ManTech International Corp (MANT) 2010 Q3 法說會逐字稿

Good day. My name is Keith. I will be your conference facilitator today. At this time I'd like to welcome everyone to the ManTech Fiscal Year 2010 third quarter conference call. (Operator Instructions). Today's call is being recorded. Mr. Davis, you may begin your conference.

Thank you, Keith, 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, Chairman and CEO and Kevin Phillips, Executive Vice President and CFO. We also have other members of our senior team including our three group president , 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 different materially from anticipated results. For a full discussion on 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 understand no obligation to update any of the forward-looking statements made on this call. Now I'd like to turn the call over to

Good afternoon and thank you for joining us on today's call. In the third quarter we continue to demonstrate strong growth and profitability with revenues up 28% and an operating margin of 8.3%.

Also our bookings were excellent, which shows that our strategy to focus on high-end events and intelligence mission is working for us. Looking ahead to major trends in our industry, we are now operating under a continuing resolution, a CR through December 3. The ultimate resolution of the FY 11 defense budget is hard to determinate at this time given the uncertainty with the mid-term elections, but funding for priority programs will continue within a framework of the defense budget and funding around $700 billion level.

We expect to operate under CR through the March time frame as we did in the 2006 election cycle or even for the full year. But we don't anticipate any major impacts on ManTech's revenues or profitability. Most of our growth for the next year is from our strong backlog that allows us to improve market share from programs that will be funded because of the war-time mission or critical-mission items.

Over the past couple months, Secretary Gates and Under Secretary Carter have issued various memorandums attempting to clarify their positions on efficiency within the defense budget.. We have positioned ManTech to be an efficient provider of critical services and technology. We believe that relatively few of ManTech's people fit within the definition of service support personnel as Secretary Gate's is trying to reduce to save $100 million.

As we look over the next several years, we still expect the markets that we are best positioned in will support double-digit top-line growth, organic growth from ManTech International. Acquisitions will continue to be part of our growth strategy, the STI acquisition is proving to be as valuable as we expected. They are a great team with a deep understanding of the customer mission and several key contracts.

We are on track to exceed the initial STI projections that we presented in January and the tremendous success that we have had with the new win from the combination of STI and ManTech means a strong growth will be sustained in 2011. The keys to the STI acquisition thesis are coming to pass. The S3 contract will soon be extended.

We have demonstrated our ability to win our existing S3 subcontract to work as a prime and we're increasing the proportion of direct labor on the legacy STI work because of a much broader base of skills and capabilities. ManTech has 9800 people to bring to the market compared to 250 that came from STI. Thus, we have the stronger capability.

I am also pleased that we're able to utilize our strong cash position to acquire the security and intelligence solution business from Kinetic. As was the case with STI, we believe that integrating S&IS business we will refer organic growth as we are seeing more opportunities to combine cyber with physical security. We can now offer a mutual customers comprehensive solutions for the full range of security and threats.

We have a solid pipeline of full-scope security services opportunities for the missile defense agency on the Midas contract and other defense intelligence customers. Looking ahead we have a robust pipeline of potential acquisitions in the $50 million to $200 million revenue range. We remain optimistic that we will be able to complete several acquisitions over the next year.

Our strong cash flow and balance sheet positions us well in the market where scale, capability and efficiency are going to be even more important. In summary, we see clear support through fiscal 2011 for continued double-digit organic growth and we expect to be able to add significant acquisitions consistent with our strategic direction.

Our goal is to grow our revenues to $3 billion to the -- $3 billion to $5 billion range. We will be at the $3 billion mark next year and on the path to get to $5 billion over the next several years. With that I'd like to current call over to Kevin.

Thank you, George. Quarterly revenues of $657 million represented 28% total growth above last year's third quarter revenues of $515 million. With 11% coming organically. Direct labor was up 17%, compared to the third quarter of Fiscal Year 2009. We did not seat pickup in other direct costs or ODCs that we normally see with the passage of a supplemental but organic revenue growth remained at double digits for the third straight quarter.

Breaking down the components of growth, STI was a real driver with about $142 million in the quarter. We are the top prime provider under the S3 contract and we are seeing tremendous demand for our development, integration and operations and maintenance services.

Going forward, we will not report STI separately because the use of the S3 vehicle across ManTech makes it increasingly more difficult to separate efforts that would have been exclusive to STI. The S3I contract will capture the strong momentum of both legacy of STI and ManTech business. The BETSS-C operator's award described in our press release, is a perfect example of business that nearly company would have captured alone.

The large tests and evaluation and systems engineering wins that we've had over the last three-quarters are now at full run rate and they drove significant growth in the quarter. We are hitting our stride on the F.B.I. and other cyber defense work that was won early in the third quarter, and this work will continue to build in the fourth quarter..

The M wrap and route clearance support contracts contributed $123 million in the quarter, which was down $16 million from last quarter and $26 million from Q3 a year ago. Labor continued to grow on these contracts, up 34% from third quarter of last year. But ODC volumes remained low.

