CACI International Inc (CACI) Q2 2009 Earnings Report, Transcript and Summary

(Operator Instructions) Welcome to the CACI International Second Quarter Fiscal Year 2009 Conference Call. At this time I would like to turn the conference over to Dave Dragics, Senior Vice President of Investor Relations for CACI International.

I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International. We're very pleased that you're able to participate with us today. As is our practice on these calls we are providing presentation slides, and during the presentation we'll also make every effort to keep all of you on the same page as we are. Let’s move to slide number two. Before we begin our discussion this morning I’d like to make our customary, but important statement regarding our written and oral disclosures and commentary. There will be statements in this call that do not address historical fact and as such constitute forward looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated results. Factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are also described in the company's Securities and Exchange Commission filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation today will include discussion of non-GAAP financial measures. Now let's go to the next slide, please. To open up our discussion this morning here is Paul Cofoni, President and Chief Executive Officer of CACI International.

With me today to discuss our results and answer your questions are Tom Mutryn, Chief Financial Officer, Bill Fairl, President of US Operations, Randy Fuerst, Chief Operating Officer, US Operations, and by phone from the United Kingdom Greg Bradford, Chief Executive of CACI Limited UK. Let’s go to slide number four. At the mid point of our fiscal year I am extremely pleased with CACI’s strong financial performance. We achieved a record quarterly revenue of $673 million in our fiscal 2009 second quarter. This second quarter is our fourth consecutive quarter of double digit earnings per share growth. We’ve had six consecutive quarters of double digit organic growth. This performance is consistent with our long term financial goals of achieving at least 8% to 10% organic revenue growth and at least 15% net income growth annually. Contract awards and contract funding orders were also up significantly from the fiscal 2008 second quarter. These positive results reflect the success of our strategic focus on the well funded federal services market. Our growth strategy is to deliver mission critical support to defense, intelligence, homeland security and the improvement of government services. Our strategy to focus on solutions to defeat global terrorism through new technology, training and analysis in intelligence, security services and cyber security is delivering profitable growth. Our intelligence revenue grew more than 35% over the same quarter last year and now represents 39% of our total business. Slide number five please. Our core markets continue to receive high priority mission critical funding. What differentiates CACI is that there is a steady long term demand for our innovative and valuable solutions which are absolutely congruent with helping our clients defend our nation. Even now with the global economic crisis we see this clearly. Our client mission understanding has never been more valuable and our client relationships have never been stronger. The new administration is communicating its strategy for American global leadership. This includes integrating the soft power of diplomacy and socio-economic development with a hard power of military strength. Both are necessary to meet today’s threats. They formed a smart power America needs to protect our homeland and promote global stability. We are taking initiatives in advancing strategy and thought leadership in this area. We are hosting a series of symposia that bring together experts from government, industry and academia to focus on strategies to deal with the global asymmetric threat. In October we co-sponsored our second symposium on the role of soft power in defeating terrorism. We’ll be publishing our white tape from this symposium soon and I invite you all to read and it will be posted our website. We have scheduled our next symposium focused on the application of benefits of smart power for March 24th. We’ve convinced that our ideas and solutions in this area provide essential value to counter threats and promote global stability. CACI’s continued growth in our core business and expansion into new business areas is a result of our experience in innovative management team. In the second quarter Zal Azmi, the FBI’s former Chief Information Officer joined us as Senior Vice President for Strategic Law Enforcement and National Security Programs. Zal brings us unique Federal IT and National Security expertise. This includes twice being deployed to Afghanistan on behalf of the US Intelligence Agency to support military operations there on the ground. He also served eight years with the US Marines. At CACI he will leverage this experience to help grow our name recognition and market share in the law enforcement and national security arena and assist us in executing our strategy of integrating intelligence and security services. Our fundamental strategy remains sound despite the world economic crisis. However, as we said in our last earnings call this crisis is impacting our UK business and our effective tax rate. We’ve taken immediate and aggressive corrective actions including a new UK sales strategy and cost controls throughout the corporation. These actions combined with the strong performance of our domestic business have helped to largely offset these impacts. Greg, Tom and Bill will provide more details on this. Our core business has performed exceedingly well in the first half of fiscal 2009 and we believe funding for our key markets in defense, intelligence and homeland security will remain strong. We have a healthy balance sheet and cash flows and remain prudent with our capital as part of a balanced and well integrated financial strategy. We are winning more than our share of awards at the Tier 1 level and our funding, hiring and overall team performance is strong. Tom will now provide his financial overview followed by Greg Bradford and Bill Fairl who will provide more information on our operations.

