ManTech International Corp (MANT) 2004 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the ManTech Third Quarter 2004 Earnings Conference Call. (OPERATOR INSTRUCTIONS). At this time, I would like to turn the call over to your moderator for today, Miss Maureen Crystal. Please go ahead ma’am.

Welcome to ManTech International Corporation’s Third Quarter 2004 Earnings Conference Call. My name is Maureen Crystal, and I am the Executive Director of Investor Relations. Leading today’s call from ManTech are George J. Pederson, Chairman of the Board and CEO; Ronald R. Spoehel, Executive Vice-President and CFO; and Robert A. Coleman, our recently appointed President and Chief Operating Officer.

Before we begin our discussion, it is important that we remind you that on this call we will make statements that do not address historical facts, and thus are forward-looking statements, made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results.

For a discussion of these factors and other risks and uncertainties, please refer to the sections titled risks related to the company’s business, and ManTech’s Annual Reports on Form 10-K, filed with the SEC on March 15, 2004 and, from time to time, and ManTech’s other public filings. Also, the entire content of today’s call, which is being recorded and webcasted, is a copyright of ManTech, and may not be reproduced in any form without our prior written consent. And now I will turn the call over to George Pederson. George?

Good afternoon, and thank you for participating in today’s call. This was a solid quarter for ManTech. Our revenues are up 16% over prior year. Free cash flow was about $19m for the quarter. Our DSOs are down by 6 days. And, more importantly, our new President/Chief Operating Officer, Bob Coleman, is in place.

The MSM difficulties are largely behind us. And now we are sharply focused on our strategy to continue to increase our penetration of the national security marketplace, and strive towards building ManTech into a billion dollar IT solutions provider as soon as possible.

For this afternoon’s call, I will start with an update of our personal security investigation business, as well as discuss our markets, the impact of the upcoming elections on defense budgets, as we see it, and an 8-K filing relating to our Board. Next, Bob Coleman will introduce himself to you, discuss our growth potential, and comment on operations. Finally, Ron, our Chief Financial Officer, will review our financial results. We will then answer your questions.

Let me start by giving you an update on MSM. I am not going to repeat the complete history of our background investigations business, given the extensive discussions we provided on our last call. But the bottom line is that we believe the major difficulties with the DSS contract are largely behind us.

As we have discussed in past calls, our problems with the PSI business have centered on our contract with the Defense Security Service, or DSS. On September 27, 2004, the government formally asked ManTech to close out its DSS contract and cease investigative work on PSI that had been assigned to us under the contract to date. ManTech was instructed to return all cases, at various stages of completion, by October 31, 2004. And we will do so.

The government issued these same instructions to the other two firms providing investigative support to DSS. Once the cases are submitted in the next few days, what remains is to complete contract settlement negotiations with the government, for payment terms on the partially completed cases, and collect the funds that are due to us.

Primarily this involves agreeing as to how much we will be reimbursed for the partially completed cases, which we expect will be payments based upon the different stages of completion currently set forth in the contract. We anticipate completing these settlement negotiations on the partial payments before the end of the year.

Additionally, we informed you about the OPM background investigation contract that we were awarded in July. We are scheduled to begin training on the OPM computer systems some time in November. Training on this system is a prerequisite to conducting background investigations under their contract. Until that training is completed, however, we are not in a position to reasonably predict how much business that contract may generate.

Hence, we do not expect to realize any revenue on the contract for 2004. And we’ll wait to comment on any 2005 revenue from the OPM contract until we have a better sense of the allocations of contracts of cases to ManTech from OPM.

As we stated in our last conference call, we do not intend to implement any business plan in anticipation of future demand, as we did with the DSS contract. We will respond to the actual requirements when they are issued. In addition to internal growth, we continue to consider possible acquisitions. As you know, we have $300m in equity, and a capital base that can support financing for future acquisitions. As we have said before, we have essentially no debt. Our potential acquisition criteria has not changed. We will stick to it.

