ManTech International Corp (MANT) 2009 Q4 法說會逐字稿

Good afternoon. I will be your conference facilitator today. At this time, I would like to welcome everyone to the ManTech fourth quarter fiscal year 2009 earnings conference call.

(Operator Instructions).

Mr. Davis, you may begin your conference.

Thank you, Robert, and welcome, everyone. My name is Stuart Davis, and I run Strategy and Communications here at ManTech. On today's call we have George Pedersen, our Chairman and CEO, Kevin Phillips, our CFO, and Larry Prior, our President and COO. During 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. For a full discussion of these factors and other risks and uncertainties, please refer to the section entitled risk factors and our latest Form 10-k and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. Now, I would like to turn the call over to George.

Good afternoon, and thank you for participating in today's call. As you can see from today's release, we are ending fiscal year 2009 with a tremendous amount of momentum, which we expect to translate into excellent results for 2010. I am pleased to report accelerating organic growth in the fourth quarter, as well as pick ups in contract awards and direct labor. We now have more than 8,800 employees, up from about 8,000 at the last call. Additionally, cash collections continue to be strong, which is a fuel that allows us to acquire companies that fit our strategic focus, and deliver substantial return to our shareholders. As you know, I spent most of my time focused on the appropriation process, the overall strategy of the company and acquisition candidates, so let me update on you the major events in these areas.

Since the last call, there have been a lot of movements on the appropriations fund, and all of it has been positive for ManTech. President Obama signed the $636 billion fiscal year 2010 defense bill, which includes $128 billion for overseas contingency operations. Earlier this month, he submitted his proposed budget for the fiscal year 2011. The budget make clear his commitment to national security, and the programs we support. His proposal calls for total defense funding of $708 billion in fiscal year 2011, with a $159 billion for Iraq and Afghanistan. He also called for another $33 billion in supplemental wartime spending for the fiscal year 2010, which will be debated this spring, and almost certainly increase with funding, and response to the earthquake in Haiti,and the record snowstorms that hit the US over the past two months. Assuming the supplemental is approved, the 2010 budget will be forfeited, the FY 10 budget will be 4% higher than FY 2009. And when passed, the FY 11 budget will be more than 7% higher than the budget originally enacted for FY 10.

Looking forward, the future year defense plan calls for about 3% growth in the base defense budget in each of the four remaining out years. We expect US forces to have a major presence in Iraq and Afghanistan for the foreseeable future, and we expect to support the vital missions such as intelligence, surveillance, reconnaissance, communications, and logistics and sustainment. On a sad note, the country lost one of it's true heroes when Chairman, Jack Murtha, who chaired the House Appropriations Defense Subcommittee passed away. But we do not expect major discussions in the appropriations process as a result of his departure. On strategy for our M&A , we see the budget and administrative priorities validate our ManTech's focus on high-end defense and high-end intelligence.

We support missions vital to our national interest and security both at home in 40 nation, and around the world. Our position in so many priority national programs, security programs such as cybersecurity, systems engineering and logistics, will provide us steady and growing funding. And should position us for our target growth, 10% organic growth in 2010 and beyond. As look out over the next several years, my goal is for ManTech to achieve $3 billion to $5 billion in annual revenue. And I believe we have the leadership and organizational structure necessary to achieve that goal. So, on top of our organic gross program, we'll continue to acquire good companies when is we can find them at attractive valuations.

In that regard, I'm excited about the integration of Sensor Technologies, or STI into ManTech. This acquisition fits squarely into where the defense budget priorities are, ISR, the Army and supports of the war fighter. STI comes to us as a fast-growing company with solid margins, and this deal could be accretive on a cash and GAAP basis immediately. The company makes good business and financial sense based solely on their business base and prospects, but what makes it especially attractive to us, is the business synergy. Most importantly, STI offers us a prime contract position on S3 with Seacom, which will provide us with additional channel to provide services to the Army. Seacom is one of our longest-standing and most important customers. And together, ManTech and STI can provide more support and innovation to Seacom and the Army at a more competitive price.

Going forward, our acquisition priorities are unchanged. First, strengthen our core defense and intelligence capability, as in the case of STI. Second, expand our cybersecurity footprint with specialized technology offerings. And third, diversify into federal civil customers, where there is synergy with our cyber and IT capabilities. Overall, we see signs of increased M&A opportunities across the market. And we expect there will be more transactions over the coming year, as a result of the availability of credit, the pending increase in the capital gains tax rate, and potential changes to organizational conflict of interest regulations. Our strong balance sheet history of positive cash flow and earnings, and access to credit markets enable us to aggressively pursue candidates.

