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
Edward Caso - Wells Fargo Securities
Joseph Vafi - Jefferies & Co.
Erik Olbeter - Pacific Crest Securities
William Loomis - Stifel Nicolaus & Company, Inc.
Brian Gesuale - Raymond James
Mark Jordan - Noble Financial Group
Timothy Quillin - Stephens Inc.
Tobey Sommer - Suntrust Robinson Humphrey
Gautam Khanna - Cowen and Company
Brian Kinstlinger - Sidoti & Company
Michael Lewis - BB&T Capital Markets
NCI, Inc. (NCIT) Q2 2009 Earnings Call August 5, 2009 5:00 PM ET
Operator
Good day and welcome to the NCI, Inc. second quarter 2009 financial results conference call. My name is [Missy] and I will be your conference coordinator for today. This call is being recorded.
I would now like to turn the presentation over to your host for today's call, Maureen Crystal, Vice President of Investor Relations for NCI. Please proceed, Ms. Crystal.
Maureen Crystal
Good evening and welcome to NCI's second quarter 2009 financial results conference call.
Here's our agenda for today: Charles Narang, NCI's Chairman and CEO, will provide an overview of our accomplishments during the second 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 second quarter of 2009.
Next, Judy Bjornaas, our Chief Financial Officer, will provide second quarter 2009 financial results and operating metrics. She will also review the third quarter and full year 2009 guidance as published in today's earnings press release.
As part of their discussions, Charles and Terry will discuss the strategic merit of our acquisition of TRS Consulting Inc. announced on August 3rd and Judy will provide the financial impact of the acquisition on our guidance.
We will then open up the call for your questions and we'll 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
Thank you, Maureen. Good afternoon, everyone and thank you for joining us today.
We are pleased to report that the second quarter was another strong quarter for NCI and we continue to make significant progress in NCI's overall [inaudible] strategy to grow organically, improve profitability and create value through strategic acquisitions. We firmly believe that we are on track with steady plans and that we have established a strong platform for future improvement across all of our key operational objectives.
I would like to highlight the following recent achievements. Our second quarter top line revenue grew to $109 million. This 13% growth in the second quarter was all organic. Operating margin increased to 8%. Earnings per share increased 25% to $0.37 per share. Our improvement in reducing DSOs to 67 days, a six-day improvement for the quarter, contributed to strong operating cash flow. We were awarded a prime contract on the important FDA ELMS ID/IQ contract, and we closed on the acquisition of TRS Consulting, which further expanded our customer side in the intelligence community and brings additional capabilities to NCI.
We've continued to drive forward and execute our business strategy. We have created a robust platform for future growth as we align our core capabilities with many of the technologies that are focused on the new administration’s initiatives to transform government.
We believe that we can significantly increase the value of NCI with the acquisition of TRS that we announced on Monday. Headquartered in Reston, Virginia, TRS is an intelligence company focused on information technology and professional services. While Terry will provide details on the operational business aspects of TRS's actions and Judy will discuss the financial implication on our guidance for 2009, I would like to emphasize that we continue to execute on our strategy goals. The acquisition of TRS is consistent with the strategy to selectively acquire companies that possess strong management teams, have access to growing federal government markets, technologies that we can leverage and a track record of strong financial performance.
In my discussions with the financial community I have consistently stated that we do not look at acquisitions to bulk up our revenue. As I think we have demonstrated, we have prudently and methodically looked for acquisitions that add long-term shareholder value to NCI in that they bring some elements of new customers, new markets, new capabilities, new contracts and new geographical presence.
NCI's acquisition of TRS came about as both companies are looking to do work together. It became apparent to both parties that together we could approach the intelligence community markets more effectively as a combined company. For NCI, we clearly understood the value of TRS's unique capabilities and how we could combine their service offerings to strengthen our position with our own intelligence customers. For TRS this offers significant benefit in leveraging NCI's business development infrastructure and technical resources to better serve their customer requirements.
I have also consistently stated that cultural compatibility is an absolute must with respect to an acquisition. We were very impressed with the sterling reputation TRS has established with their customers. As we have stated so frequently, we believe that our success is a direct result of our unwavering commitment to total customer satisfaction and delivering on our promises. We could clearly see TRS operated on the same business philosophy. We are thrilled to have this elite group of employees join the NCI team and look forward to working and collaborating with them.
Moving on to the second quarter progress, Terry will speak in greater detail on our new business activity, but I want to highlight a major accomplishment for NCI in the second quarter with the award of the Food and Drug Administration's Enterprise Systems Life Cycle Management contract. This new ID/IQ contract vehicle will provide us access to a very important customer base and it's consistent with the business strategy and growth objectives. We were pleased that we were selected and believe that this vehicle will be an important part of long-term growth in the [civilian] agency market.
Our focus is to build a strong Health and Human Services business at NCI and to accomplish this we are qualifying other opportunities to further expand our presence within HHS, including NIH, CDC and FDA.
In closing, we will continue our 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 that growth by acquiring and incubating acquisitions that meaningfully add long-term shareholder value.
As previously stated, [inaudible] 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 targeted size range.
With that I will now turn the call over to Terry to provide an operational update.
Terry?
Terry W. Glasgow
Thank you, Charles, and good afternoon.
We are pleased with our solid second quarter business results as evidenced by our strong 13% organic growth, 25% earnings per share improvement, and our 67 days sales outstanding, which represents a 21 day improvement over a year ago.
