Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

SRA International, Inc. (NYSE:SRX)

F2Q09 Earnings Call

February 5, 2009 5:00 pm ET

Executives

David Keffer - Vice President, Investor Relations

Ernst Volgenau - Chairman and Founder

Stanton Sloane – President and CEO

Timothy Atkin - COO

Melissa Burgum - Corporate Controller, Acting CFO

Analysts

William Loomis - Stifel Nicolaus & Company, Inc.

Timothy Quillin - Stephens Inc.

Michael Lewis - BB&T Capital Markets

Thomas Maher - Lord Abbett & Co.

Brian Kinstlinger - Sidoti & Company

Gotham Connor - Cowen and Company

Alex Hamilton - Jesup & Lamont Securities Corporation

Jeffrey Houston - William Blair and Company

Jason Kupferberg - UBS

Philip Friedman - Perella Weinberg Partners

Matthew Crews - Noble Financial

Operator

Good afternoon. My name is [Marcello] and I will be your conference operator today. At this time, I would like to welcome everyone to the SRA International fiscal 2009 Q2 earnings call. (Operator Instructions)

I will now turn the call over to David Keffer, Vice President of Investor Relations. Mr. Keffer, you may begin.

David Keffer

Thank you, Marcello, and welcome, everyone. On the call today are Ernst Volgenau, our Founder and Chairman, Stan Sloane, our President and CEO, Tim Atkin, our COO, and Melissa Burgum, our Corporate Controller and Acting CFO.

During this conference call we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to our SEC filings for a discussion of these risks.

In addition, the statements made during this earnings call represent our views as of today. We anticipate that subsequent events and developments will cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

During this call we will also refer to non-GAAP financial measures. A reconciliation of any non-GAAP financial measures to the most directly comparable GAAP measures is available in the IR section of our website at www.SRA.com.

Ernst?

Ernst Volgenau

Thanks, Dave, and good afternoon, everyone.

Our performance as a company over the last few quarters has been below our historical standard, and we're here today to describe these results and the measures we're taking to regain our momentum.

In December our Board established the Executive Office of the Chairman, composed of Stan, Tim and me. Together we are focusing on our core services business. We are ensuring quality work and customer satisfaction, accelerating organic growth, and taking care of our employees. We are also correcting problems encountered in two recent acquisitions and are carefully evaluating our acquisition strategy and due diligence processes. Finally, we are evaluating our financial planning processes to try to provide more accurate and timely business forecasts.

Stan continues to manage the company, meet with customers and employees, and drive our strategic vision. Tim works closely with the leaders of our business units and leverage teams to deal with operational issues of the company. I assist Stan and Tim in these efforts and together we ensure the company's continued adherence to principles of honesty and service that have driven our success for more than 30 years.

Now, Stan will discuss the second quarter performance, market conditions, and changes in our corporate strategy. Stan?

Stanton Sloane

Thanks, Ernst.

Total revenue in the December quarter was $369 million, operating income was $19.5 million and diluted earnings per share were $0.19. Our plan called for $10 million of additional revenue and 6% better EPS. In analyzing the shortfall, it's useful to breakdown the results by business area.

First, Q2 performance in our Government, IT and Professional Services business was slightly below plan. Revenue was about $7 million short because of delayed contract awards and protest resolutions, as well as lower rebillable volume. Earnings per share were about $0.01 lower because of the volume shortfall and slightly higher SG&A spending, particularly in the recruiting area. We hired 582 people in Q2, a record for us, and employee referrals and agency fees exceeded our quarterly plan as a result.

Second, our Global Clinical Development business - or GCD - missed its revenue forecast by about $3 million and it's operating income forecast by almost $4 million, reducing EPS by $0.04. Contract execution issues and market conditions led to a decline in labor utilization and financial performance. Trailing legal expense from the Constella Futures transaction accounted for about half a penny of earnings per share. Another half penny related to a contract reserve for an Era project. Era met its revenue target for the quarter and has begun to show improvement in business momentum.

Melissa will comment further on the overall financial results in a moment. I'm going to elaborate on two key areas.

Let me expand first on the issues in our GCD business. GCD manages clinical trials and provides regulatory consulting services to small and mid-size pharmaceutical and biotech firms in the U.S., Europe and Asia. Our Q2 problems in this business resulted from two issues - global economic conditions and contract execution.

Like many business in the contract research industry, ours has begun to feel the effects of the economic climate. But we also made some execution errors that led to poor contract profitability. $1.3 million of the earnings shortfall resulted from one project which had a series of problems last quarter.

Given these factors and the related decline in GCD's revenue, we initiated steps in Q2 to reduce headcount in that unit and in the process incurred a severance charge that contributed to the Q2 profit shortfall. In late Q2 we completed an in-depth financial review of GCD's business, launched a cost reduction effort, completed a contract-by-contract performance assessment, and installed senior financial personnel to improve forecasting and management processes.