In terms of the political scene and the potential impact on our business, there continues to be strong support in Congress to enhance national security, as you know. And it’s on both sides of the aisle. The Defense Appropriation Bill is now in effect, providing some $414b in new discretionary spending. There are strong indications that with supplemental appropriations, these outlays could reach $500b this fiscal year, which began last 1 October.

Some $25b of that supplemental appropriation is already in process. This is good news for us, because 91% of our revenues comes from the Defense Department and the intelligence community, as most of you are aware. We also anticipate that other agencies that we support will be properly funded. Interestingly, NASA may become a growth opportunity for us again, by virtue of increased spending on the Hubble program.

Turning to another matter, I would like to advise that we have filed the Form 8-K this afternoon, to announce that two of our Board members, (Ed Severa) and (Ray Reynali) have stepped down from service on the Board. We have appreciated the substantial time and energy that they and other Board members have devoted to Board activities. They have been helpful in guiding the Company, and providing valuable services, particularly during a period when we have implemented some of the more complex requirements of Sarbanes-Oxley, in particular section 404 requirements.

All public companies have had to exert enormous efforts in this regard. (Ed Severa), as Chairman of the Audit Committee, helped greatly to make this effort more manageable. Further, (Ed), (Ray), and the other Board members played an important role in guiding us through the MSM situation, as we have relied heavily on the Board to see this situation to conclusion.

We are in the process of selecting and interviewing additional Board members, and intend to bring the Board to its full compliment, and possibly expand it. (Barry Karbal), who has served on the Audit Committee for two years, will serve as ManTech’s Interim Audit Committee Chairman. The Company has been benefitting from rapid growth. We have almost doubled in size since our IPO two and a half years ago. In order to continue this process, we have expanded our senior leadership team. Bob Coleman was named President/Chief Operating Officer this month. Bob took over at the end of the third quarter. He and I have been working closely over the past month to ensure a smooth transition to his new role.

Bob’s appointment was significant, and a necessary action for the Company in order to position itself to meet our strategic growth objectives. Since the merger of IDS, his company, into ManTech in early 2003, Bob’s leadership skill, his industry experience, technical knowledge, entrepreneurial spirit, have proven to senior management, the Board of Directors, and me, that he is the right executive to drive growth and execute our strategy over the years ahead.

As part of the expansion of the overall management team, we have also promoted Gene Renzi to ManTech’s Senior Executive Vice-President. Gene will continue as President of our Defense Systems Group, which, under his leadership, has grown significantly. To continue to bring strong leadership to Bob’s former unit, ManTech Information Systems Technology, we have promoted Joe Fox, its long-serving Senior Vice-President, to the role of President.

I am particularly pleased to note that all of these executive changes were made from within the Company. We think that demonstrates the strength and depth of our leadership. I will continue in the role of Chairman of the Board and Chief Executive Officer. I will focus on defining and leading ManTech’s strategic business development, our acquisition strategy, communications with Wall Street, and government relations.

With that, I am particularly pleased to introduce Bob Coleman. Bob?

Thank you George for that kind introduction and your vote of confidence. I also believe that ManTech is extremely well positioned for strong growth, which is why I am so pleased to have been selected to lead this Company as President and COO.

I would like to talk for a moment about why I believe we are so well positioned for future growth. Our core business is strong, and continues to execute according to plan. The integration of our acquisitions is allowing us to compete for larger opportunities. And we have established a strong presence in the intelligence community.

As you all know, some of the greatest growth opportunities for our business exist in supporting the global war on terrorism. ManTech has made significant in-roads into major counter-terrorism centers throughout the community. We are now beginning to touch all aspects of that business, from designing and developing the systems that collect and disseminate critical intelligence information, to the systems supporting the battlefields of Iraq and the streets of New York and L.A.

Our involvement in these centers provides us with both a deeper understanding of the mission, and our customers’ expanding needs. The more we understand the mission, the better we can leverage ManTech’s resources to meet those expanding needs, both at home and abroad. Experience in these agencies also positions us to support the increasing needs of the states, as they begin to develop fusion centers and make emergency preparedness plans for first responders. We view this type of state business to be consistent with our core capabilities, and a logical extension of our homeland security strategy.

