NCI, Inc. Q1 2009 Earnings Call Transcript

May. 6.09 | About: NCI, Inc. (NCIT)

NCI, Inc. (NASDAQ:NCIT)

Q1 2009 Earnings Call

May 5, 2009 5:00 pm ET

Executives

Maureen Crystal - Vice President, Investor Relations

Charles K. Narang - Chairman of the Board & Chief Executive Officer

Terry W. Glasgow – President & Director

Judith L. Bjornaas - Chief Financial Officer & Vice President, Finance

William M. Parker - Chief Operating Officer

Analysts

Michael S. Lewis – BB&T Capital Markets

Tobey Sommer – SunTrust Robinson Humphrey

William R. Loomis - Stifel, Nicolaus & Company, Inc.

Brian Kinstlinger – Sidoti & Company, LLC.

Brian Gesuale – Raymond James

[Matthew Cruz – Noble Financial]

Joseph A. Vafi – Jefferies & Company

Timothy J. Quillin – Stephens, Inc.

Operator

Welcome to the NCI, Inc. first quarter 2009 results conference call. My name is Tom and I will be your conference coordinator for today. This call is being recorded. I’d like to turn the presentation over your host for today’s call, Miss Maureen Crystal, Vice President of Investor Relations for NCI.

Maureen Crystal

Welcome to NCI's first quarter 2009 financial results call. Here is our agenda for today. Charles Narang, NCI's Chairman and CEO, will provide an overview of our accomplishments during the first quarter of 2009 as well as some comments on current market conditions. Terry Glasgow, our President, will then discuss our operational and business development accomplishments during the first quarter of 2009.

Next Judy Bjornaas, our Chief Financial Officer, will provide first quarter 2009 financial results and operating metrics. She will also review the second quarter and full year 2009 guidance as published in today's earnings press release. We will then open up the call for your questions and we will have Bill Parker, NCI's Chief Operating Officer, join us during the question-and-answer session.

Before we begin our discussion it is important that we remind you that on this call we will make statements that do not address historical facts and thus are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results and include the risks and uncertainties identified in our earnings press release under the caption Forward-Looking Information.

For a full discussion of these factors and other risks and uncertainties please refer to the section entitled Risk Factors in NCI's Form 10-K filed with the Securities and Exchange Commission. Also we undertake no obligation to update any of the forward-looking statements made on this call. I will now turn the call over to Charles Narang.

Charles K. Narang

We are pleased to report solid results for the first quarter of 2009. NCI has consistently focused on delivering value and we take pride in the fact that we have once again achieved the quarterly targets we identified in our last conference call. Moreover we are maintaining our stated guidance for the full year 2009 and we continue to reaffirm our long term target of 10% to 15% organic growth.

I would like to touch briefly on some of our key accomplishments for the first quarter of 2009. Our revenue grew 15% to a record $105 million. Operating margin increased to 7.6% up 40 basis points. Earnings per share increased 27% to $0.34 per share. New bookings for the quarter were approximately $108 million on a book-to-bill of one times. We reduced our days sales outstanding, our DSO, by 10 days to 73 days.

The improvement in our DSO allowed us to generate free cash flow of $9.5 million for the first quarter. The fundamental tenet of our business strategy is to create a sustained value to all the customers, employees and shareholders [inaudible] in 2005. We stated that we expected to be $500 million non-red by 2010. With that goal within our sites, we continue to focus on building a performance platform designed to deliver a $1 billion entity.

We approached this quarter with all the key elements in place including longstanding customer relationships and an excellent reputation built on our past performance in a diverse [string] of technical and professional areas. This is supported by a strong portfolio of GWACs and agency specific IDIQ contracts, a talented and focused leadership team and a skilled and clear employee base.

From a financial perspective we have an abundance of financial resources in place and a solid balance sheet to continue building NCI into a premier IT and professional services company. While the markets we operate in are robust and dynamic they are also in a continuous state of change as are the customers the Federal government response to social, critical and economic forces as the less desired [inaudible] by those services, cost savings and productivity gains into government initiatives.

Fortunately since the last conference call we have a little more insight into the priorities of the new Administration. Major areas that will be priorities for this Administration include cyber security and information assurance, the war on terrorism, healthcare, intelligence, citizens [inaudible] in the civilian market and information technology to support President Obama’s initiative to transform government.

We believe strongly that quality companies focused on customer satisfaction and business development will thrive in this environment of change. Many of these priorities fall directly within NCI’s areas of expertise and domain knowledge. We hope to benefit from being in market areas that are well funded and with substantial opportunities for growth.

Many of the current issues associated with our marketplace have revolved around future budget dollars and reprioritizing of funds. More recently discussions have focused on trends associated with the level of work that’s outsourced by the Federal government to contractors. With respect to the budget the new Administration will clearly implement changes and these are expanding but that’s not likely to occur until 2010.

We also believe that the government will look towards programs that enhance technology solutions as a way to make government more effective. Areas that will come under pressure in 2010 budget and future years would include reference system platforms, programs directly supporting war efforts in Iraq as well as high dollar value programs experiencing cost overruns.

With respect to the debate over in-sourcing versus outsourcing we recognize that this issue is high on the Administration’s agenda especially as it relates to acquisition personnel. However from what we have heard and read the exact plans of implementation are not clear. Such actions will have to balanced with the talent available in the marketplace.

