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Executives

Philip O. Nolan - Chairman, President and Chief Executive Officer

Brian J. Clark - Chief Financial Officer

Lawrence Delaney, Jr. - Investor Relations Counsel

Analysts

William R. Loomis - Stifel, Nicolaus & Co.

Cai von Rumohr - Cowen & Co.

Chris Donaghey - SunTrust Robinson Humphrey

Stefan Mikatuk

Michael S. Lewis - BB&T Capital Markets

Tim Quillin - Stephens Inc.

Brian D. Kinstlinger - Sidoti & Co.

Stanley, Inc. (SXE) F1Q09 Earnings Call July 31, 2008 5:00 PM ET

Operator

Welcome to the Q1 Fiscal Year 2009 Stanley, Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Larry Delaney, Investor Relations Counsel.

Larry Delaney

Thanks for joining us today on Stanley’s fiscal first quarter 2009 earnings conference call. Here today are Stanley’s Chairman, President and CEO, Phil Nolan, and Chief Financial Officer, Brian Clark.

Phil will begin with an overview of the company’s first quarter operating results. Brian will then go through the financial results and issue guidance for Stanley’s fiscal second quarter 2009 and full year fiscal 2009. We’ll then take your questions.

Before we get started I’d like to remind our listeners that our comments today will contain forward-looking statements and information based on management’s current expectations. Such forward-looking statements are subject to certain risks, uncertainties and assumptions. Information about various risks that could affect the company’s financial results is available in the Risk Factor section of Stanley’s Form 10K for fiscal year ended March 31st, 2008, and other reports that the company files with the SEC. In addition, today’s call will include discussions of certain non-GAAP financial measures, including EBITDA and organic revenue growth. Tables reconciling our non-GAAP financial measures are available in our earnings press release available under the Investor Relations section of the company’s website at www.stanleyassociates.com.

With that, I’ll turn the call over to Phil Nolan.

Phil O. Nolan

I’d like to thank all of you for joining us this evening. Stanley began fiscal year 2009 in solid fashion with Q1 revenue of $172.6 million, representing year over year top-line growth of 29%, all of which was organic. Net income for the quarter was a record $8.3 million versus $5.4 million a year ago, equating to diluted earnings per share of $0.35, up from $0.23 for Q1 of last year. Q1 revenue exceeded the top end of the guidance we issued on our Q4 ‘08 call by nearly $5 million. Diluted EPS exceeded the high end of guidance by $0.03.

Bookings for the first quarter were $384.7 million, equating to a Q1 book-to-bill of 2.2:1. Our contract backlog at June 27 was approximately $2 billion, up 12% sequentially over Q4 and more than 102% year over year.

Our qualified pipeline currently exceeds $4 billion and that includes opportunities that came with our most recent acquisition of Oberon Associates. As of today, we have nearly $600 million in proposals submitted and awaiting decision which also includes Oberon. Collectively, we expect to submit another 15 proposals of $100 million or more in the next 6-9 months. We do expect, however, the Q2 bookings will be light, probably well below 1:1 book-to-bill. I know you’ve heard me tell you that for the last two quarters and each time we exceeded expectations, but that was driven by the timing of two large recompetes. Now that both of those are successfully behind us we will see a lighter bookings quarter. But as I mentioned, we are sitting on the strongest qualified pipeline we’ve had in our history. So we look forward to bookings again picking up in the latter half of this fiscal year.

All in all, FY ‘09 is shaping up to be another strong year for Stanley. We expect that the drivers that produce our revenue in organic in FY ‘08 will continue to generate top-line growth and improve margins in FY ‘09. These include a new ramp in passport demand, continued improvements in contracts, one in FY ‘08 supporting the Army’s equipment reset mission as well as anticipated new awards later in FY ‘09, and revenue from the Department of Homeland Securities, Citizenship and Immigration Service Centers, or USCIS, contracts. We also expect our acquisition, Oberon, which closed earlier this month to be a strong contributor to this year’s overall growth.

As a refresher from when we announced the deal in June, the Oberon acquisition gives Stanley access to a new set of customers, including the Army’s Intelligence and Security Command, the Air Forces’ Electronic Systems Center, the Defense Information Systems Agency and other Department of Defense intelligence community and civilian agency customers. Oberon has outstanding engineering and integration services and solutions, supporting biometric systems, intelligence operations, training and analysis, communication systems and enterprise data management. Since we began work on the acquisition, Oberon has secured Prime position on ENCORE II acquisition and the INSCOM Futures contract. Both of these agency-specific ID/IQ contracts are expected to provide significant opportunities for new business. I should also add here that our acquisition of Oberon will expand Stanley’s Army RESET capabilities beyond our current focus on equipment reset. One of Oberon’s core competency is providing institutional training development and training support to military intelligence personnel at Fort Huachuca, Arizona. In effect, helping to reset the skill sets of personnel returning from Iraq and Afghanistan. So with equipment and personnel reset, Stanley is inevitably involved with the military’s efforts to systematically restore previously deployed units to the required level of personnel and equipment readiness. We have begun the process of integrating Oberon and expect to be largely finished by the end of this calendar year.

