SRA International, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

| About: SRA International, (SRX)

SRA International, Inc. (NYSE:SRX)

F4Q08 Earnings Call

August 12, 2008 5:00 pm ET

Executives

David Keffer – Vice President, Investor Relations

Stanton D. Sloane - President, Chief Executive Officer

Stephen C. Hughes - Chief Financial Officer & Executive Vice President, Operations

Barry S. Landew - Executive Vice President, Strategic Development

Analysts

Timothy Quillin – Stephens, Inc.

Michael Lewis - BB&T Capital Markets

Bill Loomis - Stifel Nicolaus

Erik Olbeter - Pacific Crest Securities

Laura Lederman - William Blair & Company

Edward Caso – Wachovia Capital Markets, LLC

Gautam Khanna - Cowen and Company

Joseph Vafi - Jefferies & Company Inc.

Jason Kupferberg - UBS Warburg

Operator

Welcome everyone to the SRA International fiscal year ’08 Q4 earnings call. (Operator Instructions)

David Keffer

On the call today are Stan Sloane, our President and CEO, Steve Hughes, our CFO and Executive Vice President for Operations, and Barry Landew, our Executive Vice President for Strategic Development. During this conference call we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially and I refer you to our SEC filings for a discussion of these risks. In addition, the statements made during this earnings call represent our views as of today. We anticipate that subsequent events and developments will cause our views to change. We may elect to update the forward-looking statements at some point in the future but we specifically disclaim any obligation to do so.

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

Stanton D. Sloane

We appreciate your interest in SRA and look forward to providing an update on our fiscal year 2008 results and 2009 outlook. For the June quarter, revenue was $385 million, a year-over-year increase of 18%. Operating income was $30.3 million, an increase of 20%. Diluted earnings per share were $0.32, an increase of $0.04 year-over-year. For fiscal year 2008, we generated more than $1.5 billion in revenue, up 19% year-over-year, while shedding some low-margin revenue. This improved the quality and durability of our revenue base but lowered the computed total revenue growth rate.

Operating margin increased by 60 basis points to 7.9%. In July we completed two acquisitions, Era Corporation and Interface and Control Systems or ICS. These businesses expand our product capabilities into the air traffic management, an autonomous space control segments. Barry will comment further on these deals in a moment.

In June and early July we repurchased about $23 million of SRA stock completing the $40 million buyback authorization. While acquisitions remain our top priority for capital deployment, we plan to continue to buy back stock as market conditions warrant. To that end, our board has authorized an additional $100 million buyback and Steve will provide further details on our buyback activities in just a moment.

First I’d like to offer a perspective of current industry environment and our recent business development results. On June 30, the President signed a supplemental budget bill for Iraq totaling more than $160 billion. While this relieved much of the immediate pressure on defense spending, we’re now preparing for the possibility of a fiscal year ’09 Federal budget delay across the government. With November elections and subsequent administration change approaching, it’s likely that Congress will pass continuing resolution that limits fiscal year ‘09’s spending to fiscal year ’08 levels for all agencies from October 1 until sometime next spring. This may cause delays in contract awards and funding during the December and Mach quarters. With these dynamics in mind, we’re redoubling our efforts to drive organic growth. To that end, we’ve increased our business development investment again and I’ve asked Mike Fox, our long term head of marketing and sales, to focus on longer term strategic opportunities.

I’ve also asked Jeffrey [Ryden], known locally as JR, to lead near-term business development efforts as he takes on the role of Senior Vice President for Marketing and Sales. JR has been with us already for many years in a variety of leadership capacities, including staff and P&L responsibilities. Most recently, he has led a number of the company’s largest business capture efforts. Both Mike and JR are outstanding talents and I’m confident that we can deliver with their leadership.

Our pending proposal value now totals $2.2 billion. It should produce a good volume of wins during the presidential transition. Our diverse business portfolio spans defense, civil, and health sectors, and enables us to adapt our positioning quickly to new initiatives and fast-growing segments of the market.

In the fourth quarter we won $405 million of business orders compared with $255 million in the same quarter last year. In the March and June quarters of 2008, we received $908 million of new business compared with $427 million in the same periods last year. Unfortunately the two largest new awards this year had been protested by the losing incumbents and neither protest has been resolved to date. Our total contract backlog stands at $3.9 billion, an increase of 15% year-over-year. Conversion of this backlog into revenue will be one of the key factors shaping fiscal year ’09 growth.

I’d now like to highlight a few of the key contracts we won in the June quarter. First, we were awarded a five-year, $77 million contract to provide IT services for the Federal Energy Regulatory Commission, a new customer for SRA. The work includes network services, data center support, IT security, enterprise architecture, and software development. The award has been protested by the incumbent contractor and a decision is expected in the next few months.

