ManTech International Corp (MANT) 2005 Q2 法說會逐字稿

Please stand by. We are about to begin. Good afternoon, my name is Nora Fence and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ManTech Second Quarter 2005 Earnings Conference Call. (Operator instructions) Miss Crystal, you may begin your program.

Welcome to ManTech International Corporation's Second Quarter 2005 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. Pedersen, Chairman of the Board and CEO, Robert A. Coleman, President and Chief Operating Officer, and Ronald R. Spoehel, Executive Vice President and Chief Financial 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, and include the risks and uncertainties identified in our earnings press release under the caption "forward-looking information".

For a full 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 16, 2005, 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 obligations to update any of the forward-looking statements made on this call.

Now I would like to turn the call over to George Pedersen.

Thank you Maureen. Good afternoon and thank you for participating in today's call. As Maureen mentioned, on the call with me today is our President and Chief Operating Officer, Bob Coleman, and our Executive Vice President and Chief Financial Officer, Ron Spoehel.

With regard to today's agenda, I will lead off with some comments about our markets and federal budget. Immediately following my remarks, Bob Coleman will update you on our recent operational highlights and the integration of our latest acquisition, Gray Hawk Systems, Ltd. Next, Ron Spoehel will walk you through our financials for the quarter. We will then answer your questions.

I am very pleased to report another excellent quarter for ManTech International. We had year-over-year revenue growth of 17%. We increased our second quarter operating margin to 8.4%, and our EPS from continuing operations came in at $0.35 per share. For the past year, we have had a very sharp focus on improving our cash flow, especially our days sales outstanding, or DSOs. I would like to point out that our DSOs, excluding Gray Hawk, was at 76 days, which is down from 80 days in a previous quarter, and more importantly down from 96 days a year ago with the MSM reporting in our operations at that time.With Gray Hawk, our DSOs for the second quarter were 82 days.

All in all, we are exceptionally pleased with our results and our financial progress this quarter. We are making excellent progress in integrating Gray Hawk's systems into ManTech, and especially on the business development front which Bob will cover in just a moment. We will continue in this vein to seek out strategic acquisitions that expand our customer reach, broaden our capabilities, place us in important geographic locations, and/or augment our highly technical skilled workforce.

We are an experienced acquirer with ample financial capability to continue to grow, both organically and through acquisitions, as we have successfully proven in the past. Moreover, ManTech's solid second quarter results demonstrate the force of our integrated high-end defense, intelligence, Homeland Security, State Department, and Justice Department services platform. With the latest acquisition of Gray Hawk systems, we are well on our way to becoming a key, $1 billion government services pure-play, with a steadfast and laser focus on missions supporting high priority and well-funded national security programs.

Looking forward to the balance of the year, and into 2006, all indications suggest that the DOD appropriation process for 2006 is on track. Congress will be leaving for summer recess, but the lawmakers have made progress on key spending bills, particularly defense. We do not see any substantial delay coming with respect to the DOD appropriations bill. This is good news. This is critically important to our industry, and ManTech in particular, as we derive most of our revenue from this appropriation bill. Much will depend on a political environment upon Congress when they return to Washington. However, I am confident that the budget trends we saw in the past few years will continue on into 2008.

In our view, the Department of Defense, the intelligence community, Homeland Security, State, and Justice will continue to need more and more contractor support for IT and key technical and analytical services in the coming year. ManTech's strategy is and has been to deliver the highest quality of support to make sure we expand where we are currently operating as well as to seek to penetrate new areas through marketing and eventually, more acquisitions.

While I have said this many times, it is worth repeating. We have exceptionally strong markets in which we sell our services, excellent relationships with our customers, and 6,000 employees dedicated to our customers' critical mission. This is our time, and we intend to continue executing our strategic plan in support of our customers, our employees, and our shareholders.

And with that, I would like to turn the call over to Bob Coleman. Bob?

Thank you George. As we announced on last quarter's call, we acquired Gray Hawk Systems, which closed on May 31, 2005. I am pleased to report that the integration is proceeding as planned and we have already started working together to make the most of our combined forces. As announced in early July, ManTech-Gray Hawk was awarded an $11.4 million contract from the Naval Sea Systems Command, to provide modeling and simulation tactical training applications in support of the Nav-Sea Program Executive Office.

