ManTech International Corp (MANT) 2006 Q3 法說會逐字稿

Good afternoon, my name is Gwen, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ManTech third quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Cormier, you may begin you conference.

Thank you, and welcome to ManTech International Corporation's third quarter 2006 earnings conference call. Let me thank you for joining us today.

My name is Joe Cormier and I'm Vice President of Mergers and Acquisitions and Investor Relations for ManTech.

Leading today's call are George Pedersen, our Chairman of the Board and Chief Executive Officer, Robert Coleman, our President and Chief Operating Officer, and Kevin Phillips, our 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 from 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 10-K 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 today.

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 would like to turn the call over to George Pederson. George?

Thank you. Good afternoon. And thank you for participating in today's call. I am pleased to announce another solid quarter for ManTech International. As you saw from our press release, we continue to deliver sound operating results for our shareholders.

Year-to-date we have delivered over $846 million in revenue, versus $719 million last year. This represents 18% overall growth, with 13% coming organically.

Our third quarter revenue of $284 million was up 8% compared to $262 million in last year's third quarter, while our net income from continuing operations grew by 12% in the quarter. In addition, we had record contract awards of almost $1 billion in the quarter, the largest in our history. This is based upon 40 new contract and task-order wins. Bob will provide additional details.

In the third quarter we also saw a record cash flow generation as a result of our continued focus on receivable collection and some good luck. I learned a long time ago that good luck comes from hard work by a lot of people.

We generated an exceptional $73 million of operating cash flow from continuing operations in the quarter as DSOs were 65 days, down from 81 days at the end of the second quarter. This allowed us to pay off all of our debt and end the quarter with over $47 million in cash on hand. This is the first time in over 30 years that ManTech International has been debt-free.

We've already begun to utilize this cash. On October 5th, we completed the acquisition of GRS Solutions. Bob will give you the details surrounding the acquisition and our plans for GRS in the future in his remarks.

The combination has already gotten off to a great start. GRS won a key contract only a week after we closed the transaction. We welcome GRS employees into the ManTech family and look forward to our combined success in the future.

We await the outcome of the congressional elections. We have run several scenarios that look at the 2008 government fiscal year appropriation process. The '07 appropriations for Defense and Homeland Security have already been signed by the President, which obviously is a good -- is good news for ManTech.

We don't know the outcome of the other agencies, such as the State Department, NASA, and Justice. The most likely scenario is a continuing resolution for all of the remaining '07 Appropriation Bill. We were fortunate to learn in the past several days that NASA will launch another Hubble mission. We play a major role in that function.

The outcome of this congressional activity can impact this process, but I see no scenario where we do not have, or the industry does not have, appropriated funds for the other agencies. We will have a better understanding when we see who controls the Congress and who are the chairmen of the various appropriation committees.

We retain a positive outlook regardless of the election outcome. Again, ManTech is a mission-operations company. We will continue to provide these mission-critical activities for our country regardless of the party in power. This focus will allow us to continue to grow our revenue base into future quarters and years beyond.

We remain diligent in our commitment to our nation, our customers, our employees, and our shareholders.

Now, I would like to turn it over to Bob. Bob?

Thank you, George. I want to start off by giving you a brief update on our acquisition of GRS Solutions. As George mentioned, this is a small but important acquisition for ManTech.

GRS brings us very specialized and unique capabilities along with strategic access to what we believe are significant future growth areas within the intelligence community. They also give us prime access to an important classified contract that provides significant potential revenue upside.

As we have stated in the past, one of the fastest-growing outsourcing opportunities in the intelligence community is in the field of intelligence analysis. Our acquisition of Gray Hawk in 2005 bolstered ManTech's capabilities in this area, and GRS extends that capability into another new and growing area of that work.

Unfortunately, I cannot elaborate any further, but we see this acquisition as a significant opportunity to enhance our strategic position and extend our growth into a new and highly classified area of the community.

Moving on now to our business metrics, as you saw in our press release, revenue growth was 8% for the quarter and 18% year-to-date. Our third quarter revenues came in at $284 million and $846 million year-to-date. Operating margins were strong at 8.6% excluding the effects of FAS 123R.