With further success on the S3 contract and other awards we continue to increase our percentage of work as a prime contractor. It is now at 78% of revenue, up from 74% last quarter and 67% a year ago. We experienced a move away from time and material contracts to cost plus and fixed price contracts. 62% of revenue came from T&M contracts, 23% came from cost plus contracts, and 15% came from fixed price contracts.

Operating profit was $54.5 million in the quarter, up 17%. Operating margin was strong at 8.3% with a relatively high mix of direct labor. Across all of our programs, ODCs dropped $7 million for the second quarter -- from the second quarter though we had previously forecasted that it would increase with current up tempo and Afghanistan in the passage of the supplemental. G&A for the quarter ran at 7.2% of revenue, compared to 8.3% for last year's third quarter, despite the fact that we added $2.8 million in depreciation and amortization mostly as a result of the STI acquisition. We are appropriately lean and cost competitive in today's environment and we continue to review our indirect infrastructure for efficiency and appropriate prioritization.

Net interest expense for the quarter increased by $3.8 million as a result of the $200 million of senior notes issued in April. Issuing the note was a strategic long-term decision to enhance our ability to complete additional acquisitions. At 38.1%, our effective tax rate was slightly better than expected.

Third quarter net income was $31.4 million, up 7%, which translated into diluted Earnings Per Share of $0.86 up 6%. Without the additional interest expense from the debt offering, both net income and Earnings Per Share would have been up about 15%.

Now onto the balance sheet and cash flow statement. DSOs were 69 days, once again below our target of 79 days. This quarter we ended up using $11 million of cash to fund operations, primarily because of a temporary delay in collecting SGI invoices.

With integration complete, defense contract audit agency oversight moved from New Jersey to Virginia and the new auditors needed time to come up to speed on the new work requirements. Still, year to date cash flow from operations is 12% greater than net income, and we expect to end the year with cash flows from operations similarly ahead of net income.

As of September 30, 2010, we had $152 million in cash and equivalents with $200 million in long-term debt and no borrowings on our $350 million revolving credit facility. We are well position to use our balance sheet to grow the Company and shareholder value through strategic accretive acquisitions.

After the end of the quarter we invested $60 million to purchase S&IS. This acquisition was attracted from both strategic and financial standpoints. Based on FY 11 projections, we paid an enterprise value to EBITDA multiple of only 6.5 times after considering tax benefits.

Which is a very attractive price in this market place. Even more than the financials, the business development and human resources forward business indicators give us confidence in our outlook for continued growth. We received more than $1.2 billion in contract awards which equates to a book to bill ratio of 1.9 times for the quarter and 1.3 for the year to date.

On the face of it, a book to bill of 1.9 times is a great number. But it understates the true value of the awards. Most of the work supported by the army has transitioned from five-year awards to two-year awards. The weighted average life of the $1.2 billion is 2.3 years.

Without this change, the book to bill ratio would have been about four times which is a better indicator of the revenue run rate effect. With these strong awards, backlog at the end of the quarter stood at $4.9 billion, which was up 28% and funded backlog was $1.7 billion up 33% since Q3 of last year. Not only is our $1.7 billion

funded backlog a record for us, it also represents 70% of trailing 12-month revenue which reflects our strong market positioning and provide a great degree of comfort around revenues for next year. Looking forward, in addition to the large Q3 awards, the total qualified pipeline now stands at $25 billion, up from $23 billion at the end of the second quarter.

Even more important, bids outstanding have increased to $2.7 billion and we expect those decisions to be adjudicated in the next two quarters so bookings should remain healthy. On the HR front, during the quarter, we increased head count by another 200 people, ending with more than 9300. Remember, we began the year with about 8,000 employees.

So far in Q4, by adding 370 S&IS employees and ramping up quickly on are recent contract wins we're now above 9800 employees. We have more than 1700 open acquisitions for direct-funded work and about 700 accepted offers pending. Some of these are contingent so they will not end up as ManTech employees. But we expect to have 10,000 employees by the end of the year, which would be more than a 25% growth.

Let me now turn to the forward outlook. Based primarily on the reduction in material volumes in our in-theater work, which we now expect to continue at or near current levels, we need to adjust the guidance ranges that we gave you in the last call.

Our new Fiscal Year 2010 revenue ranges is $2.6 billion to $2.64 billion compared to the $2.63 to $2.75 billion range on our last call, which corresponds to 29% to 31% total growth and 10% to 12% organic growth. Our new net income range is $123 million to $125 million, and our new diluted Earnings Per Share range is $3.37 to $3.42 per share.

This implies fourth quarter guidance of $694 million to $734 million, net income of $32 million to $34 million, and Earnings Per Share of $0.87 to $0.92. Implicit in this guidance is an expectation of about $540 million in FY 10 for in-theater vehicle maintenance support which is $60 million below last year and below our expectations on our last call.