On Era, having discussed the operating results of that in detail with you on the last call, I'd like to now update you on the business.

In November we told you that two of the follow on orders for military products for developing nations in Asia had been delayed. The first order was pushed to the right because of political and economic turmoil in the customer country. The second was delayed in part because of schedule slippage and the shipment of hardware for a prior order. That hardware has now been shipped, is through site acceptance with the customer, and has been signed off.

Neither of the two follow on contracts, however, has yet been signed. It is possible that one or both could be executed later this fiscal year, but we're taking actions to restructure the business as if they will not. We've made significant progress on these actions since November and the business outlook is improving.

On the civilian air traffic management and airport operations side, Era is performing well and has won several recent contracts. The ATM business is growing 60% year-over-year. New business awards include airports in Phoenix, Oslo, Turkey, Fiji and Cape Town. The win rate on the civilian side of the business is as high as ever. We're also working on a number of new opportunities in the military and security side of the business, and while these are all very encouraging, they will take time to mature.

Before moving to discuss our strategic plan, I'll take a moment to comment on the virus incident on our computer network that has been the subject of media reports this week.

Our corporate IT department recently discovered a new form of sophisticated virus on our network and we moved quickly to mitigate the attack and notify appropriate authorities. Our cybersecurity experts then performed a forensic investigation and were able to reverse engineer the virus. Upon identifying its characteristics, we informed authorities and sent the information to our antivirus product vendor and to US-CERT in order for them to update their files given the probability that many others have been affected by this same attack. In keeping with our ethic of honesty and service, we also reached out to our customers and employees to notify them of the virus attack.

Over the last few weeks we've provided support to many of our customers, including ways to deal with the attack, prevent future attacks and remediate the problem. As a technology company and U.S. government contractor, we recognize that we will continue to be subject to sophisticated virus threats and we must continue to be vigilant in our efforts to ensure network security. We're fortunate to have an industry leading team of cybersecurity specialists to call upon in these circumstances.

Now, I'd like to move on to discuss the evolution of our strategic plan. Taking into account our recent performance challenges and the market conditions facing each of our business, Ernst, Tim and I have made some decisions about refocusing strategy. For the immediate future we intend to direct our primarily focus to U.S. service and systems business, delivering differentiated IT and professional solutions to government agencies.

We're well positioned in markets such as health, energy, environment, veterans services, intelligence, homeland security, cybersecurity, ERP and air traffic management. We'll continue to leverage our existing line of software and hardware products in order to further discriminate our offerings. We'll also set our sights on increasing the high-end engineering and systems integration content of our work.

We continue to view 10% organic growth as an achievable long-term target and our margins should expand as our business mix improves and we resolve the challenges in our commercial and international units.

On the M&A side, we'll continue to consider acquisitions in the government IT industry. Deals of interest to us right now would likely be smaller in size and specific to a particularly fast-growing market segment.

Above all, we'll preserve our culture of honesty and service, customer satisfaction and commitment to our employees.

As you know, Steve Hughes announced his retirement as CFO in December. Last week we named Melissa Burgum, our Corporate Controller, to the Acting CFO role until we identify a permanent successor. Before serving as our Controller, Melissa held senior financial roles in ITT and with Arthur Andersen. We welcome Melissa to the call today.

Now I'd like to hand the call over to Tim Atkin, who was named Chief Operating Officer in December. Tim's appointment was another step we took to enhance the quality of our program execution and SG&A cost management. In his 10-year career at SRA, Tim has held leadership roles in each of our three sectors. He started our cybersecurity practice 9 years ago and later served as director of our civil and global health sectors.

Tim?

Timothy Atkin

Thanks, Dan, and hello, everybody.

In the second quarter we won $329 million of business, slightly higher than the same quarter last year. As Stan mentioned, we saw movement to the right of some program competitions and over $500 million of award decisions that we expected in the second quarter have moved to the third quarter and remain pending.

Total backlog is $3.9 billion as of December 31, unchanged from the same quarter last year. Funded backlog currently is $802 million, up 5% year-over-year.

Among the contracts we won in the December quarter, the largest was a five-year $56 million contract to deliver IT systems and communications network management support to the Pentagon Force Protection Agency. We also received a five-year $42 million single award blanket purchase agreement to provide development and database support for the Environmental Protection Agency's Energy Star website. These wins were both SRA re-competes.

Last week we were notified that we won a $216 million task order to provide IT infrastructure support for the U.S. European Command and U.S. Africa Command in Stuttgart, Germany. This task order, awarded under the Millennium Contract, is exactly the kind of labor services revenue driver we need to improve organic growth.

We were also notified last week that the EPA has awarded SRA a $55 million contract to continue providing conflict prevention and resolution services. We have several contract awards that have been delayed by protests for the last two quarters. The incumbent contractor's protest of our DEA-EMS contract award was upheld in December, requiring the customer to reevaluate its options for that $79 million contract. The protest of our $78 million FERC ITSS award remains under government review. These delays continue to hinder our revenue growth profile.