As we entered the second quarter we had proposals outstanding and pending award of approximately $650 million. We were also anticipating preparing and submitting proposals with a value approaching $1 billion in the second quarter. Our expectations going into the quarter were that a majority of our pending programs would have been awarded in the second quarter. What actually transpired was that very few of our pending programs were awarded. The result is that we now have $840 million of proposals outstanding and pending award, an all-time high for our company. This represents a 27% increase over last quarter and approximately $400 million more than a year ago.
Also at the same time many of our planned proposal opportunities slipped out of the second quarter and into the third quarter. Some slippage of programs is common, but the number of program slips was unusually high. The result was that our second quarter awards and proposal efforts were lighter than planned.
In my comments this afternoon I will provide some detail about the status of those pending bids as well as our new business activity during the quarter.
The following are the metrics for new business for the second quarter, the first half of the year and trailing 12-month periods: Total second quarter awards were $37 million, a book-to-bill of 0.3 times for the quarter. Total awards for the first half of 2009 were $145 million, a book-to-bill of 0.7 times. As a reference, for three out of the last four years our book-to-bill for the first half also averaged 0.7 times. The one example where we exceeded 0.7 was in 2008 when we had a large $94 million award. Taking that one large award out of the equation would yield 0.6 times for the first half of 2008.
In contrast to the first half historical results, our second half book-to-bill for 2006, 2007 and 2008 produced 1.5, 1.3 and 2.0 results, respectively. Clearly, we have a pattern of book-to-bill results in which the second half ratio averages double the first half. The reason for this pattern is generally due to the fact that a large percentage of our awards are associated with our GWAC vehicles and those typically have new business awards and task orders that come on or around October 1st, the start of the government fiscal year. It is for this reason that a trailing 12-month book-to-bill is an appropriate metric for our business area.
As of the end of the second quarter, our trailing 12-month bookings were $540 million, approximately 24% higher than 2008. Our trailing 12-month book-to-bill for the end of the second quarter of 2009 was 1.3 times, higher than either 2007 or 2008 levels of 1.1 and 1.2, respectively.
I'd like to provide some color on some of the underlying market issues impacting adjudication of pending awards and the slippage of procurements. One trend that is becoming more evident to us is the extended government procurement cycle for acquisitions. We look at the procurement cycle in three general phases - pre-proposal to capture phase, the proposal phase and the evaluation and award phases. What used to take weeks or a few months for all three of these phases for ID/IQ task orders is now taking four or five months or in some cases even longer.
Some of the factors that appear to be driving this extended procurement cycle include the following: First, as has been widely discussed, government acquisition resources are stretched thin. The workload is expanding at a rate greater than they have trained and qualified acquisition staff. As a consequence the RFPs are either being delayed at the front end or evaluation cycles are becoming longer.
Another symptom of this problem is an increasing number of proposal amendments, many of which are in response to bidder's questions concerning unclear or conflicting specifications and proposal requirements.
Compounding this situation are the new rules for protests on task orders under GWAC contracts. With task orders now subject to protest, more time is being spent by acquisition shops to either bulletproof their decisions or in some cases to defend task order protests. The fact is that increased protests, especially on task orders over $10 million, are causing longer times to release proposals, longer evaluation periods, additional time to resolve actual protests, and delayed program start-up activity.
And finally, for the third consecutive year the delay in the approval of the war supplemental bill until late June caused some procurement activity to be delayed as our DOD customers prepared contingency plans for potential funding shortfalls. Going into the quarter we along with most people believed that the war supplemental would be approved in early May; however, the addition of non-war supplemental spending items by Congress created a signing delay of approximately two months.
Some of these problems will continue to manifest themselves into the second half of the year; however, it is our belief that most if not all of our pending proposals will be awarded in the third and fourth quarters. While most of the awards will drive 2010 growth for the company, we do expect positive contribution to revenues in the fourth quarter of 2009 from our pending awards.
In addition, we feel relatively confident that the delayed proposals from the second quarter will be issued in the third quarter, being driven both by the need to get awards completed by the end of the government fiscal year as well as in response to critical mission priorities.
Looking at the third quarter for new business position, we are projecting to prepare and submit proposals totaling almost $1 billion. For the second half of the year we're estimating proposals of between $1.5 and $1.9 billion.
As Charles mentioned, we're very pleased that one of our high priority outstanding bids resulted in an important win for us. The Food and Drug Administration selected NCI as one of 10 full and open winners of the $2 billion Enterprise System Life Cycle Management Support or ELMS contract. This prime performance-based 10-year ID/IQ contract provide for the performance of IT services, planning, design, development, testing, implementation and operations and maintenance of FDA's automated systems and business application software.
This is a new contract and a new prime customer for NCI. HHS is a key market that we have been targeting for new business and are thrilled that we were selected as a winner. Along with our Alliant contract we believe that this contract will be an important element in our strategy to expand our IT and professional service offerings to this and other important civilian agency customers. Consistent with our policies, we have not included any value in our awards or in our backlog for this ID/IQ contract win. Also in the second quarter we were awarded new business tasking on the NETCENTS [inaudible] and DSP II contract vehicles, including various progressive engagement awards.