For security reasons, I can’t elaborate on our support abroad. But I would like to point out our JRIES System, that’s the Joint Regional Information Exchange System, as an excellent example of how we have successfully leveraged our domain knowledge and expertise, to help protect the country and win business for ManTech.

Shortly after 9/11, we developed a classified system for one of our intelligence community customers. This system provided a capability for collecting, assessing, and collaborating on critical intelligence information. The benefit of this solution was recognized by all parties, and, in concert with our customers, we created an unclassified version for non-intel community use.

The Department of Homeland Security adopted the JRIES solution as a key program within their organization. And we evolved it into the system known today as the Homeland Security Information Network, or HSIN. HSIN is now deployed to all 50 states, 5 territories, and the District of Columbia. It has become the cornerstone for communication and collaboration throughout the community. And it touches everything, from the Department of Homeland Security headquarters operations, to the streets of major U.S. cities. The budgets are strong. The mission is expanding. And ManTech is well positioned for future growth.

As we prepare for that billion dollar revenue platform, we are evaluating our internal processes and procedures to ensure they are optimized to support our enterprise growth. As President and COO, improving our internal processes will be one of my key objectives. My focus will be on our customers, our people, and the metrics that drive our business forward, like internal growth, operating margins, recruiting and retention, cash flow, and competitive positioning. Thank you for your time this afternoon. I will now turn the call over to Ron.

Thank you Bob. And good afternoon everyone. We’re very pleased to be able to report continuing strong operational performance this quarter, in our high-end intelligence and defense operations, supporting mission critical national security initiatives, and to report, as George covered earlier, a resolution to the MSM contract with DSS.

On a consolidated basis for the quarter, revenues were $211.3m, an increase of 16% from the comparable period last year, which included $8.5m from the ACS operations we acquired earlier this year. On a consolidated basis, revenues were in line, as anticipated. And the organic growth for the quarter of 12% on a pro forma basis was compared to the same period last year.

For operations other than MSM, revenues for the quarter were $207.4m, an increase of 23% from the same period last year, with our organic growth rate of 18%, reflecting the expanding work we are seeing across our Department of Defense and intelligence community customers. Our mix of customers and contract types was generally consistent with past experience. Our DOD and intel customers accounted for 91% of our revenue. And we continue to derive 85% of revenue from our secure systems and information technology solutions.

In total, 98% of our revenues were from the Federal government, and 45% from GSA contract vehicles. 61% of our revenue from time and material contracts, and 28% from cost plus, and 87% of our revenue for the quarter was from our role as prime contractor. As was reported earlier with respect to MSM’s operations, the DSS contract is now scheduled for completion in a matter of days, with related settlement negotiations expected to conclude in the fourth quarter.

MSM revenues during the quarter were $3.8m, and reflecting the continuing difficulties in MSM’s operations, as we have highlighted on previous occasions, MSM had an operating loss of $4m for the quarter. This includes the impact of severance obligations from actions taken in the quarter, and is net of the use of approximately 3.1 of the 4.7m contract loss accrual, which you may recall was established in the second quarter for the DSS contract.

On an overall consolidated basis, ManTech had operating income of $13.6m for the third quarter, reflecting the consolidation of MSM’s operating loss, with an operating profit of $17.6m in our other operations, an 8.5% operating margin. Contributing to the margin increase in these areas, to a limited extent, was the slight reduction in ODCs to 31.4% from 32.2% in the same period last year.

On a consolidated basis, net income for the quarter was $7.8m, impacted by the losses from MSM, as compared to net income of $9.2m in the comparable period last year. Diluted earnings per share for the third quarter this year was $0.24, with 32.4m weighted average shares outstanding.

For the nine months ended September 30, revenue was $612,6m, up 21% from $506.8m in the same period last year, as the full period impacts of the acquisitions of IDS and ACS operations were included. Organic revenue growth on a consolidated basis was 15%. For the first nine months of the year, for operations other than MSM, organic revenue growth was 18%, as revenues grew in those operations to $604m.