When taken in context with the number of Federal government employees eligible for retirement and turnover allowance, within the first few years [inaudible] employment we believe that this will be a long process that will not cause an immediate impact on our business.

Hence we believe we will continue to see favorable market conditions and change in the Administration while possessing some unknowns does not in our opinion represent a major [inaudible] of plans. In closing we continue to affirm our value creation strategy. We will focus on maximizing organic growth, controlling costs to improve margins and generating strong earnings and free cash flow.

While we’re focused on organic growth we will augment this growth by acquiring and integrating acquisition at accretive prices that meaningfully add long term shareholder value. Areas of particular interest for NCI are civilian agencies including health and human services, the Justice and Treasury Departments, the intelligence community and other agencies likely to experience growth under the Obama Administration.

Our balance sheet is strong and we have the financial resources in place to acquire companies within our target and size range. Our overall picture for future growth and performance is solid based on many of the strong fundamentals I have just highlighted. With that I will turn the call over to Terry.

Terry W. Glasgow

In the first quarter we continued to deliver solid performance as we drive towards becoming a premier Federal government IT and professional services company. I’m particularly pleased with the focus of our leadership team in executing our business strategy. Our aggressive execution of our business plans continues to pay dividends.

The following results for the first quarter demonstrate our execution and reinforce our commitments to our stockholders, customers and employees. Awards for the quarter totaled $108 million generating a book to bill ratio of just over one times. Our trailing 12 month bookings were a very strong $572 million and produced a healthy book-to-bill of 1.4 times. Our backlog increased slightly to $1.2 billion while funded backlog increased to $249 million.

Our total staff increased to 2,600 employees and 18% growth over Q1 of ’08. PEO Soldier which we acquired in the first quarter of 2008 continues to thrive and is a major component of our business space and growth performance. We mentioned in our previous call that first quarter award activity was likely to be lighter than either the third or fourth quarters of 2008.

As anticipated the change in Administration, uncertainty around the customer spending plan and redirection of priorities contributed to a pause in some new business activities. Despite the expectations for light contract award in the first quarter our $108 million of new business exceeded our revenues for the quarter. Progressive engagement accounted for approximately 53% of the awards and 47% were for new work.

Progressive engagement is a good indicator of customer satisfaction as will be discussed later in my comments. Examples of first quarter progressive engagements awards include our PEO Soldier, HUD OIG, PEO STRI, DOE and Fort Lewis contracts. In addition several contracts that were scheduled to be re-competed in 2009 were instead extended by 12 to as much as 24 months.

Examples of work that was extended include one of our largest classified contracts as well as our [Net Sense ROAM] research labs contract. New contract awards included a $20 million subcontract on the GAO Information Systems and Technology Services Phoenix program, several OPM TMA awards as well as task orders under our Net Sense and ITES-2S contracts.

In April we announced the award of the GSA Alliant Program. You may recall that NCI was one of the original awardees on this program in July, 2007. The program which was protested in 2007 was finally re-awarded and we are pleased that we were again selected to participate in this important program. Last week GSA issued us a formal Notice to Proceed.

While it is likely that it’ll take some time for this vehicle to ramp up with respect to task orders we believe that the Alliant Program has the potential to be one of our important GWAC contract vehicles over the next several years. Some facts about this program show the importance of this vehicle to NCI. First GSA is in alignment with President Obama's agenda and the vehicle is a good candidate for executing stimulus related spending.

Areas of alignment specifically mentioned by GSA include transparency in reporting, competitive contracting and green IT technology. Second GSA estimates that their assisted acquisitions services organization will directly manage approximately $20 billion of Alliant orders over the term of the contract thus providing us access to a large addressable market.

Third the Alliant vehicle can be used by a broad set of Federal customers. For example in GFY ’08 the assisted Acquisitions Services Organization support of Federal agencies was split two thirds DOD and one third civil agencies. For GFY ’09 the split of business have slipped to about 60% civil agency and 40% DOD.

We believe that GSA will continue to have a major role in Federal procurement and will provide us with the opportunity to bid and win new business with Federal government agencies. Finally unlike previous GSA vehicles GSA will now actively solicit other agencies who want to use the Alliant vehicle and allow them to use their own procurement organizations to run and administer the acquisition.

This is a potential area for substantial growth in the use of the vehicle. We are pleased that the protest activities are completed and that GSA has issued us the formal Notice to Proceed. The Alliant Program along with our other GWAC and other multiple award contract vehicles will be a great source for our organic growth.

As is our practice we have not included any value in our bookings or backlog for this program. Consistent with our practice we only include values for multiple award contract vehicles upon the award of the task orders received. I want to address the growth of our professional staff and the role it plays in our business execution.

The flawless execution of our business strategy and the tight focus on maintaining the highest of standards and reputation with our customers is a valued attribute of NCI. In our business the thing that matters the most is consistently providing services to our customers that meet and exceed their expectations.

The conduit for those services is the program managers and professional staff that work daily with customers to help them achieve their vital missions. As we interact with our customers they begin to understand the depth of our corporate capabilities and the value of our work ethic and contribution to their mission. With this positive image of NCI these customers turn to us to help them in other areas of their missions.

This activity of expanding our role with our customers is what we call progressive engagement. As such progressive engagement is a gauge of customer trust and satisfaction and in reality the trust and satisfaction of our professional staff.

