Engility's Management Presents at Credit Suisse Global Industrials Conference (Transcript)

Executives

Mike Alber – Senior Vice President and Chief Financial Officer

Craig Reed – Senior Vice President-Strategy and Corporate Development

Engility Holdings (EGL) Credit Suisse Global Industrials Conference Call December 3, 2013 9:45 AM ET

Unidentified Analyst

So I guess we can now go ahead and get started. My name is Joe [indiscernible], I work with Rob Spingarn and covering the aerospace and defense sector at Credit Suisse. I’m very pleased to welcome Engility Holdings for the first time here at our conference. Thank you for being here. So a little bit of context here on Engility, was launched in 2012 as an independent company from L-3 Communications, who we also have here. And I have here with me; Mr. Mike Alber, Senior Vice President and CFO; Mr. Craig Reed, Senior Vice President of Strategy and Corporate Development and Mr. Dave Spille, Investor Relations.

So I think you have a presentation, few prepared remarks and then we’ll open it up to questions. So, over to you.

Mike Alber

Great, Joe. Thanks very much and thanks to everybody for coming out to hear our story today. I know we’re up against Precision Castparts and Huntington Ingalls and with Engility being a pure-play services company and I’ll talk a little bit more about that, you’ve had a clear choice. You could talk about products, you can talk about systems. We’re a pure-play services company and so I appreciate your interest in coming out and hearing the story.

Start forward-looking statement. If you don’t have enough questions we’ll use the time at the end to read through the statement in detail. So that will encourage you to ask questions. As Joe said, we reformed as a spin out from L-3 in July of 2012 and many of you, I’m sure, knew about or heard about the spin out at the time, but probably as important or more important than the spin out itself was the ability to realign what came out of L-3 into a single integrated Engility, and we entered 2013 as that single integrated company.

Coming out of L-3 there were six separate companies with multiple financial systems and other systems and maybe even more importantly, multiple cultures. And we knew that coming into 2013 we wanted to have the company realigned and in its best position to compete in this. So what we knew was going to be a challenging environment. Common wisdom says that that type of realignment may take 12 to 18 months to make happen. We were committed to getting it done by the beginning of 2013 and got it, completed in four and a half months.

Historically the legacy of the company is to become part of Engility. We’ve always performed well and had a reputation for providing the very best people wherever and whenever our customers needed them. But we knew the environment that we’re coming into, but that wasn’t going to be enough. Our customers more than ever in this environment needed to not only continue to have those best people, but have them in the most cost effective manner. But we knew we’re coming into a difficult environment and really focused on defining the ideal business model, not only to survive in this environment, but to thrive in it. And we are helping the customer perform their mission more than ever now and then also helping them do within their constrained budget environments.

Another key aspect of the creation of Engility was around organizational conflict of interest. Again, L-3 as a product provider, systems provider, part of the business that became Engility was work that also provided program management support and business system support for the customers that were acquiring those systems and products.

The government drew a bright line between either being a provider of those acquisitions and program support services or a provider of those products and systems. And it was impacting both sides of the businesses’ ability to go after work and grow their works. So by carving out the work that was more program management support-related it actually opened up significant new pipelines of opportunity for Engility as well as clearing up L-3’s ability to go after work in some of those product spaces where they might have had a conflict of interest. So that was really the thesis around forming the company.

So I talked – as we were starting about us being a pure-play government services company and I’ll take a step back and define that for you. If you haven’t heard the story before, when we think about the government having a requirement, in some cases the government says, I’ve got a problem and I need a solution to that problem. They turn to industry to provide that solution and the solution may involve a technical component and may require some research or laboratories or special facilities and a solution provider bundles those together and typically differentiates themselves on that technical solution.

The other end you can talk about what we call pure-play services and that’s where the government has a problem. They already know what the solution is, but they’re looking for somebody to come in and implement that solution in a high-quality manner at the lowest possible price. We really have focused and realigned this company with this clean sheet of paper approach on being the best provider of pure-play services. We don’t invest in technology. We don’t have special facilities, laboratories that drive the costs up on our pure-play services offering.

