ManTech International Corp (MANT) 2010 Q2 法說會逐字稿

Thank you for standing by and welcome to the ManTech conference call. My name is Dwayne. I will be the conference facilitator today, and I would like to welcome you to the second-quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

And now at this time, I'd like to turn the conference over to Stuart Davis.

Thank you, Dwayne, 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, and Kevin Phillips, our CFO. We also have members of our senior team, including our three Group Presidents, available for the question-and-answer session.

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 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.

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

Good afternoon and thank you for participating in today's call. We continue our topline momentum in the second quarter with 29% revenue growth, including organic growth of 13%. Kevin will give you more insight into the financials, but both profitability and cash collections were excellent in this quarter.

We aren't just growing, we are growing profitably and we aren't just making higher profits. We're collecting them in cash so we can help to grow the business. In addition, our business development wins and prospects give us confidence we can sustain our healthy growth going forward.

As usual I would like to update you on the major trends in our industry and their implications for ManTech and our strategy going forward.

Yesterday, Congress approved the fiscal 2010 Supplemental Appropriation Bill which provides $37 billion for the wars in Iraq and Afghanistan. The late passage did not affect us because our customers with wartime urgent programs were fully funded.

Turning to the year, fiscal year 2011 funding, the House and the Senate Appropriations Committees have both approved guidance for the various subcommittees in order for them to mark up their programs. The guidance for the Defense Department is nearly -- is near $700 billion, $7 billion to $8 billion below the President's request, but quite substantial.

The primary allocation will now get worked by the Defense Subcommittees, but is a positive sign that the overall budget process is working and that the defense mark will show more than $13 billion growth above the FY10 enacted level.

There are also positive signs from Congress on cybersecurity with the potential for passing new legislation within the next few months. It is still early to tell the details of the final legislation, but it could help shape the market, and ManTech is well positioned across the entire cyber spectrum.

In June, I attended the Undersecretary of Defense Ash Carter's presentation on recording -- restoring affordability and productivity in Defense spending. The objectives he laid out are admirable, and he has tapped Jack Gansler, who is highly respected, and once held the same position, to work with the industry on this issue. It will take some time for them to implement any changes, and the impact on our sector is uncertain. But I don't see any danger for ManTech.

The same week, Office of Management and Budget released memos freezing $3 billion on financial modernization programs. We are not on any of these programs, but the memo underscores the three main points for ManTech.

First, when money is tight, mission-critical supports of the warfighter gets funded at the expense of backorder systems. Second, performance issues cause the government to highlight the need for independent systems engineering oversight of complex systems, as we provide to the Department of Homeland Security -- as an example of what we provide to the Department of Homeland Security Border Initiative.

Third, in today's environment, strong program execution is paramount. And that is a core ManTech strength. For example, yesterday we were awarded the Contract of the Year Award by the NASA Goddard Space Flight Center for the third time in their last 10 years for our substantial contributions to the NASA Goddard Mission and, in particular, our commitment to continuous improvement.

This is certainly a good description of our approach at ManTech. And I'm very proud of the support that our more than 9,000 people provide to our customers every day.

Moving to the merger and acquisition issue. We have formally completed the integration of STI, which we acquired last January. We are pleased that our S3 contract will be extended for another five years and we see tremendous growth in this business. We are directly supporting the ISR needs and missions of the warfighter and we do not anticipate this spending coming down over the foreseeable future, regardless of any operational tempo in Iraq and Afghanistan.

Simply put, intelligence, surveillance, reconnaissance is critical and a growing component of how this nation engages in conflict. We are prepared to support the US Army's CECOM customer as it moves to the Aberdeen Proving Ground. And last month, we broke ground on our new facility near the base. Cadre of the STI folks will move to the area in the coming months. We have some people there now.

In addition, we are pursuing new opportunities that leverage our established presence and working relationships with key customers near Fort Monmouth, such as the Veterans Administration.

We are optimistic that we will be able to complete several acquisitions over the next year and we are well-positioned to do so. We are on the path to generate more than $140 million in operating cash flow this fiscal year. We have cash on hand, visibility into future collections, untapped revolver, and ready access to the capital markets to apply to our grow -- to grow our Company.

In summary, we see clear support through fiscal 2011 for continued double-digit organic growth and expect to be able to add significant acquisitions, consistent with our strategic direction. Our goal is to build our revenues to $3 billion to $5 billion over the next several years.