I now like to update you on two of our key contracts, passport book print and USCIS. Late last month, we officially opened a Tucson Passport Center and have been producing documents at this location since April. This facility adds the capacity to produce an additional 10 million passports annually through remote transfer from all the agencies from across the country. The department State has also announced that it will become producing Border Crossing Cards at the Tucson Passport Center in October 2008. The Center is expected to produce between 800,000 and 2 million Border Crossing Cards annually. In addition, just last week the State Department and the Department of Homeland Security announced the roll out of a new US passport card, which is produced and distributed from our Arkansas Passport Center in Hot Springs. The passport card is a convenient wallet-size document for land and sea travel between the US and Mexico, Canada, the Caribbean and Bermuda. Over 350,000 Americans pre-ordered passport cards. We expect the processing times for passport cards to be roughly the same as that for standard passport books, which is less than 4 weeks, and expect the passport cards will make up an increase in percentage of the roughly 20 million or so passport documents, expected to be issued in the current government fiscal year.

Much of the forecast to growth in our passport services franchise will likely occur in our Q4, as the June 2009 deadline nears for the land and sea provisions of the Western Hemisphere Travel Initiative. As you will remember, our experience with the air deadline that took effect in January 2007 was that passport demand began to be peak immediately prior to that time and continued well after. We expect that the land and sea deadline will create an even larger demand in the months before and after June 2009. And we believe that we are fully prepared to meet this expected surge.

Turning to our USCIS contract, Stanley successful support our customer’s annual surge in applications, resulting from the H1-B visa lottery that occurred in April. As we have previously stated, this contract is still on track to deliver solid revenue in FY ‘09 with operating margin below the company average. I know some of you prefer more specifics on this contract but we’re cautious about providing the sharper focus on financial performance until we complete the negotiation of our collective bargaining agreement in California. I can say, however, that Stanley’s company-wide margins are expected to improve more than we previously guided and given its role to size, the performance of this contract is obviously factored into that calculation. While there’s no guarantee that the parties will reach agreement on the terms of the collective bargaining agreement, we will be able to offer more color on the expected profitability picture of the USCIS contract when good faith negotiations have concluded.

And with that, I’ll turn the call over to Brian.

Brian J. Clark

I’m pleased to report that Stanley posted outstanding financial results for our fiscal first quarter ended June 27, 2008. exceeding street consensus for revenue and earnings, as well as the top end of the guidance ranges we issued on our last earnings call.

First quarter revenue was $172.6 million, up 29% from $133.5 million in the first quarter of fiscal 2008. Revenue growth for the first quarter, all of which was organic, came from the ramp up of recently awarded new contracts and the continued expansion of existing contracts in significant contract modifications. We continued to benefit from the increased services related to US passports and immigrant visas, ongoing demand for C4ISR-related systems and services supporting the United States Navy and Marine Corps, and expansion of work with the United States Army’s global equipment RESET mission.

For the June quarter, DOD contracts made up 63% of total revenue, while federal civilian contracts comprised 37%. The federal civilian share increased over full fiscal 2008, largely due to the result of increased revenue from our USCIS contract. We expect that federal civilian revenues represent less than a third of our total revenue going forward as a result of our acquisition of Oberon earlier this month.

Contracts from which Stanley act as the prime contractor accounts for approximately 78% of revenue for the quarter, down slightly from Q4 of fiscal 2008. Our passport services contract accounted for 16% of total revenue in the first quarter of fiscal 2009, up slightly from 15% last quarter and down from 17% in Q1 of last year. Passport services revenue grew 20% over the first quarter of last fiscal year. Revenues that aren’t under task orders on our corporate production contract aggregated to slightly less than 11% of total revenue in the quarter and were driven primarily by integration and installations of C4ISR systems for the US Navy and Marine Corps.

EBITDA in the first quarter of fiscal 2009 was $16.1 million, up 38% from $11.7 million in the first fiscal quarter of last year. EBITDA margin was 9.4% for Q1, up from 8.8% for the first quarter of last year and up sequentially from 9.1% last quarter. EBITDA margin improved year over year due primarily to continued realization of efficiency in our general and administrative infrastructure and improved profitability on contracts offset partially by additional FAS 123(NYSE:R) stock compensation expense related to equity grants made in the first quarter of fiscal 2009.

