Executives
Gary L. Yancey – Chairman of the Board, President & ChiefExecutive Officer
James E. Doyle – Chief Financial Officer & VicePresident Finance
Analysts
James Mcilree – Collins Stewart LLC
Michael Lewis – BB&T Capital Markets
Miles Walton – CIBC World Markets
Patrick McCarthy – Friedman BillingsRamsey
Steven Levenson – Stifel Nicolaus & Company
Robert Kirkpatrick – Cardinal Capital
Applied Signal Technology, Inc. (APSG) F4Q07 Earnings Call December 18, 2007 5:00 PM ET
Operator
Greetings and welcome to theApplied Signal Technology fourth quarter 2007 earnings conference call. (Operator Instructions) Itis now my pleasure to introduce your host Mr. Gary Yancey, President & CEOfor Applied Signal Technology. Thank youMr. Yancey, you may begin.
Gary L. Yancey
Good afternoon and welcome to our fourth quarter earningscalls. Probably most of you have seenour press release for this call. We willgo through the fairly typical format that we use. I have Jim Doyle our Chief Financial Officerhere as well. I will turn it over to himin a moment to recap the financial aspects of the fourth quarter and the fiscalyear 2007 and I’ll have a few minor remarks and then we’ll open up toquestions. With that, I would turn itover to Jim.
James E. Doyle
Good afternoon everyone. I’ll provide a brief review of our financial results as I normallydo. However, let me begin with our SafeHarbor Statement. Our presentation todaymay contain forward-looking statements which reflect the company’s currentjudgment on future events. Because thesestatements deal with future events they are subject to risks and uncertaintiesthat could cause the actual result to differ materially. In addition to thefactors that may be discussed on this call important factors which could causeactual results to differ materially are contained in the company’s 10Q and10K.
The order received during fiscal 2007 were over $191 millionand increased about 54% compared to fiscal 2006 orders of $124 million. We believe there continues to be an interestin intelligence, reconnaissance and surveillance by the USgovernment to respond to the threat of terrorist activities and the war againstterrorism. We also believe our companyis well positioned to benefit from the anticipated spending. We focus our operations on assuring programperformance, maintaining a competitive cost structure and penetrating ourmarketplace. Our customers continue tocome to us with their requirements for ISR solutions heavily weighted towardsnew development.
Revenues for the fourth quarter of fiscal 2007 wereapproximately $46.2 million essentially the same as the fourth quarter of lastyear. At October 31, 2007 there wasapproximately $4.5 million in pre-contract costs on the balance sheet that thecompany anticipates will convert to revenues in future periods. Revenues for fiscal 2007 were a little over$170 million, up about 5% from approximately $162 million of revenues recordedlast year.
Operating income for the fourth quarter and fiscal 2007 was approximately $4.1million and $11.3 million respectively compared with operating income ofapproximately $1.8 million and $8.9 million for the same periods in fiscal2006. Operating income increased duringthe fourth quarter and fiscal 2007 due to improved program profitability.
Net income for the fourth quarter and fiscal 2007 wasapproximately $2.4 million or $0.19 per diluted share and $6.8 million or $0.55per diluted share respectively. Comparedto net income for the fourth quarter in fiscal 2006 of approximately $600,000or $0.05 per diluted share and $4.3 million or $0.36 per diluted sharerespectively. Net income improved forthe fourth quarter and fiscal 2007 because of improvements in programprofitability and a reduction in our effective tax rate.
I’d like to briefly review the balance sheet. The combined cash and investment balances atOctober 31st were approximately $39 million and grew about $6.4million over the year. We had a balanceof about $32.6 million at the end of October of 2006. Accounts receivable balances were about $44.5million. Included in accounts receivableare billed receivables of about $25 million and unbilled receivables of alittle over $19 million. The inventorybalance at the end of October, 2007 was essentially unchanged. During thefiscal year it was approximately $5.9 million compared to approximately $6.1million at the end of 2006. Othercurrent assets included pre-contract costs of about $4.5 million at the end offiscal 2007 and that compares to approximately $5.7 million of pre-contractcosts at the end of fiscal 2006.