I wanted to discuss this contract because I believe it demonstrates the effectiveness of our integration process, and the strength of our combined capabilities. The Nav-Sea contract win was largely based on ManTech-Gray Hawk's proprietary Kill Chain modeling and simulation technology, which has been sanctioned by the Navy CNO as a preferred conflict modeling approach within in the Navy.

Historically, ManTech's Navy business has focused on the warfare analysis side, and as a combined entity, we are now able to offer our customers a full-spectrum approach to conflict modeling, to include modeling and simulation and warfare analysis. The total solution approach, that is the Kill Chain intellectual property combined with our domain knowledge and expertise, is consistent with our business model, and we believe it is the right strategy to address this requirement within the Navy. We are making good progress marketing this approach to new and existing customers, and we are optimistic that this will lead to larger opportunities for ManTech, such as deploying this across Sippernet for use by other Naval surface warfare commands, the submarine community, and airborne platforms.

This is just one example of how well Gray Hawk fits into the ManTech business strategy, and how our combined capabilities are leading to expanded relationships with our customers. We are currently working on several other procurements, which we will now compete in as a prime position, due to our combined capabilities and strength. As we had stated upon the announcement, we are very enthusiastic about the prospects of ManTech-Gray Hawk Systems, and we are pleased to have them as a member of the ManTech family.

Also, during this quarter, we announced the establishment of a new technology practice, in support of Cisco Systems' recently announced application-oriented network technology. The DOD and intelligence community have been trending toward service-oriented architectures and we believe that the AON technology can provide tremendous benefits in this area, which will result in expanded service opportunities for ManTech.

We are very excited to have been selected by Cisco to be one of the initial six advance technology partners for AON, to include Accenture, Cap Gemini, EDS, IBM, and SAIC. We look forward to a continued strong partnership with Cisco and the opportunities that this represents.

Moving on now, I would like to touch on a few key operating metrics for the second quarter. During the quarter, ManTech received new contract awards totaling 258 million, which is down modestly from Q1, and is due to some large contract awards slipping into Q3. The new contract wins include a significant amount of new business wins in our targeted defense and intelligence customers.

With these new awards over the past several quarters, our continued revenue growth demonstrates the success of our business strategy, continued demand for our services, and the strength of our customers' budgets. Overall growth for the quarter totaled 17%, with 16% coming organically. The total qualified pipeline is over $7 billion, with a number of large proposals outstanding and expected to be awarded within the next 6 to 12 months.

Operating margin was 8.4%, or roughly 60 basis points higher than last year's second quarter operating margin from continuing operations, and is up over 30 basis points from the first quarter of 2005. This is the result of improved contract performance in our high-end Intel-IT practice and increased efficiencies in our operations.

Finally, as George mentioned earlier, DSOs from our operations, excluding Gray Hawk, were 76 days in the quarter, and 82 days with Gray Hawk. This is a 4-day improvement in the core operation over our last quarter DSO of 80 days, and is the result of process improvements put in place this fiscal year by each of our operating units. Our operating units have done an excellent job bringing this number in line with our expectations, and this continued effort should result in cash flow improvements in the coming quarters.

In closing, we continue to execute on becoming the leading provider of national security solutions within the intelligence and DOD communities. We will continue to focus on driving strong organic growth, coupled with strategic acquisitions, that enhance our capabilities and extend our markets throughout the remainder of 2005.

With that, I will pass it over to Ron, to discuss our financial results. Ron?

Thank you Bob, and good afternoon everyone. As George and Bob covered earlier, we are pleased to report a solid financial quarter and continued growth in our operations as revenues grew to $239.4 million, increasing 17% from last year's second quarter revenues of 205.1 million, for an internal growth rate of 16%.

This growth was largely driven by our expanded activities, supporting Iraq and Afghanistan, as well as in the intelligence community. Our recent Gray Hawk acquisition was an important contributor to our results this quarter, as was previously covered, with 7.6 million in revenue since the closing, consistent with the run rate anticipated. Their pro forma margins were in excess of 10%, as covered in our last call, and we anticipate this good performance to continue going forward.

As we had also discussed in our last conference call, we would remind everyone that prior-period financial results have been recast for comparative purposes as a result of the discontinued operations accounting used for MSM.