Consolidated operating income was $24.7m for the first nine months of 2004, down from $44.2m in the comparable period of 2003, reflecting the impact of the MSM losses. For the first three quarters of 2004, exclusive of the MSM activity, the Company’s operating income was $51.6m, up 30% compared to $39.7m for the same period last year, exclusive of MSM also, while the operating margin was consistent at 8.6% across both periods. Consolidated net income for the first nine months of this year was $14m.

Cash flow from operations for both the quarter and for the nine months ended September 30 improved to $19.7m, as progress was achieved on receivable collection, and we experienced favorable impacts from accrued liabilities changes. Capital expenditures remained just under 1% of sales in the quarter. Net debt at the end of the quarter was reduced to $8m, reflecting the rising free cash flow in the quarter of $18.9m, due in large measure to the progress achieved on improving collections and reducing DSOs.

Receivables overall declined by 6 days, to 90 day sales outstanding at the end of the third quarter. In our non-MSM operations, DSOs were 83 days at the end of the third quarter, about the same as at the end of the second quarter. And we continue to see the way forward toward our stated target of bringing DSOs under 80 for these operations.

Net receivables in total for ManTech at September 30 were $212.3m, with net billed receivables of $156.5m, and a balance of $55.8m in unbilled receivables, a substantial reduction in the $75.3m of unbilled at the end of the second quarter. Continued progress on billings and collections is anticipated also, that the resolution on payment of MSM’s DSS contract receivables will generate a further reduction in receivable balances.

At the end of the second quarter, MSM’s receivables totaled $21.9m, comprised of billed receivables of $4.7m, and unbilled of $17.3m, of which $2.5m and $15.5m were from the DSS contract, respectively.

Looking ahead, the receivables and cash collection at MSM will depend largely on the settlement negotiations on the DSS contract, which George covered earlier in the call. Continuing DSO progress as we resolve this matter, combined with the improving profile at our other operations, should drive further improvement in free cash flow as we finish out the year.

Our forward outlook is also supported by our backlog, which at September 30 remained in excess of $1.5b. The funded backlog at the end of September was $466m, up from $411m at the same day last year. In addition, contract awards in the third quarter of over $225m, and a proposal pipeline over $5b of opportunities in process, continues to provide forward visibility.

Our guidance for the fourth quarter and the full year anticipates the continuation of very strong underlying trends in our national security business. This guidance also reflects some expectation of improvements in the MSM operations, as the DSS contract winds up, and activities are transitioned for the new OPM contract. The guidance does not include any impact of future acquisitions or divestitures.

Therefore, ManTech’s guidance for the full year is maintained, with revenues in the range of $835-850m, a growth rate of 19-21% over last year, with operating margins in the 8.5% range for the non-MSM operations, diluted EPS guidance is also maintained in the range of $0.75 to $0.81 per share, based on $32.6m diluted shares. Thus, the fourth quarter guidance indicates revenues in the range of $222m to $237m, up in a range of 14-22% from the fourth quarter of last year, and diluted EPS guidance in the range of $0.32 to $0.38 per share, based on 32.7m diluted share equivalents.

As we are in the middle of working on the details of our budgets and planning for next year, it is premature to issue guidance for 2005, although we continue to have no reason to believe that our operations should not be able to achieve a growth rate of 12-15% for the upcoming year, and with a disciplined acquisition program, reach the $1b revenue level George talked about earlier.

In closing, I would reemphasize some remarks made earlier in the call. With a resolution to the DSS contract for MSM, a balance sheet providing financial capacity and flexibility, operations positioned in key growing national security markets, and a strengthened executive team, we are very optimistic about ManTech’s future. And now we would be pleased to take any questions you may have.

(CALLER INSTRUCTIONS). And we’ll take our first question from Joseph Vafi with Jefferies.

Hi guys. Good afternoon. A few questions here. I guess we’ll just kind of follow up with a couple here on MSM. It sounds like we’ve made some progress there. Ron, it sounded like you have used $3.1m of a $4.7m accrual. Is that what I heard correctly?

That’s correct.