Our current liabilities are about $20 million down about$2.5 million from a year ago and that is due to a reduction in account payablesbalances. We did pay dividends of about$1.5 million in the fourth quarter and about $6 million during fiscal 2007. Our ending backlog for fiscal 2007 wasapproximately $127 million up from about $105 million a year ago.
That’s an overview of our financial results. I’ll turn it over to Garyand he’ll open up to questions after that.
Gary L. Yancey
I don’t have too many comments to add over what was in thepress release. Obviously, with thisstronger backlog though, we are well positioned for 2008 to be able to have anopportunity for continued growth in the company. As we’ve said and I’ll just reiterate thatthe marketplace definitely has a requirement therefore, opportunities prettywell across all of our offerings in intelligence, surveillance andreconnaissance – we’re seeing opportunities across all capabilities and areasof the company and believe that the requirements for better ISR will continueto be out there and provide a marketplace with growth opportunity for us.
With those few comments, I guess what I would do is plan ongoing ahead and opening this up to questions.
Question-and-AnswerSession
Operator
Ladies and gentlemen we will now be conducting a questionand answer session. (OperatorInstructions) Our first question comesfrom the line of Jim Mcilree of Collins Stewart.
James Mcilree –Collins Stewart LLC
Could you guys – Jim, the operating margins that you postedthis year, I think you talked about a range of 6 to 9% being reasonable goingforward and you came in kind of near that low end. Is there something about the backlog thatwould argue that the operating margins should be about the same or higher goingforward?
James E. Doyle
I think Jim, it should be about the same as this year. It still consists of a significant amount ofengineering development work which was typically awarded on a cost reimbursabletype basis which does provide lower margins. Going forward, I would anticipate it, we anticipate a continuedsignificant amount of development work so, it would be towards the lower end ofthat range. Is what we’d anticipate forthat.
James Mcilree –Collins Stewart LLC
Okay. I think on thelast call you talked about trying to change around how you were accruing forthings during the year which would make less R&D and less gross margins inthe quarter. Is that what happened? Because, usually you get a bump in the grossmargins for the quarter.
James E. Doyle
No. You’ve got toremember Jim that less R&D won’t really impact this since this R&D isbillable back to the government and so is part of our billable costs. So, the R&D doesn’t really impact that. I’m not sure quire why the margin, why youwould think the margin would’ve popped more the last quarter than here.
Gary L. Yancey
Sometimes Jim we’ll see a fourth quarter improvement inmargins because of increase in product sales and things like that. There was some of that coming through here inthe fourth quarter but, the biggest drivers were some improvement inprofitability on our development program.
James Mcilree –Collins Stewart LLC
Could you give headcount at year end and talk generallyabout what your plans are for 08 headcount?
Gary L. Yancey
Sure. Our headcountwas roughly 635 people at the end of October and we are in a hiring mode giventhe backlog that we do have. We haveimmediate need for additional staff in FY08 and we’re in that hiring mode rightnow.
James E. Doyle
Actually, in most all areas in the company, in most alldisciplines in the company, technical disciplines that it is we’re in thathiring mode. We had anticipated morehiring last year but, as I had mentioned in the release even though the orderscame in pretty well as anticipated and even slightly greater than anticipatedthey were also later than anticipated and so what it created was more of ahiring need right towards the end of the year and now going in to 08. We’re getting pretty good activity andpositive responses on our hiring.
James Mcilree –Collins Stewart LLC
The backlog is like an 18 month backlog? Is that reasonable?
Gary L. Yancey
That’s reasonable, yes.
James Mcilree –Collins Stewart LLC
There’s an RFP out there for something called Measurement & Signature Intelligence,Advanced [inaudible] Intelligence Program. Are you aware of that or involved in that?
James E. Doyle
We are actually planning to be on a team to be pursuingthat.
James Mcilree –Collins Stewart LLC
When are the bids on that one due?
James E. Doyle
I believe that they will be due towards the end ofspring. I believe it’s going to be, Ithink, a summer award or late summer.
Operator
Our next question comes from the line of Michael Lewis withBB&T Capital Markets.