Next, we won a $56 million contract to continue delivering technical analysis and management support to the Environmental Protection Agency’s Office of Emergency Management. We have now won over $100 million of business for the EPA in the last six months.

Third, the National Geospatial Intelligence Agency awarded SRA a five-year, $34 million contract t o support the movement of all of its Washington DC area missions and personnel to its New Campus East property in Springfield, Virginia. This is SRA’s first major contract for NGA, a key strategic customer.

Fourth, we won a 3.5 year, $26 million contract to provide enterprise-wide IT services for the National Institute of Environmental Health Science. This work is new for SRA and we credit the combination of our Constella acquisition with our legacy health business in crafting a unique solution for this important customer.

In addition, our global drug development group was notified that it won two of the largest contracts in its history to support worldwide clinical trials for leading pharmaceutical firms. The two contracts, which are expected to have a combined value of more than $40 million, are not included in our $405 million wins total because they have yet to be finalized. The work will involve project and data management, medicals monitoring, drug safety, and other clinical research services.

Our total pipeline stands at $28.3 billion, up 50% year-over-year and we currently have a record $2.2 billion of pending bids. In terms of recompetes, we were disappointed to learn in May that we had not retained the National Guard AITS contract which represented about 6% of revenue and earnings, but we were able to place more than half of the affected employees on other engagements immediately. Our AITS contract will officially end later this quarter and we will redeploy the remaining AITS staff as we seek to fill 350 immediately-billable openings across the company today.

On the recruiting and retention front, we increased our total head count by 52 in the June quarter. This brings the fiscal year ’08 total to 172 net hires and we increased the billable component by substantially more than that. We are seeing signs of continuing progress in Q1. In spite of the AITS loss, we have ample opportunities to bolster billable head count expansion in Q1 and throughout fiscal year ’09 and we’re optimistic that labor services revenue will continue to grow as a result.

Barry S. Landew

In July we completed two acquisitions, Era Corporation and Interface and Control Systems. Consistent with our strategy to enhance our hardware and software product capabilities, both companies developed and deployed technologies that are critical to the command and control infrastructures of their customers. We are positioning ourselves to bid and win larger systems integration programs across the US, Federal, and International markets and these proprietary products will help us differentiate our core service offerings.

Era gives us access to the rapidly growing market for air traffic management and surveillance both for US and international customers. As we noted last quarter, we expect Era to generate at least $65 million of revenue in its first year with SRA, about a month of which will extend into fiscal year 2010. The ICS acquisition brings us a strategic position in the space market both for NASA and defense customers. ICS should deliver at least $8 million of revenue in FY09. Both companies generate strong margins consistent with the value of their leading intellectual property and outstanding reputations. With these two deals complete, we’re also continuing to assess larger M&A opportunities. We intend to be aggressive but won’t [over page] us to meet our high level growth objectives. Our five year plan entails making several larger acquisitions and we remain confident in our ability to execute that plan.

Stephen C. Hughes

Revenue was $385 million in the fourth quarter, up 18% year-over-year. For fiscal year 2008m revenue was $1.507 billion for an increase of 19%. Our operating margin was 7.9% for the fourth quarter, up 20 basis points year-over-year. For the full fiscal year, operating margin increased 60 basis points. Stock based compensation expense was $2.8 million in Q4. On the non-operating side, net interest expense was about $200,000 in the quarter compared with net interest income of about $1.8 million in the same quarter of ’07. That’s a change of $2 million.

The effective tax rate in Q4 was 39.5%, up 130 basis points year-over-year, given lower municipal bond interest in fiscal year ’08 quarter 4. In addition, we booked a pre-tax gain of nearly $900,000 from the final escrow proceeds of our 2006 Mantas sale. This added about $0.01 to diluted earnings per share. Net income for the quarter was $18.8 million and diluted earnings per share were $0.32. Diluted EPS increased by $0.04 or 14% year-over-year. Of course, earnings have been higher in Q4 but for the AITS, recompete, and delays associated with the protest of our March quarter DEA win, and our June quarter FERC win.

Now turning to the balance sheet, during the fourth quarter, we increased our line of credit to $285 million in order to support our M&A objectives and our share repurchase activities. As of June 30 we had about $230 million of cash on hand pending the Era and ICS transactions. Our debt balance was $150 million for a net cash position of $80 million. As of June 30, accounts receivable were $345 million. We had approximately $1.14 billion of total assets and shareholders equity of $693 million.

On to the statement of cash flows, Q4 operating cash flows were $42 million or 2.25 times net income. Fiscal year 2008 operating cash flows were $84 million or 1.14 times net income. The days sales outstanding were 77 in the June quarter down two days from the March quarter. Capital expenditures were about $4 million in Q4 and $10.8 million for the year. During the June quarter and the early part of the September quarter, we repurchased $23 million of stock or more than 1 million shares, completing the $40 million share buyback authorization.