And so if we look at what’s left in the negotiations that are going on there, is there a scenario where that accrual is not enough relative to what’s outstanding in terms of what’s kind of been billed and done, versus what the accrual is?

Well, one can never say never. But, looking at the reserve that we have there, and the -- as we have explained in the past, we believe that the billability under the cancelled case provision on the contract would allow for billings in excess of the amount that we carry on our books as recognized revenue in the unbilled portion. So we believe we have -- that we will collect that, and that there is -- but there is the cushion in both.

Okay. So you’ve basically got a deferred revenue line versus -- that you can use also against this?

It’s actually not even on the books, because it’s just a question of how much revenue we’ve recognized versus the amount we could bill.

Okay. All right. So you’ve got a decent cushion here. So is it – ? So is the expectation somewhere in a range that we feel pretty well that we’re not going to see MSM show up in the numbers here again in terms of a charge or something like that?

We certainly believe that’s the case. Yes.

I believe that’s the case too Joe.

Okay. Thanks George. If we look at the range for EPS for Q4, it seems kind of wide. Is there a reason for that? And your kind of thought process there?

Yes. With the inherent uncertainty as to how the negotiation will come out in terms of the breadth of where the results could come out for the fourth quarter, not knowing exactly what’s going to occur during the quarter, we thought it was prudent to maintain the guidance for the year, while not honing in more tightly on the fourth quarter.

Is there a potential chance that you could have a reversal in the fourth quarter, and that would actually boost EPS then?

Well that would be -- I mean anything is possible Joe. But that’s not what’s factored in. I mean there’s just a range of negotiating outcomes that could occur.

Okay. Fair enough. Sounds like there’s also some AR from MSM there still moving through the cycle. So –

Yes. I mean we’ve collected, we’ve billed and collected consistently on MSM and the DSS contract, millions of dollars over the year and a half that we’ve had the contract. So that’s just normal course. And then there’s the unbilled outstanding. So we’re very comfortable that the billed will go through the normal collection process.

Right. That’s good. So it sounds like the unbilled was down also in the quarter nicely.

Yes.

And so with the MSM AR moving through kind of the normal course, could we expect, do you think, to see a kind of a flat DSO again in fourth quarter?

We would certainly hope to improve it actually.

Okay. All right. That’s good to hear. And then just I guess the two Board members who have, I guess, resigned, were they at the end of their term?

No. They were not at the end of their terms, per se. But they elected to resign at this point in time.

Okay. Because I guess one was your Audit Committee Chairman then, correct?

Yes. That was (Ed Severa).

Okay. All right. Thank you very much guys.

Cai von Rumohr with SG Cowen.

Yes. Thank you. Could you tell us a little bit about how the negotiations with the sort of end the MSM contract are proceeding? For example, theoretically, if you’ve completed the work, wouldn’t you get those DSOs paid down to zero, and kind of give us some color in terms of what’s happening there?

We will return all of the cases in this partial completion mode by the end of this month. And then they will evaluate them against the percentage of completion data it allows for in the contract. We will have submitted a bill in that amount. They will verify it, and they will pay us.

Okay. So the idea is that basically once they verify everything and go over it, you will get written one check? Is that essentially the way it works?

I’ll take as many checks as they want to give me. But there will be multiple bills. And that’s how we will negotiate with them.

I mean do you – ?

Please understand sir, there are 18,000 cases that will be returned. And they will go through those cases and verify the percentage of completion. And in each category, we submit the proper documentation, DD-250. So there may -- all I am saying, there may be one piece of paper with it. But they will complete that. And we will be paid.

Okay. But I mean you’ve got like $22m outstanding there. What’s your guess as to how much of that you get paid by year-end. Half of it?

Oh, in terms of by year end, until the negotiations are completed, we couldn’t comment on the timing of payment. We just don’t know.

We are going to try to accomplish that, obviously. But we will tell you as soon as we get into these negotiations.

Okay. And then turning to OPM, is the training still scheduled to start in November? And kind of do you have any visibility on when you might receive a task order? And kind of how have you planned in terms of what’s your head count at MSM now, and what’s the kind of plan going forward?