The following metrics characterize our new business pipeline: Our total pipeline is approximately $14.8 billion. Approximately $1.9 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 94 programs, with values of $25 million or more in the pipeline broken down as follows: There are 32 programs with values greater than $100 million; another 26 programs with values between $50 million and $100 million; and 36 programs with values of $25 million to $50 million. These 94 programs represent approximately 87% of the total pipeline dollar value.
To sum up our new business posture, the second half of the year provides us with substantial opportunity for new business growth and supports our 10% to 15% organic growth goals. We have a ready pipeline of over $800 million of bids that are pending award and believe that other programs being bid in the third and fourth quarters of the year will fuel our planned growth for 2010 and beyond.
I want to add one additional comment on market factors. As we have mentioned in previous calls, we are beginning to see added pricing pressure on new business proposals. Price, while not the sole factor in our procurement, is becoming more significant in the source selection process. We believe that this pricing pressure will be a factor for the foreseeable future as our government customers deal with budgetary issues and initiatives to reduce the cost of their operations.
As a leadership team we are focused on maintaining a lean and aggressive infrastructure and staffing profile as well as offering innovative solutions to customers in order to be highly competitive while driving improved company margins.
On Monday we announced the acquisition of TRS Consulting, a company focused on the intelligence community, providing information technology and professional services. Headquartered in Reston, Virginia, TRS employs approximately 60 highly skilled TS/SCI cleared experts, providing their customers with superior software solutions and support. TRS has earned unique recognition from their customers based upon their innovative approach to providing high-end software services and solutions in support of mission critical information sharing and collaboration systems.
Another indication of TRS's unique standing is that they were recently recognized by the Washington Business Journal as the best medium-sized company to work for in the greater Washington, D.C. area. TRS's strength lies in its outstanding leadership team and its highly talented and experienced technical staff, all of which are committed to staying with NCI and working with us to build a strong and enduring IT business.
The key to TRS's success is their recognized capabilities in leading edge open source technologies and agile programming environments, with a focus on delivering new systems in very short timeframes, thus supporting critical mission needs and reducing customer costs. TRS's core offerings to its intelligence customers include systems architecture and design, agile software development, database engineering, administration and development, analytic computing solutions, full systems life cycle development and deployment.
The acquisition of TRS continues our drive to build a strong information technology and professional services company with a focus on delivering sustained organic growth and market expansion. From a market position perspective, TRS has outstanding technical credentials and experience in supporting important national programs addressing some of the most critical missions in the intelligence community. This acquisition will support our long-term growth goals and provide us access to new customers and new service offerings.
Another positive factor for the acquisition is that TRS has no small business designated contracts and therefore we do not have any issues with respect to recertification.
Strategically, TRS is an ideal addition to our IT business platform. Culturally, our two companies are very compatible, with both of our priorities being customer satisfaction and recognition of employees. We're thrilled to have them join NCI.
Now for staffing, as of the end of the second quarter our overall staffing remain level at 2,600 employees compared to last quarter and about 13% higher than a year ago. Turnover improved during the quarter to the mid-teens level, approximately 3 points better than a year ago and about 1 point better than last quarter.
In summary, we're pleased with the overall quality of our business base and the strong foundation for growth that we have established. With our solid contracts base, leadership team and customer position, we believe we are well positioned to deliver our 10% to 15% organic growth objectives.
I will now turn the time over to Judy, who will present the financial results and guidance for the quarter.
Judy?
Judith L. Bjornaas
Thank you, Terry, and good afternoon, everyone.
For the second quarter of 2009 NCI reported revenue of $108.5 million, which represents a year-over-year and organic growth rate of approximately 13%. This increase was due to new contract and task order awards, primarily under our ITS, NETCENTS and TEAS, Gawks, as well as growth on existing contracts through progressive engagement and contract extensions, including the growth we expected on the NETCOM EMS program and new tasking under POE Soldier.
Operating income for the second quarter of 2009 was up 18% to $8.7 million, reflecting an operating margin of 8%. This compares to operating income of $7.3 million in the second quarter of 2008 and an operating margin of 7.6%.
Our operating margin for the second quarter was slightly higher than expected because bid and proposal costs came in lower than anticipated as some of the larger programs we were planning to bid in the second quarter have slipped into the third and fourth quarters, as Terry discussed. As bid and proposal activities increased to more normal levels we expect to see operating margins come down slightly during the second half of 2009.
Our effective income tax rate for the second quarter was 39.8%.
Net income for the second quarter $5.1 million compared to $4.1 million for the same period last year.
We reported diluted earnings per share for the second quarter of $0.37 per share compared to $0.30 per share in Q2 2008, a 25% increase in per share earnings. Diluted shares outstanding for the second quarter were approximately 13.8 million shares compared to approximately 13.6 million shares in Q2 2008.
Stock compensation expense for the second quarter was approximately $328,000 compared to $197,000 in the second quarter of 2008.
Moving on to our second quarter metrics, approximately 84% of our revenue was performed as a prime contractor. For the second quarter 2009, 87% of our revenue came from the Department of Defense and intelligence agencies and approximately 13% from federal civilian agencies. Our contract mix for the second quarter was approximately 54% from time and materials contracts, 16% from cost plus contracts, and 30% from fixed price contracts.
Moving on to cash flow, the net cash provided by operations for the second quarter was approximately $5.2 million and for the first half of 2009 was $15.5 million, which equates to approximately 160% of year-to-date net income.
