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Integral Systems Inc. F3Q10 (Qtr End 06/25/10) Earnings Call Transcript

Integral Systems Inc. F3Q10 (Qtr End 06/25/10) Earnings Call Transcript

Integral Systems Inc. (ISYS)

F3Q10 (Qtr End 06/25/10) Earnings Call Transcript

August 02, 2010 11:00 am ET

Executives

Kathryn Herr - VP, Marketing and Communications

Christopher Roberts - CFO

Paul Casner - President and CEO

Analysts

Rick D'Auteuil - Columbia Management

Dick Ryan - Dougherty & Company

Presentation

Operator

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Good day everyone and welcome to the Integral Systems third quarter 2010 earnings conference call. My name is Marina and I'll be your coordinator for today. This call is being recorded. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer portion at the conclusion of the presentation. (Operator Instructions). I would now like to turn the presentation over to your host for today's call Ms. Kathryn Herr, Vice President of Marketing and Communications. Please proceed ma'am

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Kathryn Herr

Thank you, Melina and good morning everyone. I would like to welcome you to Integral Systems third quarter 2010 earnings conference call. Before we start, please understand that this call contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

During today's call, we will discuss third quarter 2010 results and highlights for our operations. We may refer to non-GAAP measures which will be defined and reconciled on our website at www.integ.com under investors.

Joining me today on the call are Paul Casner, our President and Chief Executive Officer and Christopher Roberts, our Chief Financial Officer.

All participants are advised that the audio of this conference call is being broadcast live over the internet and is being recorded for playback purposes. The audio of this call will be archived on Integral Systems' Investor Relations website for a period of one year. As always we encourage questions at the conclusion of our remarks.

With that said, I'd like to turn the call over to Chris to provide an overview of our third quarter results and revise full-year financial outlook followed then by Paul with his perspectives on our business operations.

Chris

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Roberts

Thank you, Kathy. Good morning, everyone. It is good to be here with you today for my first call with Integral Systems. As most of you know, I joined the company just over a month ago. However, I regret that today's call is a difficult and

However, I regret that today's call is a difficult and disappointing introduction to all of you. I assume that you have had the opportunity to review today's earnings release with our third

quarter results and revised 2010 guidance.

Although, there were a number of positive developments this past quarter, unfortunately accounting issues, legal and compliance fees and acquisition integration challenges overshadowed our operational performance.

Starting with the accounting issue, the company recorded an additional $2.7 million reserve in the third quarter, adding to the existing $3.9 million reserve which was taken in 2009 to provide for potential future audit adjustments to our reimbursable government rates for 2008 and 2009.

The reserve relates to our government contract work. On previous calls and in our filings, we have discussed our ongoing negotiations with the DCAA. We've made progress in those negotiations, including the approval of our provisional 2010 forward pricing rates. We are still in the process of negotiating our incurred costs for government contract work performed in 2008 and 2009. Our prior reserves taken in 2009, reserved against the change in the allowability or reimbursability of product development costs on our government contracts.

During the third quarter of 2010, the DCAA recommended that the company implement changes to our cost allocation methodology for fiscal years 2008 and 2009 to make them comparable to the changes implemented in the second quarter of fiscal 2010. With the $2.7 million reserve, management believes we are fully reserved against the revenue impact of future audit adjustments to our rates, based on our negotiations with the DCAA.

We are hopeful that some or all of the disputed costs can be recovered although no insurance can be given on this. In the event that some or all of the disputed costs are recovered, we will recognize that gain in the future periods. We have taken this additional reserve out of an abundance of caution as we continue our discussions with the DCAA regarding our incurred cost submission for 2008 and 2009.

The after-tax effect of the additional $2.7 million reserve amounts to $0.14 per share. Our third quarter EBITDA reflects a loss of $1.8 million. Year-to-date our EBITDA is $4.5 million. Third quarter results also includes an unanticipated legal expense, additional compliance expense and a significant revenue shortfall in our CVG

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Avtec subsidiary which is now known as the SATCOM Solutions division.

Revenue for the quarter was $44.4 million which is an increase of 11% over our revenue in the third quarter of 2009 which is $39.8 million. More important this is our third successive quarter of revenue growth in fiscal 2010.

In addition, bookings for the quarter were approximately $30 million resulting in a year-to-date total of $125 million. One of the booking highlights for this quarter was an award by the US Government to our RT Logic division, the $13.1 million to modernize a major data communications network for government agency.

Our year-to-date, book-to-bill ratio is holding steady at [1.1 to 1], our third quarter contract backlog stand at $181 million. Gross margin for the company was 29.8% for the third quarter compared with 24.3% in the third quarter of 2009 and then at 38.5% year-to-date.

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