Alion Science And Technology
Moderator: Peter Jacobs
February 26, 2008
2:00 PM ET
Operator: | Good day, ladies and gentlemen, and welcome to the Alion Operations Update conference call. At this time, | |||
all participants are in a listen only mode. Later we will conduct the question and answer session and | ||||
instructions will follow at that time. If anyone requires assistance on the conference, please press * then | ||||
zero on your touch-tone telephone, and as a reminder this conference is being recorded. And now ladies and | ||||
gentlemen, your host for today's conference, Peter Jacobs. | ||||
Peter Jacobs: | Thank you. This is Peter Jacobs, Director of Marketing and Communications at Alion. If you did not receive | |||
a copy of the current report on Form 8-K filed February 20th, 2008, you may access it via the | ||||
company's website at www.alionscience.com. At this time, management would like me to inform you that | ||||
certain statements made during this presentation which are not historical, may constitute forward-looking | ||||
statements within the meaning of the Private Securities Litigation Reform Act of 1995. | ||||
Although the company believes the expectations reflected in any forward-looking statements are based on | ||||
reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks | ||||
that can cause actual results to differ materially from those expressed or implied by forward-looking | ||||
statements are detailed from time-to-time in the company's filings with the SEC, including the company's | ||||
registration statement on Form S-4 filed with the SEC on April 30th, 2007. | ||||
The company does not undertake a duty to update any forward-looking statement. And now I'd like to | ||||
introduce Alion's Chairman and CEO, Bahman Atefi. | ||||
Bahman Atefi: | Thank you, Peter. Good afternoon, everyone and than you for joining us on the call today. I'm joined today | |||
by Stacy Mendler, our COO, Mike Alber, our Acting CFO, and Jack Hughes, our outgoing CFO. We set up this | ||||
call today to discuss a couple of topics with you. The first is the ongoing transition where Jack has moved | ||||
to a financial advisory role for the company, and Mike Alber has assumed the Acting CFO position. | ||||
The second item is a delay in filing our most recent 10-Q. On this item, after a brief conversation with | ||||
Adam Plissner at Credit Suisse, it became clear that a number of you may be inadvertently connecting Jack's | ||||
transition to the delay in the 10-Q. Let me assure you that these two items are not connected. The | ||||
transition with Jack began shortly after Mike Alber joined Alion last November. Jack will continue with us | ||||
for the next six months to ensure that this transition is completed smoothly, successfully, and with no gaps | ||||
in the financial leadership of the company. | ||||
With regards to the delay in the filing of 10-Q, Mike Alber will discuss the reason for this delay next. | ||||
Before I turn it over to Mike, I would like to briefly introduce Mike to you. Mike has 27 years of | ||||
experience in government contracting, with the last 18 years at SAIC. His latest assignment at SAIC was as | ||||
Senior Vice President, Group Controller, responsible for all financial administration and oversight of the | ||||
$1.4 billion international IT services organization. | ||||
Now I turn it over to Mike for his remarks. | ||||
Mike Alber: | Thanks, Bahman, and good afternoon, everyone. Regarding the delay in the 10-K, there are two items that I | |||
would like to cover today. First, as many of you will recall from the last quarterly conference call, there | ||||
was an error in the cash flow statement contained in the 10-K that was detected after the 10-K was filed and | ||||
opined to by our auditing firm, Deloitte, last December. | ||||
All of the numbers were included in the cash flow statement. However, one of the items was listed on the | ||||
wrong line. A total of about $23 million relating to the repurchase of ESOPshares was included on the | ||||
accrued liabilities line instead of on the purchase of shares of common stock from the ESOPtrust line. We | ||||
are looking for the appropriate vehicle to make this correction. When corrected, it will reduce the amount | ||||
of cash actually used to fund operations from about 28 million to about 5 million. It will also reduce the | ||||
amount of cash provided by financing activities from 62 million to about 39 million. | ||||
Second, during the review of the correction to the cash flow statement, another separate item was raised by | ||||
our outside audit firm, related to the presentation of the ESOPequity on the balance sheet. Since the | ||||
founding of Alion, we have always listed the ESOPequity as permanent, rather than temporary equity, with | ||||
the inflows and outflows reflected in additional paid in capital. Also, noting that in the SEC filing, that | ||||
employees who have terminated their employment with Alion, may ask for distributions from their ESOP | ||||
holdings. | ||||
Since the ESOPstock may be determined to have a temporary aspect to it, it may be more appropriate to | ||||
classify it as redeemable common stock at the bottom of the balance sheet. If so, we would show it at the | ||||
bottom of the balance sheet in lieu of the current equities section as redeemable common stock with a value | ||||
calculated by multiplying the number of outstanding shares, by the share price value determined by our | ||||
outside valuator. | ||||
We would then gross up the accumulated deficit resulting in no change to the bottom line of the balance | ||||
sheet. We expect to have both of these items fully resolved in the next two weeks. If it does result in a | ||||
change to the balance sheet, to the 10-K that is currently on file, we will also take the opportunity to | ||||
correct the cash flow statement as well. These changes have no effects on the result of operations or net | ||||
assets. We will then immediately file our 10-Q. | ||||
And finally, Bahman has also asked me to highlight several of the current DSO reduction initiatives that we | ||||
have put into place over the last couple of months. First initiative is a reclassification and | ||||
reorganization of the current AR staff to better define roles and responsibilities and more closely align | ||||
the staff with our primary operating business units which we call sectors and groups. | ||||
Second initiative, a project set up initiative which will drive more consistency and standardization of how | ||||
contracts are set up; increasing automation of invoices, reduce invoice errors, and increasing productivity | ||||
per biller. Third, mandated biweekly billing on all cost type and applicable contract types. We have | ||||
completed an inventory of all cost type contracts which can be billed on a biweekly basis, and have selected | ||||
the top 30 contracts by dollar volume. A tiered rollout will begin within the next billing cycle. | ||||
In addition, there are multiple other initiatives that are in progress that will increase training, | ||||
reporting and analysis of current DSO drivers and performance. Our goal is to decrease DSOs by 10 - 15 days | ||||