Our strong cash flow over the second quarter enabled us to pay down our debt by another $4.5 million and a total of $14 million year-to-date. At the end of the quarter our outstanding bank debt was $26 million on our $90 million credit facility and our funded debt to trailing 12-month EBITDA leverage ratio is under 1 time.
At the end of the second quarter our DSO was down to 67 days, a 6-day improvement this quarter, and it's down 16 days from our year end balance. This improvement was the key driver in the strong cash flow for the quarter. We are very pleased by this improvement and are committed towards maintaining our DSO level in the current range to below 70.
Our total backlog was $1.12 billion at the end of the second quarter, with $205 million of this funded. This compares to $994 million of total backlog at the end of second quarter 2008, of which $156 million was funded.
Before moving on to our third quarter and revised full year guidance as published today in our earnings press release I'd like to spend a little time discussing the financial impact of our acquisition of TRS Consulting.
We are project $6 to $7 million in revenue from TRS for the remaining five months of 2009. While TRS's margins are higher than NCI's, due to the expensing of transaction-related expenses, estimated amortization of intangibles and interest expense, we expect the transaction to be basically neutral to earnings in 2009.
TRS is expected to grow at a higher organic revenue growth rate than NCI's target of 10% to 15%, and we are expecting the acquisition to add $0.02 to $0.03 in earnings in 2010.
We paid approximately $18 million in cash at closing using cash on hand as well as our existing credit facility. This equates to an EBITDA multiple in the 11 to 12 times range, which is typical in the Intel space. The acquisition is not expected to have an impact on our current cost of debt.
In addition to the upfront payment we could pay up to an additional $6 million over the next two and a half years if certain revenue and profitability targets are achieved.
The guidance I'm about to discuss does not reflect the potential impact due to earn-out valuations under Statement of Financial Accounting Standards No. 141R, Business Combinations.
Prior to 141R earn-outs were typically not recognized until paid and they were usually in addition to goodwill when they were paid. Under the new pronouncement, which became effective on January 1st of this year, contingent consideration arrangements or earn-outs must now be valued at fair value on the acquisition date, with any future changes in fair value reflected in earnings. Fair value is determined using a probability assessment of the likelihood of the earn-out to be paid and then discounted to a present value.
We are currently working with our valuation experts on the earn-out valuation now along with the usual purchase price allocation valuations and have not yet determined the final potential impact of the earn-out valuation. However, given the valuation methodology under 141R, the one thing we are certain of is that there will be an adjustment to earnings. The impact could be either positive or negative to earnings depending on the estimated earn-out, the actual earn-out and the discount factor applied.
I'll now move on to our guidance overview.
For the third quarter of 2009 and including the impact of the TRS acquisition we expect revenue to be in the range of $113 to $118 million. The midpoint of the range represents approximately a 12% organic growth rate over Q3 2008.
We are projecting diluted EPS to be in the range of $0.37 to $0.39 per share. This guidance is based on weighted average shares of approximately 13.8 million for the third quarter.
We do expect margins to be slightly lower than Q2 and more on par with Q1 levels as we are expecting higher bid and proposal expenditures in this quarter and a higher level of material content, which carries a lower margin, in addition to the increased amortization cost from the TRS acquisition.
We are increasing our guidance for the full year 2009 due to current business expectations as well as the acquisition of TRS, and we now expect revenue to be in the range of $450 to $460 million, with diluted EPS to be in the range of $1.47 to $1.53 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 13% organic growth rate over 2008.
The third quarter and full year guidance is based on an estimated 39.9% effective tax rate and assumes net interest expense for the third quarter of approximately $205,000 and approximately $800,000 for the full year.
Depreciation and amortization is expected to be approximately $1.2 million for the third quarter and $4.4 million for the full year, which does include an estimate for intangible amortization associated with the TRS acquisition, although those values have not been finalized yet.
Finally, stock option expense is expected to be approximately $380,000 in the third quarter and about $1.4 million for the full year 2009.
While this guidance does include our recent acquisition of TRS, it does not reflect the impact of any potential future acquisitions and, as I mentioned previously, it does not reflect any potential earnings impact from the earn-out valuation adjustments under 141R.
Operator, we are now ready to begin the Q&A session.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) Your first question comes from Edward Caso - Wells Fargo Securities.
Edward Caso - Wells Fargo Securities
Can you just repeat the F&A and the stock comp numbers again? I missed that.
Judith L. Bjornaas
Sure. The stock comp for Q3 we're projecting to be $380,000 for third quarter and $1.4 million for the full year. And amortization, $1.2 million for third quarter and $4.4 million for the full year.
Edward Caso - Wells Fargo Securities
Last quarter you talked a little bit about Alliant. I was wondering if there's been any activity under that vehicle?
Terry W. Glasgow
As of now there's been very little activity on the full and open one. We've seen more activity on the small business portion of Alliant, which was awarded about four months before. So as we said last time, it is ramping up slow given the long duration of that protest period.
Edward Caso - Wells Fargo Securities
You've taken the EPS guidance up even though it appears that most of your revenue increase reflects the acquisition, which is neutral to earnings. Obviously, you did a little better in the quarter here. What's the other reason for the EPS guidance to go up this year?
Charles K. Narang
As we're looking at the course and the profitability and looking at the infrastructure that we have, and we're [inaudible] infrastructure knowing that there's a comparative pressure on our pricing structure. What we're doing is mitigating more and more comparative. So we're already in the process of looking at our infrastructure costs and so on and so forth, and we believe we can manage this EPS.
