Summary of SM&A - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995. These statements may be found throughout this report and the documents incorporated by reference herein. Any statements (including without limitation statements to the effect that the Company or management "estimates," "expects," "anticipates," "plans," "believes," "projects," "continues," "may," "will," "could," or "would" or statements concerning "potential" or "opportunity" or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. The actual results of SM&A may vary materially from those expected or anticipated in these forward-looking statements. The information incorporated by reference under the heading "Risk Factors" in this report provides examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. Because of these and other factors that may affect SM&A's operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that SM&A files from time to time with the Securities and Exchange Commission, or SEC, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on
Form 10-K.
How to Obtain SM&A SEC Filings
All reports filed by SM&A with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC's public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. SM&A also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request and makes electronic copies of its most recently filed reports available through its website at www.smawins.com as soon as reasonably practicable after filing such material with the SEC. Our Company
We support our clients by providing a full array of services that adds to our clients' top line revenue through the more effective management of their proposals and/or improves their bottom line earnings by applying technical and management leadership to their awarded programs. While the Company operates in one business segment, our business strategy is to classify the services we offer under the following two categories:
Competition Management consulting services that provide project leadership to help our clients strategically position themselves, identify business opportunities, and formulate and prepare competitive bids; and Program Services consulting services that assist our clients in keeping their programs on schedule and under budget while increasing their probability of successful program delivery.
Under these two service lines, our employees and consultants provide strategy, proposal management, program management, systems engineering, program planning, and other high-value technical support to major industrial customers in the defense, healthcare, homeland security, aerospace, systems integration/information technology, and engineering sectors.

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Results of Operations
Three and Nine Months Ended September 30, 2008 and 2007
The following table summarizes operating results:

                                                     Three Months Ended                 Nine Months Ended
                                                       September 30,                      September 30,
(in millions)                                   2008       2007       Change       2008       2007       Change
Revenue                                        $ 25.3     $ 25.1          0.8 %   $ 76.8     $ 74.2          3.5 %
Cost of revenue                                  15.1       15.0          0.7       46.6       45.0          3.6

Gross margin                                     10.2       10.1          1.0       30.2       29.2          3.4
Selling, general and administrative expenses      8.0        7.1         12.7       25.5       20.6         23.8

Operating income                                  2.2        3.0        (26.7 )      4.7        8.6        (45.3 )
Interest income, net                              0.1        0.1            -        0.2        0.3        (33.3 )
Income tax expense                                0.9        1.3        (30.8 )      2.0        3.6        (44.4 )

Net income                                     $  1.4     $  1.8       (22.2) %   $  2.9     $  5.3       (45.3) %

Revenue
The following table presents selected financial information compared to the same
period of the prior year:

                                       Three Months Ended September 30,                       Nine Months Ended September 30,
(in millions)                       2008               2007            Change             2008               2007            Change
Revenues by Service Line
Competition Management           $     10.2         $     13.6           (25.0 )%      $     34.1         $     42.9           (20.5 )%
Program Services                       15.1               11.5            31.3               42.7               31.3            36.4

Total                            $     25.3         $     25.1             0.8 %       $     76.8         $     74.2             3.5 %


Revenues by Market Vertical
Aerospace and defense            $     20.1         $     18.1            11.0 %       $     60.7         $     58.0             4.7 %
Non-aerospace and defense               5.2                7.0           (25.7 )             16.1               16.2            (0.6 )

Total                            $     25.3         $     25.1             0.8 %       $     76.8         $     74.2             3.5 %

Revenue increased 0.8% or $0.2 million to $25.3 million for the three months ended September 30, 2008 compared to the same period of the prior year, and increased 3.5% or $2.6 million to $76.8 million for the nine months ended September 30, 2008 compared to the same period of the prior year. We attribute the increase in revenues to the execution on our corporate strategy to diversify our services and solutions across Program Services to offset the traditionally inconsistent Competition Management revenue trends.
Revenues from our Competition Management and Program Services service lines were 40.3% and 59.7% of total revenues, respectively, for the three months ended September 30, 2008 as compared to 54.2% and 45.8% in 2007. During the first nine months of 2008, there have been fewer competitive procurement opportunities compared to 2007. We believe this is primarily attributable to reduced sponsorship for new procurements and reduced levels of new large procurements during this election year. Larger Federal procurement opportunities have the tendency to drive higher revenue levels due to the larger and more complex proposals that are required. Large Federal procurement opportunities trends have been variable and have traditionally contributed to inconsistent Competition Management revenue within SM&A. Success fees for the three and nine months ended September 30, 2008 were $82,000 and $308,000 compared to $439,000 and $557,000 for the same periods of the prior year, respectively. The Company has continued to experience growth in Program Services revenue due to increases in both planning and scheduling and earned-value management systems service revenues. Total aerospace and defense ("A&D") client revenue increased to $20.1 million and $60.7 million for the three and nine months ended September 30, 2008 as compared to $18.1 million and $58.0 million compared to the same periods in 2007. Non-A&D client revenues decreased 25.7% to $5.2 million from $7.0 million for the three months ended September 30, 2008 and 2007, respectively, and decreased 0.6% to $16.1 million for the nine months ended September 30, 2008 compared to $16.2 million for the same period in 2007.