We have successfully acquired 14 firms since our IPO in 2002. We currently have discussions ongoing with a number of acquisition candidates, who could contribute significantly to our customer and technology bases, and to the growth of our Company. Most of the company's we seek are in the $100 million to $300 million revenue range, although we will also consider and target smaller niche companies, especially around cybersecurity. In closing, we think our strategy to focus on high-end defense and intelligence has been the right one, and we expect to deliver strong growth in revenue, more importantly, earnings and cash flow in fiscal 2010, and in the foreseeable future. With that, I will turn the call over to Kevin.

Thank you, George. Our financial performance in the fourth quarter was very positive across the board. Revenue, net income, and earnings per share were all towards the top end of our guided ranges, and all the items below the line were fairly standard. Quarterly revenues of $542 million represent a 10% total growth above last year's fourth quarter revenues of $495 million, with 8% coming organically. For the year, revenues grew to over $2 billion, up 8% overall and 6% organically. We're pleased to see organic growth accelerate to its highest point this year, and also pleased that search was driven by labor growth. Direct labor was up nearly 9% in the quarter, compared to Q4 of last year.

The main drivers of the quarter's growth on the program basis were similar to recent quarters. The TACOM countermine contracts contribute $135 million, up $20 million compared to Q4 of 2008, and the MRAP contract was up $25 million to $38 million. For the year, the mission critical support of the countermine and MRAP contracts increased by approximately $170 million. Also, our cybersecurity business continued to expand. For the year, our cyber business grew by over 40%, to be 7% of our business. The revenue composition was fairly steady across other dimensions we tracked, 67% of work came from a prime, versus 33% as a subcontractor, 70% of revenues came from time and material contracts, 12% came from fixed price contracts, and 18% came from cost plus contracts.

Our operating profit was $47.4 million in the fourth quarter, which yielded a 8.7% margin. So operating profit was up 15%, and margin was up 30 basis points compared to the fourth quarter of 2008. The primary drivers of the strong performance were increased direct labor and better efficiency, as G&A increased to 8.1% of revenue, compared to 8.7% at this time last year. This decrease came at the same time that we're reallocating portions of G&A toward top (inaudible) initiatives such as business development, IR&D and recruiting and retention. For the year, operating profit was over $179 million, which represented an 8.9% operating margin. Our effective tax rate for the quarter decreased to 37.7% from approximately 40% in the same period last year. This reduction was primarily a result of increases in the asset values of investments and our non-qualified deferred compensation plan. Based on the significant operating margin and lower tax rate, our fourth quarter net income rose 20% to $29.5 million, this translates into diluted earnings per share of $0.82, which was up 19% from last year's fourth quarter earnings of $0.69 per share. For the full-year net income was $111.8 million and diluted earnings per share was $3.11, both up more than 22% from 2008.

Now, on to the balance sheet and cash flow statement. We continued our steady discipline around cash with strong operating cash flows of $34 million or 1.1 times net income, and a DSO of 66 days, which was better than our expectation of 70 days. Operating cash flow for the fiscal year was $132 million, or a 1.2 conversion ratio on net income. So, we continue to build cash, and ended the quarter with over -- with more than $86 million in cash and no debt. As pleased as we were with the cash balance, we were happier to deploy the cash after the quarter close on the STI acquisition. Our conservative cash management and discipline around collections have allowed us to leverage up our acquisitions, and we have a proven track record of paying off our debt. In conjunction with the acquisition, we have amended our revolving credit facility to give us greater flexibility during the remainder of the agreement, which runs through April 2012.

With this amendment, ManTech is in great position to plan for and quickly respond to growth opportunities that may present themselves the next few years. We now have aggregate commitments under our credit facility of $350 million with an unsecured debt basket of $550 million. This will provide us the fire power we need to supplement our organic growth with acquisitions, in order to reach our growth goals. ManTech is an acquisitive Company, and anticipates it will continue to use its cash from operations to acquire companies like STI. The income in the stock repurchase basket provides us flexibility to reduce the dilutive impacts on the shareholders from the stock-based incentive programs, should it be considered in the best interest of the Company and the shareholders in the future. Our revolving credit facility continues to provide the Company with attractive interest rates, with our current borrowings related to the STI acquisition expected to run at or below 2.5%.

Turning now to forward outlook, we provided our initial guidance for fiscal year 2010 in our earnings release. As you can tell, we are moving to the standard industry practice of providing annual, but not quarterly guidance. In 2009, we experienced increased levels and variability of material purchases, and we expect this trend to continue. Additionally, the stretched government acquisition workforce and the higher volume of a work protest have resulted in delayed starts, followed by intense ramp up requirements that are difficult to project on a quarterly basis across our whole industry. Still, we're are totally committed to providing you the information that you need to make sound investment decisions. As we forecast strong double-digit growth in our 2010 plan, we're guiding to relatively wider ranges than we have in the past. For each metric, lower-end of the range assumes demand from materials and support of route-clearance systems, MRAP's and MATVs to continue their current levels as a percentage of revenues prior to adding STI, and for STI to provide financial performance at their current run rate, adjusted for the January 15th close.