I would argue that many in our industry who have tried to do both, who have that mix of pure-play services and higher end solutions, technical solutions every dollar they invest in those technical solutions suboptimizes their ability to compete effectively and efficiently on cost. We’ve chosen to focus our business on providing those pure-play services in the most cost effective manner.

We ended FY 2012 at $1.66 billion in revenue. We think that the market that we’re in, we’ve seen that market referred to as a $200 billion market. Previously we think – we all know we’re going through some contraction in the budget, but we still think it’s probably $180 billion, $170 billion market. And anyway you’ll look at it. It’s still a large market.

We benefit from having a very stable and diverse base of business. We’ve got over 1,300 active contracts and task orders, none of which accounts for more than 10% of our revenue. We have a broad geographic footprint. While we do this work in Afghanistan, we did work in Iraq. We’re actually in over 50 countries today. And so we have a very broad geographic footprint including places where we are focusing our foreign policy efforts in Africa and other places like that. So we are just in fact won contracts within the past few months with the state department in seven different African countries, and also a couple of contracts with the USA.

So we’ve talked about creating the Company around this cost efficient model. Our goal was to come out not only in it with a competitive pricing model, but actually we knew what it, because we were competitive previously, but we knew that in restructuring the Company, we could move past competitive to discriminating or differentiating pricing model and we chose to really drive down our cost to create what we think is a disruptive pricing model in our environment. All signs indicate that this strategy is working and that message is resonating well with our customers.

We’ve talked a little bit about the service market. I think that a key thing to think about in this environment is, while the market is contracting, we still see that the addressable market is being significant and the cost pressures that we are facing today are going to leave us, right.

We have entered kind of a new secular shift in how the government thinks about price as being important, you’ve all heard probably of a term low price technically acceptable where the government gets to the side, what the bar of technical acceptability is and if you meet that bar of technical acceptability, they want to purchase that at the lowest possible price. That doesn’t mean that it’s low end work and in fact, there has been some push back by some in our industry around LPTA being bad for contracting. I would argue that you can have low price technically acceptable work at any point on the kind of technical continuum.

For example, we provide Ph.D. Plasma Physicist for the Naval Research Laboratory. Who we do it in the lowest cost most efficient manner possible to give our customers that expertise in a low cost way. We think that with fewer platforms and systems being procured, more energy is going to go into sustaining the platforms and systems they have. We are well positioned to provide kind of enduring support on maintaining the systems and technologies that are in the fleet or in service today.

We have seen a kind of a shift over the past few years from factoring the wartime and surge environments around having a user centric requirement definition where a commander in the field says, I need this level of capability, I want this type of capability and they get to define, who they select to perform the work. That pendulum has shifted more towards kind of a procurement centric or the acquisition professional centric model where the requirements get generated, but the user says, okay, here is what we are going to get you and this is going to provide you the capabilities you need at the lowest possible price. So we’ve seen kind of our customer focus, our buying customer focus shift a little bit.

So we think that going forward, we think the kinds of companies that are going to be successful in this market space are going to be those that are continued to focus on their customers’ mission success. So maintaining customer intimacy and understanding a customer requirements is important, having that competitive cost structure to be able to meet those requirements in the lowest possible cost manner, having access to the right contract vehicles increasingly our customers are buying through IDIQs, indefinite delivery, indefinite quantity contract vehicles and having a seat on those contracts is crucial to being able to bid for the task order work that comes out under those contracts. Longer term enduring contracts.

So contracts that again while we don't see ourselves positioning to go after some of those faster moving technology streams and Cyber and others that that others are all beating down that path. We think the kind of work that we are performing has long term enduring needs and is not as vulnerable to the kind of the ups and downs of the short cycle.

And then the last characteristic we see is important is having scale and adversity. Scale helps you maintain both your competitive rate structure, quite using and how you leverage kind of a fixed set of infrastructure cost across the broader base, and also gives you that diversity in terms of your customer mix and kind of the services offering, so that as funding peaks and troughs come you are not vulnerable if one particular program area takes a budget cut.

