ManTech International Corp (MANT) 2010 Q1 法說會逐字稿

Good afternoon. My name is Jennifer and I will be your conference facilitator today. At this time I would like to welcome everyone to the ManTech first quarter fiscal year 2010 earnings conference call. (Operator Instructions.) Mr. Davis, you may begin your conference.

Thank you, Jennifer, 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 Chief Executive Officer, Kevin Philips, 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 of1995. 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" in 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. And now I'd like to turn the call over to George.

Good afternoon and thank you for participating in today's call. We begin fiscal year 2010 with a 31% top line growth for the first quarter and organic revenue growth is now above our long-term target of 10%. We have increased our head count by 1,000 people since the start of the year which is driving strong direct labor growth. We see a healthy outlook for the markets we serve and our positioning and forward indicators give us comfort that 2010 will be very positive for ManTech. As you can see from our press release we are forecasting 2010 revenue of $2.6 to $2.8 billion, up from $2 billion in fiscal year 2009.

As you know, we spend a good amount of time focused on the government appropriation process so our corporate strategy has a sound basis. We expect a $33 billion DOD supplemental appropriation bill for oversea contingency operations probably just before the Memorial Day recess. Congress is working on the government fiscal year 2011 Defense Appropriation bill, but in today's political environment we think it prudent to plan for a Continuing Resolution or CR until after the mid-term elections. In the coming months, we will work with our customers to make sure that priority programs get funded. Ultimately we expect the defense budget to have a growth factor of about 3% to approximately $708 billion as requested by President Obama. We also expect real growth in the appropriation bills for our other key customers such as the Department of State, Homeland Security and Justice. A positive look in all areas. Looking beyond we do not see the President cutting defense as he builds a record for the next presidential election. Pentagon planners are already working on fiscal year 2012 budget and the early signs are positive.

I'm increasingly optimistic on our merger and acquisition front. We do not have a deal lined up, but we are seeing increasing amounts of activity, and we now have a structure in place to take advantage. Matt [Candy] has joined our senior team to spearhead our M&A efforts and his knowledge of the industry will allow him to seek out strategic fits in addition to evaluating the books that come our way. Earlier this month we significantly enhanced our flexibility by completing the new high yield offering that frees our current revolve. As always we will use our balance sheet capability to pursue accretive acquisitions that position our business in the areas of long-term strategic growth and importance. With that I would like to turn the call over to Kevin. Kevin?

Thank you, George. Quarterly revenues of $588 million represented 31% total growth above last year's first quarter revenues of $450 million, with 15% coming organically. Year over year, growth in STI contributed 4 percentage points to organic growth. But even without that, our 11% organic growth for the base business was our highest in some time and it was more balanced across the company.

Direct labor was a real driver for the continued strengthening of our organic growth. DL was up 13% compared to the first quarter 2009 excluding STI. Our Q4 Electronic Proving Grounds or EPG award was nearly a full run rate as we ended the quarter, and it was the largest single growth driver in the core business. But we also had significant expansions to our global property and management work and our largest cyber security contract.

The ramp ups of our recent systems engineering wins came toward the end of the quarter so they added relatively little to Q1. But they should begin to contribute to our results beginning in Q2. Taken together the MRAP and route clearance support contracts contributed $138 million compared to $111 million in Q1 of fiscal year 2009. Compared to Q4 2009 revenues of $184 million, these contracts contributed $46 million less to our top line. We had expected some seasonal dropoff in materials from Q4 levels, but not at the rate that we experienced.

However, initial indications are that the material flow should pick back up in support of the Afghanistan build up which continues to occur at a rate much faster than the reductions supporting Iraqi operations. We should see sequential growth in the vehicle support work throughout the year providing high single-digit growth in fiscal year 2010 compared to fiscal year 2009 with continued expansion of labor through midyear supporting currently stated operational requirements.

We continue to increase our work as a prime contractor. 73% of Q1revenue was as a prime. We had an even bigger shift in contract type. Mostly as a result of the STI business mix. But we also had more of our growth come from cost plus contracts such as EPG which have lower margins, but whose indirect cost absorption may provide an uplift in our T&M and fixed price contract profitability. Finally, we had a few of our over 700 contracts switch from time and materials to cost plus. At this point we do not see this as a broad trend, but we are monitoring it closely. In the quarter, 64% of revenues came from time and material contracts, 21% came from cost plus contracts and 15% came from fixed price contracts. Operating profit was $45.2 million in the first quarter which yielded a margin of 7.7%. So our operating profit was up 12%, but margin was down 130 basis points compared to the first quarter of 2009.

Most of the drop in our operating margin was a result of the core profitability at STI and the non cash amortization expense associated with the deal which were well anticipated and communicated to you on our last call. In addition, we incurred deal-related expenses and expenses such as surge recruiting support needed to meet the start up and expansion requirements of our new contracts and task orders. As previously noted, we experienced a shift in contract mix specifically those moving from T&M to cost plus which contributed to the drop in our operating margin in the quarter and creates an earnings headwind for us going forward.