Please turn to slide number six. As Paul indicated we are very pleased with our second quarter results. Our revenue grew year over year by 16.4% driven by strong organic growth of 13.5% and acquisition related revenue from the Dragon and Athena transactions. Our direct billable labor grew by 13.8% driven by both our hiring activities and our acquisitions. Our other direct costs were up 23.4% as we continued to provide valuable services to our customers using a variety of subcontractors. This work helps our clients, solidifies our relationships, adds to our bottom line and prudently leads to directly labor growth. Let’s go to the next slide number seven. Second quarter operating income was up 18.1% year over year. The growth in our direct labor and ODC’s, our continued control of indirect costs and lower expense in amortization tailed off all contributed to the strong operating income growth. Net interest expense fell by 9% as we realized the benefit of lower interest expense on our floating rate debt. Pre-tax income was up an impressive 23.9%. Please turn to slide number eight. Our net income for the quarter was $22.1 million a 15.1% increase from the second quarter of last year despite a material increase in our effective tax rate. For the quarter the effective tax rate was 43.5% driven by continued declines in the asset value of the investment in our executive deferred compensation program. We are currently assuming a full year effective tax rate of 42.5% based on an assumption that we will not experience further losses in plan assets in the back half of the year. Let me add that the losses in the deferred compensation plan are not impacting our cash flow or the cash taxes we are currently paying. Diluted earnings per share for the quarter were $0.73 up 15.9% year over year the fourth successive quarter of double digit earnings per share growth. We are gratified to see continued progress towards our longer term goals of least 15% annual EPS growth. Next slide please. Our cash position at the end of the quarter was $105 million. Our operation used $1 million in cash during the quarter. The growth in our business requires more working capital and we continue to experience normal fluctuations in cash receipts. Day sales outstanding at the end of December were 64 days and continued to be industry leading. Our businesses must generate strong dependable cash flows. We bill the government promptly and accurately. The government pays on time and our capital needs are minimal. As such we still expect full year operating cash flow to be consistent with our initial guidance of about $130 million. Our trailing twelve month operating cash flow per share was $5.31 equivalent to a 12.3% cash flow yield at our current stock prices. Next slide number 10 please. Our financial fundamentals remain strong. Our quarter end net debt was $553 million with our net debt to trailing EBITDA leverage ratio added a comfortable 2.4 times. We have two major debt instruments outstanding. Our $334 million institutional loan matures in May 2011 and is prices at the lower of prime or LIBOR plus 150. Currently our weighted interest is 3%. In addition, in May of 2007 we issued a $300 million of seven year convertible notes with a 2 1/8% coupon. With this attractively priced debt in place I am happy to say we have no near term financing issues and we have more than adequate liquidity with $100 million of cash plus $240 million of unused revolver capacity. Next slide please. Based on activity since our last calls continued review of our operations and expectations for the remainder of the year we are increasing our revenue guidance $2.65 to $2.75 billion due to our strong growth on ODC. The higher effective tax rate is resulting in a decline of about $0.17 per share for the full year. The weakening of the UK pound is costing about $0.05 and the UK recession impact on our operations there is costing about $0.05. Because of these headwinds we have reduced the top end of our earnings guidance that we now expect earnings per share to be between $2.90 and $3.05. We are pleased that the strength of the US operation cost control activities and new UK sales strategies are expected to offset most of these headwinds that we are able to keep the bottom end of the EPS guidance in tact and only lower the top end is a testament to the strength of our core US business. The next slide number 12 has a good amount of detail on accounting for convertible debt. Let me summarize this issue without getting into all the specifics. Beginning July 1 we will adopt a new accounting standard governing how we convert debt interest. This rule requires us to impude a non-cash interest charge associated with our convertible debt. It requires retrospective application. As such we will be recasting our financial results for the prior period beginning with the first quarter of our fiscal year 2010. To give you an idea of the impact, if this standard was in placed during our second quarter our interest expense would have been $2.4 million higher than reported and our pro-forma net income would have been $1.3 million less. Let me underscore that this is a non-cash expense, cash flows are unchanged. To minimize confusion regarding 2010 estimates in comparison with our current year numbers we encourage you to refrain from incorporating the new accounting into your estimates until we provide our initial full year 2010 guidance. With that let me now turn the call over to Greg Bradford.

