Stanley, Inc. F3Q09 (Qtr End 12/26/08) Earnings Call Transcript

Jan.29.09 | About: Stanley Inc. (SXE)

Stanley, Inc. (SXE) F3Q09 Earnings Call January 29, 2009 5:00 PM ET

Executives

Phillip Nolan – Chairman, President, CEO

Brian Clark – Executive Vice President, CEO

Analysts

Brian Kinstlinger – Sidoti & Co.

Cai von Rumohr – Cowen & Co.

William Loomis – Stifel, Nicolaus

Michael Lewis – BB&T Capital Markets

Edward Caso – Wachovia Securities

Brian Gesuale – Raymond James & Associates

Tim Quillan – Stephens Inc.

Chris Donaghey – SunTrust Robinson Humphrey

Jeff Houston – William Blair

Operator

Welcome to the Q3 fiscal year 2009 Stanley Incorporated earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Larry Delaney, Investor Relations council.

Larry Delaney

Good afternoon everyone and thanks for joining us today on Stanley's fiscal third quarter 2009 earnings call. Here today are Stanley's Chairman, President and CEO Phil Nolan and Executive Vice President and Chief Financial Officer, Brian Clark. Phil will begin with an overview of the company's third quarter operating results. Brian will then go through the financials and issue guidance for Stanley's fourth quarter 2009 and update full year 2009 guidance. We'll then take your questions.

Before we get started, I'd like to remind our listeners that our comments today will contain forward-looking statements and information based on management's current expectations. Such forward-looking statements are subject to certain risks, uncertainties and assumptions. Information about various risks that could affect the company's financial results is available in the risk factor of Stanley's From 10-K in the fiscal year ended March 31, 2008 and in the other reports the company files with the SEC.

In addition, today's call will include discussion of certain non-GAAP financial measures including EBITDA and organic revenue growth. Tables reconciling our non-GAAP financial measures are available on our earnings press release available under the investor relations section of the company's web site at www.stanleyassociates.com. With that, I'll turn the call over to Phil Nolan.

Philip Nolan

I'd like to thank you all for joining us this evening. Stanley posted another strong quarter of substantial revenue growth and continued margin improvement. Third quarter fiscal 2009 revenue came in at $203.6 million, representing year over year top line growth of 38%, 24% of which was organic. The revenue number exceeded the high end of the guidance we issued on our last earnings call by more than $1.5 million.

Net income for the quarter was $9.7 million versus $6.8 million a year ago which equals diluted earnings per share of $0.41, up from $0.29 for Q3 of last year. Q3 EPS exceeded the high end of our guidance by $0.04.

Bookings for the third quarter were $254.1 million, equating to a book to bill of 1.2 to 1. Our contract backlog at December 26 was approximately $2.1 billion, up slightly sequentially, and up approximately 65% year over year.

Our qualified pipeline currently exceeds $4.5 billion. As of today, we have almost $400 million in proposals submitted and awaiting decision, and we expect to submit another 16 proposals of $100 million or more each in the next six to nine months.

Clearly award activity was very slow during the later half of the third quarter since almost all of our bookings were acquired prior to our last call. At this point, we think you should expect bookings in the fourth quarter to be light as we do not feel that any of our larger submitted bids are near announcement.

I should add that our nine month book to bill was 1.5 to 1 and the full fiscal year 2009 book to bill will be well above 1 to 1.

During the period, Stanley benefited from increased revenues from our continued support to the Department of Homeland Security to provision IT services for various Department of Defense customers and increased revenue resulting from the acquisition of Oberon and Associates. We had expected additional growth in FY '09 from new army equipment RESET contracts and a surge in passport demand in advance of the western hemisphere travel initiative, or WHGI.

However, nine months in, it's not clear that these efforts will push to the right. Nonetheless, as we stated last quarter, we remain in our FY '09 guidance as growth and other areas of our business has been strong.

In the case of RESET, the Army's procurement infrastructure is taking longer than expected to migrate Legacy contracts to the first IDIQ vehicle. This delay has caused the contracts already in place to be extended while they gear up to generate new RP's under first. I should add however, that our existing RESET work in Fort Cannibal and Bluegrass, Kentucky continue to post solid year over year growth and our rest pipeline continues to grow.

As for passport, it now appears that any major surge in passport volumes as a result of land and sea provisions of WHGI if one occurs will resemble the earlier air travel cut in and nearer to or after the June deadline. As we told you to expect last quarter, passport services revenue was down both sequentially and year over year.

Since we spoke to you last quarter, we announced several key wins. These dollars values were included in our Q2 and Q3 bookings total at October 30, but which we could not describe until we received approval. I'd like to highlight a number of these awards and business areas because of their importance to our expected growth profile going forward.