Revenue for the quarter was mainly impacted by delays in anticipated material sales, but also by the reduction in staffing on one of our contracts deemed to be non-mission-critical by our customer. We also had an unexpected staff reduction on a subcontract effort that the government is consolidating into another contract vehicle.

While these events impacted our quarter, we believe that they have substantially been offset by our third-quarter bookings. We are extremely pleased to report record third-quarter bookings of $985 million and this number does not include the award of several of IDIQ contract vehicles that we expect to generate significant revenue in 2007.

New business wins account for approximately 20% of the bookings, bringing the year-to-date new business wins to over 35%. This strong third quarter brings our year-to-date bookings to approximately $1.5 billion, which positions us to exceed our bookings target of $1.7 billion for the year.

Our bookings momentum over the past five quarters created a book-to-bill ratio of two times revenue and aligns us for what we believe will be double-digit growth in 2007. Backlog grew 26% sequentially to $2.71 billion and is up over 41% since last year's third quarter. Funded backlog was $504 million, up 15% from September 2005.

We continue to see strong demand for our services in the mission-critical intelligence and defense sector and our qualified pipelines stand at $6.5 billion. We have 19 opportunities in the pipeline over 100 million, and we continue to improve our business development processes to ensure even higher probability of win on upcoming competitions.

I want to briefly discuss our largest contract award during the quarter. ManTech received a $725 million recompete award for our Regional Service Center contract. This recompete was awarded under the S3 contract vehicle. And ManTech, as a result of our unique capabilities, strong partnership with our prime and outstanding customer relationship will perform all of the work on the effort.

ManTech has a longstanding relationship with this customer and we have been supporting the RSCs since the early 1990s. Under this contract we provide integrated C4ISR Systems Engineering, equipment maintenance, logistical support, limited depot support and backup direct support to Army units within the U.S. and overseas. These support services have proven vital to Operation Enduring Freedom, Operation Iraqi Freedom, and the Global War on Terrorism.

The RSC task order has 1 base year and 4 option years and this new effort represents a significant opportunity for growth over our previous annual run rate of $110 million a year. We're very excited to continue to support this critical mission both at home and abroad.

I want to move on to another large contract vehicle and explain its benefit to our operation. As you may recall, we won our countermine support contract in December 2005. Under the contract, we provide engineering and logistic support for IED countermeasure systems. This contract has a potential value of up to $300 million over two years, and as you will see in the upcoming 10-Q, it represents 13% of our third-quarter revenue.

Unlike most of our contracts, the work on this vehicle is demand-driven, and therefore, difficult to forecast. We expect spending may continue at the third-quarter level in the future.

Based on our recent wins and the depth of our pipeline, we're forecasting fourth quarter revenue of $285 to $300 million, exclusive of future acquisitions. This implies a 9 to 15% growth rate. The annual revenue guidance now represents 15 to 17% overall growth and 12 to 13% organic growth. The guidance reflects the strength of our market position, backlog, anticipated award activity, and increased spending on mission critical services.

The increasing growth opportunity within our mission-critical national security workspace continues to drive demand for a highly cleared and skilled workforce. We currently have a large number of open positions and more than half of those positions require top-secret security clearances. Our hiring has been strong and we continue to work hard to achieve the staffing levels necessary to offset turnover and drive toward the higher-end of our guidance range.

Consistent with industry trends, our turnover increased slightly to 21%. We continue to work to improve retention and ensure our recruiting exceeds the effects of turnover on the business.

In closing, we are diligent in the execution of our customers' missions and are focused on our goals to become the premier provider of national security solutions within the intelligence, defense, and homeland security-related community. We'll continue to focus on driving strong organic growth coupled with strategic acquisitions that enhance our capabilities and extend our markets through 2006 and beyond.

With that, I will turn it over to Kevin. Kevin?

Thank you, Bob, and good afternoon everyone. ManTech delivered another quarter of consistent growth as revenues were $284 million, increasing 8% from last year's third-quarter revenues of $262 million. In the 9 months ended September 30th, revenues of $846 million increased 18% overall and 13% organically.

Our growth was largely driven by expanded activities in the intelligence and defense communities. Our core markets continued to be strong. Growth in the quarter was slightly less than expected due to several drivers, namely, a lower volume of other direct cost pass-throughs than anticipated. And the unanticipated reductions of work and support of two programs that Bob has already mentioned.

