press release, which outlined some topics we planned to discuss today. If anyone has not yet seen a copy of this press release, it is available on the Kratos corporate website at www.kratosdefense.com. Additionally, I’d like to remind our listeners that this conference call is open to the media. And we are providing a simultaneous webcast of this call for the public. A replay of our discussion will be available on the company’s website later today. During this call, we will discuss some factors and matters that are likely to influence our business going forward. Any matters discussed today that are not historical facts, particularly comments regarding our future plans, objectives, and expected future performance constitute forward-looking statements. These forward-looking statements may include comments about our plans and expectations of future performance. These plans and expectations are subject to risks and uncertainties, which could cause actual results to differ materially from these suggested by our forward-looking statements. We encourage all of our listeners to review our SEC filings, including our most recent 10-Q and 10-K, and any of our other SEC filings for a more complete description of these risks. A partial list of these important risk factors is included at the end of the press release we issued today. Our statements on this call are made as March 7, 2012. And the company undertakes no obligation to revise or update publicly any of…

Thank you, Laura. Good afternoon. Today we announced our fourth quarter and full year fiscal 2011 results with cash flow from operations exceeding our expectations for the fourth quarter. And exceeding our expectations for the second half of the year. Kratos has generated an EBITDA margin rate for 2011 of 12.7% achieving our previously-stated targets on 2011 revenues of $723 million. For the fourth quarter of ’11, overall performance came in substantially in line with what we had expected with the exception of an anticipated $11 million high margin product delivery that was delayed by an unexpected competitor protest with this competitor protest just recently being denied. Very importantly, Kratos generated operating cash flow of over $27 million in the second half of 2011, which makes us very comfortable reiterating our 2012 guidance forecast flow of $50 million to $65 million with a current Kratos share account of approximately 32.4 million. Additionally, with the Federal 2012 DoD budget being approved in January and a Q4 book-to-bill ratio of 1.2 X, we are now comfortable providing 2012 revenue guidance of $950 million to $1 billion with Q1 revenue approximating or being slightly above the fourth quarter we just reported. And a smooth sequential quarterly ramp of 5% to 9% throughout the year, which is driven primarily by currently planned product shipments. Deanna will provide the details on our financial performance and guidance in her prepared remarks. During 2011, Kratos continued the strategic refocusing of our business with the vast majority of what Kratos does today being in the areas of electronic warfare, electronic attack, satellite communications, unmanned aerial systems, C5ISR, missile systems, and ballistic missile defense, cyber security, cyber warfare, and information assurance, and critical infrastructure securities, strategic asset security, and public safety systems. We have transitioned the business where by…

Thank you, Eric. Good afternoon. For the fourth quarter, Kratos’ performance was very solid in what continued to be a very difficult, challenging and changing Department of Defense, National Security and overall Federal Government budgetary environment, which resulted in continued choppiness throughout the end of our fiscal yearend. The good news is that we now have a Federal budget for 2012, so we have more clarity for Fiscal 2012. We continue to make progress on our integration activities of the integral systems, which is progressing as scheduled. We anticipate that the planned integration activities should be complete by the end of the first quarter of 2012. As we reported last quarter, Kratos’ profit margins in the third quarter were positively impacted by a very favorably contract and program mix, which we did not anticipate to occur in the fourth quarter. In addition, we were anticipating that our future profit margins would be impacted by increased ramp up in select investments and internally-funded research and development efforts to expand certain of our product offerings. We are pleased with our financial performance this quarter, especially in light of the continued challenging conditions of the Federal operating budget and operating under the fiscal 2012 continuing resolution through the end of our fiscal yearend. These conditions included the delay of an anticipated fourth quarter $11.5 million shipment of a high-margin ground equipment enclosure delivery that was delayed due to an unexpected competitor protest which has recently been denied ,which we now expect to further delay the anticipated shipment until the second or third quarter as a result of the effective restart of the procurement process. In addition, anticipated shipments of certain weapon systems aggregating approximately $2 million were delayed until the first quarter of 2012. These two delays substantially accounted for the difference between…