First, Biometrics. As you remember from previous calls, there are three contracts related to BAT, or biometrics automated tool set that Stanley is now executing with our teammates, one that provides for operating a system at points of entry in Iraq and Afghanistan. That contract, awarded in September to support the U.S. Central Command is for $13 million over two years.

The second is a development contract to further improve and enhance the system. That $37.9 million four year contract to continue to provide in service engineering support to the program manager, DOD Biometrics was awarded at the beginning of this quarter.

And finally, there's an operations and maintenance contract for the system. That contract, which is both a re-compete for us as well as an expansion of our current work, is part of a larger contract led by the Army's Communications and Electronics Command, or C-Com, in support of the program executive officer for enterprise information systems. Stanley's share of that contract could exceed $100 million over its four year term.

Also on the Biometrics front, but not exclusively related to BAT, we are a member of a team recently awarded a Biometrics support services unrestricted or [BOSU] contract. Needless to say, we expect further growth in our Biometrics efforts going forward as this vital technology is rolled out in greater numbers and received upgrades and enhancements.

During the quarter, Stanley continued to win additional plus ups under the Army's Intelligence and Security Command or INS-COM futures contract as well as new tasking at Fort Huachuca and Hanson Air Force base.

Last quarter we announced a system integration task order under INS-COM futures contract which was awarded in late July. This task has been increased by almost $10 million to continue managing and coordinating a cohesive effort to focus technology development and insertion into the INS-COM mission.

We also received a total of nine GSA schedule contracts blanket purchase agreement task orders totaling over $8 million to assist the U.S. Army Intelligence Center and Schools how to command Data lab at For Huachuca, Arizona by providing subject matter expertise and program managers for the development of new ground sensor systems and prototypes.

Stanley will also provide combat proven, all source intelligent subject matter experts to cut a comprehensive war glider information capabilities assessment.

Also this past quarter, we continued to make inroads with one of our longest Stanley customers, winning two new contracts. We're excited about these contracts not only because of the importance we place on this customer, but also because they will serve to strengthen our credentials in the growing cyber security arena.

The first is a five year firm fixed priced contract valued at $119 million for the network operations and securities command or [Macnols] to support the secret internet protocol routed network, the super net. [Macnols] provides global network operations and computer network defense to facilitate seamless information exchange in support of Marine and joint forces operating globally.

[Macnols] is the nucleus for enterprise data network services, network support to deploying forces and development of network enabled IT solutions. Our work for them will help provide a broad range of technical, operational, maintenance and management services to support the Marine Corp with its efforts to consolidate network and IT infrastructure.

We will also assist [Masnols] in creating a more effective and responsive web based environment capable of supporting highly distributed operations and providing commanders and authorized users at all levels improved access to time sensitive information. The work will take place in Quantico, Virginia and Camp Pendleton, California along with other Marine Corp installations world wide.

The second contract is a relatively small award, approximately $4 million over three years to provide technical programmatic, managerial and administrative support to the program manager for Marine Corp network and infrastructure services for the next generation enterprise network, or NGEN.

NGEN will provide a state of the art global networking environment that is collaborative, responsive and empowering to the war fighter. The network will enable command and control as well as business and administrative functions for both Navy and Marine Corp users and systems.

We're continuing to build up the infrastructure on these contracts and the IT work we're doing for the Marine's is a major growth vehicle for Stanley going forward. In fact, new IT focused contracts as well as increased work under existing efforts is providing growth for Stanley at a very opportune time.

Finally, a quick note on our most recent acquisition, Oberon Associates. They continue to perform well and meet the expectations that made them attractive to us in the first place. At this point, they are fully integrated into Stanley in all aspects, and most importantly, we're seeing a heavy volume of bid and proposal activity as well as a growing pipeline in the intelligence and Biometrics arenas.

The key take away tonight is even though the work we anticipated from new RESET awards and increased passport volume is delayed, Stanley's new and existing work related system engineering, enterprise integration and operational logistics continues to fuel our growth.

With that, I'll turn our call over to Brian.

Brian Clark

I'm pleased to report Stanley posted outstanding results for our fiscal third quarter ended December 26, 2008. Revenues exceeded street consensus by nearly $9 million and exceeded the high end of our guidance we issued last quarter, while EPS exceeded consensus by $0.05 at the high end of our guidance by $0.04.

Additionally, our cap performance in the quarter and year to date continued to yield solid operating cash flow that puts us on a path to beat our cash flow objectives for the year. Third quarter revenues were $203.6 million, up 38% from $147.1 million in the third quarter of fiscal 2008.

As Phil noted, year over year revenue growth in the third quarter, 24% of which was organic, came primarily from our continued support of the Department of Homeland Security, the provision of IT services for various Department of Defense customers, expansion of our RESET work for the United States Army, and the increased revenue resulting from the acquisition of Oberon Associates.