Our total pipeline now stands at $32.1 billion, which is up 35% year-over-year, and we currently have about $1.7 billion in pending bids. Looking ahead, the re-compete of our FDIC contract appears likely to be delayed until next fiscal year. This and other procurement delays make it less likely to achieve our previous $2.3 billion orders target for fiscal year 2009.

Two weeks ago Fortune magazine named SRA to its list of the Top 100 Companies to Work For. This is our 10th consecutive year. We're very proud that our culture and values continue to make SRA an employer of choice. The wins we had late in the September quarter contributed to a strong hiring period in Q2. We had a net headcount increase of 262, including about 100 part-time employees, many of whom we hired to perform peer review studies for our health practice. On a full-time equivalent basis, the net hiring number was around 200. Our voluntary attrition rate was 14.2% in the second quarter, down from 18% in the first quarter.

In my new role as COO, I'm focused on the day-to-day operations of the company. Particular areas of emphasis for me include program execution, SG&A cost control, acquisition due diligence and integration activities, and employee development. With regard to SG&A, we will do a better job of aligning costs to our revenue profile and manage them proactively and consistently throughout each quarter and fiscal year.

On the acquisition front, we will improve the strength and continuity of our processes from due diligence to deal closure and throughout the integration effort.

And with regard to our people, I'm working with our leadership team to continue enhancing our leadership development, talent management and compensation programs. The strength and stability of our professional staff remain paramount to our success.

And now, Melissa, over to you.

Melissa Burgum

Thank you, Tim.

I'd like to start by providing a detailed explanation of our Q2 results and the reasons for the reduction in our annual earnings guidance.

For the second quarter, revenue was $369 million, down 3% year-over-year and about $10 million below our plan. The revenue effects of the ICS and Era acquisitions and the Constella Futures divestiture offset each other in Q2, so the organic change was also a 3% decline. This top line shortfall resulted from the combination of lower rebillable volume and direct labor utilization, as well as the performance of our GCD unit.

Our second quarter operating margin of 5.3% and earnings per share of $0.19 were substantially below our expectations. Our earnings per share plan entering the quarter was $0.25. The largest driver of earnings performance was the GPD business, which contributed $0.04 less than plan. The combination of Era's contract reserve and the Constella Futures legal costs accounted for another $0.01. The core government services business missed its plan by about $0.01 because of lower revenue volume and higher than expected recruiting costs.

Share-based compensation was $2.7 million in Q2, on track with our forecast for the remainder of fiscal year '09.

Net interest expense was $1.5 million for the quarter, but this figure should decline in Q3 given the lower interest rate environment.

The effective tax rate in Q2 was 39.7%, consistent with our usual level.

In light of the second quarter performance, we've reduced our revenue and earnings guidance for the full fiscal year 2009. The new revenue guidance for the year is $1.51 billion to $1.54 billion. As noted, second quarter revenue was about $10 million below our expectation. The remainder of the full year reduction is related to challenges in our GCD business, the complete removal of Era's two military orders from our forecast, U.S. government procurement delays, and the unresolved protests of several contract awards.

On the earnings side, our new fiscal year guidance is $0.94 to $1.00 per share. $0.06 of the reduction relates to Q2 performance. The remainder results from our lower second half forecast for GCD, the removal of the Era orders, and the lower revenue volume expectation for the Government, IT and Services business.

We are reducing costs across the company in order to mitigate these issues and improve profitability as soon as possible. This guidance reflects caution given our recent performance challenges.

Turning to the balance sheet, we finished the second quarter with about $107 million of cash and $175 million of long-term debt for a net debt position of $68 million. Our accounts receivable balance was $359 million. We had approximately $1.1 billion of total assets and shareholder's equity of $699 million.

Now to the statement of cash flows. Q2 operating cash flows were negative $6 million. We had similar outflows in the last two December quarters given holiday payment delays and other seasonal factors. Days sales outstanding were about 82 days in the December quarter, up 3 days from the September quarter. Capital expenditures were about $4.8 million in Q2.

Now I'd like to update you on a few other key metrics. First, contract business mix, as a percentage of Q2 revenue, time and materials business was 43%, cost plus was 35%, and fixed price was 22%. Next, national security contracts accounted for 49% of our Q2 revenue, civil government, 36%, and health, 15%. Within this breakdown, U.S. government customers accounted for 94% of our revenue, commercial customers 4%, and international government the remaining 2%. We were the prime contractor for 85% of our revenue in the quarter.

Stan?

Stanton Sloane

Thanks, Melissa.

Having just been named to the Fortune 100 Best Companies to Work For list for the 10th consecutive year, we will continue to attract and retain the very best employees. However, we take nothing for granted. In the technology and professional services business, the strength of our staff is paramount to our long-term success. Over the next few quarters our intention is to recapture our growth momentum, expand our margins, and return to a pattern of stable and predictable results. Wins like the EUCOM/AFRICOM contracts that we were awarded last week will go a long way toward accomplishing that turnaround.