The upper end of the range assumes that material requirements continue for the expanded number of [fuel-led] systems and increased operations [tempo] in Afghanistan. We were able to take advantage of natural overlaps, and cross-selling opportunities from the merger of ManTech and STI, and our core business sees expanded growth, increased top-line investments and new leadership. We will update our annual guidance each quarter, if there is any material change, and our intent is to narrow our guidance ranges as visibility improves. Assuming we complete no more acquisitions during the year, we're currently forecasting 2010 revenue between $2.63 billion and $2.85 billion, which corresponds to 30% to 41% total growth in 12% to 21% organic growth. We feel confident forecasting robust growth for fiscal year 2010, based on our positioning in mission-critical areas, which has resulted in the ramp up of recent wins at both legacy ManTech, and STI.

We see more balanced growth across the enterprise, with all three operating groups accelerating to double-digit growth, and positive trends for in-theatre vehicle support, as well as intelligence, and other pieces of our core business. We continue to be well-positioned to deliver strong operating margins in our business. Along with increased direct labor growth, we have been focused on reducing our G&A expenditures, even as we continue to invest over $20 million more in business development in R&D this year. As we stated in the press release announcing the closing of STI, we expect the acquisition will provide $450 million in revenue, and $31 million of earnings before interest taxes, depreciation and amortization. STI has strong agreements and relationships with partners who use the S3 vehicle to provide mission-critical support to our mutual customers. While STI has strong growth, their operating margin will be lower than our historic run rate, which will result result in a combined operating margin at or above 8%.

Moving down the netting, the income statement, we're forecasting net income of between $128 million and $138 million, spread over 36.6 million fully diluted shares, which translates into earnings per share of $3.50 to $3.75, and earnings per share growth of 13% to 21%. This range is a bit tighter than the revenue range, since if we achieve the high end of the revenue range, we will likely have an increase in the mix of materials supporting requirements in Afghanistan, as well as subcontract flow-throughs and other direct costs on the S3 contract. The net income and earnings per share guidance includes a significant increase in interest expense, based on a higher debt position, and expected interest rate of about 2.5%, as a result of the STI acquisition and bank amendment. We're currently projecting amortization of purchased intangible assets related to STI of $12.4 million in 2010, dropping off to less than $9 million in FY 11. We're forecasting a tax rate of 38.6% for 2010, which is normative for us.

Although we don't guide the cash flow, we generally expect to generate cash flow from operations at or slightly above net income. Over the next year, we expect the working capital requirements from the strong growth in the first half of the year to leave us somewhat below a 100% conversion rate, although cash collections will continue to be a priority, and DSO should remain relatively constant at 70 days. All FY 10 guidance takes into consideration the snowstorms here in the DC area, which shut down the Federal Government for four days. Our team proactively worked system and process changes, as well as reviewed additional customer support requirements, in order to minimize the impact of our customer operations and ManTech's financial results. We estimate the net effect of the storms will be limited to a decline of no more than $4 million in revenue in the first quarter, which is less than 1%, and only $0.01 of earnings per share.

To help you set the quarterly pattern, we expect revenue and averages per share to grow sequentially through the year, beginning with the first quarter. For the first quarter, we expect our material flows to drop off from fourth quarter levels, as they have in the past. Organic growth rates will likely trend down over the course of the year, primarily because of year-over-year comparisons, as well as the ramp-up of STI's wins in the second half of last year. Operating margins should be relatively constant over the course of the year. As I said up front, the fourth quarter showed very balanced financial performance, and we enter fiscal year 2010 from a position of strength. We're excited about the prospects of our business, as we're operationally well-positioned for continued growth in revenue and profits, supported by our strong balance sheet and cash flows. With that, I will turn it over to Larry.

Thanks, Kevin. With robust guidance suggesting continued momentum in our operating performance, I want to give you the forward business indicators that give us confidence, and also an assessment of the demands that we see in the marketplace. Building on what George said in his opening remarks, recruiting has really kicked into high gear, and will drive organic growth throughout fiscal year 2010. Over the last eight weeks, we have added 850 employees including 600 organically.