It is for those reasons that we concentrate on building our workforce staffed with customer focused and mission oriented personnel. While we work closely with our team partners we nevertheless have a preference for finding and hiring key staff as NCI employees. This strategy reinforces our customer relationship positioning as well as supporting our margin expansion strategies.

In the first quarter we increased our staff by approximately 100 and now have a total staff of 2,600 employees. This represents the seventh consecutive quarter of staffing increase an 18% growth over the same period a year ago and is 4% higher than last quarter. Since going public in October 2005 our staffing has increased by 87%.

Our staffing strategy is intentionally steady, consistent and focused on long term customer engagements as opposed to pass through of work to others. Staff increases were experienced on our NETCOM, EMF, PEO Soldier, TEAS IA BRAC and Scott Air Force Base 375th Communications Support Squadron programs.

The PEO Soldier program which I mentioned earlier as one of the programs where we received additional progressive engagement tasking has shown strong staffing growth as we now have a total of approximately 230 people supporting this customer. This represents a 25% growth since acquiring the program last March.

NCI employs approximately 85% of the Soldier staff with the balance coming from team partners. Earlier Charles mentioned that cyber security is an important priority for the Obama Administration. I want to spend a few minutes tonight and discuss the threat, the opportunity and the role and positioning NCI has in this area. The cyber security risk to the Nation is immense.

Uniquely there appears to be universal agreement on the risk with broad support from all stakeholders. The risks are well known and publicized. The bottom line is that as a nation we are exposed and vulnerable to cyber attacks. While many of the early attacks were malicious in nature the scope and design of the attacks are now a more serious danger.

Facts show that many of the attacks over the last two years can be attributed directly to enemy nations seeking to compromise US sensitive data, obtain classified information and to disrupt our systems and infrastructure.

According to the Department of Homeland Security’s US Computer Emergency Readiness Team the Federal government reported over 18,000 cyber security breaches in 2008 while total breaches including US commercial sectors were over 72,000 which represented a 50% increase over 2007. Recent high visibility attacks on major weapon platforms, on large and well known defense firms and even on respect IT companies illustrate the severity of this issue.

Because of this cyber security is a major area of focus for the Obama Administration. With this cyber security risk comes opportunities for companies that have the depth, experience and positioning to defend our Nation against the threats. NCI is one of those companies that is in the middle of the fight.

We have a strong record of support to our customers as we defend their networks and protect their enterprise environments. It should be understood that in many cases our cyber security services are embedded with other enterprise IT services.

Examples of programs where we provide embedded enterprise cyber security services are USTRANSCOM, USNORTHCOM and NORAD, PEO STRI, Army National Guard, Air National Guard, Army Fort Carson 4th ID, HUD OIG, Air Force ROAM Research Labs, Army Fort Lewis Dillon, Madigan Medical Center and US Army [inaudible].

In addition we also support customers in providing cyber security policy, engineering, forensics, incidents response, compliance training and support services. Examples of programs providing these services include many of the above as well as our NETCOM EMFs, TEAS IA BRAC and the Department of Energy’s Cyber Incident Response Capability programs.

Given the criticality of cyber security and information assurance to our Nation and the substantial involvement with key customers we believe we are ideally positioned to pursue this market area and address new customer requirements. Now for our new business development status, while new business awards activity was lighter than either of the last two quarters we were however active in responding to a variety of RFPs and task orders.

We anticipate that the pace of new business activity will pick up substantially in the second and third quarters and would remind you however that the specific timing of RFPs and the awarding of programs is always subject to change and delay. As of the end of the first quarter we had proposals outstanding and pending award totaling approximately $650 million. For the second quarter we anticipate preparing and submitting proposals with a value approaching $1 billion.

The following metrics characterize our new business pipeline. Our total pipeline is approximately $14 billion, approximately $2.7 billion of the pipeline is for opportunities to be awarded in 2009 with another $5.7 billion to be awarded in 2010 and the balance in future years. We have 100 programs with values of $25 billion or more in the pipeline broken down as follows.

There are 28 programs with values greater than $100 million; another 30 programs with values between $50 million and $100 million; and 42 programs with values $25 million to $50 million. These 100 programs represent approximately 87% of the total pipeline dollar value. In conclusion we had another great quarter.

We are pleased with the overall quality of our business space and solid foundation for growth that we have established. We firmly believe that we are on the right track and that we have the resources, leadership, contracts, customer positioning and service offerings to fuel our growth. I’ll now turn the time over to Judy who will present the financial results and guidance for the second quarter.

Judith L. Bjornaas

For the first quarter of 2009 NCI reported revenue of $105 million which represents a year-over-year growth rate of 15% and an organic growth rate of 6%. This increase was due to new contract awards, growth on existing contracts and a full quarter of the PEO Soldier contract which we acquired in late Q1 2008. New contract awards consisted primarily of numerous new task orders under our ITES-2S, Net Sense and TEAS contracts.

Additionally we saw revenue growth on existing program through progressive engagement and contract extensions including the growth we expected on the NETCOM EMF program. Operating income for the first quarter of 2009 was up 21% to $8 million reflecting an operating margin of 7.6%. This compares to an operating income of $6.6 million in the first quarter of 2008 and an operating margin of 7.2%.