We did not incorporate these changes as quickly as we should have into our forecast and operating plan, but we are aggressively working this issue now. The group presidents, Larry and I, are putting in place a recovery plan to put us back on a proper margin path as well as instituting better sensors so that we will be able to react and take corrective action promptly. With the acquisition of STI, G&A decreased to 7.3% of revenue compared to 8.6% at this time last year.

We expect this trend to continue as we adjust our indirect structure and work back to the 8% target operating margin that we communicated for fiscal year 2010. Our net interest expense increased by a little over $600,000 as we used our credit revolver to finance the STI acquisition. But we were able to offset that increase at the net income level with a drop in our effective tax rate from 39% in the first quarter of fiscal year 2009 to 37.8% . So first quarter net income was $27.5 million, up 13% which was essentially in line with operating income growth. This translates into diluted earnings per share of $0.76 cents which was up 12% from last year's first quarter earnings of $0.68 cents per share.

Now on to the balance sheet and cash flow statement. We continued our steady discipline around cash with strong operating cash flows of $43 million or 1.6 times net income, driven mainly by favorable vendor terms within the STI business, the timing of federal tax payments moving into Q2 and ordinary timing fluctuations of our compensation accruals. Our first quarter DSO grew sequentially to 75 days, but this quarter is always a challenge as noted in our DSO of 89 days for the same period last year.

We received more than $23 million in collections in the first few days of April, and we expect to be at our 70-day goal for the remainder of the year. In early January we paid out $242 million for STI, and by the end of the quarter our strong cash flow allowed us to pay down the credit revolver balance to $108 million. In April we completed the offering of $200 million in senior notes having an 8-year term. After paying roughly $5 million in transaction costs we paid down a $350 million revolver and now have tremendous flexibility in a consolidating market. In addition to potentially providing greater returns to shareholders, adding some longer term debt on the balance sheet locks us into a solid position should rates increase as the economy recovers. We will have some dilution. The interest rate on the note is 7.25% versus about 2.50%for the revolver, but we expect to turn that around as we execute strategic accretive deals.

Turning now to the forward outlook, our views on the markets are relatively unchanged since our last call. And our Q1 organic growth, surge and direct labor, our recent contract wins, anticipated opportunities given the STI acquisition and other forward prospects convince us that our prior guidance ranges, adjusted for dilution from the debt offering, are appropriate. The increased interest expense associated with the offering should decrease net income by about $5 million and diluted earnings per share by $0.14 cents in fiscal year 2010 until we complete our next acquisition.

Although we were below our expectations for revenue in Q1 we had strong revenue growth in our core business. We see continued strong top line growth supporting our 30% to 41% revenue expansion in 2010. We expect to recover most of the delayed material purchases in our in-theater vehicle maintenance business over the course of the year and organic growth will remain strong. On the earnings side, we could achieve the top end of our adjusted guidance, providing net income of $132 million and earnings per share of $3.61 if revenue comes in at the high end, we make the necessary changes in our indirect structure in the areas of business that have been impacted by a shift to cost plus contracts from time and material and we continue strong program management of existing programs.

However the unanticipated shifts from profitability in some of our contracts in Q1 make it more likely that we are at the bottom half of our earnings guidance range. That said, we are committed to improving the profitability and expect to complete 2010 having achieved operating margins in the 8% range.

On balance, I am pleased that we have returned to double-digit organic growth, completed the first quarter with the most rapid single quarter organic direct label growth since going public, and showed more broad-based growth across the enterprise. Results in Q1 were a bit below expectations, but it was our best top line growth quarter since the beginning of 2008, and we believe that we can generally recover from any shortfall based on what we have already won and our forward prospects. With that I'll turn it over to

Thanks, Kevin. Our top line momentum continues fueled by our ability to win and to staff new work. Some of this momentum is the result of the changes that we have made in the company over the last few quarters, and some of it is due to our positioning in what remains a very healthy market for 2010. Despite the continued push back of our major recompetes we ended the first quarter with over $600 million in bookings and a book to bill ratio above one. So we see signs of increasing awards activity across our business base, and we expect to see more urgency around cyber security once General Alexander is confirmed as the head of Cyber Command and with a greater interest by Congress to improve the capabilities of the Department of Homeland Security as well as the other federal civil agencies.

As with last quarter, most of the wins reflect new or expanded business that will drive growth going forward. This quarter we had excellent success with our strategy to focus on systems engineering, support to our customers who are incredibly concerned about organizational conflicts of interest. This quarter we booked our $99 million Secure Border Initiative award where we are applying systems engineering discipline to analyze technical alternatives and assist the government in overseeing the Secure Border Initiative. We were also awarded $173 million over five years to provide systems engineering and technical services to two classified programs. We won a fourth major system engineering effort for the Air Force Launch and Range Systems Wing. This $160 million award was later protested, but the protest was overturned last week so it will be included in our second quarter bookings.