We're now ready to take you questions. To ensure that we get to as many people as possible, please restrict yourself to one question. Now Marcello will explain to you how you can ask your question.

Marcello?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Loomis - Stifel Nicolaus & Company, Inc.

William Loomis - Stifel Nicolaus & Company, Inc.

On just the cost reductions on the two commercial units, can you go into a little more detail and specifically from the angle that - what exactly is in the plan? So you said the two military sales you mentioned earlier are not in the Era sales, but what is? What level cost structure do you have for both those units to withstand further declines in the business as we work through this year?

Stanton Sloane

Well, let me start with Era. If you recall in November we said that we would set high end of guidance if the two key military orders moved one quarter, low end if they moved out of the year. In essence what we've done now is just assume they move out of the year.

In November we started actions in Era under the assumption that those orders did in fact move out of the year and that we needed to structure the business to be viable and profitable assuming no military orders. We have done that; we're working on that. That has, like I said, commenced in November. It is essentially reduction of personnel and that's both factory personnel as well as indirect or overhead personnel. We have also taken out a fair amount of non-personnel-related SG&A costs from the business, marketing and other things related not to people, and continue to restructure that business. We're very pleased with the progress we've made in terms of getting to a much better plan and when I say business progress looks good, I really do mean that.

I think that the ATC side is performing at or better than our expectation in terms of new business, so that's encouraging. I don't see further declines, but we have to get the business sized appropriately without these military orders and that's what we're doing.

On GCD, actually I'll let Tim answer that question since that's his business.

Timothy Atkin

So on the global drug side, in terms of looking forward, there's really two principal areas to the business - the clinical trials piece and then also strategic regulatory consulting. The clinical trials is really the larger, more stable piece of it. The higher volatility is on the regulatory strategic consulting side. And to use the language that Melissa did, our guidance reflects caution. We basically going forward have very little in there beyond what is firm orders already in terms of that business.

And so starting back in November, when we first identified the impact that we were having on utilization and the awards and this environment, as Stan mentioned, we took some cost hits because of the severance on the headcount there. So we were already rightsizing towards this type of scenario as we look forward.

William Loomis - Stifel Nicolaus & Company, Inc.

A $3 million decline in that business in the quarter from plan. You had a $4 million hit on earnings. What was the extent of the severance. I'm trying to get a sense of just why the margin was so high.

Timothy Atkin

So, first of all, the margin hit, half of that was related to one contract that we identified performance problems with and so that was a big portion of it. Of the remaining portion, I'd say it was probably around 30% or so is related to the severance.

Operator

Your next question comes from Timothy Quillin - Stephens Inc.

Timothy Quillin - Stephens Inc.

First off is the EUCOM/AFICOM contract new business and incremental?

Stanton Sloane

Yes, it is.

Timothy Quillin - Stephens Inc.

And how does that ramp up?

Stanton Sloane

It ramps up slowly. We would be basically in full swing around the June timeframe. We in fact have started work on it now, but there's a transition period. So it really doesn't get the full rate until summer.

Timothy Quillin - Stephens Inc.

And it's over what? What's the time period of the $216 million

Stanton Sloane

It's five years period of performance.

Timothy Quillin - Stephens Inc.

And my only other question, I guess, was with regards to your philosophy on quarterly guidance, which you haven't been giving. So your plan was $0.25 and I think analyst estimates were above that and so I was just wondering if there was any thought to helping us out - and, obviously, that wasn't necessarily the only issue here - but even if you would have hit your plan, you would have fallen short of analysts estimates this quarter. Have you thought about giving quarterly guidance or kind of helping us with quarterly earnings over the next couple of quarters?

Stanton Sloane

Let's see. Yes and no. We have debated, as you would imagine, Tim, quarterly guidance extensively. It's not our plan to resume doing that. I would love to help you out. If I can do something to help you out other than give you quarterly guidance, just let me know.

Operator

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

Michael Lewis - BB&T Capital Markets

Melissa or Stan, I was wondering if you could help me understand your internal growth prospects here, specifically could you please kind of define what long term means? Is it two years out? Is this a four to five-year ramp to get back to 10% organic growth? Can you help us out here because we're moving off of a zero ramp year and I'm just trying to reconcile what the acceleration will have to be to get back into that range that you are talking about right now.

Stanton Sloane

Okay, well let me give you maybe a little more philosophical answer than you want, but it won't happen this year. You have to remember, also, that we're still coming off of the AITS loss. If you factor AITS, that's around 6% or 7%, so that is contributing to this organic growth or lack of organic growth.

My feeling - and there's a fair amount of uncertainty in my mind - about budgets and delays, further delays in major programs and those kinds of things, so hard for me to tell you I think it's six months or seven months or eight months. I think it's going to take - it won't be this fiscal year, is my answer to you. We're trying to get back to that as quickly as we can, but it's going to take more than this fiscal year to do it.