This 40 basis point increase was the result of leveraging our indirect infrastructure over a larger base and increasing the percentage of revenue that is coming from NCI labor. Our operating margin for the first quarter was slightly higher than we had expected because bidding proposal costs came in lower than anticipated. Our effective income tax rate for the first quarter of 2009 was 40%.

Net income for the first quarter was $4.7 million compared to $3.6 million for the same period last year. We reported diluted earnings per share for the first quarter of $0.34 per share compared to $0.7 per share in Q1 2008 a 27% increase in per share earnings. Diluted shares outstanding for the quarter were approximately 13.7 million shares compared to approximately 13.6 million shares in Q1 2008.

Stock compensation expense for the first quarter was approximately $281,000 compared to $159,000 in the first quarter of 2008. Moving on to our first quarter metrics approximately 84% of our revenue was performed as a prime contractor. For the first quarter of 2009 86% of our revenue came from the Department of Defense and intelligence agencies, approximately 13% from Federal civilian agencies and approximately 1% from non-Federal sources primarily commercial distance learning training services.

Our contract mix for the first quarter was approximately 52% from time and materials contracts, 16% from cost plus contracts and 32% from fixed price contracts. Moving on to cash flow the net cash provided by operations for the first quarter was approximately $10.3 million which equates to 220% of net income. Our strong cash flow over the first quarter enabled us to pay down our debt by $9.5 million.

At the end of the quarter our outstanding bank debt was $30.5 million on our $90 million credit facility. Our funded debt to trailing 12 month EBITDA leverage ratio is now under one times. At the end of the first quarter our DSO was down to 73 days a 10 day improvement from our year end balance. This improvement was the key driver in the strong cash flow for the quarter.

We are very pleased by the improvement and are committed towards maintaining our DSO level in the low to mid 70s. Our total backlog was $1,191,000,000 at the end of the first quarter with $249 million of this funded. This compared to $1,024,000,000 of total backlog at the end of first quarter 2008 of which $205 million was funded.

Now I’m going to spend my remaining time on the call giving you an overview of the guidance for the second quarter of 2009 as well as the full year 2009 guidance as published in our earnings press release. For the second quarter of 2009 we expect revenue to be in the range of $105 million to $110 million.

The midpoint of the range represents approximately a 12% organic growth rate over Q2 2008. We are projecting diluted EPS to be in the range of $0.34 to $0.36 per share. This guidance is based on weighted average shares of approximately 13.8 million for the second quarter of 2009.

We expect margins to be on PAR with Q1 as we are expecting higher bid and proposal expenditures in this quarter than in Q1 and a slightly higher level of material content which carries a lower margin. We are maintaining our guidance for the full year 2009 and expect revenue to be in the range of $440 million to $455 million with diluted EPS being in the range of $1.44 to $1.52 per share.

This guidance is based on weighted average shares of approximately 13.8 million for 2009. The midpoint of this revenue range represents about a 12.5% organic growth rate over 2008. The second quarter and full year guidance is based on an estimated 40% effective tax rate and assumes net interest expense for the second quarter of approximately $200,000 and approximately $800,000 for the full year.

Depreciation and amortization is expected to be approximately $1 million for the second quarter and $4 million for the full year. Finally stock option expense is expected to be approximately $335,000 in the second quarter and about $1.5 million for the full year. This guidance does not reflect the impact of any potential future acquisitions. With that Operator we’re ready to begin the Q&A session.

Question-And-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Michael S. Lewis – BB&T Capital Markets.

Michael S. Lewis – BB&T Capital Markets

Free cash flow was excellent in the first quarter. In fact I think it’s the highest Q1 free cash flow you’ve posted since being a publicly traded company. Now with that said, how would you project the free cash flow moving through the remainder of the year and do you think that we will see a conversion as percent of net income in excess of 1.25 or 1.3 times?

Judith L. Bjornaas

On an ongoing basis?

Michael S. Lewis – BB&T Capital Markets

I’m talking about the end of the year.

Judith L. Bjornaas

At the end of the year, yes, it should be above one.

Michael S. Lewis – BB&T Capital Markets

Above one or, I was talking 1.25 to 1.3.

Judith L. Bjornaas

Yes, I think that’s probably about right because I think for the rest of the year it’ll be between 80% to 100% of net income.

Michael S. Lewis – BB&T Capital Markets

Just another question with regard to contracting, Terry you had talked about the staffing growth already but I was wondering if we could a more detailed update on the NETCOM and TEAS contracts?

Terry W. Glasgow

Michael, the NETCOM is pretty well staffed up and at it’s full run rate right now. There’s obviously opportunity for growth there but then, it’s pretty much where we thought it would be.

As I mentioned on the last conference call the TEAS IA BRAC in particular is one where we had some early staffing as we constituted some fly away teams to go out and address some of the initial requirements but I also said that we expected most of the staffing to come later this year, the third and probably fourth quarter, the urgency of BRAC becomes more apparent and as more and more dollars flow that way.

It’s moving ahead very nicely. It’s on track but that was one of the things we said, that we had to wait and see how the funding actually flowed out.

Michael S. Lewis – BB&T Capital Markets

Just a final question, with regard to your Army exposure, have you experienced any changes in procurement trends? Has there been any slow downs that you’ve seen specifically from the Army over the past two to three months?