Great, thank you, Deanna. So to summarize what we’ve gone through today, as we begin 2012, Kratos is a growing specialized products and technology based national security solutions provider and we’re focused on the following national security areas which make up a majority of our business, unmanned systems, cyber security areas, C5ISR electronic warfare, SATCOM, MILSATCOM and critical infrastructure security. We believe that we position the majority of the business in areas where we are either sole source or single source provider or where there is very limited competition and where there are extremely high barriers to entry to what we do. I want to reiterate that in 2012, we’re forecasting to generate $50 to $65 million in free cash flow from ops with the current share count of $32.4 and as we reported today, in the second half of ’11, we generated approximately $27 million in operating cash flow before acquisition items, which means we’re currently at the run rate to deliver the 2012 free cash flow objective. I also want to reiterate the valuable asset that we have from the $260 million of NOLs, the vast majority of that came from the commercial businesses we divested years ago. This is going to result in dramatically reduced cash payments for taxes in the foreseeable future. And as Deanna said, these go through 2030. We have a $1.1 billion backlog and have a bid proposal pipeline of $3.7 billion. We just came off of 1.2 to 1 book-to-bill ratio in the quarter and we believe these factors are going to bring predictability and stability to the business model as we move forward in 2012. So with that, I’m going to turn it over to the moderator for questions.

[Operator instructions]. And we’ll take our first question coming from Mark Jordan from Noble Financial.

A question Eric. When we look at sort of organic growth rate, it’s very difficult to get a handle on the company because of all the acquisitions you’ve done. And as you make acquisitions, it’s obviously some lines of businesses that are good and some are bad, you’ve done a lot of restructuring. If you were to look at the business today at sort of the fourth quarter run rate, could you run through the various packages of business like the great critical infrastructure protection business that the electronic warfare attack, and say what kind of organic growth potential kind of range do you think those business have over the next 12-24 months?

Sure. So in the critical infrastructure business as we talked about, it was north of 10% organically in 2011. And as we sit here today, it should be in that ballpark going forward. So, let’s use round numbers, that’s 15-20% of what we do. And electronic warfare, electronic attack and certain missile systems which is somewhere around 20% of what we do, we are winning new work on like P-8, older systems like F-15, and F-16 are dropping off, so that part of the business it is relatively flat. Okay, another approximately 20% of the business is in the satellite communication area, primarily related to terrestrial equipment and software, that’s a growth opportunity are for us. We think that could probably grow 5% or so, and that’s just the function of the number of unmanned systems that are planned, the satellite systems that are going up, and some of the stuff that I talked about DISA and what they are looking to do going forward. The pure cyber area which is, I am going to say, roughly 5-10% of the business, that is growing strongly. That is going to be 5-10% pure cyber, and that will include some space-based cyber stuff that we are doing. We have, as I mentioned, around 10% of the business is in that commoditizing services area, that’s about somewhere around $90-$100 million now. That has been reducing significantly. I think a couple of three years, three or four years ago, that was $200 million, so that is going to continue to come down, so that could be coming down 15-20%. We are not focusing on it and the re-compete pricing is very, very tight. And then in some of the other legacy weapon systems sustainment areas, that is flat to down a little bit, and that is just a function of some of the budgeting reprogramming. So if you add all of that up, we think organically, apples to apples, including the small business stuff that rolls off, we can generate current budget environment, 3 to 4% organic top line.

Okay, thank you, it looks like, Deanna, you gave us good details relative to expecting amortization charges in 2012, do you have an aggregate number that we should expect for ’13?

Yes, Mark, that should be approximately $20 million.

And finally, Eric, you haven’t really talked about foreign military sales opportunities. Obviously, you had a large win 18 months ago or so with Egypt, is there any -- do you see opportunity there, or do you feel that you really focus more domestically moving forward?

We absolutely see opportunity there primarily in FMS, in tactical missile systems, like Hawk, or Falcon, or Chaparral. And additionally relative to training systems, and this would be for the M-1 tank trainers where we have a significant business right now. As you know, these are typically large wins, I think the last one we won was $40 or $50 million and the one before that was $30 or $40 million, but they come a year or two apart. We are tracking a few of those, two or three right now that are real with the current timeline either late calendar ’12, or ’13, but as you know those cases move around.

Okay, final question. You mentioned the $21 million dollars on the letters of credit out under your bank line, I take it that those are related to, you know, you had some performance bonds on the PSS business, and do you look at the -- your line of credits specifically as more vehicles to support that business, or do you look at it as something that you might be liking for acquisitions, and you talk about you use of capital in ’12.