Operator
Your next question comes from Joseph Vafi - Jefferies & Co.
Joseph Vafi - Jefferies & Co.
I was wondering if we could talk a little bit about TRS and their contract structure, if it's similar to your long-term contracts or is it maybe shorter-term consulting work?
Terry W. Glasgow
Their contract basically is all done under agency specific ID/IQ contracts of which several large primes hold those contracts and these classified customers in effect direct work to specialty places like TRS. Their work typically runs like a normal task order would under one of those ID/IQ vehicles.
Joseph Vafi - Jefferies & Co.
So you're not really worried about the nature of the contracts and renewals coming up or lumpiness or fluctuations in the revenue stream here?
Terry W. Glasgow
We looked into that really carefully and spent a lot of time doing that, working not only with TRS but also their customers and their primes and really trying to understand the real value that this company has to it. And everyone we talked to, everyone there, was very clear about the unique offering that TRS had and the dependence they have on what they're doing. They're really involved in very, very crucial things, and the technology they're involved in are such that we walked away with a very high level of confidence there.
Joseph Vafi - Jefferies & Co.
I might have missed the organic growth rate in the quarter and then also how many points of organic growth PEO Soldier was of that.
Judith L. Bjornaas
Organic growth rate in Q2 was 13%. And PEO Soldier's lapsed; it was over a year ago that we acquired that so we don't have that as a separate number anymore.
Operator
Your next question comes from Erik Olbeter - Pacific Crest Securities.
Erik Olbeter - Pacific Crest Securities
Real quick just on hiring, flat year-over-year. It seems like the firm's growing organically 13%. Can you talk a little bit about some of the dynamics behind that, give us a little more color? Are you keeping SG&A - are you sort of replacing some folks in SG&A with people on the line or what's happening there? What are your expectations moving forward.
Terry W. Glasgow
Let's back up. We were not flat year-over-year; we were up 13% year-over-year.
Erik Olbeter - Pacific Crest Securities
Oh, I'm sorry, sequentially flat. You're correct.
Terry W. Glasgow
Quarter-over-quarter probably had more to do with the fact that some of the awards that we might have expected in the second quarter - which we did expect, obviously - didn't get awarded, so that moved some of that hiring out.
Judith L. Bjornaas
Some of the hiring, too, came towards the end of Q1, so the people were here but we're getting the full impact of their [inaudible] in Q2.
Erik Olbeter - Pacific Crest Securities
And can you talk a little bit about cybersecurity? I know you've talked about it in the past as being sort of a driver. How was the quarter? How's the second half look in that opportunity?
Terry W. Glasgow
Cybersecurity, as you well know, is one of the real strengths we have as a company and we remain very bullish on our position, especially given where we are focused on, which is really around security operation, network operations and so on. As we've explained before, those cybersecurity initiatives are embedded within the full range of services that we provide to customers. So as we go out and bid and win and implement new contracts running new networks and so on, we take on more and more of those activities.
From a market perspective of what's going on, there's been nothing that's been happening that would lead us to believe that this isn't going to get more important. Obviously, the July 4th activities with the disruptment of services in South Korea and here in the States, the acknowledgment pretty widely is that we still have a huge problem. It's affecting all of our services, all of our federal and state and local. I don't see anything ramping down there at all.
The way it's going to mass test itself we still believe is primarily through network operations. About 70% of the spend for this year that is expected to be spent is in that area.
So bottom line, it's a continuation. We've got a long road to go on this thing. It's not a short-term problem; it's a long-term problem.
Operator
Your next question comes from William Loomis - Stifel Nicolaus & Company, Inc.
William Loomis - Stifel Nicolaus & Company, Inc.
Can you talk about just a couple things, one on TRS. As far as customer concentration, is there any one contract that makes up the vast majority and, along those lines, is that contract up for re-compete soon?
Terry W. Glasgow
There's one where they have more than any place else on one ID/IQ vehicle where there are four different primes on that one. And that one will be up for re-compete in the foreseeable future, but given the kind of work they're doing - they were basically directed there by the customer - and so given the nature of work going on, number one, the prime who's doing this stands a very, very high probability of winning and, if not, the work that we'll be doing under this is such that they cannot get that from other sources. And so we'll either go to another prime who does win it or we'll be directed by the customer to whatever source they want to get to us by.
William Loomis - Stifel Nicolaus & Company, Inc.
Is there any overlap between TRS and what you're doing now in terms of are you working in adjacent offices or anything like that today?
Terry W. Glasgow
In adjacent offices? Are you talking about customer offices?
William Loomis - Stifel Nicolaus & Company, Inc.
Exactly, yes.
William M. Parker
There's really no overlap; it's a distinctly different client base, Bill.
Terry W. Glasgow
However, what's really interesting and I really can't go into it here, the nature of what they're doing, the specifics of what they're doing, and what we're doing with our clients there are absolute leverage points there to both customers as well as to us.
Charles K. Narang
Bill, as I said in my call they have technologies which really can be used by a lot of customers in kinds of communities, so they can share the technologies. The customer set is different and the facilities are different.
William Loomis - Stifel Nicolaus & Company, Inc.
And then just on in-sourcing impact, are you seeing anything going on there in terms of government stepping up hiring or any instances where you've seen some paths been brought in-house, whether NCI was doing it or another company?