I’d like to give you an update on our UK operation and what we’re doing to address the impact of the global recession on our business over here. Let’s move to slide number 13 please. Our UK subsidiary reported revenue of $18.1 million for the quarter, a 21% decrease from last year’s second quarter. This decrease was the result of a 23% fall in the value of the pound from the second quarter of last year. Our net income margin was 6.1% compared to 6.6% for the second quarter of last year. Our UK operation performance in the second quarter and year to date has been adversely impacted by the substantial fall in the value of the pound and the UK recession. We took a number of management actions during the quarter to increase sales activity and reduce costs to mitigate the impact of the recession. These actions enabled us to successfully generate a net income margin in the second quarter close to what we achieved in quarter two of last year. The UK recession is expected to worsen and so we implemented additional measures mostly cost savings at the end of the second quarter to offset any further impact on our business going forward. A key component of our business strategy over the last five years has been to grow our government business. Today, approximately 32% of the UK business is government. This area of our business has been largely unaffected by the recession which we believe will continue to be the case in the future. To further our strategy we acquired a small government software contractor last week which we expect will generate $3.5 million revenue per year and be accretive. We will of course continue to keep a watchful eye on the UK economy and we will take swift and appropriate action where necessary to sustain our business and maintain our profitability. Our greatest asset in achieving this is our UK management team. I have been at the helm of our UK business since the mid 1980’s and the members of my top management team are well seasoned business managers with many years of experience at CACI. While every economic crisis is different we successfully managed our UK operations through the recession in the early 1990’s and the lessons learned from that experience are proving valuable this time around. We know what’s expected of us and we know what to do. With that I’d now like to turn it over to Bill Fairl for an overview of our US operations.

This morning I’ll address second quarter highlights from US operations. If you could let’s go to slide 14. Our contract funding orders for the quarter increased to $538 million that’s a growth of 21% or more than $92 million over the second quarter of fiscal ’08. Our funded backlog through the first half of fiscal ’09 was $1.53 billion. At this point I call your attention to our contract awards for the second quarter. During the quarter we received contract awards of $886 million that’s a dramatic increase of $442 million or nearly 100% more than the second quarter of fiscal ’08. I’d like to take moment now and briefly discuss some of our major second quarter contract awards and announcements. Our largest single award for the quarter was GENESIS III, a prime contract with a $452 million ceiling to continue providing mission support services to the US Army Intelligence and Security Command. CACI’s role here is to provide complete support for systems for electronic warfare, security, quick reaction capability and prototyping. We also receive an additional classified contract award with an approximate value of $114 million to support the intelligence community. We received $96 million in S3 awards during our second quarter and through December we’ve been awarded more than $1.6 billion in S3 task awards. We announced the opening of the CACI Research and Development Lab what we call CRaDL on the US Army’s Aberdeen Proving Ground in Maryland. With this innovative new high tech facility CACI continues our ongoing support for Army operations, transitioning to Aberdeen from Fort Monmouth, New Jersey as mandated by the Defense Base Realignment and closure commission. The CRaDL provides tools and resources to support the seamless and uninterrupted transition of these operations. We also announced an agreement with Oracle during the second quarter. Per this agreement Oracle and CACI will jointly develop a contract lifecycle management solution to help federal organizations manage procurement contracts in compliance with federal regulations. Slide number 15 please. Growth in the Intel portion of our portfolio was strong again as we were up 35% quarter over quarter. Our Intelligence business was approximately 39% of our revenue in the quarter. Our Athena and Dragon acquisitions contributed to this impressive growth. Just to give you a little historical perspective here, between our fiscal years ’05 and ’08 CACI’s Intelligence revenue grew from 25% of our total revenue or about $414 million per year to 34% of our revenue or almost $834 million a year in fiscal ’08. Year to date our Intel revenue represents 38% of our total business or almost $503 million of the $1.33 billion in revenue we have reported for our first two quarters. Let’s move to the next slide please. Our proposal activity continues at a high level. At the end of our second quarter we had more than $4.2 billion in submitted proposals under evaluation both new and recompete. We expect nearly all of them to be awarded by the end of our fiscal year. During our third and fourth quarters we anticipate submitting more than $5 billion in additional proposals. During our recent conference calls I’ve discussed our progress in hiring. This morning I’m delighted to report that our trend of outstanding hiring results continued during our second quarter as we added over 240 net new hires, many with security clearances of top secret or above. Today approximately 35% of our workforce has a top secret or above security clearance. Overall we now have more than 8,400 cleared employees, that’s 8,400 cleared employees. In summary, our strong contract awards, contract funding orders and funded backlog coupled with our success in hiring give us continuing positive momentum for the second half of fiscal ’09. Our team is focused on maintaining our momentum through the remainder of this fiscal year and beyond.

Let’s turn to the last slide please. I’d like to conclude our call today by summarizing CACI’s business strengths. We believe CACI’s double digit earnings per share and organic growth for the second quarter and the first half of fiscal 2009 validates our growth strategy. This strategy is to position ourselves in the Government’s growth areas of defense, intelligence, homeland security and the improvement of government services, where our services are in high demand. Our clients are expected to continue to spend in support of their critical mission. The strength of our US operations combined with our ongoing cost control initiatives should largely offset impacts we are experiencing in our UK business and increases in our effective tax rate. We believe our core business is resilient to the current economic crisis. The government services market remains robust and CACI is a leader in this market. We have an outstanding and experienced leadership team implementing a sound strategic plan and a robust federal services market. Our employees are committed to our vision of being the best in our industry. CACI is a market leader value added business partner and a great place to work. We are delivering on our commitments building lasting trust and enhancing shareholder value. With that we can open the lines for questions.