We think going forward; we think that those kind of high-quality service providers that can provide that quality service at the lowest possible price will continue to be very attractive for our customers.

I think that this chart is intended to depict our portfolio of offers and what I'd like you to takeaway from this is that this is a broad range of services and really supports that full acquisition and support lifecycle that our customers have both, and I should have said we are 98%, 99% federal government contractors. So we support both the DoD and federal civilian agencies and provide these kinds of services to our customers across that customer mix.

When be spun out there wasn't a lot of visibility into the portfolio of offerings that we provided, and I would say kind of ironically, we were lumped in with other companies that are intended to have higher OCO or Afghanistan kind of war zone exposure and lumped in with companies that intended to have lower margin as well. So when people talked about what was being spun out of L-3, they tended to say, okay well, more OCO, lower margin types of work. Because we got in a really we were able to start articulate our story ourselves.

We really went in and made sure we could identify the kind of work that we did which truly is much higher end work than it’s been kind of previously characterized. The vast majority of our work is in higher end technical, special technical consulting areas, full lifecycle engineering and technical support. We do, do training. We do the kinds of training in kind of austerior locations and things like that. But that is a much smaller piece of our business than might be recognized if you had only listened to kind of the legacy of how our story was told in the past.

So we tend to see that this work also is much higher margin and Michael will talk a little bit more about our financial performance and where our margins have been coming out recently as well.

So I’ve talked a little bit about contract awards, just since the spin, we won over $15 billion of ceiling value on major IDIQs and why this is important is that these are the vehicles that our major customers are going to be using going forward to procure their capabilities in the future.

We feel and this is just a sampling of some of these – we have tens of contract vehicles that were currently active on working with our different customers, and a lot of our work, while we have work coming through single awards as well. A lot of our work comes through this IDIQ kinds of vehicles, but we believe these are some of the key contract vehicles that that are going to produce a lot of work – a lot of work for us in the future.

We’ve been successful getting on these right vehicles and in recent months, we've started to see the task order flow start to come through these vehicles. I think we've had – we've benefited from increased win rates in terms of revamping our business development infrastructure and again – and being able to provide both that more competitive capability and increased business development capability to start to harvest some of the work that’s coming through these vehicles.

So I think that’s a strong indication that the strategy is starting to take hold and work, and with that I’m going to turn it over to our Senior Vice President and Chief Financial Officer, Mike Alber. Thanks Mike.

Mike Alber

Okay, I’m going to speak to you about our third quarter financial results and highlights. We’re on a calendar year or so, our third quarter ended the end of September. So overall the third quarter results looked pretty good.

We were starting to see some of the benefits from the process improvements that we put in place earlier this year to help increase the velocity of cash, improve our DSO, and continue to drive cost out of the business. And as Craig mentioned, part of our investment thesis is that we’re going to be a low cost services provider, and so this – past nine months have given us the ability to continue to kind of refine our processes and look to drive additional cost out of the business.

From a macro sense, we are currently controlling what we can control. We’re looking to improve profitability and cash flow, these things are – these are metrics that I’ll talk about later and you’ll see that we've got improvements in those particular areas.

Overall, we continue to provide superior services to our customers and our clients out there. That’s really job number one; making sure that we continue to provide first class talent, first class services to all of our customers out there. During this period as Craig mentioned, there were two major IDIQ awards with the SPAWAR pillars that were awarded during the third quarter and these really provide us the ability to, on a go-forward basis to be able to or compete in areas in which SPAWAR will be using these vehicles to procure goods and services going forward.

We did see in the third quarter though some of the cumulative effects of the sequestrations and furloughs, these are not only impacting Engility, but pretty much everybody in our industry as well and I’m sure lot of our peers talk about it as well.

There was a lot of confusion out there from our customer standpoint with regards to what their budgets were going to look like. What the impact of sequestration was going to be. And just kind of a general lack of clarity out there in the market place. This caused us a fair amount of paralysis with regards to new awards and funding levels on contracts coming forward.