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. The proportion of revenues coming from contracts billed on a time and material basis was 66% this quarter, while fixed-price contracts represented 10% and cost-plus contracts were approximately 24%, which is consistent with the prior quarter.

In the quarter, 64% of our work was performed as a prime contractor, and we expect continued changes in our mix over the next several quarters as our RSC contract transitions into a subcontracted vehicle. This trend will be offset as we renew prime contracts in future quarters.

As Bob mentioned earlier, our record contract awards in the third quarter were $985 million. This award activity translated into backlog as of September 30th of $2.71 billion, up 41% from last year's third quarter. The reported backlog reflects removal of approximately $150 million in contract value related to the two contracts described earlier. Funded backlog was $504 million at the end of the third quarter, up 15% from $439 million reported in the previous year.

Our operating margin in the third quarter was 8.6%, excluding the impact of FAS 123R, which is up from 8.3% in the second quarter. Our gross margin increased slightly, while our general and administrative costs saw a decline of 30 basis points in the third quarter compared to the second quarter. This reflects continued trends in operating efficiencies.

Excluding the effects of FAS 123R net income from continuing operations was $14.6 million, up 12% from the same period in 2005, which translated into diluted EPS from continuing operations of $0.43, up from $0.39 in the prior year. EPS grew 10% compared to last year's third quarter. For the third quarter, our effective tax rate was 39.4%.

To touch on our discontinued operations, MSM, we continue to aggressively move forward on the divestiture. As only two active contracts remain and given the level of diligence performed today by various parties, we remain confident that a divestiture will occur.

Losses associated with MSM started to decline in the third quarter and will continue to decline in the fourth quarter, with significantly positive trends for acquirers heading into 2007.

We expect MSM to incur a net loss of $600,000 to $800,000 in the fourth quarter.

From a balance sheets and cash flow perspective in the third quarter, our performance was outstanding. As you may recall, at the end of 2005, we consolidated several operations in order to align similar business competences and to improve our overall operating efficiency. As you would expect, the full effect of these process improvements takes some time to yield results.

The third quarter represented the culmination of these efforts we have made to improving our billing and collections process over the last year and generated the highest amount of collections in our history. We generated over $72 million in operating cash flows from continuing operations in the quarter and had receivable DSO for the quarter of 65 days, down 16 days from the second quarter DSOs of 81 days.

As of September 30th, the Company had $47.3 million of cash and no debt. We expect strong cash flows from operations throughout the remainder of 2006.

Turning to our guidance and focusing on the fourth quarter, guidance for revenues is in the range of $285 million to $300 million, reflecting a 9 to 15% organic growth rate over the last year's fourth-quarter revenue of $261 million, and is exclusive of future acquisitions.

Guidance for diluted EPS from continuing operations for the fourth quarter is in the range of $0.43 to $0.45 per share or $0.41 to $0.43 after the impact of FAS 123R expense, based on weighted average shares of 34.2 million for the fourth quarter.

Our year-to-date performance and fourth-quarter guidance implies full year 2006 revenue growth at 15 to 17%, and organic growth at 12 to 13% for the year.

We have updated our guidance range for diluted EPS from continuing operations for the full year 2006 to $1.69 to $1.71 per share or $1.60 to $1.62 after an expected $0.09 impact from FAS 123R. Full-year EPS is based on weighted average shares of 33.9 million for the full year 2006.

To touch on 2007, given the level of the award activity, strong backlog, and a strong business pipeline, we're targeting a full-year organic growth rate of at least 10%, exclusive of any future acquisitions. This is due to the strength of our intelligence and homeland security-related work, our other armed forces contracts, and the demand for our mission-critical services.

In closing, we are well positioned for continued growth due to our positioning in growing national security markets. And now, we would be pleased to take any questions you may have.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Cai von Rumohr with Cowen and Company.

Yes, good quarter, guys. The delays, could you walk us through a little more detail on the two contracts where you've kind of had the slippage and kind of tell us what the impact might be on the fourth quarter and going forward?