For the December quarter D of D contracts made up 76% of total revenues while Federal civilian contracts comprised 24%. The D of D share increased by 8% year over year and 5% sequentially. The sequential increase is largely a result of a higher proportion of revenues coming from IT and logistic services performed for the Marine Corp and other DoD customers, increased hardware and integration through put under our corporate production contracts and lower revenues from Federal civilian contracts including passport services.

Contracts in which Stanley acted as the prime contractor accounted for 66% of revenue for the quarter, down from 68% last quarter primarily as a result of the addition of Oberon's largely subcontracted work. We continue to expect the recent prime contract wins in the areas of intelligence, cyber security and logistics, coupled with our continued organic growth will migrate Stanley toward a larger share of prime contract work in the coming quarters.

Our passport services contracts accounted for 8% of total revenue in the third quarter of fiscal 2009, down from 11% last quarter due to lower processing volumes as expected, growth in other areas of the business and the acquisition of Oberon.

Revenue earned under task orders on our corporate production contracts aggregated to 10% of total revenue in the quarter and were driven primarily by integration and installations of C4SR systems for the U.S. Navy and Marine Corps. We expect the corporate production will again account for approximately 10% of revenue in the fourth quarter.

EBITDA in the third quarter was $20.3 million, up 45% from $14 million for the third quarter of last year. EBITDA margin was 10% for Q3, reflecting 50 basis points of margin improvement over the third quarter of last year, and up 10 basis points sequentially. EBITDA margin improved year over year due primarily to a greater proportion of more profitable time of materials and fixed priced contracts as opposed to cost plus fee contracts and the contribution of higher margin work coming from Oberon.

These gains were offset partially by additional FAS 123R compensation expense related to equity grants made in the first quarter of fiscal 2009 and Oberon having a higher G&A as a percentage of revenues.

We continue to see a significant shift in contract mixture in Q3. In the December quarter, time and material contracts accounted for 51% of revenues, down from 55% in Q2 and up from 38% last year. The cost plus fee contracts accounted for 30% of revenues in Q3. unchanged from Q2 and down from 47% last year.

Fixed priced contracts were 19% of revenues in the quarter, up 4% sequentially and year over year. The relative increase in fixed priced contracts as a percentage of revenues resulted from new contract wins and additional tasking under existing contracts.

We expect this mix to remain relatively stable over the next few quarters based on expected growth in existing programs as well as the relative mix in our pipeline of new opportunities.

GAAP operating income was $17.5 million, up 43% from $12.2 million in the same quarter as last fiscal year. Operating margin was 8.6% versus 8.3% in the third quarter of 2008. The increases in operating income and margin resulted primarily from the factors improving EBITDA I just discussed offset slightly by depreciation and amortization representing a higher percentage of revenues as a result of the amortization of purchase intangibles related to the Oberon acquisition.

Net interest expense for the third quarter was $2 million versus $919,000 for the third quarter of last year. The increase of net interest expense year over year was a result of higher average outstanding borrowing on our senior credit facility after the Oberon acquisition, partially offset by an overall lower weighted average borrowing rate.

Net income for the quarter increased 43% to $9.7 million fro $6.8 million a year ago. The increase in net income year over year is attributable to the factors affecting operating income and the lower effective income tax rate offset partially by higher year over year interest expense.

Diluted earnings per share was $0.41 in the third quarter of fiscal 2009 compared with $0.29 in the year ago quarter, again exceeding the high end of our guidance by $0.04. Day sales outstanding or DSO was 78 days for the quarter, down from 80 days last quarter. The decrease in DSO is attributable to strong cash collections during the quarter and higher average daily revenues on slightly higher average receivable balances during the quarter.

Cash flow from operations for the first nine months of fiscal 2009 was $38.5 million or 1.4 times net income. As expected, cash generated by operations during the third quarter was down sequentially following a quarter of unusually high receivables collections in Q2.

CapEx for the nine months was $6.0 million resulting in free cash flow of $32.5 million, or 1.2 times net income. CapEx for the third quarter returned to more customary levels after being higher that normal in the first six months, principally to build outs of two new facilities in the first quarter needed to support expanding operations. We expect that CapEx will be slightly more than 1% of revenues for full fiscal 2009.

Free cash flow during the third quarter and cash on hand at December 26, 2008 enabled us to continue to reduce debt on Stanley's revolver by approximately $10 million during the quarter to its current balance of $143 million. Cash on hand at December 26, 2008 was $5.5 million.

As we discussed on last quarter's call, due to the significant fluctuations in LIBOR rates and the decreases in the prime rate caused by the recent turmoil in the credit markets, we alternated our revolver for Q3 between LIBOR and base rate borrowings to ensure we achieved the lowest rates possible.