So from a third quarter standpoint, overall we were pleased with the profitability we’re able to generate cash flow and DSO. Revenue for the quarter was $339 million. This was down from the previous quarter, was really pretty much impacted by drawdowns that we saw with regards to the military support that we had of in-theater support. As well as contracts were reduced in scope.

There were no contracts that ended, that we are cancelled or ended due to sequestration but what we saw was, attrition on programs that our customer would basically ask us not to funded openings that we had, basically waiting to see what the budgets are look like for the upcoming quarter. Margins were very strong in the quarter we as, Craig mentioned, operating margins increased 8.9% on an adjusted basis up from 8.6% last quarter and 7.5% last year.

Lot of this was driven by the fact that we did not see a migration to new contract vehicles that we had expected to see. We are continuing under fixed rate or T&M contracts, and also our ability to be able to continue to focus on cost improvements, cost reductions in our SG&A and overhead structures as well we benefited from that.

From a cash flow perspective we saw $75 million in cash flow from operations. Our DSO decreased 6 days to 77 days, so we continue to look at those improvements going forward.

Book-to-bill ratio was at 0.8 times in the third quarter on a trailing 12 months basis, we are looking 0.9 times, which is really kind where our – the rest of our industry peers where from a book-to-bill basis. And so we feel pretty good about that. Adjusted diluted EPS for the quarter was $0.80. As I mentioned, we had extremely strong cash flow in the third quarter. On a trailing 12 month basis that you can see cash flow from operations was slightly under $98 million.

Services business is a very capital light business. We have the ability to scale our business with relatively little capital. We don’t have a lot of invested capital with regards to labs, testing facilities, production lines. Probably the biggest investment in capital is the lineage for the badges when we win new work to bring folks on.

So through three quarters, we have just under $2 million of CapEx expensed, which yielded a free cash flow of right under $96 million, so from a free cash flow yield we are looking at 17%, which is a very, very strong for the quarter in the year.

From a liquidity standpoint, I think most of you know we had a really – renegotiated our credit agreement in August of this year was basically the one year anniversary from our spin. We are able to – we benefited greatly from the favorable credit market at that point we are able to reduce interest expense by almost 50% going forward.

And so we are now looking at roughly $10 million of cash paid interest on a yearly basis versus $21 million previously. This past quarter we’ve also been able to significantly deleverage you can see we reduced our overall net-debt by just over a $102 million going forward. So services business one of the characteristics of a services business, is that it tends to draw off a lot of cash. We are capital light and have a high conversion rate in terms of income to free cash flow as well. So from a liquidity standpoint we are looking at total availability of credit right around $242 million. So we’re very pleased with that.

FY 2013 guidance, the third quarter we adjusted guidance from a revenue perspective. Our original guidance was $1.45 billion to $1.55 billion. We reduced guidance to $1.39 million to $1.41 billion. This reflects what we saw as some additional drawdown in in-theater work as well as kind of an overall reduction in new business awards due to the sequestration furloughs and budget impacts as well.

Adjusted diluted EPS of $3.20 to $3.30 per share, we increased cash flow from operations of $80 million to $100 million to $110 million to $130 million and we adjusted our adjusted operating margin 8.4% to 8.7%. So from a profitability cash flow standpoint a very strong performance.

I think lastly to reiterate an earlier point, we’re really controlling those things that we have the ability to control. Our customers still lack a lot of clarity in terms of what their budgets look like. They continue to have enduring machines that we support. We have some of the most important customers out there right now and we’re providing high quality support to these customers. We have a very strong management team in place. It’s really able to, I think address a lot of the changes in the market dynamics that are out there right now and are uniquely qualified to be able to react to this.

And so I think 2014 for everybody is going to be challenging year until our customers have more clarity in terms of what’s going on to the marketplace. I think everybody is going to have a bit of a cloudy crystal ball going forward. Okay. Any questions?

Question-and-Answer Session

Unidentified Analyst

Hi. Thank you. Does the guidance you provide include the effects of sequestration or is that guidance without it?