And importantly, virtually all these net adds, are filling direct positions, serving on new or expanded programs. And we're not done yet. We have more than 800 open requisitions for direct bill positions, that we could put to work today. And with an average time to fill a vacancy of about 50 days, we should be able to continue to grow head count throughout the year. Our retention continues to improve as well. The voluntary turnover was 15.3% for the fourth quarter, and 17.2% for the year, an improvement of more than 200 basis points in each case. While we are pleased with the improvements, we recognize we have a lot more work to do in this area. And we expect to continue to drive down voluntary turnover by at least another hundred basis points in fiscal year 2010. This year, we will also implement a redeployment program, so that we can drive down total turnover, lower our recruiting costs, and strengthen the ties between the Company and our employees. This is an important component of a broad-based, people first campaign throughout our Company. Still, my experience is that nothing improves recruiting and retention more than winning in the marketplace.

So let me turn now to the business development, Q4's $547 million in contract awards represented a book-to-bill of 1.1, spurred by the large win at the Army electronic proving ground. This win is especially important from both mission and business perspectives. This is absolutely mission-critical work, testing C4I equipment going to the war fighter, and it strengthens us in one of the clear, priority areas of defense spending. On the business side, it's a take-away win with a quick ramp, so we are fully up to speed with 400 new hires, and an extended staff over 600 people. In addition to performing work at the EPG headquarters in Fort Huachuca, we'll also support EPG testing at Forts Hood, Bliss, Lewis, the Yuma and Aberdeen proving grounds and the White Sands Missile range. And we'll expand our presence in all of these locations.

In the fourth quarter, we also won the almost a $100 million systems engineering contract for the Department of Homeland Security and their Secure Border Initiative program. The previous incumbent that filed a protest, but GSA overturned it earlier this month. As such, it will be a Q1 award, but we are already staffing up and should be fully ramped up within the next 60 days. We see systems engineering as a significant growth engine for the Company, and we are expecting near term award decisions in this area from key customers such as the National Reconnaissance Office. Together, the EPG and the SBI wins, alone should add about $80 million in annual run rate, equating to about 3% organic growth in fiscal year 2010.

We is also had significant expansion on some of our most important programs. Louis Addeo and his team, at the Global Property Management contract, have added 150 people over the last 90 days, supporting the Army sustainment command as it enables the deployment of our units out of Fort Hood. On our largest cyber contract, our annual run rate for November and December was $10 million higher than for all of 2009. And we expect an additional $20 million in scope increase over the rest of the year, as we support expanded requirements, as well as new missions in San Antonio. As Kevin said, cyber grew more than 40% last year, and I expect them to do the same this year. At the end of Q4, total backlog was $3.8 billion, and the STI acquisition adds another $1 billion. So in total, we now have about two years worth of backlog, which in our industry is pretty healthy.

Also, we now have about $1.4 billion in funded backlog, which translates to about six months of 2010 revenue at the high side of our guidance, which provides excellent visibility, and is a direct result of our positioning in the center of this nation's most critical security operations. We also continue to build pipeline right as the pace of procurement remaining slow. Bids outstanding were down slightly at just under $2 billion, but our qualified pipeline stands at $17.6 billion, up from $16.6 billion at the end of the third quarter. Also, we continue to target more, large opportunities, and we now have 56 opportunities over $100 million in value, compared to 50 at the end of the last quarter. And we are, however, adjusting to a new state of procurement activity, where procurements keep getting delayed, and there are more contract extensions, and plus-ups under existing contracts, which does not impact revenue or growth, but pushes book-to-bill closer to 1.

For example, consider our Seacom customer, who is moving from Fort Monmouth, New Jersey to Aberdeen, Maryland and has already lost many of the procurement officials as a result. We expect to see overburdened contract officers put new requirements through to us on task orders that we have won, and without having to issue a new contract. In fact, STI brings to us about $800 million in ceiling value on task orders, above and beyond what we have included as backlog. And this represents tremendous upside to us in this new competitive environment.

George laid out the funding framework for our industry with a fiscal year 2010 and 2011 budgets. And I would like to aggress the strategic foundation laid out in the QDR, and what it says for our prospects for growth going forward. The QDR highlights six mission areas for enhancement to rebalance the force, and that road map for support spending supports ManTech's growth goals for fiscal year 2010 and beyond. For example, ISR, intelligence, surveillance and reconnaissance is specifically mentioned as a critical element for two of the six major mission areas, succeeding counter-insurgency, stability and counter-terrorism operations, and deter and defeat aggression in anti-access environments. Mike Gualario and his great team from STI, support expanded ISR efforts such as the distributed common ground system, and the guard rail common sensor, as well as the human terrain systems, and biometric systems. We, at ManTech are also working on vital ISR programs like such as elevated sensor, as well as the disturbed common ground system, just like Mike does. And together, we expect to be an even bigger force in the growing ISR market.