Under our credit facility we had the option of borrowing at the LIBOR rate plus the applicable margin, currently 1.25% or prime rate plus the applicable margin currently .25%. Through the quarter we were able to make a number of moves which allowed us to realize lower rates than anticipated and thereby contributed about $0.01 of the EPS above guidance.

To date we have hedged approximately $18 million of our term loan indebtedness to fixed rate debt bearing interest at 5.28%.

And now, moving on to guidance. For the fourth quarter of fiscal 2009 we expect revenues to be in the range of $206 million to $213 million and diluted earnings per share of $0.41 to $0.43 on a weighted average diluted share count of 23.8 million to 23.9 million shares. For the full fiscal 2009 year, we now expect revenues to be in the range of $773 million to $780 million and diluted earnings per share of $1.53 to $1.55 on a weighted average diluted share count of 23.8 million to 23.9 million shares.

We've now reached the midpoint of our FY '09 EPS guidance from $1.30 in our initial guidance last May to $1.54 today weighing in an increase of over 18%. The midpoint of our EPS guidance now implies 38% EPS growth over full fiscal 2009. The new midpoint of our guidance equates to full year revenue growth of 28%, approximately 29% of which will be organic.

The new midpoint also has approximately 98% of our forecasted revenues coming from existing contract backlog, 1% coming from re-compete contracts and 1% from identified new business opportunities.

As Phil noted, Stanley's new and existing work related to systems engineering, enterprise integration and operational logistics is providing a healthy growth as new RESET awards and higher passport processing volume have been delayed.

On last quarter's call we said we expected to realize EBITDA margin improvement of 50 to 60 basis points, and operating margin improvement of 30 to 40 basis points for full fiscal 2009 over fiscal 2008. We're not projecting full year EBITDA margin improvement of 70 to 80 basis points and operating margin improvement of 50 to 60 basis points.

The difference in basis point growth between the EBITDA margins and operating margins is due to the amortization of purchase intangibles related to the acquisition of Oberon.

The primary reason for the year over year margin improvement will be as a result of the higher mix coming from more profitable T&M and fixed price contracts and the continued realization of efficiencies in our general and administrative infrastructure.

While we continue to be very pleased with our top line performance, we are more excited about the margin and earnings growth Stanley has delivered thus far in fiscal 2009. And finally based on equity grants and stock options and restricted stock in the first three quarters of fiscal 2009, as well as the two prior fiscal years, we included approximately $1.8 million in the third quarter and approximately $6.3 million for the full fiscal year for FAS 123-R equity based expenses.

Earnings per share for the fourth quarter for the full fiscal year, our FAS 123-R expenses of $0.04 and $0.16 respectively. Guidance for fiscal 2009 also includes the impact of the amortization of purchased intangibles of approximately $5.6 million related to Oberon and our acquisitions completed in prior years.

With that, I'll turn the call back over to Phil.

Philip Nolan

Before we get to Q&A, I'd like to mention how proud we are to have moved up on Fortune's 2009 list of the 100 best companies to work for. As you know, Stanley plays in a very challenging space where the competition for talent is fierce. As a Federal IT services provider, we're keenly aware that our most valuable assets walk in the door each morning.

To be recognized by Fortune and our employees as one of the best places to work in the country says a lot about the culture we foster here at Stanley. We appreciate your attention here tonight. I apologize for the additional sound track courtesy of Wellington County. At this point, we'd be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brian Kinstlinger – Sidoti & Co.

Brian Kinstlinger – Sidoti & Co.

Maybe you can update us a little bit. We thought there would be some RFP's that came out at the end of December and its turnaround time would be quick. Maybe you could expand on that and tell us how that played out.

Philip Nolan

We did too, and at this point it still looks like its moving to the right. We really just do not have really clear visibility when these things are going out the door unfortunately. As you know, and everybody listening knows, we've been talking about this for several quarters and we know the work is there. We know the Legacy contracts have expired and have been extended, and we're waiting for them to come out the door.

Brian Kinstlinger – Sidoti & Co.

That's the RFP that came out under the award for awhile, the turn around timing?

Philip Nolan

No, the RFP's haven't even come out.

Brian Kinstlinger – Sidoti & Co.

The difference between the bookings and the announcements that you put in the press release, is that just generally factoring those into your backlog?

Brian Clark

If you add up all the numbers in the press release it's a little bit more than the bookings number.

Philip Nolan

Because some of those awards in there, it's not exactly. Some of the awards in there are kind of what we know the value of it is, but we didn't take it as a booking because we didn't get the full paperwork for it. For example, I think the press release has a number in there for $112 million in Biometric support. As an example, we only took $12 million of that in our bookings number. That's consistent with what we've done with our IT contracts and that sort of thing, that we do not give ourselves credit for that until we get paper.