The world is a dangerous place and the nation will spend what it needs on its national defense. I simply do not see major cutbacks to the overall level of defense spending in a world where so many regions are unstable, the terrorists are targeting our country's people, the infrastructure, and nation states and criminal elements are attacking our cyber assets. I see no downside.

And with that, I will turn the call over to Kevin.

Thank you, George. Quarterly revenues of $662 million represented 29% total growth above last year's second-quarter revenues of $514 million, with 13% coming organically. Direct labor was up 15% overall, compared to the second quarter of fiscal year '09 and more than 10%, excluding STI.

Breaking down the components of growth, STI was a driver with about $130 million in the quarter. This was the first full quarter of STI contribution. And along with our other business, we are seeing tremendous demand for its services. As George said, STI is now fully integrated and operating effectively.

Our EPG or Electronic Proving Ground contract continued to scale, and for the quarter, it was at full run rate. Our four major systems' engineering awards in Q1 and Q2 are still ramping. They contributed materially to the quarter's growth and they should expand to be near full run rate by next quarter.

The other major driver of growth in the quarter was the expansion of our largest cybersecurity contract, which is now running about $100 million a year. Cyber continues to be a strong growth engine for the Company. It has averaged about 30% to 40% growth for us over the past several years.

In addition to our legacy work and computer network attack and exploitation getting expansions, there has been a big uptick in the cyber defense business especially in the federal civil space. We recently won a position providing Security Operations Center support to the FDIC, and we have bids outstanding at the USDA and FBI, with more coming.

We also have reorganized the business to increase our focus on cyber, creating three business units with the cyber focus, which are better aligned across customers and capabilities. The MRAP and route clearance support contracts contributed $139 million in the quarter. Labor is drawing on these contracts, but material purchases are tempered because the new missions and operational tempo in Afghanistan have just begun to ramp up. We expect this business to increase in the second half.

Overall, we are pleased that we have growth engines and opportunities spread across the enterprise, especially ISR in Lou Addeo's group, systems engineering in Terry Ryan's group, and cyber and other intelligence mission support in Bill Varner's group, which can drive growth across ManTech as a whole.

In Q2, organic growth, excluding STI and MRAP route clearance work, was 10%. The other major revenue breakouts that we track were relatively consistent. We increased our percentage of work as a prime contractor to -- slightly to 74% in Q2 and contracts mix stayed at Q1 levels. 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 $56.5 million in the second quarter. So operating profit was up 26%. The operating margin was 8.5%, and I am especially pleased by the way the organization responded to the first-quarter operating margin challenges.

When several key contracts unexpectedly changed from T&M to cost plus in Q1, we embarked on an ambitious recovery plan. We successfully moved people onto direct labor and renegotiated fee on materials on some contracts. And we had strong award fees in the quarter as well. Also, G&A for the quarter ran at 6.5% of revenue. We are appropriately lean and cost competitive in today's environment.

Compared to last year, we have reduced G&A by $4 million, while adding $148 million in revenue, even while increasing amortization by $3 million from the STI acquisition.

In Q2, we recognized a $2 million gain due to increased forfeitures and stock options. If you exclude this one-time pickup from our quarterly operating margin of 8.5%, we had an operating margin of 8.2% and we expect to achieve our 8% target operating margin for the year.

Net interest expense for the quarter increased by $3.2 million as a result of the $200 million of senior notes issued in April. This was a deliberate decision to enhance our ability to complete additional acquisitions. At 39%, the effective tax rate ran about 50 basis points above where we expect it to run which translates to about an impact of about $0.01 on earnings per share.

Still, second-quarter net income was $32.2 million, up 13%. This translated into diluted earnings per share of $0.88, which was up 10% from last year's second-quarter earnings of $0.80 per share.

Now onto the balance sheet and cash flow statement. We continued our steady discipline around cash with strong operating cash flows of $70 million for an outstanding 2.2 times net income. DSOs for the quarter were the lowest in our history at 63 days. Along with our strong cash flows and cash management, one of the benefits we are seeing from the STI acquisition, beyond the EPS accretion, is a lower DSO as part of their business model.

As of June 30, 2010, we had $162 million in cash and equivalents, $200 million in long-term debt, and no balance on our $350 million revolving credit facility. We are well-positioned to use our balance sheet to grow the Company and shareholder value through strategic accretive acquisitions.

Before turning to guidance, I want to give you a view into the nonfinancial forward business indicators that give us confidence in our outlook. In Q2, we posted a book-to-bill ratio of 1 for the third straight quarter, even as some awards slipped to the right. Our largest award was for $160 million to provide systems engineering support for the Air Force Launch and Range System Wing. The other awards in the quarter were spread across the enterprise and balanced across our capability sets.