GAAP operating income was $14.3 million, up 42% from $10 million in the same quarter of last fiscal year. Operating margins was 8.3% versus 7.5% in the first quarter of fiscal 2008. Operating margin improved year over year due to the factors improving EBITDA margins just discussed as well as depreciation of amortization representing a lower percentage of revenues. Net interest expense for the first quarter of fiscal 2009 was $411,000 versus $1.1 million for the first quarter of fiscal 2008. Reduction in net interest expense year over year was the result of an overall lower weighted average borrowing rate and lower average outstanding borrowings in our amended senior credit facility, as well as interest income on delayed receivable receipts.

Net income for the quarter increased 55% to $8.3 million from $5.4 million a year ago. The increase in net income year over year is attributable to the factors affecting operating income and reduced interest expense, as well as a slight lower effective income tax rate.

Diluted earnings per share was $0.35 in the first quarter of fiscal 2009, compared with $0.23 in the year ago quarter, exceeding the high end of our guidance by $0.03. Days Sales Outstanding, or DSO, was 83 days for this quarter, up from 81 days last quarter. The increase in DSOs is attributable to higher average receivables balances during the quarter and the timing of receipts from two key customers with new payment processing systems still being implemented. As we stated last quarter, we expect DSOs to fluctuate throughout the year and ultimately settle into the high 70’s.

Cash flow from operations for Q1 of fiscal 2009 was $8.1 million. Cash generated by operations resulted primarily from the increase in net income and receivables collections in the quarter, offset by the timing of payments to subcontractors and other vendors. Operating cash flow came in at approximately one times net income for the quarter. CapEx was $3.4 million resulting in free cash flow and $4.8 million, or 0.6 times net income. CapEx was higher than normal for the quarter principally due to build outs of two new facilities needed to support expanding operations. And we expect CapEx to be approximately 0.75-1% of revenue for fiscal 2009.

As previously announced in July, we exercised and closed on an additional $69 million in available credit through a partial exercise with the accordion feature associated with our senior revolving credit facility. This additional availability was used in part to fund the acquisition of Oberon and provided additional funding for future working capital and other needs. Slight challenging credit markets, we were successful in maintaining our existing pricing grid resulting in below-market LIBOR spreads for our leverage points following the closing of Oberon.

And moving on to guidance which now reflects the impact of the Oberon acquisition. For the second quarter of fiscal 2009, we expect revenues to be in the range of $184-192 million and diluted earnings per share of $0.31-0.33 on a weighted average diluted share count of 23.7-23.8 million shares. For the full fiscal 2009 year, we now expect revenues to be in the range of $755-780 million and diluted earnings per share of $1.30-1.38 on a weighted average diluted share count of 23.8-23.9 million shares.

As Phil noted, we’re taking a conservative approach to [? Inaudible {14:20}] in fiscal 2009 guidance. Our assumptions include a revenue contribution with Oberon of approximately $85 million in our fiscal 2009, based on an assumed 12-month forward run rate of around $120 million. Combined passport revenues trending down sequentially in Q2 but picking up again in the latter half of the year in advance of the June 2009 Western Hemisphere Travel Initiative land and sea deadline, and one or more RESET-related awards coming in after the first of the year.

I want to reiterate as we’ve done in the past that we evaluate a number of possible scenarios that place us within the guidance ranges provided. To further illustrate this point, at the midpoint of our annual guidance, we have approximately 90% of our forecasted revenues coming from existing contract backlog; 2% coming from recompete contracts and 8% from identified new business opportunities. This break now is consistent with where we have been at this point in the year for each of the last few years.

You’ll also noted some of the trends that we’re seeing and outline some of the factors that lead to the timing of the growth will be expected to occur throughout the remainder of this fiscal year.

I’d like to take an opportunity to add some additional granularity around the transition from the first quarter to the second quarter of 2009 and beyond, so it pertains to expected run rates. As we look at Q1, we exceeded the top end of our guidance range by approximately $5 million, which relates to revenues we expected to earn in the later fiscal year 2009 quarters but was pulled forward into Q1. Substantially, all of this earlier-than-expected revenue came from equipment purchases and refresh for the passport program as the State Department prepares for increased demand later in the year. To a lesser extent, we realized higher revenues on our USCIS program in connection with higher staffing and therefore higher processing volumes earlier in Q1 in connection with the H1-B visa lottery surge. Also, we had approximately $2 million of additional build out work in Tucson and Hot Springs book prints facilities as they continued preparations for much heavier volumes expected in connection with Phase II of the Western Hemisphere Travel Initiative next year. These additional build outs contributed to us being at the high end of our guidance range. When factoring out these non-recurring items, which totaled about $7 million, our normalized Q2 ‘09 run rate should be approximately $165 million excluding Oberon. Adding in projected revenues of $22-23 million for Oberon in Q2 brings us to admit one of our guidance range of $184-192 million. As you know, we do not typically provide this level of detail. We thought it was important to expand on this to ensure everyone’s expectations are consistent as they relate to the business post-Oberon.