Mark, you are correct. I had $21 million of LCs that’s all predominately related to the PSS business as well as some of our foreign products businesses. So that’s what those are used for. As far as capital structure stand point, what the use, we continued to expect to use the line of credit to be able to finance those letters of credit and performance bonds…

And to be opportunistic going forward, you know. To be opportunistic. As you know, in the fourth quarter, 2 million shares came on the market that we could take out quickly, we struck. If opportunities like that, unique situations like that occur we want to be able to strike. If there, hypothetically, if there was a major dislocation in the bond markets for a short period of time, that would provide an opportunity to de-fees certain of those bonds, we want to be in a position to do that because that would be smart finance and extremely accretive. And so that is kind of our thinking, we want to make sure that we have flexibility where we can turn on a dime very quickly to make the right decisions for stakeholders.

Okay, thank you, and our next question is from Mike Crawford from B. Riley.

In your remarks you talked about this one high margin ground equipment enclosure that was expected to, I think to ship in Q4, but now it’s not expected to ship until Q2 or Q3. So one, why would it be a 6 to 9 month delay, and I guess two, maybe broader picture, what does that say about our procurement process where things that are needed are getting pushed back so far just based on protests?

Yes, and so, Mike, what is going on in the environment most severely in the services area, but it’s actually now, as you can see, going over into the products area, is as the pie has slowed growth, or stopped growing, or is just shrinking, we are seeing more and more protests across the industry. This is one of the first protests I have seen in the products area as far as I can remember back, and it was a protest on a contract vehicle that a customer that had funding was going to use to get to us for some very specific equipment in the fourth quarter that we were going to turn very quickly. As I mentioned in my remarks, it has just recently been denied, the protest was thrown out, the competitor lost, now it needs to be re-procured. Well, that protest period took, what 60, 90 days and the customer’s priorities -- I am not going to speak for him, but may have changed, et cetera, but that is going to be re-procured as Deanna said, and that is looking like a Q2 or a possibly Q3 of that right now. You know, we are sitting here in March, so we are almost out of Q1.

Okay, thanks. And then you did go through the business and these kind of broader segments, I understand there’s -- well, not segments, that’s not the right word, compartments -- there is some overlap between what you might call a UAV, or EWEA, or C5ISR that includes combat systems. But you know, without -- if you try to put everything in on bucket, is there a way that you could do that, that gets you up to 100% of that $950 to $1 billion dollar revenues?

It’s very hard now Mike, because of the integration that we are doing. The integration that we’re doing is not just from a back office or a business development standpoint, it’s also from a bid and proposal standpoint and we are now, which is the way obviously when you make strategic acquisitions, one plus one is supposed to equal at least two-and-a-half, three, and that is happening . I mean, I can, I will give you an example, we built some very sophisticated portable data center equipment that is hardened. That portable data center equipment has very significant security elements on it that another part of our business does, and it has fiber protection elements. So it’s crossing over between command and control equipment or our PSS business is putting on certain security elements and the cyber business also is going to be involved in a certain potential software product. And so it’s blending. So I was just giving big-picture answers to Mark to give him a feel that the majority of the business is solid, we have some areas that we believe are going to grow and continue to grow, like the cyber area and the PSS area and the SATCOM area. And the Legacy Services Area has been contracting and we believe it will continue to contract.

Okay, thank you. On kind of backlog and pipeline and re-competes, can you just comment a little bit further on what important re-competes might be coming down the pipeline in 2012? And also, in terms of that qualified bids, what are some of the bigger ones that you can comment on that you are looking to win?

So there is one large command and control contract that has to do with satellite ground equipment that is supposed to be up for re-compete in 2012. I say it that way, supposed to be up for re-compete, because what we have been seeing is because of the protest situation I was just talking about, that bridge contracts are being let. Where a contract comes up after a five or seven-year cycle, it’s up for re-compete, and you’ll get a one-year bridge contract, and you’ll get another one-year bridge contract, and you’ll get another one-year bridge contract. So we have one major re-compete this year across the company and it has to do with command and control equipment for the terrestrial side of SATCOM. And that RFP has not come out yet and it was expected to come out and it has been delayed. I truly don’t know when it will come out or if it will even come out this year. I just don’t know. That’s tying into your comment on the procurement side. Mike, what was the other part of your question on the backlog?