This drop is partially offset by other growth factors in our business. We also lowered the top end of net income in Earnings Per Share guidance and raised the lower end of Earnings Per Share guidance by a $0.01. The change in the net income and Earnings Per Share guidance is the lower than the revenue rate adjustment because the ODC's revenue carry lower margins.

We are not ready to give guidance for 2011, but our initial outlook confirms that we will have strong double-digit organic revenue growth, landing us near the $3 billion mark. Based on the drop in profitability associated with known or anticipated moves away from T&M and our expectation of an increasingly competitive market, we expect 2011 margins to contract slightly to yield mid to high single-digit Earnings Per Share growth before adding the impact of any future accretive acquisitions that we complete.

On balance, I am pleased with the current results and excited about our momentum heading into next year. There are plenty of opportunities for us to remain and maintain robust top line growth. And we will work diligently to optimize profit in the current environment. With that I'll turn the call back to George.

Thank you, Kevin. Since the last call we have defined a new operating structure with our three group Presidents taking on more responsibility as Chief Operating Officers of their units. This new Governor's model is working well.

They bring an energy and excitement about their role and are creating a stronger presence in the market place as evidenced by all the new contract wins. Despite the headlines, defense and intelligence is still a great market and ManTech is well positioned to succeed in it. We do not face the issue that is some of the major firms have with organizational conflicts of interest.

So in summary, we are pleased with our performance, especially how strong the business development success positions us for Fiscal Year 2011. With that I'd like to have the three group Presidents join us to take any questions you may have. May we have your questions.

Thank you. (Operator Instructions) . We'll take our first question from Joseph Vafi with Jefferies &

Hi, guys. Good afternoon. And congratulations on those booking numbers. A lot to talk about here this afternoon. Maybe we'll just start with the bookings number. It seems relatively large. Is there anything we should be aware of in that number that may be abnormally high in terms of say pass throughs in some of those contract wins?

Joe, it's Kevin. I'd speak to it and add for the Presidents to add if they'd like. It's a heavy mix. It's not heavily focused on pass throughs. If you look at the amount of head count growth we're expecting at the end of Q4 or during Q4, that is a reflection of the ramp up that we have on a lot of the ISR related business that we've won. We expect to significantly support the labor growth in Q4. There are components of those awards that may have subcontract flow through, not ODC flow through, but in large measure these contract awards will increase our staffing of ManTech employees. Do you have anything to add?

I think that's good.

Okay. And then maybe on some of the commentary that you provided on next year's, thank you for doing that,and you kind of talked about a double-digit top line number. Is that based on what you have on hand at this point in time and basically run rate that you have now or run rate that you see in the near future, or is that also include expectations of additional vehicle and task order wins that aren't yet enhanced?

It's a mixture when you look at the contract awards we have in hand, that is going to strongly support growth going into next year. But that will be tempered by some reductions in the ODC flows from the in-theater operations support and will also require some additional wins as with any company. But I think that positioning that we have from the bookings give us a strong baseline to give us that $3 billion mark.

Okay. And then just the last one and it might be early, but sound like you've got some visibility to a little bit of pricing pressure or whatever you want to call it in the contract vehicles. Is there any other color you'd like to provide on that at this point?

Well, yes, I will and then I can hand it over to George if he has comment. Based on the memos and the directs from the DOD, we have seen movement across our customer base to trend away from T&M contract. And we're expecting, over the next four quarters, that trend to continue with either known or expected changes, whether it's to fix price or cost plus, which we think will be a fairly even mix of transitions up to maybe 10% of the overall contract work that we have away from T&M. That's a rough estimate today. So we're projecting that will have an impact on our business along with the competitive nature of the business that we're in. So it's a combination of both. We're trying to project that in our business. Having said that, the contract wins we have and are positioning we think are going to really position us well in that market.

That does not imply that profits forecast next year will go down, it just means the Secretary, as you know, is trying to deal with the public relations and the Congress and they are talking about different forms of contracts. And we've gone through that cycle before. And usually it works itself out over a bid of about a year. And we go back to the processes and place at earlier time. So we don't see a real impact on those.

Okay. So just to be clear, at this point it sounds like is it fair to say that it's kind of high-level government memos that you believe is going to have an impact or you kind of already have heard from the contracting officers or clients that there is going to be an impact on specific contracts at this point?

We have seen some negotiations where the discussion about the new process comes up. And there may even have been some that have been closed already. But it's not radical.

But Joe, for my purpose based on your expected and earned, we're trying to build both into this. Maybe a 30% to 40% change in operating income percentages that's built in to get the overall returns that we're expecting. That could improve based on the customer's direction, but at the same time we're trying to reflect what we see or hear as potential ranges within the customer set.

We are also looking at cutting costs to accommodate their desire for lower billing rates. Indeed, Kevin, I don't know if you reported the numbers about our G&A somewhere in there you had some indication of the amount our G&A has gone down.

Right. Yes. We provided the lower G&A percentage.

Yes. So we're dealing with this from a realistic point of view. We're trying to cut costs to match the Secretary's objective but do it in a disciplined way.