Michael Lewis – BB&TCapital Markets
Nice clean quarter. Okay, Jim just a quick question on pre-contract costs. Over how many quarters do you think that wewould expect to see the $4.5 million convert?
James E. Doyle
Probably over the first two quarters of the year.
Michael Lewis –BB&T Capital Markets
Okay. Can I get yourmix please, what the mix was at the end of year?
James E. Doyle
The mix in?
Michael Lewis –BB&T Capital Markets
With regards to costplus.
James E. Doyle
As far as sales? Orbookings?
Michael Lewis –BB&T Capital Markets
With regard to sales.
James E. Doyle
With regard to sales, in the fourth quarter it was roughly15% from product and about 85% from our engineering work.
Michael Lewis –BB&T Capital Markets
Okay.
James E. Doyle
And that’s about the same for the year, Mike. It’s roughly 14% to 86%. So, it’s roughly 15% product sales and 85%development.
Michael Lewis –BB&T Capital Markets
Gary, we wouldexpect to see, because of thelarge portion of R&D inthe mix right now,continued flatlining of theproduct percentages ataround 15%, but low20% going out for therest of this year?
Gary L. Yancey
That’s definitely what we believe for this year, Mike.
Michael Lewis –BB&T Capital Markets
By theway, it was nice to seethat IDIQ on process hit back inOctober. I’m kind of wondering whetheropportunities are outthere in thefield for SAS systems with theUUVs. Areyou looking at otherRFPs or any other type of near term opportunities for that type of processright now?
Gary L. Yancey
We have a number of opportunities actually, over the nextfive years that we’re looking at both unmanned undersea vehicles SAS –Synthetic Aperture Sonar, of course, is what that stands for and towed SASwhere you have a towed vehicle or a towed fish as they call it and there’sdifferent applications for both. Bothfit different applications. We have someinternational opportunities that we have to make sure we can get export licensefor and we’re working with the State Department on that as we speak to verifythat we can do such. Then we have somenaval opportunities as well. Some ofthose could happen in this fiscal year and 09 and actually we’ve identified opportunitiesclear out through 2012.
Michael Lewis –BB&T Capital Markets
Gary, arethese going to beDARPA development type contracts? Or, arethey going to be fullcompetitions?
Gary L. Yancey
Well, they won’t be DARPA development. Some of them will be competitions. We have one foreign opportunity right now that’s going to be acompetition between two primes and so, that will be competitive. Some of the opportunities are a bit smallerand could perhaps be sole source. Weneed to completely productize our towed SAS. We have productized unmanned undersea vehicle SAS and we have a towedSAS system actually, sitting in our LA office now. Actually, not in an office, it’s pretty bigbut, sitting in a laboratory and it’s been out for sea trials quite a bit. So, we’re pretty close to having that as adeliverable system as well and we think there’s going to be some opportunitiesthat might be sole sourced to us as a result of having that pretty much off theshelf opportunity.
Michael Lewis –BB&T Capital Markets
Just one more question and then I’ll hope back in thequeue. I might be taking a tangent onyour Gary. The Air Force obviously, is right nowstanding up the new cyber command. MajorGeneral Lord recently said the budget could be as large as $10 billion to setthat thing up. Have you guys looked intoareas that you think you could leverage some of your product that could bebeneficial to this new command? Because,this is going to start up sometime next year I’m wondering if you guys havelooked into that as a possible new market opportunity.
Gary L. Yancey
As we speak we are looking into that but, very preliminary, very prematureright now for us to have much knowledge about what this whole cyber initiativewill be. We had a strategic advisoryboard meeting a while back with some very high level experienced individualsfrom out of the government and that was a strong recommendation to make sure wefollow that initiative and see if there would be opportunities for ourcapabilities there.
Michael Lewis –BB&T Capital Markets
Okay. So, they’ll belooking at your algorithms, right?
Gary L. Yancey
Well, it could be algorithms, it could be hardwareproducts. You know, it depends on againon exactly what the cyber – what all capabilities the cyber initiative wants tohave. But, most all of our expertise isbased on the algorithms we’ve developed and we can implement in fieldablesolutions and whether that would be running on commercial off the shelveequipments or in some cases the special purpose engines. It’s way too premature for us to know whatthe initiative will be to know where we might fit in.