At the end of the quarter, our backlog stood at $4.5 billion, which was up 15% and funded backlog was up $1.4 billion, up 40% since last year. Looking forward, our pipeline shows tremendous health. Bids outstanding increased to $2.1 billion at the end of the quarter and now stand at $2.6 billion.

The total qualified pipeline at the end of the quarter was $23 billion, up from $21.5 billion at the end of the first quarter. The pipeline is especially flush with ISR, systems engineering and cyber defense opportunities. Our business development success is leading to double-digit organic growth, and we can achieve more than a one times book-to-bill in awards for the second half of the year.

On the HR front, during the quarter, we increased headcount by another 220 people, or over 1,160 year-to-date. We have about 1,000 open requisitions for direct funded work so our headcount will continue to grow. Our voluntary attrition rate ticked up slightly to 19.2%. But involuntary turnover came down as we expanded our redeployment campaign. Employees understand that we are hiring them for a career, not a contract, and we expect to build engagement and productivity and lower attrition over time.

Turning to the forward outlook, we are now halfway through the year with good visibility into the second half. So it is appropriate for us to narrow our ranges. Despite the drop-off in material volumes in our in-theatre work, and contract mix changes in Q1, we are able to maintain the lower end of our ranges for revenue, net income and earnings per share.

Our new fiscal year 2010 ranges for our revenue of $2.63 billion to $2.75 billion which corresponds to 12% to 17% organic growth, net income of $123 million to $127 million and diluted earnings per share of $3.36 to $3.48 per share.

In Q3, we expect revenues to build as we continue to ramp up recent systems engineering wins. But operating margins may come down slightly without the one-time stock option gain.

In Q4, revenue should pick up even more with expected awards from Q3 while margins hold relatively constant, coming in at about 8% for the year. Given our pipeline and proposals outstanding, we see good momentum heading into 2011.

Looking to next year and beyond, we still believe that our basic business model can achieve organic growth for revenue exceeding 10%, with our goal to achieve 10% earnings per share growth. Acquisitions will bring additional revenue and earnings and may change the margin profile slightly.

We have not had any further conversion of contract type on important programs since Q1, but we do have some programs under review which could affect the margin profile slightly in 2011. On balance, I am pleased with our resilience as our core business was able to hit double-digit growth and management actions were able to offset reductions from profit -- to profit on some contracts. The outlook for our business is positive and our financial awareness and accountability is improving.

With that, I will turn the call back over to George.

Thank you, Kevin. Before turning to your questions, I wanted to address the departure of Larry Prior, our former President and Chief Operating Officer. He advised that he had accepted a position with BAE Systems and asked to leave, and we wish him well in his new position.

ManTech has a long and successful history of growth and financial discipline. We have a very strong management team and we have no intention of changing our strategic direction or commitment to the mission.

The Board of Directors and I are actively engaged in the process of identifying a new president. We believe that that process will not take long, and we have the management depth and commitment to continue to operate effectively and grow.

So we are pleased with our second-quarter performance, our future direction and, most certainly, the recent Congressional appropriation actions. With our position in the mission-critical areas and our financial strength, ManTech is poised for market-leading growth and absolutely committed to being the leading company in the industry.

I have to once again salute our employees for all they do. It is their work that produced the results you have just heard about.

With that, we are happy to take any questions you have.

(Operator Instructions). Michael Lewis with BB&T Capital Markets.

Thank you so much. And George, I was wondering since you guys addressed cybersecurity again during this call, if you look at the cybersecurity side of your M&A process, where are you focusing most of your M&A dollars? Are you looking at C&E, C&A, or C&D opportunities? In other words exploitation, attack or defense opportunities on the cyber front?

I'll tell you what, I've got an answer to that. But let me ask Bill to give you some input on our thinking, what we are looking at.

Yes sir. The straightforward answer to your question is that we are certainly looking for opportunities in all parts of the market, particularly we are looking for organizations that offer something that we don't, something that would augment our strengths and capabilities. And we believe we are very close to being able to participate in several such opportunities in the very near future.

George, would you care to --?

No, I think we are looking across the board. We do have some active candidates for acquisition at this point. But as you know well, you never count them until you close them. But we believe the growth we have experienced, as Kevin reported to you, will continue and we will be leading edge technical, also.

