ManTech International Corp (MANT) 2009 Q3 法說會逐字稿

At this time, I'd like to welcome everyone to the ManTech third quarter 2009 earnings conference call. All lines have been placed on a mute line to prevent any background noise. After the speakers remarks, there will be a question ask answer period. (Operator instructions) Now at this time I would like to turn the conference over to Mr. Cormier. You may begin your conference.

Thank you and welcome to ManTech International's third quarter 2009 earnings call. Leading today's call from ManTech is George Pedersen, Chairman of the Board and Chief Executive Officer, Larry Prior, our President and Chief Operating Officer and Kevin Phillips our Executive Vice President and Chief Financial Officer. In our prepared remarks, George will discuss our strategic outlook, Larry will discuss operational highlights and recent developments and Kevin will detail our Q3 results and growth outlook. Before we begin our discussion, it is important to remind you 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 Securities Ligation Reform Act of 1995. These forward looking 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 full discussion of these factors and other risks and uncertainties, please refer to the section entitled risk factors on ManTech's form 10-K filed with the SEC on February 27, 2009 and in ManTech's other public filings. We undertake no other obligation to update the forward-looking statements made on there call.

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

Good afternoon. Thank you for participating in today's call. We pleased to have the opportunity review the third quarter financial results as you saw from the release we delivered strong earnings growth of over 21% of last year based on our significant expansion of margins in the quarter. Our growth and operating profit and earnings came despite our revenues being a bit lower than we had originally anticipated as a result of an industrywide delay in issuing new contracts and contract modification. Additionally, our cash collections were once again strong, so our aggressive focus on management efficiency and cash flow continue to strengthen our balance sheet and deliver returns to our shareholders. As you were aware, the congressional appropriation bill process is always an important factor in strategic planning ManTech. Congress passed the supplemental '09 defense in June in the amount of $80 billion for defense, which included additional amounts for agencies other than the Department of Defense, such the as the Department of State, which is also one of our customer. The DOD requested $60 billion so they obviously received significantly more funding than anticipated for the mission. Although this has not immediately translated into higher bookings, our current customers are placing additional funding on existing vehicles which provides a great foundation for next year.

While there were delays in awards, our customers continue to substantially fund our mission critical programs, which is evident in our record funded backlog of $1.3 billion at the end of quarter. We also have over $2 billion in proposals outstanding and we believe the log jam has begun to break in some areas, as indicated by recent awards such as our $99 million DHS win for systems engineering support for the third quarter initiative and the $76 million contract for support IT infrastructure for the DOD's National Meter Exploitation Center. Most importantly, given our position and so many priority national security programs, we see the future very positively.

We believe our momentum will continue to improve during the fourth quarter and position us for very solid organic growth in 2010 and beyond. Looking ahead the Department of Defense FY '10 appropriation bill which is expected to be at least $635 billion this bill which normally had been enacted and signed by the President on 1 October, has been delayed. Current thinking is that it will pass some time in mid December. In the meantime the Department works under what is called a continuing resolution CR, which allows expenditures at last year's level. While this may limit our revenue in the fourth quarter of 2009, the passage of the bill and acceleration of awards from the pent up demand will provide significant momentum for our 2010 performance.

I'm very pleased with the recent sense additions to our senior management team, beginning with Larry Prior, as our new President and Chief Operating Officer. He reported if July. Also some of our new senior executives that he has attracted to the firm, we have also added some additional strategic advisors such as Melissa Hathaway who formerly worked the cyber strategy for the White House. She will continue to the development of our cyber security strategy as a consultant. We expect major future growth in the cyber technology area.

Our strong balance sleet and current line of credit enable us to aggressively pursue acquisition candidates, we have successfully acquired eleven firms since our IP in 2002. Our current line of credit is $300 million with an accordion feature to $400 million and recent conversations with our banks have indicated a willingness to substantially increase our credit line because of our positive cash flow and earnings history. We currently have discussions ongoing with a number of acquisition candidates who could contribute significantly to our technology base and the growth of our Company. Our experiences indicated that the firms we pursue are comfortable with our business strategies and we believe we are acquirer of choice for many of the mission driven national security companies.

If closing, we believe our management technical team are among the best in the industry and will continue to support key programs that are vital interest to our nation here and in 40 countries around the world. We are also very acutely aware of our obligation to our shareholders as we continue to enhance the value of the Corporation. With that I would like to turn it over to Larry Prior.

Thank you, George. Last quarter I provided you with the focus areas for the balance of 2009. Three of them top line growth, talent management and program execution. We have moved out on an aggressive plan to build momentum as we move into 2010, and I'm pleased with the progress to date.