The training is scheduled to begin on November the 8th. I think initially we send 15 people for the training. And that will be expanded. We have no insight at this point in time as to how many cases they will assign to us. And we don’t have insight, as you know, they have five or six other contractors. And we don’t have insight as to how many cases they will give to them. The RFP indicated a total of 400,000 to 800,000 cases per year. There are indications that that number is greater than that. But we don’t know an exact number.

Well, I mean, presumably if you get no revenues, which seems reasonable on OPM, you are going to have some costs, so that if the MSM number, assuming your reserve is correct, you’re going to continue to have this DSS number as a loss. You’re still going to have a loss on this business. I mean it’s a guess of $2-3m? Is that kind of the range of the loss? Because you’re basically going to have some ongoing expenses. Isn’t that correct?

I have to see how this training proceeds, and what their requirements are, and what we have to do to get there. We have run several scenarios as to how it would occur. But until we actually get in front of them for the training, I can’t answer your question yet.

Okay. Thank you very much.

Sandra Notardonato, Adams, Harkness & Hill.

A couple of questions. Who from ManTech is involved in the negotiations? And what could cause the settlement or the negotiation process to be pushed out beyond next quarter?

The senior executives involved in MSM are some corporate representatives. And I touch this process, as we go through it, from the strategy point of view. Now there are scheduled negotiations with the contracting officer. I don’t remember the exact date. But I think it’s the middle of November. So they are scheduled to begin.

Now that’s a little misleading, because there have been negotiations with those contracting officers leading to the return of the cases. But it picks up again in the middle of November.

Okay. So there is no reassurance though that the timing of the payment would be before year-end. Right?

We can’t guarantee that. But obviously we’re pressing for that.

And is that included then in your numbers for the fourth quarter?

You mean the cash collections?

Correct. In other words, are you – ? Sorry. Go ahead.

I was going to say, not directly. No. But the variability and the -- there’s some amount that we have in the range that would be included in that.

So what would that be?

We don’t have specifics on that. And there’s a variety of factors that will affect our guidance for the quarter. We’re not intending to put out anything more specific.

Okay. Does your ability to generate cash flow from operations in the fourth quarter depend on the negotiations settling?

No.

Okay. So we should see you cash flow from operations positive in Q4?

Yes.

Okay. A couple of other questions. The organic growth rate in Q4, what is that projection?

I don’t have one for you on that. It’s a wide range. The overall range, I think we’d said, was from -- it depends whether it’s, if you’re looking at just the quarter, it’s from 14-22.

Would be your projected organic growth?

No. That’s just the total growth. We’ve not broken it out to organic.

Okay. Is there a reason why it would be down from this quarter in the fourth quarter? Is there something that we should be aware of? Or could it actually accelerate?

That range would allow for it could be down, or it could accelerate. But we continue to see strong underlying trends. I mean there’s been some very good things happening in the underlying markets. If the very good things continue to happen, we could accelerate it.

Because we’ve had, so far, to year to date, without MSM was 23%, as Ron reported, and 18% organic growth. And we’re hoping it stays in that range.

Okay. Did you benefit from budget flush in the quarter, or higher pass through revenues this quarter? Anything that made the results stand out that would be a one-time event?

No. Our customers, with the automated accounting systems they have nowadays, have gotten much more efficient in the way they manage their money. So we don’t see the kind of year-end bust ups that we used to see in our customers.

That’s Bob Coleman speaking.

Okay. What was turnover in the quarter?

Again, it was in roughly the 15% down.

15% down. That’s voluntary? Or is that total?

That’s voluntary.

Okay. And the total head count? I am not sure if you gave that number.

It’s roughly 5,400 at the quarter end. And as you may have seen in the press release, we’re over 5,500 at this point.

And how many have security clearance?

Well, in total security, well, total security clearance is a very substantial number. The top secret level is at least about 2,700. And I don’t know if I am allowed to tell you the special clearances. But a significant part of those have special clearances above top secret.

Okay. The 12-15% growth that you are alluding to for 2005, is that all organic?