So -- well, you have this -- well, more in terms of the [indiscernible] proposal pipeline, so that -- I mean, that’s a recon -- that’s something you already have, right? Is that what you’re talking about on the terrestrial side or that’s business that you don’t have yet?

That is -- that one I was talking about was the one re-compete, the business we have that…

Right. The other half of the question is business that you don’t have yet that you’re bidding for. Anything major you can talk about there?

There are two that are on the critical infrastructure side that are pretty large, pretty large, that are going to be awarded this year. They’re scheduled to be awarded this year. They would be single award contracts. On the couple, we are one of very few bidders. These would be burned in less than 24 months, that’s how fast they would be deployed and they’re $100 million plus each.

Okay. Thanks. And then final question. Relates to the guidance, Deanna, could you just go over it one more time? I thought you said at one point, $700,000 of cash taxes paid per quarter, but then I also heard $6 to $7 million of cash taxes for the year?

Yes. $700,000 is related for the fourth quarter of 2011, but with a full year of all the acquired entities and just with the tax attributes that we have, we’re looking for an estimate of 6 to 7 million for next year, for 2012 on a full-year basis.

Thank you. And we’ll take our next question from Yair Reiner from Oppenheimer.

Just a quick follow up on the last question. What’s the anticipated share count for next year that you’re basing your EPS target on?

At this point, Yair, we’re at the $32.4 million that we - that we have not anticipated any significant change in that share count with the EPS guidance we’ve given.

Great. And then in terms of book-to-bill, it was quite strong in the quarter. I'm just wondering if you can point to any specific contracts that contributed to that nice number?

Yes. So the biggest area was in the electronic warfare and the electronic attack area and I spoke about that program in my prepared remarks. We also had some very significant wins for some unmanned aerial system ground control stations and ground control equipment. We had some very nice wins on the command and control side and this is command and control equipment, command and control electronics equipment. And our critical infrastructure security business, that -- the bookings there in the quarter were very strong, and I think as you’ve seen over the past couple of months, they’ve remained very, very strong. We were just informed today we have just -- today, we were awarded a very large contract, hopefully we’ll be able to put a release out in the next month or so if we can get customer approval, in that critical infrastructure area. So those are the areas where we’ve seen a lot of strength.

And then when I think about the guidance for next year and the [indiscernible] two major buckets, the defense side and the critical infrastructure, should we think about the critical infrastructure being up kind of low double digits and then the defense business being down -- being up marginally? Is that the right way to think about it?

I would look at the critical infrastructure business to be in the 10% to 12% to 13% growth area. You know, we just came off 11% or so and the threat profile and the opportunities we see, we think we can sustain that from an organic standpoint. And on the Government side, we’re going to have some areas where we’re definitely going to grow. We’re going to grow in the SATCOM area, we’re going to grow in the cyber area and we’re going to grow in the UAV area. We’re going to have to -- we’re going to have that area that’s going to be down, which is the generic undifferentiated services area. I said it’s about $90 million now. And the then biggest remaining piece, I’m going to say it’s going to be flattish, which can maybe mean down a little bit or up a little bit and we’re going to have a lot more clarity on that as is everybody in the industry. Once we have the ’13 budget resolved, which may not be resolved until after the election or into calendar ’13 and the question on sequestration because there’s just uncertainty with customers.

Great. And then my final question that has to do with sequestration. To what extend can you plan for it? To what extent is the possibility of sequestration changing the way you operate or the way that you go about performing due diligence on potential acquisitions?

That’s a good question. So obviously, everything that we’re doing in the public safety and the critical infrastructure business is, it’s a diversification plan, which as I’ve said , that business is now nearing 20% of the company and it is not touched at all by sequestration. So that’s a very important data point. I talked about what’s going on in the cyber side related to that. So this wouldn’t be DoD related cyber, this would be commercial infrastructure related cyber and so we’re doing the best we can to build up that part of the business. By definition, the way we have put the strategy for this company together, we’re not on some of the very high profile programs where they could possibly get the money. Now, I know sequestration would call for a pro rata cut across everything. I just personally can’t see that happening or you’re going to have half of the ship built, or half of the tank built. But we’re not on things like F35, we’re not on the Virginia Class submarine, we’re not on ground combat vehicles or expeditionary fighting vehicle where those huge dollars are. So think just sometimes it’s better to be lucky than good. The way we’ve positioned ourselves is we’re not on any of these large new programs in any material way and so in my opinion, if sequestration were to happen, which I don’t believe it will, but if it were to happen, I just don’t think we will take a proportionate hit of another 5% to 8% annual defense cut as some other people might.