The other four major mission areas, defend the US and support civil authorities at home, build a security capacity of partner states, and prevent proliferation and counter weapons of mass destruction, and finally, operate effectively in cyberspace. All of these correspond well to core ManTech's strengths. DHS is one of our fastest growing customers, as we established ourselves as their most trusted systems engineer. We have established campaigns around nuclear non-proliferation, and smart power that leverage key customers, and a global presence to address the growth markets. Our southwest border campaign builds on our support of the El Paso Intelligence Center, and the National Drug Intelligence Center. And we believe the leadership of our national security will increasingly turn its attention to Mexico, and we're prepared to support them.

Our cyber capabilities are world-class, and we are building a presence in computer network defense, especially the Department of Justice and the FBI. I believe strongly that these priorities will endure. And President Obama's Afghanistan policy ensures the defense market will show strong growth through at least 2011. Moreover, we think the in-theater support will not decrease precipitously after that, because the mission will continue for years to come. Secretary Gates and the National Security Advisor General Jones ,are both cautioning the July 2011 will begin a ramp, not a cliff, of US forces returning home. And that we will see a transition first to tactical overwatch, and then strategic overwatch, missions that our nation performs today in Europe, Japan, South Korea and Cuba. So in summary, we're pleased by the Q4 momentum, we're committed to even stronger growth in fiscal year 2010. And we're excited about the prospects of building this Company in the prepared federal services industry. With that, we would be happy to take any questions you may have.

(Operator Instructions).

Our first question comes from Joseph Vafi of Jefferies.com.

Hi, Joseph Vafi from Jefferies. Good results, you guys. Larry, you just said something that was interesting in terms of a lot of hiring that recently went on. Obviously, the Company's been doing well for awhile, and has gone well in terms of new contracting and award activity. Was there a strategic decision or coming something going in the hiring marketplace, where all of a sudden the hiring spigot really got turned on here?

Well, I think, Joe, two things happen. First, we're benefiting from some of the new wins the team did over the course of fiscal year 2009. As we pointed out in previous calls, about 70% of our awards are new, our win rate for new business was over 60%. And that contrasts with fiscal year 2008, where only about 30% of our awards were new, and a pretty low win rate. So, first and foremost, business development set a foundation for us to grow. And then, we're just benefiting. Lou Addeo and Bonnie Cook and the team that does technical services for us, I have done a really great job of hiring across logistics and sustainment. Now mind you, we need to higher better in the cyber arena, and we need to hire better in the DC area. But as a Company, we really benefited from the wins. And we have a good team and technical services that knows how to hire and deploy.

Okay. That is helpful. And then, if we kind of look through 2010, I think, we have some major recompetes coming up. Any updates there in terms of your thoughts. I think, countermines is up this year, and anything else we should be aware of, that is material to the overall business?.

Yes, Joe, this countermine and the entire collection of those MRAP programs. We had expected that we'll see a competition this summer, with a planned award by 1 November. But if experience is teaching us anything, we're handicapping that it will probably delay into 2011. The other two that we're most interested in, DNDO, the Domestic Nuclear Detection Office, we had expected a recompete this year. My best guess is that will slide about 18 months. And then, JDEC is one we expected to have recompeted. We're still expecting it this year, we are well prepared. And our win at EPG, the Electronic Proving Grounds, absolutely makes us the preeminent provider, but I fear that one will slide as well. Most of our recompete list, looks to me like it's sliding at least a year.

Okay. And that is helpful. One then just final quick one for Kevin, with STI acquisition, we got obviously a lot more in terms of intangibles, amortization. And you're also -- we're also getting I guess a tax break on the 338(h)(10). What, where do you see -- I mean you got the guidance numbers that are GAAP earnings, but it seems look your cash earnings power here, is even higher than that. And -- just kind of doing the math -- I'm just -- is it I guess with $12 million of additional intangibles, are we talking another 10%, 15% higher when we think of cash? Cash earnings power here versus what you got out on a GAAP basis at this point?

Yes, Joe. That is a good point. We will certainly will have benefiting from both, the amortization of under $13 million, as well, I'd say from $5 million and $6 million in the year from the 338(h)(10), a significant increase in the cash flows around that. And I think it's going to help us, support the strong growth that we have in FY 10. And then in the out years, we should have a strong, going out of the 2010, a much stronger cash flow, pushing us back above the one times.

Okay. All right. Thank you very much.

Our next question comes from Gautam Khanna of Cowen and Company.

Yes, I just wanted to understand the mechanics of the hiring. If you added 600 roughly to organic head count, should we think net of the snow day effect of a $0.01 or so, should our starting point around Q1 be somewhere around $0.86?

Guatam, I can't provide you first-quarter guidance on earnings. What I can tell you for the quarter is at the top-line, remember, we're talking about STI at a run rate coming into the year, the 450 provides that. We only have 2 1/2 months in the first quarter, and would expect ODC flows to be lighter in the first quarter, as it was last year. If you remember last year, the ODC flows dropped about $20 million in Q1, and picked back up. And we have a higher level of ODC flows coming out of this year. In terms of lower end and earnings, if Q1 tends to be less of a growth pattern, then in other -- than in other quarters, but at the same time we have a good baseline to support growth. So it is going to be tempered by normal Q1 items like the snow days, like higher holidays, and offset by the growth patterns that we have in labor. So it's going to be tempered, but growing for the first quarter.

And just the timing of the organic, of the 600, about 200 of them were hired in Q4. We hired 400 since then. And then as Kevin pointed out, the 250 employees at Sensor Tech didn't start until the middle of January, so they're only partially into the quarter.

Okay, and just to refresh on the gross margin line in Q4, it moved down sequentially. What explains that? Was there some mix issue of labor was actually growing above the rate of the corporate average? What could explain that?

Gross margin in Q4 was, I'm sorry, gross margin Q4 was driven by the ODC flows for in-theatre operation support. Again, our TACOM business had a $135 million in the quarter, and SOCOM 38, both were, had a significant flow through ODC's.

Okay, you can give us what the DAA guidance for year, as well?

What? Sorry. Depreciation and amortization, I believe is running somewhere around $17 million and CapEx around 8, excluding the recent purchase contract costs.

Thanks. Thank you.

Our next question comes from Brian Kinstlinger of Sidoti & Company.

Great. Thank you. I'm interested, you're seeing a acceleration of revenue growth organically. I wonder at the low point of your guidance, what percentage is coming from what is already in backlog or recompetes?

In terms of the 2010 recompetes, in terms of revenue at risk, we have about 11%, excluding the TACOM business of the low-end that is at risk, pending the likely delays and extensions that Larry had provided. Now that does not include TACOM, which would be about 19% in total, if we included that, again, pending likely extensions and delays of.

And how much outside of that comes from what is contracted and backlogged?

We expect about $2.2 billion of revenue to be generated in 2010 from the combined ManTech and STI backlog that we have as of 12/31.

Great. And you guys talked about cyber growing potentially as fast as it did this year, which was 40%. And you can talk about, I think, a while back, about $800 million a couple of quarters ago in proposals outstanding, and can you talk about maybe where you are there now for cyber, and maybe what the overall pipeline looks like to you as well?

Think of as a standard run rate pipeline for our cyber team of just over a $1 billion.

The pipeline and how much is already bid?.

So just under $2 billion in bids outstanding. Think of cyber as being generally a third of it. And I will have to get you the number, the precise number and Stuart can come back to you on that.

Great. Thanks very much. Our next question comes from Bill Loomis of Stifel Nicolaus.

Hi, thank you. Good quarter.

Thanks, Bill.

See, looking at, first of all, what was the RFC revenues in the quarter?

RFC for the quarter was $29 million. I would note that going into 2010, based on its size, we're going to stop providing that.

Okay. And then looking at the organic growth that you're estimating in your guidance, what would be the range? You mentioned, George mentioned 10% being a long-term goal, but obviously, this is much higher, towards the upper end. What is that, and then, kind of what is the split on that, between the countermine and MRAP contract versus the rest? How much do you expect from each side?

Well, I will try to parse it out. 12% to 21% growth, and we look at the in-theatre operations for wheeled staple systems, so that means route clearance and MRAP related, on the bottom of our range, we are expecting about $650 million for that type of work. We're expecting again somewhere in the $450 million range for STI, and the rest in organic. And at the higher end of the revenue range, we're expecting roughly out of the $220 million of range we have in guidance, about a third of that range to be coming from the opportunities within the wheeled vehicle support, about third coming from opportunities supporting and out of the STI acquisition, and about third related to our other core business, which as you can tell from the discussions that Larry's had, we're seeing a significant amount of surge real time, and we think reinvestments in top-line growth will support that. And does that answer your question?

Yes, I have to work through the numbers you told me. If it doesn't, I'll get back to you. On the Army EPG contract, was that a cost-type contract?

Yes, it was cost type.

And when you look at the pipeline, what are you seeing, just generally speaking on, have a lot of competed business. I guess some of these new task orders, not expansion of people but kind of the scope expansions. Are you seeing a change in pricing trends on that?

I haven't seen the pressure yet, and counter-intuitively, for four of our bids, I have gotten some pressure from customers to raise my price.

That's nice.

Well, we want to stay focused on lowering our rap rates, and Kevin and his team have done a good job with SG&A. And each of our group Presidents have tuned up their overhead and we put a little back in the top-line. But, absolutely, we want competitive ran rates.

Bill, our overall fee structure on the bids outstanding supports our continued returns in our business profile. Finally, one quick question, on any change in insourcing or any impact there you have seen recently in the last few months? It's been about -- I have taken a strong look at where it is, and what it is, its dipped down a bit. Overall, it's about 2% of our total turnover and has been anecdotal. Now mind you, all of the congressional testimony is focused on insourcing, but it tends to focus on the acquisition work force. And it hasn't touched us to extent, that I thought it might a year ago.

Okay, great. Thank you.

Bill, this is Stuart. I wanted to add color on your first question relative to the organic growth, and where it's coming from. I think again, this year compared to other years, you can get to the bottom end of our organic growth, kind of the 12% number, really at the drive of things outside of the wheeled vehicle. So if you're looking at EPG, or you're looking at the SBI net, or you're looking at the Global Property Management, or the cyber. These wins we have outside of our TACOM countermine kind of stuff, gets us most of the way there.

Okay, so just to be clear, countermine and the SOCOM contract MRAP are flat from what they did in 2009, you would still make the bottom end of your range?

No, I have about $650 million for in-theatre support. Now, the fourth quarter run rate for those program was higher than that, but the full year of 2009 was about $600 million. Talking the fourth quarter run rate, yes, we would certainly make that taking the full year. If it didn't include the full ramp-up on some of the programs, no.

Got it. Okay, thanks.

Our next question comes from Michael Lewis of BB&T Capital Markets.

Thank you for taking my question. Larry, I was wondering if you could talk about the S3 recompete. What is your expectation on the timing of this?

I have spent a lot of time with Mike Gualario and Doug and the team up there. And our expectation, there has been just so much trauma around the move to Aberdeen. A lot of folks missed that they lost the procurement workforce to our own Veteran's Administration. So as they try to muddle through that, we think that they will take a two-path course. One of them is, one path, absolutely do a five-year extension of the current contract, in parallel, be working the recompete. If we had to handicap it today, we don't think it will work until 2011.

Okay, that is fair. Just to shift gears here for one second, on Friday, there was a $23 million P&M contract from TACOM on work for Afghanistan. MRAP work in Afghanistan. Is that your first actual reward related to -- specifically located in Afghanistan?

It's Kevin, and the answer is no. If you look at the overall contracts we have, they support both areas of operation. And in all of our contracts, there is an increase in the number of systems and requirements in Afghanistan, that is going on at a greater pace than any reduction for activities in Iraq. That expansion that you're talking about is specific to that region, but it is not in total, it is only work that is growing. That area is growing at a much faster pace.

Okay, so as we model what our head count is doing, Iraq's down 4%, but Afghanistan's up about 30%. So overall, across the 40 countries where we've got ManTech employees in harm's way, it's up 15%, but a lot of it driven by Afghanistan.

Got you. And just a final question for Kevin. If you look at the mix at STI, how will this impact the current mix of the business this time next year?

Are you talking about in terms of --

Cost plus T&M, right now you're running 70% T&M. I'm interested is to see what that mix looks like this time next year.

It's funny, Mike, I have been watching it, and it's been trending towards T&M, even as we try at times purposely try to reposition it to fixed price. We're seeing less cost plus, and even fixed price came down a little bit, but T& M has been tracking up. And what you see is, they're adding task orders to the large contracts that we have. We expect that to trend for a little bit longer.

That is interesting. Okay. Thank you so much.

Our next question comes from the Eric Olbeter at Pacific Crest Securities.

Yes, it's Eric Olbeter here. Good quarter. Real quick. Looking at sort of gross margin, Kevin, for next year, your midpoint of guidance, understanding that we're going to have indirect costs or sales going through the income statement. What is sort of your target for gross margin? How should we think about that? Is it sort of slipping a little bit? Is it staying flat, are we seeing increase? You guys have been doing a great job of sort of increasing that. Should we expect that to continue? I mean give us help there.

Well, I think our reverse engineer, we should expect G&A to be running plus or minus in the 8.2% range, and my wrong sheet of paper. But the gross margins should be around the 16.2 as results. So it's going to be pressured down from the 17 range, based on the STI component, but it is going to still be fairly positive.

That is great. Thank you very much.

(Operator Instructions).

The next question comes from Gautam Khanna of Cowen and Company.

Yes, of the under $2 billion of outstanding bids, are there any that are well over $100 million in aggregate value, 200, 250, if so, how many?

There are, I don't have the number at my fingertips. We'll have to get back to you with that.

Are there any extremely large lumps like a $1 billion dollars?

No.

Okay, thanks.

Our next question comes from Robert Spingarn of Credit Suisse.

Good afternoon. I don't know if this question is for George or Larry, and I stepped in late, so hopefully you didn't go over this already. But, George, you talked about $3 billion to $5 billion in target revenues down the road, and I heard a number, 10% organic growth. You can give us some of the assumptions behind that 10%, how we should think about that in the major lines of business?

Well, I will ask Kevin to focus specifically on the 10%. What we basically see is the market growing by virtually appropriation bills that are currently approved, currently contemplated, and the fact that much of the increases that are occurring are in the exact space we're in. So we believe that we continue to grow, and basically indicated that STI added receive now this year, projected revenue of 450 on top of our internal growth. So we think it's reasonable for us to target $3 billion to $5 billion, and that depends also on our ability to continue to identify good acquisition candidates. But we think they're there. So the market will support our growing into that range, and the question is how do we do it most effectively? Larry, you got an idea on that?

If you look at the three parts of our business, technical services, what we do in systems engineering and then mission support. What we saw is we built a plan for this year ,and looked at the quality of the wins that we had. We're seeing double-digit growth in all three groups. In Lou Addeo's group, in tech services, a lot of the MRAP work should start falling to single digit growth, but he's picked up, reset and sustainments in intelligence surveillance and reconnaissance work that is keeping him at a strong double-digit clip. The big news, I think, from last year to this, is for both mission and cyber and systems engineering, they're starting to see uplift and that is going to put them in the double digit range. Obviously the cyber budgets are helping us a lot in the mission group. as well as the intelligence support downrange.

But systems engineering group we're benefiting from, frankly, some of the new look at organizational conflict of interest, where we're getting to bid more prime opportunities today, than we would have bid a year ago. And again, we're going to give annual guidance long-term, we think we are in the right segments. this five-year defense plan. A year from now, if we look at the kind of growth rates they're talking about, we want to relook at every palm every year, but right now, they showing real growth the next five years.

Larry, just going back to what you said on the OCI issue, are you saying you're bidding more opportunities because others aren't?

If, for example, at the National Reconnaissance Office, first they will allow us to do a press release to point out that we're one of 4 non-conflicted competitors. We can go in and bid systems engineering, and a system with tough technical problems, and that is opened up playing fields for us, that we would not have had a year ago.

I see.

As you watch this unfold -- I'm sorry. Go ahead.

I'm sorry, I was going to ask you about something you said before, somewhat related. But on the troop drawdown, some companies tried to characterize, what kind of lag there might be from a contractor perspective, maybe a year or two relative to the troop drawdown but of course, it's complex, because we got numbers rising in Afghanistan, while they declining in Iraq. Do you have any kind of methodology for thinking about that?

I don't know if it's methodology. We're asking our customers. When you think of the work we do, where we do it, so first, just a route clearance, MRAP support, even as they bring home the combat brigades, the troops that remain in tactical and strategic overwatch, are still going to need that security. All of our folks that are doing intelligence and surveillance, take for example, we have folks out there today that are in Iraq doing counterintelligence and doing forensics work. And when you think about those, they going to be there for a while supporting the strategic overwatch that remains. So what we started doing is every period, every quarter, we're trying to look at the trend line for what forces are going where. And, frankly, it's slower in Iraq than we expected, and that is about as fast in Afghanistan as we thought. Look at the timeline for 2011, I think your seeing strong growth in Afghanistan, slow withdrawal in Iraq, and contractors will be there to provide infrastructure and support for the fewer forces remaining in Iraq. And they'll be there for the larger force in Afghanistan.

I was going to throw out a number. The exhibits provided with the budget released back on February 1, show flattish troops in-theatre, I'm talking about both countries together from fiscal 209 to 2010, and a 1% net drawdown in fiscal 2011. When would you see the effect of that? Would be that 2012 or 2013?

For example, in Iraq, when I said, we're down from 4% of our employees, and up 30% in Afghanistan So we expect to see some of that now. What I don't know is when does it trigger to double digit drawdown? I don't think that happens until summer of 2011.

Thank you very much.

And please remember in 2011, they continue to show the defense budget going up. The current number 708. They don't forecast a decline into 2012.

I'm talking about the troop numbers, George.

And the other thing that contractors, especially ManTech's going to look at is smart power, that we believe there has to be infrastructure investment with the Iraqi government and the coalition, the Afghani government and the coalition, and we need to support state and USA ID We have employees today who are at core headquarters, not only rebuilding radios, but teaching Afghanis how to rebuild radios. Now, it's just a beachhead, but we expect to be doing more of that work the next two years, not less.

Okay, thank you again.

Robert, it looks like we don't have anymore questions. Seeing that on behalf of the team, I want to thank you all for your interest in ManTech. And obviously, if you have followup questions or you want to schedule a trip to visit us here at ManTech, just feel free to give me call. Thank you.

Thank you for participating in today's conference call. This call will be available for replay beginning at 9:00 PM Eastern, this evening through March 10, 2010. To access the replay, please dial 1-888-203-1112 for domestic calls, or 719-457-0820 for international calls with a ID number of 8846208. This concludes our conference for today.