The contract revenue mix was relatively consistent across most areas of our continuing operations, as over 83% of our work was performed as a prime contractor, and over 98% came from Federal Government sources. DOD and Intel business comprised approximately 95% of our revenues, and we would expect that proportion may well increase, as the Gray Hawk results become fully consolidated into ours in future quarters. GSA revenue was up slightly, to 39% in the second quarter, from 36% from these schedules in the previous quarter.

The proportion of revenues coming from contracts billed on a time-and-material basis increased slightly to about 62% this quarter, while fixed-price contracts were about 10%, and cost-plus saw a reduction to about 28%.

Our second quarter operating margin expanded to 8.4%, which was in line with the 8 to 8.5% range we had indicated in our last conference call, and up from 8.1% in the first quarter of this year. Operating income in the second quarter rose to $20.2 million, up over 25%, as compared with $16.1 million for the same period in 2004.

Net income from continuing operations was up 24% for the quarter, to $11.6 million, which translated into diluted earnings per share from continuing operations of $0.35, at the high end of our previous guidance. Losses from discontinued operations, reflecting MSM operating results, were approximately $1.4 million in the quarter, as the operational ramp on MSM's OPM contract continues. As covered earlier, the efforts to sell MSM continue, and the company and its advisors continue to target a closing prior to year-end.

Contract awards in the second quarter, including many follow-on and classified awards that could not be publicly announced, were approximately $258 million, reflecting continued focus and success in our national security markets. Backlog remained at $1.7 billion, while the qualified new business pipeline, as covered by Bob earlier, grew to over $7 billion in the quarter, which, combined with expected award decisions in the remainder of this year, provides an encouraging outlook for future backlog expansion this year. Funded backlog expanded in the second quarter to $452 million, from the $390 million reported at the end of the first quarter.

Turning now to the balance sheet and cash flow. Our operations at all levels continued to focus on receivables management, and were successful in reducing DSOs to 76 days, as compared to the same operations at 80 days last quarter. With the impact of the overall company revenue in the quarter, and the timing of certain other cash payments occurring in the quarter, operating cash outflows from continuing operations were approximately 4 million.

Depreciation and amortization, as well as capital expenditures, were about 1% of revenues this quarter. Option exercise proceeds contributed over 4 million towards reducing our debt in the quarter, and as well, contributed to the increase in stockholders' equity, which rose to over 350 million.

Debt increased to $78 million at the end of the second quarter, including 53 related primarily to the Gray Hawk acquisition.

ManTech's strong balance sheet, contract award and new business profile, operational performance, and market positioning continue to support our outlook for achieving continued growth. Guidance for the third quarter, and full year 2005, anticipates a continuance of very strong underlying trends in our national security business, as well as in the defense and intelligence sectors. It includes the anticipated accretive and synergistic effects from the recent acquisition of Gray Hawk, although it does not include the impact of any future acquisitions or divestitures.

For the third quarter, guidance for revenues is in the range of $260 to $265 million, reflecting 12 to 15% internal growth, previously indicated. Consistent with that range, guidance for the third quarter diluted earnings per share from continuing operations is in the range of $0.36 to $0.39 per share. For the year, the range of revenue guidance has been shifted up on the lower end of the range, to a range of $985 million to $1.005 billion, while diluted earnings per share from continuing operations guidance is in a range of $1.48 to $1.58 per share.

In closing, to affirm remarks made previously, we are well positioned for continued growth, supported by the financial capacity and flexibility provided by our balance sheet, by the performance of our operations, and the opportunity presented by our combination with Gray Hawk, reflecting how well we are positioned in growing national security markets.

And now, we would be pleased to take any questions you may have.

Thank you. (Operator instructions)

And our first question will come from Bill Loomis, with Legg Mason.

Hi. Thank you. Good quarter. Can you -- I have got a few questions. One on the -- as far as the guidance, just to clarify, I know the year guidance was unchanged. That is assuming the $0.39 number in the first quarter, and a $0.35 in the second quarter when you are giving the $1.48 to $1.58 range. Is that correct?

That is correct.

And then the contract slippage -- can you just elaborate on that a little bit? Was it something that was pretty widespread, or across a particular client base, or any specific reasons, and why do you think that they will be awarded in the third quarter?

It was just some slippage in a couple major contracts in the Intel community customers. And it was just delayed due to other priorities in their organization. We do expect them to hit in the third quarter.