All right, guys, thanks for the color.

We'll go next to Erik Obeter with Pacific Crest Securities.

Maybe diving in a little deeper. You said you've opened up 2011s for questions. So what is your general impression of how -- are we looking at is this the start of a trend so the $60 million taken off this year or is this something you're seeing sort of slipping into next year and beyond?

Yes, hi, this is Lou Addeo. There is an impact relative to procurement. There's a fairly substantial contribution and off set on direct labor, not unexpected, large numbers of soldiers move in the forward operating bases in Afghanistan. We're doing a healthy exchange between Iraq and Afghanistan labor mix. Labor mix contribution is supporting some of the procurement downside. In terms of the Countermine M-wrap work, we see that in probably healthy, relative to the run rate of this year. Between $470 million, $500 million next year.

Thank you. That's helpful. And I guess sort of looking at tax rate, can you tell us sort of how shall we think about tax rates for the remainder of the year?

Well, we end the first three-quarters at about a 38.3 effective tax rate. We expect that effective tax rate to hold through the balance of the year.

Okay. Great. Thanks, guys.

We go next to Brian Kinstlinger with Sidoti & Company.

Thanks very much. First, I want to talk about the continuing resolution. George, you mentioned that it might last through March or even longer through the year. I guess I'm wondering does that change the strategy of what types of work right now you're currently bidding on? For example, are you trying to go after programs that already exist where incumbents are there? And then what does that mean about bookings in the next four quarters say compared to the last four quarters? Do you expect they'll be down?

The only place who may be down is where we've described where the material ODC may reduce. But we don't see overall revenues going down. And the continuing resolution is now in theory in place until September 30, when they will come back. And then they talked about having a continuing resolution until February. I'm now hearing talk about continuing resolution for the entire year. And, you know, while so much of that will depend on how the makeup of the Congress. It does not impact us. And again on defense side we're seeing 700 plus as the target number for the year. So I don't yet know the impact on the civilian agencies. Candidly, we don't follow them as closely. But in our world and our market I don't see an issue.

It my not affect revenue. I'm just curious on the bookings side if there's not really a budget in place until March or potentially like you said much of the whole year, what would that mean about contract wins year-over-year? Would they be down substantially?

Candidly, we don't focus as much on budgets as we do on continuing resolutions. Budgets are a philosophy thing from my point of view, CR is where the funding is and that's what we monitor extremely close.

Yes. This is Terry Ryan. A couple clarifications here. So on the continuing resolution, one of the things that we've postured very well for, if you look at the number of prime positions we've gone to as a percentage of revenue, from first quarter we had about 72% of all our revenue was prime. We're now up to about 77%, almost 78%. And a lot of those primes were around multiple-award contracts. So we've won those contracts. The TOs, the task orders, will be left over these next couple quarters during a continuing resolution. So we're still in a very good position to add bookings because we have those multiple award contracts.

So task orders can be awarded under IE IQs?

Yes, sir.

And so the $2.7 billion of outstanding proposals you expect a lot in the next two quarters, much of that are probably task orders under those IE IQs that you've won?

Some percentage, yes.

Every mix includes those that the customer is letting through those, yes.

When we look at S3, you won a good amount of work there. I'm curious first of all how much of that is direct labor since STI used to do most of it through subcontractors?And then overall in the contract maybe what percentage right now is direct labor versus where it was a year ago?

Yes. This is Lou. So on S3 there's been a fairly high tempo of task orders over the past quarter. The labor mix is affected in two different ways. One, as a prime contractor, we get an opportunity to as we move from sub to prime on a number of these to insert labor where the mission needs it, where the government needs it, and where our current mix of prime subs, where we could find and add value that doesn't exist already. In terms of an actual percentage, I think that I would say that the labor percentage is increasing, not decreasing. In terms of an actual percentage, we don't have that right now.

Is it still relatively small? Because I thought one of the pieces of the acquisition was your ability to put direct -- your own people on that versus before where it was mostly subcontractors. Is there still a huge way to go -- or has a lot of it been -- ?

It's not small at all. I think every single one we went as prime is an opportunity for us to add value. One that has been announced we are putting over 50 to 70 people in Iraq, operators, trainers, that's largely our labor. So I think our numbers are progressive. And I think it will show as we look at the end of the year direct labor numbers.

Okay. And the last question I have if you could is of that $1.2 billion, roughly what percentage of that was new tasks or expansion versus recompete?

About two-thirds was new work.

Great. Thanks very much.

Yes. This is Lou again. Just in terms of one other thing on the labor, alone, I think we've got probably hiring around 2,000 people this year. And in Afghanistan right now, well, in Southwest Asia we've had well over 1200 people. So a lot of those have been part of that add. So by end of year we'll have added a fairly substantial amount of direct labor that's a huge contribution relative to the margin.

Thank you.

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

Good afternoon. Nice bookings. I think you kind of talked a little bit about this, but what kind of margins are you seeing on the $1.2 billion of awards you had in Q3?