All of these contract awards are take away wins. They are in our core business. They are performing technical work, all in the United States and they are not tied to wartime operational tempo. As Kevin indicated, these awards are not fully ramped, so they should drive growth for some period of time. Switching subjects, last week there were draft changes to the Defense Federal Acquisition Regulations on organizational conflict of interest which were submitted for comment. Our reading of this draft DFAR is that it is fairly restrictive, meaning that most agencies are going to require that companies declare whether they are on the advisory side or the production side especially for Cat-A programs. So with limited exceptions for mission, each firm will have to choose a single type of work for each agency and then manage very carefully across inter-agency products.

We expect that the platform providers will likely divest some or all of their businesses on the advisory side which offers opportunities for us to build our systems engineering businesses both organically through competition as well as through accretive strategic acquisitions. At the end of the quarter, total backlog stood at $4.6 billion which was up 13% and our funded backlog was $1.4 billion up 29% since last year.

Looking forward to pipeline, bits outstanding were flat, but our qualified pipeline at the end of the quarter was $21.5 billion, up from the $17.6 billion at the end of the fourth quarter. Part of that growth was attributable to the new opportunities brought by STI . But it also reflects acquisition synergies where we are now able to pursue contracts as an S3 prime. As an example, there are several competitions this summer where we currently do about $50 million a year as a subcontractor, but we are now pursuing these opportunities as a prime contractor for over $800 million in work over three years. All of these opportunities should award by early summer. Much of our other current work is being extended so we have relatively little recompete risk for this year. As we have been predicting for some time now, the recompete of our in-theater MRAP work has been formally pushed out with an estimated February 2011 award date.

Also CCOM has officially canceled the S3 recompete. We expect that they will soon exercise the five year option and put off any recompetition until fiscal year 2011 or 2012 or later. As the wins have come in, we have been able to hire the people needed to execute. As George said since the beginning of the year, we have increased the number of employees here at ManTech by over a thousand people including 150 in just the last two months since our last call. As our first quarter wins ramp up, that figure will continue to grow. We currently have just shy of 9,000 people, 1,000 job openings for funded direct requisitions, and we should be able to add another 500 to 1,000 people over the rest of the year.

I have stressed to you since I have been here that we must improve our retention and we are on target. Voluntary turnover for the quarter was 17.4% compared to about 19% a year ago. Even better, the trailing 12-month voluntary turnover number is now 14.9%, the first time that ManTech has been below 15% in many years. Beyond the raw numbers, we are also making progress on aligning our people around a common set of metrics. We now have every Vice President incentivized and motivated around revenue, EBIT, direct labor, bookings, DSO and voluntary turnover. Both at the level that they manage and one level up.

Our people are beginning to understand what we are trying to do as a company, how they can contribute and how we will measure success as we all perform critical missions for our customers. Having people properly aligned and incentivized will help us drive long-term value and sustainable, profitable growth. So in summary, we are pleased by the top line momentum in our ability to grow across the business.

We believe that our strategic positioning lines up well with the nation's priorities. We will improve our discipline around forecasting, but make no mistake, this team is driving towards continued improvement in the market place. With that, we would be happy to take any questions that you might

(Operator Instructions). We'll take our first question from Peter Arment with Broadpoint Gleacher.

Yeah, good afternoon. Larry, I guess this question is for you could you give us a little more color regarding the puts and takes for the recovery plan to get you back on a margin closer to your 8%? How do we view that?

What Kevin and I are focused on first and foremost is to manage our infrastructure and our overhead costs. We had already begun to tune that up last fall. You will remember we talked about moving about $20 million of our cost structure and reinvesting it in BMP and IRAD. So when we had in March a couple of the contract officers suddenly move contract extensions from T&M to cost plus, we have to go back in, relook the infrastructure for those businesses and make sure we got the absorption in order. The second thing is going to be just longer term. When a customer is used to your support in Time and Material, there is often unbilled direct. There are people in overhead who are supporting them that you are covering with those healthy T&M margins.

As you switch to cost plus you've got to have a rich dialogue with the customer over why they have to move to direct or they'll need to move to another part of the business. That's a conversation you want to be careful with and not too aggressive. As I said these were contract extensions. They will be recompete a year or so from now. There are people who are valued by the customer, but you've got to have that straightforward conversation with both the contract officer's tech rep and the KO. Kevin, do you want to add anything?

Okay.

Yeah, I will just add that we have a very strong growth as we mentioned. Our target as a company is always to achieve near the high end of our guidance ranges. We tend to work aggressively to recover on the bottom line or the bottom end from this as a team. We think we can do that given the strong growth we have as well as our ability to manage the indirect expenses.