Okay, and then let me just ask the same question another way. If you look at the defense portion of cyber, it probably makes up about 50% of the transactions that we've seen so far. But the expectation is that the exploitation market is probably the higher growth, higher margin opportunity for industry.

Does that align with your strategy? In other words, are those numbers somewhat on point with what you are feeling on the M&A side there, George?

Bill, I might ask you to comment on that also.

Yes, I believe it's hard to disagree with those numbers. We recently did a re-organization exactly along the lines that you just suggested, and we believe we are well-positioned to move forward in all of those areas.

Kevin, you also have some comments on that.

Yes. What I'd say is on near term, the funding priority is in the C&E area. But long term, we are seeing an uptick in bids that are going to support the C&D activities across the entire federal government and now would be a great time for us and we will strongly consider C&D type activities, because it will have expansion opportunities going out the -- 2011 to 2012.

Okay. And then, Kevin, just one more quick question for you. On the --. You addressed the shortfall from the Intel contracts being repriced last quarter, but 20 or 30 basis point reduction EBIT margin year over year, what were the moving parts of that 20 to 30 basis points? And how much of that decline is attributable to those Intel contracts that you discussed last quarter?

As mentioned last quarter, I think the overall impact of those changes were about 15 to 20 basis points and that is a carryforward impact, and what we've been doing is looking to work on realigning the staff to more billable positions and, I think as we mentioned before, having those areas where we may have provided unbillable direct support to get those personnel billable as well. And what we're doing is working and have successfully worked to offset a fair amount of that so that we can hit that 8% growth goal -- 8% margin goal for this year.

So 15 to 20 basis points was impacted by those contracts. I think we are moving well along the way with that, along with our overall growth to help recover and get us to an 8% plus operating margin for this year.

Mike, this is Stuart. But you know, if you are looking year over year, the major driver in that comparison is going to be STI and they just have a different labor-to-subcontractor mix than we did. And so, when we brought them into the fold, we were looking at bringing the op margin down ballpark 80 basis points, which is the major driver of that year-over-year compare.

Okay and that is exactly what I was looking for. Thank you so much.

Peter Arment with Gleacher & Company.

Yes. Could you give me a little more of an update what you're seeing in terms of the M&A opportunities in the [CDA] business? I think you kind of identified that as an area that you were going to continue to look to grow into.

We are seeing acquisition opportunities in a number of different areas. Kevin, is there any particular one that falls into the category we are talking about here?

I think you should know, there's a large number of companies that are looking to potentially are in the process of divesting. We also have a large set of businesses that may be supplemental to that in the systems engineering area that we evaluate as well. Because not only their acquisition opportunities, but for smaller companies the combined capability may help us with takeaways from other competitors.

So I think we are looking both at spinoffs. Whether they are of value or not, we should target them as well as companies whose capabilities will help us combine to do takeaways from some of these other larger primes.

You also have to remember, we don't wait for the brokers to send books in here. We are very aggressively out talking to companies that we know and companies that we have identified as acquisition candidates. And as you also know in this, you don't do an acquisition necessarily in a day. You make that initial contact and six months later, the phone rings. So we see the marketplace producing adequate candidates for us.

Okay. Thank you for that. And could you just give me what the -- what's the total employment now at ManTech?

9,100 and -- Kevin.

(multiple speakers) 9100.

If it's a number, I have to ask Kevin.

About 9100.

All right. Thank you very much.

Joseph Vafi with Jefferies.

Good afternoon. I was wondering if book-to-bill in the quarter here at 1.0 was -- if there weren't any protests or any significant protests, would that have changed the book-to-bill here this quarter at all?

There were not a significant -- there was maybe one protest, but it is not a sizable one that would have impacted that. I'd note that about half of the awards were for new or add-on business. So strong relative book-to-bill, but nothing would have changed that in any material way, based on protests that are outstanding.

(multiple speakers). I'd add to that is we did have the LRSW award slip into Q2 because it was -- although it was won in Q1, it was protested and then finally adjudicated in Q2. So it hurt our Q1, helped our Q2. It all averaged out to 1 for the last two quarters.

Got it. So 50% new or add-on. Is there anything we should be aware of on any significant losses in the quarter in terms of renewals or anything like that?

No. No significant losses in the quarter.

Okay. And then, I guess, on the M&A front, I assume it doesn't change anything. Just wanted to make sure that Larry's departure isn't really changing the M&A strategy at ManTech by -- in any way, shape, or form here?