Michael Lewis - BB&T Capital Markets

If you look at the reduction in the guidance, the $1.51 to $1.54 billion range, you already talked about Q2 being $10 million below your expectation. I think Bill was actually hitting a little bit on this, but can you specifically quantify to us what was the actual amounts of errors removal, delays, what was GCD's removal and what was the impact from protests, because I'm trying to quantify where this reduction is coming from and that would be very helpful to myself and, I'm sure, my peers.

Stanton Sloane

Okay, well Melissa, I think, can help us walk down through that.

Melissa Burgum

Right. So on the high end, the revenue guidance on the high end, went from 1.6 down to 1.54. As we said, $10 million of that related to the Q2 mix. Era accounted for about $12 to $13 million of that. And then the remainder resulted from the protests, the GCD business and the other delays.

Michael Lewis - BB&T Capital Markets

Okay, so that's 22. So over $35 million to $40 million is responsible for the rest?

Melissa Burgum

That's right.

Stanton Sloane

Just let me help you with two numbers I know on your growth issue. Let's set aside AITS and the impact on our defense and intel business, but our civil business has grown at 11% roughly and our core health business has grown about 9%, so that'll give you some feel for how things are going. If you normalize for AITS, like I said, we'd be growing on the defense side. It's somewhere around 6% or 7%.

Operator

Your next question comes from Thomas Maher - Lord Abbett & Co.

Thomas Maher - Lord Abbett & Co.

Yes, I'm just trying to understand, in terms of the GCD shortfall, how much of the earnings miss relative to your expectation did that drive?

Melissa Burgum

$0.04.

Thomas Maher - Lord Abbett & Co.

Okay, so $0.04. And that's in total. How much of that 15% of the health care, is that all GCD in this consulting business?

Melissa Burgum

No.

Thomas Maher - Lord Abbett & Co.

What else is in there? I'm just trying to understand how what seems to be a relatively small part of an acquisition you guys did drove such a sizeable miss in the earnings. And you said the stable part, the clinical trial piece, was pretty stable, so this was particularly the consulting?

Stanton Sloane

No. Maybe we've confused you. When we say core health business, we're talking about our U.S. government contracting business related to health care. We're trying to treat the global clinical trials business, which is a clinical research outsourcing operation, separately. That's the part that we had the performance problem with.

Thomas Maher - Lord Abbett & Co.

Okay, how much of SRA is that business?

Stanton Sloane

Very small. It's roughly $30 million of revenue.

Thomas Maher - Lord Abbett & Co.

Okay, it's $30 million of revenue. What I think I and others are struggling - and that caused a $0.04 miss. How much of that was severance of the $0.04?

Stanton Sloane

Not the major part of it. To be honest, the major part of it had to do with performance.

Timothy Atkin

A single contract.

Thomas Maher - Lord Abbett & Co.

A huge loss contract?

Stanton Sloane

Yes, one particular contract that had a pretty significant problem.

Thomas Maher - Lord Abbett & Co.

Now I guess the broader question is - and I think everyone's kind of tiptoeing around this  there's been two acquisitions of size of late, both of which have caused major problems for the company overall. I guess, one, maybe some more concrete ideas on how these things go through any due diligence process when they were this far off, and then secondly, the core business on the defense or the government side, should we think of you guys not focusing on anything beyond that? Just strategically, when I think of where SRA was a few years back and then these forays have really not worked out very well. I just want to understand the thought process, the review and what the outlook is forward.

Stanton Sloane

Okay, well let me start with due diligence. Obviously, we have to improve our due diligence process. Some of these issues are directly traceable to due diligence. Some of them are tied to global economic conditions, but certainly we have work to do on due diligence and that's part of what Tim is going to be focusing on. We've embarked on a variety of processes, Lean Six Sigma and other kinds of things, to get a better process so that when we get around to doing another acquisition that we'll do them much better. That is an absolutely fair criticism and we'll take that one.

Thomas Maher - Lord Abbett & Co.

And the loss contract in the GCD business this quarter, was that the result of a weak economic situation?

Timothy Atkin

No.

Thomas Maher - Lord Abbett & Co.

I don't understand how that has anything to do with it, so that's where I'm confused.

Stanton Sloane

Well, you have two issues in GCD and I'll let Tim give you the details, but essentially you had a reduction in the revenue outlook associated with market conditions and then we had a performance problem on an existing contract. So you have the loss of revenue associated with the reduction in loss of margin associated with the revenue reduction and then you had the hit with the performance problem.

Thomas Maher - Lord Abbett & Co.

And then I guess - and this is for Ernst - in terms of your role at the company at this point, can you just give us a little more detail on sort of what you're working on specifically?