Yes.

Okay. And the last question I have is the person that’s resigned, and headed the Audit Committee, is the person who would potentially be taking his place, does he or she have the same level of experience around the requirements associated with Sarbanes-Oxley? In other words, why did this person leave before we actually meet the Sarbanes-Oxley deadline? I guess that’s my question.

The reason he left, essentially, is (indiscernible) it has taken, Sarbanes-Oxley and 404 have taken far more of his time than he ever expected he would have to give to this. And he had told us he was very good going through the Sarbanes-Oxley with us. And the MSM issue at the same time. But he basically said I never expected to have to put this amount of time on it.

Now the gentleman that we’re using as an interim Chairman to replace him has been a part of the Audit Committee for the past two years. He’s participated in all the Sarbanes-Oxley issues, and MSM issues. We are out there. We are interviewing a number of people. And we expect to return the total Board to the previous level. Indeed, we’re looking to increase the Board. And some of those under consideration would have equal capability and knowledge of Sarbanes-Oxley.

So, would it be fair for me to assume then that you are moving on track to be compliant by the deadline?

We have every reason to believe that we will continue on that path. And we believe we’re going to -- certainly we believe we’re going to be compliant and meet all the requirements.

Okay. Thanks.

Like everybody else, we’ve got an enormous number of people really working that issue. And we think we will get there.

Do you have a sense of how much you’ve spent this year on compliance?

It’s not insubstantial. But we haven’t put out any particular number.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). Tim Quillin with Stephens, Inc.

Good afternoon. We’re almost getting to the point where we have to figure out how to model a normal quarter again. And –

That’s nice.

Yeah. I am wondering what normal means in terms of gross margin. I guess a few quarters ago, kind of in the 18.5% to 19% range was where gross margins are. Is that what we’re expecting now in the fourth quarter?

As you may recall Tim, we haven’t put out specific guidance on gross margins in the past, because they do fluctuate between our gross and our operating level. But operating margins in the 8.5% range on a modeling basis for the business going forward, with improvements, as we mentioned, over time, heading towards the 10% level in the intermediate term is something that we still anticipate.

Okay. And D&A was down a little bit this past quarter. Did some intangibles, amortization drop off? And is that a good number to use going forward?

No. This past quarter, we benefitted from a one-time benefit from the adjustment that related to the completion of the appraisal related to our ACS acquisition earlier this year. We had an adjustment in the assets related to that, and the one-time true-up on the amortization. So we had a benefit in the quarter from that, offset by some one-time adjustments in the headquarters staffing in certain areas.

Okay. That’s helpful. Thank you. And then just lastly, I tend to get a lot of questions about your backlog, which doesn’t grow like we see from other companies in the industry, or hasn’t grown for a while, the total backlog. And it’s a relatively small backlog relative to your revenue run rate, compared to other companies in the industry. And I just want you to help me explain why we’re not seeing the growth in backlog, and why it’s not 3x or 5x your revenue run rate, like some of your peers.

I think the primary reason for that is we try to divided as much of our revenue through GSA contracts. And indeed, that number today is about 44% to 45%. I guess it’s a little different than the others. But I point out to you that our revenues have gone from $431m pre IPO to $500m in ‘02, $700m in ‘03, this year $835-850m.

So the revenue is coming, perhaps in a slightly different channel than the others. But it is there. And we have the backlog. And we have the revenue flow. It just doesn’t map to the other people in the industry, as best I can tell.

Right. And so instead of getting five years of a single source contract, you’re getting projects, small projects, off of GSA schedules, and you don’t put them into backlog at all.

They’re not small. We don’t put them into backlog in the same manner. And they’re not small. It’s just that we use that contractual vehicle, because we believe there’s greater profit potential there than in some of the other contracts. But, as I say, we’ve gotten this question for two and a half years now. And our model is just different than the others. But we’ve almost doubled our revenue using the technique that we use.

Right. Just helpful to reinforce. Thank you.

George Price, with Legg Mason.

Just, Ron, if I could, there were a lot of organic revenue growth numbers running around. Can you just re-clarify for me, in the quarter, overall organic growth, and then excluding MSM?