It's a heavy mix based on the type of contract awarded. I would say that overall returns on those are somewhat consistent with our returns in our business. But will be slightly depressed on certain task orders based on the competitive nature. But it's not too far out of line with what our current run rate is.

Okay. So you're not necessarily seeing the margin degradation you expect in 2011 on what you booked in Q3?

I'm seeing some associated with that, but also trying to anticipate the overall changes in contract mix based on procurements that are out or expected. The contract award mix for this quarter is fairly consistent, these awards are fairly consistent with our current run rate. They'll have some impact on our overall margin profile but that is just one contributing factor to next year's expected outcome.

Okay. An then what is the status of the pending recompete on the Countermine SOCOM opportunity?

This is Lou again. So it is the current schedule probably puts us out on award date or at least award date sometime the end of April, early May. That's on the CLSS recompete. And in terms of transition, I don't know what it looks like relative to the rest of the year.

Yes. I mean, it's an April date right now.

Okay. And then just lastly, George, there's been some acquisitions in the industry at very high or what appears to be very high valuations with Lockheed's EIG business and task being acquired for double-digit EBITDA multiples. And at least there's press reports that potential buyers have approached ManTech. And I just wondered what is your view of a potential acquisition of ManTech and why or why not would that make sense? Thanks.

We have no comment on all the press reports. The only thing I can say is we have no comment. In terms of whether or not ManTech would accept an offer, we have a procedure in place where if we got a bona fide offer we would turn it over to a committee of the board of directors and that process is in place. We have not received a bona fide offer.

Okay. Thank you.

We go next to Tobey Sommer with Suntrust Robinson Humphrey.

Thank you. I was wondering if you could give us some additional color on the trend of contract durations contracting? Any color you could provide as well as maybe comment on whether that impacts the way you manage the business if the duration is a little bit shorter.

This is Kevin. I'll start. Two things. Within the directives there's a request by the government to reduce the length of contract awards and the procurement actions are reflecting that. And I think that that's going to -- the goal is to make it more competitive, which it may within the framework of people who have the qualifications. But it will also create a higher level of expense in the procurement activity from a contractor standpoint. So we have to anticipate that. I think that there's a mix of this for the responding to the procurement environment that lead to the DOD want and in theater trying to reduce the overall term of contract awards to three years to reflect some positions they have with uncertainty on how long that it will go and then they'll extend from there. I don't know if anybody has any other comments.

We have seen this cycle before. And the government is reflecting political pressure that the award contracts for five years and had they been more selective they could have saved money by renegotiating at the end of two years. If you look at the number of contracts that are currently issued with a five-year term, if they were to be reduced to two-year term they do not have a contracting officer workforce capable of accomplishing that. What we see going forward, yes, they are writing two-year contracts but the end of the second year they will do one-year extensions. They simply don't have the acquisition capability to do what they desire.

So the average term in the quarter of 2.3 times might even -- maybe that's actually understating the terms they're going to be forced to extend them.

I think that's correct.

And my next question and last one has to do with maybe some color if you could give us on the pace of cyber contract opportunities. You do cite a couple of wins, but I was wondering what kind of the pipeline over the next couple of quarters looks like. Thank you.

Yes. I'll be happy. To this is Bill Varner. Good afternoon. We are seeing the pace of cyber acquisitions and cyber opportunities pick up. In the third quarter alone we've won about $125 million in cyber business. And we have a current pipeline of about $2.5 billion. We are seeing cyber capabilities being bundled across broader opportunities, whether it be for battlefield systems, integrated security, IT jobs. So we may want to look at how exactly we define the cyber business because it's getting harder and harder to track pure cyber. But we are seeing the pace of acquisitions continue to be strong and even increase a little bit. And we're expecting that to continue as the US cyber command gets stood up and fully functional.

Just as a brief follow-up, is there a decent size or percentage of that $2.5 billion pipeline that is maybe not as bundled with other IT functions and is a little bit more quote, unquote maybe purer cyber?

What you would refer to as purer cyber opportunities tend to be on the smaller side of the pipeline I talked about, the opportunities where cyber gets bundled with other areas such as IT support tend to be the larger ones. But there are pure cyber opportunities out there. There are some research opportunities, some research and development opportunities. There are what we call cyber-tool development opportunities. And those are all out there and in our pipeline.

Thank you very much.

You're welcome.

We go next to Peter Arment with Gleacher & Company.

Good afternoon. Just a question I guess to clarify, Kevin. Did you give us the percentage of mix of what the current percentage of mixed contracts are on fixed cost plus and time materials in terms of the overall revenues?

Yes, I did.

Sorry.

I was speaking too fast. Sorry. I do that. So time and material is sitting at 62%, cost plus 23%, fixed price 15%.

15%. Okay. Great. And then so to understand the bookings, because they are impressive, you're saying that we're seeing just that mix change and that's what you're addressing but you're not saying -- it's not rolling over too materially in terms of the margin.