Not at all. We have always followed the same strategy, and I am personally responsible for that strategy. So we are aggressive as we were before.

(multiple speakers). Makes sense, George. And then, finally, I know that you do have that high yield debt sitting on the balance sheet. You're kind of already paying for the -- paying for the interest on it. Is that at all changing, George, your financial discipline here when you are looking at some of these deals since you're kind of already paying the cost of the interest expense?

No, and we knew we would pay that -- a slight price on that on the way up. We sit today with cash, about 100 -- well, let me use Kevin's numbers as opposed to what I know today. How much cash did we have at the end of the month?

About $160 million.

We had $160 million, we have [$200 million]. To me it was important for us to get that high yield debt and get it in place. We now have rated debt, so as we go down the road, we will find the acquisitions, and we will use that money and we knew we might pay a slight penalty on that for one quarter or so. But we felt the penalty worthwhile.

All right. Very good. Thanks, guys.

Brian Kinstlinger with Sidoti & Company.

Brian Kinstlinger Great. Thanks very much. The first one, I wasn't sure if you had mentioned this. The contracts that went in -- that transitioned to cost plus, is that process fully complete? Are all contracts at this point the cost side is adjusted?

In terms of the impact from Q1 to Q2, yes. Going forward, that totally depends on the bid strategies for every recompete and we will have to wait and see how each agency works that over the next 18 to 24 months. But, (technical difficulty) Q1 to Q2, yes.

Well, that was my next question. Because, Kevin, I think you had mentioned last quarter you were going to do an assessment of what you thought was coming forward in your recompetes and how they might transition to cost plus. Has there been any results? Has it -- does it seem like more and more contracts are going to go that route?

I think the trend is to -- for agencies to look at fixed price cost plus options. Not in all cases are they going to convert. When we looked at the Q2, Q3 activity, there did not seem to be, especially in those agencies that were driving towards that, a change. But I do think that some of the agencies are considering other alternatives, based on the communications. Where they end up is to be determined, but it's a mix. Some are moving to cost plus, some are not. Some are moving to fixed price, some are staying T&M. It's a mixed bag.

And now, if that happens again, are you able to negotiate immediately that your indirect people are not to be part of that contract anymore? Or how would you -- how will you differently address that once it happens where at the last second they tell you, we are going to give you this contract but at cost plus?

What we're doing is we're making sure that up front in control gates for the pricing strategy on these procurements that we're much more focused on ensuring that there is a direct billable portion that we managed the indirect and support infrastructure around that to maximize our returns, should those contracts go cost-plus. So we have more up-front controls around that now.

The last question I have, the bookings. Did you mention how many of those bookings were new versus how many were recompetes or extensions of new work -- of older work?

About half of the awards were new or add-on business.

Brian Kinstlinger Great. Thanks very much.

Tobey Sommer, SunTrust Robinson Humphrey.

Thank you. Just start out with one housekeeping question. Do you have an organic growth rate in terms of revenue, excluding STI?

Yes, for the quarter excluding MRAP and STI, it was 10%. That what you're looking for?

Yes, exactly. And I wanted to get a sense -- ask another follow-up question on the potential shift to cost-plus contract vehicles. Got the sense from the first quarter that it was a couple of contracting officers who made some choices. Is it your sense that this was a thing of individual decisions or I want to just get your perspective whether this is a top-down mandate or, you know, you are seeing sporadic evidence of such moves?

The quarter one actions we saw as individual instances of contracting officers. What we are tracking though is, with any communication that has recently come out from Ash Carter and the DoD, how that impacts future procurements. Because they basically said for services they would like to rearrange over time, the mix of contracts away from T&M.

Now how quickly the agencies or the government can move that is to be determined and how that really shakes out once you make intentions or policy changes is open for debate, too. But there is a long-term discussion and movement to get away from T&M. The question is whether that will actually be implemented.

Thanks. And I wanted to ask a question about any information you can give us about significant bids that you have coming up in the quarter and whether you received the RFPs for those to date?

In terms of the second half of this year's recompetes, you know, we believe that less than 10% of our business is up for recompetes. We don't see a huge amount for this year. So I am trying to understand the question.

We will have under the ordinary course receive bids for recompete work. That's -- happens every day, every quarter and outside of the TACOM and in-theatre business, we have no contract greater than 4% of our revenues.

One of the -- you know, if you move beyond recompetes and you just look at the large bulk of awards that we think are going to come in the second half, Tobey, we have responded to certainly one large one in that category. We are right now working hard on another one. That is a multi-hundred million dollar award. And there's another one that is cued to come out very soon. It has not come out yet that kind of fits into that category.