On the last quarter’s call, we said that we expected 10-20 basis points of margin improvement in fiscal 2009, it was fiscal 2008, as we continue to see a higher mix coming from TNM and fixed-priced contracts as we realize additional leverage of G&A coming from prior investments and growing revenue base.

Excluding the impact of Oberon, we now expect the legacy Stanley margins will improve by 20-40 basis points over fiscal 2008. Including the impact of Oberon, we expect of EBITDA margins to show 40-50 basis points of improvement for full fiscal 2009. And we expect operating margins to improve 20-30 basis points for full fiscal 2009. The difference in basis point growth between EBITDA margins and operating margins is due to the amortization of purchase intangibles related to the acquisition of Oberon.

Based on equity grants of stock options and restricted stock in the first quarter of fiscal 2009, as well as the two prior fiscal years. We have included approximately $1.7 million in the second quarter and approximately 6.3 million for the full fiscal year for FAS 123(R) equity-based expenses. Including earnings per share for the second quarter and full fiscal 2009 or FAS 123(R) expenses of $0.04 per quarter, which rounds to about $0.15 for the full fiscal year. Earnings guidance for full fiscal 2009 also includes the impact of the amortization of purchase intangibles of approximately $7.7 million related to Oberon and our acquisition completed in prior years.

Finally, we filed in our Form 8K this afternoon is Tom Fradette, our Vice President and Corporate Controller, made decision to pursue an opportunity as the CFO of a private federal government services firm in Northern Virginia. Tom has given a lot to Stanley since joining the company to the acquisition of FFC in 2003, has been a great partner to me as we transition from a private to a public company. Most importantly, we have worked together to develop our people and Tom will leave us with a talented organization that is well equipped to handle the challenges of growing a public company. We wish Tom all the very best with his new endeavors and thank him for his many years of great service and leadership at Stanley. With that, I’ll turn the call back over to Phil.

Phil O. Nolan

As you run the numbers, I think you’ll see that our guidance exceeds the organic and overall growth goals that we set out for Stanley over two years ago. What we tried to do with this call besides reporting the usual financial metrics is to highlight the impact of the Oberon acquisition as clearly as possible. Our approach has been two-fold. First, we’ve issued guidance that focuses on Oberon’s contribution, while at this point in the year, keeping the assumed growth rate of the core business unchanged. Second, we’ve issued earnings guidance that clearly shows the accretiveness of the acquisition, while at the same time highlighting the better-than-expected margin improvement story of the legacy Stanley business.

And with that, we’re happy to turn the call over to questions.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bill Loomis of Stifel & Nicolaus.

William R. Loomis - Stifel, Nicolaus & Co.

First, on the amortization. Brian, you have given us numbers pretty fast. Could you please clarify the September quarter, what we should be looking for in terms of total depreciation amortization? And then for the full year, if you can repeat those numbers. And the second question is on the corporate production contract. It was a little higher than we thought. It was really kind of one-time event like you had in the past that won’t repeat again.

Brian J. Clark

On the amortization figures I gave were for the intangible amortization. That’s estimated to be $7.7 million for the full fiscal year. The only qualifier I’ll stick around that is that’s still subject to audit and we have that independent review down and we reviewed it; we’re comfortable with it but we still kind of go through that process. And we’ll complete that in September quarter. But for your total depreciation and amortization expectations, I’ll tell you about 3.2-3.3% for the September quarter and about a little less than $12 million for the full fiscal year. And that would be intangibles and normal depreciation of fixed assets, that kind of thing. So about $7.7 million on intangibles and a little over $4 million on just normal PPE-type depreciation amortization.

William R. Loomis - Stifel, Nicolaus & Co.

And then on corporate production?

Brian J. Clark

No, I don’t think anything out there is unusual this quarter that would be perceived as kind of a one-time event in the quarter.

Phil O. Nolan

It behaved itself this time, Bill.

William R. Loomis - Stifel, Nicolaus & Co.

Okay, thanks a lot. Strong quarter.

Operator

Your next question comes from the line of Cai von Rumohr of Cowen & Co.

Cai von Rumohr - Cowen & Co.

Thank you very much. Since this is the first time you’re talking about numbers on Oberon, could you give us some color as to its profitability pre-intangibles?

Brian J. Clark

Cai, I think as we said before, we expect that the profitability will be higher than the rest of legacy’s family. They will be accretive, the margins.

Cai von Rumohr - Cowen & Co.

And can you give us any more color--clearly, it looks like a terrific acquisition--about operationally, what you hope to do to kind of benefit from the synergies of having Oberon as part of the family?