I would like to recap some of the key actions we've completed during the third quarter. First and foremost, we have been building the executive team to drive growth in our business. During the quarter, we named two new presidents, and aligned the three main operating groups. First technical services led by Lou Addeo, second mission cyber and technology solutions led by Bill Varner and third our systems engineering and technology group led by Terry Ryan. These groups are aligned by capability and are structured to collaborate with one another and across our customer sets. As you may have read from the release in September, Bill Varner joined us from Northrup Grumann's task unit. He is considered a national asset within the intelligence community and will lead our efforts in this marketplace. Terry Ryan comes to us most recently from Mercury Federal, where he was the President, and he previously was an executive at SCIC, SRA, as well as a tour as CEO of Adroit Systems prior to their sale. His background in the Department of Defense and C-4 I S R is key to driving our systems engineering group's growth in the future. To build out our talented management strategies, we hired Carlos Echalar as our EVP of Human Resources. Carlos has been instrumental in implementing effective recruiting and retention strategies for a number of leading companies in the government services market. I'm also please today welcome Stuart Davis, who most of you on the line know very well. As you saw from yesterday's press release, Stuart has joined us to be our Executive Vice President of strategy, overseeing marketing, business intelligence, and investor relations in addition to his core strategy responsibilities. Stuart's background in the federal government services and solutions industry will serve us very well in defining and communicating our strategy with our employees, our customers, our shareholders and our partners. Given our strong balance sheet and our track record of M&A success, Joe Cormier will focus intensely and exclusively on our M&A program and capital structure to facilitate our strategic acquisitions which are core to our future growth plans.

Second, we have continued to tune up our G&A to provide for more investments and top line growth, while still improving overall operating margins. As a team, we are reinvesting over $20 million across our business with a real emphasis on business development infrastructure, our research and development program and the hiring of additional recruiters. These investments are designed to accelerate our growth and meet our strategic plan objectives all while reducing our overall G&A costs. Third we held a senior leader offsite in early October where we focused on the way ahead for ManTech by first assessing the external market conditions we face and then formulating our three-year strategic plan, which will be supported by our growth campaigns and a very strong current business position. This is a great investment in our future. All of these actions and additions have further energized the Company and provide confidence achieving our strategic plan and delivering on our long-term steady state operating model of at least 10% organic revenue and earnings growth. Of course, acquisitions are also a part of our growth plan, and will be additive to our long-term model.

Turning to the quarter's results, revenue of $515 million represented 6% growth. But our focus on program execution and leaning out the G&A drove operating profit growth of 15% and operating margin of 9% in the quarter. This expanded EBITDA margin, it drove our EPS growth of 21%, which we find pretty impressive and the team was very satisfied. Q3's $456 million in contract awards represented a book to bill of under just one, which was below our expectations. We had anticipated heavy awards, but instead award decisions were slow to materialize and we sit today with record bids outstanding of over $2 billion, which is up about 60% from the end of our second quarter. At the at the same time our qualified pipeline continues to grow, and now stands over $16 billion, up from $13 billion at the end of the second quarter. We have also added numerous large opportunities of over $100 million in value, in fact there are 50 in the pipeline versus 40 in the end of just the last quarter. These factors lead us to believe that awards should increase over the next several quarters, but are obviously intentioned with market uncertainty. One positive indicator from the third quarter was the new business and add on segment of the bookings, which were over 50%, which will help drive organic growth in the future. Year to date, two-thirds of our awards are from new or add on business.

I'd like to discuss some of the more significant recent wins and what they imply for our business going forward. Our Department of Homeland Security, secure border systems engineering project is a great win for us and it is the second systems engineering wins in the last three months with DHS customs and Border Patrol. The SBI award was a classic take-away capture led by Dave [Herding] and continues to position ManTech as a leader in positions engineering services to the government. Our team has remarkable in deep domain expertise and systems engineering and it was a clear advantage in this competition as was our plan to transfer knowledge to our government customer over time, as we continue to provide technical and engineering services. We have already begun work on the program. I've already met with our customers, and we plan to be fully staffed on this effort by the end of the first quarter. The SBI win also highlights ManTech's posture in the OCI landscape. As we have mentioned in the past, Weapons System Reform Act has create clear lines related to organizational conflicts of interest on large cat A programs, but each defense and each intelligence agency is interpreting the rule and formulating their strategy to execute on programs going forward. We plan to build on our business base and have already bid several prime opportunities, arising from the new rules of the game, and we are very active on the playing field.

On the cyber front, we continue to expand our practice at the Department of Justice, and at the FBI. We were recently awarded a new cyber task to provide systems in software design and maintenance on the FBI's secure SCI operational network infrastructure. This task adds to our presence at FBI, where we currently provide security operation center support for the agency. And as a reminder, the FBI is a designated agency for CNCI funding.

In closing, as award decisions are made in our favor in the fourth quarter, it will provide additional momentum for organic revenue growth in FY10. Our record funded backlog, which was up over $300 million from the second quarter, continues to demonstrate the criticality of ManTech in serving our customer's missions. Based on our focus in areas of vital interest to this nation, we are well positioned for continued long-term profitable growth, and I look forward to driving the results and making ManTech into the premiere federal services Company. With that I'll turn the call over to Kevin.

