ManTech International Corp (MANT) 2004 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the ManTech Fourth Quarter and Full Year 2004 Earnings Conference Call. (OPERATOR INSTRUCTIONS). Thank you. Miss Crystal, you may begin your conference.

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

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 section entitled Risks Related to the Company’s Business in ManTech’s Annual Report on Form 10-K, filed with the SEC on March 15, 2004, and from time to time in ManTech’s other public filings, such as our recent Form 10-Q and Form 8-K. Also, we undertake no obligation to update any of the forward-looking statements made on this call. Finally, the entire contents of today’s call, which is being recorded and webcasted, is a copyright of ManTech, and may not be reproduced in any form, without prior written consent.

Now I’d like to turn the call over to George Pederson.

Good afternoon, and thank you for participating in today’s call. ManTech achieved significant operational and strategic progress in 2004. We realized strong revenue growth in 2004, as we continued to execute our strategic plan, which has us focused on the high end defense, intelligence, Homeland Security, and State Department marketplaces. Today our innovative technologies and solutions, developed and delivered by our highly qualified staff and management team, continues to attract new customers. We are also pursuing attractive acquisition candidates, as we have in the past. But we have also, as we promised, evaluated existing businesses, to determine if they match our long-term strategy.

As a result of this continuing evaluation, we made the decision to exit the environmental business, and did so successfully, as announced very recently. We have now also made a decision related to our personal security PSI business. And we will discuss that in a moment.

This was a solid quarter for ManTech, and a good year overall in terms of our revenues and growth. Total revenues were up 20% for the full year, and 18% for the quarter. Operating cash flow was about $7m for the quarter. And our DSOs at year-end were 79 days, excluding MSM. These numbers demonstrate the strength and resilience of our core business, despite our experience with our MSM PSI business.

For this afternoon’s call, I will start with an update of our PSI business, discuss our M&A activity, and conclude with our market outlook. Then, Bob Coleman, our President and COO, will have comments on our operations. Finally, Ron Spoehel, our Chief Financial Officer, will review our financial results. We will then answer your questions.

Let me update you on the status of our MSM subsidiary. As you know, it has been a challenge for us over the past year. We completed the technical requirements of our defense security services or DSS contract when we delivered all of the remaining cases on October 30. We submitted final invoices in the amount of $16.4m, and have already collected $12.7m of that amount.

The remaining payment of $3.7m has been approved by the government, and is in payment process. We have been promised a check during the first week of March. Now that the DSS contract is behind us, we have had an opportunity to perform a comprehensive evaluation of the personal security investigation area.

Although PSI is a part of the national security mission, we concluded that this business is not consistent with our strategy to focus on the high-end service market. As a result, we have made a decision to place our MSM subsidiary in the category of a discontinued operation. And we will offer this business for sale.

To expand a bit on the sale of our environmental business, we found the perfect buyer in Alion Science and Technology Corporation. We had a team of first class environmental scientists. And they will join a first class team at Alion. Our employees have been transferred into safe hands. We hope to do the same with MSM.

From a financial point of view, we received an all-cash payment of $7m from Alion, which will enable us to recognize a gain of over $3.5m in the first quarter. In the mergers and acquisition area, we continue to consider a number of possible acquisitions. We see a continuing strong flow of interesting acquisition candidates, and are actively reviewing them and holding discussions. Our criterion standards have not changed. And they will guide our decisions.

We have over $300m in equity, virtually no debt, and a projected positive cash flow in ‘05 of about $40m, as well as the appropriate lines of credit to support our program. These factors obviously enable us to aggressively pursue the right candidates. And we will.

Turning now to the Company’s market and defense budgets, we are well positioned to capitalize on the trends in those areas. As most of you are aware, the President submitted his proposed $416b defense budget for ‘06 on February 7. In addition to this, the Senate has proposed a supplemental spending Bill for $80b for ‘05, which would bring the total defense budget allocation to just under $500b in ‘05.

All indications suggest that it will pass the Congress. We believe that a significant portion of the funding will focus on the technology business areas where we have expanded our skill base and increased our management strength. In our markets, we see no decline in funding, despite all the talk about budget cuts.

In summary, our mission is clear. Our capabilities of expanded enormously over the past 3 years. And so have our revenues, which have doubled in size since we went public. Our leadership and technical capability has also grown tremendously, putting us in a great position to capitalize on market and budget trends. Our goals work for both our country and our stockholders.

Before I hand over to Bob Coleman, I want to pay tribute to two ManTech employees, Ryan Hogan and Erik Wellumson, who perished in the Afghan planes that crashed on February 3 while they were on an assignment for the Department of Defense. The whole ManTech family is deeply saddened by their loss. And we have extended our most sincere sympathy to the families, friends, and loved ones of these two men. They gave their lives for their country, and for the cause of freedom. And for that we honor them. May God bless them and their families. Bob?

Thank you George. As George stated earlier, FY04 was a successful year for ManTech in terms of our growth and revenues. It was also very successful in terms of expanding our presence throughout the (indiscernible) community. ManTech now has contracts in most of the major intelligence agencies, including the National Counter-Terrorism Center. And we continue to expand in that market.

I would like to point out that not only do we have the strong presence within the major intelligence agencies. But we are (indiscernible) of the counter-terrorism mission within these agencies. This is where the shifts in Federal spending are occurring, where the barriers of entry remain high, and where the greatest opportunities are for ManTech.

Three years ago, we could not have made this statement. As you can see, our growth strategy is working. We are seeing the benefits of our acquisitions. MSM is behind us. And FY05 is shaping up to be a great year. Our legacy businesses also continue to perform extremely well. As you may know, ManTech is one of the top 50 Army contractors, and the future for that business, along with our other armed services and State Department business, continues to be very bright.

In 2004, ManTech won over $1.2b in contracts, with $305m coming in the fourth quarter. These new business wins, coupled with solid execution of our business strategy, drove internal revenue growth to 16% in 2004. Without MSM, our internal growth rate was 20%. The opportunity pipeline is equally strong and robust for fiscal year 2005, with well over $5b in qualified pipeline opportunities.

We have recently brought in Mr. Shawn O’Brien as Vice-President of Program Development to lead our business development efforts, and ensure that we take full advantage of these upcoming opportunities. Shawn comes to us from Northrop Grummon IP, where he was the Director of Program Development. He has a long history, and a very successful track record, serving the U.S. intelligence community. We are very pleased that Shawn has joined the ManTech team. And we are looking forward to his contributions in the year ahead.

I would like to speak for a moment about ManTech’s business model, and discuss the market drivers and opportunities that lay ahead for us, given the strength of the intelligence and DOD budgets. As you know, ManTech is an information technology services and solutions Company. Our business model is based on using our intellectual property to create solutions that we sell to our customers, or use as a discriminator to drive additional service revenue, and open new markets.

Several of our solutions have been adopted by the intelligence community, most notably our Joint Regional Information Exchange System, or JRIE, the Homeland Security Information Network, or HSIN, and the Sensitive Compartmented Information Operational Network, also known as SCION, or SCI Online. These solutions and programs have helped ManTech develop a strong reputation as a leading provider of secure collaborative solutions, that allow our customers to seamlessly share information on a need to know basis.

The sharing of information within this community is becoming increasingly important, with the signing of the Intelligence Reform and Terrorism Prevention Act of 2004. Historically, the intelligence community has operated in a very stovepipe fashion, sharing information on a limited basis. In addition, each agency has individual stove pipes within it, that also do not share or exchange information.

They have traditionally been very compartmented, each having different program access requirements, security policies and procedures, and different sources and methods. The Intelligence, Reform, and Terrorism Prevention Act calls for the establishment of an information sharing environment, and mandates the horizontal integration and fusion of data across the various stove pipes and agencies.

It also requires that the information be shared with local and state law enforcement organizations, while protecting critical sources and methods. In sum, reform fundamentally changes the way the community has operated in the past, and creates a very complex and difficult problem that we believe will be a significant market driver for ManTech going forward. How does ManTech bring value to our customers and help them meet these new requirements?

First, we have a highly skilled work force, with the security clearances necessary to work in this community. Approximately 75% of our personnel holds security clearances. And about 50% hold top secret special access clearances. Also, because of our broad community presence, and proven expertise, with solutions like JRIE, HSIN and SCION, we have a unique perspective of the horizontal integration challenges these organizations face with regard to policy, procedures, mission and security requirements.

ManTech is also viewed by this community as a trusted partner, which is why over 86% of our contracts are prime. This trust is critically important in a market where mission success depends on the quality of the solution, and the quality of our people. Finally, our worldwide presence gives us the capability to address our customers’ expanding mission needs anywhere at any time. Considering our capabilities, and the changing intelligence environment, I am very optimistic about our growth opportunities in the new year.

Thank you for your time this afternoon. I will now turn the call over to Ron.

Thank you Bob. And good afternoon everyone. As George covered earlier, we are pleased to report continued growth in our operations, and that the MSM DSS contract was finished, and a settlement agreement was reached on payment and related terms, and that all receivables associated with the contract have been now collected or billed.

With other actions already taken in the current quarter to reshape our business and add to our management team, we believe we are well positioned to capitalize on the growth opportunities we see ahead. On a consolidated basis for the year, revenues increased to $842.4m, a 20% increase over 2003's $701.6m, and a 16% organic growth rate. For our non-MSM operations, 24% growth was achieved overall, which was a 20% internal growth rate. Operating income for 2004 was $40.9m, as compared to $61m in the prior year.

Results from our non-MSM operations were strong 25% growth in operating income, to $68.5m, were reduced by the $27.5m operating loss from MSM. Without MSM’s operations, our operating margin was 8.3%, versus 8.2% in 2003, on a comparable basis. The impact of tax planning and related adjustments and finalization of the DSS contract benefitted the tax rate for the year, which, at an effective rate of 38%, led to consolidated net income for the year $24.7m. With weighted average shares outstanding of $32.5m, earnings per share were $0.76 for the year.

For the fourth quarter, revenues increased 18%, to $229.8m from last year’s fourth quarter revenues of $194.8m. Internal growth for the quarter was 14% for consolidated operations, and 19% for non-MSM operations. Operating income for the fourth quarter was $16.2m, with a margin of 7.1% unfavorably impacted by the fourth quarter growth of ODCs to 35% of revenue from 31.5% in the third quarter, and also impacted by the continuing losses, totaling $.7m at MSM.

Consolidated net income for the quarter was $10.7m. And with 32.9m weighted average shares outstanding, diluted earnings per share were $0.33. Turning to MSM for a moment, in the fourth quarter MSM’s revenues were $5.1m. A fourth quarter operating loss of $.7m includes the cost of severance and other fourth quarter actions to reduce the ongoing cost structure of the operation, along with the benefit from using $1.2m in the quarter of the DSS contract loss accrual.

The close out the settlement negotiated with DSS, provided MSM with revenue and income in the fourth quarter of about $2.5m, and, as importantly, allowed for the billing of all outstanding receivables related to the DSS contract. Of the $16.8m in receivables remaining at year-end, we have already collected all but $4m. And we expect to collect that balance within the next month.

We also made substantial progress in receivables management on a consolidated basis, with DSOs declining to 85 days overall, and to 79 days for our non-MSM operations. Overall, net receivables were $215.8m at the end of the year. The unbilled portion was $40.2m at year-end, down from $55.8m at the end of the prior quarter, which was principally due to the billing in connection with the DSS contract negotiated settlement as covered previously.

The progress on DSO in the quarter also contributed to the net cash flows from operations generated in the fourth quarter of over $7m. For the year, net cash flows from operating activities were $27m. Capital expenditures for the fourth quarter were approximately 1% of revenues. At the end of the year, the net debt position was reduced to only $2.2m, as cash and equivalents at $22.9m offset the outstanding debt of $25.2m. And stockholders’ equity expanded to $320.5m, positioning the Company well to support continued growth.

A continued focus on areas where we believe growth opportunities exist is reflected in the trends of our customer and contract mix. Our Federal government work continues to be over 98% of our revenues, with a strategic focus on DOD, DHS, the State Department, and other Intelligence Community customers, who continue to represent over 90% o revenues. Our revenues from secure systems and IT solutions comprised 85% of the total.

We saw GSA revenue expand by almost four percentage points over the year, to 44% of revenues. We’re a prime contractor, as Bob mentioned before, in approximately 86% of our work, with an expanding percentage of TNN and related fixed price work, which now accounts for 61% and 11% of our revenues, respectively.

Contract awards this year were approximately $1.2b, with many of these contracts from follow-on and classified awards that could not be publicly announced. Relatedly, backlog expanded in the fourth quarter and, at the end of the year, stood at $1.7b as compared to $1.5b at the previous quarter end and year-end 2003.

Blended backlog was $450m at the end of 2004, up 20% from $375m at the end of 2003. The proposal pipeline remains robust, and at a level substantially in excess of $5b, supports the outlook for continued growth. Guidance for the first quarter and for the full year 2005 anticipates the continuation of very strong underlying trends in our National Security business, as well as in the Federal Defense and Intelligence sectors, as covered earlier by George and Bob.

Guidance includes the implementation of the new FAS 123 requirement to amortize stock option expense as part of the compensation expense, beginning in the third quarter of this year. It also anticipates the net impact at MSM of additional restructuring efforts, and discontinued operations treatment. The previously announced divestiture of the (Medi) (ph) operation will also favorably impact revenue and benefit operating income guidance for the first quarter and for the year.

The sale is expected to provide a boost to other income, estimated at over $3.5m in the first quarter. The guidance does not include the impact of any future acquisitions or divestitures. For the full year 2005, guidance for revenues is in the range of $930m to $950m, reflecting the 13% to 15% internal growth rate we’ve previously indicated achievable.

2005 guidance for diluted earnings per share from continuing operations is in the range of $1.40 to $1.50, based on an effective tax estimated at just over 40%, and weighted average shares outstanding of $33.2m. For the first quarter, guidance for revenues is in the range of $214m to $218m, impacted in part by reductions in the level of ODC pass-throughs anticipated during the quarter, as compared to the relatively high level of ODCs in the fourth quarter last year.

Guidance is also impacted, in part, by the (Medi) divestiture, and the discontinuance of the MSM operation as discussed earlier. Diluted earnings per share from continuing operations guidance is in the range of $0.38 to $0.40, with 32.9m weighted average shares outstanding. In closing, to affirm those remarks made earlier in the call, with the resolution of the DSS contract for MSM, balance sheet providing financial capability and flexibility, and operations well positioned in growing national security markets, we remain very optimistic about ManTech’s futures.

And now we’d be pleased to take any questions you may have.

(OPERATOR INSTRUCTIONS.) Michael Lewis from BB&T.

Good evening. Ron, can you discuss for a second where you think the operating margin may be able to move in ‘05, now that we won’t see MSM impacting the results anymore?

Yes. In ‘05, as you know, we’re impacted by the FAS 123 requirements coming in for option issuance. And taking that into account, as we’ve done in our guidance, our operating range anticipates something in the 8% to 8.5% range. We think that’s a reasonable range for the planning here.

Okay. Have you seen any difficulties working with any of the contracting payment offices recently with regard to kind of a backlog of accounts receivable building up?

No. We’ve been fortunate this year. We’ve not experienced that, as we had in prior years.

In fact, it’s just the opposite.

Okay. Well, thank you very much gentlemen.

Mark Jordan of A.G. Edwards.

Good afternoon gentlemen. You mentioned that you have included FAS 123R in your calculations. Could you quantify the per share impact of the adoption of that ruling?

How about I can give it to you in operating income?

Okay. That would be fine.

It’s roughly a million dollars a quarter, that ballpark.

Okay. Looking at the backlog, can we talk about it a little bit? When you talk about your $1.7b backlog, again that only includes contracts and (tasks) (ph)? You don’t develop any implied value that GSA relationships might imply beyond just the term of the specific (tasks) release?

That’s correct Mark. And not only that, but in terms of IDIQ contracts, until we have a pattern of work in hand, even though we have contract vehicles, and we know we’re going to get work awarded, it’s not included in backlog until we have a demonstrated record.

Okay. With MSM, with the $16m that you will collect, that all will come in then in the first quarter? Or be reflected in the first quarter results? So the cash position ought to be very strong then in Q1?

That’s correct. And just to reiterate, of the $16.8m in receivables remaining at year-end, we’ve already collected about $12.7m to $12.8m of those.

Okay. Final question just on the M&A front, would you say what is the probability that you’re going to have something meaningful on that front, on the acquisition side, this year? Again, obviously you had a bit of a distraction in the middle part of this year.

We are talking to a number of firms as we speak. And as you know well, you never count an acquisition that you’ve closed a transaction. But we certainly hope to do perhaps more than one acquisition this year.

Okay. Thank you very much.

Tom Meagher of FBR.

Could you talk a little bit about, on some of the other calls, we seem to be hearing this undercurrent coming out of what happened last year with some of the statement of work issues and what not that were involved in procuring services in Iraq and what not. So where people may be leaning away from using GSA schedules, specifically maybe the Air Force, for example, and kind of developing their own look-alike type schedule there, I was just wondering if that’s something you all are sensing as well.

We do not see that yet. A good part of our work over there comes through the Army, through several commands. We also have Air Force work in that area. And I guess the nature of our business doesn’t create a problem for us at this point in time. And they find a way to reach us, whether it’s GSA or some other contract because, as you know, we’re in Iraq, Afghanistan, the three stans, in those other areas. They always find a way to fund us.

Okay. Thanks very much. I appreciate it.

Joseph Vafi of Jefferies & Co.

Congratulations on moving those MSM receivables into cash or the billed A/R column. Just a question, if we could, on MSM business. George indicated it looks like you’re going to sell that business off. Do you have a feel yet for, in the accounting of that business, if, given what you paid for it, and given the money you’ve collected versus what has gone into the business, if you’re going to have to take a charge or not when you sell that business?

Yeah Joe, this is Ron. It’s too early, as you know, under various requirements. We have an estimate of amounts to be incurred in the disposition of the business. We will put forward information on that. It’s too early to tell specifically on that. But, given the opportunities that we see in that business, and the positioning it has in the market, we’re quite optimistic regarding the disposition and in finding a good home for the business.

The Board of Directors has only made that decision in the past several days. We’ve had unsolicited inquiries over a period of time. But as Ron just said, we haven’t put the book together, or any of those things at this point in time.

Okay. That’s helpful. But right now it’s not making money, is it?

Ron, how do we answer that?

No. It has shown a loss position. But, as you know, that won’t be reflected but in a separate line item.

Okay. That’s helpful. And then just moving on to the guidance again, there are a few moving parts to it for ‘05. I just wanted to kind of be clear on those. We’re selling the environmental business. And was that other income going to be included? Is that included in the guidance?

Yes it is included. And that business has been divested, and the postage from the sale received already in the first quarter.

Right. So you said that was $3.5m of other income. Is that correct?

That ballpark. Yes. Until we hit the – it’s a mid-stream, mid quarter divestiture. So until we have the final results from where the net asset value was from sale, it could swing slightly.

Okay. That’s helpful. And then just trying to kind of get to where the -- get in this, the earnings to put to the revenue guidance relative to kind of a historical margin structure, are we looking at a difference in tax rates for ‘05 versus ‘04?

Yeah. In ‘05, the guidance for tax rates is just over 40%)

Okay. And then, so if we looked at kind of -- if we went back a year or so before MSM, where we kind of had business kind of in a more normalized operating margin structure, if we took that and we took into account option expensing, and the other income coming from this business, and that tax rate, should we be getting close to the earnings numbers? Or are there other moving parts to get to the guidance numbers?

I think you’ve got the general moving parts there. The operating margin, including the impact of the option expensing, is still in the eight to eight and a half range. So you include the option expensing on a quarterly basis. It moves it up by about a half a point. But obviously that averages over the year. So we’re in the mid eights on a comparable basis.

Right. And so if this is for continuing ops, we’re basically moving MSM to discontinued ops now. And so –

It would be a first quarter item. Correct.

Okay. So it’s basically excluded in revenue and earnings for the year? Is that right then?

That is correct. Yes.

All right. Thank you very much.

Joe, that was the decision of the Board of Directors.

Right. Absolutely. Thank you George.

Alex Hamilton of Advest.

On your sales pipeline that you talked about, $5b plus, can we kind of dig into a little bit, how many of those are $100m plus, or kind of the pulse on those opportunities, if you will?

The opportunities are large. I am not going to go through and identify specific ones because, as Ron pointed out, and I have, the nature of our business doesn’t allow us to announce some of the contract awards. I can tell you that the outlook for ‘05 is very strong. We’re ramping up right now for some of our contract wins, and those that will be in full capacity later in the year.

Okay great. And on the contracts being sold under MSM, is there the potential for continuing liability going forward in terms of the government contracts?

The way we are contemplating closing this sale, it would not be sir. But once again, as you know well, it depends on whether we sell stock or it’s an asset sale. There are a variety of options, as you know well.

Fabulous. Thank you.

Cai von Rumohr of SG Cowen.

If we back out MSM, it looks like the core margin was 7.5% in the fourth quarter. The worst of the year. What happened?

The primary impact from last year, a couple of things coming through. One, some added expenses from the Sarbanes-Oxley implementation that I think are shared by a number of companies. We also had some one-time items, including some lease termination costs that we disclosed earlier, and some other items along that line.

Okay. My understanding was the lease termination costs related to MSM. Could you quantify how much the Sarbanes-Oxley expenses were in the fourth quarter and the size of the lease termination, so we can see what’s kind of ongoing, and what’s special?

Right. That’s not something we would go to that level of detail. But the lease terminations also included items that were not related to MSM, just normal moving out of particular locations. And from a GAAP standpoint, it’s essentially like a contract. It’s an accrual that you take at the time you actually leave a facility. So it’s a one time item. It would not be continuing.

Okay. How big, essentially, if we took it out, how big would the margin have been? Would it have been a normal 8% plus margin?

It would have been closer to that. Yes.

Okay. And second question, you mentioned that option expense is expected to be approximately a million per quarter. What changes, if any, are you considering to kind of your compensation policy, so that in the future the actual impact would be less?

We are looking at the whole option structure at this point in time. How we do it, how they’re awarded. And I don’t have a precise answer for you. But we’re trying to determine, given the impact of the tax, which is quite different how we treat that whole program. Don’t have an answer for you yet. Okay?

Okay. Lastly, another question for you George. We just had named a Director of National Intelligence, John Negroponte, and maybe more importantly, Michael Hayden at the DD&I, who, as you know, kind of made some changes at NSA in terms of trailblazer and ground breaker. What’s your guess as to what that means for the Intel business for ManTech? Or what it might mean?

We look at those two individuals as being a superb appointment in both cases. Some, two or three of the members of our Board of Directors know these individuals quite well, and have worked with them. And they all offer praise. I think it’s important that you have two very sophisticated people, have been in the business. They’re not going to have to learn where the community is, or what it does. I think it’s very good, because it’s going to move the whole community ahead. They have a lot of things to do. And they have a lot of money to spend. We see it as nothing but positive. And we think both men are perfect for the job.

Okay great. Thank you very much.

Colin Gillis of Adams, Harkness & Hill.

George, understanding the sensitivities associated with the topic, can you talk at all to the current level of head counts that are outside the U.S.?

We don’t normally talk about that. But I will tell you at times we may have as many as 500 to 1,000 people. You have to understand, in our work overseas, there are several components, more than several components. We obviously have the battlefield and Afghanistan. We have the battlefield in Iraq. We are in three of the stans above that. We are in Turkey, and have been for a long time.

We also support the State Department around the world, in many embassies. We also are in a drug interdiction business, support business, in South and Central America. So there are more than one, there is more than one program wherein our people are involved. And it is not uncommon for us to be given an assignment to go to a new country, put together a system. Sometimes you go install and turn over. Sometimes we go and stay. We are in a total of 34 countries as we speak.

Okay great. And then can you just – ? Is there a status update on the composition of the Board, and when we might see membership expand?

We just expanded the Board. We added Admiral Dave Jeremiah, who I am sure you know, as a Former Vice-Chairman. He had been Chairman of our Advisory Board, been on the Advisory Board since ‘92. We moved him to our Board of Directors for the obvious reason, he really understands this business.

We also added Dr. Paul Stern. And Paul Stern has a history -- I think at one point he was President of Unisys, President of a couple of others, but also in recent years a very prominent venture capital capitalist, with -- my brain just went dead with the venture capital thing -- Arlington Capital. And both of these individuals, they bring a different skill set, which is what we’re trying to do. And we’re very pleased with them. And there may be more to come. But, for the moment, we’re very happy with the team.

Okay great. Thank you very much.

George Price of Legg Mason.

Hi. Thanks very much. Many of my questions have been answered. Just one thing Ron, I wanted to confirm. The guidance is continuing ops, excluding MSM, right?

That’s correct.

Okay great. Then I think did George mention a free cash flow number for ‘05?

Operating cash flow, targeted over $40m.

Over $40m. Okay. And a couple of just housekeeping items I guess. The qualified opportunity pipeline I missed. If you could repeat that.

Just over $5b.

Okay. And then lastly, the share count expectation for the full year.

2005 -- 33.2,

33.2 million.

And just for revenues for the quarter was $32.9m.

Great. Thanks very much.

Tim Quillin of Stephens, Inc.

Good afternoon. I kind of feel like ding dong the witch is dead with MSM and discontinued operations. So congratulations on that, a load off your chest.

You got that right sir.

Just a clarification on the options expense. Are you going to apply that? Or are you thinking that’s been applied retroactively to 1Q and 2Q? Or just the $1m a quarter in 3Q and 4Q?

Three and four.

Okay. And then as far as the one-time gain of $3.5m, is that kind of normally taxed, and kind of a $0.06 EPS impact?

I think it’s slightly over six, but yes.

Okay. And then, do you have the, in 2004, what the revenue would be, excluding MSM, and excluding the environmental business? Kind of the apples to apples, versus what we’re going to have in ‘05?

Yeah. So ‘04, I’d have to get back to you. I don’t have that in front of me.

Okay. Maybe off hand, how much in environmental did the (Medi) business contribute in ‘04?

I don’t have a breakdown. Between the two of them, it’s in the ballpark of 30.

Okay. Okay. Do you have the MSM revenue for the fourth quarter in front of you?

$5.1m.

$5.1m. Okay. That’s helpful.

Yeah, what we did say Tim, just to clarify again, with the growth that we anticipate for the year, the $930m to $950m, that does anticipate in the 13-16% organic growth.

Yeah. Okay. And then the – ? How is the – ? I know it’s a small part of revenue, but the NASA business that you do. Is there any negative impact from the cuts that we’re seeing in the hubble program?

Don’t know that yet. I think this year we forecasted NASA business somewhere in the band of $28m to $29m. The Hubble robotics piece was part of a $295m appropriation included in that bill. There is a move afoot to take $165m out of that, and suspend the program as of the first of April. There’s equal pressure to not let that happen, coming from Senator Mikulski and others.

At this point in time, it’s not quite clear where Hubble robotics goes. I’ve been to ten ceremonies of Hubble’s death. And it’s not dead yet. So I don’t know where this thing goes. There is a move afoot to continue it, obviously. But there is a robotics requirement also in terms of some of the President’s other initiatives. I think if they shut down the Hubble program, Ron am I allowed to say in terms of people? It might impact 30 or 40 of our people sir.

Okay. That’s helpful. And out of curiosity, how – ? Do you have a sense now of MSM’s piece allocation from the new OPM contract?

We have received – as you know, that contract was awarded to us in July. And it is only in recent days, and I really mean recent days, that we had gotten some case allocations. It is too early in the process here to really understand what that is. Indeed, we’re asking for a meeting with the OPM senior management. It’s been quite difficult to forecast, because, candidly, we thought there would be a lot more cases coming a lot earlier in the process.

Okay. And just –

And, by the way, again, it’s part of the ongoing business. But going down the road, we have said we decided to exit that business.

Okay. And just finally George, can you talk about strategically the type of acquisitions you might make, where you’re trying to position yourself for growth and how acquisitions might help?

Acquisitions, the reason for the acquisition is obvious. We have enormous financial capacity. We have $318m in equity today. We have essentially no debt. And we’re looking at $40m in positive cash flow in this coming year. And we’ve already, in this past month, we’ve collected an enormous amount of cash.

So logic dictates that we use that money effectively. Acquisitions were part of our strategy when we did our IPO. We’ve done five at this point in time. The focus is exactly what we’ve looked at before, high end defense, high end intel, particularly where they are the special clearances involved, because that is a market that doesn’t open to the entire community. And what you’ve seen us acquire before in terms of IDS, CTX, Aegis, etc., that’s the type of company. And they’re out there.

Okay. Thanks gentlemen.

Ed Caso of Wachovia Securities.

Hi. Thanks. Just sort of a couple clarification questions. Ron, the Alion gain, that will be at a normal percent tax rate?

Yeah. On an effective rate basis, it should flow through as that. Yes.

That’s about $0.06 a share. And then the FAS 123R? Is that fully taxed as well? And that would imply not quite two pennies a quarter?

Correct. Again, on an approximate basis, yes.

And can you just help me out with the Q4 awards number?

I am sorry, I just couldn’t hear you.