Brian J. Clark

Cai, I think there’s not a whole lot of--there are some cost synergies here and there that are obvious things that come out, like savings and insurance costs, audit costs, and those kinds of things that are not terribly meaningful--but as you suspect, Oberon is a growing company, the staff and people that they come with. Frankly, we need them there to support us, support Oberon and support Stanley going forward. So, you should not expect to see cost synergies coming out again as we talked about before. In looking at acquisition, we’re really focused much more on revenue and growth synergies.

Phil O. Nolan

Yes, from a growth synergy standpoint though, Cai, obviously there’s very, very little overlap in the customer base between the two companies. So, the first order of business is being sure that Oberon is able to continue to operate and grow the business as well as they had been. They’ll also have the additional resources from Stanley to be able to bid on larger procurements and as of prime, that in some cases they might have thought that they needed to take in some contract position instead. And then after we’ve taken that, which I consider as part of a low-hanging fruit and the next thing is to look at the skill sets they bring us in areas such as biometrics and how we are going to apply that to other customers that there’ll be some logical applications to, such as DHS and Department of State with the passport services business that we have.

Cai von Rumohr - Cowen & Co.

Terrific, and the last one, your EBITDA margin is 9.4% in the first quarter. By my numbers, if you get to your guidance, the EBITDA margin will be about the same for the rest of the year? Maybe I have something different?

Brian J. Clark

Yes, what I said was we expect it for the full year, the EBITDA margin to come in about 40-50 basis points above, once again, this is for the full fiscal 2009 year over the full fiscal 2008 year, we expect them to increase by 40-50 basis points, which is about 9.5-9.6%.

Cai von Rumohr - Cowen & Co.

So, they will track up a little bit. Was there anything abnormal? That was a good EBITDA margin for you guys. Was there anything kind of abnormal because presumably adding Oberon to the mix makes it better than not? Was there anything abnormal in your numbers that could have made it higher than normal in the first quarter?

Brian J. Clark

No, I think most of the additional EBITDA growth is really due to operating leverage, higher revenues, things like depreciation amortization representing a lower percentage of it, and then just generally across the board, overall better contract performance.

Phil O. Nolan

Cai, if I can add, even the two biggest contracts that we won recompetes on recently which was our passport floor contract and our corporate production contract. We told you before that we expected to see a little bit from those contracts and I think we’ve seen that also.

Cai von Rumohr - Cowen & Co.

Thanks a lot. Great job. Thank you.

Operator

And your next question comes from the line of Chris Donaghey of SunTrust Robinson Humphrey.

Chris Donaghey - SunTrust Robinson Humphrey

Hi, good evening guys and a very good job on the quarter.

Can you update us on the status of hiring at Oberon? I remember on the conference call they were just coming off of a 6-month,where they have been hiring at a pretty significant rate. What has happened in the intermitting time period from a hiring perspective there?

Phil O. Nolan

They continue to hire. They’re not quite at the clip that we advertised last time as they come up at six month in term, but that makes sense because that’s after they had a couple of large contract awards that we had talked about. But they have continued to hire and they still have a few open positions that they’re waiting to hire on and we have obviously more work in the pipeline there that we think will drive additional hiring, both here and with Oberon.

Operator

And you next question comes from the line of Stefan Mikatuk.

Stefan Mikatuk

Just a couple of things. Can you go back at the FAS 123, you were saying is going to be how much this year?

Brian J. Clark

For the full year?

Stefan Mikatuk

Yes, I think you gave the next quarter and then the full year.

Brian J. Clark

Yes, this next quarter or the upcoming quarter, I tell you it’s going to be a little better than $1.7 million and for the full year, it’ll be about $6.3 million.

Stefan Mikatuk

And some of that’s in cost-for-sales and some of it’s in SG&A?

Brian J. Clark

That’s correct.

Stefan Mikatuk

This sounds like just a fantastic acquisition. I would think you guys are going to take your time and kind of get this integrated before you think about swallowing something else?

Phil O. Nolan

You might think that. Yes, that’s a plan right now. We certainly do have additional capacity so if there’s a really compelling opportunity, I don’t think that we would hesitate to do it but it would have to be compelling at this point. We certainly want to get the combined operation going smoothly and making sure that our projections would come out the way we want. So, I think we can’t just shy away from having too many moving parts unless it’s something that just really blows us away.

Stefan Mikatuk

Makes sense to me. Last question is the pipeline of proposals you’ve got out, maybe I’m mixing words there, but seems like you had a bunch of bids out there for sizable contracts and it’s kind of building up. Is there something going on at the government that they’re just not making decisions on these things?