Thank you, Larry. Revenues for the quarter were $515 million, representing 6% total revenue growth compared to last year's third quarter revenues of $486 million. Our operating profit was $46.4 million, and grew 15% over last year's third quarter. Our third quarter operating margin was 9%, up from 8.3% in the third quarter of 2008. We had strong margin performance, resulting from increased direct labor returns as well as improved contracts execution across our business base. We also began realizing improvements from our G&A line as expense decreased from 9.1% of revenue in the second quarter to 8.3% of revenue for the third quarter or over $4 million in reductions. G&A expense reductions are in part due to our move toward completion of several systems improvement initiatives during 2009 and the emphasis on reallocating dollars toward top line revenue growth as we go into 2010. Based on the significant operating margin and a lower than anticipated effective tax rate of 37%, our third quarter net income was $29.2 million up 23% from $23.9 million in last year's third quarter. The tax rate was lower than estimated due to favorable fluctuations in our deferred compensation assets. This translates into diluted earnings per share of $0.81, which was up 21% over last year's third quarter earnings of $0.67 per share. Our total backlog was $3.78 billion and our funded backlog was a record $1.28 billion as of September 30th, which provides us a solid base to grow from in the future.

Turning to the balance sheet and cash flow metrics, we saw another decrease in DSO due to outstanding receivable collections during the quarter, which resulted in strong cash flow from operations of approximately $32 million. This impressive cash flow allowed us to eliminate our debt and build cash by the end of the quarter. As of September 30th we had approximately $52 million in cash and no debt. Our conservative cash management and discipline around collection has allowed us to leverage up for acquisitions in the past and we have a proven track record of paying off our debt. This uniquely positions ManTech in today's credit environment to have ample flexibility to complete sizable strategic acquisitions and fund continued organic growth through available debt capacity. We are very pleased that we were able to improve our DSOs within an environment requiring more lengthy reviews by our customers and their auditor. Our team has done a job in this regard. Given the variability resulting in increased customer reviews, we are anticipating DSOs to run near the 70 day level during the remainder of 2009. We anticipate cash flows for the year to be over $100 million approaching 100% of net income. Our largest programs, TACOM and Countermine, generated $120 million of revenue in the third quarter while SOCOM generated $29 million and R OC was also $26 million. Additionally, our revenue from cyber based contracts represented 7% of revenue up from 5% last year in the third quarter.

Turning now to our financial outlook, we have provided our fourth quarter 2009 guidance and modified our full year 2009 guidance in our earnings release. Our fourth quarter 2009 revenue range of $522 million to $547 million represents 5% to 11% total growth over last year's fourth quarter. Our improving contract fees and reduced infrastructure allowed us to increase the top ends of our net income in earnings per share. Our net income range of $29 million to $29.8 million results in earnings per share guidance of $0.80 to $0.82 per share on weighted average shares of 36.1 million. This represents 18% to 21% growth over last year's fourth quarter earnings per share. We anticipate a slight decline in G&A expense as a percentage of revenue in Q4 as we see the completion of system initiatives during 2009 and as we tune up and reallocate our resources toward top line growth. Guidance assumes net interest income of $60,000 in the fourth quarter and a 38% effective tax rate. Combination of our growth and labor based revenues, general and administrative fish efficiencies, strong cash collections and improved effective tax rates place us in a strong position to reallocate resources to supported top line growth and execute our acquisition program, while continuing to provide strong returns to our shareholders.

Our adjusted full year 2009 guidance range, which does not include any future acquisitions or divestitures is $2 billion to $2.025 billion. Based on our expanded operating profits, we estimate our full year 2009 net income to be between $111.2 million and $112 million, which results in increased earnings per share of $3.09 to $3.11 per share based on weighted average shares of 35.95 million. This earns per share range represents 21% to 22% growth of $2.55 per share. Our guidance assumes $700,000 in net interest expense for the year and a 37.5% effective tax rate. Despite variability in the volume of material flow throughs during 2009 we have continued to provide strong earnings per share for our investors. Going forward ManTech continues to focus on mission critical markets while major diversified across the intelligence and DOD community. We have invested in and enhanced our business capture process to make sure we are optimally aligned with our addressable market. This will allow us to fully execute our existing contract and personal talent base while targeting resources in our opportunity pipeline. We believe the strategic decisions will allow ManTech to deliver the long-term growth that is our cornerstone.

And with that, we will be happy to take any questions you may have.

(Operator Instructions). First, we will go to Ed Caso with Wells Fargo Securities.

I heard several times you mentioned being a leader in national security, national defense particularly in regards to your acquisition intent. Do you have interest in making acquisitions in more of the civil agency focused areas?

Yes, we do. We are looking at that. Actively. Obviously in healthcare and certain other areas of government, there will be some tremendous increase in the amount of activity ongoing, and we have something to bring to that market and we are considering it as we speak.

And Ed, it's a great question. When you think we have three priorities, one defend the core. If we can do anything with more prime contracts, it's an obvious place that we are always interested in. Second, George has led the team in doing additional acquisitions around cyber. Third, obviously, in the Obama administration, they define vital interest to include healthcare and energy. And we have to look more broadly across fedsive. And cyber is a great place for us to get introduced to every security operation center to every network and learn the fed domain.

Kevin can you repeat what the SOCOM numbers were?

Sure. The Countermine program was $121million in the quarter. SOCOM was $29 million, and R OC was $26 million.

Right. And last, the organic I know you had a tough comp on organic. What would the number come out to be?

Organic for the quarter was had 4%.

Plus four?

4%, yes.

Next question is from Joseph Vafi from Jeffries & Co.

Start on the booking side a bit I think you kind of explained you saw some delays here in Q2. I was wondering if you have any comments on what you have seen kind of convert out of the amount of bids awaiting decision here in Q4? I guess we have had about a month or so to look at Q4 so far?

You've seen Joe, this is Larry Prior. So you saw a couple of announced wins we've done recently to include SBI net and the work we are doing to DHS. We still see a hesitancy really across the Defense Department with many of our customers, and it's reflected that even though our book to bill was less than one our funded backlog is up $300 million. We are seeing them park money on current contracts, which we see them kind of park and go waiting for next year. The hesitancy is the uncertainty over what's going on in the market and the fact there is not an FY '10 appropriations bill.

Okay. That makes sense. So if you kind of then look at your funded backlog up, wouldn't you kind of say then the duration of that funded is probably up to, because I mean it looks like, you fine tune down the revenue range a little bit for Q4 that seems to be maybe a little bit more than that's reflective of what the revenue number was in Q3. Is that the right way to look at it then?

Joe, great question. What we are seeing then is all of our customers are waiting to see do you get a fully funded FY'10 proposeiation decorated like a Christmas tree before the Christmas recess. Do you get a positive decision on Afghanistan in supporting general McCrystal's troop request and I don't think it's the full 40,000 troops but anything above 20,000 is going to catalyze a supplemental next spring. But everyone in the Defense Department is waiting to see how that proceeds before they start freeing up money. So there is this kind of hesitancy on the part of folks to obligate and aggressively spend those dollars and we keep waiting for the dam to break and we think it will before the Christmas holidays.

And then one final question on that. On the supplemental spending, which seems also to be a little bit light. Is that a different set of kind of issues there rather than waiting for the fiscal '10 budget?

On the supplemental, that was approved, we have not seen our customers really spend that money. And that's not a normal situation as you know in years past when there was supplemental there was normally a deadline at the end of the fiscal year and this case would have been September 30th. It did not happen. So that money is there and indeed, as we have said many times, DOD got $80 some-odd billion versus $60 billion and we just haven't seen that money come to market.

It's really, Joe, the opposite of what you saw in 2005 and 2006. Where people were spreading and hesitant to spend O & M dollars while waiting for the spring supplemental. Just the opposite is happening right now. Everyone is holding on to dollars while they wait for an affirmation of the commitment to the troop increases in Afghanistan, and then second, as George points out, a fully funded FY'10 appropriation before Christmas.

The other thing we are hearing, as you know, there has been a lot of discussion over the years about no more supplementals. The Department would identify the requirements and there would be a one time funding. I don't believe that's the truth any more. I think in the spring or perhaps summer, there will be another supplemental over whatever amount they put in the bill.

Okay. That makes sense. And thanks and good job on the margins.

Thank you.

Next question comes from Bill Loomis with Stifel Nicolaus & Co.

Hi, thank you. And good job on the margins. Just focusing on that can you tell us what the margins on either Countermine or the rest of the business without Countermine and SOCOM were the in the quarter?

Yes, Bill the core business margins were at 10.3% and the combined was 5.8% for Countermine and SOCOM.

Okay. And I know you talked about G&A efficiencies and so forth. But I see your bids submitted going up sharply pretty obviously that costs money. And then hiring people that costs money. So it's got to be coming out of somewhere to show just to break even on margins to show such strong sequential improvement. What are some of the areas that you are doing the cost cutting?

I'll speak to that if Larry wants to add in he is welcome to. As you know we have had some initiatives over the first part of this year to improve systems so we can have automation and we have also been working to combine some of the back office areas that were in different regions and we are at the point going into Q3 and Q 4 where we are able to do travel additionally, with the alignment of the organizations that Larry's put in place, the three groups we have additional reallocation that we can do through reductions. Larry talked about reallocating $20 million. We are going we have been through the process of identifying and taking action on many of those efforts, so that we can begin to expand the top line growth team as we go into 2010.

Okay, so looking in the margins and 2010, and what you have under bid right now, obviously price competition is increasing out there how do you see that playing out? Do you see higher organic growth offsetting some margin pressure? Or do you think you can maintain margins over 10% on their core or non?

I think our core markets were very well positioned and that creates the opportunity for us to increase or continue the overall margins that we have and what we are expecting is to continue the margins, reinvest, through the reallocation of resources, and grow top line as well.

So in your, so it is a fair statement to say in our business outstanding that $2 billion dollars waiting, that is generally speaking as an average business that will keep that margin around 10%?

For the pieces of the business related to that, yes. For the pieces of the business related to the in theater operation obviously had the mix of business we have talked about.

Okay and I know you are starting the integration on the MATVs or support I should say how do you see that now you have a little more insight going into 2010? How do you see that playing out kind of in the first half of 2010? No terms of your total Countermine and SOCOM business?

Let me start and then I'll have Kevin fill in, Bill. So again, we want to watch carefully the decision by the President in the first couple of weeks of November. Of what is the actual increase forces in support of General McCrystal in Afghanistan. If we see anything over 20,000 troops as George points out, there's probably going to be the need for an additional supplemental this spring. In addition, when you go to those kind of troop levels, they're going to have to expand the number of forward operating bases and significantly increase the number of route clearance units to support an operating area the size of the State of Texas. So our estimate is that there will be fairly significant growth, and I'll turn it over to Kevin to throw in some color.

Bill, as I think I mentioned last quarter, we seek double digit growth in the number of systems that are being fielded. When we look at the staff that's in Iraq for the third quarter we have seen any reductions in the overall staff in theater there while we've seen a double digit increase in the number of staff providing services in Afghanistan. So the number of systems in aggregate is increasing. That's both route clearance as well as MRAP and MATVs. We see through the second quarter of 2010 continued double digit increases in the number of systems as well as the personnel that we have been over the last quarter and will continue to field that will provide a strong service returns on that, as well as OTC runs material flow throughs for the route clearance and had some MRAP pieces. So we still so a strong level of growth going into the middle of 2010.

Thank you.

Next question from Michael Lewis with BB&T Capital Markets.

Thank you very much for taking my questions. Larry, I may get a little specific on one contract here. On NPPD with the DHS, can you remind me how many other competitors were awarded the contract? And also, I know this is difficult because it's contingent upon tax quarter but what are your internal expectations on possible bill lets that you could win off this ID IQ over the next say six to 12 months?

So there were five awards. We were one of them. When you look at what we're doing across DHS, we've got basically a three prong strategy. One we are very interested in anything related to cyber that touches the security operation centers. Two, we love our just general IT offering across DHS. And what we have seen is there is an increased need for systems engineering and also some knowledge transfer and training of the program management capabilities of DHS. I think this is going to be a theme we are going to see both within DOD as well as DHS where they'll rely on contractors more for the systems engineering capability. And really, help us train their PMs, while we are doing a lot more SC work. Now we are waiting for initial tasks on many of these. We think we are very competitive and looking forward to bidding.

Okay and that me into the next question with regard to Hathaway global strategies coming in as an independent consultant for cyber will ManTech be the only system integrator that she contracts with or would we expect to see her have the liberty to expand her business with some of your other competitors?

We have not put any restrictions on the lady. She has set up a firm and we are just pleased that she has chosen us to be one of the companies that she will advise. But there are no restrictions we would impose.

Now as she discussed with us she really saw us as the bell of the ball for the national security force when it comes to providing services. What we see her doing is laying down a partnership with a network services provider. A peer provider. But it's clear we were her first and only choice when it comes to services business around cyber.

Okay. So it's toward specific niches and that's where she is working with independent companies.

I think she's going to dial in a conflict free ability to do consulting work. She is one of the smartest people in our industry and we trust her completely.

Okay, just a final question I'll get out of the way here. Want to just the in sourcing issue here. Of are you specifically seeing any of your intel business being brought back into the various agencies or can you just talk about that a little bit with regard to the in sourcing trends?

Yes, so first, just as we are trying to improve, our voluntary turn over and really improve retention, the Company historically was running about 20% voluntary turn over. We're doing a little bit better than 18 as we close the year. Of all of our folks that leave ManTech, only about 10% of them are going to government. And we are seeing it spread fairly broadly across our base and not focused on any one agency. Now remember, we have less exposure to acquisition support, to contracting, to auditing, and we have less really exposure to some of the classic intelligence analysis work for some of the agencies. So we probably have been hit less hard than some of our peers. And haven't seen it take on a life of its own yet.

That's wonderful. Thank you very much.

Our next question will come from Tim Quillin with Stephens Incorporated.

Good afternoon. You all are the bell of the ball. Couple questions I guess one not to split hairs too much. But but regarding Countermine and SOCOM, is the work that's route clearance related mostly being done in Iraq and MRAP and MATV support especially under the SOCOM contract war in Afghanistan?

There is an increase in the number of systems being fielded in Afghanistan. There are new systems that are being fielded there. But there are still a majority of systems that are in the Iraq area but they are working to reposition those. The other MRAP related and MAT related activities are more in the Afghan operation and remind you, we didn't have a huge amount of support requirement in Iraq for those systems where we do in Afghanistan and that's providing us a strong services-based growth as they continue to field those systems.

Okay. So you work under [Taicom] or Countermine or however we want to call that is not, you don't need a different contract vehicle to do work in Afghanistan. That kind of seamlessly goes across theater?

Yes, sir.

And second question is regarding the SBI Award. You know that's a single award ID IQ. But how will taskings come across and how do you expect that contract to ramp up? Thank you.

Yes. So we started on day one in providing the program management, the leadership team and about 12 folks starting right out of the gate. We are working closely with a customer and doing a transition plan. We'll be fully manned over 100 folks by the end of the first quarter, we are very committed to improving the system's engineering processes and discipline, in support of CBP and DHS. And working closely with the various primes that they are working with. One of the aspects of it is, we are going to intentionally try to work with them on knowledge transfer. So that program management skills and positions over time, will move from the contractor to CBP and to DHS. While we continue to invest and support them to systems engineering.

Thank you.

Our next question will come from Gautam Khanna with Cowen & Co.

Relative to your quarterly sales guidance, the sales came in a little light like you mentioned due to delays and contract awards and modification. But it looks like on the three more pass through heavy contracts, the sales were about in line with your expectations. So can you characterize where the variance was in the other parts of your business?

Yes Gautam, it's Kevin. When we look at material flow throughs, they exist in other programs outside of the theater support as well. And we historically have seen that support continue, and what we were expecting is an increase in that amount of support in the United States for various customers, and that failed to really materialize. Additionally, we are some pretty strong new business awards in the second quarter. That frankly have not ramped up as quickly as we would like but we do have those contracts in place and we were working with the customer to get those ramped up.

Just as a quick follow-up the funded backlog was up nicely. Was it pretty chunky or was it well distributed across a lot of contracts? If you could just characterize the increase sequentially.

I would, I would over about $220 million of that $300 million was for in theater support. So it's heavily weighted toward supporting our critical activities in Iraq and Afghanistan. The balance, though is under other programs across-the-board. And I think it shows the important nature of what we do for the customers across our business.

It also shows their parking money for a future day.

Lastly, could you remind us again about the important recompetes you have next year, characterized sort of percentage of revenue that are up for rebid and perhaps the timing of them? Timing of some of the larger ones? Thanks.

Yes so obviously, all of the in theater support is planned for recompete next year. We think it will push until the end or actually into FY'11. But that's probably the largest one that we are looking at. We'll typically do about 20% to 25% of our business base recompete every year. But we would expect some of our work, for example in DHS to be recompeted over the next year as part of that normal transition.

Thank you.

Our next question is from Rob Springarn with Credit Suisse.

Actually Pete Skibitski with CS. Can you give some more color on whether you are seeing any pricing pressure on some of your new bid programs and and of the new competitions out there? We are certainly seeing among the large caps and wonder if you are feeling it too?

Yes, Kevin. It depends on the customer set and the mission that is being supported. And in certain customers, there is more price competition in others based on our positioning within the customer set and unique nature of what we are providing it is less competitive. Having said that, I would imagine that going into next year there will be more competition in our space and that area all handed over to Larry.

We went through as I mentioned we did our three-year strategy and looked at that first year of our annual operation plan, and it's counter intuitive. Our guys are still seeing the path to double digit growth and the intent to improve our margins. And we are pretty confident we got a path to get there. Now it's weighted where we've got advantages in some of our cyber bids and we are also seeing, there's a transition to some of our contract base to fix price where we tend to do better in our margins. And you are going to watch this President and this Secretary of Defense really shift to fixed price contracts. That's generally a plus for the services industry while it tends to be a drag in a sea anchor on the big primes you tend to get put into the challenge of doing fixed price development on big iron programs. So we think we are going to benefit from that over the year ahead. And it's partially in our plan.

It's just a follow-up. Can you categorize the pressure of defense versus civil are they equally out there? Or maybe one side or another?

I think it's pretty balanced. You are seeing smart customers really across each one of the agencies that we are bidding on. There's a lot of shared information and lessons learned. So no, I don't see that.

Okay. And then just to clarify on the nice G&A control this quarter, it sounds like it's going to continue in the fourth quarter, and just so I'm clear, no reason to think it won't continue to be pretty well under control going into 2010?

Yes, we do again I think we are going to see a slight decline going into Q4 as well and be under control. But it will level off as we focus on the reinvestment on the top lean growth the business development activities and the staffing that we have built into next year's plan.

Alright. Thanks, guys.

Next question is from Eric Olbeter with Pacific Crest Securities.

Hey guys, congratulations on the margins as well. One question something that's recently popped up some jurisdictional issues between State Department and the DOD when it comes to Afghanistan and Iraq and shifting of contract spent. DOD took over more of this favorable for you. Is that a trend that you think could affect the business at some point, if in fact dOD takes on more responsibilities and State Department has less?

Actually what we are seeing is better teamwork 2007 the two. I had a new learning as I joined George Pedersen's team and I'm used to you know title 10 for to the department of defense and title 50 for the intelligence community. I learned all about title 22, which was State Department money where our team is repairing radios for the Afghan Army and training Afghani on how to do it. Now mind you we are doing it through a defense department F.M.S contract with State Department dollars. So we like that they are teaming better in theater, where we are doing direct support the Afghan Military, and not just in one facility, we are going out for the different core headquarters, and in one of the true advantages we have, at ManTech, is we'll go outside of bag ram, outside of the wire, we'll work with our US forces, whether they are State Department AID, or Defense Department, and do roll up your sleeves kind of work. So I think it's a positive that they are looking for ways to work together to make things happen in theater.

Okay. That's helpful. And on just margins again in many of the competitors are seeing margins on new contracts being slashed. For Iraq and Afghanistan work. Some are actually reporting that contracts are being recompeted early to end with the expectations the margins will be lower and certainly others are reporting some contract funding issues. Contractors actually taking work at risk. Are you seeing what's your perspective on that? Are you seeing any of that now? Do you expect any of that to impact you?

The pressure we are seeing on early recompetes is that they are hitting their ceilings fast. And they are looking to either increase the ceiling and then they get some pressure that they might have to have an early recompete, and we expect that that will continue. We are seeing it not just in the in theater work we are seeing some of it in our cyber work, where there is an expectation to raise ceiling. Still the dollars to the ceiling, and there might be early recompetes, because of all of the funding they are putting on. But I have not seen the specific strategy to recompete to drive down margins and we have not seen any different from our historical norms on funding at risk. Now mind you, George is pretty courageous and bold in support of a customer, if we think it's important to national security, we have a customer wanting our support, we'll fund at risk. But it's not out of the norm.

The risk really means that you have full agreement with a customer as to what the mission and what the completion requirements are. So it's only a matter that they will take perhaps extended time to modify the contract do the contractual modifications. So risk is not risk from a cost or profit point of view but in theory absent the contractual document you are running at risk. That's what risk means to us.

Thank you, guys.

Next question will come from Mark Jordan with Noble Financial.

Good afternoon, gentlemen. You had stated that your in theater recompetes were now looking to be late '10, possibly pushing into '11. Does that assume then that if that happens that you would have an interim ceiling increase that you would have to go through that increase process prior to the recompete that would be late next year or in '11.

Mark, it is Kevin. I start by saying that we have on some of our larger contract ceiling today based on timing of the use of the prior contract to continue, but if needed, based on the importance of the mission and the customers's requirements we could certainly work on an extension. But today we don't see the requirement for that.

Okay. Just to a different topic M&A, you are talking about placing more emphasis there. Obviously Joe is going to be working there full-time. But you seem to have a stated focus on that for the last 18 months and have not consummated anything that's very large. What gives you the confidence that in the next 12 to 18 months that you will have success in something more meaningful? And then secondly, what really are your target capabilities or markets you are focused on now?

We are focusing primarily on the marketplace that we are in. High-end defense, high-end intel, which has been our strategy for the past seven years. We have seen far more opportunities, I would say in the past several months and I can't tell you exactly why. But in any event as, we have said before we will not buy sales. We have to get new technology new customers, new people and it's got to be accretive from the beginning. Now, we have, for the moment, far more ongoing I'll call it on going discussions and evaluations and for some reasons suddenly the market seemed to have broadened for us. We are also beginning to look for the first time at acquisitions and again everybody's attracted to healthcare. And not just healthcare, I'll call it the health agencies but with the DOD with other agencies like that and I have to tell you sitting here with $55 million in cash in the bank, and the line of credit of $400 million, if there is something out there worth buying, we will buy it. If we don't find something that meets our criteria, I'll take a cold shower.

Final question relative to there's been some good new business components and some of your recent awards with the large $2 billion and pending bids. Is there a potential for some new contract start up expenses or inefficiencies that we might you know we should think about in early 2010?

This is Larry. We don't see them now. In fact when I mentioned the three priorities, looking at top line growth, looking at people first for recruiting retention, when I talked to program execution is that third priority, really focused on start up well, one of the things we actually did for SBI net was to do an investment prior to the announcement of us winning. So we actually had budgeted some G&A in overhead dollars to get a facility to put people in it and to start the transition plan. Now that would have been a lost investment if we had not won. But fortunately, it proved very good for us and we are going to get a great return on that.

Thank you.

(Operator instructions) We'll go to Peter Arment with Broadpoint AmTech.

Good afternoon or good evening should I say now. Congratulations on the margins also. Most of my questions have been asked but maybe Larry or Kevin you could address this. A lot of new taskings coming up in Afghanistan or at least looked like it's going to be in support of the MRAPs or MRAP ATVs a lot of services growth. How should we think about headcount for you guys in that area? Thanks.

It's going to continue to grow. I mean, if you think of roughly we've got a thousand plus people outside of the continental United States for all of ManTech, over 600 in Iraq, and it hasn't decreased, it's actually gone up. And going up in a larger number in Afghanistan over 400 and increasing. We're going to be committed to not just sent come and the Military forces but US AID, State Department and direct support. So we think it will continue to increase. But frankly our largest growth area in manpower of ManTech employees in the next two months is going to be here in Washington as we support the Department of Homeland security and do systems engineering work for them. So our growth will be fueled in cyber, it will be fueled by a lot of the systems engineering around OC I and what we are doing for DHS as well as you know our continued commitment to national security in Afghanistan.

That's great color. Thanks, Larry.

We'll take a follow-up from Gautam Khanna with Cowen & Co.

Can you talk about what your expectations are for the tax rate through 2010 perhaps? Also if there was anything in the numbers this quarter that were unusual, perhaps very high utilization rate? Or award fees that are nonrecurring, et cetera? Thanks.

Okay. I'll start with the award fees. There are no significant nonrecurring award fees in the quarter. A lot of the activities in the quarter were specific to the retooling activities that are underway, and drawing down that G&A number. And that's something that we intentionally have focused on in the year and as you know in the first half of the year we had a higher G&A number just so that we could get these investments in place going into 2010. It is going to really pay dividends for us as we grow our business. In terms of 2010, we have had a fairly good effective tax rate this year. The year before it was a little bit higher. I would expect it to be closer to the 38% range right now, but it's early in the evaluation.

And I think he asked a great question. Our DL is up year to year 12%. Obviously you have got organic growth that contributed to it. We also are tuning up the G&A. So we are trying to gain efficiency in moving people off of overhead and on to dl and improve utilization rates. So in FY '10 you are going to see the entire team slightly improve utilization rate and shift focus to getting more folks on dl while we reinvest the remaining overhead in top line growth. The reason we can do it is Kevin and his team are so good at managing cash with great controls over the finances it is a nice, stable platform for us.

To that just to follow-up on that comment, Larry, the Countermine profitability has increased pretty substantially from where it was last year. I know you are forecasting relatively flattish sequential sales. Is there a view that the services piece is going to keep out stripping the ODC growth? Or how should we think about that as we look forward?

Yes, that's our expectation but I'll let Kevin provide the color.

I think Larry's correct it will in general continue to increase. Having said that, there is uncertain about how many systems will be fielded and the amount of material requirements that are going to be associated with that and then you know frankly in the suit, as you know how they are going to procure. When we work through those things we still see very strong returns from that business growing double digit growth in the services which will provide higher level returns for that piece of the business.

Okay, Kevin so just to interpret that should I assume that from the 5.8% is that what it was? 5.8% across SOCOM and Countermine this quarter, if anything, the margin will remain stable?

If anything, it will remain stable.

But I really.

Stable. It's not going to tick back down, even though systems are going to increase at a double digit clip next year. Is that a fair conclusion?

That's a fair statement, yes.

This is Larry and I want to redefine worst case best case. So as it grows and we support our customers in theater, we expect the dl to grow. If they need help on materials and ODCs, by God we're going to do it and we'll still hit our margin goals but we'll have to find another way to do it.

Can you remind us what the ceiling value is? What's remaining on that contract in terms of funded potential? An $800 million award back in the day? And you had some on The Bridge contract before that? What's sort of remaining ?

I'm sorry. The net backlog that we have on the program, as of the end of the third quarter was over $500 million. So the remaining backlog for its future use.

Thanks, appreciate it.

Our final question is from Michael Lewis BB&T Capital Markets.

Thank you very much. For taking the follow-up. Larry or George this question is for you. It is obvious that M&A has been anemic at best within the industry within 2009. But what do you think would have to be the primary calices to see additional industry consolidation across the group going forward?

I think the consolidation will come out in the large hardware programs, and in the world that we are in. There will be certain consolidations where they don't have the contracting offices to issue as many contracts as they have in the past. So they'll depend upon firms they have confidence in and use them as a prime. In an earlier time, as you know, it was not a big thing for them to issue a new solicitation and make the award in some reasonable time period. So, they simply don't have the staff to do that and it will take a little while for them to get that. So we think we benefit because they look at us, we have this technical skills, we have the management skills, we are in 40 countries, there is nowhere that we won't go and we have a strong balance sheet. So we think we benefit out of all this.

Yes Mike, it's a great question and it's clear all of the large primes, if you just look at the press conference for the signing of the defense authorization bill today, everyone of the primes have had cat A programs cut. They are going to see more of it in the QdR. They will be attracted to the services sector with a magnetic quality .

Thank you very much. That answered my question.

There are no further questions in the queue. We'd like to thank everyone for participating in today's conference call. This call will be available for replay beginning at 9:00 p.m. this evening through November 11, 2009. To access the replay dial 1-888-203-1112. For domestic calls or 719-457- 719-457-0820 for international calls with an ID number of 891469922. This concludes our conference call for today. Thank you all for participating.