Sure, Cai. It's Bob. On the call I talked about the countermine effort being difficult to forecast the materials flows due to the demand-driven nature of the contract. So we had some slippage on that contract. We were expecting something to come through and it just didn't hit this quarter.

With regard to the other contracts, one was actually a reduction in forces on a contract we have. And the other was, like I said, the result of the government consolidating our subcontract into a larger vehicle and a change of staffing as a result of that. It's unfortunate, it was completely unexpected, and I don't see that impacting -- well, in terms of the quarter impact, I'll let Kevin talk about that, but I believe it's going to be about $10 million for Q4.

All right, it's Kevin. His number is correct for Q4.

Okay. And then the last one before I let someone else get on, you talked of strong cash flow in the final quarter. What's going to contribute to strong cash flow, because I assume there is nowhere for DSOs to go but up from the spectacular level you've kind of achieved in the third quarter?

Yes, Cai, I think that the cash generated in the third quarter is because of my charm. But putting that aside, frankly, our team and our group have done a very good job of focusing on collections. It's hard to say that that DSO balance will continue at that level, but we are going to target to at least hit a low-70 DSO.

So for the fourth quarter, you may have some trends to go a different direction, but we still think that we are going to level off at a much better DSO level. I can't give you the exact number right now because of the successes, and from there we'll continue to have very good cash flow trends.

Yes, but if you basically go from 65 to the low 70s, how do you get positive cash flow on the final quarter?

Again, we expect to have 90%-plus cash flow generation from our net income and about -- I'd say maybe about the same amount -- and you are correct, about the same amount of cash flow in the fourth quarter; may draw back based on the leveling of our DSOs, but again, we are not sure what that exact number is going to be because of the successes. We don't expect it to get back up to the 80s.

Okay. Let's deal with that offline. Thank you very much.

Thank you.

We'll go next to Tom Meagher with FBR.

Yes, thanks for taking the call. Just to make sure I understood that, the two contract spots, did you guys say there was a loss of $150 million in revenue or did I hear that wrong?

No, no, no. The fourth quarter impact is $10 million.

Okay.

And again, I think that's -- in the short term, the impact is $10 million. I think we've more than made up for that with our bookings though going forward in 2007.

Okay, so what was the 150 -- did I -- if I heard that correctly, $150 million number, what did that refer to?

This is Kevin. We have pulled out a $150 million out of our backlog.

Oh, out of backlog, okay.

Out of backlog associated with those contracts.

Okay, so then in terms of what you do with the guidance for the full year, what was causing that to be reduced? Was that the loss in the backlog that you mentioned?

The full-year guidance for '06 is impacted by the drivers that Bob had mentioned, some ODC timing, again it's highly variable.

Okay.

And the restrictions in the labor market that we continue to focus on as well as these contracts that he mentioned.

Okay. And then, Bob, maybe one other question within the context of what you -- we talked about GRS Solutions. The Directorate of National Intelligence has published their Strategic Human Capital Plan. And obviously they are trying to increase the -- excuse me, the number of in-house intelligence analysts.

I was just wondering how you see that playing out within the context of what you guys and other people are doing in that capacity as -- on an outsourcing basis, if you will?

Yes, it's too early to tell, but I think that's a longer-term issue, Tom. And the fact is also that as these government folks with this highly specialized training reach the retirement level, they come to contractors. And I don't think the government is going to want to lose that domain knowledge and talent. But in terms of the impact, I think that's a longer-term issue.

Okay, so [multiple speakers]. I'm sorry, go ahead.

This is George. May I make a comment? I sat on a committee with one of the intelligence agencies 2 years ago and the committee tried to raise the salary structure for the intelligence committee because we recognized that it would be very difficult for the government itself to hire the kind of talent they need at the current salary structure.

Unfortunately, the committee and those engaged were not successful in raising those salaries. So despite the desire, and I think it would be a damn good thing if they could hire people in-house, I'm not sure they can get their total needs as they anticipate by hiring inside.

Okay. So in other words they wouldn't do away with the double-dipping rules and things like that I know the DOD used to have in place.

I can't answer that but I will tell you that nothing is going to overcome the need they have, and the need right now is very pressing, and it's pressing in different areas that have been focused on very recently, the new areas. I just don't see the demand from the professional contracting side really going down.