Phil O. Nolan

No, we don’t really have too much that’s hanging out there right now, Stephen, that’s been hanging out for a long time. I think I’ve got maybe one bid that’s been hanging out longer than a quarter. What I said was that we had $15 million-plus ones that we thought we would be submitting in the next 6-9 months, meaning that we would be putting the proposals in. So, it’s not yet in the government’s lap.

Stefan Mikatuk

Okay. So otherwise, your view of things you can win hasn’t really change? Do you feel like there’s a lot to swing at and they’re not holding up the process at all?

Phil O. Nolan

Well, I think there is a lot to swing at. I will tell you that I think that especially if we said that we’ve seen some of the opportunities that we have on our target list, we’ve seen some of those push to the right. And we could bay whether or not that’s the government being slow on that. I think that what’s really going on is that all those things related to RESET which are worth to operate the FORCs and DOLs that we’ve talked about in the past. All of those things are really come in contracts. They’re not new work. And so, the customers got a little ceiling left on the legacy cast quarters, under the large ends contract. And if I were the customers, I’d do the same thing. They would like to go use up all that ceiling before they move on to the next procurement. So, that as well as I think the contract can be possibly be backed up a little bit but I think those has move. DR fees coming out the door a little bit later but none of that work is going away or I don’t think anything like that is in jeopardy.

Stefan Mikatuk

Okay terrific. Thanks very much.

Operator

And your next question comes from the line of Michael Lewis of BB&T Capital Market.

Michael S. Lewis - BB&T Capital Markets

Hi, good afternoon. Nice quarter. And Brian, thanks by the way for the complete balance sheet there. Very helpful.

Phil, I was wondering if you could talk a little bit about the INSCOM ID/IQ that you reported today. Have you seen any tasks awarded with the receipt of that award so far?

Phil O. Nolan

We haven’t seen any tasks awarded but we are in the thick of responding to task orders right now. I think we’ve probably got only about four of them that we’re actively working on right now. So, that’s moved out with pretty good pace.

Michael S. Lewis - BB&T Capital Markets

Would you offer the size of these individual tasks that you’re looking at?

Phil O. Nolan

No, sir.

Michael S. Lewis - BB&T Capital Markets

Okay, that’s fair. With regard to corporate production, you said there was 11% in the quarter but can you remind me of what that number was last year?

Brian J. Clark

Let me get that one, Mike.

Phil O. Nolan

You got another question there, Mike, while we’re looking?

Michael S. Lewis - BB&T Capital Markets

Yes, actually, Brian had offered what the Q2 expectation on Oberon would be. If we look at the $165 million run rate for the core business, Brian, did you say $20-24 million from Oberon? Could you correct that for me?

Brian J. Clark

Sure, $22-23 million. And then, Mike, on the corporate production contract, that represent a little less than 13% of revenue for the same quarter last year.

Michael S. Lewis - BB&T Capital Markets

All right, thank you very much.

Operator

And your next question comes from the line Tim Quillin of Stephens Inc.

Tim Quillin - Stephens Inc.

Hi, good afternoon. I appreciate you anticipating a lot of questions in your prepared comments. In terms of your commentary on “don’t expect great bookings in the current quarter,” I guess it surprises me a little bit in the sense that maybe your DOD customers might be anxious to get some things under contract in view of uncertainty around the budget process and the political situation over the next few months. In these rebooking to be pretty solid but just because of the timing of your particular opportunities that might be a little bit of a lull?

Phil O. Nolan

Yes, I’m not meaning to make any implications about the space or the environment in general. I’m just looking at our business and what we got out there. As we sit right now, my expectations is I’ll look at these as we’re going after some new work. We typically put the probability of those wins of truly new work lower. And so I put all those things together and it says that my bookings should be minor. If I had run the table, then I’ll come back here and had been called by soulful hire again next quarter. But I’m not looking at anything from the macro environment. There’s obviously the possibility that contracts such as corporate production could be a catcher’s mitt for things like year-end money when the government decides if they’ve got some tasks that they want to get done. That’s a very quickly action contract.

Tim Quillin - Stephens Inc.

And speaking of corporate production, can you update me on what’s happening with the system of systems piece? I guess my understanding is that most of your work is or will be on the contract that you just won. But what’s the split of work across the two different opportunities and what’s the timing of system to system?

Phil O. Nolan

Well, I could tell you that we anticipate the sealing on those two contracts to be roughly the same, which is just under $250 million. And right now, we’re able to do any of the work that could happen under a system to system, under the mission module contract or the corporate production contract that we currently have. Corporate production is still burning up the last remaining ceiling on that. And then we’ll switch over to mission module and all the work can be done under that. System to systems right now, our best guess, and this is all that is, is that we won’t see an RFP any earlier than September on that.

Tim Quillin - Stephens Inc.

