ManTech International Corp (MANT) 2006 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the ManTech First Quarter 2006 Earnings Conference Call. [Operator Instructions] Mr. Cormier, you may begin your conference.

Thank you, Sheila. Welcome to ManTech International Corporation's First Quarter 2006 Earnings Conference Call, and we thank you for joining us today. My name is Joe Cormier and I'm Vice President of Mergers & Acquisitions and Investor Relations. Leading today's call from ManTech are 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 discuss our strategic positioning and future vision for ManTech, Bob will touch on our operational highlights for the quarter, and Kevin will review our financial performance.

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 “Risk Factors” in ManTech's Annual Report on Form 10K, filed with the SEC on March 10, 2006, and in ManTech's other public filings. Also, we undertake no obligation to update any of the forward-looking statements made on this call.

During this call, we will also refer to certain non-GAAP financial measures. The reconciliation of non-GAAP financial measures discussed during this call to the most comparable GAAP measures can be found in our press release, which is posted on our website.

Now I'd like to turn the call over to George Pedersen. George?

Good afternoon, and thank you for participating in today's call. I'm very happy to announce another outstanding call for ManTech International. As you saw from our press release, we continue to drive strong revenue growth of 27%, while seeing an increase in our operating margins to 8.7%. This translated into solid earnings per share, results of $0.41, from continuing operations, prior to the effect of FAS 123R during the quarter. Our EPS grew over 28% for the first quarter of 2005, where you exclude the one-time gain of $0.07 from our [Mehti] divestiture last year.

This strong performance continues to demonstrate the merits of our strategic plan, which we set forth prior to our IPO. The plan called for ManTech to transform our company from, at the time, a $431 million in annual revenue firm with deep Defense Department relationships into a pure-play, high-end intelligence and defense company, with revenues over $1 billion. To meet this goal, we have employed a disciplined and successful dual-track growth strategy of organic growth and strategic acquisitions.

Our organic growth has been driven by focused business development efforts, which continue to yield substantial business awards to ManTech, while our highly selective acquisition program has allowed us to see a force multiplier across the combined organization. We now see ourselves uniquely positioned to serve the demands of our customers in fighting the global war on terror, and to continue our growth to the next plateau.

Unfortunately, we don't see this as a short war, but rather a long and complex battle against a vast, asymmetric threat. Today, we face an intricate web of rogue threats which will be difficult to tackle. Not only will this effort be long in duration, but will require continuous focus on information technology improvements, and eccentric warfare issues to combat these threats. ManTech is well-positioned to meet the demands of our customers in providing actionable intelligence at the earliest point of consumption and as trusted relationships across the community to be called upon to deliver these solutions. Our consistent performance over these past several quarters leads us to support our position and gives us confidence in our ability to continue to deliver into future quarters and years.

From a budget and funding standpoint, the continuing resolution slowed the flow of funds in the fourth quarter of 2005, and into the early stages of the first quarter of 2006, but we continue to see strong demand for our services, which meets the critical needs of our customers' missions. We have seen growth in our funded backlog, which demonstrates the improvement and movement of funds to our customers during the quarter. We have ample financial capability to continue to grow, both organically and through acquisition, as we have successfully proven in the past. We continue to review and have discussions with potential acquisition candidates, but we continue to be very selective without -- with which companies strategically meet all of our requirements.

In closing, we have expanding markets in which to deliver our services, trusted relationships with our customers, and over 6,000 employees dedicated to our customers' critical mission in over 40 countries around the world. The strong first quarter 2006 results continue to demonstrate our success. We look to continue executing in support of our nation, our customers, our employees, and our shareholders.

With that, I'll turn the call over to Bob. Bob?

Thank you, George. We're pleased with the momentum we built in 2005 has continued into the first quarter of 2006. As George mentioned, ManTech is benefiting from the execution of our strategic plan and our market position in the high-end intelligence and DOD community. We continue to see strong end markets and increased demand for our mission-critical services. As you saw in our press release, first quarter revenues came in at $275.3 million, with operating margins of 8.7%, excluding the effects of FAS 123R. Overall revenue growth for the quarter totaled 26.6%, with 17.6% coming organically. Our strong results were driven by contract wins in our classified customer base and Army support activities.

Bookings were strong and totaled over $290 million for the quarter, with new business wins accounting for approximately 50% of the total. Our book-to-bill ratio is a solid 1.1 times revenue, and we continue to build momentum on the heels of our record contract awards in 2005. Over the last 12 months, we have delivered a book-to-bill ratio of 1.8 times, which will drive our revenue growth throughout the remainder of this year and beyond.

Total backlog stood at $2.24 billion, a slight decrease from $2.34 billion in the previous quarter and reflects an adjustment for two ManTech contract awards that are currently being protested by an unsuccessful bidder. We will re-enter these contracts into our backlog calculations once these protests are favorably resolved.

Funded backlog grew to $519 million, or over 32% from March, 2005, and largely reflects the passage of the 2006 federal appropriations bill in late January. The qualified pipeline stands at $5.7 billion, and we remain optimistic about our continued growth in our national security market space.

I want to briefly discuss some of our recent contract awards and their strategic importance with regard to ManTech's long-term position and support of the Army transformation initiatives and the overall DOD defense infrastructure.

ManTech has recently been awarded a number of important contracts to support the increased demands and expanded role of our military at home and abroad. These contracts, which have large ceiling values, long durations, and broad scope of work, create the foundation for the DOD's new transformation requirements. They also provide a strong indication of the amount of long-term work required to support the military's infrastructure and operational programs. Even in the aftermath of high intensity hostilities, our government has characterized the global war on terror as the “long war” and we believe that they will continue to rely heavily on outsourcing, as they have in the past, to provide continuity of operation, infrastructure connectivity, and operational support for the expanded mission, daily sustainment, and counter-insurgency activities taking place around the globe. ManTech is prominently positioned to support the DOD in this environment, as we have in the past, and continue to on U.S. and coalition programs, such as the Partnership for Peace, Combined Endeavor, African Endeavor, and others that represent our government's long-term commitment abroad.

The demands on our military are quickly changing, as is the technology and systems required to support them. We are extremely honored to support our military in these activities, and we look forward to a continued partnership as the demands on our military increase.

Based on our recent wins and strong business development pipeline, we are forecasting second quarter revenue of $285 to $290 million. This implies 19 to 21% overall growth, with a 13 to 15% organic growth rate. We have raised our full-year 2006 revenues by $5 million on both the bottom and top end of the range. The new annual revenue guidance is 1.15 to 1.18 billion, which represents 17% to 20% overall growth and a 14% to 17% organic growth rate.

We have successfully completed the first stage of the branding and recruiting campaign that we discussed on the last call, and I would like to congratulate two ManTech employees, [Joel Folkhertz] and [Charles Hardy], on winning the two BMW automobiles that we gave away. We thank them for their contribution to ManTech and wish them well in their new cars. This campaign was a tremendous success and has resulted in an increased awareness of the career opportunities ManTech has to offer and an overall increase in the number of new hires per month.

While the recruiting campaign has borne success, our focus on reducing turnover is also showing signs of progress. Our annualized turnover rate declined again in the first quarter to 17%, and we will continue to make turnover a priority going forward.

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 strategic acquisitions that enhance our capabilities and extend our markets throughout 2006.

Before I turn it over to Kevin to discuss our financial results, I wanted to mention that last week, George Pedersen was presented with the Lifetime Achievement Award from the Association for Corporate Growth. This award is given annually to individuals that have contributed significantly to the region’s corporate growth over a number of years. We congratulate you, George, on this very well-deserved honor. Kevin?

Thank you, Bob, and good afternoon, everyone. As George and Bob covered earlier, we are pleased to report a strong financial quarter with continued growth in our operations, as revenues grew to $275.3 million, increasing 26.6% from last year's first quarter revenues of $217.5 million, for an organic growth rate of 17.6% on a pro forma basis.

Our organic growth rate is derived from pro forma revenues for the first quarter of 2005 of $234.1 million, which includes first quarter 2005 revenue from Gray Hawk and excludes revenue from Mehti, our environmental operation that was divested in the first quarter of 2005. This growth was largely driven by our expanded activities in the intelligence and defense communities, the acquisition of Gray Hawk, and continued support of our nation's efforts on the war on terror.

For the quarter, over 97% of our revenue came from federal government sources -- defense, intelligence, and homeland-security related business comprised approximately 95% of our revenues. In the first quarter, 75% of our work was performed as prime contractor. The proportion of revenues coming from contracts billed on a time-and-material basis was 64.3% this quarter, while fixed price contracts represented 9.9%, and cost-plus contracts were 25.8%. As Bob mentioned earlier, contract awards in the first quarter were over $290 million. Our continued strong awards activity reflects our success in expanding within our national security markets.

This awards activity translated into backlog as of March 31st of $2.24 billion. Funded backlog grew to $519 million at the end of the first quarter, up 32% from $392 million reported in the previous year. On a sequential basis, funded backlog increased by approximately 11%, from $467 million in the fourth quarter of last year, as the passage of the DOD FY 2006 appropriations bill increased the fund flows from our customers.

Along with the substantial revenue growth and award activity, we continued our focus on delivering solid margins. Our first quarter operating margin, excluding the impact of FAS 123R, of 8.7% was over 60 basis points from last year's first quarter. The higher margin was primarily due to a strong component of direct labor generated revenue, reduced G&A costs as a result of efficiencies, gains through our systems integration, and a slower ramp up in spending on our business development organization, which we expect to occur in future quarters.

Excluding the effects of FAS 123R and a $2.3 million one-time, after-tax gain from the sale of Mehti in 2005, net income from continuing operations was $14 million, up 33%, which translated into diluted earnings per share from continuing operations of $0.41. This reflects a 28.1% growth rate, compared to last year's first quarter, after excluding a $0.07, one-time gain from the sale of Mehti.

Turning now to discontinued operations, we noted last quarter that we had entered into a non-binding letter of intent with an interested party. We continue to actively work towards a transaction with that party, and are in discussions with several other interested entities. In late March, the Office of Personnel Management issued a new, multiple-award solicitation for field investigative services, with an expected award date in late June. Our completion of this divestiture has been delayed and the extended time of the transaction into the second half 2006 as the potential impact of this procurement is evaluated by interested parties. We expect to incur a net loss on [MSM's] operation of approximately $1.2 to $1.4 million during the second quarter of 2006.

Looking at the balance sheet and cash flow statement, you will note that our debt borrowings as of March 31st increased approximately $10 million from year-end. This was due to our strong revenue growth and receivables days outstanding for the quarter rising to 86 days, up three days from the fourth quarter. The increase in our DSOs was a result of delays in some large payments, in the $10 million range, which were expected in late March but arrived in April, and from increased receivables, as we fully integrated Gray Hawk Systems into our financial systems, effective January 1st. The slower DSO collections, combined with additional payroll and bonus-related cash outflows, impacted our cash flow from continuing operations for the quarter. For the quarter, these issues, related in the use of $10.1 million of operating cash.

As of March 31st, the Company had $4.8 million of cash and $52 million of debt. The Company had strong collections in April and we’ve already recovered the operating cash flows lost in the first quarter. We expect strong cash flows from operations throughout the remainder of 2006 allowing us to further lower our debt levels and support internal growth.

As a reminder, our cash flows will be positively impacted by over $5 million annually as a result of the benefits of the 338H-10 elections employed in our strategic acquisitions.

ManTech’s contract awards, operational performance and market positioning support our outlook for achieving continued growth. Initial guidance for the second quarter of 2006 anticipates the continuation of strong trends in our national security business. Our guidance does not include the impact of any discontinued operations, future acquisitions or divestitures.

Focusing on the second quarter, guidance for revenues is in the range of $285 million to $290 million reflecting a 19% to 21% overall growth with 13% to 15% coming organically. Guidance for the diluted earnings per share from continuing operations for the second quarter is in the range of $0.42 to $0.44 per share or $0.39 to $0.41 after the impact of FAS 123R expense based on weighted average shares of 33.8 million in the second quarter. For the year, we have raised our revenue guidance range to $1.15 billion to $1.18 billion which represents 17% to 20% total growth and organic growth of 14% to 17%.

We have raised our guidance range for diluted earnings per share and continuing operations for the full year 2006 to a $1.72 to $1.80 per share, or $1.62 to $1.70 after the expected ten cent impact from FAS 123R. This is based on weighted average shares of 34 million for the full year 2006.

The second quarter and full year guidance includes a 39.3% estimated tax rate and assumes interest expense for the second quarter of approximately $600,000 to $1.8 million for the full year reflecting anticipated positive cash flow trends.

In closing, to affirm remarks previously made, we are well positioned for continued growth, supported by our financial capacity, the flexibility provided by our balance sheet, by the performance of our operations and the opportunity presented by the recent amount of contract awards which reflects how well we are positioned in growing national security markets.

Now we will be pleased to take any questions you may have.

Thank you. [OPERATOR INSTRUCTIONS] And we’ll take our first question from Cai von Rumohr, Cowen and Company. Please go ahead.

Yes. Thank you very much. Could you give us an update on the two protested awards?

Are you talking about the protests that are against ManTech that we took out of backlog?

Yes. Exactly.

Yes. It’s two new awards that we’ve had and they total about $88 million in total. I don’t want to get into the details of the contract as they are being protested, Cai, but we’re comfortable with our position on them and we’re optimistic that they’ll be favorably resolved.

Any timeframe you can give us?

You know it’s difficult to tell having been on the other side of this. These things can drag on for quite some time so I think what’s important is that they are new contract awards for us and hopefully they’ll get resolved over the next several months; but, again, you can’t predict on these things.

Okay. It looks like your bid pipeline of 5-7 came down a bit from the fourth quarter. Should we read anything into that or is there still a fair amount of things that are coming up for near-term decisions?

Yes. I’m not too concerned about that right now. As a matter of fact, that’s already on its way back up for Q2. We continue to see a large number of opportunities out there. We’re currently tracking about 16 in the pipeline, Cai, that are about $100 million and larger; and, again, I’m not worried about it. I think there’s plenty of opportunities and as we continue building that business development infrastructure which we are, I expect to see that increase significantly.

Great. And the last question, you had mentioned that one of the profit margin lines in the quarter was delay and build-up of business development. Could you comment kind of when you expect that to ramp, how much and any kind of color on that?

I’m sorry, Cai, could you repeat that question?

Yes. I think one of the comments that I saw on why the margins were so good was a delay in the build-up of business development that would come later in the year. Can you give us a little bit of color of kind of when and how much?

Hi. It’s Kevin. One of the primary drivers for the margin was actually the component of direct labor as proportion of our total costs in the revenue drivers. We have been making investments as we said in the business development function. We have been hiring people and we will continue to do that in order to make sure that we continue our growth trend. But we don’t have color on how much we’ll hit in any given quarter or what impact it will be but it is factored into the range of operating margins that we provided in our guidance.

Thank you very much.

And we’ll take our next question from Tom Meagher, Friedman Billings Ramsey. Please go ahead.

Thank you. Good quarter. Could you talk a little bit about, especially in light of your MSM experience, this thing that came out last week with the defense security service said that they were going to stop clearing contractors. What’s your understanding behind that? Is it a political/funding kind of thing that’s going to go away pretty quickly or do you see it having a longer-term impact?

I think it’s a very good thing because it highlighted the whole issue and it’s energized a whole bunch of folks on the hill. I think you know Tom has already, Tom Davis Chairman of the Reform Committee, has already written a letter to the Pentagon. I know that John Warner and Pat Roberts Chairman of the Senate on Service Committee and Intelligence Committee are working on this. They are allegedly short a certain amount of money. We don’t know what that is. The Congress has been quick to say that they are going to provide these additional funds; but I think the main thing is it will force a review, again, of how they do this whole process and I see it as nothing but good news because it’s going to focus on the issue.

Okay. Now would this affect the transition work that was going from DSS to OPM? In other words, would OPM get the money or would DSS be the recipient?

It’s hard to know. I think different agencies have the right to send their requests for clearances to either one of the agencies and/or they can send it directly to the NRO, the NSA, the CIA - there’s a little bit of mystery in that and I don’t think that’s the issue. I think it’s where this funding goes and as I say I’m very pleased to have seen this because it’s highlighted the issue which means it will be fixed and fixed quickly.

Okay. Thanks very much. I appreciate it.

And we’ll take our next question from George Price, Stifel Nicolaus. Please go ahead.

Hi. Thanks. One thing I just missed - I apologize. What was the revenue from Gray Hawk, Kevin?

Gray Hawk has been fully integrated into the other operations effective January 1. It’s not something we report or will report externally only because we don’t track it internally as a stand-alone component. But we are pleased with the performance and the amount of staff and capabilities that it brings.

Okay. And George, let’s hear your thoughts maybe on what you’re hearing on the supplementals and how that’s impacting your work and maybe work in general particularly on the Army side?

The supplement, I believe, is $65.3 billion. It’s been passed in the House, as you know, and I’m told that there’s two more days of hearings on the Senate side and it will be passed. It also includes additional monies in [inaudible] and I think there’s $4.2 billion for the State Department. I don’t know whatever else is in there. But I am told as of today that this issue will be resolved and the appropriation, the supplemental will be passed. It is my own belief that’s not the last supplemental you will see this year.

And I guess there’s some conjecture that that second supplemental, the process might be a little bit more acrimonious. Any thoughts on that?

I don’t know how things could get anymore acrimonious on a [inaudible]. You’ll have to explain that to me, sir. But I think at the end of the day when it comes to defense and intel, as you know well, that’s the one area that the cooler heads go into a room and they take care of those issues. For all the reasons, this is a real war and those folks know that.

Okay. And last question, maybe just if you guys could talk a little bit about the M&A pipeline. You talk about being selective. Has the number of attractive targets -- is that thinning out at all, where do valuations --?

No. They’re going up actually. We’re seeing more and more candidates. The books come in here. We continue to focus on those opportunities that we have a personal relationship as opposed to waiting for book to come in. We have ongoing discussions at this point in time, I think it’s 4 to 5 different organizations. You can never judge these things as you know well. You think you’re making progress and then somebody changes their mind. We expect to do one because our cash flow, well, you haven’t seen April’s report, but our cash flow is very, very positive and we have money ready to go do some. And I think we will, sir.

And on valuations? How are things trending?

It’s pretty much the same. I think this industry has well recognized is where the growth is and the sector we’re in, in particular is where the growth is and those folks that are offering their firms up for sale are well aware of that. But I think the margins are there. The cash flow is there and, as we have before, we went on models and we don’t do anything foolish.

Great. Thanks for the time.

And we’ll take our next question from John Mahoney, BB&T Capital Markets.

Hi guys. Great quarter, sigh of relief given some of the other reports you’ve had earlier this week.

Thank you, sir.

I’ll ask the obvious question and could you give us -- what is it that you think - and I’m sure you’ve watched some of the other earnings releases and conference calls and maybe you didn’t have time - but what difference for you guys that really helped you kind of avoid some of the problems. And again, we’ve heard a lot about funding issues but it doesn’t seem to have had any impact on you. Could you kind of elaborate?

From the 50,000 foot level, as you know four years ago we focused on the high-end defense and high-end intel because we believed that’s where the funding is absolutely solid. And some of our competitors are in slightly different markets but I think, Kevin, that number is now 95% comes from this market and that’s from the 50,000 foot level I think why we have strengthened potential growth. I also think Bob and his team have done a very good job on focusing the new business development efforts into areas that are producing success. Bob, why don’t you comment a little more on that?

Yes. I think as George mentioned a lot of it - the positioning, and the mission support activities of our customers - you know, there’s I think a limited number of companies that provide this type of support. The missions are changing for a lot of our customers. Their roles are expanding and there are opportunities for us to grow and support those changing missions and transformation activities. Again, I think it’s the result of the close mission support that we provide those customers.

You know well, the battlefield and the intel side of it, the collection aspects for the whole terrorism issue, that’s where the money will go and when you hear reprogramming, what normally happens is the reprogramming goes to the areas where we’re directly involved.

Thanks a lot. Congratulations.

We’ll take our next question from Joseph Vafi, Jefferies & Company. Please go ahead.

Good evening, gentlemen. And great results this quarter. Maybe we can talk a little bit about some of these contract wins that have been announced recently. Maybe we’ll start with the $20 billion IDIQ, just some color form your perspective on your teams; because I know you’re on more than one team. And how you think your team stacks up and maybe I guess when you might start seeing some passing or when you might expect to be bidding on some tasking coming off of that vehicle.

Yes, Joe. It’s Bob. Those vehicles are good wins for us and we are sub on a number of them and I think it’s too early to tell for us right now how that tasking is going to play out. But we do know that, as I mentioned in the script, that these vehicles lay the foundation for the DOD transformation and military expansion activities. We believe we’re on these teams and provide the kind of support that is exactly in line with what these contracts serve. Keep in mind they are kind of broad in scope so they support everything from the war effort to these transformational and infrastructure rebuilding activities. And the ManTech component of those contracts is well within the scope of our historical performance and capabilities we provide our customers.

In terms of the tasking and how it’s going to hit, obviously we have some things factored in; but we don’t have enough history on those contracts right now to predict when they’re going to be coming out.

Right. And so --

Obviously the wins for us are all good news.

Yes. Sure. On the big one - on the ITS II which is clearly IDIQ, the tasking that ultimately comes off of that and if your team hopefully wins its fair share and maybe a little bit more, would we consider all of that to be incremental new business to the Company or in the kind of vagaries of various contracts and stuff would any of that be seen as renewal business?

I think by far the majority of it is new business; now as has happened in the past, as contracts are changing, are expiring, we expect some work possibly to move over to those; and those arrangements, of course, have been negotiated prior to joining those teams. But for the most part we expect it to be new business and, as you know, the [IPEZ] II contract is a communication support contract right in our lane. So we are well-positioned.

We always make our customer aware of new awards like that; so if it’s an easier vehicle for them to use we welcome the funding no matter what contract they use.

Sure. That’s makes sense, George.

But it is, as Bob said, it’s all good news.

Right. And then on the - I guess it’s smaller, but it’s still a big contract - the crew contract with the Army. I know part of that is new and part of that is renewal. I was just trying to get a sense for the new business there. It sounds like looking at what’s going on it’s not something we’re really waiting for to get funding on or to ramp and that’s actually going to be going on here in the next couple of quarters. Am I right there?

Yes. That’s correct. Keep in mind a large percentage of that is existing business and we’ll see that over the next several quarters.

Okay. And then maybe we could -- I know one of the previous questions talked about some of the protests against ManTech. I was wondering if we have an update on the other protest the other way around?

Yes. The current contract with the State Department has been extended through the end of May. And we have not included anything in our guidance beyond that period. On April 24th we were notified that [GIO] denied our protest and we continue to work with the customer to resolve this issue. So we’ll keep you posted it on it as we get more information.

Okay. That’s fair enough. And then finally -- we’ve heard a lot from some of the other peer companies on recruiting and retention. I know you mentioned your turn-over was down a bit. I was wondering if we could get maybe some color on the strategy the company has in place more than what you have now, maybe in terms of diversifying -- I guess people have been talking a little bit about diversifying a little more geographically with their employee base and if you could kind of refresh us on what percentage of your employees are northern Virginia-based versus other geographies around the world and how you see that resource issue playing out here a little bit more?

Yes. Over 50% of our employees are in the D.C. metropolitan area. Fortunately, ManTech does have pretty diverse locations across the U.S. and interestingly enough what we’re seeing is not only do you see some of our competitors maybe looking to diversify their geographic displacement but our customers are looking to do the same and many of them have reached out to us to help them with this transition and to support those efforts. So I think it’s a good news story that our customers are moving in that direction and they know about our broad geographic presence and are calling on us to support them.

As you know we’re in about 30 states and we have from time-to-time examined the concept of where possible, where the employees don’t have to be in close proximity to a customer, can we move employees to a less costly area? Can we move into an area where it’s easier to recruit or in close proximity to a university? So we use every one of those techniques we possibly can.

You know, obviously Joe, employees are still a limiting factor of our growth. So we’re confidently working on trying to drive new recruits into the Company and reduce turnover. We talked about this, I think, on the previous quarter but we’ve hired external firms to come in and assess our workforce, identify where some of the issues may be with turnover and we’re working to resolve those. I think we’re making progress. We’re down -- turnover is 17% which is down about a point from last quarter. And then about 3% from the quarter before that; but I think it’s -- I’m not too excited about that yet; but we’re moving in the right direction.

Okay. And do you have an approximate headcount exiting the March quarter?

It’s over 6,000 but we tend to not get down to details. It’s over 6,000 people.

Okay. Right. And then just finally, I know that some of the other peer companies were seeing some tightness in the ODCs or their pass-throughs. I was wondering if you had any comments on that relative to your business?

Yes. I think the entire industry is going to see that and it’s built into our out-quarters expectations that we may have or will have a higher portion of our direct calls coming through ODCs or subcontractors. There is going to be compression but, again it’s built into our overall estimates.

Joe, I think some of that will come down to how the appropriation process winds up. As you know well, they tend to come through at the end of the fiscal year and try to take what they call sweep-up money and perhaps use it to buy material costs or whatever. I think there will be money left in that sweep-up process and I think they will be very disciplined and I don’t see a decline in that type of thing.

Very good. Good quarter, gentlemen. Thank you.

[OPERATOR INSTRUCTIONS] And we’ll take our next question from Tim Quillin, Stephens, Inc. Please go ahead.

Good afternoon. Great quarter and I only say that when it’s true. Your guidance seems to imply that margins might go down for the rest of the year relative to the first quarter. And maybe we’ve hit on a couple of the issues with the investments in business development, build-outs of your bid and proposal staff and maybe there’s some assumption implied there about ODCs for the remainder of the year relative to your direct labor content in the first quarter; but can you just talk about what your assumptions are there, please?

Yes. We do have assumptions that our ODC and subcontractor mix in the out-quarters will become a larger proportion of our overall direct costs and driving or revenue. We do continue to plan on investing in business development proposal activity and recruiting activity. I’m not giving you the specific numbers on each of those drivers but we believe that we’re going to continue to see that and that’s going to drive down the margin compared to the first quarter a little bit or may drive it down; but we’re fairly comfortable with the range that we have. I think we have for the full year an operating margin range of a range of about 8.5% to 8.7%.

Okay. That’s helpful. And would you be able to quantify in some way your - how your support work in Iraq has ramped up or is ramping up right now in terms of maybe the number of employees in the theatre of operations or in some other way just give us a sense of how that business is growing and how important that is to near-term growth?

Actually, Tim, it’s Bob. Less than 4% of our work force is in Iraq and Afghanistan. I think we have somewhere around 160 in Iraq which is up slightly but not significantly from the previous year and we have a fairly large number in Afghanistan and I think that’s remained relatively consistent. The growth is really related to, again, on some of these large contracts I think there’s a lot of opportunities that support the infrastructure and transformation activities that we are serving for them.

I think the issue is it is not purely people on the ground. It’s the technology we are putting together racking and stacking getting it to them. Also, we support the operations in Iraq and Afghanistan and surrounding countries. We’re in the three “stans,” we’re in Turkey, where else are we? We support them from our operations in Germany. But we just see a continuing demand in that whole area for the obvious reason that you know well.

Great. And then should we expect -- a $300 million Army support contract announced a few months ago, I think it was initially funded at $30 million and it was fairly uncertain how that would grow. Do you have a better sense of what that might look like over the next couple three quarters?

It’s Kevin. The first quarter flow was okay but it was not that high or that heavy and the funding, we’re getting increased funding, but the usage and the timing of the usage from the customers is still variable. We’re still trying to understand that. It is not as high as we had expected to date and so we built that into our growth range but I think they funded more than the $30; they’ve gone above 70, 75-plus but the usage from the customer is still an unknown.

Great. Thanks, gentlemen.

And we’ll take our next question from Cynthia Houlton, RBC Capital Markets. Please go ahead.

Hi. I just want to follow-up on the organic growth question. I think that you said that you had fully integrated Gray Hawk into your business; but I just wanted to just make sure that I understood the numbers in terms of 275 is obviously 27% year-over-year and I just want to make sure I’m getting the right calculation of what is included in the organic growth. I know we’re taking out MSM but if you could just walk through that. That would be helpful.

Sure. We had the $217.5 million for ’05 plus $18 million for the first quarter of Gray Hawk in ’05 less 1.4 million for Mehti.

Okay. And there were no other acquisitions since then, right?

That’s it.

Okay. Great. Thank you.

Operator; And we’ll take our next question from Mark Jordan, A.G. Edwards. Please go ahead.

Good afternoon. Talking about the retention issue, you have a reasonable number of people deployed outside of the United States which I would understand that they would typically deploy under contract basis. How much of your turnover is just the natural flow of people coming off their contract or tour and becoming deactivated and then when they may come back to you at a later date?

Mark, it’s Bob. That does drive our turnover to a higher percentage, I think, than if you just examined it without those folks. I don’t have the exact number for you but it does play a significant role in the turnover number.

So if we were looking at yours versus someone else, a 13 to 14, that might explain the difference?

I don’t have the exact number but certainly it does impact the overall turnover rate.

Those folks do have to come back after awhile for a variety of reasons not the least to which is pressure from family. But the jobs on the battle field are still the easiest jobs we have to fill.

Looking at the back or the bookings for the quarter, if you have a contract like ITS IIS, given the IDIQ nature, you would not be reflecting the potential opportunity in that in your stated backlog?

That’s correct.

Final question, with MSM, you’re continuing to have losses there but I would assume now that the book value of that business is down to a nominal level?

That’s correct.

Do you see an opportunity to [inaudible] some of that when this operation is sold?

I’m sorry, you’re breaking up. Could you repeat the question?

Yes. Is MSM - when it’s sold - is there the opportunity to recoup some of the losses you are currently incurring?

We have recorded and have the carrying value of MSM that we’ll consider the fair market value. So I don’t think -- there may be a potential for upside but I think we have it recorded properly as carrying a fair market value of the enterprise.

Okay. Thank you very much.

And we’ll take our next question from George Price, Stifel Nicolaus. Please go ahead.

Thanks. Couple of follow-ups. First I wanted to clarify the full year of operating margin guidance, the 8.5 to 8.7, includes FAS 123?

Yes. It’s prior to.

Prior to.

Impact of 123. And with the 123R expense it would be 8.1 to 8.2. Or 8 to 8.2. It’s about a 45% basis point difference.

And then just given the demand for people and skills, I wonder if you could talk a little bit more about when you are able to get, attract or retain the people may be -- what the impact is of the wages required to do so and how pricing is out there both from a competitive standpoint and given the budget environment, you know, are the client’s still absorbing some of these increasing costs?

Yes. And the client does absorb all the costs, George. We pass that cost on directly to them and it is just a circumstance of the industry. The clearance process drives higher salaries and we make sure that our bid rates are flexible enough to account for those increasing salaries.

Great. Thank you.

[OPERATOR INSTRUCTIONS] At this time we have no further questions so we would like to turn this conference back over to the speakers for any additional or closing remarks.

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