Operator
Our next question comes from the line of Miles Walton withCIBC World Markets.
Miles Walton – CIBCWorld Markets
You did have actually, nice improvement in operating marginin the quarter. I was just hoping eitherJim or Gary, if you can probe a little bit deeper maybe give some color behindwhat in particular in characterization of program performance is drivingthat? It looks like maybe excluding thestock based comp you’re getting pretty close to about a 9% or excuse me 11% opmargin.
Gary L. Yancey
We had some nice improvement Miles in one of our developmentprograms. It’s an Award B typeprogram. We picked up some nice – we hadbeen a little bit conservative on what we thought the program might look likethe rest of the way and we had a good Award B period this last one and giventhe way the programs going and we anticipate essentially completing it by themiddle part of next year. Just the wayeverything looks. The programs goingwell until we’re able to improve our profitability on that.
Miles Walton – CIBCWorld Markets
Amillion pick up, or something inthat order?
Gary L. Yancey
Well, it wasn’t that big but, it was a good three-quarter ofa million or so.
Miles Walton – CIBCWorld Markets
Okay.
Gary L. Yancey
We also, throughout the year and even in the fourth quarterwe’ve had some good improvement with the royalties that we were getting fromComTech. So, that’s been a niceroyalties stream and continues to show improvement. Those are some of the things – were some ofthe bigger drivers in helping fourth quarter profitability and year-to-dateprofitability.
Miles Walton – CIBCWorld Markets
Okay. Maybe back to,I think Jim had brought this up initially but, on the R&D side, it waslower as a percent of sale here in the fourth quarter, just over 7% of salesand I understand that it’s billable back Gary. But, presumably there’d be better margins onyour contract work than your R&D. So, on a go forward basis, what’s the appropriate percentage of saleskind of you think R&D is going to be as a run rate?
Gary L. Yancey
We target on the order – or actually we’ve changed the mix alittle bit because some of our business development is going to require a bitmore of an investment in marketing and we’ll trade that a little bit for aninvestment in R&D. But, we shouldget back up more towards 11%, 10.5% to 11% of a portion, a large portion of ourrevenue. There’s some – it’s way tooinvolved to try to explain here but, there’s some type of contracting work wedo that does not generate the G&A pool for R&D. Or, the R&D pool would be a better way tosay it. So, we don’t count that revenuein when we make a decision at the beginning of the year for our R&Dbudget. The reason the R&D rolledoff in the fourth quarter, as I mentioned before, these bookings came in muchlater than had been anticipated and once they hit we had to pretty immediatelyshift staff from R&D activities and a few of the other what we call enddirect activities on to contract activities so that we would keep up the goodprogram performance that Jim’s been referring to. It was a conscious decision that we had totrade that until our hiring picks up to where we can then get back to thebalance that we want.
Miles Walton – CIBCWorld Markets
Jim, maybe on the stock based comp for next year. I think you had a reset that wastriggered. So, is just over $5 millionthe right number to be targeting in terms of the stock comp expense before itdrops to kind of the mid threes in 09? Also, if you can comment on the tax rate assumption.
James E. Doyle
Sure. Let me justgive you some color on the FY07 results. Stock comp was about $4.2 million. We anticipated growing just a little less than that. It should be less than that $5 million Milesso, we’re a little bit under that for FY08. Then, as far as our effective tax rate for fiscal 08, right now we seeit somewhere in the 44 to 45% range. That’skind of a similar range to where we came in FY07. Our effective tax range for 07 is about 43%so, we’re in about a similar range for next fiscal year.
Miles Walton – CIBCWorld Markets
Okay. That’shelpful. Gary,on the guardrail program obviously, Northrop has now been on contract forthat. Is there a timeline for when theyare going compete the work on that that you’re looking to compete on? Also, if you can kind of lay out for us themajor programs that you’re thinking about in 08?