So there are some big swingers that we have submitted, another one we are working on and another one that will come out shortly.

We also hope that the fact that they passed the Supplemental and the President is expected to sign it. They usually have to spend that money by the end of the fiscal year, and we think that will stimulate a lot of activity. Hopefully, it will stimulate a lot of activity.

And that goes right into my last question. And it has to do with the activity in the third quarter, the federal government's fiscal fourth. Do you expect a kind of classic budget flush, then, as a result of the supplemental being spent and typical seasonality?

I would say that, in our guidance ranges, we have what I would consider a conservative estimate around that. But it is quite likely that there would be more potential. It's not visible in hand today, but there will be more potential for buys that could move the quarter up, based on those requests. So I think that we are expecting that type of activity, but we have not built that activity into our ranges for the quarter going into the full-year guidance.

Thank you very much.

Tim Quillin with Stephens.

Good afternoon. Nice numbers, especially with regards to margins, given what you had in 1Q. But, Kevin, with regards to the guidance, I mean it appears that the margin expectations in 3Q and 4Q were actually lower even than the adjusted number that you gave for 2Q. And is that a function of mix or lower award fees or what exactly is the thinking there?

I think it's largely building in a function of mix specifically for fourth quarter. You know, we have a lot of contracts that Stuart mentioned that are potential awards, or bids that are potential awards. They could have a heavier component of subcontract material flows. We are trying to factor that in and also be cautious about the level of ramp on staff in order to meet those projections.

So I think that we have got a huge amount of opportunity, a huge amount of open reqs. But we are trying to be cautious about the overall returns of the business given the mix that we see within the awards.

And also, obviously, those bids don't submit themselves. So we are going to increase our bid and proposal activity and bid and proposal cost and that will hit the G&A line.

And just -- with regards to this potential mix shift with the Ash Carter memo away from T&M. You have a big chunk of T&M and I understand you don't know exactly how this is going to play out, but what are you thinking in terms of your margin expectations for the whole business over the next three to five years?

What I --. It's hard to tell where the agencies will go. There are always directives and you never know what they're going to hit. We continue to believe as a goal that we can hit double-digit EPS returns. There may be, based on opportunities, a higher level of growth on the top end to get there. There might be the ability to hit it with both.

I just think that we are well positioned in markets that are going to continue to grow. We have a huge amount of pipeline in those businesses. And we think that we can provide the goals and returns that we lay out for ManTech and for the investors.

Great and Kevin just one last question on the $2 million gain that impacted your margin. What exactly was that again? And what was -- how was it taxed? Thanks.

Well, to be specific, the first year option grants for Larry did not vest and because they did not vest there were forfeitures around that expense, and we picked that up, appropriately, based on that special option grant. There is ordinary tax around that. It's normal expense that we accrue and since there was no vesting, I don't think that there is anything special with it.

Thank you.

Edward Caso with Wells Fargo.

Thank you. Just trying to get a view of the details on the guidance. The tax rate, where is that shaking out? I assume in the quarter, the rabbi trust worked against you a little bit?

Yes sir, in the quarter it did. In Q3 and 4, we are expecting the effective tax rate to be about 38.7%, full-year, 38.6%.

And implicit in your revenue guidance, what would the organic growth rate be?

12% to 17% organic. For the year.

All right. And the average shares?

36.6 for the full year. 36.6 for Q3.

And you are too quick in your answers, I'm sorry.

36.6.

No, no, no, I've got them. (multiple speakers). George, I was curious, a lot of static in the last two weeks. I mean, obviously, a lot of the give-and-take on the [war] supplemental or OCO was more about sort of giveaways to the teachers and other groups and so forth.

But there also were an awful lot -- a rising noise level from a segment of the Democratic side of the aisle. Sort of an antiwar kind of sentiment and, obviously, the disclosure the other day didn't help either. Do you sense any change on Congress's part to just embracing defense spending no matter what?

I don't think it is embracing defense spending, no matter what. Indeed there is a strong group that's opposed, as you know well. But at the end of the day, they are going to have to spend $700 billion and they know that. And the $700 billion, as I've told you before, is only 3% of gross national product which is the classic national expenditure rate for defense.

So, I have met with the new -- the gentleman who has replaced Jack Murtha, Norm Dicks, and he is very knowledgeable and he will work that appropriation bill through the process. So I don't see an impact on the defense appropriation side. Now I cannot tell you that they will not add substantial additional things, funding for teachers and others -- issues that have been raised, but the defense budget will come out $700 billion.