Just quickly on the S3 contracts, it sounds like it is very good news that obviously it's going to be extended, but do you expect a renegotiation in terms of some of the profit outlook regarding what you are experiencing that you just described?

No, no. And the advantage there is they will execute -- there is one option to execute. It's got five years of life to it. We think for ourselves and the other S3 primes that won't be a factor.

Okay. Thank you, Larry.

We'll take the next question from Robert Spingarn of Credit Suisse.

Good afternoon. Just a couple of quick things. Larry, could you talk a little more about the cadence of changes in Iraq and Afghanistan? I guess as regards the revenue declines that Kevin spoke of earlier.

So there are two aspects you want to think about. One is the material flow and then the second is just what's happening with people as you ramp down Iraq and ramp up Afghanistan. So on the material flow, remember we had a pretty large upper in the Q4 of last year, and they've got a situation where they've got plenty of inventory. They are moving inventory from Iraq to Afghanistan. And remember there is new vehicles coming into play. And as they do that, they are coming with full up kits of materials.

We saw the heavy investment in the material side in Q4. We saw the downer that hit our revenue number in Q1. We expect that that will catch up. When you think of the manpower side of the equation we are down about 6% in terms of our people in Iraq. We are up over 34% in Afghanistan so that ramp continues. We just had a customer ask us for another 50 of our highly qualified field service reps to support Afghanistan. We think that's going to be the rate. Net-net, when you total all of our people in Iraq and Afghanistan and look at it in fiscal year 2009 for the fourth quarter and compare it to this most recent first quarter we're up slightly when you compare the totals.

But what you have to be careful of is there is that shift of down single digit in Iraq and up double digit in Afghanistan. The other thing I would add is they are building -- everyone is watching in our industry. What is going on with the next budget build? We are right now performing on fiscal year 2010. You've got the fiscal year 2011 request before Congress. The Pentagon is busy with building the fiscal year 2012 palm. What we're hearing is there is military construction for Afghanistan as well as in the planning guidance it parallels what the President had said when it was his 2011 budget that the army plans to be there for all five years.

So it looks like there is a long-term commitment. No one is ready to commit yet as to what the on going sizing of it will be. You can see as General Odierno is thinking about leaving Iraq, they are talking about the need for a renegotiation of the SOFA agreement, and what US force might stay there for a longer period of time for strategic overwatch and training, I think two years from now we will have that same discussion in Afghanistan, and it remains something of vital interest to the US.

Larry, when you say all five years, you are talking about both theaters?

So what I'm talking about was specifically for Afghanistan as they are building the fiscal year 2012 palm. I have not gotten any insight as to the long-term planning around Iraq except for the comments by the General as he is getting ready to leave this fall. When he hits his goal of the 50,000 troops in Iraq and he is coming over to take command of joint forces command he has made reference specifically that he thinks the SOFA agreement gets renegotiated and there is some longer term US commitment to Iraq. But that's way above my pay grade. I just wanted to make sure you were aware of his comments.

Then another couple quick things. You mentioned from an OCI perspective that we could see some more activity in the M&A pipeline as the bigger guys perhaps divest some assets. How would you characterize that pipeline relative to task?

In terms of size?

Either size or strategically different. In other words, task went to someone else, what might make you more interested in some of these other assets?

Yeah, so first I think everyone should get acquainted with the new language in the DFAR. I think it is pretty forceful. You will see the big primes all just guarding their Cat A1 production programs. Obviously everybody's eyes are on Lockheed Martin and what happens with their strategic resources that are highly valued by the nation and just provide superlative systems engineering work. I think you will see that same sort of discussion with the other big primes.

I don't know if they will be as large as what task put forward. But I think you will see them north of $500 million. I wouldn't be surprised by that. I think they will be valued by ManTech and by others in the industry. We have made a commitment to be on the advisory side, and we're excited by it. Obviously with our first quarter performance we took advantage of this change in the market with Northup Grumman selling task and we are going to continue to try to maximize our capability.

And just quickly, Kevin, you gave us so much information maybe this was covered but on G&A as a percentage of sales, it's quite low relative to history, how should we think about that going forward and what were some of the factors there?

A large part of the factor is the addition of STI into the base and it had a very -- relatively low G&A expense itself. I think going forward --

So it doesn't gross up with the acquisition?

It doesn't gross up with the acquisition. In fact, we have a fair amount of infrastructure that is already in existence to be able to pick up that support over time, but I would say in the first quarter and leading a little bit into the second quarter we do have some expenses that are related to making sure that we integrate the company well, that we complete that in a successful fashion so as we go toward the second half of the year we can hit a 7.3% or less G&A as a percentage of revenue.

Excellent, thank you very much.

We will now go to the next question from Michael Lewis with BB&T Capital Markets.

Thank you so much. Larry, I was wondering if you could just expand a little more on the T&M to cost plus contract shift. How many contracts were actually impacted and what was the total value of these contracts as part of the pipeline?