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Gross Margin
The following table presents our gross margin results compared to the same
period of the prior year:

                                     Three Months Ended          Nine Months Ended
                                        September 30,              September 30,
         (in millions)               2008           2007         2008           2007
         Revenue                   $    25.3       $  25.1     $    76.8       $ 74.2
         Cost of revenue                15.1          15.0          46.6         45.0

         Gross margin              $    10.2       $  10.1     $    30.2       $ 29.2

         Gross margin percentage        40.2 %        40.4 %        39.3 %       39.4 %

Gross margin increased $63,000, or 1.0%, to $10.2 million for the three months ended September 30, 2008 compared to $10.1 million for the same period of the prior year, and increased $1.0 million, or 3.4%, to $30.2 million for the nine months ended September 30, 2008 compared to $29.2 million for the same period in 2007. As a percentage of revenue, gross margin slightly decreased to 40.2% and 39.3% for the three and nine months ended September 30, 2008 compared to 40.4% and 39.4% for the same period of 2007. The Company's continuous efforts to improve margins was offset by pricing structures offered to our clients, which included $99,000 and $286,000 for the three and nine months ended September 30, 2008. We recorded success fees of $308,000 and $557,000 for the nine months ended September 30, 2008 and 2007, respectively. Excluding success fees the gross margin percentage increased 0.7% and 0.2% for the three and nine months ended September 30, 2008. We expect gross margins to be approximately 39% and 40% for fiscal year 2008.
Selling, General and Administrative Expenses ("SG&A") SG&A consist principally of salary and benefit costs for executive, sales and administrative personnel, stock-based compensation, depreciation and amortization, training and recruiting, professional services and other general corporate activities. SG&A expenditures increased $0.9 million or 12.7% and $4.9 million or 23.8%, respectively, for the three and nine months ended September 30, 2008 compared to the same period of the prior year. These increases are due primarily to the Company's expansion thru acquisitions and the related earn-outs, the Company's offsite training conference held in March 2008 and professional fees related to the recent proxy contest, offset by the expenditures related to the changes in management incurred in 2007 including the retirement payment to the Company's former Chairman and Chief Executive Officer. On October 31, 2008, the Company announced a definitive agreement under which an affiliate of Odyssey Investment Partners, LLC, will acquire SM&A for $6.25 per share in cash in a transaction with a total value of approximately $119.6 million. The transaction, which is expected to close near the end of calendar 2008 or early in the first quarter of 2009, is subject to SM&A stockholder approval, antitrust clearance under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions. Pursuant to the merger agreement, the Company will solicit alternative acquisition proposals from third parties for 45 days subject to compliance with specific procedures set forth in the merger agreement. The Company does not intend to disclose developments with respect to any solicitations it makes or inquiries it receives until the Board has made a decision regarding any alternative proposal and subject to compliance with the merger agreement. The Company recorded costs associated with this transaction for the three and nine months ended September 30, 2008 of $256,000. The former Chairman and Chief Executive Officer of SM&A solicited stockholders to vote for a dissident slate of four directors he recommended replacing four independent incumbent directors. We settled the contest in May 2008, prior to our annual meeting of stockholders. This contest demanded management's time and corporate resources diverting focus from core business activities. SM&A retained a third party proxy solicitor to assist the Company in the solicitation of proxies for a fixed fee. The Company's expenses related to the solicitation in excess of those normally spent for an annual meeting with an uncontested director election were approximately $920,000, of which $40,000 and $920,000 was expensed during the three and nine months ended September 30, 2008, respectively.