Okay. Thanks very much; appreciate the detail.

We'll go next to Tim Quillin with Stephens Incorporated.

Good afternoon.

Hi, Tim.

In terms of your level of conviction in your organic growth target in 2007, can you just break it down in terms of what business you expect to be growing? And maybe you can talk about your intelligence work, as a percent of revenue and what kind of growth rate you expect there. And maybe what kind of business you expect to be a drag on growth. And then also what are your assumptions regarding your countermine contract in 2007? It sounds like visibility is a little bit of an issue in there.

Okay, Tim, this is Bob. Let me address your question by looking at the bookings that we've had for the quarter and what we expect year-to-date. Okay. If you look at -- we're on track to do about $1.8 billion in bookings for the year. Let's just say 30% is new-business related, conservatively, and I think if you break that down, I think that's somewhere -- $540 million over 5 years. And if you look at the average contract life of 5 years, that's about $108 million in revenue for 2007 alone.

So that rate there implies at least a 9% growth rate, and if you look at our backlog, the growth opportunities we have in the pipeline, I think we have more than enough opportunities to offset these contract setbacks that we've had. In terms of the core business, I think it would be mid-teen double -- mid-teen growth if we did not have those contract issues.

With regard to countermine, again, we are taking a conservative approach on that because the work is demand-driven, and it does make it a little more difficult to forecast. I think that by -- some of the processes we are putting in place to identify and track that materials flow-through will hopefully give us earlier notification in the future of a change. Kevin, do you have anything to add?

The only thing I would comment is we are fairly comfortable with the 10%-plus growth based on the visibility we have. We'll provide more detail obviously as we get toward providing 2007 guidance.

And just in terms of the percent of business from the intel community and your expected growth in that nugget of business in 2007? Thanks.

We don't provide the percentage of businesses within the intel community, but obviously with the acquisition of GRS as well as some award activity, we are fairly confident in our growth within that customer base, and also the opportunities within that customer base. But specifically we are not going to provide you a higher level growth rate for that business component.

Okay. Thanks, gentlemen.

We'll go next to John Mahoney with BB&T.

Hi, guys. Congratulations on the cash collection and all the new orders.

Thanks, John.

I just -- you mentioned that the IED contract was 13% of revenues in the recent quarter.

For the quarter, yes.

Yet it was still a little bit -- a little below your expectations. That seems kind of -- it seems a little unusual. I guess that's where you had indicated [multiple speakers].

That's correct. But keep in mind it's a $300 million contract over 2 years. And I don't think that it's unusual to have this unexpected ODC not come through in the quarter.

I understand, yes, completely that ODCs don't come through in hardware delay. But so we could have -- you mean, implicit in your guidance for revenues in the quarter, it might have been an even larger percentage of revenues?

That's correct.

I mean, you guys -- okay.

That's right.

Okay. What was the percentage of revenues -- could you give us what it was in the first and second quarters this year?

In the first quarter that contract represented only, I think, $5 million of revenue and second quarter I think it was a little over $20 million in terms of dollars. So again it was not a large component of the business but it obviously grew in this quarter.

And we were expecting it to grow obviously in Q3 and Q4.

All right. So it did grow quite a bit, I mean it's 13%, I mean -- I'm just repeating --

We're not complaining.

Okay.

Yes, it did.

[multiple speakers] It was $36.9 million.

That's correct. It was over $36 million.

Yes, that's right. [multiple speakers] 63 year-to-date.

This is George. You know how critical this particular subject is. And it is one of the most difficult issues they deal with. So it's a little hard to determine or forecast exactly what the assignments will be, except they will -- we believe they'll continue to grow.

Of -- you wouldn't -- could you add numbers to the three explanations you had for the revenue shortfall, the delays in hardware, staff reduction on those two projects? What -- could you associate numbers with --?

For which quarter?

The quarter just completed, for the three explanations.

Okay. For the third quarter, the two contracts that Bob mentioned were slightly under $5 million in their impact.

Okay.

ODCs were, rough order of magnitude, again, it could have been $5 million and then we had some constraints in the labor market as well.

Okay, so the staff reductions in the two contracts are $5 million each or total?

Total.

Total. And then on the hardware -- I guess, it's all the IED that was --

No.