Terry W. Glasgow

Not specifically from the Army, it’s been actually fairly good. Now obviously there’s been some extensions of review process of proposals and things like that just because of recent protest kinds of things and I think most of the customers, not only the Army but all the service is being a bit more cautious than they have been in the past. But we probably haven’t seen as much there as we might have seen in some of the other service areas where there’s been slow downs.

Operator

We’ll take our next question from Tobey Sommer – SunTrust Robinson Humphrey.

Tobey Sommer – SunTrust Robinson Humphrey

Quick question, can you talk a little bit about turnover trends and what you’re seeing out there in the hiring environment?

Terry W. Glasgow

Turnover actually remained kind of flat for this last quarter almost exactly where we were the previous quarter which is down a little bit from the previous year but there’s still a fair amount of turnover out there especially in the more populated areas where there are jobs like in the National Capitol region.

You tend to see less turnover as you get out and around customer sites especially in the St. Louis area or places like that. It’s pretty much consistent with what we’ve seen before. It’s just down a hair.

Tobey Sommer – SunTrust Robinson Humphrey

There’s been some commentary recently on some initiatives to move some of the I guess positions back in toward the government or in-sourcing. Can you remind us maybe so some of your intelligence exposure and any thoughts you have on that trend or commentary of in-sourcing?

Terry W. Glasgow

Charles mentioned a lot about it as he went through it. I’ll just mention a few things and just say that there is a lot of talk. Obviously it’s not just around intelligence but it’s around a lot of different functions. It’s something that we watch very carefully. It’s something where typically the government has a habit of taking our people anyway so it’s not unknown to us that they’d do it but clearly there is a lot of focus here.

As Charles mentioned there’s some things working against it one of which is finding qualified people. Secondly the issue is that there is a fairly hefty turnover planned in the Federal space and so I wouldn’t think we would have anything initially that would be significant. However as we move forward we’re going to be watching very closely for specific action.

I also think that you’ll see different actions being taken by different services and agencies as they interpret what those rules are. In some cases we’ve already seen that.

Charles K. Narang

Tobey I think they’re talking about 5,000 personnel by 2010 and about 30,000 over the next five years. It’s a lot of people to be trained to take over those jobs and acquisition personnel is very hard to train, it’s not an easy thing to do. They’re already having difficulties n acquisition shops right now. It might happen but it’s going to take its time.

Terry W. Glasgow

With respect to the intelligence side, there are some functions that are inherently governmental in nature in the intelligence area that have been fairly well advertised. I won’t go into them here. We’re not involved in those kinds of activities so I wouldn’t see any kind of great exposure for us on the intelligence side as far as taking jobs back into the government. Okay?

Tobey Sommer – SunTrust Robinson Humphrey

Okay and if I could sneak one numbers question in, what do you expect for cap ex going into ’09?

Judith L. Bjornaas

Cap isn’t a big deal for us. It’s probably going to be less than .5% of revenue, in that range.

Operator

We’ll take our next question from William R. Loomis - Stifel, Nicolaus & Company, Inc.

William R. Loomis - Stifel, Nicolaus & Company, Inc.

Focusing on the awards, a two part question, one of the $650 million that you have been submitted, that’s obviously a lot higher than any quarter you’ve had in the past and then the $1 billion in bids you plan to submit. What’s the nature of the large jump because generally we’re looking at modest growth in Federal budgets overall so clearly NCI’s doing something a little bit different on the business development side. Can you talk about that? Then I have a follow up.

Terry W. Glasgow

I don’t want to get into a lot of detail obviously because some of these things are highly sensitive, Bill. I promise in all cases they’re things where we’re leveraging off of our existing GWAC contract vehicles. There are obviously opportunities in the Army space. There’s a number of activities that are related to BRAC and things like that which are time critical so those things are coming forward and those are typically fairly large kinds of opportunities.

That makes up a chunk of it and like I said most of them are built around our GWAC or agency specific IDIQ contract vehicles. It is large and that’s one of the reasons why I caution in there that these programs do have a way of slipping and changing and being delayed but as we look at the activity today, as we look at our customer plans we feel that there is a very large volume of business out there. We’re looking for some of those to be resolved in the near future.

William R. Loomis - Stifel, Nicolaus & Company, Inc.

Can you talk about the awards you had in the first quarter where a lot of that work came from progressive engagement, expansion of existing task? Can you just give us some examples like for example on the PEO Solider contract with the work expansion you got there, was that expansion in a particular support area, support you were doing with the army or was it a new type of solider system that you’ve been brought in to evaluate? What’s the nature of the expansion of that one? And, maybe if you can talk about maybe one of the other support contracts to give us an idea of where this growth is coming from?

Terry W. Glasgow

The specifics around the solider with regard to the existing contract, if you look at the growth in the staffing, most of that staffing growth as occurred in the last three to four months and so you saw fairly substantial growth taking place there. It’s around an expanded mission obviously, as we are looking at activities in Afghanistan and places like that there’s a substantial amount of things that have to be done to make sure we field soldiers with the best equipment possible.

I think this administration is very keen – there is high emphasis on making sure that we only put the best equipment there. Since we’re involved in a lot of the fielding activities, the logistics, training, things like that are all very important. There are also new things coming out for PEO Solider as the army for instance puts out a new parachute, there’s a lot of training that goes in to that so there’s training facilities and help they turn to us to do.