Brian Kinstlinger – Sidoti & Co.

And that comes when? Later on when there's a renewal in the contract, or once you start it up?

Philip Nolan

In that particular case, that's a subcontract, so that comes as a prime contract. That gives us additional paper.

Brian Kinstlinger – Sidoti & Co.

It seems if I read that list, most of it is new business other than two of the smaller deals out there, so is that accurate? The $254 predominantly most of it is new business?

Philip Nolan

That is correct.

Brian Kinstlinger – Sidoti & Co.

Are you able to give us how revenue Oberon may have added?

Brian Clark

It was a little better than $30 million for the quarter.

Brian Kinstlinger – Sidoti & Co.

Do you have a funded backlog number?

Brian Clark

$259 million.

Operator

Your next question comes from Cai von Rumohr – Cowen & Co.

Cai von Rumohr – Cowen & Co.

The passport, is this around 8%? It's a little bit more because even if it's like 16.5%, 17%, it's come down pretty sharply since the June peak. Should we expect a normal seasonal lift in the fourth quarter? How should think about it in 2010 because it seems like it bounces around quite a bit.

Philip Nolan

I think that as we look at Q4 for our own estimates, we're not expecting a lift in Q4 in terms of how we're looking at our numbers.

Cai von Rumohr – Cowen & Co.

Sequentially from the 17% and the third?

Philip Nolan

We are not expecting lift sequentially. And we think probably as you look out from there it's going to be, I would say the way we're looking at it right now, flattish.

Cai von Rumohr – Cowen & Co.

At this run rate, or flattish year over year?

Philip Nolan

Probably flattish at this run rate. We'll see what happens with the June deadline. I've told folks when we knew more from the State Department in terms of what they were looking at in terms of numbers, we'd talk about it. At this point, they're looking at something on the order of 14 million total documents I think, so that's recent news that we've got from them, so that's certainly lower than what they had in this past fiscal year.

Cai von Rumohr – Cowen & Co.

And that's the result of what, the economy?

Philip Nolan

Yes. I think that's what it amounts to. It seems like that's impacted like everything else. Our job is to put the right amount of staffing to the task, and obviously we flex our staffing based on production load that we have and we're the only guys doing passports, so the work is not going anywhere else. So if it's not coming in, my guess is it's the economy both from what's happening from the commerce standpoint and people probably aren't eager to spend their money on European vacations right now with the state of things.

Cai von Rumohr – Cowen & Co.

If we look here at your margins were great, even if passport was down, so if passport stays at this level, doesn't this have leverage on that, so if the total revenue is there in the mix with other stuff, obviously Oberon continues to grow the margin, it should be sustainable.

Philip Nolan

We expect the margins will be from that standpoint around 10%.

Cai von Rumohr – Cowen & Co.

As we look on the corporate production, that's going to hold in the final quarter, and how should we think about that going forward. Is there any [inaudible] pretty much winding down, is there any more opportunity there?

Brian Clark

[M-Rap] I think as you know for the most part ended last year with a very small trickle into the beginning of this year. We've seen continued growth under that program. It came in at 10% this quarter. We expect it to be right about 10%, 11% in the fourth quarter and where it goes from there will depend on what we see coming down from a pipeline standpoint from the customer.

Phillip Nolan

You know that we've been waiting for the system to systems contract to come out the door which is really kind of a companion contract to the one we do right now, the mission module contract which kind of make up core production. That came out here a couple of weeks ago now, and we've got about a 60 day turnaround, so we're looking forward to that at the beginning of our next fiscal year to add to what we're doing from a smaller arena.

Operator

Your next question comes from William Loomis – Stifel, Nicolaus.

William Loomis – Stifel, Nicolaus

Looking at the organic growth it was still very strong in December. When you look to the slowdown in March, is it just coming year over year on visas coupled with passport dropping off, is that 80% of what's happening in terms of the organic growth slowdown in the March quarter?

Philip Nolan

I would argue that's it's not really slowed down that much, but just looking at the numbers and the comp that we're against in the third quarter last year which make it look a little better than what we did there. That's the only thing I would attribute it to actually if you look at what we've got. We've got pretty strong bookings and pretty strong contributions to our revenue from the new work that we got and if you listen to the Biometrics and Intel support work that I talked about, the Marine Corps contracts we got, all those things are still in the process of ramping up.

William Loomis – Stifel, Nicolaus

Maybe I did my calculation wrong, but what do you see as the organic growth for the range in just the March quarter?

Brian Clark

In the March quarter about 8%.