In some cases they extended us for a period of time on a sole-source basis for three months or so, waiting for final contract awards.

Okay. And then finally, just on the backlog, $1.7 billion, does that include contribution from Gray Hawk, and how much was that?

This is Ron. It does include the contribution from Gray Hawk, and that was a little under $200 million.

Okay, thank you.

And our next question will come from Cai von Rumohr with SG Cowan.

Yes, if you kind of look back at normally your bookings were stronger in the second quarter than the third, in contrast to others. Could you give us any quantification of how much in terms of award slips, and any indication of perhaps the dollar value of bids submitted in the quarter? Are those up for decision in the third quarter?

It is primarily due to one large procurement that is sole-sourced, and it has slipped into the Q3. We would expect it to be in place, but because of the size of the contract and the sole-source nature, obviously the customer has to do a lot of due diligence on their side, which delayed in the award. I cannot give you the specific value of the contract, obviously.

But they have continued to fund us on interim funding of 2 to 3 months.

Absolutely.

Can you give any quantification on the aggregate number of bids that you expect to submit in the third quarter or the bids that are up for decision? Just an aggregate number?

Hi, this is Ron again. We haven't given out specific details on the quarterly basis for contract awards. But in the past we have said that through the remainder of this year there are several billion of expected awards decisions to be made. So, we look forward as I mentioned, it is an encouraging profile for expansion of our backlog for the remaining of the year.

Okay. If I kind of take what looks like the midpoint of your guidance it would look like you expect organic growth to pick up a little bit sequentially in the third and fourth quarter. Is that a reasonable assumption?

No, the third and fourth quarter, what we said there is what continues to be the 12, this is Ron again, it would be in the 12 to 15% range. There is no built-in assumption on pick up. That is consistent with levels we have seen before.

Okay. And could you give us any help in terms of if Gray Hawk is 6.7 in the second quarter where they might be for the year.

This is Ron again. Just to clarify it was 7.6 in the second quarter came in and consistent with the range we said before they were on target to do about 90. We expect a little more than half of that to be in the second half.

Okay. Thanks.

Tom Meagher with FBR.

Call. Ron, maybe this question is for you. First of all how active are you looking at the M&A market. I know you just have done Gray Hawk, but what are you seeing there? Given the public market valuations, are the multiples going up? Are the sellers looking for higher expectations? I know they always do, but I was just wondering kind of what you are seeing generically on the M&A side of things?

I don't see any demand for higher prices than we have seen over the past year. The larger issue is not the number of opportunities that are out there, that is an overwhelming number as you know. It is finding them in the precise areas that we are focusing on and we have some candidates out there that we are looking at.

Okay.

But, I don't see the prices, as you know, the area we have been in for the past three years has demanded somewhat higher prices because of the nature of what we do, the clearances and that type of thing. But I don't see it going above those standards.

So, is your expectation, George, do you still want to build that part of the business or do you feel that you kind of got enough critical mass their right now? That perhaps you look at somewhere else?

Absolutely not, sir. That is where the market is going to go over the next three years. There will be enormous funding spent in precisely that area. That is why we started three years ago focusing on it. We have just begun.

Okay. Thank you very much, I appreciate it. Good quarter.

The next is Joseph Vafi with Joseph and Company.

Good afternoon. Joe Vafi, here. Good quarter.

Thank you.

Just a couple of questions here. On the new award activity in the quarter, I was wondering if you could give us maybe at least a qualitative view there if the new award activity this quarter was trending in one way or another versus last quarter, relative to new business coming from existing contracts and new tasks versus kind of more new brand new contract vehicles?

It is really a combination of the two. We have about 105 million that was not announced in our classified program. Much of that is in new work. But there is really a pretty good mix of new awards and re-competes and task order add-ons. I don't have the specific information broken out for you though.

Sure. So, do you think, Bob, kind of qualitatively we are looking at the last couple of quarters there has been a shift one way or the other in where the new business is coming from?

I would say on a lot of our IDIQ's we are seeing an increase in task order awards for sure. And, on several of those we have actually popped the contract ceiling and had to move on to new contract vehicles. So, some of it is in that area.

That is one of the issues we have had. Some of this funding has come in a lot faster than the contract originally contemplated. Which is why we asked some of these sole-source procurements and competitions waiting.

Right.