We have some very specialized kind of capabilities there and we have a very strong leadership team there. Looking at things like Madigan and places like that, medical IT obviously is a sweet spot for us. We have a great contract vehicle out there and or vehicles I should say. It’s a place where the staffing might be six to a dozen, to a couple of dozen a quarter in some places and more in other places.

It just looks like an expansion of work there, they’re turning more to us. I think that we’re starting to build a very strong reputation, especially though as we’re looking at places like Fort Lewis, or Fort Carson where there’s BRAC activity going on where new units are moving in, that means there is additional infrastructure requirements, therefore with more seats there they have to increase our involvement there. Those are the kinds of things that we’re doing. There are not any one of them 200 or 300 heads at a time but they’re very manageable but they’re very long term. We think that positions us very nice for the future.

Operator

Your next question comes from Brian Kinstlinger – Sidoti & Company, LLC.

Brian Kinstlinger – Sidoti & Company, LLC.

Judy, I was curious you seem with your awards that have been submitted met your targets where I think you mentioned last quarter 500 to 600 would be submitted and with that you didn’t see the instep increase in SG&A like you thought you would. I guess I’m curious what happened and what will be different in June when you’re also going to almost double your proposals that you put in, in the first quarter?

Judith L. Bjornaas

I think Q1 was lower than we expected for a couple of reasons, there were some things that delayed in to Q2 and then the makeup of some of the bids, the structure of the proposal turned out to be different than we expected. We had a couple that we thought were going to be orals which is much more expensive than a written proposal, much more complex and cost a lot more if you have to bring in outside people to help with those types of things. So, that pretty much drove the difference of what we had expected in Q1 versus what happened.

Brian Kinstlinger – Sidoti & Company, LLC.

So in Q2 you think there will be more of that kind of more expensive?

Judith L. Bjornaas

More of that and more proposals in general.

Terry W. Glasgow

More volume specifically.

Brian Kinstlinger – Sidoti & Company, LLC.

When I look at your gross margin I know we look at the overall margin, I’m just curious how much of the weaker gross margin compared to all the quarters last year is price versus how much is just the mix of revenue?

Judith L. Bjornaas

It’s almost all driven by the mix of revenue.

Brian Kinstlinger – Sidoti & Company, LLC.

On the pricing landscape has it changed at all given a shrinking pie that all the contractors seem to be going after?

Terry W. Glasgow

Price is a very important element of any decision today. It use to be we’d talk a lot about best value and that’s still very important especially how you set it up. But, whatever you do has to be affordable and has to fit within a very aggressive competitive landscape so it is a factor.

Brian Kinstlinger – Sidoti & Company, LLC.

With that said, are not just yours but the overall industry margin sustainable or is there maybe should we think about it as there is less leverage than there has been overtime? How do I translate that in to profitability?

Charles K. Narang

I think if you look at margins, you can’t sustain forever 9% to 10%, after a while you come to a point where to compete in the marketplace and as Terry pointed out and so did Judy that it is becoming more and more comparative with best value as defined earlier is not the same thing as best value anymore with the pricing pressures out there. So, you can maintain certain margins and after that it becomes very difficult to maintain those margins forever.

Brian Kinstlinger – Sidoti & Company, LLC.

A couple of more, did you say how much revenue came from PEO Solider in the quarter?

Judith L. Bjornaas

No, we did not.

Brian Kinstlinger – Sidoti & Company, LLC.

Was it significantly different than the last quarter?

Judith L. Bjornaas

No.

Brian Kinstlinger – Sidoti & Company, LLC.

I thought when you mentioned guidance that you said the operating margin would be similar to the first quarter. I thought you said that but maybe I’m wrong, the high end of revenue and the high end of earnings it looks like a 7.2% operating margin. Is that accurate?

Judith L. Bjornaas

No.

Brian Kinstlinger – Sidoti & Company, LLC.

Sort of back of the envelope I put $111 million in the interest expense you said and so if I put 7.2% operating margin it gets you to $0.34.

Judith L. Bjornaas

Well, that’s not what my model reflects.

Brian Kinstlinger – Sidoti & Company, LLC.

My final question I had was you had that contract protest that it was the A76 that you were ramping up, was the ramp up as you expected since that protest is no longer there and you had detailed some plans over the first and second quarter. Is that still on track?

William M. Parker

After the protest was resolved the ramp up was consistent with our expectations and we’re fully ramped up now.

Operator

Our next question comes from Brian Gesuale – Raymond James.

Brian Gesuale – Raymond James

Just a couple of questions, most of the questions that I had have been asked already. You did a nice job kind of running through some of the recompetes that have been extended. I’m wondering if you could maybe estimate the amount of recompete business still remaining? And, I’m not sure you mentioned the PEO STRI contract and maybe give us an updated status on that?

Judith L. Bjornaas

Well I’ll start with the overall numbers. At our last quarter call we said we had about 20% of our ’08 revenue up for recompete in ’09 and that made up about 7% or 8% of the ’09 guidance numbers. We’re now down to less than 9% of our ’08 revenue still outstanding in recompete status either because we’ve won things or they’ve been extended as Terry talked about and less than 4% of our ’09 guidance on recompetes that are still outstanding.

Brian Gesuale – Raymond James

And where does the PEO STRI contract fit in to that mix?

Terry W. Glasgow

It would be one of those that would be in the balance of the year.