While we expect our M&A program to remain our primary use of capital, we’ll continue to consider repurchases based on market conditions. To that end, our Board of Directors has established an additional $100 million buyback authority. We don’t intend to deploy the full $100 million in the short term, but rather to balance the use of cash for repurchases with our ongoing M&A program.

Now before discussing forward guidance, I’d like to update you on a few other key metrics. First, contract business mix. As a percentage of Q4 revenue, time and materials business was 43%. Cost plus was 39% and fixed price was 18%. Next, national security contracts accounted for 51% of our Q4 revenue. Civil government, 30%, and health, 19%. We are the prime contractor for 86% of our revenue in the quarter. On the [inaudible] side, voluntary attrition was 16.5% for fiscal year 2008, and we finished the year with 6,494 employees.

Now to forward guidance. Looking forward we are providing our initial guidance for fiscal year 2009. We will give annual guidance from this point on as we believe it best reflects the long term focus of our management team and our shareholder base. Our guidance includes a full year forecast for ICS and 11 months of ERA. It accounts for the September quarter roll off of the AITS contract and takes the current Federal budget situation into full consideration.

For fiscal year 2009, we expect total revenues of $1.6 billion to $1.66 billion for growth of 6% to 10%. There are two important factors to consider here. First, as you know, we did not win the AITS recompete. In fiscal year 2008, the AITS or A-I- T-S contract accounted for about 6% of revenue. Normalizing for this, fiscal year 2009 revenue growth would be 12% to 16%. The point of this calculation is simply to show that the rest of the business is growing according to plan. Second, labor services growth for fiscal year 2009 is expected to be somewhere in the 10% to 15% range.

Seasonality: in the fiscal year 2009, we anticipate the usual seasonal revenue effect on revenues and profits. In the summer quarter, leave taking is higher and B&P typically is higher as the government closes its fiscal year activities. In Q2, while B&P may decline, leave taking increases farther as the holidays approach. Then in Q3, leave taking drops and we benefit from the cumulative effect of hiring to date, driving labor services growth. Finally, in Q4, leave taking drops further and with additional hiring, labor services should continue to increase. Similarly, operating margins are typically lower in Q1 and Q2 and build through Q3 and Q4. We anticipate an operating margin in the 8% to 8.2% range for fiscal year ’09. This would represent approximately 30 basis points of margin expansion at the high end.

On the non-operating side, we expect net interest expense to be around $4 million, compared with net interest income of about $1 million in fiscal year ’08. The tax rate should increase slightly to 39.7% range. We expect diluted earnings per share of $1.30 to $1.35 for growth of 6% to 10% as adjusted for the fiscal year ’08 Mantas gain.

In fiscal year 2009, we expect capital expenditures to be about 1.5% of revenues as we continue to build the infrastructure for future growth. As we begin the new fiscal year, we see ample opportunities for expansion in areas such as cyber security, ERP, air traffic control, geospatial intelligence, energy, health, and the homeland security sector to name a few. We’re optimistic that these strong SRA capabilities will align closely with governmental priorities in the coming years and we look forward to a sustained period of growth and development in the company.

Stanton D. Sloane

I’d like to comment briefly on our plan to reach $5 billion in revenue and 10% operating margin. While the AITS contract loss will delay our progress towards these targets, I’m confident in our team’s ability to accelerate growth going forward. We’ve made good strides in many critical areas in the last year, including the acquisitions of Constella, Era, and ICS, growth in our proprietary technology business, expansion into international markets, and operating margin improvement. I expect that we’ll demonstrate further progress in these and other areas in fiscal year ’09.

We intend to discuss our strategic plan and to provide business-level insights into the road ahead at our Investor and Analyst Day in New York City on September 9. The event will be webcast on SRA.com and you can feel free to contact Dave Keffer at investor@SRA.com if you are interesting in attending.

We’re now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tim Quillin of Stephens, Inc.

Timothy Quillin – Stephens, Inc.

I got the revenue figures or expected revenue from ERA and ICS but could you run through your margin expectations for those two businesses and also your cash outlays for those and what your cash balance is now?

Stanton D. Sloane

As I think we said in the script, we expect revenues from ERA to be $65 million or greater, from ICS about $8 million. From a margin perspective, we would expect in the short term and more so in the long term, for ERA to have much higher margins than we currently have. ICS would operate at about the same level that we do right now, so the net effect is a blend up of operating margins. I think your third question had to do with the price and the way we’d look at that is that we typically don’t disclose the price of acquisitions unless they pass the SEC threshold, but to give you a little insight into it, we paid about somewhere in the 13 to 14 times the calendar year of 2008 EBITDA figure.

Timothy Quillin – Stephens, Inc.

For both of those?

Stanton D. Sloane

For ERA and probably on the ICS, Barry, do you have that figure?