Thank you. We’ll take our next question from Michael Ciarmoli from Keybanc Capital.

Maybe just a couple of housekeeping items on the 2012 outlook. Can you sort of give us, Deanna, maybe a revenue breakdown that you’re looking for between the product or target I guess between product and services by the close of 2012?

Yes, I would say, Michael, I don’t have it cut that way, but just off the top of my head, I would say it would not be too far from the -- where we were for the fourth quarter. So we were at 54% and 36%, so sorry – 56% and 44%, so I don’t see it being radically different from the mix that we just closed on for the fourth quarter.

And Michael, on that, remember, of that 44% services, somewhere around half of it, or just under half of it is critical infrastructure security.

Right.

I just want to makes sure I break that piece out because that services piece is not your traditional government contracting services. And then on that part of the -- just for this discussion, cut it in half and say it’s 44%,22% is critical infrastructure security. Of that other 22%, a good number of that, like probably 50% of that number is services related to satellite command and control monitoring and cyber, the cyber work we’re doing in the information and sharing [indiscernible].

Okay. That’s helpful. And then just on, looking at segment operating margins, obviously there’s some pressure in the quarter on the government side, but you seem to be running in that upper 6% range. The past two quarters, the public safety running at about 11.5%, are those sort of levels sustainable throughout 2012? It sounds like you’ve got the visibility and confidence where you could even get some leverage where you might see some upside to those numbers. Is that kind of fair?

It’s fair and our -- the majority of our cyber business right now is based around product delivery and these are situational awareness products that are embedded in networks that give a real live picture of what’s going on and certain things that are happening. In the third quarter, we had a very strong mix relative to product deliveries including in that area. The pipeline in that area is as good as it’s ever been for this company. It’s really, really good right now relative to the cyber products. But as you know, it’s a product, it can deliver a 50% margin because it’s software that it obviously it has the maintenance frame. And so that can lead to some choppiness. So in the first quarter, we could have two or three deliveries for a few million dollars and it can make things really strong and then in Q2 we don’t, and then in Q3 -- you understand what I’m saying?

Yes. Sure. Okay.

So it moves around a little bit.

Big picture, I guess, you talked about the bidding proposal pipeline being $3.7 billion. I mean, relative to a lot of other defense contractors, even ones that are situated in sort of the C4ISR world, you seem to have much better relative visibility, continuing resolution, you know, even though contracts haven’t really been flowing yet, I mean, where are you getting kind of this visibility, this confidence even on a quarterly basis to kind of see these revenues ramping without any disruptions from future protests or cuts or what might happen down the road in 4Q here with the presidential election and other possible continuing resolution? I mean, what’s giving Kratos this confidence and this sort of performance versus some of the other players out there?

Well, first of all, I want to address what you said on protests. We can’t foresee what’s going to be protested or what’s not going to be protested. We can’t foresee that. And so we make assessments of what we think could possibly be protested based on the competitive profile and what’s not. As we talked about in the fourth quarter, one came out of the blue. I still can’t believe it, but it happened. So protests can happen, they can happen more and more and that’s just a judgement call that we need to make. We enter a quarter with a significant amount of that revenue in backlog. It’s deliverable. It’s product that’s under contract that’s going to be delivered it’s going to be produced and delivered et cetera. We take a look at the bid pipeline and we make decisions on, okay, if we were to win, how quickly can it be turned over. As Deanna said, and I’ve been trying to allude to more and more, the business, the vast majority of the business now is product based and product deliverables and we can schedule those out. So I’m not sure that we have better visibility than other people in this space, but we take a look at the waterfall, the backlog, how the bid and proposal pipeline blends into that waterfall, we put judgement on it and then we put out what we think we’re going to do.

How much of the funded backlog is shippable in ’12? What percent?

It’s probably about 80%.

I was going to say, a lot. A lot of it is because it’s product based.