If you look at the mix of the business that we've won, it's probably not far off from there. Because actually much of the work that army is putting out under the F-3 vehicle continues in a T&M kind of mode. So I don't have that figure in front of me, but I wouldn't be surprised if it's sort of right in line with those what we executed in Q3.

Okay. And just regarding the general off tearity measures that are being put out there, George, you mentioned the continuing resolution lasting longer.. So is it to understand that we wouldn't be able to see -- the funding still exists but you don't get to see any growth on that funding? Is that correct?

Well, the current number is $709 billion, which I believe is considered to be 3% higher than last year. We are hearing talk of the $709 billion may be a bit higher. We're not hearing things being cut, but I believe I'm correct in telling you it's allegedly 3% higher than last year. From our point of view, more of it is shifting into areas where we have the capabilities as opposed to some other areas. We have no complaints.

Yes, this is Terry again. So we have the pipe line out for 2011 fourth quarter through 2011. And in no indications have we received any notice from the government that says that these procurements will not occur within the time frame that we're looking at because of the CR. I would expect, my history and being around this for a long time, that we would receive notices like that by now.

By the way, in CR the funding must be spent or they lose it. It they're very careful not to lose money.

That's great color. Thank you very much.

We go next to Bill Loomis with Stifel Nicolaus.

Yes, hi, thanks. Good afternoon. Let's see. Just looking at, Kevin, when was the growth if we kind of take STI out as well as the acquisitions? What would the organic growth be year-over-year for the quarter?

For the quarter it would be between 7% an 8%.

And then your implied guidance for the rest of the year? What would you say that's in the fourth quarter goes to?

We're expecting sequential growth -- well, I don't have a specific for Q4 for non-SGI and in-theater business but it will exceed the 7%, probably exceed 10%.

And what's driving award you just won in this quarter or is there some other contracts?

It's a combination of the awards that we've won this quarter, expansion of requirements under existing task orders on existing STI business, and just ramping up on demand for contracts we had already won.

And then as far as the trend on that, when you talked about the organic growth obviously STI will roll even into that number next year. But when you're talking about organic growth and kind of excluding the pass through type business, what are you thinking about over in 2011 based on what you've won in your direct labor? Is that a high single-digit number? Or is that in the double digits?

The organic growth that we have get together $3 billion -- getting to the $3 billion, the only acquisition of material nature we take out would be the roughly $65 million for the recent acquisition that we have, the balance is expected to be organic. In the first half of January equivalent for STI. So we're expecting somewhere just south of a 15% growth organically from the contract awards.

And obviously when you take into consideration the fact that the in-theater business is expected to come down slightly, the organic growth exclusive of that is going to be even higher.

And then just talking about the in-theater work on the -- contracts, what's changing there? Because obviously you have the I assume the Afghanistan contract, COCOM is showing good growth while the Countermine declines, is that true?

Well, there's a family of vehicles is, well, increasing relative to NATB. There's still a pretty good number of vehicles in turn therefore sustainment of maintenance work that's going on for an operating basis of Afghanistan. So we see no decline in labor. We see an increase in labor. And even in Iraq, it's getting near to steady state relative to the labor force. So whether -- we'd like to think that and we've had these conversations with government, that our labor force is an unified force and could be universal relative to the type of work it does irrespective of the vehicles.

And then so going -- it sounds like they're taking some more of the -- when you say lower pass through I assume you're talking spare parts and materials and so forth. Is the government doing that? Or is it just the amount of parts necessary is declining?

I mean, the parts -- the government is doing parts, acquisition right now. Depot part of their mission. We still do parts acquisition and have done procurement for a number of years. Of course, as they inventory and store more parts they utilize parts. But they are still using some of our systems and some of our people and tools.

So Bill, I'd add to that in terms of expectations the government, first of all there's more prepositions that we had anticipated which is one near-term component. But long-term the government is now more able than they were in the past to be part of procurement internal. It's been a long-term goal of theirs. And I think that's finally starting to trend through. And it's been unclear when they would be able to do that. We're trying to reflect that.

Then on the margins of the M wrap now that direct labors going up, before I was modeling in the 5% to 7% operating range. What should I model going forward given the mix and shift in business with those contracts?

I think the modeling should be somewhere just slightly north of 7% and we'll track that. But if you look at the TACOM contract itself that will be in the queue I think it was somewhere around 7.3%.

And the two are still going to merge together into one procurement next year in April?

You know, it would be part of a government plan to do that. But we'd have to say what the procurement looks like.

Okay.

I'm sorry. Actually if it's in the CLSS recompete.

And is that RFP out yet?

Not out yet.

When do you expect that to be out?

In November.

Okay. Thank you.

We go next to Edward Caso with Wells Fargo Securities.

Hi, thank you. Good Evening. In the press release you talk about exceptionally strong program performance where there's some true ups in your margins that helped the numbers this quarter?