Ernst Volgenau

Yes. Every week Stan, Tim and I have a regular meeting of an hour and a half or two hours. We talk over priorities for corrections and, as I mentioned in my part of this, we're focused like a laser, I hope, on quality work, organic growth, correcting problems in these two recent acquisitions, evaluating our acquisition strategy, and improving the due diligence process. We're also not totally satisfied with our financial planning processes.

So I meet regularly with key executives in the company. These are motivational meetings and also information gathering meetings. I've mentioned again and again, the reason for our success, not just since we've been public but long before that, has been our values - honesty and service and all that it implies, particularly when it comes to quality work and caring about our employees. But we've always realized that those values aren't going to do any good if we don't run a decent business.

Frankly, I think we tried to do too much too soon. And so my job is to make sure that we don't lose track of these priorities and, at the same time, that people are motivated to work together to fulfill our values and at the same time make this business a success. We're determined to do that.

But it's going to take time. As Stan said, it's going to take time.

Operator

Your next question comes from Brian Kinstlinger - Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

On the GCD side, is that a handful of contracts or are we talking about hundreds of contracts in that $30 million of revenue?

Timothy Atkin

In the overall program that's multiple contracts; you're talking easily dozens. Again, on the clinical trial side, you're easily talking dozens. When you get into the strategic regulatory consulting, in that space you could run through anywhere from 20 to 50 in a month.

Brian Kinstlinger - Sidoti & Company

And that was the piece that had the contract that was a problem, is that right?

Timothy Atkin

No. So let me just separate again, because we may have confused you. If you look backwards, if you go back to the issue that we had in the second quarter, there was a single contract, a large contract, that was clinical trials. There was some regulatory consulting as a part of that, but that overall contract had significant problems that were uncovered, and that was a large write-off, about half the write-off that we had or half the loss in the quarter.

As I was describing looking forward, when somebody asked, I think it was Bill asked about sort of the different pieces of the business, the projection going forward, that was where I was distinguishing from there's a larger contract base in clinical trials that's more stable in terms of larger funded programs and he like versus the higher volatility you get in terms of more short task orders in the strategic management consulting.

Brian Kinstlinger - Sidoti & Company

And so is that based on a contract where it wasn't delivered on time? I mean, what is the problem and in your forecast do you assume additional problems with contracts or how do you think about that?

Timothy Atkin

As Stan said, we did a detailed project by project review back in the fall to identify and we feel confident that we're on track in terms of program execution.

Brian Kinstlinger - Sidoti & Company

And they are fixed price? Is that the scenario that happened here?

Timothy Atkin

A fixed unit price, yes.

Brian Kinstlinger - Sidoti & Company

And they're all fixed price, right, or no?

Stanton Sloane

In that business.

Brian Kinstlinger - Sidoti & Company

And my only other question I had - and I'm not sure I'm going to get this right - it seems like sequentially the backlog came down by more than the difference in your bookings and revenue, so I'm curious - and by a decent amount - so I'm curious why that was.

Stanton Sloane

Yes, actually I'll have to pull the numbers out, but I think the answer is it relates to DEA and what we had in the bookings for DEA and then the adjustment we made to de-book that.

Brian Kinstlinger - Sidoti & Company

So that was about $200 million?

David Keffer

No, Brian, that’s a part of it. Every quarter there's a piece there that relates to contract deobligations, etc., in the standard kind of course of business. This quarter it happened to be a little higher than usual because of some protest activity, the DEA/EMS protest in particular.

Stanton Sloane

De-books this quarter are, if I'm correct, are around $180 - $184 million, I think, was the number for the quarter. So that's a little high.

Operator

Your next question comes from Gotham Connor - Cowen and Company.

Gotham Connor - Cowen and Company

Tim, now that you're kind of looking across the entire business, can you talk about whether there's any sort of structural reason why a number of the elements of the business now are underperforming? Is there any sort of common theme and is there going to be any fallout with respect to management changes perhaps, you know, a level below your level?

Timothy Atkin

Well, I wouldn't characterize it as underperformance across the business. I think we've talked about a couple of areas that we've had some problems in and I think we've taken significant action to address those, so I don't think there's - across the business, I wouldn't characterize it that way.

Gotham Connor - Cowen and Company

Well, maybe I can rephrase it then. There are a number of issues, some relating to acquisitions you've made, some from legacy programs. Is there any sort of common theme and sort of where is the level of accountability down below? I'm wondering basically has the business become to some extent ungovernable structurally or these are problems that we can be confident you guys will nip in the bud so that they don't become much larger problems?

Stanton Sloane

Well, Gotham, maybe you can help us. You're painting a much bleaker picture than I think we see. Other than the two things that we talked about here, what other issues are you referring to?

Gotham Connor - Cowen and Company

How about I take it offline?

Stanton Sloane

Okay, great.

Operator

Your next question comes from Alex Hamilton - Jesup & Lamont Securities Corporation.