And then just the last one here and I’ll get out of the way. And a lot of things have changed since you put this out, so I won’t really hold you to it, but back in June of last year, you put out a pro forma with Kratos and Integral Systems for yearend 2012 of $141 to $145 million in EBITDA and sort of net leverage of 3.4 X. It looks like the EBITDA has obviously come down given the guidance. Is that a function of the Integral side of the house coming down or was it Kratos coming down, or maybe what were the drivers? Again, I know the defense demand backdrop has changed a lot since then, so it could be a lot just market conditions. And then if you could just answer or talk to kind of -- do you have a net leverage target by the end of 2012?

Right. On our last conference call for Q3, we address that EBITDA thing in very explicit detail, where after we closed on Integral Systems, we sat down with Integral Systems and Herley and we took a look at their product offerings and we took a look at where the market was moving for the command and control equipment, the electronic warfare equipment and SATCOM equipment and we said on that call that we were going to make in 2012 a significant IR&D investment. And accordingly, we were going to take down our EBITDA for 2012 from what we had thought before and the EBITDA margin rate. So that is a primary item that’s addressing the $140 down to the $120, mid-$120s to $130.

Okay.

It’s a conscious decision we’ve made. We talked about some of the programs and I can go through those in detail with you offline. What we’re looking at and where we’re going, a good amount of it has to do with space-based cyber-related products. It has to do with -- I’m not talking about the program here, but I’m talking about the concept, the next generation jammer and AMDR.

Okay. Perfect. And do you have a leverage target for the end of the year?

Well, we just look at it mathematically. If we have the cards that we have and if we have net debt at the end of ’11 of around $550, which is what we said, and if we can generate, let’s pick the mid-point, let’s say $55 million in cash and let’s say we drive that $550 down to something like $490, $495, after free cash flow generation.

In the high threes.

Thank you. Our next question is coming from Jonathan Richton from Imperial Capital.

I guess speaking of the R&D, do you give what you expect to spend on R&D in 2012?

We did not provide that on the call, but I think I can give you that number. It’s roughly about $20 million for 2012.

Okay, and split evenly I guess through the year would be the best way to do it?

That’s probably about right, Jonathan.

Okay. And then kind of speaking back to the point of using the cash opportunistically, I guess what capacity do you have under your credit agreement to buy back bonds?

Under the credit agreement?

Yes. Is it open and there’s no limitations?

The only limitation is that after any buybacks that we have available liquidity of $25 million after the transaction.

Okay, so there really is no limit[indiscernible] or anything, it’s just as long as you have that liquidity or that cash, we’re good to go?

That’s correct.

And I guess, kind of following up to that, I know the question has been asked I think on the last call when the bonds were trading around PAR, at what point are you looking for and you’re seeing the situation as really, really accretive? Is it when the bonds go below PAR or is it when they kind of come back off to where they were that’s when you’ll start thinking about it? Just because, you know, they really haven’t gone below that.

No, but in my prepared remarks, you heard what I said, Jonathan, I said, in case that there’s a serious temporary dislocation in the market, so something crazy happens in Europe, or something crazy happens in the Mid-East, and the -- I think that at like 108 or 109 or 110 right now, and they trade down significantly, probably well below PAR, that it may make all the sense in the world to try to buy some of them back.

So I guess, what would be the plan for the cash in 2012? [indiscernible] comes across or…

Well, the primary plan ties into what Michael just said, it’s to net down the debt and de-lever. That is the absolute primary plan. Because we are going to generate that -- those free cash flow numbers. As Deanna said, this is very, very important. We made some great transactions with that critical infrastructure business and the Integral Systems business with the amount of cash that is on their balance sheet in receivables that is going to be collected on milestone schedules, tens of millions, and that unbilled is going to be converted and is going to be billed and is going to flow into this company. So we are going to generate that cash this year. The primary plan is to net down the debt and we are going to continue to be opportunistic as far as acquisitions, which is one of the reasons why we took out those bonds. Its permanent capital, it’s seven year paper. It has -- it gives us the flexibility to be opportunistic and move quickly to -- for example, what we’ve done in the past six months, we’ve built our cyber business, we’ve built our critical infrastructure business and that bill is on the senate floor right now. That is converging and we are positioned to take advantage of it.

Okay. And then I was just wondering if you can maybe just give us some color on which area of the business I guess you have the most concern for just if things kind of slow down a little bit more than expected, where do you see the biggest happening?