The awards number in the fourth quarter?

Oh, it was about $305m.

Thank you. And the funded backlog? I missed that.

$450m at year end.

And the environmental business, that wasn’t a discount. That was just a sale. Right?

Correct.

Okay. And help me a little bit. You made some comments about pass throughs. And I was a little confused. So they were – ? Were they strong in Q4, and then not expected to be so in Q1? And can you give me the order of magnitude?

We had a very strong Q4 in terms of pass throughs. So the percentage of pass throughs will come down. It was over 35% in the fourth quarter. And that was up from 31.5 in the third quarter. So it will come down in the first quarter. And, as you know, that’s a bit lower margin business. So that had some impact on the margin jump.

Right. And just to follow up on a prior question, I mean I know you just decided on the DISCO decision. Given that you’re assuming a higher margin, that would suggest that you’re selling a loss business, and presumably you’d be taking a loss on that. Is that fair to say? Or is there going to be a Q1 charge of some size?

At this point in time, until we have a determination of what we should say on that, we don’t have anything to say. But we don’t expect that we’re going to take a charge of any -- what you were saying, we don’t expect that at all.

Great. Thank you.

Erik Olbeter of Stanford Financial Group.

Yeah, hi guys. My question has been answered. Thanks a lot.

Thank you.

Brett Manderfeld of Piper Jaffray.

Hi Ron. You mentioned the tax rate being a little bit lower, I think, in the quarter. I didn’t catch the reason. Is that just the year-end true-up? Or is there something else there?

That was primarily it, as well as the final determination of what we ended up with as the DSS contract also flowed through.

Okay great. And in terms of DSOs, I think you mentioned in the release there are 79 days ex-MSM. And were they 89 days in the previous quarter? Is that right?

It was lower on the ex-MSM for the previous quarter. Probably it would have been about 83.

83. Do you have a target looking forward? Or should we look for kind of the high 70s?

I think for the moment the high 70s is where we would like to keep it. And, as I mentioned, I think that could fluctuate around, depending on where particular spikes in revenues come in the quarter, and the collection cycle occurs. But that was (indiscernible).

Okay great. Thank you.

George Price of Legg Mason.

Hi. Just a quick follow-up. D&A kind of spiked up in the quarter Ron. What was behind that, and kind of what’s it going to be going forward?

I think the roughly 1% level would be a good planning purpose. I’ll have to get back to you in terms of the particular spike. Did I miss anything?

There were a couple of things in there Ron as we looked at it a couple of days ago. We had the Sarbanes-Oxley cost in there. We had a variety of other charges. And Ron can come back and give you. But we did an analysis of that just in the past week.

Yeah. I am sorry. Also, I thought I heard you say depreciation and amortization.

No.

You were saying G&A?

Yeah. No, no, no. Actually I was saying D&A.

Yeah, that’s what I thought. Okay. Yeah. D&A.

Okay. But on that about 1% going forward?

Yeah. I am just looking here for a moment. As a primary aspect of that also is levels of amortization we have in our business. As you know, we had several true-ups during the year on the purchase accounting. So as we got through and we did our anniversaries on those.

Okay. All right. Thank you.

(OPERATOR INSTRUCTIONS). Cai von Rumohr, SG Cowen.

Yes, Ron, you had mentioned $40m in cash flow. Is that before CapEx? And does that include collection of the receivables from MSM?

It does include the receivables from MSM. And that would be before.

It does include them? It does include them?

Yes. Correct.

So what would cash flow after CapEx be, excluding it, since it’s excluded from the net income? That’s what I thought. So it’s probably – you’re probably talking closer to $25m free cash flow, $20-25m if you put MSM below the line?

Yeah. We weren’t saying free cash flow. Again, we’re saying operating cash flow. So looking at the –

Okay. But I mean even if it’s operating cash flow, if it’s discontinued, it shouldn’t be in operating cash flow. It should be in disco ops. Really, operating cash flow would be about 25? Is that about right?

I follow your reasoning there. Obviously we think it’s going to be higher. But it’s inherently uncertain, given the timing of various items coming through. So we think it will be -- we think it should be higher.

Okay. Okay great. Thank you.

Thank you for participating in today’s conference. (OPERATOR INSTRUCTIONS.) This does conclude our conference for today. Thank you all for participating.