by year-end. Thank you for your time this afternoon and we are now prepared to answer any questions you may | ||||
have. | ||||
Peter Jacobs: | I wonder if you could just remind all of our listeners how to ask questions. | |||
Operator: | Thank you, sir. Ladies and gentlemen, if you have a question or comment at this time, please press the #1 | |||
key on your touch-tone telephone. Again, ladies and gentlemen, if you have a personal comment at this time, | ||||
please press the #1 key on your touch-tone telephone. Our first question is from Adam Plissner of Credit | ||||
Suisse. Your line is open. | ||||
Peter Jacobs: | Adam, are you there? | |||
Operator: | We'll go to our next question. Our next question is from -- | |||
Bahman Atefi: | Oh, we didn't hear the question from Adam. | |||
Adam Plissner: | Hello. | |||
Peter Jacobs: | Oh Adam, are you there? | |||
Adam Plissner: | I am, can you hear me? | |||
Peter Jacobs: | Yes, we can. | |||
Adam Plissner: | Okay, great. Thanks, guys. | |||
Peter Jacobs: | Thank you. | |||
Adam Plissner: | Mike, I was wondering if you could just take a step back and talk to us about your experience at the | |||
division at SAIC, and maybe compare and contrast some of your initial impressions now since November, about | ||||
process controls, MIS, automation, some of the things you even mentioned, now that you're using those | ||||
initiatives to work on DSO specifically, but just overall, your impressions so far of the accounting | ||||
controls and so forth, technology. | ||||
Mike Alber: | Okay. The transition to Alion has been fairly smooth. From an organizational construct basis, Alion is | |||
organized very much alike SAIC was in terms of the establishment of sectors and groups and the P&L centers | ||||
at the group level. In terms of automation, they are using the JAMIS system, which is very similar to other | ||||
systems that I've used in the past. It's a job costing system which provides a lot of visibility in terms | ||||
of jobs and revenue recognition, as well as, set ups of different types of contracts as well. It's fairly | ||||
straightforward in terms of the organizational breakdown, as well as the reporting hierarchy as well. | ||||
There seem to be sufficient controls and processes in place that overall, give me a pretty good sense in | ||||
terms of the operating mode of the company. | ||||
Adam Plissner: | Okay. You know, obviously you're going to be a champion of some of the initiatives that are underway | |||
besides DSOs. I was wondering if you could just take a step back and relist a couple of items here that are | ||||
an imperative for this year, and tell us what you comfort level on each of them is. I guess the first is, | ||||
there's been a history of quite a few non-recurring add backs within the EBITDA. So far out of the first | ||||
quarter of the gate this year, this fiscal year, the first quarter was clean in that regard. | ||||
In terms of those accounting add backs and non-recurring items, are you comfortable that we can end up this | ||||
year, on a much cleaner basis, first off. Two, maybe give us some initial impressions on the initiatives | ||||
with DSO. How quickly you think those can be in place, and ultimately, the probability and maybe milestones | ||||
when we can hear back from you in terms of progress in that regard. And maybe three, the last one, just in | ||||
terms of your comfort level on monthly cash flow and what trough liquidity and what your ultimate liquidity | ||||
goal is by year-end. | ||||
Mike Alber: | Right. You know, Adam, the answer to your first question is to -- in terms of looking at increasing the | |||
quality of EBITDA, I think we're not going to see the same level of add backs, due to a number of the | ||||
initiatives that were started last year and had been completed last year as well. This has to do with the | ||||
number of automated systems and processes that they put into place this past year, which I think will | ||||
actually increase the operating efficiency of the organization going forward. So we're not going to see as | ||||
many of those types of either financing or one-time, non-recurring type of expenses due to the fielding of a | ||||
lot of systems expenses that we saw last year. | ||||
In terms of DSO, as you know, this has been a number one priority since I've come on board here. In | ||||
addition to the initiatives we've talked about, several others as well in terms of trying to really get to | ||||
the root cause of what is driving some of the build and open, and some of the unbuild issues as well, and | ||||
just getting more immersed in the data and some of the process flows as well that will hopefully allow us | ||||
to be able to scale up to a much larger size, without having to increase the headcount from a billing and an | ||||
AR perspective. | ||||
In addition, we're looking at trying to exploit a lot of the automated systems that we have right now to be | ||||
able to get to a more of an automated stage, whereby we are not having to have as much manual interaction | ||||
for bills, which could potentially cause higher error rates, higher rejection rates as well, which would | ||||
ultimately drive some of the aging that's out there as well. | ||||
As I'd mentioned earlier, we are shooting for a goal of 10-15 days by year-end. We're hoping to see in the | ||||
next period submission, we'll begin the biweekly billing of about 30 cost type contracts, which should | ||||
increase the velocity of cash on a more consistent basis coming through, since we'll be billing every two | ||||
weeks as opposed to once a month. So those are some of the initiatives that we've got. | ||||
Going forward what we're going to do is look for economies that can be affected within the SG&A, | ||||
specifically looking at the different functional areas. Primarily looking within the finance area to see | ||||
how we're currently organized, how we can best deploy individuals there, and are there any areas that we | ||||
could take a look at automation improving productivity and reducing costs, as well. | ||||
Adam Plissner: | Okay, so when I think about what the primary difference between Alion's ability to collect today, versus | |||
industry standards or maybe your experience at SAIC, it sounds like that maybe the top initiative here is | ||||
getting the biweekly billing out, and ultimately, some of the automation and the staff levels correct. And | ||||
do you think that that's probably the bulk of the opportunity? | ||||
Mike Alber: | Yeah, we really do. And I think what we'll see each of these really adding value at each one of the steps, | |||
as well as increasing an overall awareness of cash. In previous organizations that I was in, the whole cash | ||||
flow process started at contract or proposal inception and carried all the way through close out. So there | ||||
were tenants of good cash flow management in all of these different disciplines. And it wasn't focused | ||||
primarily in just the finance, but it really went from the line organization all the way through to | ||||
corporate. | ||||
So it's just kind of adopting some of these philosophies and some of these general understandings, so that | ||||