I think it would continue to be in that traditional services, IT, program management area. That is an area that has been under siege for three years. It continues to be under siege. If you take a look at the 2012 budget, it is under -- it’s continuing to be under siege. And if you take a look at the 2013 requests, it’s all there. So that is the area, but we’ve identified it, we -- thank God we identified this three years ago, it’s not a significant part of our business right now. We have zero major re-competes in that area this year. None. They were all the last two years, which is great. And so that’s the area.

And our next question come is coming from Josephine Miller from Benchmark. Okay, we’ll give it one more shot. If Josephine Miller still has a question from Benchmark, please go ahead with your question. And we’ll take our next question from Tyler Hojo from Sidoti and Company.

Just firstly, what is the amount of merger and acquisition expense that’s included in the 2012 guidance?

There are no merger related expenses that are included in the guidance.

In our guidance, we’ve assumed zero acquisitions.

Okay. All right. But the expense though, associated with secure info and, what was it, the critical infrastructure business that both have been announced in the last couple of months?

Yes, so the Secure Info merger related expenses, those would have all been included in our fourth quarter P&L so there are going to be some merger related expenses related to the critical infrastructure business that will be posted in the first quarter.

Okay, got it. And then just in regards to Herley and Integral Systems, and I guess it looks like you had about a month and a half contribution from Secure, what did those add in the fourth quarter in terms of revenue?

That was that number that I provided of the $122.4 million I believe. Those were all the acquisitions in 2011 and those that did not have a full quarter’s impact for 2010, that would have included a full quarter of Henry Brothers as well. So it would have included Herley, Integral, Henry Brothers, since we acquired them in mid-December in 2010 and Secure Info.

Okay. So it did include Secure Info. Okay. Great. And maybe if you could just talk about the two most recent acquisitions, what’s baked in the 2012 guidance in terms of contribution from those?

Right. So as we talked about when we announced those acquisitions on the critical infrastructure business, I think that we said that we were looking for a contribution this year of somewhere around $35 or $40 million. And that’s one I think we paid $20 million for not including the $25 million in receivables they had. And on Secure Info, I think it was around $19 or $20, something like that.

Okay, so nothing’s changed since they’ve been announced. Great.

That’s correct.

And just one more clarification. I’m a little bit confused when you’re talking about adjusted free cash flow. What are you adjusting for? I guess what might be helpful, if you just provide kind of like a GAAP cash flow from operations expectation for 2012.

Right. So what we mean by it is, it’s excluding primarily merger, the merger and acquisition costs. So basically what it is, is…

But those are at zero, right?

There’s going to be some for IR for the first quarter.

IR closed in Q1.

And what is that expense that’s being adjusted?

It’s the merger related expenses. So from a GAAP perspective, GAAP now requires you to expense merger related expenses in operating cash flow.

I understand that, but what I’m trying to figure out here is what is that expense.

Oh, how much are you asking? Okay. We thought you meant what type of cost they are. That should be no more than $1 million. It should be less than that.

Okay. So I mean, it’s really negligible?

Yes, but we think it’s important to be able to point that out that it does not include.

Okay. That’s very helpful. And just one last one. I don’t know if you provided this or not, but what is the funded backlog? I think you just provided the total backlog.

No, I provided it, it’s 473.

And we’ll take our next question from Bhakti Pavani from C.K. Cooper and Company.

Actually most of my questions have been asked, but just a housekeeping question. I believe the CapEx for this year was $7.5 million. So what would be your expectation going forward in 2012?

Yes, in my prepared remarks, I had given a range of $10 to $14 million for FY12.

And I’m showing our final question at the moment comes from Josephine Millward from Benchmark.

Sorry about earlier. Most of my questions have been answered. Just a quick one, did you give depreciation for fiscal year ’12?

I did not. That’s about $14 million for the year.

Okay. And also, do you expect any small business revenue to roll off in ’12?

No. As I had said in my prepared remarks, Josephine, the last small business roll off that we were expecting was in the first quarter of ’11. So we do not expect to see that going forward.

And I’m showing no further questions. I would like to turn the conference back to your host for any concluding remarks.

Thank you very much for joining us this afternoon and this evening. We will be circling back up with you at the end of Q1. Thank you.

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.