Mike Alber

The revised guidance does include the effects of sequestration. The original guidance that was put out earlier this year from a revenue and adjusted EPS basis did not include the effects of sequestration. We did mention in our first quarter call that there was possibly $100 million of revenue and approximately $0.20 per share that could be impacted by the effects of sequestration and furloughs.

Unidentified Analyst

Thanks for the presentation. Just curious on your kind of longer-term outlook, just in general services market. Obviously 2013 and your [indiscernible] service segments and companies have been challenging. If you look forward exactly the pressure is from the budget sequestration. Do you kind of see 2015 as like a stabilizing year or do you see services in general as kind of longer term correction in the market? Thanks.

Mike Alber

I’d comment that a couple of ways and just to repeat for the webcast, the question was around 2015 being a stabilizing period for the services market. I’d say that in a couple of different ways. One, go back to the comment I made about it during mission requirements. And one of those for example, in the program support, the acquisition support that which some people refer to as SETA, the government demographics are such that there are a significantly large number of government employees are going to be eligible for retirement, we continue to see the demand for those kinds of services, being there in the face of those demographics we are well positioned to support that type of opportunities same thing with maintaining systems that are in the fleet today instead of buying new systems.

So that type of positioning to me are used for an enduring market and enduring demand and those kinds of areas regardless of the overall macro budget trends. I think the greatest issue we’ve seen in the near-term has been one of uncertainty and that as we go through the budget cycle, we still – we will go through January and we’ll look at getting a new budget in place resolving the debt ceiling again, those kinds of uncertainties have lead our customers try to hold back and procurement actions and keep their powder dry from a budget standpoint to ensure that they have the latitude to adjust the kind of changing priorities going forward.

I think we believe that uncertainty will lift, as we go through 2014 and that we will have greater budgets certainty in 2015 and beyond, greater budget certainty might be at a lower budget level but even at a lower budget level that greater certainty allows the government to get on with their procurement activities and flow those new procurements out which we think we’re well positioned for and even in the tighter budget environment we think our low cost model becomes even more attractive in that type of environment.

So uncertainty has been hard on everybody, certainty even at lower funding levels we think is a very positive trend for us.

Unidentified Analyst

Hi, could you please explain how your low cost strategy is work – I mean what’s your competitive advantage because I would assume that all your major competitors have similar initiatives to reduce costs. And you all pretty much have the same sort of cost structure. So how are you achieving a comparative advantage in cost vis-à-vis your competitors, and a similar event your major competitors like DynCorp, [indiscernible] are owned by private equity groups that are really financially oriented. Thus Engility being a public company helped or hinder your ability to compete in the market?

Mike Alber

With regards to the cost structures, Craig had mentioned an important point, I think it’s an important distinction to look at as well. When you compare us to members that are in our peer groups from a size or capability standpoint, those companies that contain within their portfolio services and solutions work have a much different costs profile. In order to be competitive in a solutions environment, the discriminator that you have is your technology, your investments in high R&D, your labs, your testing facilities, your ability to maintain clear facilities as well. So there is an investment cost that is required to be able to maintain that level of discriminators. In a pure services environment, all things being equal what you’re looking at is your ability to be able to deploy first class talent at a very low ramp rate. And so if your portfolio contains both solutions and services work you’re sub-optimizing because on the solutions side of the house you’re having to continue to investment and maintain fixed expenses which sub-optimizes your work over in a services side of the house.

If you’re a peer services company, you are not investing in that kind of technology, that kind of infrastructure, those kinds of certifications that are required to be able to work in that area. So unless somebody comes out and really declares their major to be in the pure services area they are not going to be able to get their infrastructure to be able to be competitive to what Engility has done.

Mike Alber

Let me tag on to that for a second now.

Craig Reed

Sure.

Mike Alber

Before moving on to the second question, but I think the other key thing was the realignment that we went through, we literally took a clean sheet of paper approach to the company. The L-3 businesses were already cost competitive. But we were able to – we literally took put your paper, put it on the Board and said, what would be optimal pure play services company look like in this environment.

We designed the Company from the scratch and essentially blew up the existing structure, created a new company from scratch that have happened to have four years of experience. And in the process of doing that we took out 40% of the indirect labor and 26% of the overall indirect cost. So we were able to truly drive that down from that clean sheet of paper approach.