It was about five of our 700 contracts. So percentage wise on the revenue base it was relatively small, but it was contracts where our performance was dearly valued, and we were paid a premium in our operating profits for that. So when it shifted to a very structured cost plus environment, we absolutely have to go in and re-align the infrastructure around it as well as a conversation with the customer over some of those unbilled overhead folks who provided them such great work that they valued for so long but now are going to have to be costed out. So percentage wise on the revenue base it wasn't large. But we had benefited from years of faithful service, rewarded for the margin, and it hit the quarter.

So was this a surprise to you? And what about the margin implication, and how much will this drive the margin going forward?

As we look going forward, our headwind is 15 to 20 basis points. When we look all in from the impact . We got a little bit of indication of where the negotiation was going , and two of the contracts hit in February. But March was definitely a wake up call for me when we had two

This is Kevin. I would add that in terms of process we certainly will and have to take changes to make sure we have an earlier indicator of this so that we can adjust our indirects accordingly and in a timely fashion. So from the perspective of having internal processes to ensure that we address that early we have to adjust that and we will. Specific to the out quarters, again the headwinds that Larry talked about -- we feel confident that we can recover from this given the strong awards and the staffing growth and the positioning we have in the marketplaces we are in, and we are going to work that. But given this occurred, it is just better to state that we think the lower half of the earnings range is appropriate at this time, but we are going to work to recover from it and I would also add that we still have 64% of our business in T&M, strong labor growth and we expect it will recover.

And Michael, what it hints to us is you have to pay attention to your best performing contracts with your best customer relations. And when a contract officer changes you've got to watch it like a hawk.

So with regard to watching it, is it just setting up the proper communication with the program manager and the customer, or is there other automated mechanisms that you can set to be assured that something like this does not occur?

One of the triggers is as each program does an estimate to complete just how it is performing against its bid profit margins is the reporting signal. But frankly you have got to get it before that. You've got to get the verbal communication of changes in contract officers and KO (inaudible). I mean one of them wasn't supposed to have a recompete for extension for another year. And a new guy came in and changed it. So when you have 700 contracts and you are going through a change curve, missing five of the 700, we've got to put the discipline in place for the signals, but we as a team have to communicate better.

And then just one more question for George. With regard to the M&A, what is the size of the opportunities out there. Are you seeing more auction books or are you proactively going out and pursuing some of these properties through your own discovery process?

We have always received a lot of books, and we continue to do so. But what we have now increased our staff to go out and actively search out precise candidates for what we're looking for. So we think with the funding we now have available we needed to get far more aggressive, and we have identified a lot more candidates in a short period of time than we had before. So we see ourselves in a very good position.

Thank you.

We will now go to Brian Kinstlinger.

Great, thanks. I was just wonder if my math is right by 20 basis points you meant of the margin pressure from the T&M to cost plus. So the impact was about $0.03 to earnings is that right?

Approximately, yes.

Okay. Why do you think -- this the first time we heard of this from you. It is only five contracts, but why do you think this might not turn into a trend? If it is saving the government money why do you think you might not see more of this?

In terms of saving them money we haven't gone through the drill of -- when you think of in a T&M with good margins, you will have on that team unbilled people who are working on the contract that are covered by those T&M margins. What the government hasn't experienced yet is that they go away as a freebie and it is into the total cost to the government or they will move to another program. So we haven't gone through that dialogue and that process with them. That's generally the reason they go back to fixed price or T&M contracts. I have gone through these cycles before, and it takes you several quarters to work your way through it.

Right, but if it takes several quarters, why wouldn't the government be pushing this more until they find themselves in a hole three or four or five quarters from now and saying it didn't work out? It seems like to them right now they are saving money off of the switch.

You also have just the timing of -- when you have three to five year contracts they only come up for recompete so often. What triggered these were upcoming recompetes where extensions were required. They just don't have that large of a contractual wherewithal to willy nilly come in and make those changes.

In terms of revenue, the short fall from your expectation, how much of that was product and how much of it was elsewhere, and if it was somewhere else, where. Can you describe where else it might have fell short of your expectation?

It was all material flow throughs. Our labor actually is very strong. The sub contract mix is very strong. The in-theater support, material flow throughs being $46 million less than the prior quarter was a greater swing than we had anticipated. We knew there was seasonality and had anticipated that, but not at that level. So it was strictly within the ODC arena that we had the top line change.

So I know you don't provide quarterly guidance any more, but when you look at your annual revenue guidance, it suggests each of the next three quarters it is going to be about $100 million at the low end, higher than the first quarter. And so I'm wondering with what you have in backlog, is that transition going to happen in the second quarter or is that more linear over the course of the year?