Thank you. And then, Brian, I think you talked about this a little bit, but what kind of interest rate do you expect on the new debt?

Brian J. Clark

On the new debt, Tim, I gave you all the pieces of it but let me give it to you two ways. Let me tell you what I’ve projected out to be by quarter and then I’ll break it down for you a little bit. But in terms of dollars, a little less than $2 million in the September quarter and then in the December and March quarters, I think a little less than $2.7 million each of those quarter. The reason I want to give you the actual dollar figures is because as I think you know, in addition to just straight out interest expense, you also got amortization of prepaid financing costs and all those kinds of things get included in interest expense. So, if you want to talk about from the standpoint of an incremental borrowing rate, the credit agreement, the amendments of the credit facility they just did. We’ll contemplate LIBOR plus spreads that will be 0.875 through November. That will flip to LIBOR plus 1-3//8 and then that will tail down to LIBOR plus 1¼ in the March quarter for the incremental borrowing piece. And then in each quarter, you probably got about $300K of other amortized costs that go in that they report it as interest expense.

Tim Quillin - Stephens Inc.

Brian, that’s very helpful. Thanks.

Operator

And your next question comes from the line of Brian D. Kinstlinger of Sidoti & Co.

Brian D. Kinstlinger - Sidoti & Co.

Thanks for taking my questions.

Did you ever provide revenue stats for Oberon in calendar ‘06? I do remember you saying it was growing very rapidly.

Phil O. Nolan

No, we didn’t.

Brian D. Kinstlinger - Sidoti & Co.

Are you able to?

Brian J. Clark

Not off the top of my head.

Phil O. Nolan

Yes, we don’t have Andy here, Brian, but they’ll be filed eventually when we file the Oberon financial statements, probably in the latter part of September.

Brian D. Kinstlinger - Sidoti & Co.

Can you give us a sense for what/how you pay on trailing EBITDA or trailing any kind of metra?

Brian J. Clark

On trailing?

Brian D. Kinstlinger - Sidoti & Co.

On trailing EBITDA or expected EBITDA. When you looked at it, you obviously paid a certain price than most people. I take it EBITDA kind of multiples to 80 EBITDA.

Brian J. Clark

On trailing EBITDA, for what they just finished that in June, it’s probably in the neighborhood about 15 times.

Brian D. Kinstlinger - Sidoti & Co.

And we’ve seen some articles and discussions out there about the Navy budgets being cut. SPAWAR certainly didn’t show that so I guess I’m curious you’re seeing in the Navy, is it outside some of your focus areas and how you take a look at that going forward in your guidance?

Phil O. Nolan

Yes, I mean as far as our guidance because Brian, we’ve held that pretty steady. I’ve seen the same thing that you talked about it but in terms of the work areas that we’re in so far, we just haven’t seen an impact on that. Right now, I don’t think that I anticipate one for the modernization-kind of work that we’re doing. Corporate production is really an integration contract but it’s really a modernization contract. They’ll go in and do an improvement of existing stuff.

Brian D. Kinstlinger - Sidoti & Co.

And in terms of run rates for the $100 million-type contracts, would you say that is a little bit lower? Do you win one in ten? I know there’s more competition probably in those, or is it more like one in four? Is there a rough number to look at?

Phil O. Nolan

That’s a good question, Brian. I never broken it out that way. We’ve never drawn the line and said what did we made, and then I tell you that overall run rates continue to sit above 50% but we haven’t broken out the big bids versus smaller bids to give you a number.

Brian D. Kinstlinger - Sidoti & Co.

And the contract you announced today, I saw one of the contract announcement, do you know how many full and open? And then how many small business contracts are awarded to that deal, the ID/IQ?

Phil O. Nolan

I know there were three winners. That’s what I can tell you.

Brian D. Kinstlinger - Sidoti & Co.

And you’re on open. You’re not a small business obviously, right?

Phil O. Nolan

I believe that’s correct.

Brian D. Kinstlinger - Sidoti & Co.

And can you tell us how much debt, Brian, you stand as of today, how much you have on your balance sheet?

Brian J. Clark

About $200 million.

Brian D. Kinstlinger - Sidoti & Co.

The last question I have, on your Oberon call, you mentioned, and correct me if I’m wrong, the biometrics contracts. I think going to contract of record. Could you just talk about what that means? I think, and if I’m wrong, my understanding was that means that will be recomputed once that happen. Can you just take me through the whole process?

Phil O. Nolan

Well, what it said is that it goes to a program of record. And what that means is that the biometrics officially gets palmed in the defense budget. So, it’ll sit there and palm 10. There will be a line item in there for this program, which is significant. In terms of making a program of record, it’s really in there as a funded line item.

Brian D. Kinstlinger - Sidoti & Co.