Gautam Khanna with Cowen and Company.

Yes, can you quantify the award fees that you saw in the quarter and what may have been kind of extra? And then, update us on your revenue expectations for STI and the counter-mine MRAP RSC type of work? Thanks.

Sure. Well, the award fees were good in terms of their percentage. I mean, we have very strong ratings from the customers and that increased our overall returns. Don't have a specific dollar amount for you. I think we were more pleased with the fact that we got 100% award fee on a contract. We got a 98% award fee on a contract. Our average is over 90% and that provided us a level of return.

But I hope that that level of performance will continue in the second half of the year. We focus ourselves on program performance, and I think that that result is proving out.

In terms of the overall ranges in the guidance for those businesses, our minimum for the route clearance is about $600 million which is down from the prior quarter's estimate, but the other businesses, or components of the business, are doing well and better. So, we are going to offset that at the lower end of our guidance range. And we are actually expecting more than the $450 million in revenue from the STI acquisition. More in the range of $470 million or greater.

Okay. And so when you say $600 million in the route clearance, just so we're clear, that includes the old counter-mine RSC and the work with some of the other vehicles -- the MRAPS (inaudible) vehicles, stuff that got folded into the --?

It does not include the RSC. It includes the SOCOM-related, MRAP-related, TACOM-related businesses. The route clearance vehicle pieces.

On an apples to apples basis, that 600 is what we did on those same types of contracts in FY09.

Okay. Thanks a lot.

Mark Jordan, Noble Financial.

Thank you. Question initially here for Kevin. You know, you've obviously pulled down the top end of the range. What went out of your thought process here to -- that caused you to bring down that range?

Sure. When we look at the material flows for the in-theatre businesses, that drops the top end of our range. We were expecting more pickup starting in Q2, based on op tempo and that has not happened so about $70 million of that came from the material flows or range of flows from the in-theatre activity. And the balance came largely from the up-side within the STI contract vehicles based on delays and past quarter bids and awards.

And frankly, the core business is moving up, not down. And so we were able to increase that as a component of our range. Top 10.

Secondly, talking about M&A and talking about doing accretive acquisitions, obviously, acquisitions from many companies in the cyber area are expensive. You know, any acquisition's accretive if you are using your $162 million in cash you have on the books.

But are you use -- when you talk about accretive acquisitions, is your cost of capital effectively the cost of that bond issue of 7.25 plus expenses as the hurdle rate for GAAP accretiveness?

No, the WACC rate does not include that full amount because we do have the revolver as well. We are not building in that as a minimum component or a guaranteed component for returns. Our WACC rate is pretty much averaged out for the combination of the revolver and the high yield when we do our estimates.

Okay, but it is based on your average cost of capital not just utilizing cash on hand?

Correct.

And I guess, final question, if I may. Talking about with STI costing you about 80 basis points versus a year ago on your op margin, is that going to be sort of a consistent relationship that when things are running well for you, you will be in the 8.2%, 8.3% op margin range as a target versus the 9-ish that you showed for much of 2009?

Mark, I think that we are building that in as a consistent. Our goal is to increase our labor component of task orders through those vehicles. Whether we prime and do the bulk of the business or we increase work share where appropriate with our partners. Having said that, we are not really building in a lot of upside to that, even though the opportunities exist in our outlook.

Okay. Thank you very much.

(Operator Instructions). Bill Loomis with Stifel Nicolaus.

Thank you. Just looking at the SOCOM and the counter-mine contract. Can you just talk about the recompete again and give us an update there? Are you still expecting them to be combined and what is the timing?

This is Lou Addeo. So nothing has really changed, relative to the recompete and timeframe. So we will expect February of 2011. In terms of the mix, we would expect the mix to include the family of vehicles that exist right now. There is not a lot of other information other than the responses and the sources sought, pretty much constant.

But the two contracts that you say, this year, you expect $600 million combined, all that business gets moved into this one procurement. Is that true?

Well, depending upon, you know, what the op tempo is in Afghanistan and the vehicles that are in-theatre.

Right, but as they produce revenue this year, that $600 million of revenue this year, that group of contracts is being recompeted as one recompete. Right?

We expect that, yes.

And then, just looking at the -- Kevin, just on the $2 million gain. Just so I understand the tax rate, right, when I use the full tax rate I get $0.03. Is that the benefit in the quarter or was it different?