No, it's not all IED. There are many contracts where we go through the process of reviewing our opportunities to determine where our future business and opportunities will come from and that's one of the components.

Okay, because I guess, it sounded as though during this presentation just a little bit -- I might have misunderstood -- that the bulk of the delays in hardware deliveries which was one of the three explanations was associated with IEDs. That's not the case.

One of them is associated with the countermine program, that's correct, but there are others as Kevin mentioned that we expected to come through.

Okay, I'll let somebody else get on. Thank you.

We'll go next to Bill Loomis with Stifel Nicolaus.

Hi, thank you. On the RSC contract recompete, how has the structure of that contract changed? And you said you expect -- you could see some growth. So my questions are, with the new structure how has that changed now with the subcontract in terms of profitability or any other changes? And the second is where could the growth and when -- where could the growth on that contract go and over what timeframe?

Okay. In terms of the structure and the terms of the contract, we've not seen them change under this task order. The government wanted ManTech for this effort and that's why we are performing all of the work under the task order. Profitability remains the same. I think structure is pretty much the same. Kevin, do you have anything to --?

Yes. Only comment I'll make is on that contract you'll know historically the run rate in terms of revenues has been about $110 million annually. Obviously, given the contract value and the 5-year term, it has upside. That's going to be very much dependent on -- there are about 8 different regions of this, different RSCs that we support. It's going to be dependent on the volume of activity within those regions according to customers.

Okay, and what -- at what -- I'm just trying to get what the magnitude could be if I could obviously straight-line the contract value. Is that fair to do to get to a run rate that you think that the business would be at?

Yes, it could be -- yes, it could be up to $35 million.

Okay.

Annually.

Okay. And the contract wins have been strong, including the new ones with your organic growth rate target of at least 10% next year. First of all, how do you see that playing out? Is that more of a backend loaded, will we start off the year a little bit slower as you work through the two contracts being reduced and having those comparisons? Or how do you see that playing out through the year?

In terms of the '07, I think the backlog and the growth opportunities we have on the pipeline support us coming out in '07 very strong. Now, some of that's going to be dependent on our ability to ramp up and staff these contracts. But I believe that we will feel the biggest impact from the contracts we lost in the first and second quarter but I think we can offset most of that.

Bill, it's Kevin. Obviously, for 2007, we haven't provided the guidance yet. We'd rather not get into the quarter specifics until we have further detail.

Okay. Okay, and finally just on the labor market constraints, you said you have a large number of openings. Any way you can help quantify for us that number or if it's gone up or if it's the same kind of labor constraints you felt over the last quarter or two? Is the situation getting a little worse or any thing you can quantify in that regard?

It fluctuates quarter by quarter, Bill. I think what's important is we know how many new hires we need to have next year in order to achieve the 10% range that we're looking at. And we believe that if turnover holds steady that we can do enough hiring to offset that and still make that range.

Okay, but this is -- are you trying to signal that the situation is tougher as far as the hiring environment or it's been tough so it's the same?

The highly cleared market makes retention of our employees very difficult. They are in demand, they have the kind of skills people are looking for in order to penetrate this market. So retention is more of an issue then recruiting.

Okay.

Recruiting is going very well. Our HR staff is just doing a tremendous job.

Okay. Thanks.

We'll go next to Alex Hamilton with The Benchmark Company.

Hi, good evening. Two questions. First I guess your balance sheet has kind of an -- one of the best positions you've ever been. And as George said before, that happened due to a lot of luck. Being that it happened with luck, I don't know how much of that was planned. I guess the question is have you thought about how are you going to utilize that cash or the newfound leverage on the balance sheet?

We are focused on acquisitions, as you know, and we always have been. And when we did the GRS acquisition it was interesting for me because this is the first time we've made an acquisition without having to borrow from the bank.

We continue to have dialogue with a number of companies. We have the cash, we also have the ability to borrow up to probably $300 million, and we're actively out there in the acquisition marketplace. You know that well and we've made a number, as everyone in our industry has. And we're just turning up the heat on the acquisition search. And we think we will find an acquisition to utilize, properly utilize this cash, and make it effective for us.

All right, thank you. And I'm just trying to get a gauge of kind of what the other business momentum is. And if we were to kind of back out the impacts that -- of this quarter -- some of that ODC stuff that slid to the right and some of these other contracts that we are talking about, where do you think guidance would have come? Would it probably have been unchanged, up or slightly down?

I think we already provided one of the -- the various impacts on the third and fourth quarter, full year. I don't know if I can provide you any estimate of what that would be because we had already provided a range at the beginning of the -- at the end of the last quarter based on the visibility that we had. So it's very hard for me to provide anything other that what I've already provided on that.

That's fair. Thank you.

We'll go next to Cynthia Houlton with RBC Capital Markets.

Hi. Just -- on [a] housekeeping, did you give ODCs for the quarter?

No. ODCs for the quarter as a percentage of revenue are approximately 39%.

Okay. And then, did you give ending employees and net hires for the quarter also? Just -- I'm trying to get a sense of how much -- what the pace of hiring has been.

I don't think we give out the hiring statistics, but I can tell you we're at about 5,800 for the quarter. That number will probably go down some as a result of the [Op MAS-E] contract, but hiring continues to be very strong.

Okay, and then turnover. I know you talked about -- if turnover stays kind of at the level that you've seen, what kind of range or percentage rate are you seeing in turnover right now?

Turnover has been averaging about 20%, and I've got to tell you that October has been a strong month for us, and if we continue on that pace, I think we will -- we'll be very comfortable achieving that guidance range.

October has been a strong month in terms of hiring or retention?

Yes, it has.

Okay.

It's been a very strong month in terms of hiring and retention and that makes us very comfortable with the guidance range we set.

Okay, and then just a final question on countermine. You said that the assumptions are similar revenue range that you were -- that was this quarter. So is that kind of 13% or you are anticipating it in your guidance to grow sequentially further, kind of what's the expectation there?

No, we kind of -- we're expecting that to stay at about 13%.

Okay, thank you.

We'll take a follow-up from Tim Quillin with Stephens Incorporated.

I had just to follow on with regard to your subcontract with [BSC] is -- you're assuming about 13% in 4Q and that -- roughly that same level throughout 2007?

I don't know if I can -- again, it's highly variable but we've used that trend to help with our overall growth rate that we've provided in 2007.

And how should we think about in 2008?

You know, it's a 2-year contract, but the IED issue is a significant one in Iraq. And I would expect that the government would want to continue this type of service going forward, because I don't see the problem going away. As a matter of fact, it's becoming more of an issue every week as you see in the news.

In terms of the appropriation, and I'm not totally current, I believe that Congress gave the Pentagon $3 billion a year or a year and a half ago. And I believe that DOD has spent half of that $3 billion -- indeed, the Congress is a little concerned it didn't spend it fast enough.

In the current year's appropriation, I believe there is an additional $1.8 billion in on this line item over and above what they have. There is no indication that that amount of money will go down. What I'm hearing, it will go up for the obvious reason. So I think in that particular segment the IED issue will be -- continue to be very heavily funded going forward on into '08.

Can you discuss in any detail what you're doing on that contract or is it too sensitive?

No, it's not too sensitive, Tim. It's -- as you probably know, a lot of the equipment and devices they use out there are very new to the Army. And therefore, they don't necessarily have the logistic supply lines set up and established for that along with the repair and maintenance. Our job is to do the logistic support for those devices, do some of the engineering and then the repair and maintenance of them as well.

Okay, thank you.

We'll go next to Tom Meagher with FBR.

Yes, hi. Just a couple of points of clarification to make sure I'm up to speed. When you talked about the RSC recompete, you said you would be a subcontractor on that going forward?

Yes we are under S3, that's correct.

Okay, so was that a small business set-aside type of field?

No, it's not. It's under a major prime.

Under a major prime, okay. And then Bob, in terms of the reductions of people that you talked about, I think you said 80 or something like that on one of the contracts. Were you able to redeploy any of them into the open slots that you've got available right now?

No, I don't know that we gave a number on how many we lost, but you are correct, we have seen an uptick in our NATO wins, and our goal is to redeploy those folks on those NATO efforts.

Okay, so those people aren't just walking out the door then. My reason for asking is I know their clearances don't go through.

Tom, absolutely. Some are walking out the door, that's true.