What we are seeing from a competitive dynamic is, harder for companies that don't have that opportunity to kind of blow up the Company and do that, are trying to do that incrementally year at the margins and they're taking their existing structures, their existing personnel and cutting a few here, cutting a few there, we’ve heard of companies who and I don't want to sound nasty about it, who kind of brag that they have taken their levels of management from 12 to 8. We probably have three, between our senior executives and direct build personnel.

So and created the Company with that kind of model in mind, what we see our competitors are trying to do is to either compete on margins, and which where we haven't seen the need to compete on margins, because we’ve gotten our indirect cost down so low, or compete on the backs of their employees, where they are cutting their employee cost, which in both of those we see a very short term approaches to this market. So we think having created that indirect low-cost industry differentiated or disruptive indirect cost model provides a really enduring kind of capability. Do you want to talk about the product?

Craig Reed

Yes. So I think the big difference between when you take a look at a DynCorp or VAE that is a privately backed, the areas that they are working, but they are operating in are very different. When you take a look at DynCorp, significant amount of their portfolio is still tied up in OCO troop related revenues that we are going to start seeing that the pendulum swing on that.

We are really what I would consider kind of at the top of the ninth ending, with regards to our participation over in-theater, with regards to how much work we got left over in-theater. Number of our competitors I think are in a position where were going to probably see over the next 12 to 18 months significant declines as that OCO revenue in that in-theater support comes down as well. So I think that is probably the biggest difference in terms of our portfolio.

Mike Alber

Our existing leverage structure as well, I think it provides us some advantages over some of those – particularly some of those they were acquired by sponsors back a few years back right highly leveraged, higher interest rates, more senior debt types of things, so they have got some leverage challenges that they are working with both on our ability to create this new facility that Mike spoke about, again gives us some competitive advantage.

Unidentified Analyst

[Question Inaudible]

Craig Reed

Yes, I think that the statistics I have heard was that over the previous decade, the market actually doubled to say approximately from $100 billion to $200 billion, but the number of competitors in the space probably tripled. So as you start to see a 10% or 15% or 20% decline in overall market spending, clearly think that there is opportunities for consolidation in the space and you have a range of – you have Tier 1 primes that are looking at carving out their businesses, CSC for example, recently carved out a piece of their business, you have a number of businesses that grew up during that decade of that were special satisfied types of businesses that have graduated out of those protected classes that are kind of now in a no man’s land and they are looking to try to find an exit.

You have a number of again sponsor backed platforms that are a little bit long in the tooth in their investment cycles and their sponsors are looking for what to do with those next.

And so I think you have conditions that are right for consolidation and we don’t see a lot of people that are saying they want to double down in this space, but they want to be kind of a leader in this pure-play services market. So I think that’s a good observation.

Unidentified Analyst

Craig, do you see more of an emphasis on the international side than to make up for all the uncertainty in the U.S. and the answer is yes. Does Engility have the reach and throw weight to chase those opportunities?

Craig Reed

Yes, so David, we have experience operating in over 140 countries, but we’ve done mostly and we are currently operating in over 50 countries, but we have done that as a U.S. government contractor. I mean many of us who had experience working in the past are trying to go grow that international business and know that that generally is a cost intensive, timely and somewhat inefficient new business pursuit.

We don’t feel opportunity limited in our core market. So we feel that our thesis is around taking market share from our competitors based on cost. We think we’ve got plenty of opportunity close to home and then we see some readily adjacent markets with other customers providing the same high level of services that we provide with other federal government customers today. And while we see international as an opportunity out there and some areas where we have been performing for the U.S. government in a country and work is transitioning to a host government or things like that. Some of those make sense for us and we are looking at some of those, but we think we’ve got plenty of opportunities much closer to home which is a much more efficient use of our business development resources.

Unidentified Analyst

So Craig, if you added up all the task orders issued off of the IDIQs that you’ve won, so the big ones SSES, [indiscernible], Marine Logistics Command, how much do you estimate in total task orders have been issued and what has been your market share win off of those tasks awards being issued in aggregate?