Okay. In the quarter, organic growth was 12%. For operations other than MSM, it was 18%.

Okay. Thanks. And can you get more specific in terms of what expectations for MSM are in the fourth quarter guidance?

No. We wouldn’t have anything for you at this point.

Okay. Maybe, you talked about, related to the PPS guidance range in the fourth quarter, you talked about different scenarios. Can you elaborate any more in terms of what some of those scenarios are that get you to the low end and to the high end?

There’s two factors that primarily impact that. One is the status of the negotiations, and how that’s done. And obviously there’s a range of outcomes that could occur there. And secondly, there is the operations of MSM as it continues on its other contracts and ramping up for OPM. So, as George has mentioned before, until we ramp up for OPM and know with certainty as to how that’s going to occur, and whether revenue opportunities occur this year, we don’t have a complete feel for how that business is going to go. It’s just highly uncertain.

Okay. That’s helpful. Hanscom, quarter-over-quarter, as I recall, it was up a little over $8m from about a little over $6m last quarter. What drove that? Anything you can elaborate on?

There’s continued growth in the business. But we also had a small benefit from the fact that we had a full quarter’s impact of, we acquired a small piece of business, including some operations related to NATO, related to that activity. So we had some pick-up from that. But the bulk of it is just continuing good growth.

I am very pleased with that group. They’re doing very well. They have come on board, and they have learned to work with the rest of ManTech quite nicely. And we see a lot of potential for that group. They’re quite good.

So, I am sorry, was that – ? So that was something that, was it in process last quarter?

Yes.

When you say in process, I don’t understand that.

I guess in terms of the win, or was it just the ramp up, the ramp up was in process last quarter?

We did a small acquisition last quarter.

Oh, okay. All right. I am sorry, unrelated to the Hanscom acquisition from ACS.

Well, it was from ACS. It just was unrelated directly to Hanscom. It related to some NATO operations over in Europe.

It was essentially a second piece that trailed a little bit, because work that they do ties to what they do at Hanscom and elsewhere in NATO. And that’s of interest to us, not only from that point of view, but because in Germany we have ManTech German Systems Corporation, with about 300 people. So we see a (cross multiple) (ph) in a combination of these. Again, I have to tell you, I am very pleased with the group. They are going in the right direction. And they’re quite good.

Okay. Thank you for clarifying that. Last question, just maybe if you could give us your thoughts on deal flow trends over the next few quarters. Are you seeing anything particularly large coming down the pike? And do you think that there is going to be anything in terms of eventually, either way in the elections, maybe as point fees are reshuffled around, anything like that? And thanks very much.

In terms of the election, I don’t think that will have an impact on the defense budget. I think both aisles, both sides of the Congress, are talking in terms of $500b for defense. What comes after that, if you have a new president, obviously we don’t know. But I don’t see the defense business, and that’s our 92% of our business, being impacted in the short term.

There are four appropriation bills that have been passed to date. They will come back in early November. They will do probably a CR for some of the agencies, and an omnibus for some of the others. That assumes there’s a Republic Congress, Republic House, no matter who the president is. In terms of the deal flow, by that I assume you mean acquisitions. I think the pipeline is pretty much what it has been. We are seeing some interesting opportunities. And we hope to be a participant in that process in the next quarter.

Okay. Actually specifically I meant award flow.

Well, in award flow, I think it will continue at the current base. Actually, the good news, as you know, is the defense team already has $414b in hand. There’s $25b already in process. The Senate is talking about $50-90b in the February time period. And I believe the President or the Pentagon recently announced that they are interested in $70b.

So, I think, in terms there is a steady flow. Right now the focus is obviously those requirements for Iraq, for the battlefield. And we’re part of that team also. I think there will be a steady flow. And the money will be there for them. And we’re waiting to see the outcome of homeland security. That’s going to be interesting.

Great. Thank you very much for the time.

This does conclude our question-and-answer session. Thank you for participating in today’s conference call. (OPERATOR INSTRUCTIONS).