Brian Gesuale – Raymond James

You guys have also done a great job as a couple of people alluded to on the cash flow front, as you’re generating this cash flow and knocking out some debt, how are you guys looking at acquisitions and what are you seeing in the marketplace on that front? It’s been a while since you’ve done a deal.

Charles K. Narang

We always have been looking for acquisitions to augment our organic growth. But, I believe organic growth is the most important thing for us because that gives better return on investment but certainly to get in to some new customers and some new core capabilities you look at those candidates. Right now we’re not seeing that many good candidates to be honest with you. If we’re seeing some of them in the Intel area, valuation is pretty high. That’s the turn rate now but in other years in the civil sector and other places we’re not seeing really as far as what we’re looking for we’re not seeing those kind of good candidates out there.

Judith L. Bjornaas

I think from a capacity standpoint you’re right, we’ve been paying down the facility so we definitely have room to do kind of our typical smaller size acquisition $20 to $40 million without needing to do anything to the line or change our pricing grid. But, as Charles said we’re not seeing the quality and the quantity companies, we quickly get priced out of the market because we’re not willing to do an extremely dilutive deal in the first year.

I think just from the opportunity cost of knowing that capital is tighter and we could do one but that might preclude us from doing something that might come up down the road, I think we’re being a little pickier on what we’re choosing to kind of go down the road on.

Operator

We’ll take our next question from [Matthew Cruz – Noble Financial].

[Matthew Cruz – Noble Financial]

A question regarding the PEO Solider, I was wondering if the growth in the PEO Solider was growing faster than the rest of the NCI revenue? And secondly, what sort of when you looking at the growth popping out with PEO Solider in terms of what maximum revenue is that you can generate under that contract?

Terry W. Glasgow

I wouldn’t even want to hazard a guess on that last one because no matter what I say I am going to be wrong there. It’s a very great contract vehicle, it has a great mission. It’s one where there is a lot of attention to making sure that we’re fielding the very best equipment to the soldiers and that will be well funded. As new requirements come forth these things have to be fielded fast, a lot of work has to be done and there is a tremendous amount of logistics that has to be put in place both here and in theater. The kinds of things that we do, the expertise that we have are very specialized.

I do think there is more opportunity there obviously and that’s why we were very excited about the acquisition in the first place. It has represented a nice percentage of our growth but we have other businesses that have been growing equally well so it rounds out and makes for a very strong part of our portfolio.

[Matthew Cruz – Noble Financial]

Would you have a sense for ramping down in terms of that business? Would you get a sense forward look at slowing down of activity under that contract?

Terry W. Glasgow

As we look throughout this year we feel confident that what we have in our plans are reasonable and obtainable. As we look at 2010 and 2011 we will obviously address that.

[Matthew Cruz – Noble Financial]

Then lastly, maybe I’m a little bit behind on [Net Sense], that’s business as usual with the RFPs out now or they’ve just extended it so you’re doing business as usual under [Net Sense 1]?

William M. Parker

We are doing business as usual in [Net Sense 1], they have indicated they’re going to be extending that and they are now taking task orders that are going out in a couple of years, so that’s good. And, relative to [Net Sense 2], we have addressed PWS and anticipate a draft RFP in the July/August time frame and they’re projecting best case for an award March/April ’10. So, stay tuned, we’ve been updating you for a while and we’ll continue to update it.

Operator

Your next question comes from Joseph A. Vafi – Jefferies & Company.

Joseph A. Vafi – Jefferies & Company

It sounds like there is a pretty big supplemental that is coming down the pipe here pretty soon. I think everyone is pretty well aware that you really don’t have that much exposure to the supplemental. Do you see any net positives for the company just maybe even indirectly coming from maybe the Army getting some funding for the war effort and perhaps that maybe eases money up for you in other areas or something like that?

Terry W. Glasgow

I think you’re spot on right there. Typically without the supplemental or the delay of it, it tends to delay other activities. You’ve got to find bill payers. So, as we’ve seen in the last two years that’s really slowed down second quarter activity. It’s looking like with this supplemental coming in it will address those things. I think some of the work we do around Solider might have some direct benefit but, more than likely will be as you described a secondary effect easing other budgets.

Joseph A. Vafi – Jefferies & Company

So that secondary effect might take another quarter or so to kick in I would imagine then?

Terry W. Glasgow

Those things do. I think mostly where we will see it is you’ll see some procurement activity break lose. That’s typically what we would see after the supplemental comes out, the month after or so all of a sudden there’s a pretty sizeable uptick in procurement activity especially as you March towards the end of the fiscal year. So, I would think this would be another reason why we would see an uptick in the activity in the second and third quarters.

Joseph A. Vafi – Jefferies & Company

Then maybe just a little more commentary on the cyber initiative and I think we kind of all understand you just maybe see some scope expansion on current vehicles to kind of incorporate some cyber activities. I’m just wondering kind of what level as we sit here in the early month of May if you’ve kind of seen maybe some scope expansion actually occur on some of your important vehicles relative to cyber say versus a couple of quarters ago?

Terry W. Glasgow

I think this has been something that we have been seeing for a number of quarters and it’s absolutely integral to what we’re doing across all of our work with these customers. That’s why I really wanted to point out that in our case we have this embedded across a very broad set of customer engagements and the kinds of things that we’re doing I think are very important. Matter of fact, our customers are well protected, in some cases they have received national awards, in some cases they received two or three awards from NSA as being the most secure site. This goes back a couple of years.

I think we’ll continue to see it. I think what’s going to happen is that the risks are going to change or become more intense and we’ll probably get more funding to address these kinds of things. But, I don’t think I’ve seen anything in the last one quarter or two quarters, I think this is something that we’ll continue to see ramp up and stay with us for some time. I think the threat is that pervasive and that extensive.

Joseph A. Vafi – Jefferies & Company

Then maybe one final question following up on a previous one, it sounded like the M&A pipeline was kind of light, nothing looked super attractive. Is there anything you can really point to as to why that is or is it maybe in your size deal in your wheel house versus other sizes or does it have to do maybe just with the market is a little bit soft and the higher quality companies, there’s not a lot of higher quality companies that want to come to market right now?

Charles K. Narang

Joe, a combination of two things, one is that the companies that are out there they have small business content to them. That does not help us at all. Of the companies out there that do not have small business content, [inaudible] much larger than what our target size is. If we have to go and do the financing all over again to have a different credit line, the [inaudible] change is [inaudible] and very, very expensive. So, it’s a matter of the right size for us and no small business content and the valuation is correct so it becomes accretive. Those kinds of candidates are very hard to find.

Terry W. Glasgow

Frankly, we’re very sensitive to the fact that if we do an acquisition it really has to have a substantial amount of growth potential itself. We’re not interested in looking at turnarounds or situations where there is weak customer base and things like that. It’s a much better return on investment as Charles said to grow organically. But, there are good companies out there and we continue to look and if we find one we will be aggressive but not to the point where we destroy our business model or put our business model at risk.

Operator

Your next question comes from Timothy J. Quillin – Stephens, Inc.

Timothy J. Quillin – Stephens, Inc.

In terms of your proposals, you have some pretty big numbers in the 650 currently submitted and the billing expected in Q2. How much of that is IDIQs?

Judith L. Bjornaas

Well it would be past quarters under IDIQs.

Terry W. Glasgow

If you’re talking about are they new IDIQ vehicles then the answer is zero there because we carry those at zero. If you’re talking about are they task orders under existing GWAC than it would be substantial.

Timothy J. Quillin – Stephens, Inc.

No I was thinking in terms of new IDIQs so this is obviously a significant period of bidding activity and how do you expect the awards to shake out in terms of the quarters?

Terry W. Glasgow

Things are taking longer to resolve themselves and it just is that I think that the government goes through much more extensive reviews to make sure there are no issues there. So, as we look at our forecast, it takes in to account that these things are going to slip, our revenue ramp ups take in to account these things. So, it’s a big question.

Charles K. Narang

It’s a difficult thing. Some of the stuff that we talk about that we have $650 million outstanding pending of [inaudible], some of those have been sitting there for six months now and they have not been decided as of yet. So it’s very hard to bid a billion over the next 90 to 120 days it might take them six to nine months before they’ll finally award it, with protests on top of that. So, it’s very hard to imagine exactly when you’re going to start working on those contracts.

Timothy J. Quillin – Stephens, Inc.

I guess the last question is in terms of your cyber security business, can you just give us some sense of what percent of revenue that represents? I know it’s spread throughout your organization, difficult to measure but, some sense of that would be great.

Terry W. Glasgow

We shied away from that because a month or so it’s really very, very difficult. It’s not a case that we just don’t disclose the number, it’s not the way that we manage the programs, it’s not the way that the PWS’ are aligned, it’s very difficult. Now, we have some programs like IA BRAC, because that’s all Information Assurance related. The DEO cyber program is very clearly what it is doing.

There’s very few programs in the marketplace where it’s just around IA or cyber security. That’s one of the reasons why I kind of wanted to lay down that all of this is going on across all of these programs. It’s substantial in the sense that it’s absolutely essential if you’re going to be in this business you have to have those capabilities and those qualifications and we have them. I wouldn’t know how to put a number to it. I really don’t Tim, I’m sorry.

Operator

Your next question comes from Michael S. Lewis – William M. Parker &T Capital Markets.

Michael S. Lewis – William M. Parker &T Capital Markets

Judy, I was wondering if we could just clarify something with regard to the margin, did you say that your expectation was that the second quarter margin in line with Q1 but with higher B&P and higher material cost allocated in there?

Judith L. Bjornaas

Yes.

Michael S. Lewis – William M. Parker &T Capital Markets

So if I were to look at the Q1 result where you came in at the 7.6% EBIT margin, and I do some fuzzy math here, would this be a correct number on the bid and proposed activity that did not occur in the quarter being around $100,000 to $120,000?

Judith L. Bjornaas

We really haven’t disclosed that level of detail.

Michael S. Lewis – William M. Parker &T Capital Markets

Could you say was it 10 basis points of margin, 15 basis points?

Judith L. Bjornaas

It’s probably pretty close to that. I mean, that’s kind of where we came in above the guidance for Q1.

Michael S. Lewis – William M. Parker &T Capital Markets

So it was all that B&P?

Judith L. Bjornaas

Primarily, yes.

Operator

(Operator Instructions) It appears that there are no further questions at this time. You may hear a replay of today’s call through May 19th by calling 1-888-203-1112 or 1-719-457-0820 and use the pass code 3494776. Again, that number is 1-888-203-1113 or 1-719-457-0820, pass code 3494776. This concludes today’s call you may now disconnect.

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