William M. Parker
You know, there's been a lot of talk about that in-sourcing and, first of all, you need to understand that it's relatively common for our customers to hire our people since they know them and our people know their missions, so that's not unusual. But given Secretary Gates' public comments and some of the other comments coming forth, it's clear that there's a lot more emphasis there.
The answer's yes, there has been some, but it's relatively small. If I had to size it right now and, of course, we are watching this very closely, it's on the order of 5 to 10 people maybe over the first half of the year. And in almost every case the 5 to 10 people that have gone over there have been replaced by other NCI of more than that number.
So we expect that there will be some of this going on. We expect that there'll be certain places, there'll be different applications, basically, different customers are looking at it a little bit differently, but there will be some going on.
I don't think that this is going to be a significant risk to our business base, but it's something that we will clearly follow very closely.
Operator
Your next question comes from Brian Gesuale - Raymond James.
Brian Gesuale - Raymond James
I wanted to maybe dig in a little bit into those bids outstanding and the expected bids that you were so kind to give so much color on. If we look at that $840 million outstanding and the $1 billion that you plan on submitting this quarter, can you give us a little flavor in terms of how much of that's new business versus re-compete, maybe a little bit of how much of that is defense versus civil and if you're seeing any changes in where the proposals are coming from? And then finally maybe if you're actually benefiting a little bit in some cases of some of these delayed procurements with some of your existing business being pushed out on the renewal side.
Terry W. Glasgow
A lot of questions. Let me kind of jump in and Charles and Bill will help me, I'm sure, here.
First of all, the mix of the work between our business base and so on, typically our pipeline almost follows a similar pattern of our revenue mix. So there's around 80% of our pipeline right now that's around DOD and intel and about 20% of our pipeline around civil. So that's kind of the same mix whether it be in the pipeline or looking at bids and so on.
By the way, also in that number of programs to be bid are other government-wide acquisition contract vehicles that have no dollar value in there, but are also equally important to us.
Relative to the mix between new business and re-competes, I really don't have that number with us. There is a mixture there, though, obviously. We have some business there that is re-compete, but there is a new business, a substantial amount of new business in there. I'm just not going to guess what it is right now.
Bill or Charles, you want to add to that?
Charles K. Narang
Yes, Brian, both in re-competes and in new business, it's just hard to figure out what the percentage is. But there's much more new business than the re-competes in there because I've been saying all along that the re-competes, we don't have that much re-compete going on this quarter and the next quarter. Most of it is the new business.
As far as looking at how much of that's civil and how much is DOD, we are trying our best to get into more and more of the civilian agencies and we're looking at more and more opportunities there, but at this point in time [inaudible] the breakdown might be 80/20 or 70/30, something like that.
Brian Gesuale - Raymond James
Just one follow up, if you can maybe give us a sense of what your thoughts are on the '10 budget, maybe how you incorporated that into some of your award ramp activity and if some of the slowness year-to-date in award activity coupled with that makes you alter maybe what your target book-to-bill might be for this calendar year?
Terry W. Glasgow
First of all, we haven't shared a target book-to-bill, but obviously we're very pleased with a 1.3 book-to-bill that we've had for the trailing 12 months. And, again, that's our focus, trailing 12 months. We'd obviously like to see the book-to-bill stay in the 1.2, 1.3 or above range. That's healthy in our mind.
As far as the budget goes, clearly, everyone's watching that and seeing what's going on. What's very encouraging is that the IT spend continues to be very strong, and there's a huge budget out there. And so if it's growing at 2% or 3% or even 4% on the top side, we still have a very large spend rate that gives us lots of opportunity to go out and capture new business, take business away, especially through consolidations and things like that.
My belief right now is that we have a lot more activity going on with the 2010 budget and my concern probably right now is not so much the budget but the approval of the budget and whether they can get done what they have to get done and avoid a continuing resolution.
Brian Gesuale - Raymond James
That's where I was going with that. Are you feeling better, worse, how do you prepare for that?
Terry W. Glasgow
Well, you know, I thought that there'd be no problem getting the war supplemental approved either with having both sides of Congress in power plus the president, but there was a problem there. So given some of the concerns that I think the public has over overall spending and some of the things going on, I think there's some room for debate there. That's why I think the issue of a CR is a possibility at this point in time, where I think two or three or four months ago I don't think we would have thought so.
Charles K. Narang
I think, Brian, what happens is a House bill that's supposed to be voted on in the fall and winter timeframe, that's going to affect the budgets. They're going to get passed or continuing resolutions.
Operator
Your next question comes from Mark Jordan - Noble Financial Group.
Mark Jordan - Noble Financial Group
Back to TRS, please, it looks like the average revenue per employee there is in the $250,000 to $260,000 versus about $170,000 on average for NCI. In doing their work do they have any specific products that they sell through with their services to get that 50% higher yield per employee?
William M. Parker
No, they don't sell products; they do sell services and they're very high-end services that are very highly valued by their clients.
Mark Jordan - Noble Financial Group
Secondly, you said they had a higher margin. Could you quantify what their operating margin would be before any amortization or 141R costs?
Judith L. Bjornaas
They're running about 2% to 3% higher than we are on average.
Mark Jordan - Noble Financial Group
You have an emphasis on doing more work with Health and Human Services. Do you notice any pricing differential or the opportunity for op margins there versus the core DOD business? Is it more competitive, less or the same?