Craig Reed

Yes, we haven’t put out any specific details on either of those fronts. So unfortunately, I guess I don’t know you have a way to kind of tie a boarder around some of that. I would say that the one thing that we have said is that our win rates have increased over last year which we attribute both to the model that we put in place and the kind of business development process improvements that we’ve put in place, but we haven’t put out any data on specific on what the win rates have been and I don’t know that we’ve talked specifically about total volume of new business wins, but I will say that in some of the major vehicles that we’ve seen, it was a very slow start up in terms of that task order flow. Really just before the shutdown we started to see a flurry of activity of procurements coming out under those. We then went into the shutdown mode, come back out of shutdown and we’re seeing that engine kind of starting up again. And so we have seen some increased flow in those vehicles, but we have won a number of task orders under those vehicles.

We intended to put out press releases on most of those. So those are publicly available. But we still see that there has been a little bit of customers keeping their powder a little dry, getting through this, the January and the new budget process and expect to see a lot more flow coming out beginning next year and then to have a better win.

Unidentified Analyst

Mike, if you could just talk about on the cash for a minute. I know you’ve been paying down that thing. You’ve been paying down debt. You’ve got to focus on de-levering. In your intention to continue to do so going forward, what’s the plan for cash and capital allocation going forward?

Mike Alber

Yes, at this point the direction from the Board has been to continue to focus on de-levering the company. Through the third quarter we’re at about 1.5 times leverage. So we’re a lot lower than a number of our peers out there. But as I mentioned, these kinds of companies tend to throw off a lot of cash and so going forward we’re beginning to engage the Board in dialog about, are there opportunities out there from an inorganic standpoint that we could take a look at, that would give us the ability that when these markets begin to come back then we’re positioned with customers or capabilities that would facilitate growth in the future.

Unidentified Analyst

Any questions out there?

Unidentified Analyst

Of the $180 billion market that you guys talked about, how much is the pure services generally that you guys are targeting, and what’s the kind of general landscape of competitors, are there mostly very small competitors, are there some large competitors?

Mike Alber

I think that we view that as an addressable market, that $180 billion capability. I would say that the – I don’t have some specifics to kind of break out particular shares, but we come up against a real mix of competitors and we come up against large Tier 1 prime contractors who have a services element. They tend to be higher cost, because they have major systems, production lines those types of things. We come across mid tiers like ourselves, many of whom we think of, again bifurcated their business model around both the solutions that require technology, investments and the pure-play kind of services that we provide.

We have others that are the smaller firms, many of which are special niche providers of their services and in those special niche areas, some of them again can provide very cost competitive kinds of capabilities. And then some of these kinds of competitions you’ll see some more irrational bidding behavior kind of bet your company bidding behavior around, if they have one or two major opportunities that their livelihood kind of hinges on. But we like our chances. We like our positioning in the markets, in the different markets that we support.

On the technical consulting space we tend to compete against Booz Allen, SAIC folks like that let us information technology. We compete against the range of folks like GDIT and CACI, ManTech, CSC, program supported the full range of suite of providers that are out there. Engineering and tech support, again folks like SAIC, ManTech, good companies, but we like our position.

Craig Reed

Becoming a broad diversified portfolio really gives us the ability to weather any changes in our customers’ preferences out there. We’re not tied to any one particular platform out there. There’s a cut in the F-35 engine variant, decisions made to reduce an engine variant out there or particular platform that the navy might be advancing. There’s no large concentration in that portfolio that would cause a large perturbation from a revenue perspective. So it gives us a certain amount of reduction in risk in terms of our portfolio given the number of different service offerings we have and then the number of customers that we’re supporting in those different service offerings as well.

Unidentified Analyst

Thank you very much, gentlemen. That just about brings us to our 10:30 coffee break. Great pleasure to have you here.

Craig Reed

Thanks.

Mike Alber

Thanks, Joe.

Unidentified Analyst

[indiscernible]

Mike Alber

Thank you.

Craig Reed

Great, thanks.

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