William Loomis – Stifel, Nicolaus

As far as some of the wins that you've had over the last six months, how are they ramping up? I'd say by the organic growth in December they're doing pretty good. Anything that really hasn't kicked in here in the December quarter that will in the March quarter to add growth that you've already won?

Philip Nolan

I think the [Macnols] contract that we talked about in the remarks that we talked about, I think that some of our Biometrics efforts and our support to the Army Intelligence school, all those things will see a bit of an increase in this quarter.

William Loomis – Stifel, Nicolaus

What's the tax rate you're assuming for the fourth quarter and going forward beyond that?

Brian Clark

About 39.5% for Q4. Beyond that will be probably marginally higher 39.6%, 39.7% maybe.

William Loomis – Stifel, Nicolaus

Is there a particular reason for it being a little lower in the December quarter?

Brian Clark

Yes, a couple of things. I think as you know in the third fiscal quarter for us when we file our prior year returns, there was one piece, not terribly significant but you always true up your tax provision to what your actuals are when you file the returns so a little pick up there.

We also had done an enterprise zone study. We had a pick up of a little better than $100K on tax credits that we picked up. And then with Oberon coming in and just the shifting around of the stated portion and factors, just all those things to take into account moved our effective rate down for the year and then there's a little more dramatic impact in Q3 when that takes place. You're effectively doing a catch up entry.

So that all told contributed a little better that $0.01 of the EPS over what we had originally anticipated.

Operator

Your next question comes from Michael Lewis – BB&T Capital Markets.

Michael Lewis – BB&T Capital Markets

I was wondering if you had a status update on the pending PEO contract.

Philip Nolan

No.

Michael Lewis – BB&T Capital Markets

So it's still hanging out there?

Philip Nolan

It's still in evaluation. Right now we're still expecting, what we've been told is expect end of the quarter. Since we haven't heard any rumblings, haven't got any questions, my expectation is that might be extended somewhat. But I'm giving you my guess there.

Michael Lewis – BB&T Capital Markets

A follow up on your super net, the [Macnols] opportunity here, specifically related to cyber opportunities out there, of the 16 bids that you're about to submit out there in the next few quarters, how many of these are specifically addressing things like this [Macnols] area?

Philip Nolan

I'd say the 16 that I've got out there; I'd say that we could fairly say about four of them.

Michael Lewis – BB&T Capital Markets

Do you know the size of what these contracts will be? Are they a few hundred million for the cyber, are they right around $100 million? Can you give us a little more detail on what size you think they're going to be?

Philip Nolan

They're in the $100 million to $200 million range.

Michael Lewis – BB&T Capital Markets

Did you say that there were 14 million projected passports in 2009 or is that for the second half of 2009?

Philip Nolan

2009.

Michael Lewis – BB&T Capital Markets

My numbers are indicating based on the state's web site, 16.2 million were issued in '08. Is that correct?

Philip Nolan

That's correct.

Michael Lewis – BB&T Capital Markets

So what about that acceleration that we, we had some pretty significant numbers with expectations on passport, and I understand it has a macro effect as a result of the economy, but does the state, in your conversations with the state, have they implied that they anticipate that may be the out year will be much more significant as people try to catch up on having to have these passports? What have your conversations been like with regard to how we can expect to see some type of accelerated ramp going out to say the next three or four quarters.

Philip Nolan

We know the demand is there. We know the requirement is there and when it kicks in, I'd be making a guess just like you would if I gave you a number right now. It looks like that's going to be, that could be somewhat dependent upon what's going on with the broader economy. So the State Department has told us, we know that we're staffed for it, if you look at what they're doing with their infrastructure. They continue to actually add infrastructure so they fully expect it to come.

But they also in their conversation expect that to be delayed in terms of when, not the deadline, but when the buying comes.

Michael Lewis – BB&T Capital Markets

With regard to the staff, are you able to shift the actual Stanley staff to other contracts while you're waiting for this ramp? What's going on there?

Philip Nolan

In some cases yes and in some cases we have to rent folks. That's not really anything new. That's the way we've performed this contract since '92. It's made to do that. It's made to flex with the demand. We obviously try to find homes for people if we can but we also may experience layoffs too.

Operator

Your next question comes from Edward Caso – Wachovia Securities.

Edward Caso – Wachovia Securities

Your prime percentage was what?

Brian Clark

66.

Edward Caso – Wachovia Securities

And the attrition rate in the quarter?

Brian Clark

15% as an annual run rate.

Edward Caso – Wachovia Securities

That's a little bit of an uptick from where it's been in recent quarters? Anything noteworthy?

Brian Clark

No. Nothing noteworthy. I think we said it's been 14% for the last couple calls.

Edward Caso – Wachovia Securities

I missed the CapEx in the quarter.

Brian Clark

Right about $1 million.