The funding is there as you know, also the mission is there.

Correct. Thanks. And then just we have heard a lot about maybe some accelerated GSA spending here in the September quarter. I know you have a lot of GSA business; do you have a view on that?

I don't know it from the GSA point of view. I think from the DOD point of view there is a need to deal with a lot of funding requirements for Iraq/Afghanistan as you know. I just see a lot of funding, and whether it flows through the GSA contracts or flows through the agency contracts it doesn't matter to us. We see a lot of money coming from both sides.

Okay. And just one last question. I think in your prepared remarks you mentioned MSM which is clearly now in the discontinued bucket. But sounds like that business might be making some investments here as it kind of starts to move forward and before you sell it, do you have a target as to what kind of investment level your company is looking to make her given that it is a discontinued op and how that might get recouped as the business gets sold?

The way we recoup it is get a market price for MSM. We are in the phase where OPM is starting to ramp up on a number of cases and the type of cases they put out there. So, we are having to train the upfront staff for doing this type of thing and that is what you are seeing in that cost there.

Okay. Thanks a lot, George.

Our mission hasn't changed. So, we are going to exit that business.

Thanks so much.

We'll go now to Erik Olbeter with Stanford Financial.

Yes. Hi guys. Two questions, one just a follow-up on Bill's question on Gray Hawk and its contribution to backlog. The $200 million number was that for total backlog or for funded backlog, Ron?

That was for total.

And do you have a number for funded?

It was in the 50 million range.

Okay. And, secondly help me understand some of the margin story. You have given a guidance in the past of 8% to 8.5% for the year for operating margin. You had a really good quarter here. Does this sort of suggest that it might be trending to sort of the higher end of guidance? Or you might be willing to narrow the range for us? How should we think about this quarter in relation to your guidance on the year end margins?

I think if you look at the 8 to 8.5% margin going forward and what we put out for the third quarter it is consistent with that. For the year it tightens up a little bit as it flows through, but that range is still the right range to look at our business at the moment.

Okay. Thanks a lot.

And we will take our next question from John Mahoney with BB&T.

Hi guys. Nice quarter. Could you give us since I don't have some of the prior periods. What was the quarter we are comparing against last year on the revenue line?

It was 205.1 million.

It was 239 this quarter, 205 last - -

Right. I meant the third quarter of '04?

I'm sorry, third quarter of '04. We haven't published that at this point.

Okay. That was what I was asking about. Okay, we'll get that later. And, the - -I may have missed this earlier. What is the implied organic growth in the midpoint of the third quarter guidance?

We haven't put out something on that.

I mean it is going to be consistent with the 12 to 15?

Correct. The range on that is a 12 to 15% range.

Okay. Well, that's it for now. Thank you.

(Operator Instructions) And we will go next to Matthew Conrad (ph) with Friedman, Billings, Ramsey.

Hello, gentlemen. This is Matt Conrad. I have a question first about interest expense. It looks like the new borrowings for the revolver were taken in early June. Can you give us an idea of the, if there is an amortization schedule? And what the interest expense will look like going forward?

Yes, there is no specific amortization schedule at this point. This is Ron. It is a long-term revolver, so we have several years remaining under that revolver. And at the moment with the good cash flow from the business would intend just to pay it off over time as we generate cash flow. Borrowing rate at the moment is on a floating rate basis for a portion of it, $53 million which is probably a little under 5% at this point in time. And there is a swap that you may recall that we have outstanding through the end of this year that is at 6.83%.

Okay. And can you give us an idea of what you think the interest expense will be next quarter and through the year?

That is just an implied in the balance of our guidance range. We haven't put out anything specific on it.

And we understand that the integration of Gray Hawk is going well. Will its DSO's begin to come down toward ManTech levels or is there something different about the business?

No, their DSO level should be consistent with ManTech levels. What you will see on the reported basis for the company this quarter and as mentioned was 82 days. That is reflective of the fact that Gray Hawk was acquired late in the quarter. So, it had all the receivables but a small amount of revenues. So, when it averages in, it pulls it up. So, we will see it go back and we expect to be under 80 for the quarter.

Okay. Thank you very much.

Colin Gillis, Adams Harkness,

Hello, can you hear me?

Yes we can, Colin.