Slight but it's not something that is worth noting I think in terms of actual program performance improvements. But we think that overall the Company focuses on program execution. We try to work that to make sure we provide the returns and we've been very focused on that since the beginning of this year. And I think we're trying to message that we consider that a very important component of how we provide returns to the investor.

On the guidance side, can you update us on your outlook for operating cash flow and precash flow? And I assume you're using a 70-day number?

We're using a 70 days. And I think we're still expecting somewhere north of one times. So operating cash flow probably adding another $40 million roughly Q4 on top of the $112 million I believe we have year to date. And precash flow is just standard CapEx adjustments downward. So $2 million or $3 million in a given quarter.

George, you haven't mentioned anything about non-DOD Intel. I mean, as you're thinking $5 billion now instead it looks like you've got $3 billion in sight, is getting to that $5 billion going to require you to move beyond your current focus?

We have done that, so we have looked at other areas. But candidly we're waiting to see what the congress does with the appropriation bill. We know that defense and Intel will be funded. We don't want to make a decision, let's say to go into the environmental business until we see what the new Congress does with the out-quality non-Intel non-defense agencies. I would want to ramp up and go out to environmental, and I'm just using that as an example, and have the Congress decide they're going to cut that spending. When I see that profile then we'll make the decision.

Thank you.

We'll go next to Jeremy Devaney with BB&T Capital Markets.

Good Evening, gentlemen. Thanks for taking the call. Going back and looking at Kinetic S&IS business, I was wondering if you could help us with the forecasting a little bit of you're looking for in terms of revenue and profitability on that acquisition.

For 2011?

If you look back at the expectation for FY 10, what were you expecting for FY 10 revenue full year?

So for the fourth quarter and what we're building in?

Yes.

So we're somewhere between $14 million and $15 million on the revenue side. We expect in the quarter about $400,000 for purchase contract costs for amortization, additional amortization. We're expecting to be north of $1 million, $1.5 million in terms of operating profit but more like $1 million operating profit. So we'll provide a decent return to the business right out of the gate.

And do you expect that $14 million, $15 million to sort of be steady state next year? Or are you looking to be able to get some growth out of that?

No. We're expecting growth out of that. We're expecting our target to be between $60 million and $65 million next year top line.

Great. And then George, I was wondering if you could talk to us a little bit about the political environment and what you're seeing out there, what you're hearing? You tend to be plugged in a little bit more than most. Just some expectations on November 2? And then impacts that you believe might come from the elections?

Well, I'm not a political forecaster in that area. And the only thing I look at is depending on which party controls the house where the appropriation bills begin that will have a significant impact. And I would look at who the Republicans are likely to have to replace Mr. Murtha as Chairman of the defense appropriations Subcommittee. And I think the Republicans have some strong people in that area. But the main thing that I see, I can't forecast the overall congress for you. That's beyond my paid rate. But I think in the areas where we have an interest, defense and Intel, the cooler heads will prevail and there will be a $700 billion funding for the year, for the requirements. We also here, if you take cyber, the congress is beginning to understand the threat of cyber. The current thinking is $17 billion. I'm hearing rumors it could be as much as $19 billion and it may be more. So I think when they get down to the real discussion, I think the cooler heads will prevail and it's certainly in the business we're in they're not likely to do something drastic. We are hearing, as you know, that some of the other government agencies are a target of some different political people. But that doesn't impact us. You know, my optimism is the fact we began the year with 8,000 people. We wind up to 10,000 people. We've got 850 offers outstanding and 1400 openings. So if we can continue this people growth, yes, there may be a slight decline in our ODCs, but our growth is going to be there, gentlemen.

Jeremy, this is Bill Varner. Could I expand just a bit on your questions to Kevin about the S&IS acquisition?

Please do.

I believe what we find so attractive about the business is that it's a great set of people and it's a wonderful set of contracts that just fits very, very nicely into the business areas that ManTech is in and wants to be in. I just returned actually from visiting their team, our team and their customers in Huntsville, Alabama. And I'm just convinced that this will be a great acquisition for us. It's a good set of programs. It's good set of data. There are opportunities well beyond -- well beyond just the sum of ManTech plus Kinetic. So I think we're seeing a lot of good growth opportunities in there that are not in the number you.

Excellent. Thank you Gentlemen.

Next to Mark Jordan with Noble Financial.

Good afternoon, gentlemen. Were there any specific transaction costs for S&IS for either the third or fourth quarter?

Yes. For Q3 we had about just shy of $400,000 of transaction costs associated with it.

Okay. Then nothing in Q4?

No.

Should one assume a fairly consistent tax rate for next year as the 38.3 that you're showing this year? Is there any change we should assume?

We should assume no change to that for initial outlook.

Okay. And Kevin, sort of a last question, if you're estimating or in your thought process for next year you've got the assumption thatyou might see 10% of the T&M business move to cost plus or fixed price, is there a specific character of the contracts that might make that migration or is this just random?

It's not -- I wouldn't say there's not a characterization. There's just a trend within the government procurement offices that is identifiable enough for us as a management team to predict -- and that's what we're trying to provide.