Barry S. Landew

Somewhat less, closer to 10 times on ICS.

Timothy Quillin – Stephens, Inc.

And can you give us the cash balance right now?

Stephen C. Hughes

Yes, Tim, I can. We have outstanding... You mean as of today?

Timothy Quillin – Stephens, Inc.

As of today.

Stephen C. Hughes

We have on the balance sheet about $70 million of cash with about $200 million of debt. We would anticipate that by the end of the year that debt number would be and the cash number would be at about a net somewhere in the $10 million to $20 million range, so we have liquidity of $285 million in our current line of credit, with significant additional liquidity available.

Timothy Quillin – Stephens, Inc.

And just finally could you help us out with expected D&A for the year including the intangibles amortization from those two?

Stephen C. Hughes

Approximately 1.7% give or take.

Operator

Your next question comes from Michael Lewis with BB&T Capital Market.

Michael Lewis - BB&T Capital Markets

Tim actually got the ERA question for me, but I was wondering if Barry could answer what he’s seeing in the M&A market with regard to differentials in transaction valuations between the hot areas like cyber security, DHS, health care, IT. Could you walk us through some of the multiples that you’re seeing out there and how you would suggest these multiples will play out over say the next 12 to 18 months. Will they go up, come down, stay stable?

Barry S. Landew

I don’t have a crystal ball, Michael, but I’ll give you my personal views on this. In the hot areas of cyber security, intel, those kinds of areas, we’re seeing multiples, you’ll see some recent deals of kind of 12 times up to kind of 18 and even 20 times. Product companies typically trade at different kinds of multiples towards the higher end. My view, though I’ve been running this before, is that valuations are extremely high and I would expect they would slowly come down, but I think what’ you’re seeing, frankly, is a scarcity premium. There’s not a lot of really good companies on the market and the ones that are premium properties and hot areas are commanding very pricy valuations, and companies have a choice, buyers whether to pay those valuations or sit in the sidelines ad watch others pay them. So supply and demand I think is keeping these valuations pretty sticky at high levels. I don’t think they can go much higher. At some point they become economically not supportable but I’ve been wrong about that as I’ve said for probably the last year or so. I suspect we’re near the high water mark though.

Michael Lewis - BB&T Capital Markets

That’s very helpful. Stan, if I could just ask you a question with regard to the guidance change. Can you walk us through the decision process to move to the annual guidance versus the quarterly guidance. Is this in any way related to a reduction in your visibility necessitating this change in guidance or is this just the decision that you wanted to make at the corporate level to kind of walk away from some of the variants that we’re seeing in between the quarters?

Stanton D. Sloane

It has nothing to do with visibility. There’s no change there. The thinking is that we really want to adopt the best practice. If you look at what [asken] is recommending what seems to be a trend. I think there’s a move away from these kind of short term metrics and more of a focus on longer term health of the business which is exactly how we think about SRA so it’s simply in response to what we think is a wise practice.

Operator

Your next question comes from Bill Loomis with Stifel Nicolaus.

Bill Loomis - Stifel Nicolaus

Just a thing on the business development side, the pipeline obviously had a big sequential improvement, $23 billion to $28 billion or more and then bids outstanding had a very high sequential improvement. Can you just give us a little more color on what exactly happened in the June quarter? That’s a massive increase on pipeline and also on the bids outstanding, your awards were OK in the quarter so I assume there was some slippage but not a huge amount so there must have been a lot of new incremental awards on the bids outstanding. What areas were they in?

Stanton D. Sloane

I’ll start and then maybe Barry can comment. First of all, about 15 or 16 months ago, we were looking at a pipeline of around $14 billion and we said at that time that we wanted to get the pipeline to $40 billion that we thought that was kind of the number we needed that we feel comfortable with in terms of being able to get the kind of growth we want, so I’m very encouraged. You can’t do that overnight and I think the fact that we’ve been able to get the pipeline to where it is in roughly 15 months I think is very encouraging, and it continues to grow. I mean, I still say I’d like to see it at $40 billion and we’re going to keep driving to do that. It has a lot to do with investments. Steve talked about increasing investment in new business. We’re going to continue to ratchet that up. I think that is showing benefit in the pipeline. I think the other thing is you have to look at the number of large bids that we have in the pipeline. Today we have about 63, I think the number is, of bids of over $100 million that are in there. All of that I think is very encouraging. There are some dynamics in the marketplace. For example, a number of protests. We talked a little bit about DEA and FERC, and kid of the prevailing environment is that almost everything that gets awarded is getting protested, so that does cause things to slip to the right a bit, but I feel pretty good about that. I don’t know if I addressed all your points.

