Question-and-Answer Session
Operator
Thank you. (Operator Instructions) Your first question comes from Bonnie Wachtel – Wachel & Co., Inc.
Bonnie Wachtel – Wachel & Co., Inc.
The annual meeting was held on February 26. You reaffirmed this guidance. That’s despite the fact of receiving two memos from me challenging that you could not possibly earn $1 this year. This was all fully predicted. I’d like to know where $12 million in pretax income evaporated over the course of the past 60 days while your revenue targets are relatively closely met. I’d also like to know if a stop work order was placed on any of your major contracts in the last quarter.
John B. Higginbotham
Well, first of all, Bonnie, we’ve had to spend more compliance costs than we anticipated in February to fix problems that go all the way back to the time when you were still on the board. That’s unfortunate. You know, we hoped we could start to generate savings much earlier and as we’ve clearly explained the investment levels that we’re continuing to have to make on a compliance front to address a lot of these old issues is unfortunately quite high.
Point number two, as we’ve explained in our guidance we did have some surprises late in April relating to an inability to get approval on one of our large Air Force contracts on the rate variance issue that goes all the way back to, I think it was ’05, Bill.
William M. Bambarger
That’s correct.
John B. Higginbotham
So we were successful in getting approval of the rate variances on all of our other contracts including those we had reported back in Q1. We were not – we are not as of today successful in getting approval of that rate variance and that’s frankly quite a substantial amount of the revenue and does have an impact on this forward-looking margin mix, seeing as how the vast majority of that is margin.
We do obviously anticipate eventually getting approval, but the various reviews that we’re required to go through, you know, are going to take a substantial amount of time and we cannot forecast that we’ll get those done in fiscal 2009. We of course – the [MET] award which we thought we had a very high probability of winning, we were not successful and that award was granted approximately two weeks ago to Harris. That was a bit of a surprise to us. So, you know, we got hit with a combination of some surprises on major high margin revenue items in late April and, as a result of some events during primarily April, we decided that we were going to have to continue to spend at the compliance levels that we’d had earlier and were to continue to address some of these legacy issues as I’ve mentioned before.
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