Gary L. Yancey
They arecompeting that. They actually had aninformal competition where they had some run off. We probably arenot going to get thepiece that we originally had wanted on guardrail. Itlooks like we still think there’s opportunities and we’re indiscussions. There’s opportunities on theprogram for our expertise and we’re indiscussions on that. Theamount that guardrail could mean to us is still questionable atthis time. Some of theother programs, I mentioned that we had aforeign opportunity inthe SAS area, that’sone of our major opportunities. There’s afew different ELINT opportunities for thedivision, our electronic systems division where we’ve been making apretty major investment and astate of the art ELINTprocessor. Those opportunities we’re alittle cautious about this because anumber of them are foreign. We have licensing so, that’s not anissue but, it seemslike the foreignopportunities slip even worse than US government ones. But, there’s about three different ones that aresuppose to be awarded inthe fiscal year 208. Those arecompetitive in most allcases so, there’s still also thecompetitive factor behind that. Then, anumber of – well, actually there is one potential opportunity for selling 10-20ground base wireless comment processorswhich is not real bigbut, it’s not bad and hopefully, that would bea little higher margineven though it’s still not enough of therevenue that it wouldgreatly swing it but, itcould help the margin.
Miles Walton – CIBCWorld Markets
Okay. Near term, thenext couple of quarters will the supplemental delay or the budgetary dynamicsand politicking that’s going on now, is that going to way on the booking trendsin the next couple of quarters?
Gary L. Yancey
I don’t think the supplemental – it turns our we do getbenefit from the supplemental each year. We never know how much and our customers don’t really know how much, youknow, we can get benefit from that. But,the fact that is maybe hitting a little bit later probably isn’t a real issuefor us, especially with the fact that we’re starting out with a stronger backlog this year going into the year than last year.
Miles Walton – CIBCWorld Markets
Okay. Indirect ratevariance, I guess at the end of the year you’re able to absorb that, I thinkyou were carrying maybe just over $4 million on the balance sheet afterreserves last quarter. I guess, we’resitting now at zero and that was able to be absorbed on plan.
James E. Doyle
Yes. You’re rightMiles. We reported that we estimated$4.5 million of variance that we could not absorb and itdid in fact, itall trues up toactuals at theend of the year. What was left on thebalance – what was left before we actually trued everything up was bout $2.3million. We did better than we thought. We lowered what that variance was and that was aprimary result of theback log improving. Things coming ina little bit earlierthan we thought in thefourth quarter so itenabled us to charge directly to contract and that helped to lower theimpact of that indirect ratevariance in thefourth quarter.
Miles Walton – CIBCWorld Markets
The $2.3 million that was left was then charged tocontracts?
James E. Doyle
Essentially. Some was charged to profits some was flowedback on the cost reimbursable type job.
Operator
Our next question comes from the line of Patrick McCarthywith Friedman Billings Ramsey
Patrick McCarthy –Friedman Billings Ramsey
I had a couple of additional questions on the order flowduring the quarter. I was wondering,typically you see this year end, December year end flush of product and I waswondering if you saw that in the quarter. Given the FFP contribution it maybe looks like you might not of.
James E. Doyle
It wasn’t that big of a flush. You’re right.
Gary L. Yancey
You’re right Patrick.
James E. Doyle
A little bit. It was improved over the third quarter but itwasn’t a significant amount.
Gary L. Yancey
It was a weak flush so we’re calling a plumber.
Patrick McCarthy –Friedman Billings Ramsey
So, should we assume that because that was kind of driven byyear end it’s probably not going to come in the current quarter either?
Gary L. Yancey
That’s correct.
James E. Doyle
Right.
Patrick McCarthy –Friedman Billings Ramsey
Some other programs that you talked about in the past butdidn’t mention. You haven’t talked aboutthese in a while but, some smaller ones you were looking for at the end of thequarter. Did any of those come in? Some multiple channel system program andparticle imaging program that might have come in the fourth quarter?
Gary L. Yancey
Yeah. We did get someparticle imaging, I’m just trying to think back to what you might be referringto versus what versus what we got. Wedid get some bookings in the particle imaging area. We definitely got a large number of bookingsin the multi channel area, multi channel comment area, high capacity commentarea. It was somewhat across the boardthat we got the bookings.