everybody understands that cash is king and it's of paramount importance to make sure that we consider cash | ||||
flow terms and impacts for cash flow when we're bidding jobs and we're establishing terms and conditions, | ||||
and we're letting subcontracts and we're signing contracts with primes, as well. | ||||
Adam Plissner: | Great. And then the last thing along those lines, Mike, is there a year-end liquidity goal that you guys | |||
are employing here in terms of cash plus liquidity, where you want to end up inclusive of this DSO | ||||
initiative? | ||||
Mike Alber: | You know, right now, we're looking at trying to hit about -- we're trying to establish about somewhere in | |||
the neighborhood of $30 million to $35 million of additional cash and liquidity, in terms of headroom. And | ||||
I think that's a doable number. I think we have enough opportunities out there in terms of improvements | ||||
from our unbilled and our billed and open, to be able to affect that and get there from this standpoint. | ||||
Adam Plissner: | Excellent. Bahman, if you don't mind, I'll give Mike a break here and just ask you a couple of quick | |||
business update questions. The contract renewals, are any re-competes coming up this year? I think the | ||||
only one I remember of significance was the Miziak [ph] contract. And I think that Stacy commented at some | ||||
time back in October, but what's the update on that? What's the time of the re-negotiation and maybe the | ||||
probability on wining the recompete? | ||||
Stacy Mendler: | Miziak and Wisiak [ph] -- Wisiak is weapons systems IAK [ph] -- both of those RFP's are expected out the | |||
end of the year. So they're going to be re-competed probably some time mid next year. | ||||
Adam Plissner: | Okay. | |||
Stacy Mendler: | Those are our two largest re-competes. | |||
Adam Plissner: | Okay. And Stacy, and color or comments on what you think, how long that contract's been in place, and what | |||
you think the probability of re-competing successfully on that? | ||||
Stacy Mendler: | Yeah, we are working very diligently on the capture process and positioning the company to win the | |||
re-competes. We have been following a methodical process and we have our team put together. Without | ||||
divulging too much competitive, sensitive information on the line, I will tell you that we have a very large | ||||
team to capture both procurements, and feel as if we are positioned very strongly to win both of those | ||||
re-competes. They both have been in place for more than five years, and we have a great amount of volume | ||||
under both of those contract vehicles. Our client assessments have been very positive, and the teams we've | ||||
pulled together are strong. And most of the companies that would have competed against us, are on our team. | ||||
Adam Plissner: | Great. And then, Bahman, I know we had some offline conversation on some of the recent M&A transactions in | |||
the marketplace. Can you comment, just give us a little more color on this latest transaction in the market | ||||
with MTC and BAE, and maybe just how Alion stacks up versus that what you think it's a current comparable | ||||
and whether we can look to that as sort of another indication of the activity in the market? | ||||
Bahman Atefi: | Right. You know, you would have thought that with the change in the market, that the multiples that are | |||
being paid in our industry for M&A might have softened. But in fact, it really hasn't, and it's held up | ||||
pretty strongly, which is a testimony to our industry. Which is -- more or less, is recession proof, | ||||
because -- especially those of us that are fortunate enough to be in the research and development or other | ||||
activities associated with Department of Defense. It has had consistently very strong budgets and | ||||
increasing budgets. | ||||
One example is the recent acquisition of MTC by BAE Systems. MTC is about a $430 million company, about a | ||||
little over half of our size. A very good company, but not as high-tech as we are. And the deal was | ||||
approximately 11.4 or 11.7 times EBITDA for that size under current circumstances, which is a pretty good | ||||
number. So I have always consistently thought that if we ever got into a situation that we decided to | ||||
either go public or sell the company, that we should expect strong double-digit multiples for EBITDA, too. | ||||
But that's a most recent indication how the market is holding up very well for M&A activity. | ||||
Adam Plissner: | Okay, maybe the last question, I'll let somebody go, Bahman, I guess it kind of segues into your ultimate | |||
exit strategy here in terms of timing of that exit strategy. Certainly, I imagine if there was that kind of | ||||
multiple bid in the marketplace and activity, you might entertain bids along those lines, given the capital | ||||
structure constraint. What exactly is -- again, is reiterating your near-term plan, both the deal with | ||||
bottom part of the capital structure and ultimately, exit. | ||||
Bahman Atefi: | Well, in terms of exit strategy, we pretty much have set ourselves in a path over the next three years of | |||
either going public or looking at a transaction. High appeal markets would depend on the conditions in the | ||||
markets. So the timing of that would depend on when the market improves. But, right now, there is really | ||||
no extra pressure on us to look for a transaction in terms of sell, but that is always a possibility. And | ||||
as opportunities come, if they are outstanding, we certainly will look at that. | ||||
We also have the option of, and have had some preliminary look at that, taking partial investment by private | ||||
equities to have infusion of cash in the company, partially to deleverage and partially to give extra cash | ||||
to the company for acquisitions. So that option also exists. So between partial investment IPO which is | ||||
market timing dependent and sale, we have multiple options and we will look for the right opportunity in the | ||||
next three years or so to pull those triggers. | ||||
Some of them might come faster. For example, if we decided to take partial investment, that could come | ||||
within the next year or sooner. But with opportunities that we have on the books, the backlog, the bids | ||||
that are coming up which are quite substantial. With all the initiatives that Mike discussed that -- about | ||||
bringing DSO down -- right now, we got somewhere in the $60 million to $70 million of cash just bottled up | ||||
in our process of AR. And we need to mind that quickly, by just virtue of better processes and all of that. | ||||
So a lot of factors go into that decision, but I like to see us very quickly improve the cash flow and have | ||||
extra $30 million to $35 million of cash this year and $20 million to $30 million each year for the next | ||||
couple of years. We'll keep the idea of a partial investment in mind and continue discussions with private | ||||
equities. And if an outstanding deal comes about, we certainly will look into that and we'll see how the | ||||
market changes and if there's a right timing for ideals. So all those options are really on the table for | ||||
us. | ||||