It will certainly begin to happen in the second quarter if you look at STI. STI had a stub period of the first through the 15th of January that was not in our financials for Q1. That's going to add over $20 million for the quarter. We have a greater number of man days and we also expect the ODC flows to pick up, and we are going to start to seeing the full expansion of these new contract awards that we have received going into Q2 and throughout. But from the Q2 baseline then we will start seeing rateably a succession of higher level top line growth.

And when you are talking about -- thinking about this year that analysts should think about the low end of guidance, are you talking about earnings and not so much revenue given the cost pressures, or are you talking about both?

I am talking about the earnings side. We work through the recovery plan. Not the top line.

And then --

And we have not given up the ghost yet on that.

Correct.

Right. I'm just trying to reconcile the revenue and the year with last quarter you talking about giving the numbers, there was about 93% visibility to the year on the top line. Based on what was coming out of the backlog and recompetes is that still the case?

Yeah. Still the contracts are there, the ability to work through that is there. It's the timing of the requirements for the government for these ODC flows. We still have strong growth in labor that's going to provide returns. It is when the government needs these material flow throughs, and the first quarter drop was greater than we anticipated based on historic averages.

Please remember we are still forecasting $2.6 to $2.8 billion which is up from $2 billion. So we are forecasting 30% plus growth on the revenue line. Also forecasting profit growth on the net income line for the year.

And with the raising of capital, I hear the increased effort there, should we take it that you are close to any deals of magnitude or in late stages given that you have already gone ahead and raised the capital? Or are you no closer than you were before and it was just really to be prepared in case a book comes by you that are interested in?

As you know well, sir, in the acquisition business, there is no such thing as close. We have continuous discussions and they are on going, several a week in fact, but you never count them until you get all the way through the gate.

And it is fundamentally different as we sit here today looking at the number of candidates that are out there in our core that have come to market in the last month and a half. With the change in OCI we expect those numbers to double. If I look at the last three or four years in my industry, I think it has fundamentally changed and we are now in a consolidating market.

Can you reconcile that without any timing, when you are talking about recouping the $0.14 in expenses, are you talking about once an acquisition is made on an annual basis? Is that what you are sort of are getting at and not for 2010 specifically?

Yes, it is from the time frame going forward and not recovery in full because we can't time acquisitions and we wouldn't be able to communicate that. The positioning of the debt is very important for us because of our strong positioning in the market and the ability to react quickly to the right acquisitions as they come along. That's the purpose of establishing that debt.

Last question I have --

I have to emphasize our $2.6 to $2.8 billion projection does not include any acquisition revenues at this point.

Right. The last question I had was you had mentioned most of your business bookings were from new business. Can you maybe quantify that as a percentage or number for us?

It is about 56%.

All right. Thanks very much.

We will now take a question with Joseph Vafi with Jeffries & Co.

Hi, guys, Good afternoon. A lot of questions have been already answered. Maybe one question, one that hasn't been asked on the debt financing -- well maybe hasn't been asked in this way. If you hadn't anticipated the OCI changes, do you think you would have done such a material debt financing or would you have just kind of gone along as you kind of have been doing before with your cash structure?

So that's a great question, and obviously our interest in systems engineering and test and evaluation driven by conflict motivated George and the board, but we also see a number of properties in core intelligence that are coming to the market as well. While they may have some headwinds in the short-term, we think the sense of urgency and the threat today is going to continue to make those properties of interest. We think there is going to be a lot more competitive pricing and there will be a hesitancy around over buying for anything especially if it's got exposure to Iraq or Afghanistan. But it is a rich market of opportunity out there. And remember when we think of strategic acquisition we think accretive.

Joe I would add in terms of making this decision for a long-term view, now is the time given the market and interest rates for these notes. So when it combined with the opportunities coming along as well as the timing, the interest, it was a good time to take this action.

Okay. And then maybe just a follow-up to that. If you look at an acquisition target that was either an operating entity within a defense prime versus a stand alone company, obviously every deal is different, but is there any kind of way of saying a carveout has certain benefits and what those might be, and what might be the unique benefit that a stand alone brings versus a carveout in terms of deal structure, accretion, or client penetration or client opportunity?

Carveout is very often associated with one of the classified agencies where we are looking for specific capability because that agency and that code has a high revenue potential. But the prime contractor who had been working both sides has been told by those agencies they can no longer be both the conceptual company and the production company. And that's what we are seeing out there which drives us on to something.

Joe I'd say a carveout -- the only other comment is it would have a much more frontloaded surge to get that integrated. So the longer-term returns would be greater with a little bit more headwind in the first quarter.

Okay. Would there be anymore D&A or amortization in one type of deal versus another?

No, it is all based on the fair value of the assets acquired.

Okay. And then maybe just one kind of quick housekeeping question and I might have missed it. I saw that backlog increased 13%. Do we have the number without STI in it?

STI was about $900 million in total backlog and $300 million of funded.

Okay. All right, thanks a lot.

We will now go to Bill Loomis with Stifel Nicholaus.