Patrick McCarthy –Friedman Billings Ramsey
Then, just on theELINT side. I mean, is itfar to say that unitis now up and just kind of waiting on orders? And, did anything fall inthe fourth quarterhere? Or, is itmuch more of an 08hopefully the bookingsstart coming in then?
Gary L. Yancey
08 for the bookings. The unit, we actually, in fact, we mentioned that in that one pressrelease where we had the demo, fairly well attended demo by prime contractorrepresentatives of US government agencies and there we were able to demoessentially, all of its capabilities. There’s still a bit of work. Mostof that work is just finishing up now for a few more of the capabilities. Then, we have a qualification phase to gothrough which would not necessarily impact us being able to stand up to theopportunities we have and is not impacting that. But, the unit will be more of a complete offthe shelve capability by probably April to May timeframe of next year.
Patrick McCarthy –Friedman Billings Ramsey
Okay. Could you justgive us a sense of how many bodies you have allocated to that effort?
Gary L. Yancey
Probably about 15.
Operator
Our next question comes from the line of Steven Levensonwith Stifel Nicolaus.
Steven Levenson –Stifel Nicolaus & Company
I know you caught up on thelabor rates. Can you tell us how youplan to handle thesituation in fiscal08? Doyou think we’re going to bump into those same things? Or, doyou plan to raise your – try to avoid thevariance? Or, doyou think you will have abetter time negotiating labor rates with thecustomer?
Gary L. Yancey
We’ve got a much better opportunity here in 08 and we saythat damn near every time we start a fiscal year. But, by having the higher back log we canregulate this better to balance between contract labor which has to happenanyhow and the indirect labor that is discretionary spending. Going into 07 with the lower back log we hadto start investing more heavily keeping staff occupied investing in ourR&D, internal R&D more heavily early on and some of our other businessdevelopment activities. We’re actuallyin an opposite situation now we’re really needing to hire just so we can startmaking those investments and as we can hire then we can start making thoseinvestments. But, we’ve got a muchbetter opportunity to keep that in balance.
Steven Levenson –Stifel Nicolaus & Company
That sounds good. Doyou think – do you plan on one of your job fairs? Or, is the employment situation such outthere that you think you’ll have a little bit easier time?
Gary L. Yancey
No. We’ve beenholding our own job fairs; we’ve been attending many job fairs. There’s many of them around coast-to-coast,actually across the United States. We’re hiring at almost all offices except ourTexas office. We’re seeing pretty good resume flow, infact, surprising this time of year typical would be pretty slow and we’re stillpicking up new employees right through the holidays too. It’s an investment, a fair amount ofinvestment. But, I think we’ll get agood stab at what we need to do.
Steven Levenson –Stifel Nicolaus & Company
Thanks. You mentionedone of the teaming agreements before. Can you give us a little update or outlook on how you think that’s goingto work going forward? What sort ofprograms you’re going after and if you can say how your partners are?
Gary L. Yancey
I’m not sure which teaming agreement I would have beentalking about is the problem.
Steven Levenson –Stifel Nicolaus & Company
You mentioned on one of the foreign programs.
Gary L. Yancey
Oh well, we have – we’re teamed on maybe three or fourdifferent foreign – most of itin theELINT area but, on those. Those were theones we were referring to earlier when I said we had some opportunities comingup in 08.
Steven Levenson –Stifel Nicolaus & Company
Do you have a goal for bookings in the coming year?
Gary L. Yancey
Yep. Next question.
Steven Levenson –Stifel Nicolaus & Company
Any more detail on that?
Gary L. Yancey
Nope.
Operator
Our next question is from the line of Robert Kirkpatrickwith Cardinal Capital.
Robert Kirkpatrick –Cardinal Capital
Although I’m a little bit new to the story, you talkedearlier about royalties from ComTech. Could you give us a ballpark as to what those are on an annual basis?
Gary L. Yancey
Actually, we can tell you what they were for this year. I mean, it’s a bit of a projection Robertbut, it has been growing as Jim said.