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The following table presents our SG&A results segregating these areas of cost for comparison purposes:

                                                     Three Months Ended September 30,               Nine Months Ended September 30,
(in millions)                                      2008            2007           Change          2008            2007           Change
SG&A before the segregated expenses below        $     5.3       $     5.6            (5.4 )%   $    15.8       $    16.8           (6.0 )%
Recurring SG&A:
Stock-based compensation                               0.4             0.4             0.0            1.3             1.3            0.0
PPI and PMA SG&A                                       1.1             0.5           120.0            3.1             1.2          158.3
Strategic Advisors SG&A                                0.2               -           100.0            0.7               -          100.0

Subtotal                                               1.7             0.9            88.9            5.1             2.5          104.0

Non-recurring SG&A:
Earn-out amount earned by the principal of PPI         0.7               -           100.0            2.3               -          100.0
Transaction expenses                                   0.3               -           100.0            0.3               -          100.0
Proxy contest expenses                                 0.0               -           100.0            0.9               -          100.0
Company-wide offsite training conference fees            -               -             N/A            1.1               -          100.0
Management transition related expenses                   -             0.6          (100.0 )            -             1.3         (100.0 )

Subtotal                                               1.0             0.6            66.7            4.6             1.3          253.8

Total SG&A                                       $     8.0       $     7.1            12.7 %    $    25.5       $    20.6           23.8 %

Excluding the items detailed above, SG&A as a percentage of revenue decreased to 20.9% and 20.6% from 22.3% and 22.6% for the three and nine months ended September 30, 2008 and 2007, respectively. Operating Income
Operating income decreased $810,000 or 26.7% to $2.2 million and $3.9 million or 45.3% to $4.7 million for the three and nine months ended September 30, 2008 compared to the same period of 2007. As a percentage of revenue, operating income decreased to 8.7% and 6.2% for the three and nine months ended September 30, 2008 as compared to the same period of the prior year. Operating income primarily decreased due to the increase in SG&A expenditures discussed above.
Income Tax Expense
Our effective income tax rates for the three and nine months ended September 30, 2008 and 2007 were 39.4%, 41.0%, 40.9% and 40.6%, respectively. Income tax expense for the three months ended September 30, 2008 was impacted by the reduction of the fiscal 2008 effective tax rate due to the lower estimated annual income before income taxes. We estimate the tax rate for the full year 2008 will be approximately 41 percent.
Liquidity and Capital Resources
The following table presents selected financial information and statistics for each of the periods ended presented:

(in thousands)                                                     September 30, 2008         December 31, 2007
Cash, cash equivalents, and short-term investments                  $         11,536           $        16,032
Accounts receivable, net                                            $         25,193           $        18,171
Prepaid expenses and other current assets                           $          2,683           $         2,011
Working capital                                                     $         28,197           $        28,904

As of September 30, 2008, the Company had $11.5 million in cash, cash equivalents, and short-term investments, a decrease from $16.0 million at December 31, 2007. The principal components of this net decrease were included within the net cash provided by operating activities of $1.3 million, including the increase in the number of day's sales outstanding ("DSO") to 91 days from 69 days at September 30, 2008 and December 31, 2007, respectively, the $3.6 million payment on the earn-out amount earned by the principal of PPI and approximately $900,000 of expenses paid on the total $1.1 million of fees related to the Company's offsite training event, and the cash used in financing activities for the share buyback activity in which the Company repurchased $3.1 million of common shares during the nine months ended September 30, 2008, which approximated the daily maximum volume limit under SEC rules. The cash used for these expenditures was partially offset by the proceeds from the sale of marketable securities. The increase in DSO's at September 30, 2008, was attributed to the $1.4 million increase in unbilled revenues at September 30, 2008 from December 31, 2007 due to the cut-off of the billing cycle at period end and the timing of cash receipts related to two of our largest clients. Periodically, when our larger client's contracts are under renewal we are authorized to continue providing our services while the extended contract is being processed. This process can take two to three months to finalize at which time we invoice all unbilled amounts. Our clients typically pay the balances within 60 days upon receipt of our invoices. DSO's, excluding the unbilled portion of

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accounts receivable, was 79 days which approximates our three year historical average of 80 days. We expect to reduce our DSO's to a level at or below our three year historical average of 80 days before the end of this fiscal year. We plan to use approximately $100,000 of cash on hand to implement additional modules and functionality to our existing Enterprise Resource Planning Software during the balance of fiscal year 2008.
We believe we have sufficient working capital available under the line of credit and that cash generated by continuing operations will be sufficient to fund operations for at least the next twelve months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company currently has no instruments that are sensitive to market risk. Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the requisite time periods. While the Company's disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well designed and administered. Changes in Internal Controls
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) identified in connection with the evaluation of our internal control performed during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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