Alex Hamilton - Jesup & Lamont Securities Corporation

Two questions - one kind of relates to that once again, not to beat a dead horse, but the acquisition strategy, I missed the first part of the call. Would it be safe to say that the strategy of buying a product type company in a services business is dead or is that something that's still going to be considered?

Stanton Sloane

For the time being, we're going to focus our energies on things that are closer to our core business and principally focused on the U.S. government market.

Alex Hamilton - Jesup & Lamont Securities Corporation

And the results in the quarter were not what people expected and guidance came down. I'm just kind of curious, was this not pre-announced because there's no quarterly guidance given?

Stanton Sloane

No. The answer is that a lot of this stuff is developed fairly close to this call, so we didn't have a lot of - it wouldn't have made sense to pre-announce anything in the last couple of days and so we elected to do it for the call.

Operator

Your next question comes from Jeffrey Houston - William Blair and Company.

Jeffrey Houston - William Blair and Company

Given your increased focus on the federal market, what are you targeting federal to represent as part of the total mix?

Stanton Sloane

Total revenue?

Jeffrey Houston - William Blair and Company

Right.

Stanton Sloane

Well, gee, almost all of it - 94% - 95%. I would not expect that to change dramatically. It's principally going to be U.S. federal company.

Jeffrey Houston - William Blair and Company

So outside of civil you'll still be focusing the mix about where it is now?

Stanton Sloane

Well, when we say civil, keep in mind we're talking civil U.S. government the way that we're organized. The only non-U.S. government business we have, we have some state and local work here in the U.S., principally in law enforcement and cybersecurity and those kinds of things. We have international military products and air traffic control. And then we have the global clinical development work, which is a commercial business.

Jeffrey Houston - William Blair and Company

Then lastly, can you give us any sense for cash flow for 2009 or for the rest of the year?

Melissa Burgum

Right now we expect cash flow to operations to be one-time operating income. It was a little lower in Q2. That's just due to seasonal factors. It's typically lower in Q2.

Operator

Your next question comes from Jason Kupferberg - UBS.

Jason Kupferberg - UBS

I had a question for Ernst. It's been a long time since we've heard your voice, so that's comforting. Thanks for being on the call.

I wanted to get a sense of the way you're viewing SRA, not just in the near term but medium to long term as well and your thought process in terms of various options - SRA remaining an independent entity, perhaps at some point in time becoming part of a larger organization given the extensive capabilities that you have and highly capable work force. I'm just thinking in terms of ways to ultimately maximize shareholder value, how are your thought processes evolving here now that you're a little bit closer to some of the day-to-day operational decision-making?

Ernst Volgenau

Well, first of all, I feel keenly the responsibility in my role as Chairman and the Board of Directors also feels its responsibility to fulfill its obligations to protect the interests of shareholders. And, as you might expect, we get inquiries from time to time.

My personal view is that our share price seems low compared to what it is likely to be, given the changes that I know we are instituting. So it just doesn't make sense to sell the company at a low price, nor am I necessarily advocating that we sell the company at any price. But, as I said, we need to protect the interests of the shareholders.

So I think the things that we are doing will build value in the company. I believe this and, by the way, the relationship that I have with Stan and Tim is collegial. Stan is the CEO; I don't get in the way of that. But the policies that we are following we all agree to and support. And if one of us disagrees, we keep talking about it and maybe get some advice from others until we reach a conclusion. But we are determined an invariant in carrying out this near-term policy of fixing the problems that we have.

And, as I said, I think they're going to build value in the firm, but it's going to take time.

Jason Kupferberg - UBS

And just a quick follow up. I know last quarter in the 10-Q you had some new disclosures around potential violations of U.S. export laws related to the Arab business. Is there any update there and can you frame any of the potential financial implications for us?

Stanton Sloane

Yes, Jason. We've been through a variety of reviews now with the State Department. We believe that most of those issues are behind us. We conducted a follow on audit and submitted all that to the State Department. So where we sit right now we don't anticipate any other issues, but obviously we have to manage that going forward and make sure there are no problems in the future.

Operator

Your next question comes from Philip Friedman - Perella Weinberg Partners.

Philip Friedman - Perella Weinberg Partners

On GCD, relative to the $0.94 to $1.00 forecast you're now giving, I just want to understand what the per share losses you're forecasting are for GCD and Era, just to cull those two businesses out.

Stanton Sloane

I don't know we're going to get to that level of detail.

Philip Friedman - Perella Weinberg Partners

I'm just trying to understand maybe what the loss contract - maybe collectively, what the loss contracts are. Maybe not individually, but collectively look at Era, GCD and other nonrecurring  well, maybe they're not nonrecurring - but losses from very small businesses.

Stanton Sloane

Well, a loss contract is essentially the one problem we talked about in GCD.

Philip Friedman - Perella Weinberg Partners

So Era does not have a loss this year? I thought it did.