(Operator Instructions) Your first question comes from Bill Loomis – Stifel Nicolaus Bill Loomis – Stifel Nicolaus: On the gross margin I know you had higher ODC’s but you’ve had them for a while. Why does the gross margin hit an all time low in the quarter, yet your direct labor was up 14% so almost as high as your total revenue growth. What’s the component that’s going on with gross margin and where do we see that going over the next year?

Two components of gross margin obviously are direct labor margins and ODC margins. In the quarter we continued to see strong ODC performance so everything else being equal that’s going to depress gross margins as ODC’s grow. That is one of the major drivers of the gross margin, it was down year over year and that was the major attributing factor to it. The other factor that’s occurring is within direct labor and within ODC’s there is a variety of components. At any point in time CACI has over 2,000 task orders. Not all direct labor is created equal, not all ODC’s are created equal. As certain projects grow, certain projects contract we’ll see mixes within the direct labor margin category or the ODC margin category as well. A lot of moving piecing going on simultaneously and the net result is always moving pieces is the gross margin that we reported.

Your next question comes from Michael Lewis – BB&T Capital Markets Michael Lewis – BB&T Capital Markets: I was wondering can we get a status on the ETOS recompete do you have any new information there?

That recompete is due in March.

We’re currently thinking March.

We’re feeling very confident we have been there a very long time. We’ve won successive recompetes. Our performance is strong and the client relationship is outstanding. We’re confident. Michael Lewis – BB&T Capital Markets: Was that two previous recompetes that you won on that or three?

That relationship goes back many, many years, 20, 25 years in various contract forms before the client actually moved up to Fort Monmouth out here in Vint Hill Farms Virginia. There’s been a whole series of recompetes. Our success comes not from low price bids but instead from a really solid client relationship and best value deliveries over a whole series of recompete wins.

Your next question comes from Brian Gesuale – Raymond James Brian Gesuale – Raymond James: I wanted to talk to you a little bit about direct labor; it looks like it grew really nicely in the quarter. On some of this new business that you’ve won which has been impressive how does that fit into that overall goal of having that 60/40 split direct versus indirect? On that 14% direct labor number growth you gave is that all organic or how should we look at that?

As Tom mentioned we’ve got approximately 2,000 active task orders at any given time. Some of the growth in direct labor; actually a lot of it comes from those ongoing 2,000 task orders many of which go back many years in time. The initiative that you’re referring to about us with our new business wins going out and really focusing on those opportunities that give us at least 60% CACI labor content that is slowly over time delivering more labor content to us. If you use the analogy or metaphor of an aircraft carrier turning it takes a long time to do that. At the same time as Tom mentioned we’ve had outstanding growth in ODC’s. Direct labor has been growing fantastically, good news, ODC’s have been growing faster. We like that because we get real value out of that, we earn money on it, it build client relationships and also frequently leads to new direct labor work downstream so the whole thing is good there it just changes the little mix there while ODC’s are growing a little bit faster.

Your next question comes from Jason Kupferberg – UBS Jason Kupferberg – UBS: I wanted to touch on the operating margins briefly. Obviously with the ODC’s going up and we’ve been assuming that your operating margins for the full fiscal year would come in around the low end of the 6.7% to 7.0% range I think was where you left off on the guidance. Is that a pretty reasonable working assumption given the ODC trend?

Yes it is. Let me take a step back and address the margin question we just had a few questions on margin. As we have said our focus is on delivering value to our shareholder. First and foremost we believe that driving a 15% plus year over year growth in net income and earnings per share will drive significant shareholder value. At the same time we believe that delivering strong organic growth, 8% to 10% will provide value to our shareholders. Quite candidly our next priority is to prove our margin, our gross margin, our operating margin, our net margin. In other words, we do want to make sure that every incremental dollar that we produce is more profitable, one way to look at margin. Like many things it’s easier said than done, complicated issue to two broad mix issues. One is the ODC versus direct labor mix; both ODC’s and direct labor are good. We have seen over the last several quarters’ higher growth in ODC positive through the bottom line, good for a number of strategic and operational regions but it does serve to reduce margin. As we said, we also have mix within our ODC categories and mixes within our direct labor categories. That being said we’re focused on increasing the margin of ODC’s, getting higher mark ups, increasing our direct labor content, taking some time to do that. In our cost control initiative the economy scale tight controls will help our operating margin as well. A long winded answer to your question. Bottom line, we initially guided operating margin of 6.7% to 7% for the year. Right now we think we will either be at the low end of the range or slightly outside of the range given the strong growth in ODC’s. That’s what we’re thinking margins will come out for the full year.

Your next question comes from Mark Jordan – Noble Financial Mark Jordan – Noble Financial: I’d like to talk a little bit about the concept of cash earnings versus reported GAAP as GAAP is becoming more and more complex. Specifically if you look at the fiscal ’09 outlook if we had adopted FAS SP14-1 you would be looking at a base that would be say 280 or less. Then looking at amortization of purchase intangibles which this year I believe is around $32.1 million or $1.05 a share you add back the $0.20 from 14-1 you’re looking at a $4.05 number which would be up 45% from what will be the recasted ’09 when you adopt 14-1. In addition, going into the new year I believe you’ll have to use 141-R which is the immediate write off of any deal expense which will add more non-cash variability to profit. Do you believe at some point in time you might also start to report a cash EPS type number which would add back these non-cash charges as it would be instructive to your shareholder base that this is more reflective of what you are earning versus the GAAP numbers?

Those are very good observations. We have certainly though about that quite a bit. In my prepared remarks I mentioned that our operating cash flow per share was the equivalent to $5.31 per share equivalent to a 13% cash flow yield. We’re very much focused on cash and we recognize that some of the current accounting is non-cash based. You mentioned the convertible, the amortization, we also have significant non-cash stock compensation expenses, while some of the higher effective tax rate that we’re seeing are non-cash. We will take that under advisement and we want to provide that type of insights into our investors. I encourage all of you on the call to do your own calculations as well; I think that’s a very good way to look at both CACI and other companies on a cash basis.

Your next question comes from Tim Quillin – Stephens Tim Quillin – Stephens: In terms of cash flow I think both last year and this year it’s going to be back half weighted. What’s the comfort or confidence level that the timing of collection of receivables will be such that you’ll achieve that $130 million operating cash flow target?

We’ve been back over the last several years and looked at cash flow the first half of the year versus back half of the year and typically we’re stronger in the back half of the year. We have a good amount of confidence that the back half of the year will come in quite strong. Year to date our cash from operations is essentially flat so we have a significant positive cash flow to come up with in the back half to get to those particular numbers. All in all we’re comfortable that we will get that money. We bill the government, the government pays. CACI is a generally strong cash flow generating machine. The reality though is there are always random fluctuations in cash flow. We look at cash coming in the door every day, every week, every month and it’s somewhat of a sawed tooth, choppy graph if you look at it on a day to day basis. Often times one of the situations we face is where does the quarter end versus that sawed tooth choppy pattern and that will impact our GAAP reported cash flow from operations. Bottom line, we’re very comfortable we will continue to generate very solid dependable cash flow. That being said, there is some choppiness to it. Tim Quillin – Stephens: On the tax rate, I know it’s a little complicated, I don’t want to get too deep into it. In terms of how we think about fiscal ’10 if asset values stabilize does the tax rate go down or do asset values have to increase before the tax rate goes down.

Asset values stabilize. In fiscal ’10 if you assume that the plan assets are generally flat there’s no precipitous losses we revert back to a normal tax rate let’s say 39%.

Your next question comes from Dhruv Chopra – Morgan Stanley Dhruv Chopra – Morgan Stanley: Over the past year and a half you’ve seen pretty solid growth in cost reimbursable contracts. How should we think about that going forward? What impact is this mix shift having on the margins?

Most of the shift for us to cost plus occurred three to four years ago. The last couple of years it’s stabilized a little bit. Going forward there seems to be a bias, easier said than done but maybe moving more towards fixed price kind of contracts. That’s still very much under debate inside the government. With that in mind I would offer and observation that we’re spending a fair amount of time training our project managers on the proper management of fixed price contracts. We have a very deliberate process around here for risk management and getting those projects delivered on time within budget. We’re really good at it. We think there’s going to be more movement towards fixed price contracts so there will be more requirements so we’re getting ahead of that. Fixed price contracts managed properly can be very profitable; it can be a good thing. To your question about cost plus contracts when you think about three types of contracts, fixed price contract, managed very properly, time and materials contracts and cost plus. In terms of profitability cost plus is at the bottom of that totem pole. Some are around 5% and 8%. There could be some variations on that depending on whether you have award fee contracts or not. Generally think about 5% to 8% on the cost plus contracts.

Your next question comes from Seth – JP Morgan Seth – JP Morgan: On taxes for the year as a whole the 42.5% guidance it looks like the tax rate in the second half would have to be fairly high, higher then the tax rate in the first quarter and then the normal tax rate. I thought you said you were assuming no more losses in the deferred comp plan. I was wondering how that shakes out.

Any quarter we need to come up with an effective tax rate, which is based on our best estimate for the full year. For the first quarter we had a 41% tax rate. Our second quarter was approximately 43.5% which brought us year to date close to the 42.5% tax rate. Right now with no further gains or losses in the deferred compensation assets we would book an effective tax rate in our third and fourth quarter of 42.5%. Seth – JP Morgan: I wonder if you can talk in a little more detail about what you’re expecting from the UK business for the remainder of the year. It seemed like the margins held up fairly well this quarter. I know there’s a translation losses ahead but in terms of where the margins might go and what that contribution might be.

Our forecast for quarters three and four are that we should be able to maintain the same level of profitability as we’ve achieved in quarter two. The margin percentages may vary depending on the mix of revenue. Our government services business is actually growing but it produced a smaller margin then our commercial software product business. The absolute profit that we produce we feel we can continue to generate the next two quarter, again the percents may change.

Your next question comes from Brian Kinstlinger – Sidoti & Company Brian Kinstlinger – Sidoti & Company: We talked about the cash flows looking backward. Can we talk about what we expect the free cash flow target to be this year?

You were expecting cash flow from operations for the full year to be around $130 million consistent with our initial estimates. We generate approximately $10 million of capital spending on a typical year so the free cash flow target would be $120 million. Brian Kinstlinger – Sidoti & Company: You’re more and more profitable each of the last two years what is the difference that it has caused free cash flow and if that comes in like that to drop each of the last two years.

Two things that are occurring, one is our collection organization has been doing a spectacular job of reducing our DSO. Our DSO has dropped from the low 70s to the low 60s so very admirable work by that organization. The second factor is we’re growing. In growing companies you use working capital and so that is a use of cash. First and foremost it’s the very strong collection activity we got.

Your next question comes from Erik Olbeter – Pacific Crest Securities Erik Olbeter – Pacific Crest Securities: It looks like the markets in the fourth quarter was expected to take a pause of so the transition a lot of new programs not coming on line. You guys really showed a lot of resilience particularly in a contract awards. Can you talk a little bit more detail what particular customers you’re seeing that from, what particular areas of business core comp you’re seeing strength in. Paul Cofoni The resilience lays in the fact that our market is focused at the largest most complex problems that our clients face. We are getting that kind of continuous funding from defense, intel, homeland security. There are obviously the big problems in the nation once you get past the global economic crisis that we’re experiencing. The next thing right below that is of course security, the threat of terrorism around the world. That continues to be a steady drum beat of funding from the clients that are involved in that fight which of course spans a good part of government. We expect going forward that the spectrum of involvement from the US Federal Government and the war on terrorism will broaden. Today it’s more focused in defense and intelligence but we expect other agencies of government to increasingly participate in what Secretary Clinton called smart power which is provision or targeting of socio-economic development and diplomacy at trouble spots that are likely breading grounds for terrorism. This is the big security problem for the nation and the citizenry and we are heavily committed to that focus there, investment there nearly 40% of our people are specializing in the area of intelligence alone. If you were to add in the other dimensions I mentioned of homeland security and other agencies that get involved in the smart power contribution probably 80% of what we do is in this area. That is pretty independent of even the world global economic situation because security has to come first.

Your next question comes from Ed Caso – Wachovia Ed Caso – Wachovia: Given your strong free cash flow $120 million this year I don’t think you did any repurchase activity in the quarter but do you have interest in restarting your repurchase effort? Any cost reductions control focused in the US or was it all in the UK?

On stock repurchase we did do some not in this current quarter I think it was in the prior quarter that we did some. Before that we did some in fiscal ’07 as part of the convertible as well, I think that was close to $50 million at that time then $20 million in the first quarter of fiscal ’09. We’re always evaluating that from time to time. We continue to evaluate that, however, given the tightness in the market for access to capital that would be a more difficult decision for us right now. Tom talked a little bit in the script and I expect he’ll want to use this as an opportunity to expand on those comments about our strategy for preserving capital going forward. I would say that’s always a consideration for us.

Everyone on this call hopefully will agree that we’re in a new environment. The world is significantly different then it was six and 12 months ago. Capital markets quite candidly are in disarray. Cost of capital much higher and capital is scarce. As the result of that we have adjusted our strategy. We are responding to a new environment. The sound strategy right now is to limit the amount of capital we will deploy until there is more clarity and stability in the marketplace. That goes to both share repurchase and acquisitions. That said we expect acquisition values to come down through maybe some very attractive opportunities in the next six to 12 months. Given the disarray in the markets the prudent course of action is for us to respond the new environment and take a pause. There was a second part to your question. It had to do with the cost reduction efforts are they impacting both the US and the UK. As we see some of the headwinds associated with the tax rate in the UK we are also looking at our indirect expenses in the US. We continue to have a very tight control in our expenses, incremental hiring, and traveling, discretionary types of activity. All in all we’ve been doing a very good job of controlling our indirect expense both here in the US which is the majority of our business as well as in the UK.

We acted as a corporation. We acted across the whole spectrum of indirect spending both in the UK and the US with our management actions to partially offset the effect that Tom talked about regarding the effective tax rate and the UK exchange rate as well as the compression of some of the sales in the UK. It was a comprehensive corporate activity.

Your next question comes from Laura Lederman – William Blair Laura Lederman – William Blair: Following up on the last question on the desire to hold capital and acquisitions does that mean if you acquire something its likely to be smaller, none of the mega acquisition you’ve talked about strategically in the past. If you could talk a little bit about the new UK sales strategy and a little bit of components on that.

We continue to stay very active in the area of mergers and acquisitions. We’re looking at all size opportunities. However, given the realities that Tom talked about at least for the near term yes we are focused more at smaller niche strong technology capability or strong advance in the new client area from smaller organizations right now. That is something that we evaluate continuously as we go through. We don’t know how long our visibility about the liquidity and the capital markets, how long our visibility will be limited. As soon as we have greater visibility we’re likely to reopen some larger opportunities as well.

It’s focused primarily on our commercial software products business which has been hit by the recession and which does generate high margins. What we primarily do in the UK is we have software products and services that help commercial organizations expand. For example, retail organization wants to open up new branches, we tell them the locations in the UK where they can achieve the highest sales potential. The problem with the recession is that the retailers aren’t opening up new branches. In fact, they’re actually contracting. We can take our same products and services and help them decide which branches they should consider closing or merging based on the sales potential and not just go by sales of those branches. We’re pushing that quite hard. All companies in the UK and I’m sure in the US as well are attempting to reduce costs as much as they can. There are outsourcing opportunities for us where we can take over marketing functions or customer databases and provide that service to them at a lower cost then they can provide themselves. We’re pushing that sales initiative part as well. Those are two examples. We are achieving some success though these are long sale cycles. We think this will be instrumental in us maintaining our profitability going forward.

Your next question comes from Chris Donaghey – SunTrust Robinson Humphrey Chris Donaghey – SunTrust Robinson Humphrey: Obviously this is very early on but taking a look at the stimulus package and the well documented limitations of the Federal acquisition work force what level of involvement do you see yourselves playing in this area or just the government services sector has a whole. As a quick follow up, could you give us the trend in direct labor mix over the past couple of quarters including the second quarter?

We have been examining that same question here ever since the concept of a stimulus package first emerged on the national scene. We continue to explore what role, how we might help. You put your finger on one of the key areas that the whole concept whether the money is being distributed directly to states or whether there are federal programs the same issue will, we believe, emerge which is the ability of the Federal Government to administer a program like this, all the way from selecting projects that deserve funding to program management, oversight and control. This is a very, very large amount of money which will have real implications in terms of control against waste, fraud and abuse. Our interactions with various congress members tell us that they’re very focused on this and language of that sort will be in the stimulus package bill. There is one area where we have strong expertise in the areas of acquisition management services also in program management CIDA and oversight type work. Also as you might imagine all of that being new will require technology. Technology to track and control management information systems to oversee the allocation of funds, the progress of projects, the tracking of reviews of projects and corrective actions against slippages in schedule, budget all of that from a program management standpoint will require management information systems. We think there’s a role there. There are also secondarily several agencies of government including the Department of Defense, Department of State, several other agencies that will be direct recipients of funds from the stimulus package. The stimulus packages calls for nearly a quarter of a million new government employment jobs, federal workers. That will have impacts across the board in terms of technology support for example, etc. We continue to look at this, it’s a good question. There are many more questions and answers in this area. Obviously companies that are positioned more in the infrastructure project area will benefit the most from this. We think there will be role for us.

To follow up on the question on the direct labor mix. The statistics I will give you will be our direct labor as a percentage of our direct costs. Third quarter ’08, 42.3%, fourth quarter ’08, 41.4%, first quarter ’09, 41%, second quarter ’09, 39.4%.

Your next question comes from Alex Hamilton – Jessup & Lamont Alex Hamilton – Jessup & Lamont: I think you guys highlighted something that’s very important and speaks to your strategy so I’d like to know if you could talk about the future for us. You talked about your intel revenue being 38%/39% of revenue and that’s certainly impressive as it’s grown from about 26% in ’05. How do you look at that in the next year or two? Where do you want that to be, do you think most of it’s going to come organically or is that where you’re going to probably focus acquisitions?