Adam Plissner: | Excellent. Thanks for doing the call guys. Appreciate it. | |||
Peter Jacobs: | Thank you. | |||
Operator: | Thank you, and again if you have a question or comment at this time, please press the #1 key on your | |||
touch-tone telephone. Our next question is from Scott Goldsmith. Your line is open. | ||||
Scott Goldsmith: | Hello. In terms of liquidity and DSOs, can you give us where those two numbers stand today? | |||
Mike Alber: | Sure, right now. At the end of Q1, we are sitting at a DSO, a total DSO of billed DSO and unbilled at about | |||
116 days, which is very high. However, what we see here is we've seen an increase in cash over the last | ||||
several weeks of the period, so we do expect to see some decrease in that for period four. | ||||
Scott Goldsmith: | Right, and can you give us where the revolver is right now? | |||
Mike Alber: | Right now, the revolver -- from a headroom standpoint, right now the revolver is at $46 million. | |||
Scott Goldsmith: | I'm sorry, drawn or available? | |||
Mike Alber: | It's $46 million drawn and we have just over $15 million of cash. | |||
Scott Goldsmith: | And that is versus what at December end, or you haven't given those numbers? | |||
Mike Alber: | I don't have the December end numbers. | |||
Bahman Atefi: | I think we have fairly consistently have had approximately $20 million to $25 million of headroom on an | |||
ongoing basis over the past couple of months. | ||||
Mike Alber: | Yeah, at the end of December, we had $26.5 million drawn on the line. | |||
Scott Goldsmith: | Okay. And I'm sorry, one more, the DSO's 116 at the end of December, and again, where do you think that is | |||
roughly, now? | ||||
Mike Alber: | Right now, I would say we're probably in the 110 range. | |||
Scott Goldsmith: | And that's before several of these initiatives were started? Or is that fair to say it's actually as they | |||
have been started over the last few months? | ||||
Mike Alber: | I think what we're saying now is we're coming off the seasonal lows that we would typically see in the | |||
November, December timeframe where typically the cash tends to slow down. January starts an up tick from | ||||
that standpoint, and then we're continuing to see that increase. So I fully expect it to see some decrease. | ||||
One from an improvement in terms of our cash receipts. And two, as a result of some of these initiatives | ||||
as well. | ||||
The other thing, just to remind everybody, is back in September of this past year, we converted over to wide | ||||
area workflow across the entire enterprise. And that did have some impact from the -- on a DSO standpoint | ||||
because we experienced a higher rejection rate from dfas [ph] upon our initial entry into wide area | ||||
workflow. We've, for the most part, ironed out all of those wrinkles that were related to initializing that | ||||
system, getting through it as well. And we're seeing much lower rejection rates and much better throughput | ||||
as well. | ||||
Scott Goldsmith: | Just one more question if I can. Can you just give us the backlog number, what it is at the end of | |||
December? I guess the last backlog we've seen from you is the end of -- year end September. | ||||
Stacy Mendler: | Yeah the -- this is Stacy Mendler. The backlog at the end of the first quarter was still strong at $4.8 | |||
billion. That's total funded and unfunded backlog. | ||||
Peter Jacobs: | Scott, are you still there? | |||
Scott Goldsmith: | Yeah, I think someone else's line is open. | |||
Stacy Mendler: | Okay. | |||
Scott Goldsmith: | Thank you. | |||
Stacy Mendler: | Thank you. | |||
Peter Jacobs: | All right, we'll take the next question please. | |||
Operator: | Thank you. Our next question is from Murray Kenney. Your line is open. | |||
Murray Kenney: | Hi, thanks for putting on this call. My question has to do between now and the end of the fiscal year on | |||
September 30th. How much money do you anticipate spending on earn outs and transactions in the | ||||
equity account, meaning any -- what's the net number going out the door in cash to -- on the ESOPside and | ||||
for earn outs? And also, what you anticipate, if you're willing to share it, your CapEx number's going to | ||||
be? | ||||
Mike Alber: | In terms of earn outs, earn outs retention and deferred payments, that number is between -- since the | |||
beginning of the year to the end of this fiscal year is just slightly over $8 million, in terms of overall | ||||
-- that's the total potential earn outs that are there. Several of these earn outs are based on | ||||
performance, and so, that number could do down slightly depending upon the calculation of the overall earn | ||||
out. But that's really the kind of the top, top side number that we would see for earn outs. | ||||
From an overall ESOPperspective, in terms of looking at what the net number would be, that is somewhere | ||||
right in the neighborhood of about -- ESOPis about $7.6 million. | ||||
Murray Kenney: | And then there is going to be -- | |||
Mike Alber: | Which is not -- I mean that's the outgoing which is then matched by the incoming cash in for deferrals and | |||
purchases. | ||||
Murray Kenney: | Well, I'm just trying to figure out, your EBITDA is already adjusted for non-cash compensation. And so | |||
you're saying your, from a cash point of view, you're going to be spending $7.6 million to buy back ESOP | ||||
shares between now and the end of September? | ||||
Mike Alber: | Right, but that's $7.6 million prior to the ESOPpurchases or the cash coming in as well. The two pretty | |||
much net each other out. | ||||
Bahman Atefi: | Yeah, I mean if you're starting from the top line, if you start with the EBITDA of $63 million that we're | |||
planning to do, and so far we're ahead of the plan, you add to that that the E which is what we gain by | ||||
collecting contributions to 401Ks from our customers in cash, but we give that to our employees in the form | ||||
of stock. | ||||
That's about $10 million. And we have a double E which is the contribution of our employees to the plan in | ||||
cash where we match it with stock, which is $7 million. So starting point is about $80 million of EBITDA, E | ||||
and double E. And then from there, you take the interest payments and ESOPpayments and so on. | ||||
Murray Kenney: | So there's $7.6 million of ESOPmoney going out to people who are leaving and then there's also going to be | |||
phantom stock cash going out between now and September 30th? | ||||
Bahman Atefi: | That's correct. | |||
Murray Kenney: | How much is that? | |||
Bahman Atefi: | This year is the biggest year. It's about $10.9 million. | |||
Murray Kenney: | And how much do you anticipate for CapEx for the rest of this year? | |||
Bahman Atefi: | Somewhere around $5 million to $7 million. | |||
Murray Kenney: | Okay, thank you very much. | |||
Peter Jacobs: | Your welcome. | |||
Operator: | Thank you. Our next question is from John Blaney, of Guardian Life. Your line is open. | |||
John Blaney: | Hi. My question was answered. | |||
Peter Jacobs: | Okay. | |||
Operator: | Thank you. Our next question is from Jeffrey Gallo, of Shenkman Capital. Your line is open. | |||