Stanton Sloane

Well, you said loss contract. In November we set the guidance assuming that we'd have a $5 million loss. I'm going to ask Dave to keep me honest on the numbers here, but my recollection is we said that we were going to assume a $5 million loss associated with  if those orders moved that we'd have cost of liquidation issues in the basic business. Since November we're working hard to get that $5 million closer to zero. I don't want to tell you we're there yet, but we're working hard on that. We've made significant progress in doing that.

That's not associated with any one contract. That has to do with the overall cost liquidation of the business. So when you say loss contract, there's no particular problem contract other than the one we talked about in GCD, but that's not to imply that we don't have cost problems elsewhere that we have to address. I don't know if that helps.

Philip Friedman - Perella Weinberg Partners

Same thing, I'll take it offline. Thank you.

Stanton Sloane

Okay.

Operator

Your next question comes from Matthew Crews - Noble Financial.

Matthew Crews - Noble Financial

If you could just expound on the cybersecurity and information assurance business. I believe you gave some detail on the last quarter current run rate, bids pending, your pipeline - it was about $1 billion for the near-term pipeline. Any update there?

Stanton Sloane

Specifically related to cybersecurity?

Matthew Crews - Noble Financial

In the cybersecurity or I'm not sure how you break it out, if you include information assurance or in the basic cybersecurity initiative.

Stanton Sloane

Yes, right now our run rate in cybersecurity, if you lump everything together - and I would include IA/IO, cybersecurity, all of that as part of the broader cybersecurity - right now that business is in the range of $125 or $130 million run rate. It'd be hard for me to break out the pipeline with respect to what's purely cybersecurity. The problem is that many of the larger integration jobs include cybersecurity as a significant element, but they're not classified as cybersecurity. But that's the current kind of run rate and my expectations for that business is it's going to grow at [inaudible] digits. So it's a high growth area for us.

Matthew Crews - Noble Financial

I'm sorry, could you repeat the growth rate?

Stanton Sloane

Better than double digit.

Operator

(Operator Instructions) Your next question comes from Timothy Quillin - Stephens Inc.

Timothy Quillin - Stephens Inc.

First, I may have missed the breakdown between national security, civil and health again. I think you may have said that a couple of times.

Stanton Sloane

Are you talking about in growth rates?

Timothy Quillin - Stephens Inc.

Revenue mix.

Stanton Sloane

Revenue. Okay, about - sure.

Melissa Burgum

National security was 49%, civil government 36%, and health 15%.

Timothy Quillin - Stephens Inc.

And then just my other question was with regards to the acquisitions you've made. I think with the Constella acquisition, at least I kind of looked at the CRO piece and thought I'm not sure that that fits; I'm definitely wondering that now. And I think with the Era acquisition, it adds this lumpiness to your business that doesn't seem to be helpful in terms of you being a good pure play federal services company. Is there any thought to just cutting your losses and really getting back to your roots as a great services company by selling or divesting those businesses, putting them into discontinued operations and cleaning your slate?

Stanton Sloane

Our focus right now is to get those businesses functioning and delivering on their contracts and profitable and that's where we're going to put our energies. Anything else would be kind of speculation.

Operator

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

Michael Lewis - BB&T Capital Markets

If I sit here and I look back a few years, SRA was at one time the premiere margin company in the group. This has fully reversed course and now, after today's showing, you're the lowest EBIT margin company in the space. So what I'm trying to get my hands around here is what contract opportunities are out there in the near term that we should be focused on? What type of business is out there with regard to mix? Is it more fixed price or are you going after cost plus? In other words, it doesn't matter what examples I give, I just want to know how you're going to add 200 basis points to the margin over the next three to four quarters to get to back at least to par with the rest of the peer group.

Stanton Sloane

The first answer is we're going to improve performance, get our SG&A under control and stop these contract losses. That will make up most of that difference. The other thing that we're doing is looking at overall restructuring in terms of getting additional SG&A out of the company. We have a plan, we have a line item plan, we have targets, we're working all of that. I'm not going to give you a commitment in this call in terms of how we're going to end that up, but it's going to be better than what it is.

As soon as we get these problems fixed, the company's in good shape. So that's my answer.

Operator

Your next question comes from Brian Kinstlinger - Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

I think I may know the answer. I'm just curious. In the September to December quarter on health and commercial, it looks like you dropped about 25% from your revenue base. Is that part of a divestiture you made or maybe you can remind us. That's a lot bigger than the $3 million shortfall.

Stanton Sloane

That's associated with - if you recall, we divested Constella Futures, which was part of the original Constella acquisition.

Operator

And at this time we have no other questions. Mr. Keffer, do you have any final remarks you'd like to make?

David Keffer

Sure. Thanks, Marcello. We'd like to thank everyone for joining us this afternoon and welcome you to contact us after this call or anytime with follow up questions. So that concludes today's call.

Operator

Ladies and gentlemen, this does conclude today's conference call. We'd like to thank you for your participation. You are now free to disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: SRA International, Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts