ManTech International Corp (MANT) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the ManTech fourth quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. Mr. Cormier you may begin your conference.

Thanks. Welcome to ManTech International Corporation's fourth quarter 2005 earnings conference call. And again, we thank you for joining us today. My name is Joe Cormier and I'm Vice President of Mergers and Acquisitions and Investor Relations. Leading today's call for ManTech is George Pedersen, Chairman of the Board and Chief Executive Officer; Robert Coleman, President and Chief Operating Officer; and Kevin Phillips, Corporate Vice President and Chief Financial Officer. In our prepared remarks, George will cover industry and budget trends as well as strategic direction for ManTech; Bob will touch on our operational highlights; and Kevin will review our financial performance.

Before we begin our discussion it's important that we remind you that on this call we will make statements that do not address historical facts, and lots of 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 indentified 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 Forms 10-Q and Forms 8-K. Also, we undertake no obligation to update any of the forward-looking statements made on this call. Now I would like to turn the call over to George Pedersen. George?

Good afternoon and thank you for participating in today's call. I'm very pleased to report another strong quarter for ManTech International. As you saw from our press release we continue to drive solid revenue growth while seeking an increase in our operating margins which translated into exceptional earnings per share results of $1.60 from continuing operations for the year. These results culminate a four-year period since our IPO in February 2002 over which time we have grown EPS at a compounded annual growth rate of 22%.

2005 was a strong year operationally for ManTech. Not only did we deliver 18.5% overall revenue growth, but we saw an increase in our operating income and diluted EPS from continuing operations, which grew by 23.2 and 24% respectively. As you are all aware the fiscal year 2006 DOD Appropriation Bill was not signed into law until January 30. We noted during our last conference call in November that the longer the continuing resolution was in place the more our fourth quarter results would be affected. As a result of the delay, the normal level of ODC purchases were not completed in the fourth quarter and several programs saw slow ramp-ups in spending. It had a small impact and Kevin will provide further details.

We are pleased at the level of appropriation funding of 453 billion and the base bill and the anticipated supplemental appropriations of 120 billion which will continue to provide funding in areas which stress defense of the Homeland as well as fighting the war on terror. This is important to both our country and to our company. 50 billion of supplemental appropriations have already been approved and the President submitted a request for the additional 73 billion last week and it is being processed. The QDR provides similar foundations that our future needs of defense spending and from our perspective continues to validate ManTech's decision four years ago to focus on the higher growth segments of our marketplace, particularly intelligence and high-end defense.

Another indicator of our current strategic position is our second consecutive quarter of record contract awards. We won 775 million of contract awards in the quarter, bringing our total annual bookings for '05 to 1.94 billion, the highest in the history of our company. We have now reached the 1 billion revenue level as a result of our focused organic growth and acquisition strategy. Through the effective deployment of our capital we have driven rapid EPS growth and currently have a strong balance sheet from which to embark on the next phase of our growth. Moving ManTech to 2 billion and beyond.

Our new strategic plan calls for us to use our established growth method of focused organic growth as well as completing significant strategic acquisitions. To that end we continue to seek out acquisitions that expand our customer reach, broaden our capabilities, place us in important geographical locations, and augment our highly technical work force. We have ample financial capacity to continue to grow, both organically and to acquisitions as we have successfully proven in the past. And we have an experienced management team in place to accomplish our goals.

In addition to our outstanding financial results we had many operational highlights which demonstrate the critical roll ManTech plays in supporting our customers missions both at home and abroad. Bob will touch on a few of these. We have growing markets in which to deliver our services, excellent relationships with our customers and over 6,000 employees dedicated to our customers critical missions in 41 countries around the world. I believe our solid fourth quarter and 2005 results demonstrate our success. We intend to continue executing in support of our nation, our customers, our employees, and our shareholders, and we intend to continue delivering strong focused growth, and with that I turn the call over to Bob Coleman.

Thank you, George. We are very pleased with the progress our company has made this year. We consistently delivered solid financial results acquired and integrated Gray Hawk systems and delivered a record amount of contract wins positioning us for another great year in 2006. As you saw from our press release fourth quarter revenues came in at 261 million with operating margins of 9.5%, full year revenues were 980.3 million with an operating margin of 8.6%. Overall revenue growth for the quarter totaled 16.1% with 10% coming organically. Organic growth for the quarter was impacted slightly by ODC delays that have shifted into '06 and ramp-up on several previously awarded contracts. For the year we had overall revenue growth of 18.5%, 14.4% coming organically.

With regard to our bookings, we posted our second consecutive quarter of record contract wins totaling 775 million. Contract awards for the year totaled 1.94 billion, representing an overall book to bill ratio of two times our annual revenues. I would like to note that even though 2005 was a heavy recompete year, which contributed to the large bookings number, 50% of our bookings came from new business wins. With our recompetes now secured we will continue to focus on market expansion for 2006 and beyond.

Our qualified pipeline stands at over 7 billion with a number of large proposals outstanding and expected to be awarded within the next 12 months. The successful awards over the past several quarters have contributed to strong growth in your backlog which grew to 2.34 billion up 43.5% from December 2004. Drilling down a bit deeper into our 2005 awards, one of our key goals was to target, capture, and win four opportunities in excess of 100 million. I am pleased to announce that we exceeded that goal winning 5, $100 million plus opportunities. These opportunities make up over 900 million of our 1.94 billion in bookings for the year.

As we announced in early January we were awarded a $300 million subcontract to support the Army and it's efforts overseas. This contract was awarded on December 30, 2005 and it was a great way to end the year as we did not expect the award until January 2006. We are still in the early stages of this effort. We are currently funded through March and we expect incremental funding to come shortly. This contract has the potential to drive the substantial amount of revenue for our company and we look forward to maximizing that potential as we become more engaged on the effort over the next several months. This is a great win for ManTech and we are extremely proud to support the Army on this mission critical contract.

Based on our recent wins and our strong business development pipeline we are forecasting first quarter revenue of 270 to 280 million. This implies a 24 to 29% overall growth with a 15 to 20% organic growth rate. We are forecasting full year 2006 revenues of 1.145 to 1.175 billion, which represents 17 to 20% overall growth and a 13 to 16% organic growth rate.

As we closed on 2005, we completed the consolidation and functional realignment of seven of our operating units into four major areas focusing on information technology, security and mission operations, defense services, and space systems. This realignment will provide our customers with better access to the full depth and breadth of capabilities that ManTech has to offer, provide new and enhanced career opportunities for our people, and will improve our competitive position in our target markets. We also expect to achieve some cost synergies that will help us to continue to improve our margins as we work on driving them towards the higher end of our guidance range. We look forward to leveraging these newly aligned capabilities to drive new business wins in 2006 and beyond.

As we have previously discussed the labor market in our industry is very tight, especially for our high end intelligence and defense work. With 75% of our employees holding security clearances and 445 open requisitions, recruiting and retention continues to be a mayor focus for the Company. As many of you are aware we initiated a unique recruiting campaign designed to inform potential employees of the challenging and high tech work that ManTech performs. The customers we support and the exciting career opportunities that our company has to offer. Since we initiated the campaign which involves the giveaway of two BMWs we have seen substantial increases in traffic to our career website and greater attendance at career fairs. This is translated into an overall increase in the number of new hires per month and we believe a greater awareness throughout the cleared employee community that ManTech has great opportunities for employment. While the recruiting campaign has born success our focus on reducing turnover is also showing signs of progress. Our annualized turnover rate has declined by 2% since the third quarter.

In closing, 2005 was a solid year of performance for ManTech which saw continued business momentum and recognition of our commitment to National Defense, intelligence, and Homeland security missions in the form of awards. Several examples include, the John Potter award from the Defense Intelligence Agency, the Directors Team award from the National Reconnaissance Office, the NASA Contractor of the Year award, and we are also proud that our Chairman and CEO, George Pedersen was selected for the National Defense Industry Associations prestigious James Forrestal award for outstanding industry leadership. We continue to execute on our goal of becoming the premier provider of national security solutions within the intelligence, defense, and Homeland Security related community. We will continue to focus on driving strong organic growth coupled with our strategic acquisitions that enhance our capabilities and extend our markets throughout 2006. With that I'll pass it over to Kevin to discuss our financial results. Kevin?

Thank you, Bob. And good afternoon, everyone. As George and Bob covered earlier we are pleased to report a solid financial quarter and strong year with continued growth in our operations as revenues grew to 261 million. Increasing 16.1% from last year's fourth quarter revenues of 224.7 million. Organic growth rate of 10% on a pro forma basis. Our organic growth rate is derived from pro forma revenues in the fourth quarter of 2004 of 237.2 million which includes fourth quarter 2004 revenue from Gray Hawk and excludes revenue from METI, our environmental operation that was divested in the first quarter of 2005.

As George and Bob mentioned we were impacted by the continuing resolution from a revenue standpoint in the quarter as well as procurement delays due to the holiday season. RDC purchases, representing at least 6 million in revenue were delayed. In addition, a few contracts experienced delays in the ramp-up of staffing, which impacted our revenue dollars in the quarter. For the year, revenues grew to 908.3 billion up 18.5% with 14.4% coming organically over 2004. This growth was largely driven by our expanded activity in the intelligence and defense communities, the acquisition of Gray Hawk, and continued support of our nations efforts in Iraq and Afghanistan. We would remind everyone that prior period financial results have been recast for comparative purposes as a result of the discontinued operations accounting use for MSM. Our personnel security investigation business that was reclassified as a discontinued operation in the first quarter of 2005.

The contract revenue mix remains relatively unchanged during the quarter and year. In the fourth quarter 80% of our work was performed as a prime contractor with over 81% for the full year. Over 97% came from federal government sources both for the quarter and the year. Defense, intelligence, and Homeland Security related business comprised approximately 95% of our revenues both in the fourth quarter and full year. GSA scheduled revenue was down to 35.7% in the fourth quarter from 38.6% in the third quarter and 42.5% in last year's fourth quarter. For the year, our GSA scheduled revenue was 37.3% compared to 43.6% in 2004. This shift demonstrates the broadening mix of new contract vehicles utilized by our DOD customers.

The portion of revenue coming from contracts billed on a time and material basis was 63.9% this quarter while fixed price contracts representing 11.5% and cost plus contracts were 24.6%. For the full year, T&M representing 63% of revenue, fixed price was 10.2%, and cost plus was 26.8%. As Bob mentioned earlier, contract awards in the fourth quarter was 775 million, reflecting continued focus and success in our national security markets. This strong award activity translated into an expansion of our backlog as of December 31, to 2.34 billion up 43.5% from 1.63 billion in the previous year. Funded backlog was 467 million at the end of the fourth quarter. This was up from 439 million reported last quarter.

Along with this substantial revenue growth and award activity, we continued our focus on delivering solid margins. Our fourth quarter operating margin was 9.5%, which was up approximately 200 basis points from last year's fourth quarter. For the year operating margin was at 8.6% or 30-basis points higher than in 2004. The fourth quarter substantial margin improvement was due to several pickups which were primarily driven by revenue and margin gains from custom software development, and related services during the quarter, and lower than anticipated fringe benefits and indirect labor expenses. Adjusting for these items and some other smaller gains which are not expected to recur, operating margin would have been in the 8.7% band for the quarter.

Interest expense for the quarter was 700,000 and was reduced due to an adjustment in the fourth quarter from the termination of the Company's interest rate swap agreement in December bringing reported interest expense down to 315,000. Net income from continuing operations was up 33.6% for the quarter, to 15.8 million which translated into diluted earnings per share from continuing operations of $0.47 on 33.4 million fully diluted shares. Included in the net income for the quarter was a one-time gain of approximately 1.6 million in the quarter or $0.03 per share from the sale of the interest in the Vosper/ManTech joint venture announced in December 2005. The $0.47 represents 30.6% growth over last year's fourth quarter diluted earnings per share from continuing operations.

For the full year net income from continuing operations was 53.2 million, up 26.9% over 2004. Which translated into diluted earnings per share from continuing operations of $1.60 on 33.3 million fully diluted shares. Included in the full year net income are one time gains from the sale of METI in the first quarter and the sale of Vosper previously mentioned. These two sales combined accounted to $0.10 per share from the results of continuing operations. Full year EPS represents 24% growth over last year's diluted earnings per share from continuing operations.

I would like now to turn our attention to our discontinued operations. As stated in our press release the Company posted an adjustment to the carrying value of it's MSM subsidiary during the fourth quarter. For the quarter the Company recorded net losses of 5.4 million which included 1.3 million from MSM operations as well as a $4.1 million net loss relating to impairments on the carrying value of MSM's assets. We have made the adjustments to reflect MSM's current market value. The impairment resulted in a $0.12 impact to diluted earnings per share for the quarter and the year bringing the total impact from discontinued operations to $0.16 per share for the quarter and $0.27 per share for the year.

As you are aware, in the first quarter of 2005, we decided to exit the investigative services business and as a result, placed our MSM subsidiary into discontinued operations. During the first three quarters of 2005 we invested in establishing a capacity to support the OPM contract. Which began receiving cases in February 2005. Once this capacity was established we began marketing MSM. We recently entered into a non-binding letter of intent with a party to sell the business and the fourth quarter impairment of MSM's carrying value reflects the terms of the LOI. We continue to anticipate completing a transaction by the end of the second quarter. We expect to incur a net loss on MSM's operations of approximately 1.2 to $1.4 million during the first quarter of 2006.

Turning now to the balance sheet and cash flow statement. We continued to improve cash flows through management of our balance sheet. Our DSO's of 83 days from continuing operations as of December 31, was up 2 days from the third quarter and reflective of the slow down of cost to governments financial payment system during the holiday season. The operating margin improvements, the gain on the sale of the interest in the joint venture with Vosper, and our focus on various balance sheet items including receivables produced exceptional positive cash flows from continuing operations of $24.1 million in the quarter. We used this cash to pay down a substantial portion of our debt balance in the quarter. As of December 31, the Company had 5.7 million of cash and 42.5 million of debt. Down from 75.1 million of debt at the end of the third quarter. Bringing net debt as of the end of the year to 36.8 million. We believe the strong cash flow from operations reflects the financial health of the business and along with our available credit facility provides us ample flexibility to support internal growth and continue our acquisition program.

ManTech's strong balance sheet, contract awards, operational performance, and market positioning support our outlook for achieving continued growth. Initial guidance for the first quarter and full year of 2006, anticipates the continuation of strong trends in our national security business, bolstered by our strong contract wins in 2005. Again, our guidance does not include the impact of any discontinued operations, future acquisitions or divestitures.

Focusing on the first quarter guidance for revenues is in the range of 270 to 280 million reflecting a 24 to 29% overall growth with 15 to 20% coming organically. Guidance for diluted earnings per share from continuing operations for the first quarter is in the range of $0.38 to $0.41 per share. Based on weighted average shares of 33.7 million in the first quarter. FAS 123(R) expense is expected to impact our first quarter EPS by $0.02 and reduce our EPS from continuing operations to $0.36 to $0.39 per share. For the year our revenue guidance range is 1.145 billion to 1.175 billion which represents 17 to 20% total growth and organic growth of 13 to 16%. Guidance for diluted earnings per share from continuing operations for the full year 2006 is in the range of $1.66 to $1.76 per share prior to the effect of FAS 123 R. Which is expected to be $0.11 and reduces our EPS from continuing operations to a range of $1.55 to $1.65. This is based on weighted average shares of 34.1 million for the full year 2006.

The first quarter and full year guidance includes a 39.5% estimated tax rate and assumes interest expense for the first quarter of approximately 700,000 and 1.7 million for the full year reflecting our anticipated continuation of positive cash flow trends. Depreciation in amortization is expected to be 2.5 million per quarter or 10 million for the full year with capital expenditures of 2 million per quarter and 8 million for the full year. In closing, to affirm remarks previously made we are well positioned for continued growth supported by our financial capacity, and flexibility provided by our balance sheet. By the performance of our operations and the opportunity presented by the record amount of contract awards during the year, which reflects how well we are positioned in growing national security markets. And now, we would be pleased to take any questions you may have.

[OPERATOR INSTRUCTIONS] We'll take our first question from Tom Meagher with FBR.

Yes, good afternoon. First, Kevin, I think this is your first call as the permanent CFO if I'm not mistaken?

That's correct.

Congratulations there and good to have you on board. Really two questions for you. First on the ODC issue, as you see the ODC slip into 2006 obviously those are lower margin revenue, and I'm just wondering as you guys are looking at your financial projections and whatnot if you lose something on the revenue line because of the ODC slipping what impact do you see having in the first quarter in terms of those being included and then the result and impact on the profitability of the remaining revenue?

Sure. For the first quarter of 2006, the implied operating margin prior to FAS 123R is in the 8.2 to 8.5% range and this reflects our anticipation of a portion of ODC's that are driving revenue.

Okay. And then the other question I had, maybe, Bob, for you. Obviously more pressure is building for troop withdrawals from Iraq and so forth. Obviously the kind of work that you guys do there's a need for it and it isn't going away anytime soon, but do you have plan in place for redeploying those assets? I think last time I talked with you guys you had something like 150 or so people on the ground in Iraq and Afghanistan. What is the plan to utilize those folks once they do come back from overseas? Thanks.

Yes, Tom. You are right in that ManTech is a mission operations company, and as such we will continue to support our troops regardless of the theater of operation, whether it's Iraq, Afghanistan, or other areas throughout the world, we believe that we will move with our troops and support them wherever they go. In terms of risk mitigation and mitigating our exposure, we believe there's enough changes going on overseas along and the Bates realignments and NATO picking up some of the work as we transition to new areas that will create opportunities for ManTech to grow in those areas, and continue to build business over there.

Okay. Thanks very much. I appreciate it good quarter.

And we will take our next question from Cai von Rumohr with Cowen and Company.

Okay. The amount of ODC's that slipped is about 10 million the number?

No, it's approximately 6 million.

Okay. Okay. And could you comment a little bit on kind of booking opportunities that you are looking at now and kind of your recovery from the budget delays, how is that all going?

Cai we continue to have good opportunities in the pipeline that we are tracking. We have about 12 in there that are over $100 million and that's in our focus area. We believe that will increase as we continue to invest in our business development infrastructure and expand into other opportunities within the Federal Government, others GWACs and vehicles out there.

Okay. And can you give us any color on the number of bids you are going to submit in the first quarter?

We always have a large number of bids outstanding, Cai, but I don't want to get into the specifics of any of them or the dollar volume. Suffice it to say that we're as aggressive this year as we were in '05 and we will continue to be putting out a large number of bids as we move forward.

Okay. And on the M&A front. Any kind of color, George, you want to give in terms of your pipeline? What are you seeing opportunities?

We continue to look for the acquisitions. You know the market. We are hoping to find some. We have some ongoing discussions. The prices as always will be driven by the nature of the Company, how many clear people, are they in the Intel business, or what business they are in. We are comfortable with the prices we paid in the past and we are comfortable with the discipline we brought to this process. So I see the opportunities. I don't see prices getting totally out of hand in relation to value.

Okay. Great. Thank you very much.

We'll take our next question from Mark Jordan with A.G. Edwards.

I'd like to talk a little bit about the large $300 million contract, the one that was announced recently. Could you give a little more color as to the potential task that you will do under that program, and is that supporting, the -- what I would call the current mission or troops or the ground or is this more of a supporting of infrastructure in theater?

It's a combination of the two, really, Mark. It's supporting the infrastructure and direct support to the troops on the ground over there. It's great win for us, we're extremely pleased that the Army selected us to support them in this effort, and we look forward to seeing how this thing pans out as we get more engaged with the customer.

Okay. How are you finding staffing that opportunity. It seems relatively large. You said I think there was a $30 million in initial funding. Is -- are you able to staff and exploit the opportunities there?

Yes, Mark, as you are aware we have initiated a unique recruiting campaign a few months ago, and that's really paying off for us with regards to staffing this effort in particular. We have had some good success in the past few months bringing on new talent to support this effort overseas and we're optimistic that will continue over the next several months and we'll meet our staffing goals.

Final question relative to the supplemental budget. It looks -- the release said there was 7.1 billion that was allocated funding for state Intel and other federal agencies. Is there some special opportunity there on the Intel side for you, or is it too early to tell?

I think it's too early to tell. We have to see that money get to the program management offices and make sure they allocate it the way the Congress thought. As you know sometimes that changes. The key issue is that there is funding and that's the most critical thing.

Final question, quickly, your guidance for Q1 has a higher organic growth rate than you have for the full year implying a slowing as the year evolves in your model. Is that -- do you see it evolving that way? Or is that just sort of budgeting conservatism in the out periods?

It reflects the fourth quarter ODC flows into the fourth -- first quarter and the rest is our expected growth rate.

Thank you.

We'll take your next question from George Price with Stifel Nicolaus.

Hi, thanks very much. Congratulations on a good quarter.

Thank you.

First of all Gray Hawk revenues in the quarter?

Gray Hawk revenues in the quarter were 22.6 million which is consistent with the third quarter.

Okay. And in terms of the fourth quarter bookings, I know you gave it for the full year, but half of the business was new wins. How much of the fourth quarter bookings were new versus recompetes?

Well, as we mentioned earlier, this was a higher than average recompete year for us, so a lot of those recompetes were already in place so Q4 was a much higher percentage with regard to the total.

Okay. Okay. And what margins are implied in the -- I know you talked about this for the first quarter '06, but what margins are implied for full year '06 excluding FAS 123 given the EPS guidance.

Full year implied margins are 8.3 to 8.6%.

Okay. And last question, maybe if you could give us an update, maybe, on your view into the S3 competition. I think last time you mentioned that that was coming sometime this quarter. Is that still the outlook?

S3 is still in process, and we feel like we have our bases pretty well covered on that procurement we're prime in a sub on several teams, but what is important to note about that effort is that S3 is out of the acquisition command and our primary customer there is the communications and electronics command. While S3 would be a great win for us and we're certainly expecting some sort of award on there, it's not critical to our business in that area as our customer CECOM is already moving some of our logistic readiness contract work over on to other vehicles that we have at Fort Hood and Log World and other that exist throughout the community.

Okay. And-- and just last question, if I could just related to that, it looks like looking at the 10-Q that the third quarter growth there's a lot of internal growth driven by the Army CECOM business. What's the -- what's -- can you give us a little bit more flavor for the outlook for that in '06? I mean is that-- are we going continue to see that same kind of growth or moderation of that growth, and when?

It's Kevin, I think that we're going to see continued growth in supporting of the Army especially with the award of the Army support services contract. Specific to logistics material command, I think is the name now formally CECOM versus other commands that's going to vary depending on the mission we support.

Okay. Thank you.

We'll go next to Joseph Vafi of Jefferies & Company.

Hi, gentleman. Good afternoon, and good results.

Thank you.

I was wondering if we could just kind of circle back to these two large contracts here that were announced in the quarter, and just get a specific feel for the amount of potential recompete that was embedded into each one and then secondly, how much new business do you see -- or what kind of run rates do you think that you can see off of the contracts in terms of new business in 2006?

All right. The AVCOM, AVCAT contract was a recompete and that's a 10-year effort for us. In terms of the R2 contract for VSE 30 that were subcontract to VSE on, there's about 20 million to 30 million of existing work that's going to move over into that contract. We're optimistic that that -- we can use that vehicle to drive continued growth in '06, and while it's a two-year current task order -- that BPA that it's on runs for much longer than that, basically it's too early to tell right now how that will impact us but we'll keep you updated as we get more information and we work the effort and get better metrics on the performance.

Did you have a feel for given that you're -- I mean it's a very large contract win, and obviously you must be doing a ton of work relative to the overall contract that the prime has. Maybe if you could provide some feel for your level of influence in ramping business there as a sub versus, maybe on another deal where you might be a smaller subcontractor and you are kind of maybe potentially have less influence on how tasking works and interaction with the customer in getting tasks.

I think that all of that pretty much depends on the ramp-up, and how that goes over the next few months. We believe the Army has considerable funds to spend and, again, we'll just have to see how it looks as we get more engaged with them on this effort.

Okay. And maybe an update on the State Department contract and what is going on there, and how that's kind of been factored into your outlook for '06. Thanks.

Sure, well the protest is still ongoing and we'll keep you updated on our progress as we get more info on that. As you recall, we had to two options on that contract that carried us through April 30. Those options were both executed and we will be working the program through April 30. That has been factored into our guidance only through April 30.

Okay. And just remind us again what that run rate was on that contract.

That was about 25 a year.

Thank you very much, gentlemen.

Our next question come l come from Colin Gillis of Canaccord Adams.

Hi, yes, good afternoon everyone.

Good afternoon.

Could you talk a little bit about on the hiring front just what you are doing in terms of internal referrals and a little bit about what your needs are outside of the DC area?

In terms of referrals, probably a referrals are our absolute best source of new candidates that we have in the DC metropolitan area, and they have gone up since we put this campaign in place. Once people realized they may be able to win a BMW by referring more people to ManTech the number of referrals that we receive have gone up. So it's a great source of new hires for us. But we have also gotten a lot more activity as a result of that recruiting campaign with regard to traffic on our website, and attendance of career fairs, so it is paying off for us. In terms of outside the area, the demand is not as strong as the DC area in terms of people, so what you have is a lower turn overrate outside this area. And that is helpful, obviously, in that, recruiting does not need to be as aggressive.

Great. And then can you just comment a little bit about the pace of security clearances? Are you seeing that speed up at all?

It's remained about the same and it varies from agency to agency, but as far as I know the backlog still has not broken loose and don't expect it to anytime soon.

Kevin, just two quick housekeeping items. Can you just give us an update on the line of credit and also refresh us on how you account for IDIQs value in the backlog number?

Sure on the line of credit, we have a line of credit for $120 million that can expend up to 200 million through an core deep an feature. On the IDIQ's we only book under IDIQ contracts if we have work that is rolling under us that we can be assured will run through the IDIQ, so it's limited to what we have that's going to roll under the IDIQ when we consider a booking.

Great. Congratulations on a nice quarter.

Thank you.

Our next question comes from Ed Caso of Wachovia.

Thank you. If Kevin can give a little bit more clarification again on the -- what happened with the interest expense line and whether that change will carry forward into '06?

First of all the change will not carry over into '06. It was a a one-time event in the fourth quarter. As you recall, I think in 2001, there was an interest rate swap that was established that ended in December, and at the end of the -- at that interest rate swap we had a one-time adjustment that reduced our interest expense by about 400,000, again, that's not a carry forward activity.

Okay so you are looking more like 700,000 or so a quarter going forward?

We're looking at 700,000 in the first quarter and 1.7 million for the year based on our improved cash flow that we're going to get in '06.

1.7 million for the year?

Correct.

Okay. And the -- on the contract, again, where you are subbed the VSE you quoted 300 million is that your share? Or is that VSE's share?

We're expecting to perform the vast majority of the work on that contract. It was our share -- that's our share of the work.

Great. And can you -- one other question. Can you just get a little bit -- I know what it was. I calculate the backlog funded the total backlog every quarter and a year or so ago the funded used to run 27, 30% of your total backlog and now it's more like 20% of funded total backlog. I need you to help me out on why it's sort of a lower funded percentage.

It's a number of things. Obviously some customers are going into different contract vehicles and working to add incremental funding. Because of the missions we support sometimes there's more incremental funding than maybe in the past. In addition, I think that just the customer missions and the continuing resolution and the impact on it had a factor for this quarter. We do expect to have improvement but I don't want to say that that's going to roll it back up to the number that you've seen because some of the missions we support have more incremental funding associated with it.

Thank you.

Our next question comes from John Mahoney with BB&T.

Hi, guys, nice quarter. Just quickly, the one time gains on the sale of the UK operations, did I read that correctly, that's $0.03 in the quarter it has a regular tax rate?

That's correct.

And could you just comment about the -- I guess I'm a bit surprised and pleasantly surprised that the first quarter revenues are snapping back so strongly given the timing of when the budget was finally signed. And could you discuss kind of what your surprise level or how things are snapping back this quickly, obviously given your guidance?

No, there's no surprise level and we're fairly comfortable, given the awards that we had last year and the visibility and the transition and the timing of the ARDCs from Q4 to Q1. So I'm fairly confident that that's a good guidance range and I think it reflects on the strength of our business.

I think also, as that appropriation bill gets moved through OMB and goes down to our various customers, not immediately but you will begin to see far more contract awards.

Congratulations again.

Thanks, John.

[OPERATOR INSTRUCTIONS] We'll go to our next question from Erik Olbeter of Stanford Financial.

Yes, hey, guys. Quick just question on the operating margins. Can you go over just for us the operating -- the one time gains that you had there. Just sort of run through them. And did you say that the operating margin without those gains would be 8.7%?

That's correct. The 8.7 would be the range or where we were in the Q4 without these one time items. The fourth quarter had a couple of items in it, we had a software gain of about 600,000 that was specific to the quarter. In addition we had less indirect labor in our G&A than we anticipated. Basically more employees, indirect employees took vacation than we anticipated. And finally, as you go through the various fringe benefit lines, we incurred less expense in several fringe benefit areas than we expected in the fourth quarter to include holiday's and other components. So it's not any one thing is my point. It's just a--.

Right. Okay. Thanks. That's it.

We'll go next to a question from George Price with Stifel Nicolaus.

Hi. Just one or two follow-ups. The last question being one of them, but another question -- talking about the realignment into the four new business areas and the cost synergies that you're realizing there helping margins. Can you talk about maybe, one, how much of that is being reinvested versus being accretive to the margin? And maybe how that changed from last quarter your view of that into '06? Because obviously the margin range, I believe moving up from what, about 8 to 8.5 to 8.3 to 8.6 as you noted earlier.

Right. We do expect to get some margin improvement out of that as we consolidate staff and improve efficiencies within that infrastructure. But we also expect to be investing considerably in our business development infrastructure and building that area of the business over the next 6 to 12 months. So in terms of the margins I don't have an exact number for what that's going to provide but we're comfortable with the range we've put there.

Right. The combination of improved margins as well as the investment in the business development are used, along with the ODC close are used to come up with the margins we provided you.

Okay. And then just as a follow-up to the discussion around S3 and the CECOM business indicating that the client had already started moving some of the -- some of the business onto other vehicles. You mentioned Fort Hood and maybe a couple others that I missed, but could you clarify what vehicle specifically again, and maybe how much of that had been moved thus far?

Yes. In terms of the vehicles, I don't want to get into the specifics of the vehicles, but I think what's important for you to understand is that we do have a very large contract base at ManTech, we have over 200 contracts. That particular contract is in the process -- if you look at the commands, S3 comes out of the acquisition command. We're currently working in CECOM. The commands, while they can share vehicles, typically it's been our experience there's no mandate to use a particular vehicle and as a result of that CECOM wants to be in control of their own destiny, and they are moving the LRC work over to vehicles that they are comfortable with and are driven by their command personnel rather than acquisition personnel.

All right. Great, thank you.

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