Jeffrey Gallo: | Hi, good afternoon, everyone. Just a quick question for you. Can you just go over new contracts that are | |||
potentially being bid out at this moment, and if you feel that your cap structure and liquidity is actually | ||||
a potential hindrance to you from bidding on or winning new contracts. | ||||
Bahman Atefi: | I'll give you a list of things that are on our plate over the next two or three months. But I'll answer the | |||
second part of your question that there's nothing in our capital structure or liquidity that prevents us | ||||
from bidding that. And as I mentioned earlier, we pretty much consistently have had a headroom in the order | ||||
of $20 million plus or minus, and improving cash flow. So our hope is by end of the year to have about $25 | ||||
million to $30 million of headroom, and additional $30 million to $35 million of extra cash and improving | ||||
each month by $4 million or $5 million. | ||||
In terms of the largest bids coming up, there is an RFPfor the next cruiser, CGX that is coming up | ||||
hopefully this week, which is a fairly substantial effort that ultimately, if we are successful to win, | ||||
could be somewhere in the hundred to 150 people working on that. A very important bid for us. We actually | ||||
are working on the precursors to that work on existing casts. | ||||
We have a very large bid coming up in March timeframe for FAA training, which is for about 400 people | ||||
training FAA traffic controllers. That's another large one coming up. And then two IDIQ contracts coming | ||||
up in the April, May timeframe. One is R23G for -- in support of the C-com [ph]. And another one is in | ||||
support of the forces command. Both of them are multiple award, multi-billion dollar contracts. The kind | ||||
of contracts that a year ago, we really couldn't bid because -- or a year and a half ago, when we were like | ||||
$400 million or $500 million, but now that we're more an $800 million company we are in the range. | ||||
And those are the kind of contracts that government puts substantial amount of work both through Optars [ph] | ||||
for forces command, and R23G. So we're looking forward to bidding those, hopefully winning those and | ||||
putting substantial amount of work through them. So as I mentioned, those are four large ones which are | ||||
happening in the next three or four months. There are probably another 15 or 20 of lower sizes that are on | ||||
our plate, but this is going to be a very interesting, challenging year. And we have the resources in terms | ||||
of the overhead dollars for marketing them. We have resources in terms of BNPdollars for writing an | ||||
excellent proposal and training for our people in terms of orals and what have you. And no constraints in | ||||
terms of putting the best quality proposals in. | ||||
Jeffrey Gallo: | Just to follow up then, so you would anticipate by the end of the year, actually paying down revolver and | |||
having additional $20 million to $30 million worth of cash on your balance sheet? | ||||
Bahman Atefi: | Something like that. I mean if you look at our goal of having let's say $20 million to $25 million of | |||
headroom, plus another $30 million to $40 million that we hope to gain out of DSO -- our revolver is 46, so | ||||
that makes that -- that would say that by end of the year we should zero out the revolver and have maybe an | ||||
additional $20 million to $25 million of cash sitting in the bank. That's our goal. | ||||
Jeffrey Gallo: | Okay. And if you could just recap for us with respect to your negotiations with IIT. I know you mentioned | |||
that on the previous call, but how you would anticipate meeting that first $25 million payment in '09. | ||||
Bahman Atefi: | Well, we haven't really started negotiating with them. We have talked to them about thinking about whether | |||
they are interested in refinancing this and switching from pick [ph] to current cash and pick. We probably | ||||
can start talking to them, earnest, somewhere in the summer time with help of our bankers and see what we | ||||
want to do with them. But we -- our first payment due to them is December of '09. | ||||
However, the interest on current activities increases from pick to current cash, starting December of this | ||||
year. So we need to either negotiate to refinance them or find alternative ways of paying down that debt. | ||||
And all these issues are on the table. We work with our bankers, and we will probably engage them starting | ||||
in the summer to come to some conclusion by the fall. | ||||
Jeffrey Gallo: | And just one last question with respect to flexibility. I think your original bank deal when you brought | |||
the bond deal, had some covenants in it. If you could just refresh us, I think you guys went back to the | ||||
banks. There used to be a covenant of 3.75 times and scaling down. Was that eliminated? And if there is a | ||||
new one, where is it? | ||||
Mike Alber: | No, we're still under those two covenant compliance ratios, and I believe we're three, three and a half -- | |||
Unidentified Speaker: | The senior secured leverage is 3.75 -- | |||
Mike Alber: | 3.75. | |||
Unidentified Speaker: | And interest coverage is 1.351. | |||
Jeffrey Gallo: | So you wouldn't anticipate any issues with respect to those covenants in this current year? | |||
Mike Alber: | No. We expect to be able to make them. | |||
Jeffrey Gallo: | Thank you. | |||
Operator: | Thank you. Our next question is from Jeff Kirt, of Oakhill. Your line is open. | |||
Jeff Kirt: | Hi. Most of my questions have been answered. I guess there's just one. I missed the -- did you give the | |||
dollar amount of the potential reclassification of the ESOPto redeemable stock? | ||||
Mike Alber: | No, we did not. | |||
Jeff Kirt: | And can you share that? | |||
Mike Alber: | On the balance sheet change, what you would see is the additional paid in capital, would basically go from | |||
$82,512,000 to approximately $200,768. The accumulated deficit or the offset would go from a minus 141,941 | ||||
to 260,147 million. So the overall total liabilities and shareholder deficit wouldn't change. What happens | ||||
is the total liabilities sub total above shareholders deficit would basically disappear and then you'd have | ||||
the two amounts that I just gave you. | ||||
Jeff Kirt: | Guess I'm a little confused. Did the liability -- the number goes from a negative -- the number of I think | |||
it was accumulated deficit, goes from negative 141 to negative 260? | ||||
Mike Alber: | Correct. | |||
Jeff Kirt: | And that's because -- I guess what I'm getting at is, have you looked at the -- both the indenture and the | |||
credit facilities to see if this reclassification would be deemed to be an incurrence of debt? | ||||
Mike Alber: | Yes, that has been reviewed. | |||
Jeff Kirt: | Okay. And it's not going to be an incurrence of debt? | |||
Mike Alber: | No. | |||
Jeff Kirt: | Okay. All right. That's all I've got. | |||
Mike Alber: | Thank you. | |||
Operator: | Thank you. Our next question is from Matt Vittorioso of Barclays. Your line is open. | |||
Matt Vittorioso: | Yeah, just a point of clarification. Did you say that your target EBITDA for this year was $63 million? | |||
Mike Alber: | Yes. | |||