Barry S. Landew

I would just add that in addition to bigger opportunities that we’re seeing, and the government is cooperating here by bundling, frankly, lots of requirements. We’ve got a broader aperture now, so when you think about our strategic plan and products and technology and international markets and getting closer to the mission for a number of our customers, it’s enabling and causing us to look at opportunities of the past weren’t really in our sweet spot, and some of the growth in our pipeline is coming from those kinds of opportunities that we think are attractive and potentially high margin opportunities that heretofore were really not things that we focused on and I would also say, if you look at Q4 just completed, we’re kind of seeing a bit of an inter-government fiscal year surge a little early, at least for us. Our Q4 was our busiest B&P, our busiest proposal quarter, in history. We expect this quarter will be very busy as well as it usually is but we actually saw this in the fourth quarter ahead of this quarter.

Bill Loomis - Stifel Nicolaus

And can you give us just a couple of examples of some areas kind of more broadly like for example in systems engineering, when you’re looking at the incremental pipeline growth and bids growth, is that an area, and what types of services would you be looking?

Stanton D. Sloane

I think honestly it’s across the board. We’re seeing it on civil defense and health. It’s tough to single out one particular area of seeing kind of more dramatic growth in the near term but it’s certainly on the ERP and kind of back office side, on the civil part of government, a number of opportunities that I think you are aware of. But it’s a fairly broad expansion of opportunities.

Operator

Your next question comes from Erik Olbeter of Pacific Crest.

Erik Olbeter - Pacific Crest Securities

On that question again, you’ve talked in the past about going after another of ERP projects in the civilian agencies and that being a particularly hot area. Can you give us an update on where those contracts are right now, what the bids are, and when you expect to hear back on them?

Stephen C. Hughes

We typically don’t discuss pending bids and I really don’t want to violate that, Erik, because these are truly active procurements. I can tell you that there is four in the civil side of government, all of which are sizable, one of which is likely to be over $100 million in size and all four should be awarded in the next 45 days, perhaps even sooner on some of them.

Erik Olbeter - Pacific Crest Securities

I guess just to be more specific, you haven’t heard back on any of them? They seem to be slipping into next quarter, so it sounds like they’re still alive.

Stephen C. Hughes

Yes.

Erik Olbeter - Pacific Crest Securities

Okay, that’s great, and did you guys give a funded back haul number?

Stanton D. Sloane

$699 million.

Operator

Your next question comes from Laura Lederman of William Blair.

Laura Lederman - William Blair & Company

When you talk about larger acquisitions, how do you define large, and can you also talk about recompetes in ’09?

Stanton D. Sloane

Large acquisition in my vernacular would be something between $500 million and $1 billion.

Laura Lederman - William Blair & Company

And how are pricing on those? Are they too large as well in terms of what you’ve been experiencing on some of the other --?

Stanton D. Sloane

What I would say, and Steve has addressed that capacity a little bit, what I would say is I don’t think there is any deal that’s too large. I think the limitation is how you structure the deal. It’s how you balance equity and other arrangements. For us, I think we’ve kind of got a commitment here to keep the debt at a level that we would notionally think of as investor grade, and we don’t want to get outside of that box. Beyond that, it’s a function of if something were larger than we would consider equity or other structures to try to put something together if we thought it was strategic. I think in reality the sweet spot, the kinds of things that we like most are things that typically are in 100 to 500 kind of revenue range but that’ s not a limitation.

Barry S. Landew

Let me just address the question on valuation of the larger companies. It’s kind of interesting. There is still evaluation inversion in the marketplace. The larger companies, particularly the public companies, are actually trading at lower multiples than the private company counterparts. Obviously you know you have to have a premium to get those companies but the conventional wisdom about a premium to scale, a premium for control, which would imply public company valuations being higher, right now that’s not the case in the market which I think suggests you’ll see even more activity among public companies.

Stanton D. Sloane

Also on the recompetes, we really don’t have any coming up. We do have FDIC which I think the RFP is probably going to be in the latter part of the year but unlikely that would be an ’09 award or impact.

Laura Lederman - William Blair & Company

And how large is the FDIC for you now?

Stanton D. Sloane

We would expect that that recompete will be in the $300 million to $500 million range.

Laura Lederman - William Blair & Company

I was talking on a per-year basis.

Stanton D. Sloane

Probably $60 million. I don’t know, we’d have to check the number, but it’s about that.

Laura Lederman - William Blair & Company

And on the protest, any sense of timing, milestones we should understand for the two protests you talked about?

Stanton D. Sloane

No, if I could figure that out, I’d be very happy. To be honest with you , they typically are taking 4 to 6 months to get resolved is kind of what it’s been looking like.

Stephen C. Hughes

Laura, GAO has I believe by statute 100 days from the time its filed. They rarely announce before the final day and they’re typically not filed until after a debrief and then sometime within the [inaudible] after the debrief and in some cases protests are going directly to Federal court, and that has its own set of rules and timelines, so...

Operator

Your next question comes from Ed Caso from Wachovia.

Edward Caso – Wachovia Capital Markets, LLC

You mentioned the two protests in the March quarter and the June quarter, I got the sense if they are captured into your awards number, is that correct?

Stanton D. Sloane

Yes.

Edward Caso – Wachovia Capital Markets, LLC

And how much of the Constella, is there sort of a smidge of Constella that’s still left over, that will fall into the ’09 number? What is that on a dollar basis?

Stanton D. Sloane

You mean the pre-acquisition piece from this past year?

Edward Caso – Wachovia Capital Markets, LLC

When you do the organic growth calculation, how much is Constella?

Stanton D. Sloane

I think it’s $20 million out of that September quarter of last year. The acquisition was closed in August, August 9 or something.

Edward Caso – Wachovia Capital Markets, LLC

So $30 million.

Stanton D. Sloane

No. $20 million. $20 million plus $30 million was the September quarter. $20 million before we bought it.

Edward Caso – Wachovia Capital Markets, LLC

Okay, and if I heard you correctly, $70 million in cash, $200 million in debt now. That’s a swing of $210 million so far since the end of the quarter. Could you give us a sense of the breakdown on the repurchases versus the acquisition versus the other piece I guess is operating cash flow?

Stanton D. Sloane

We did about a $40 million repurchase and that kind of broke out as follows: in first quarter we did about $17 million and let me just double check that. Just one moment. Could you re-state your question please?

Edward Caso – Wachovia Capital Markets, LLC

I’m breaking up. On the repurchase thing, just trying to get an understanding of the $22.7 million, how does that split between FQ4 and FQ1?

Stanton D. Sloane

In Q3, we repurchased $17 million. In Q4 we repurchased $17 million, and in Q1 we repurchased $6 million. That’s a total of –

Edward Caso – Wachovia Capital Markets, LLC

Then the next question is, is the operating cash flow number really meaningful in this quarter or is the difference between $6 million and $210 million what you paid for the two acquisitions?

Stanton D. Sloane

Yes, the operating cash flow for the quarter is about $42 million I believe.

Edward Caso – Wachovia Capital Markets, LLC

In FQ1. I’m trying to back into how much you paid for the acquisitions and it looks like it’s about $200 million.

Stanton D. Sloane

No, that’s way off. I don’t know how you did that. I could walk through that with you offline if you like, but as we said earlier –

Edward Caso – Wachovia Capital Markets, LLC

One last question is. As I back into the organic growth for FY09 somewhere from 0% to 4%, including the impact of AITS, is that about right?

Stanton D. Sloane

If you don’t adjust for AITS, for which year, ’08 or ’09?

Stephen C. Hughes

For ’09, if you don’t adjust for AITS, then the organic growth is in the low to mid single digits. If you add the AITS effect of that, you’d probably add 600 basis points of that growth rate.

Operator

Your next question comes from Gautam Khanna of Cowen and Company.

Gautam Khanna - Cowen and Company

Can you tell me what’s your material pass throughs were in the quarter? First, then I’ll ask some others.

Stanton D. Sloane

The material pass throughs were approximately 10%.

Gautam Khanna - Cowen and Company

Okay, and looking back at ’08, what was the net billable hire at, the head count?

Stanton D. Sloane

The total head count add was about 172 and I would guess that the net billable piece would be 20 or 25% higher than that.

Gautam Khanna - Cowen and Company

Okay, and what was the utilization in the quarter?

Stanton D. Sloane

The utilization for Q4 was about 78.4% for the core business.

Gautam Khanna - Cowen and Company

What are you assuming in terms of average diluted share count in ’09?

Stanton D. Sloane

59 million shares.

Gautam Khanna - Cowen and Company

And what are the kind of variances to get to the high and low end? Is there anything... how much of, it looks like the months of funded backlog are running under 6 months. You’re talking about a couple... After this quarter perhaps, December and March have been light from an awards perspective. Is it fair to say you entered this year with a little bit less visibility than you have in prior years?

Stanton D. Sloane

No, it’s not fair, in fact, I think that visibility is a bit better. As you know, our funded backlog number is an interesting number because some of the backlog is funded during the quarter so that number I think has increased fairly nicely and if you go across all the businesses, if I give you that data, what you’d see is they are at or above prior years visibility at this point.

Gautam Khanna - Cowen and Company

Last question, is it true, if I recall, Q1 usually has the bonus payouts, is that right?

Stanton D. Sloane

Yes.

Gautam Khanna - Cowen and Company

Do you have a sense or order of magnitude of how large that will be this year?

Stanton D. Sloane

A little bigger than last year.

Gautam Khanna - Cowen and Company

Do you expect anything different with respect to turnover this year versus last year in this quarter?

Stanton D. Sloane

In this quarter?

Gautam Khanna - Cowen and Company

Given you have the bonuses being paid out this quarter.

Stanton D. Sloane

There could be a little blip but we are using on a planning basis the same attrition rates as in prior years and the upshot of it is that to make our plan, we only need to hire a couple hundred people more in gross than we did last year, so it’s something well within our ability and what we’ve done in the past.

Stephen C. Hughes

So far we’re tracking right to that plan which is very encouraging.

Operator

Your next question comes from Joseph Vafi of Jefferies.

Joseph Vafi - Jefferies & Company Inc.

On AITF, just on the personnel side there, do you expect first of all to see any kind of contract wind down charges and how many of those employees do you think you can retain and how long do you think until those employees are kind of fully back up and billing on other contract vehicles?

Stanton D. Sloane

We don’t anticipate any unusual charges as a result of winding down and we have placed all but something like about 30 people on the project. We expect to have them placed before much longer. We have plenty of openings so that’s not an issue.

Joseph Vafi - Jefferies & Company Inc.

Okay, so if we look at organic growth then and we’re kind of taking a bunch of people and moving them off of AITS onto other things, obviously there’s other things on the contract like pass throughs and subs and things like that. How should we kind of think about organic growth if we’re kind of filling some of the hole by moving people from one vehicle to another?

Stanton D. Sloane

I think Steve covered the numbers but generally organic growth is going to be depressed as a result of AITS wind down or the loss of the recompete. That’s pretty clear.

Joseph Vafi - Jefferies & Company Inc.

Right, but it’s less of a kind of true hole in the revenue. It’s just because you’re kind of retaining a lot of the revenue b y moving the people from one contract vehicle to another.

Stanton D. Sloane

Yes, but I don’t think of it that way. It’s 6% of revenue that if we were running that revenue through the books, we’d be 6% higher in revenue to start with. We’ve already back filled a lot of that with new wins but you can’t... I don’t know how you avoid the pot hole, if you know what I mean.

Joseph Vafi - Jefferies & Company Inc.

That’s helpful and then I guess Stan you were kind of talking about really large acquisitions and the sizes you’re talking about are big and have you kind of thought about the numbers and the types of businesses you’d be looking at that size and would you do a diluted acquisition, because if we get that big and we kind of look at ways to not have them be non-dilutive, it gets a little more challenging unless of course we’re talking low purchase prices.

Stanton D. Sloane

I have to respond with kind of a philosophy response here. We have said consistently for the last 15 months that we’re going to be very strategic in how we approach acquisitions and we don’t desire, we don’t go out looking for diluted acquisitions but if we though something was really strategic for the company and was going to fuel growth then we would certainly consider it. We wouldn’t shy away from it simply because it was dilutive. Then of course you have to get into discussion about GAAP dilutive versus cash dilutive or accretive. My view of the world is I’d be much more concerned about the cash side of it because I think that’s real then I would the GAAP side but we can’t ignore either one of those, so the size of the deal to your point is of course is something we’d have to consider a very big deal that was dilutive of course would be more, we’d be more careful than a small deal that was dilutive given that they were both strategic.

Operator

Your next question comes from Tim Quillin of Stephens, Inc.

Timothy Quillin – Stephens, Inc.

I just wanted to try and revisit the question that Ed was asking in terms of your cash is down $160 million from where it was at the end of the quarter, and debt is up $50 million, so that nets out to $210 million and I think you said you used $6 million on buy-backs, and so it’s a $204 million delta. I think what Ed was asking is that indicative of what you paid for the acquisitions, you said no. I think you’ll probably put what you pay for the acquisitions in the next 10-Q.

Stanton D. Sloane

Tim, you and Ed are going to cause me to violate our policy. The amount that we paid out for acquisitions in total was $132 million for the combination of Era and ICS. It’s also probably not wise for me to give you a point-in-time number of August 11, 2008 because you have the comings and goings to cash flows and checks and so forth. So, at the end that really reconciles it for you is that $132 million. Okay?

Operator

The next question comes from Jason Kupferberg of UBS.

Jason Kupferberg - UBS Warburg

So I know you guys outlined the organic growth expectation and that low to mid single digit range for fiscal ‘09 and obviously your idea is weighing on that to some extent, but at the end of the day, this, I guess will be the third straight year when you’re down in that low to mid single digit range, and in the past you’ve talked about talked about trying to get back to a mid-teens organic gross rate on a CAGR basis. Is that still on the cards over the next five years on an average basis, or are we going to get an update on that in September at the analyst meeting?

Stanton D. Sloane

Well Jason, let me review the bidding on that one more time. We factored out, if you factor out or normalize for AITS, you’d have 600 basis points higher in growth. We’ve elected, we’ve made a decision that we would forego some low-margin revenue. Call that number $50 million to $60 million, okay? That’s a decision that we announced maybe a year ago, I don’t recall when. Back to those two things. Also consider the fact that what drives our margin growth, and that’s labor and services revenue. That for this fiscal year is growing somewhere in the 10% to 15% range, and the thought behind that is the change in the margin from ’07 to ‘08 to ‘09 is nearly 100 basis points, so you know, any way I count that, that turns out to be a positive result.

Jason Kupferberg - UBS Warburg

No, I totally get that, part of my point is that you guys have made that election to forego some growth, to expand your margins but does that mean that a mid-teens organic growth is not the right expectation to set for investors on a CAGR basis over the next 5-year period?

Stanton D. Sloane

Well, we’ve given guidance that we think is appropriate for this year. Our long-term objective is still what I said, is to get the organic growth significantly higher. I think the AITS situation is about a year setback on that plan.

Jason Kupferberg - UBS Warburg

At start of fiscal ‘08, I think you guys had offered a $2 billion bookings target for the year and you achieved that, so congratulations there. Do you have a goal for fiscal ‘09?

Stanton D. Sloane

Depending on the timing of when those contracts are awarded, and we have about $2.2 billion outstanding right now, but depending on the timing of that, it’s somewhere in the region of $2.3 billion to $2.6 billion range. That’ll be what we’re looking for.

Operator

Our next question comes from Laura Lederman of William Blair.

Laura Lederman – William Blair & Company

Can you just give us the organic growth rate if you just isolate out [inaudible], sorry, taking it out, sorry, from the quarter that just ended.

Executive

Laura, we don’t have that computation, that’s integrated, so I’d have to do some extra homework but I’d don’t even think I could do it. I could try, given the integrated nature of it at this point.

Operator

Your next question comes from Michael Lewis of BB&T Capital Market.

Michael Lewis - BB&T Capital Markets

Hi, thank you, thanks for taking this additional question. Steve, I was wondering if you could walk us through SG&A for a second. My estimate was off about 100 basis points as a percent of sales, so I’m wondering if, I think it was Barry who said that there was some additional B&P in the quarter, and additional marketing spend in the quarter, but can you quantify for us how much and what level should we expect moving into, I guess you could just say for the entire year. What’s the sustainable level of SG&A that we should be modeling to?

Stanton D. Sloane

That’s a good question, Michael. In Q4, there are lots of cats and dogs that made up the difference. I don’t know which you’re model number had in, but with respect to what our model had in it, there are some additional marketing sales and B&P as Barry noted, very heavy activity in the disposal tanks in the quarter. We’ve also elected to begin building a tech ops function, to ensure excellence in execution. We’ve added money for career development. All these things we’ve done not at the expense of the bottom line, but as you note, at the expense of a high SG&A number. Going forward to ‘09, it’s a bit of a different picture. As Stan’s talked about in the past, we’re looking to buy companies that have higher gross margin, leverage their SG&A. The higher acquisition will in fact cause our cost of sales number to decline a bit, but will be offset in the short-term by a higher SG&A rate. So I’d expect to have a higher SG&A rate in ‘09, a lower gross margin. As I said before, at the end of the day it’d be about 20 or 30 basis point operating margin expansion, which we think is pretty good in the circumstance.

Operator

Your next question comes from Gautam Khanna, of Cowen and Company.

Gautam Khanna – Cowen and Company

I just wanted to ask if Steve, you anticipate any quarters to be sequentially down on the top line, given the AITS loss? Like will December be lower than this September?

Stanton D. Sloane

Well, let me divorce this from the AITS contract historically, although we’re not giving quarterly guidance here, historically Gautam, we could see a decline from Q4 to Q1 and because the leave factor in Q4 is much, much lower than in Q1. So when that happens, you have much higher leave taking in Q1, which reduces your direct labor services revenue. In addition, B&P activities are which also reduces your DL utilization. Just give you a little bit more color on whether we expect in terms of the flow, I would guess that the revenues in the first half of the year would probably be in the 48% to 49 % of the total, with the other half being in the second half of the year. Does that help?

Gautam Khanna – Cowen and Company

Yes, that is helpful, thank you. And by the way, did you mention that the acquisition contribution will be $65 million plus $8 million?

Stanton D. Sloane

We said at least $65 million, plus $8 million for ICS, but I think we failed to mention that these acquisitions would be accretive.

Gautam Khanna – Cowen and Company

Can you tell me what the quarterly rate was on Era anyway?

Stanton D. Sloane

No, it’s a growing company, and we simply say that the company, we would expect the company to grow nicely, and as I mentioned before, we’re not intending to give quarterly guidance, so it wouldn’t be appropriate for me to guess at that.

David Keffer

Okay, I’d like to thank everyone for joining us this afternoon, and we look forward to seeing many of you in New York on September 9, and that concludes today’s call.

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