Hi, thank you. Can you give us what the split was? I'm just trying to understand between the two components kind of the Iraq countermine component and the Afghanistan focused SOCOM component what the revenue split was between those two?

Bill, I think as we said in the last call we are going to combine our in-theater operations for one overall revenue communication for each quarter.

Okay.

TACOM was about $88 million. I will go ahead and say that because it is going to be in the queue. For that one program.

And then on the Sensor, I know you gave the organic growth, but what was the actual Sensor revenues for the quarter?

Sensor revenues were just shy of $90 million in the first quarter.

To ManTech.

To ManTech. There was a fair amount of ramp up on some contract awards that happened in the fourth quarter that are occurring as we go through Q2 based on subcontractor and direct labor additions. They have over a hundred direct recs that we are helping them to support.

And in the press release you talked about two different sections. You talked about how Global Property and TACOM were extended and then separately talked about the pressures from contract negotiations. Were one of those two contracts one of the contracts that got renegotiated? Global Property or TACOM?

It didn't impact the headwinds that we had talked about.

So neither one of those two got renegotiated when they got extended, is that true?

They had some, but it wasn't in the realm of the headwinds that we had talked about. But they were normal negotiations to complete those.

Okay. And then the DSO's -- what were they adjusted for if we had Sensor into the full quarter? Do you have that figure handy? If they would have had a full year's revenue versus their receivables, their DSO's would have been lower.

I don't have that handy. I will have to get that to you.

Okay. And then I think I missed it earlier on the call you talked about TACOM contract and SOCOM, what is the status of that recompete? Did you get the formal extension into 2011 did I hear?

Yeah, exactly.

When is that? Can you tell us a little more about how that is going to unfold?

They went through with a renewed acquisition strategy and shifted the potential award date from November of 2011 to February -- I'm sorry. November of 2010 to February of 2011.

And that includes both the TACOM and the SOCOM so all of your MRAP support?

Yeah. So far their acquisition strategy is still to consolidate the programs and compete them as one integrated program which we think gives us great advantage.

And have they talked about any change in structure in terms of how the contract is structured or maybe taking parts themselves or anything like that?

They are just considering what they will do to bridge and what form that will take and we are just in discussions with them now.

Okay. Thank you.

Thank you.

We will now go to Edward Caso with Wells Fargo.

Hi, thanks. I was curious there was a big up tick in payables, accruals. Was that a timing of a pay cycle?

Hi it's Kevin. It's primarily the integration of STI into our balance sheet. They have favorable payment terms to subcontractors in terms of pay one paid for some, and it is primarily that, but in addition we had about $14 million of federal and state taxes that were accrued that will be paid in Q2 along with normal Q2 payments. So from an operating cash flow perspective we will see a decline in the operating cash flows in Q2 as we pay basically two times the amount of federal tax payments.

Maybe I missed it, but did you guide to a new tax rate for the year?

A tax rate for the year will be 38.3% and that will equate to a 38.4% effective tax rate for Q2 through Q4.

In the past you talked about non national security acquisitions, but I didn't hear any of that today. Are you moving away from targeting some of the civilian agency efforts?

We still have interest -- when you think of our core capability around cyber and around IT it is a natural extension for us to think that civil. We just haven't seen the number of possibilities around there that we have seen in our core traditional markets. But it is still on the horizon.

And I guess that's it. All right. Thank you.

Jennifer, are you ready to take the next question?

Yes we now go to Tim Quillin with Stephens Incorporated.

Good afternoon. In terms of STI, the revenue was a little under $90 million in the quarter. I think you said that would go up by roughly $20 million as they get a full quarter in Q2. Do you still expect to get to $450 million for the year?

Yes, we do. Strong growth, strong awards starting to ramp up. We feel confident about hitting a $450 million revenue and a $31 million EBITDA.

Okay. And now is that based on things that you have already won or based on things that you expect to win that are in the pipeline?

It's largely based on the ramp up of existing contract and task order awards based on customer requirements.

Okay. And in terms of the contracts that were adjusted from T&M to cost plus, Larry, you mentioned there was a small percent of revenue. Can you say more precisely what it was, and was there a specific customer set or a customer type that is doing more of this right now?

It was two different customers on different sides of the Potomac River. So no real consistency there. I think it was mostly driven by changes of contract officers and the need for extensions.

Yes, it's Kevin, I would say in aggregate when you looked at the five contracts they were less than 2% of the revenue. Probably more like 1% to 1.5% range. But again they had higher level returns based on the type of work that we had performed.

And then just lastly, regarding the debt that you issued, did you have -- or do you have a specific target in mind, or is it just general, generally looking at acquisitions?

We basically have a target of completing acquisitions as we always have as part of our history and our method of growth. It is just that we know there will be opportunities. We forecasted what we think the revenues would come out of those acquisition candidates, and we calculated how much we would need. That's how we arrived at the amount we went to the street for. I think you know they offered us far more than we actually signed on for.