I heard this and this could be absolutely incorrect. Does that mean that they’ve got it done recompete at that point or is that not accurate?

Phil O. Nolan

Joe, we do expect by 2010, there will be a recompete on that. Yes.

Brian D. Kinstlinger - Sidoti & Co.

That’s the closest we compete that Oberon has whatsoever or is that not the case?

Phil O. Nolan

I’ll tell you that’s the closeness that we can recompete that job.

Brian D. Kinstlinger - Sidoti & Co.

Okay, thanks very much.

Operator

And your next question comes from the line of Chris Donaghey of SunTrust Robinson Humphrey.

Chris Donaghey - SunTrust Robinson Humphrey

I guess my first question is do you guys offer any training on how to operate a speakerphone?

I apologize if I missed this, Brian, but the answer to your whole question. What’s your funded backlog number?

Brian J. Clark

$308 million. So it’s up about $8 or $9 million from year end.

Chris Donaghey - SunTrust Robinson Humphrey

Okay, great. Thanks. And then just thinking about the organic growth rate for the remainder of the year, obviously down significantly versus 29%, how much of that is just uncertainty due to macro concerns versus what’s going on with the CIS contract? Could you just help me understand what sets the organic growth expectation for the remainder of the year?

Phil O. Nolan

I don’t think there’s anything magic in it. It’s just what we’ve been projecting from the beginning of the year. If I look at the CIS, I don’t think that has anything that we’re talking about in terms of our organic growth projections. Certainly, as we look at how things are promoted in there, I think what we said in the call and to answer to another question, that we do expect some of this to be for Q3, Q4 really because you might want to see some of the recent work that we’ve been on. We think that’s coming out a little bit later than we had previously hoped and the passport ramp, that’s really going to be a fourth quarter event. I mean that’s when the ramp will start happening for that June 2009 deadline.

Chris Donaghey - SunTrust Robinson Humphrey

Okay great. Thanks. Do you have a feel, Brian, at the point what the availability is left under log jams is, how much they have yet to clear?

Brian J. Clark

I don’t. I really don’t. These are tasks orders that obviously we don’t already have. So, we just don’t have a feel for that. The rumors we’re hearing now is expect November RFPs but I don’t know if that’s a very good rumor or not.

Chris Donaghey - SunTrust Robinson Humphrey

Okay, thanks a lot. Congratulations.

Operator

And your next question comes from the line of Cai von Rumohr of Cowen & Co.

Cai von Rumohr - Cowen & Co.

Yes, thank you.

Given that you’re going to own Oberon for most of the quarter, obviously with the [intercom] when it’s on a pretty good run rate. What kind of exit run rate do you expect it to have in the fourth quarter?

Brian J. Clark

Oh, Cai, I’m not going to give you that one. You’re going to be putting FY ‘10 on me already.

Cai von Rumohr - Cowen & Co.

Right, right. And the other question is it’s obviously fairly substantial intangible. Can you give us any idea? Do those intangibles kind of burn off quickly? Are they front loaded? How big is the total intangible, at least your estimate at this point, and approximately how they roll off?

Brian J. Clark

For this year we expect it to be probably in the range of about $4.4 million for the year and as you said, they will be front loaded, so it’ll be fairly heavy for the first few years then, Cai. It really drops off quickly after that. It’s really tied in to contract backlog that we inherit through customer relationships. Those are the biggest components of it. Other things that get valued are non-compete agreements, and that kind of spans out over a 3-year period so they burn off over the period as it applies to those agreement. So the short answer to your question is yes, it will burn off rapidly. It’s over about three years is when most of it will burn off and then you’ll have a little bit of a tail a couple of years after that, is what we anticipate.

Cai von Rumohr - Cowen & Co.

And the last one, your tax rate for the year a little lighter than I expected. What are you looking for the year?

Brian J. Clark

We still you around 40.3-40.4, is what we’re thinking right now. The reason it has been coming down is we’ve generated more and more pre-tax income and we’ve kind of restructured some of our equity plans and things like that. The item that was the most significant component that kept it above 40 was stock compensation expense related to ISOs, in terms of the accounting rules, you don’t have a deduction for those.

Cai von Rumohr - Cowen & Co.

Can you give us a range on cash flow expectations for the year? Free cash flow, or op cash flow?

Brian J. Clark

The op cash flow, right now, we expect it to be close to 1x net income.

Cai von Rumohr - Cowen & Co.

Okay, thank you very much.

Operator

And now we will turn the call over to Mr. Nolan for closing remarks.

Phil O. Nolan

Thanks. For those of you on the call who might not have got all of your questions answered, we’d be happy to follow up with you. If you do have additional questions, please go through Larry Delaney and one of us will be happy to get back to you. Thanks everybody for being on the call and we’ll talk to you later. Good night.

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