Matt Vittorioso: | That's adjusted EBITDA, down from the 73 that you did this past fiscal year. | |||
Mike Alber: | No. | |||
Unidentified Speaker: | That's basic EBITDA, plus then you've got the -- | |||
Mike Alber: | E, which is $10 million or $11 million. So apples to apples, that would be 73, 74 again. | |||
Matt Vittorioso: | Okay. So you're going to be flat year over year on adjusted EBITDA, and then -- I guess then, just to | |||
clarify again on the cash side, you're expecting to generate upwards of $40 million to $45 million of cash | ||||
from operations on your cash flow statement for this fiscal year? That's how you're going to achieve that | ||||
$35 million of extra cash and pay done a bit on the revolver. | ||||
Bahman Atefi: | Right. I think we expect free cash from operations, somewhere in the $10 million to $15 million. An | |||
additional $30 million, $35 million from just bringing DSO down from 110 down to 90, which is really a very, | ||||
very [unintelligible] to 95 is 15 days, which is a very reasonable goal. And then each year, probably 10 | ||||
days a year, from 95 to 85, 85 to 75, and if we can get to about low 70's on a steady state basis, that's | ||||
our goal to do. So in effect, 15 days this year, approximately $2.2 million a day, is about $33 million of | ||||
extra cash and approximately $22 million, $23 million a year each year. So our goal is about $35 million | ||||
let's say, from that 15 days this year. About $20 million, $25 million next year. Another $20 million, $25 | ||||
million the following year on that. And then from operational cash this year, $10 million to $15 million, | ||||
probably will increase to $15 million to $20 million each year. So the combination will give what we're | ||||
looking for. | ||||
Matt Vittorioso: | Okay. And just again, to be clear, the bridge between the 63 of normal EBITDA and adjusted EBITDA, that E | |||
that you referred to, that's all non-cash compensation type of charges? | ||||
Bahman Atefi: | Right. That is a part of our retirement component that we collect as cash from our customers as we build | |||
them. But that's a component that we give to our employees as stock. So essentially, we collect cash, | ||||
approximately $10 million and we give $10 million worth of stock to our employees. So the cash goes into | ||||
our coffers for our operating expenses, but the liability remains as a part of the stocks. | ||||
Matt Vittorioso: | All right. Okay. Thank you very much. | |||
Bahman Atefi: | Thank you. | |||
Operator: | Thank you. Our next question is from Alan Goldfarb, of TCG. Your line is open. | |||
Alan Goldfarb: | Hi. Quick clarification question. Can you just go through your current availability and how it's split | |||
between revolver and cash? | ||||
Mike Alber: | Yeah. Where we're sitting right now is we are sitting with a -- the current revolver is sitting at around | |||
$46 million, so at this point in time, there's no additional availability to the revolver. From a cash | ||||
perspective, we're sitting somewhere, depending on what the receipts look like -- today, roughly in the $13 | ||||
million to $17 million of available cash. | ||||
Alan Goldfarb: | All right. Thanks. And one other quick question, and it might be part of the reconciliation that you were | |||
referring to earlier, but when I look at the 10-K, it looks like there was, if I add up the fiscal year, | ||||
payouts for the ESOP-- it looks like it's $29.4 million? | ||||
Mike Alber: | Last year. | |||
Alan Goldfarb: | Last year. How did that -- can you just walk through the cash -- I'm assuming that's all cash. | |||
Mike Alber: | Yes. | |||
Alan Goldfarb: | Right. And you're also get some cash in for that. | |||
Bahman Atefi: | No, I guess if you're looking for reconciliation of that number versus the $6 million or $7 million that | |||
Mike mentioned for this year, the difference is the following. Over the years, our plan is written from day | ||||
one, so that when an employee leaves and they request payment, we have the option of paying them in five | ||||
payments, up and including waiting for five years to make the first payment in year six. Up to here, | ||||
[unintelligible] say the first couple of years the demands were in a million or two or what have you, and | ||||
then it grew to a large number last year, we chose to take exception to that in the ESOPCommittee and pay | ||||
current cash when people ask for their payout. | ||||
And our expectation on moving forward with the demand on cash going higher because of, we have a larger | ||||
company, a larger number of people coming in and going out, that most likely the decision that we are going | ||||
to discuss in the ESOPCommittee -- I have discussed with some of the members of ESOP Committee -- would be | ||||
to extend the payments according to plan. So when you see the difference between a $29 million of payment | ||||
last year, and only a $6 million or $7 million of payment this year, it's a difference in terms of immediate | ||||
payout, which exception to the rule that we have done up to here, and following our plan which says, only | ||||
certain things have to be paid immediately such as death, disability, retirement or the 10% diversification, | ||||
and the remainder of the demand can be stretched out to be paid out over a five year period. And with | ||||
starting even five years from now. So that's the difference with the numbers that you see. | ||||
Alan Goldfarb: | Got it, but is it fair to say that kind of the 25 to 30 is what the annual, if you were to pay it out in | |||
cash what the annual numbers -- | ||||
Bahman Atefi: | Maybe the last year was unusual because if you recall, we had one contract doing Spectrum Center [ph] that | |||
individuals left, and that demanded about $10 million. So I would say from an regular, ongoing demand, | ||||
probably in the $15 million, $16 million would be more reasonable. But as I said, we're not going to pay | ||||
that out of current cash. | ||||
Alan Goldfarb: | Okay, thanks. | |||
Bahman Atefi: | Sure. | |||
Operator: | Thank you. Our next question is from Andrew Carlino, of Sankaty Advisors. Your line is open. | |||
Andrew Carlino: | Hey guys, just want a quick clarification. I apologize if I missed it. You mentioned the phan stock | |||
payouts were expected to be $10.9 million, is that correct? | ||||
Mike Alber: | That's correct. | |||
Andrew Carlino: | So you guys have decided to pay that out in cash? | |||
Bahman Atefi: | That has to be paid out in cash somewhere along the year. Yes. | |||
Andrew Carlino: | I thought there was an ability to defer that. | |||
Bahman Atefi: | There's ability to -- it actually came due February 1st. There's ability to defer that during | |||
the year on volunteer basis, that everybody has volunteered to do that. But you can't push it to the | ||||
following year for tax reasons. The taxes have to be paid and so on and so forth. So there is flexibility | ||||
to pay it later on in the summer or fall, or what have you, but not push it out to 2009. | ||||
Andrew Carlino: | And what's the current expectation on when you would actually make that payment? | |||
Bahman Atefi: | Probably in the summer, fall timeframe. As I said, we have had fairly steady headroom of approximately $20 | |||