Right. So you erased $200 million and you have a $300 million credit line. I think you mentioned some time on the call that seeded spinouts may be close to the $500 million range, so just I'm wondering if you have a specific seeded target in mind. Thanks.

There are a couple opportunities we have that are quite large without getting into the precise amount, but some are quite large. And that's what drove us. We didn't want to go and go through this exercise and wind up with $50 million or something like that. Indeed I think you know we were offered as much as $600 million. So it focused on if a large opportunity came we could respond.

Thanks, gentlemen.

We will now go to Brian Kinstlinger with Sidoti.

Thanks. Just two follow-ups. I am still trying to reconcile the revenue from the first quarter and where it is headed. I'm curious, are there some major contracts for example that you signed in the fourth quarter like the C4 I4 [hachuka] that hasn't begun yet or have most of your contracts already begun ramping? Give us a sense of what's been signed and what hasn't ramped yet maybe.

It is Kevin Phillips. We have the four systems engineering contract wins that I think Larry had mentioned that are going to begin ramping up. One of them began in late Q1, but they are going to certainly ramp up aggressively over the course of the second quarter. Continued growth and expansion on the Electronic Proving Grounds effort will likely see some ramp up on our C programs, ODC supporting other programs as well. Continued growth with Global Property. So we have a number of programs that are ramping up in addition to STI which we expect again based on the task orders and the awards to ramp up in the second quarter, and that moves into the labor-based growth in-theater supporting the route clearance and MRAP efforts. On top of that the material flowthroughs that will begin to catch up. And with that I will hand it over to Larry.

I think you covered it.

Okay. And the other question I had, you mentioned one of the protests where you won the contract that will be recognized next quarter on bookings. Are there other awards that are not yet able to be mentioned that are being protested that you've won that are of size like that?

Not of that size. There are some out there that are still being discussed and debated, but nothing of that magnitude.

Okay, thank you.

We will go next to Tim Quillin with Stephens Incorporated.

Yes, thank you for taking a follow-up. Kevin, you had given guidance for $650 to $720 million from countermine and SOCOM. Is that still a good number?

Yes on the lower end. On the upper end, it may be more in the range of $700 offset by the growth in other programs.

Okay, thank you.

We will go next to Gautam Khanna with Cowen and Company.

Yes, you may have answered this, and I apologize if I am asking it again. But when you mentioned the 15 to 20 basis point drag from those five contracts, did you mean through the full year? In other words it is about $4 million pre tax or $0.07 cents a share for the year?

Yeah, so for these contracts it will have a (inaudible -background noise) forward impact and it will have (inaudible - background noise) of that much for the year, and that's what we are aggressively wanting to address (inaudible - background noise) to offset.

And may I just ask, the two customers at least that renegotiated these extensions, do you have any others that would potentially be coming up? With those customers this year?

Going through the ones that we worked through with the customer, I don't know of any additional ones . We're scrubbing that and going to monitor it closely. But there we don't know if the other ones are out there that at this time will have that

Thanks.

We will now go to Michael Lewis with BB&T Capital Markets.

Thank you for taking the follow-up. There was some wind or something on the call there. Can you talk about the impact from these contracts again? Did you say it was going to be, was it $0.05 to $0.07?

Yeah, 15 to 20 basis points going forward, $0.05 to $0.07 . But that's what we are working to offset as we go forward, and that's where we talked about the high end of our earnings range having some headwinds that we are going to be working to

But Kevin, here we are moving into the end of April. What is your level of confidence that you will probably by the end of this fiscal year be able to find ways to offset some of this headwind? In other words, there is probably other contracts where you can make up some of the short fall. What is the probability of that happening?

Well first of all on the indirect side we can fairly quickly manage some of our depressionary spins. We can manage things like R&D and other indirect expenses and we are going to work aggressively on the bottom line drivers . And from there work within these programs and other programs to recover. Given adding a thousand people in the first quarter, given the contract awards we have as well as our market positioning, I think that we can recover. I think that we can get to that 8% return even toward the top end of our business earnings -- guidance ranges, but it will be a challenge, and we're going to work to achieve

Okay. Then just a quick final question. George, tell me if I am wrong here, but do I recall correctly that back in late 2004 or early 2005 we saw something like this happen in the contract base that was a very quick fad, and then it kind of went away or --?

Yes.

Okay, so and --

You goes through these cycles, as you know well. And there is pressure from the Congress on the DOD to show you doing something different. It doesn't mean you are doing something better, but do something different, and that's what we are experiencing here.

Okay. Thank you so much.

Jennifer, I think we have time for just one more call today. Or one more question.

Okay. (Operator Instructions.)

Is that it?

At this time there are no further questions.

Okay great. Given that there are no more questions I think we will end the call. On behalf of the team I want to thank everyone for their interest in ManTech.