James E. Doyle
For FY07 Robert it was about $1.5 million in royalties. As Garymentioned, it has grown up from about $8 to $900k a year ago.
Robert Kirkpatrick –Cardinal Capital
Okay.
Gary L. Yancey
But again, we don’t know how much one should trendthat. I mean, that’s nice and healthyand looking good but, you’re still looking in the future. This is a market that ComTech’s really theexpert in and can control much better than us so, we kind of ride along withthem on this.
Robert Kirkpatrick –Cardinal Capital
Okay. Do you havewhat D&A was for the year?
James E. Doyle
Yes. Depreciation and amortization wasapproximately $5.6 million.
Robert Kirkpatrick –Cardinal Capital
Okay. I’m sorry youdidn’t get the guardrail business. Didthat end up going all in house to Northrop?
Gary L. Yancey
No. I think there’sgoing to be another contractor that will get that. They were looking at two or three of us and Ithink we’ll get that – we still think we have offerings for guardrail, as doesNorthrop. It isn’t necessarily all goneyet.
Robert Kirkpatrick –Cardinal Capital
Okay. Finally, withthree quarters or more than three quarters of your business being termeddevelopment when does that mix of business really start to change? Or, does it never really change with AppliedSignal toward production?
Gary L. Yancey
Well, I’m not sure it’s even just Applied Signal but, in ourbusiness model as we go forward and as we keep growing and feel that we need largerparts of larger programs to grow the company in a multi $100 million rangeinvariably the kinds of programs of records we’ll be going after will be costreimbursable. There will be enoughdevelopment in them that they won’t be fixed price. Even some of our air bourn programs thatwe’re in right now pretty heavily every platform will be cost reimbursablebecause – you can think of them as production but, there’s enough newengineering and engineering issues that come up platform-to-platform that a contractorjust couldn’t take the risk of taking those fixed price. We believe that we’ll be seeing this type ofa mix for – definitely for 08 and probably into even further years out.
Operator
Our next question comes from the line of Michael Lewis with BB&TCapital Markets.
Michael Lewis –BB&T Capital Markets
Gary, I waswondering, you’ve maintained 635 employees since I think April, the Aprilquarter, what would be your internal goal? Are we talking trying to get close to 700 by the end of your fiscal08? Is there any goal that you couldtalk to us about so we can kind of?
Gary L. Yancey
It is in that ballpark, in fact, I think it’s actually alittle over 700 is what we are showing we need. Our attrition has picked up because the economy has picked up. It’s a bit higher so there was a fair amountof hiring that went along but, the real issue from April to the end is whatwe’ve been referring to is the slip bookings or you would have seen growth instaff in that period. That’s what causedthis phenomena now of having a much heavier hiring effort going. Right now we’re really running in favor ofcontract work versus any of the discretionary spending.
Michael Lewis –BB&T Capital Markets
Can we somewhat isolate are you seeing more turnover out therein Silicone Valley? Are you seeing more turnover in Indianapolisor Northern Virginia? Where are you seeing the turnover that’s really hitting because, I knowyou’re hiring people. It’s a matter ofwhere you’re holding on to them.
Gary L. Yancey
It’s almost universal. Perhaps a bit less in Salt Lake Cityalthough, we’re seeing a bit there and again, it’s just going to opportunities,some of them commercial and other opportunities. But, otherwise I would say it’s relativelyuniform amongst all of our offices.
Michael Lewis –BB&T Capital Markets
Okay. That’shelpful. Bookings, at least north of onetime next year? Would you offer anythingthere?
Gary L. Yancey
We’d offer something there. No, we think it’s north of one.
Michael Lewis – BB&TCapital Markets
Okay. North ofone. Then Jim, just two remainingquestions. Operating cash flow? Well, you can give me full year?
James E. Doyle
For the full year Mike is $14.1 million.
Michael Lewis –BB&T Capital Markets
$14.1 million. Whatabout CapEx?
James E. Doyle
CapEx was about $2.8 million for theyear.
Operator
Mr. Doyle, there are no further questions in the queue atthis time.
James E. Doyle
In that case, then that will conclude our conferencecall. Thank you very much.
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