Okay, great. Actually this is Don Lacava (ph) for Collin Gillis. I have a question, can you talk a little bit about the employee retention from Gray Hawk. Have you seen any issues on that front?

We have not seen a spike in turnover, that would be any different from the turnover they have historically experienced. As you know, there were some, as part of the acquisition there were some changes in the senior management levels. But no increase in turnover as a result of that.

And the turnover, did you mention that number as far as company-wide?

No, we haven't given out that number. But the range is between and 15 and 19% which is really consistent with our competitors. And if you look at our business it is not unexpected given the high level of clearances that our people hold and the demand for those folks in our industry.

Okay.

Also, let me just point out that again, a lot of our work is overseas. There is a lot of travel involved with that and as a result we have people cycling in and out of our company, which increases the turnover numbers.

Okay. Great. And then is there, what's the hiring environment look like right now?

It is strong. We continue to get a large supply of good candidates and a lot of that due to the type of work we are involved with and the customers we serve. So there is a good pipeline of new candidates, we have a good bunch going for people awaiting clearances. So the hiring is strong for the company.

We at 6,000 people right now which is up quite a bit from a year ago.

Okay, thanks. And I guess the last question I have, can you talk about your expected impact or the impact you expect to see from the GSA get it right program? Especially the effect on the September quarter spending?

We have in many cases been moving some of our work off of the GSA schedule to other vehicles like GovWorks and agency specific vehicles like Seaport in the Navy. We will continue to do that as necessary. But what you have to understand is a lot of the work our customers do is going to get executed one way or another regardless of what GSA is doing. So when they can't use that vehicle they find other ways to get to us. As a result of that there is not going to be a big pop from GSA in the Q3.

Okay. Great, thanks guys.

Tim Quillen, Stephens Inc.

Good afternoon.

Hi, how are you doing?

The revenue you reported was slightly short of the guidance range. Is that just a function of the timing of the integration of Gray Hawk or were there other factors?

It was actually, primarily, the timing of the closing on Gray Hawk. Not so much the integration, the closing was delayed from the timing we had originally forecast in the quarter, which would have contributed over $4 million with differential in the revenues.

Right. Thank you. And then as far as the backlog, it looks like the backlog would have gone down fairly significantly without the acquisition of Gray Hawk, but yet you're growing revenue. I think this is sometimes a definition issue, with how you define backlog. But is it right to think that that was a fairly steep decline and how are you able to have the outlook that you have given that declining backlog? Thanks.

Right. That is a very good question. This is Ron. Looking forward it is basically the timing of contract awards. As Bob mentioned before, we have several awards that are just on short-term funding so you don't see it picked up in the backlog number in various extensions. But what we see is that we see a very good contract award -- and again we are very encouraged by the outlook for the second half of the year in terms of where the backlog could be.

And just lastly, Ron. There was a couple of below the line expense items, a loss on disposal and other expense. Can you detail those for us?

Sure, the loss on disposal was just a purchase price adjustment on the prior divestiture that was in the normal course. And the other income expense is primarily a foreign exchange translation item.

Okay. Thanks gentlemen.

And we will take a follow-up question from Joseph Vafi with Jeffries and Company.

Yes, just kind of a high level question, I guess maybe for George and Bob on Gray Hawk. Sounds like the integration there is going pretty well and it is a pretty big acquisition. I was just wondering if you could kind of share some thoughts with us on the process and the way Gray Hawk is being integrated versus perhaps maybe some of the previous acquisitions you did, say 18 months ago or something like that. Or even further back have we kind of have seen changes in the way the company approaches the integration challenges of two companies.

I think this one is a little different than the previous ones, Joe, in that many of the components of ManTech had working relationships with Gray Hawk personnel in the field and were able to as a result more quickly identify potential market opportunities, which of course, brings people together much faster than when they are not there. So, the folks have been getting along tremendously well. We couldn't ask for a better relationship. As a matter of fact, I think the day we made this announcement, many of the organizations had already been meeting and talking about potential opportunities and what we can do together. In terms of integrating Gray Hawk into the organization, we are still working through the plan, in terms of how that work component fits into what aspect of ManTech going forward. But we won't see that fully in effect until after the first of the year.