million over the past few months after coming from the holidays and all of that. And have paid all of our | ||||
obligations including interest payments and all of that and expect that headroom to continue increasing from | ||||
20 to 25 and 30 and on so on. So as that headroom gets closer to 35, 40, or 45 and we feel more | ||||
comfortable, we'll just pull that trigger. But that is, we have between now and end of the year to do that, | ||||
then we'll do that as our headroom is stronger. There's no really rush on that. | ||||
Andrew Carlino: | What kind of headroom do you want to get to before you pull the trigger on that? | |||
Bahman Atefi: | I think ideally, as I said, a $20 million, $25 million headroom is comfortable. Ideally, I like to have $35 | |||
million of headroom at a given day before I would start paying that out. | ||||
Andrew Carlino: | How much headroom -- when you say headroom, you're just talking about total liquidity. | |||
Bahman Atefi: | Yes, availability whether it's combination of cash in the bank and the revolver. We have availability in | |||
the $20 million give or take a couple million dollars, mostly $20 million, $25 million. I like to have | ||||
availability at $35 million. And in fact, as the DSO comes down and processes get better, your confidence | ||||
in even a lower number like 25 goes higher, but I like to get to $35 million before I give out a large | ||||
payment that on volunteer basis, we can delay it. | ||||
Andrew Carlino: | And when you say, when you give guidance of the amount of headroom that you want, are you thinking about | |||
that after the payout, that performer for the payout, you want to have $25 million of cash? | ||||
Bahman Atefi: | Absolutely. I mean I'm saying is that, I like to get to $35 million or $40 million of headroom than to pay | |||
the $10 million of the phantom stocks. Even the day after that, I would have $30 million or $28 million of | ||||
headroom and then keep building upon that. So I don't want to be at 25 and pay 10, and be at $15 million of | ||||
headroom since I have that flexibility. | ||||
Andrew Carlino: | Thank you. | |||
Bahman Atefi: | Sure. | |||
Operator: | Thank you. Our next question, we have a follow up, Adam Plissner of Credit Suisse. Your line is open. | |||
Adam Plissner: | Hey guys. It's actually what Andy just asked there. Let me just understand this correctly, because we had | |||
probably originally discussed the phantom share stock being pushed out to next year. This is a tax related | ||||
item. In the event that your liquidity doesn't, DSOs for whatever reason get hung up Bahman, what is your | ||||
flexibility in being able to defer that payment, if it ends up that you end up $20 million availability at | ||||
the end of the year and you don't want to restrain liquidity and payout that phantom share program. | ||||
Bahman Atefi: | I think we have plenty of flexibility in the following sense that, just to be on the safe side of the 10.9, | |||
approximately $4.5 million is taxes. So it would be very safe to send the tax in so that there's no issue | ||||
with IRS that these things became vested and so the tax are due. So of the $10 million, $4.5 million of | ||||
taxes, we'd certainly want to send that in and then the remaining $6.4 million hopefully by end of the year. | ||||
But if you even have to push that to the next year, we can. | ||||
Adam Plissner: | Okay. That's helpful. And then, in terms of just one last question on DSOs, I wonder if you could just | |||
give us a frame of reference. The 95 days that you're looking to achieve by year-end or so, just as a | ||||
target level, have you been there in the course of your recent history? And maybe you can explain at the | ||||
point that you were there, what's different between now and then and maybe to debridge [ph] that level. | ||||
Bahman Atefi: | Let me make couple of comments and then I'll turn it over to Mike to go over more detail. Before we made | |||
the four acquisitions, we made the year before last, the large one on Anteon [ph] and the three smaller ones | ||||
that we were in the $350 million, $400 million range, our DSOs were as low as high 60s. So once we made the | ||||
acquisitions it crept up, and especially the large acquisition of Anteon, really the transition in terms of | ||||
integration and line organizations went extremely well. | ||||
The transition in other organization went very well. But getting the hang of all the bills, sending it on | ||||
time and collection, and all of that, really wasn't in sync with the good integration. So that really | ||||
pushed us dramatically. So we've been there, it's going to take us some time to get there so, I want to | ||||
turn to Mike to make a couple of comments about that, too. | ||||
Mike Alber: | Sure. Just in FY '07, looking back at where we were from a quarterly standpoint, we are pretty much | |||
averaging in the low 90s, 91, 92, in terms of DSO performance. Period one of this year, we had hit 91.6 | ||||
days and then we kind of hit some of the seasonal slowdown that tended to drive it up. But as Bahman said, | ||||
the high percentage of systems integration work that we do as well, with the high sub-content and bringing | ||||
on the accruals for these subs as well, tends to drive the days up higher than they had been previous to the | ||||
Anteon acquisition. | ||||
Adam Plissner: | Great. Thanks, gentlemen. | |||
Mike Alber: | Yeah. | |||
Operator: | Thank you. Our next question is from Murray Kenney. Your line is open. | |||
Murray Kenney: | Yeah, I just wanted to follow up and say I'm, I guess I'm struggling a little bit with the concept that the | |||
company has no availability on its revolver. And since you closed the acquisition of Anteon and incurred | ||||
the senior notes, I'm calculating something like $50 million has gone out to management and shareholders. | ||||
So I don't -- it just seems like a kind of a strange situation to me that that much money would be going out | ||||
to the equity, in a situation when the company has no liquidity. And maybe you could comment on that. | ||||
Bahman Atefi: | I think your comment is a valid comment. We made a conscious decision to payout $22 million last year when | |||
we could have deferred that completely, and that was a conscious decision on our part, for morale purposes | ||||
at the time, after 45 years, for political reasons that were very unusual. We had lost one of our contracts | ||||
so we had lost about hundred people to show that we have the capability of doing that. I think your comment | ||||
is also valid in the sense that we should have brought our DSOs down much faster last year, and that's why | ||||
this is a focus of our activity this year. | ||||
This year, we're not going to have those kind of large payments to the shareholders because as I mentioned | ||||
to you, most likely the [unintelligible] would be to defer those kind of payments five years out, and then | ||||
over the next five years -- and we are going to get our DSO down this year quite a bit. So the difference | ||||
between really the essence of your question is very correct. The only thing that I would say, I would have | ||||