Okay, okay.

Our goal is to try to redeploy as many as we can on these overseas efforts that we have, and in particularly, the NATO awards we've got.

Okay, so it wasn't an issue then of one agency not being willing to accept a clearance from another agency kind of thing?

No, absolutely not. Not at all.

Okay, great. Thanks very much for the detail.

We'll go next to John Mahoney with BB&T.

Hi. Again, a little bit of clarification. Earlier you mentioned that you wanted the -- thought the IED contract would continue at current levels. And then I think some of the callers later on may have put words in your mouth to say 13%. Did you mean in dollar terms or percentage terms?

Dollars.

Dollar. We just -- the current or the third quarter revenues, we have basically expected in the fourth quarter for that effort.

Okay. That's kind of -- you built it in your fourth-quarter assumption I guess. And then I would like to -- on a dollar basis -- and Mr. Pedersen mentioned though that given the funding, that's a conservative expectation but probably appropriate given a little bit of the light of what you thought was going to come through this quarter.

I think it's a highly variable requirement. It's very difficult for us to provide level of information until we have better visibility on the requirements of adjustment.

All right, and the two examples you gave about staff reductions. One you mentioned that it was deemed not mission-critical. Could you give us some more details about what type of work you were doing in those projects and what happened? I guess one of them just -- the project kind of consolidated down and -- I'm not sure if you lost to somebody else or what happened there.

No, no, no, it was just a cut, and -- in the staffing on the effort and I believe it was probably due mostly to war tax in the Army.

Okay. So just things aren't mission critical anymore, in their opinion?

Yes.

[multiple speakers] the only important one.

I guess we -- we use the term mission critical because if you look at the majority of the work that we have as a company, it's not typically subject to those type of cuts. I mean, most of it is extremely mission critical and I would be surprised to see that happen.

This contract was deemed by the customer to be non-mission critical, and therefore, was subject to war taxes. And that's what drove this staffing cut.

Okay. Thank you very much.

You're welcome.

We'll go next to Cai von Rumohr with Cowen and Company.

Thank you. The RSC contract, it was down in the second quarter from the first. Where was it in the third quarter and kind of -- was it down just because you were approaching the recompete?

Two items. It was a little over $16 million in the third quarter and it was down for two reasons. Number one, some of the tasking was transferred to other contract vehicles. If you remember, there's a larger effort on those tasks. But primarily it was -- in the third quarter specifically targeted or focused on, the direction of the customer in terms of the upcoming competition.

So the third quarter was 16, is that correct?

That's correct. Over 16, but much less than normal run rate.

Oh, okay, so that was -- but was all that work, the $10 million drop, was that done under another contract so that that work wasn't lost? Is that the right way to think about it?

In part, yes. I mean, the rest is more of a timing of the budget and the new competition.

Okay. So when you say a $110 million run rate, that's for all of that work, whether it's specifically under that contract, going up $35 million, that's the RSC plus other contracts. Is that correct?

No.

Well, I think you said $110 million --

If you look historically, except for the last quarters, the run rate was running a little -- at $110 million annually. There has been a drop-off in the third quarter on the tasks that were under competition.

Right.

But the funding coming through on the new vehicle is higher and potential requirements coming through that vehicle may be greater.

Okay, and is this --

So again, it's hard to determine.

So we should expect that funding, so we should expect that to ramp in the fourth quarter and then on in the next year?

That will be dependent on the customer requirements. The funding is there. It's a matter of the requirements that they have.

Got it. And the lastly under the IED -- the last one on the IED, the $300 million contract for 2 years, and clearly in the first two quarters as you were ramping up, you ran under that. Is your expectation that they'll go to the ceiling in that period, and is there a provision under the contract for an extension?

Cai, it's difficult to predict whether they will spend that much or not. Of course, we would like them to, but again, it's going to be based on the requirements they have overseas. In terms of the future of that contract, I believe that there will be -- like I said before, the demand is there and I believe there will be another award in the future on that.

Okay. Is there a provision under the contract for an extension?

They can unilaterally extend that contract when they get close to the completion date. The completion date, as you know, is a flexible type of thing. And we would obviously accept any extension they give us.

Fabulous. Thank you.

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