We think that the funding stream for intelligence will continue to be vibrant. This is the first line of defense tactically against global terrorism is the ability to have information, timely and exchange it with the right resources that can interdict preempted terrorist activity. It’s not theory its practice, it’s going on all over the world today. It is the best single tool we have in the near term to defeat or hold at bay terrorist threats. Long term smart power is the more comprehensive answer because it attacks the underlying conditions that caused terrorism to breathe. That will be a big growth area. We see cyber terrorism, cyber crime as a big, big area going forward. These are the focused areas. Taken together then of course the normal homeland security activity is taken all together that is a well funded and will continue to receive strong funding. Its sort of the condition that as long as it can continue to be effective this is the first place the nation should invest in the short term. In the long term the first investment needs to be in smart power. In the short term the first investment for security has to be in the area of intelligence to gather the information necessary to preempt.

We through the good efforts of our Chief Operating Officer, Randy Fuerst, the head of corporate business development team. We moved to this account structure over the last couple of years and we currently define about 30 major accounts for the company. Among other things we look at what our forward pipeline is for each one of those accounts. The biggest account we have right now with about $8 billion of future opportunities in it is the Army’s communications electronics activity. That gives you an indication, lots and lots of opportunity there. Specifically if you think about what’s being talked about in government the idea of bringing folks out of Iraq but putting folks and capability and focus on Afghanistan. One of the major challenges there is the whole ISR problem, Intelligence, surveillance and reconnaissance, a big factor in turning the tide in Iraq among other political things that happen. When you move to Afghanistan it’s a completely different country, completely different topography, people don’t live in cities there, they live out in the good ole villages, no roads or anything. ISR is going to play a big role there but it’s going to be a new ISR requirement. Our customer on the Army side also in the intel community that’s their mission. We’re there to support them, we have the contract vehicles already S3, ETOS and others we’re there. Task orders are rolling in to us. Lot and lots of opportunity there.

To take that piece of your question that dealt with the acquisition strategy the priorities are clearly in the area of niche technologies that make a difference in counter terrorism and intelligence is a big part. Cyber and smart power which has got to do more with the diplomacy and socio-economic development. These would be the areas that we have on the top of our priorities currently. Also, logistics is going to continue to be a very important thing as we see that the fights we’re engaged in fourth generation fights we’re engaged in today widely dispersed around the globe and the logistic trains out to those resources that are fighting are long and they have to be maintain. Logistics will continue to be an important area as well.

Your next question comes from Mark Jordan – Noble Financial Mark Jordan – Noble Financial: I’d like to talk a little bit about, expand upon your M&A plan. Clearly with the changing in rules it seems like deals are going to become more costly from an amortization standpoint both writing off deal costs and also an upward bias on what you have to amortize. Secondly, it seems the company when Paul you took over that you did a wave of acquisitions to some extent to try to change the profile of this company towards the intelligence side. Given those two trends do you think that the desire to make acquisitions moving forward and the need to do them are less now then they were two year ago?

I’d say we’re in a temporary period where that’s true. I don’t view that as a long term effect. Our strategy has consistently been to grow the company through a combination of organic growth which of course is the most efficient way to grow the company and acquisition growth. The acquisition growth is aimed; the whole strategy of the acquisition growth is about new things. It’s about being able to have access to new clients, new technologies that are important. That is all correlated to our ability to track or trend the future to be able to predict a bit of what is going to be important a year from now, two years, three years. Its not about bulking up it’s about where is the requirement going. What is the shifting importance of the requirement set of our clients or in some cases even new clients who are the clients that we have the ability to help more. The acquisition program is more a function has been throughout the history of our 40 some acquisitions has been about access to new technologies to support growth, access to new clients to support growth. Always focused on the shifting requirement of the client set. We’re in a period now where necessarily because of the uncertainty of availability and about capitals going forward that we have to step back, wait for the expectations of sellers to intersect with reality which is starting to occur and also be prudent in terms of preserving our cash so that when we need to either repay the debt or refinance debt we have that we have the cash available that gives us the leverage of an alternative, a choice between paying the debt down in cash versus refinancing and we’re not at the mercy of the financial institutions. We have necessarily pulled back but we’re continuing to be active in the M&A market because all of this could change in the next three to six months and you know acquisition activities from the time you start looking at a company to the time you close is six month, nine months, sometimes a year. We are continuing to have an active program. This has brought it down a bit so that we can be conservative cash conservation.

We have no further questions at this time. I’d like to turn the conference over to Mr. Paul Cofoni for any additional or closing remarks.

Thank all of you who participated this morning on the call. We certainly appreciate your interest. Your interest is important to us as investors, advisors, and potential investors. We know that some of you may have additional questions and as always our team will be available to respond following this call perhaps in about 20 minutes. That concludes our Second Quarter and First Half Fiscal Year 2009 Earnings Conference Call. Thank you all very much.

That does conclude today’s conference. We appreciate your participation you may disconnect at this time.