Edward Caso – Wachovia Securities

I heard Oberon $30 million. That's higher than it's been running. Are you still looking for $85 million to $86 million for the year or have you upped that number now?

Brian Clark

We're still on track for about $85 million for the year.

Edward Caso – Wachovia Securities

It's $85 in your F'09.

Brian Clark

That's correct.

Edward Caso – Wachovia Securities

You haven't talked about Brack recently. Any updates or opportunities on that front?

Philip Nolan

We haven't talked about Brack lately as we've turned other topics. That's still on our watch list as ANC starts getting serious about getting down the arsenal in Huntsville, and we're also looking at [inaudible] move to Aberdeen because that affects a lot of the work that we're doing at Fort Sills, so those are two areas that we're working hard here in the background. But really no other commentary than that.

Edward Caso – Wachovia Securities

Can you talk a little bit about US CIS percent of revenue, what's happening with the margins? Any success in getting the government to adopt the new way trades?

Philip Nolan

That's still ongoing. We have a proposal in to the government for that. We fully expect that will be incorporated but that's just one of those things that takes some time. Hopefully when we get to the next call, we'll tell you that that was incorporated. The contract has held pretty steady. The next event on that is when we do the cap in April when we'll potentially see some surge in volume.

Edward Caso – Wachovia Securities

And the percent of revenue?

Philip Nolan

We're calculating. We'll pop that in with somebody else's question.

Operator

Your next question comes from Brian Gesuale – Raymond James & Associates.

Brian Gesuale – Raymond James & Associates

I wanted to just look at the pipeline a little bit. You mentioned $400 million in bids outstanding. Can you break that out between new work and re-competes please?

Philip Nolan

I'd say about three-quarters is new, about a quarter is re-compete.

Brian Gesuale – Raymond James & Associates

On Oberon, as you've had them under the umbrella here for a little bit of time, it's still early but can you talk about how you're able to chase some business that maybe Stanley couldn't get and Oberon couldn't get as independent companies and how that's coming together?

Philip Nolan

I really think that comes with the scale of the two companies. We've got a number of efforts in our combined pipeline now that we've added that we wouldn't have had there before that we're going after, and I think having Oberon coupled with us was a nice contributor to our [Macnols] win also. That's a $120 million contract and that was awfully nice to pull that off so quick into the acquisition.

Brian Gesuale – Raymond James & Associates

You mentioned also having 16 $100 million plus opportunities out there over the six to nine months. Are some of those RESET's or could you, you gave us some of the [Macnols] opportunities, could you give us a RESET feel?

Philip Nolan

We have other RESET opportunities coming up. Some of them are smaller so they're not that $100 million effort. The bigger ones have moved, at least in our opinion, we've taken them out of that six to nine month pipeline just because we can't seem to get good clarity on when they're going to come out the door. As a caution for us, we've taken them out of that six to nine month window and moved them to what we call targeted, so we're not really counting them in that. But we do have one opportunity of that size within that window.

Also if I could add, Ed Caso, the answer to your question was 5%.

Operator

Your next question comes from Tim Quillan – Stephens Inc.

Tim Quillan – Stephens Inc.

Remind me, in 4Q '08 you had a pretty big sequential spike up in revenue and I think there might have been one or two one time things that makes your comparisons difficult in this fourth quarter, if you recall?

Brian Clark

The biggest piece is in Q4 of last year we had the build out of the Tucson passport center last year, so that was about $5 to $6 million that fell in the quarter. You also recall that in that quarter we also had as we had all fiscal year this year as well, but we also had about $5 million of work that went away, so you have about a $10 million to $11 million that created a hole between those two.

Tim Quillan – Stephens Inc.

Related to passport, I agree that you've done as well given the drop off in passport volumes the 14 million is a long way away from what the State Department thought they were going to do this year. I guess the implication is, if you stay at the current run rate, that you would have a drop off in your passport revenue year to year in fiscal 10 versus fiscal '09 just because you had stronger revenue in the front half of fiscal '09. Does that give you any pause in terms of the ability to put up 15% sales growth in fiscal 10?

Philip Nolan

Of course I'm not guiding you on fiscal 10 on this call. That comes next quarter. But understanding the question, sure. If you look at those things and that would imply that passport is down and you've got, we've got a hole that we have to fill, but that's really not particularly unlike what we had coming into this year when we looked at $20 million worth of [Emrap] work going away and not having a repeat of one time things such as what we did with the passport center build out. That's kind of a challenge that we face every year. I'd like not to face it, but it's there.

Operator

Your next question comes from Chris Donaghey – SunTrust Robinson Humphrey.

Chris Donaghey – SunTrust Robinson Humphrey

If you can go into it a little bit, is there any inter-relationship between the [Boss] contract and the BAT contract and is there a broader strategy you thought about on the Biometric side in general?