Joe, I think the other thing that is quite different. When we began this process three years ago and we did our first acquisition of Aegis Research we were moving into market space that we did not then occupy and that was the deliberate as you recall. So, when we picked up the Aegis team which was then about 500 people, we had at that point no commonality if you will, of precise customers. So, for a while that was a stand-alone operation. Then we began to add the additional acquisitions that were again in this same space and expanded our role. Today, if we hire or today if we acquire or merge with a Gray Hawk it is not likely you will find somebody out there where we don't currently have a presence and that wasn't correct two years ago.

You know well this was our deliberate plan to move into these different segments of the market, which we have done.

And the working relationship in the field is really helped a lot in the way that this gone.

Sure, that is helpful. Thank you.

Ed Caso with Wachovia Securities.

Hi. Thanks. I just want a clarification. I think George, early on you mentioned that you saw the particularly the DOD '06 budget process moving forward now. I think another company indicated they thought because of the Supreme Court situation may see some slippage in a continuing resolution at least for several weeks. I thought if you could comment on that.

The people I talk to on the Hill, indicate that without fail there will be a defense appropriation bill on 1 October. John Warner's bill has been up on -- I'm sorry the Senate Armed Services bill has been up on the floor this week and it contains 441 billion for defense and 50 billion for Iraq and Afghanistan. That bill has slipped a little bit and they were hoping to get it done before recess. They will now bring it back to the floor on 1 September. And they don't expect any real problems in that.

On the other side, the appropriation bill, I am told by people that really respect that there will be a defensive appropriation bill on 1 December. And there will likely be a bill also for Homeland Security. And I think Homeland Security numbers are coming out something like $40.8 billion. So, I don't see in those two areas, now, obviously a lot changes between now and then. But, again, I respect the opinions of the folks that I am talking to up there.

Just clarifying, you see both DOD and a Homeland Security appropriations bill out of the House and the Senate by September 1st.

No, October 1st.

October 1st, for the President to sign after that or to have signed...

You are down to a level of detail I don't have, sir. The only thing I can tell you, I am told repeatedly by members on the Appropriation Committees on both house and the senate, that there will be a Defense Appropriation Bill by 1 October. And that there is a high probability that there will be Homeland Security appropriation bill by 1 October. The balance of the bills may role into a continuing resolution, I don't know that. But, to try and say that the President will sign that bill on 1 October, I can't answer that yet. The serious players up there know they must, that they must deal with this mission soon.

Great. Thank you.

The next question comes from Cynthia Houlton, RBC Capital Markets.

Hi, Ron just a question on the, on the margin and SG&A. We saw an absolute sequential decline in dollars spent in G&A; I just want to get a sense of what, what drove that for the quarter and then kind of thinking about going forward, what's a sustainable level on, either on a percentage basis or an absolute dollar basis. How we think about the G&A line?

Okay. Two things there; one is, you may recall, we look at a rate structure. There are things that go between G&A and overhead which shows up above the, in the cost of sales so it's not always absolute to look at one or the other. So, when we look at the margins, margins did improve sequentially on, and we do see a lower cost structure particularly in some of our payroll benefit areas that were spread across the higher operating base of the company so that we anticipate that there's a good opportunity to maintain margins in that area and then it it'll be a mix in the business question.

So, the, the kind of the higher end of the target of 8, you know, between 8 and 8.5, that seems like that's sustainable? Is that kind of how, the read that we should take?

We haven't led you to, we're not going that far in terms of drawing a conclusion, no.

Okay. Thank you.

Clearly, we'd like to target that though as we're reminded constantly here.

(Operator Instructions) And we'll take our next question from Erik Olbeter , Stanford Financial.

Yes, hi. Just quick follow up on the investments you guys plan to, you plan to make in the MSM unit. How much just on a, are we talking about in some dollar terms should we expect is going to be sort of drawn into the unit and do you expect this to just to, to be spread over the third quarter or the fourth quarter?

We cannot answer that precisely at this point in time. It depends on how they ramp up the number of cases. They have a requirement to do additional cases. Indeed, we have meetings scheduled with them as we speak to understand what the requirements are and, until we get that definition, because they still have this huge backlog, as you know. And then it depends on when we sell the units.

Okay, so it's related to the number of cases they actually throw back in?

That's correct. They, the number of cases, the type of cases and what they're asking people to do.

But...

Again, we are responding to what their needs are. It's a growing need, but again, our focus is finding a way to sell this entity.

Understood. Thank you very much.

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