Yes, $0.03.

And then on the S3 contract, you know certainly, I mean even 450 was a huge growth. Now you are saying 470 on that contract. What is the main driver there? Are you gaining market share on that vehicle versus the other S3 players or, you know, is it the Afghanistan surge that is specifically driving a big increase in task orders? Or is it another vehicle that hit funding levels? What's causing that big growth?

What I would say and then I will let Lou add on. There are a number of task orders that have been awarded under that vehicle, which is great. And there is also a great amount of opportunity set. The awards that took place prior to acquisition allow for a significant amount of capacity on those task orders for expansion. So, based on customer demands and mission requirements, the customers have the ability to flex up and surge up. And I think what we're seeing is the success of the former STI team to win business, and the combined success to expand on opportunities on existing task orders that have that capacity. Lou, do you want to add anything?

No. I was going to say I think that the combinations of organics on the existing task orders and an increase in some of the focus and direct labors is a contributing factor.

And as far -- is it being driven by in-theatre needs? Or what's the -- what's the big driver in growth overall in that vehicle?

I think it is across the board.

Across the board. What you mean by that?

It's CONUS, it's OCONUS, it's in the country. It's outside. You know, it is a pretty even mix.

And is there any dynamics going on as far as that contract vehicle S3 taking market share or the Army showing increased preference in that versus some of the others that may have been used?

Well, I would hope so. I think that the S3 is valuable to us and we are increasing tasks. But there are other Army businesses and TACOM and Army Material Command that were also driving revenues through. (multiple speakers) talk often about that division, but there are a number of other divisions within our group that have Army business.

I don't think -- I think the Army is taking advantage of the vehicle, but not going all in on it in terms of putting more and more opportunities against it. They are looking at other vehicles.

I guess my whole point of these questions is to see what the growth dynamics of that contract could be in 2011. You know, are you looking at similar type of growth because you know this is more of a preferred vehicle or the surge increasing in Afghanistan in terms of average soldiers for the full year. What are your early thoughts on that? What it could do in 2011?

We are going to see increasing growth on the S3 vehicle. There are a number of submits and bids in the pipeline right now and an increasing number of opportunities. So we are pretty excited about what is going to happen in that vehicle.

And the margins, Kevin, are they tracking as you thought before you acquired STI? On that -- just on that contract?

When we acquired them, we -- that's the bulk of it, but not all of the contracts they had, but when we acquired them, we noted that we expected about a $31 million minimum EBITDA and I think they are tracking well to that prior to the amortization of PCCs and things like that. Yes.

Okay. Thank you.

We do have a follow-up from Michael Lewis with BB&T Capital Markets.

Thank you for taking the follow-up. Kevin, you have averaged over the last six quarters about $43 million in SG&A. Should we just assume around this level going forward for the next few quarters since you have been able to cut so much cost out of the business?

When you factor back in the one-time stock option expense and you look at that as a percentage of revenue, plus or minus a couple of basis points based on surge for B&P, those are reasonable levels to expect. In our business we think that we are fairly efficient, but we can manage within that to prioritize for topline growth, recruiting, retention. But there may be quarters where we do more surge work around those things based on requirements.

Okay, that's fair. Thank you.

We do have another follow-up from Joseph Vafi with Jefferies.

Hello, just one follow-up. I know, Kevin, you commented in your remarks on a greater than 1.0 book-to-bill in the second half of the year. You know, obviously, I think you are probably thinking Q3 will be big seasonally.

Do you have any view or look into Q4 at this point with that? Do you think that could be a greater than 1.0 book-to-bill quarter at this early point in time?

Yes. We have a significant amount of proposals outstanding, proposals in the pipeline, a lot of activity that I believe from the op tempo we have today that we expect above 1 times book-to-bill in both quarters. Very -- a whole lot of activity going on.

Okay. That's great. Thanks a lot.

With that, there are no further questions in the queue.

Okay, Dwayne, thank you for hosting the call. And I want to thank everybody for joining in on today's call. And we will turn it back over to Dwayne and end the call.

I just have one comment. I have to once again compliment our 9,000 people. We talk about producing this. It is 9,000 people out there who have done this. The other thing I have to report and as you know, yesterday, our people at NASA Goddard were again awarded Contractor of the Year for NASA Goddard and that is the third or fourth time since beginning -- I guess it's the third time. I cannot say enough about our people. Well done, guys.

Very good. With that, this does conclude today's conference call. We do thank everyone for your participation.