Philip Nolan

I'm not going to talk too much about our strategy on that but certainly Biometric side in general, we don't want to limit ourselves just to the work that we're doing for the Army. They're a very valuable customer and obviously we're doing some very tremendous work there, but we certainly want to be able to apply what we know there into a number of other agencies within the government, and some of those shouldn't be too hard for you to guess.

If you look at the customer sets that we have within the civilian side, people that would be all these candidates of being able to employ that technology. The [Boss] contract itself is not a BAT specific contract so that really play Biometric large and we expect to do other things on the back of that contract.

Chris Donaghey – SunTrust Robinson Humphrey

On the acquisition front, obviously the government is now contemplating spending a lot of new money so how are you looking at the acquisition pipeline? Are you looking at healthcare, IT companies, road building companies, bridge building companies, solar power, car companies, what are you looking at out there?

Philip Nolan

The four, the top one. No road buildings, no bridge builders, no solar power energy companies.

Just to talk about the acquisition pipeline, I would say that it's certainly down from what we've seen in the past. There are still companies coming out that we're taking hard looks at, but we've also talked about the basic, what we perceive as a winning environment. We talked about it in the last call, and it's only exacerbated itself over the last few months, so we're being very selective about what we might take a run at. But there are some good candidates out there that we're still looking at.

Operator

Your final question comes from Brian Kinstlinger – Sidoti & Co.

Brian Kinstlinger – Sidoti & Co.

If the volumes are down on passport and you've increased capacity, does profitability dive because of that leverage factor for next year on that contract? Not just, obviously with the volume, but even then some more because you have those costs?

Philip Nolan

Not really. When we did the build out of those facilities and those sorts of things, they were directly reimbursed by the government so those really, those costs of operations are behind us. A little bit of operating cost goes into that but we have that factored into the pricing in terms of what the government orders from us. So I don't really look at that as on our scope of a big concern as we look at what happens with the volumes.

Brian Kinstlinger – Sidoti & Co.

The profitability will change with volume but not any more than the volume.

Philip Nolan

Brian Kinstlinger – Sidoti & Co.

On this passport initiative it was more the person not traveling on vacation although certainly those were renewals, but more the person that's traveling over and back beyond the borders by land and sea for work or things like that, so why would be that dramatic a decrease. Certainly people lost their jobs, but from a vacation standpoint, it didn't seem like that would be more the airplanes, the air side.

Philip Nolan

I can only guess on that. I think the economy has gotten a lot worse a lot quicker than anybody thought. You look at the amount of layoffs and things going on, that's got to have some sort of impact. All I can really do, I'm not trying to predict the future expect to tell you I will promise to tell you what the State Department told us in terms of their volume expectations.

So unfortunately, I'm telling you what they told us in terms of the numbers there, which are obviously down. And of course, I'm giving you the latest news they've given us. They could be wrong. We could still see the surge in June that they're all ramped up for. It's just at this point they don't think it's going to come.

Brian Kinstlinger – Sidoti & Co.

So the deadline doesn't sound like it's going to change, it's just the volume.

Philip Nolan

I haven't heard any talk about the deadline changing. There's really no argument for that. The capacity is certainly there and space to be able to get the job done and we've head no rumors of moving that deadline.

Operator

Your next question comes from Jeff Houston – William Blair.

Jeff Houston – William Blair

Are there any major re-competes coming up in the next 12 months?

Philip Nolan

We have a couple of re-competes that are on the way, one that's underway which is the PS contract which we were asked about earlier. Then we have a couple of other efforts that might be combined into another re-compete. Relatively speaking it's a relatively small re-compete for us. We're probably looking at about 15% of our base up for re-compete as opposed to last year which was almost 35% of our base up, so it's a pretty light year from a re-compete standpoint.

Jeff Houston – William Blair

Are there any changes in your long term growth or margin targets?

Philip Nolan

No.

Jeff Houston – William Blair

Can you remind us what those are?

Philip Nolan

Since we've told people that our long terms were to be able to grow the company 10% to 15% on an organic basis and that we had a goal of reaching 10% EBITDA. Obviously on a quarterly basis, that's a number that we've hit and we're hopeful that over the next couple of quarters that we might do a little bit better than that, but those have been kind of our stated goals for a long time.

Those folks who cover this space know that 10% EBITDA is pretty good. It's a pretty good number and to inch up a little bit above that, that would be great.

Operator

Now, we will turn the call over to Mr. Nolan for closing remarks.

Philip Nolan

Thanks everybody for joining us tonight. For those of you on the call who may not have gotten all your questions answers, we'd be happy to follow up with you. If you do have additional questions, please go through Larry Delaney and we'll get back to you. Thanks everyone. Good night.

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