William M. Parker
I think really the way we look at it is fairly similar. It depends on where you go in DOD and where you go in HHS, but I think across the board the way we look at it is that the margins are pretty similar across the board to DOD.
Mark Jordan - Noble Financial Group
Talking about sequentially you didn't grow your headcount, excluding TRS, would one assume that you ought to be up 10% to 15% in the second half to sort of fulfill the minimum organic growth goal that you have?
Terry W. Glasgow
That'd be fair. We had been averaging about 100 people every quarter for the last seven quarters and the new business that we are pursuing to a greater extent has labor content for NCI for a lot of different reasons. If we're successful, as we believe we will be, we should be seeing substantial growth over time.
Operator
Your next question comes from Timothy Quillin - Stephens Inc.
Timothy Quillin - Stephens Inc.
Just to try and figure out exactly what the nature of the business that you're bidding on is, what are the bigger contracts? What type of work are you looking at? Are there two or three that are high probability wins and big dollar size that you think could impact your 4Q? Is that what you're looking for?
Terry W. Glasgow
Primarily the bids we're bidding on are against our GWAC contract vehicles and in each case there those GWAC vehicles have very strong competition, okay? So as we look at our ITES or NETCENTS or TEAS or the other vehicles, they're not without competition and nothing's a given. We have been very successful in doing them.
There are some there that they fall into doing our normal high-end IT work. There is engineering work around the TEAS kinds of things. There's BRAC-related kinds of things which have some very tight timelines involved right there in which we have a nice competitive position.
But it's nothing outside of what we do today, really. It's a continuation of existing contracts against the same set of competitors and we feel that we have a very strong offering there and feel very confident about our overall growth plans.
Timothy Quillin - Stephens Inc.
And you talked about the fact that most of your cybersecurity opportunities would be embedded in larger opportunities, but are there any of, let's say, the $840 million of proposals submitted or the $1 billion that you're going to submit this quarter that are more information assurance in nature and maybe more in your sweet spot?
Terry W. Glasgow
Well, going back to the original question, most of the large IT jobs that we're doing, running the networks for them and so on, include a heavy amount of information assurance, security engineering, cybersecurity. It's the full gamut there.
And so, yes, I mean, some of these bids we have in here have a substantial amount of work along those lines, but it's not a pure carve-out of IA or cybersecurity.
We are also doing a lot of other kinds of work, and if you look at the input breakout of it there's a lot of different breakouts. But network security is about 70% of the spend; there's a lot of policy, planning and things like that. For instance, on our NETCOM EMS contract we're doing a substantial amount of cybersecurity and information assurance planning there.
So it's really hard to break it out like you're saying because most often there's very few procurements where it's an information assurance stand-alone bid. Now we do see additional growth over time on our IA BRAC job. That continues to move ahead nicely. And that is a job that is really around information assurance and compliance and preparation, and that will grow over time and we expect to see more of those as time goes on.
Timothy Quillin - Stephens Inc.
And then, Terry, you talked about the margin pressure that you might see on contracts and I'm wondering just philosophically how you're thinking about your margin profile right now. Are you still focusing on margin improvement over time or are you willing to keep margins where they are and focus on business developments and to drive top line growth?
Charles K. Narang
It's a big question. Eventually the focus should not change; the focus should always be on improving margins. That should be the focus. But you have to be realistic as to what's going on in the marketplace. It is becoming very, very competitive. Price pressure is going to be there for the foreseeable future; that's not going to go away.
What you have to do and what we'll have to do is look at the firm fixed price and [T&M]-type contracts, how we can improve the margins.
Five years ago or four years ago when we went public we said we'll improve the margin between 8% and 9%, operating margins. We have been close to 7.8%, 7.7%. And certainly we'd like to improve those margins. But it is becoming competitive and to get to it, to 8% to 9%, is going to take a lot of work that we would not like to do, to cut back infrastructure, which is the B&P side of it. We'd still like to continue to bid large proposals, big proposals, which is going to require expenditures and require bid years and a capture management team.
So obviously the pressure's going to be there, but we'd like to still focus on improving the margin if we can.
Terry W. Glasgow
Tim, one other aspect of that is it really comes down to what you bid as well and what your strategy is. Our strategy has always been to bid the higher end, the more sustainable kind of work and to avoid the lower-end commodity business.
In our assessment of our new business opportunities as we look to the future, if we see opportunities which have a substantial potential to provide long-term growth but that have some different aspects to them - for instance, some of the BRAC work, some of the things going on there might have a front end where it might have some front end costs that are lower margin but if it sets us up for longer-term engagements, longer-term growth, let's say over three to five years with new customers, we'll clearly look at that and make a business judgment if it makes sense.
But I don't think we will - part of it is just not engaging in certain places where the only basis to differentiate yourself is price. That not only hurts margins but also it's very hard to sustain over a period of time.
So I think we'll try to find ways where we can sustain long-term relationships that can grow both the top and bottom line, but we are willing to make judgments and assessments either on investments or on particular programs that might position for the long run.
Operator
Your next question comes from Tobey Sommer - Suntrust Robinson Humphrey.
Tobey Sommer - Suntrust Robinson Humphrey
You talked about the procurement process seeing some slippage, etc. I was wondering if within the different areas of procurement whether any areas have noticeably kind of been accelerated or if it's just kind of universally taking longer?