done differently would have been that, put stronger emphasis to bringing DSO down. And in fact, we really | ||||
had an extremely good quarter in the last quarter of last year as I have mentioned before, where during | ||||
July, August and September, we actually collected $200 million. | ||||
We bumped into a difficulty in the fall with certain changes and seasonal activities. Some of the billing | ||||
error rates and all that. We've got over that. We feel very good about where we stand right now. And hope | ||||
between now and the end of the year to bring the DSO down, to defer the ESOPpayments and have much higher | ||||
headroom as I mentioned and ability to have extra cash in the bank. | ||||
Murray Kenney: | Yeah. I mean I just think that at some point, the owners of the company need to stand behind the company | |||
and support the company's capital structure, rather than taking money out of the company. Because you have | ||||
over $500 million of debt, not counting the Illinois Institute. And the holders of that debt are looking at | ||||
this capital structure and kind of wondering what hit them. Because we're being told that business is | ||||
great, and yet, we have $46 million drawn on our revolver, 18 months or so after you closed this big | ||||
acquisition. And then to be told $20 million more is going out of the company in the next year -- it's a | ||||
little staggering and hard for someone who's used to lending money to these situations to understand how | ||||
that can happen. That's all I wanted to say. | ||||
Bahman Atefi: | I think, again, your comment is very, very valid in the sense that the only thing that I would have -- I | |||
wish we had done it differently, was to have brought the DSO down much better last year, so that we would | ||||
have an extra $30 million or $40 million of cash. What we are paying out this year, when you look at the $6 | ||||
million or $7 million of ESOP, are mandatory stuff. It's not anything that is on volunteer basis. Certain | ||||
things such as death, disability, and retirement, or special [unintelligible] diversification, by law you | ||||
have to pay. So we are basically now down to paying what is required us to pay by law and deferring, | ||||
according to our plan, those payments that can be deferred. | ||||
So in effect, what we are doing, is essentially what you're saying. That is, asking essentially our owners | ||||
to essentially defer asking for their money by virtue of the ESOPCommittee decision and focusing more on | ||||
deleveraging and growing the company. So we agree with your comment. | ||||
Murray Kenney: | Okay. Thank you. | |||
Peter Jacobs: | All right. We're running a little bit over, so I think we'll have time for one more call. | |||
Operator: | Thank you, sir. Our next question is from Kelly Baccei. Your line is open. | |||
Kelly Baccei: | Hi. Thanks for taking a question. I just had a quick point of clarification. You just gave us your | |||
current cash position with zero available on the revolver, and Mike, when we spoke recently, you said that | ||||
you're expecting a large cash collection in the next week in the range of $20 million or so. So I just | ||||
wanted to verify, once this payment is received, do you expect to max out the revolver again during the | ||||
year, or is this a seasonal peak that won't be repeated once you improve your DSOs? | ||||
Mike Alber: | Yeah Kelly, we don't expect to be in this same situation. We've got a big week planned next week in terms | |||
of some very large payments coming in on our Saftas [ph] contracts along with some other very large | ||||
contracts as well. This is kind of an anomaly for us to be at this position whereby we've got it maxed out. | ||||
So, no, we do not expect to be in this same situation. | ||||
Kelly Baccei: | Okay, great. I appreciate that. And then just lastly, if you can just share with us, you did mention that | |||
you expect to have EBITDA flat for this current year. As you look out for the business longer-term even | ||||
over the next two years or so, where do you see yourself being able to bring EBITDA and therefore, | ||||
deleveraging through EBITDA growth. | ||||
Bahman Atefi: | You know, the EBITDA growth should go hand in hand with the growth of the company. We planned for 8% to 10% | |||
top line growth and correspondingly, hopefully 8% to 10 % growth in the bottom line. We're hoping that if | ||||
we can have a solid $63 million of EBITDA this year, EBITDA E of -- would be $10 million more. So to | ||||
perhaps 70 the following year, and closer to 77 to 80, the following year. So we are hoping to grow the top | ||||
line, bottom line somewhere in the 8% to 10% each year. And again, I want to also emphasize that the EBITDA | ||||
that we are planning this year and hoping and so far, only four period have gone by, and has been very | ||||
solid, and we are ahead of the plan -- to be with minimal amount of add backs for only out-of-pocket | ||||
expenditures. | ||||
So I would like to say that the $63 million of EBITDA that we are planning this year is hopefully a $60 | ||||
million EBITDA that is solid, minus just maybe a few hundred thousand dollars of out-of-pocket expenses | ||||
[unintelligible] we had a very large amount of add back last year because of both stops and starts in many | ||||
of the programs that we had acquired as a part of Anteon and investments in our systems and all of that. So | ||||
the quality of the EBITDA that we are talking about this year in terms of $63 million is substantially | ||||
higher than the quality of the adjusted EBITDA that we had last year. | ||||
So even though on the surface, you would call it flat, in my opinion, it's substantially better because it's | ||||
with minimal amount of add back and it's solid, so it's true cash in the bank kind of a thing versus last | ||||
year where we had adjusted EBITDA because of many one time events. So it's transitioned from adjusted | ||||
EBITDA to solid EBITDA to growing 8% to 10% is really our goal for the next two or three years. | ||||
Kelly Baccei: | Okay, great. So if your cash balance is expected to grow then, do you expect to delever more from free cash | |||
flow rather than EBITDA growth, is that fair? | ||||
Bahman Atefi: | Yeah, I think at the end of the day, the combination of -- the free cash will come from combination of -- or | |||
extra money will come from combination of free cash from extra monies from operations that is EBITDA minus | ||||
expenditures, and bringing down DSO. And the combination, our hope is if in the order of $30 million, $35 | ||||
million this year and approximately $20 million, $25 million or a bit more each of the next two years. | ||||
Kelly Baccei: | Okay, appreciate it. Thanks. | |||
Bahman Atefi: | Thank you. | |||
Peter Jacobs: | All right. And I apologize if we were not able to get to your question, but we are out of time. Thank you | |||
to everyone for joining us this afternoon. Please visit www.alionscience.com for more information on the | ||||
company. Have a great afternoon. | ||||
Operator: | Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the | |||
program. You may now disconnect and everyone have a wonderful day. |