Terry W. Glasgow
You know, there's some acquisition shops that are really good and there's a few in particular that are not, and it would not be particularly politic to say who they are right now. But there are some out there where we've seen some programs that have been slipping and slipping, and I think a lot of you know where they are. And those are obviously disappointing.
One of probably the really good things about Secretary Gates' comments about improving the acquisition corps that we 100% concur with is that the acquisition staff needs to have more qualified people to be able to handle the significant demands that they have, and until that's addressed I think we are going to have problems.
But there is a real difference in some of the acquisition shops. And, frankly, if you look at vehicles like the Army ITES-2S contract vehicle, one of the reasons why almost everyone universally says it's successful is because it's a good [break in audio] and the acquisition staffs around it have been very good.
Tobey Sommer - Suntrust Robinson Humphrey
And then when you look at the bids that you having coming to submit in the third quarter of 2005 as well as those outstanding waiting for award, do they have a meaningfully different proportion of NCI labor content? Is it any higher or lower than what you currently have in the P&L?
William M. Parker
It's pretty much on par with what we have today. Our bid profile looks a lot like what we are today.
Tobey Sommer - Suntrust Robinson Humphrey
And then I probably missed this from the prepared remarks but, given the acquisition, what does the current balance sheet look like after the quarter?
Judith L. Bjornaas
Basically we were $26 million in debt after the quarter, so we're probably $17 million higher than that right now.
Operator
Your next question comes from Gautam Khanna - Cowen and Company.
Gautam Khanna - Cowen and Company
Just to follow up on the margin question that was posed earlier, in terms of challenges to get to 8% and stay there, could you remind me again what G&A investment excluding bid and proposal costs you have to make to scale the business $500 million and then when would those payments be made?
Judith L. Bjornaas
I'm sorry, can you repeat the question? I didn't quite catch what you were asking about the G&A.
Gautam Khanna - Cowen and Company
If I recall around the IPO you'd mentioned the infrastructure of the company was sort of scalable to $500 million in sales, after which you may have to scale, whether it be financial reporting systems, what have you. Do you still feel that way and, if so, how large might those investments be and when may they occur?
Charles K. Narang
I think we feel the same way. Nothing has changed, Gautam. The focus is still on the margin and the focus is on infrastructure. But once you get to a $500 million number or you're trying to bid the programs to get the $500 million numbers - and some of the programs that you're bidding today are very, very competitive in pricing - you're bidding for the future, that you want to get into that business, into that customer side. And to do that you have got to compete those and meet the incumbent's price structure.
Under those circumstances, yes, that's going to affect your margins, but hopefully you'll have more DL going down the path and that'll cover some of the absorption and help you recover some of the margins.
But we still believe that we'll try to maintain 8% and see if we can focus on and go to better than 8%.
Judith L. Bjornaas
I think to specifically answer your investment question, we kind of feel like we're there now. We're guiding $440 to $460 million this year, so clearly over $500 million next year would be very reasonable.
And one of the specific investments you mentioned that we've been talking about is the investment in financial systems and we actually are there now and did start making some of that investment in Q2. You'll see we had a slightly higher CapEx number. So we are looking to put in place a new financial system over the next year.
Operator
Your next question comes from Brian Kinstlinger - Sidoti & Company.
Brian Kinstlinger - Sidoti & Company
First of all you'd mentioned that you want to propose $1 billion but some of that slipped. Did you say actually how much you actually bid in the second quarter?
Terry W. Glasgow
We did not but it was around approximately $200 million.
Brian Kinstlinger - Sidoti & Company
And on TRS, could you provide what kind of revenue they produced in calendar 2008 and if they were to hit the midpoint of your goal what kind of revenue they would have in 2009?
Judith L. Bjornaas
I think they've been growing slightly. So if you take the five months' number we gave, something less than that in 2008.
Brian Kinstlinger - Sidoti & Company
So there was an unsubstantiated report on the Internet that I'd say that they did $13 million in 2008. Is that about accurate?
Judith L. Bjornaas
That's probably ballpark, yes.
Operator
Your next question comes from Michael Lewis - BB&T Capital Markets.
Michael Lewis - BB&T Capital Markets
Judy, when you discussed the EBITDA multiple on TRS you said 11 to 12 time. Is that a forward multiple or a trailing multiple?
Judith L. Bjornaas
Trailing.
Michael Lewis - BB&T Capital Markets
We're already halfway through calendar '09. Can you give us an indication on how much we'll see in re-competes in 2010 right now?
Judith L. Bjornaas
I was thinking about that today. We have not calculated that yet.
Michael Lewis - BB&T Capital Markets
Okay. Is it the typical range, 15% to 20%, or do you think it's going to be higher?
Judith L. Bjornaas
It will definitely be in that range if not slightly higher if only because, if you recall, earlier in the year our number dropped because we had a lot of things get extended and pushed into next year from a re-compete standpoint.
Michael Lewis - BB&T Capital Markets
And then I guess I'll just throw this one out there, too. With regard to TRS, what did it add to your pipeline with regard to dollars.
Terry W. Glasgow
We haven't added anything in there for them at this point. All pipelines were as of the end of the second quarter and we had not acquired them as of then.
Operator
Thank you. It appears there are no further questions at this time.
You may hear a replay of today's call through August 19th by calling 1-888-203-1112 or 1-719-457-0820, passcode 3406000. Again, the numbers are 1-888-203-1112 or 1-719-457-0820, passcode 3406000.
This concludes today's call. You may now disconnect.
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