Well, there isn't a type of business like you said the S3 business was all staying T&M but there isn't some type of common characteristic that potentially see that as just more random in terms of type of contract?

I'd say government business but that would be too smart ass so I'll pass on that.

Thanks.

I think what you're seeing is there's a desire to portray change in greater control. And for the moment they're talking about taking things and making it cost plus so they could have some insight into the profit the contractor's making as opposed to fixed price.. What's ironic in earlier times was a major move to get away from fixed price contracts to cost plus. It's just another cycle. So at the end of the day the average prices or profits will be according to weighted guidelines. And that will provide reasonable profits. Weighted guidelines is the direction and the policy in the government's

Thank you.

We'll go next to Erik Keener with River Road Asset Management.

Good afternoon, guys. Great execution in the quarter. Wanting to go back to M&A if I could and just ask, given all the activity in the space and given your willingness to take a bona fide offer to the board, George, have you and the board had any discussions or is there any willingness to maybe pursue strategic alternatives and get that bona fide offer from the market?

I have no comment on that, sir. We will do what every other corporation does in these areas. So I have to tell you I have no comment.

Okay. Looking at the acquisition market for you guys, and seeing probably most small acquisitions, I don't know, eight to 10 times EBITDA range, how do you guys treat your own shares looking here around the six to seven range? Has there been any consideration of a share repurchase?

We look at that periodically, sir. We look at that. And we look at paying dividends. We look at all of the options that would benefit the stockholders. And that's a major issue by the board. And we look at those issues. For the moment we look at share repurchase versus growth using that cash for strategic acquisitions. And we feel that's a better strategy. If this corporation gets to the $5 billion level, that's a greater return for our stockholders than buying back stock or something like that. But we do that routinely, sir.

Okay. That's helpful, too. Just one last housekeeping question. In the quarter and then given the outlook for the vehicle and maintenance contracts possibly winding down in Q4, what would you say is percentage of revenue directly related to in-theater deployments in Iraq and Afghanistan now?

If you look at the -- and I say the ODC and material flows are winding down the requirements are picking up which is why our direct labor supporting that has been increasing. So going into 2011, that's going to be maybe 20% of our business that one combined route clearance vehicle work. We have other work in-theaters supporting it as well. It's hard to segregate for several task quarters. But if you look at the 1200 people that we have in-theater along with material flow throughs on this program it should give you a good flavor of the type of work and the percentages.

Okay. Thank you so much for your time.

We go next to Robb Spingarn with Credit Suisse.

Good Evening. Hi. Wanted to ask you a couple questions. Going back to the Countermine, have you talked about I think $470 million to $500 million next year?

Correct, yes.

What's the cadence on that? Do we start the year at a higher level? How shall we think about the flow?

Cadence?

How does that flow over the quarters?

Kevin, I'll speak briefly. If you look at our current run rate in trending an what we're projecting for the balance of this year and you trend that out, there's some reduction from Q4 ranges downward. But it's going to be highly variable based on customer requirements and all the things that have impacted those material purchases over the last several years. So it's not an easily identifiable timing to provide you, because we really can't easily determine the customer's up tempo and requirements.

We take the entire thing the 540, though. It's not 135 a quarter. That would be too flat, right?

Correct.

Okay. And then George, a higher-level question. We had good O&M growth in fiscal 11 request. We don't know where that's going to shake out yet, but you sound fairly confident how it might go. And understanding that we've got an election to get through here next year, with regard to fiscal 2012 and Gates' latest austerity measures with regard to O&M, how do you think about fiscal 2012 O&M?

Let me be totally honest and say I cannot forecast 2012, at this point in time. I have talked to a lot of folks on the hill on that subject. And I don't have those that are quite knowledgeable on not putting out any forecasts if you will. And we can all run scenarios. I think we'd best wait until next Wednesday and see what really happens. But I'm reluctant to do a 2012, forecast. The only thing I believe in my heart is that defense budget will remain at $700 billion or whatever it is. As I've said before, historically the defense budget, $700 billion is 3% of gross national product. Historically, that's what the nation has spent on defense. And I think sadly there's going to be more spent in cyber than we really believe because we're already seeing some issues there. But I'm not prepared to forecast 2012, sir. I just don't know.

Well, maybe I can approach this from a slightly different direction. We've heard the secretary say that he'd like to reprogram some O&M money into the war-fighting accounts.

Yes.

And they've talked about perhaps 2/3 of the $100 billion, which again is a five-year number. So call it 2/3 of $20 billion per year out of O&M and into the war-fighting accounts.

Yes.

You've also said earlier in today's call that you don't see ManTech being particularly affected by the kind of let's say advisory services that they're going to target. So where are they going to target and who does get affected by the movement of this money?

Let me ask Terry. Terry has done some review of that type of thing.

Well, I mean, it's not easy to start forecasting as George said. So the administration now, where they are in the process is the services and agencies have submitted their 2012 numbers to OSD. OSD has until about the 22nd of November to put together a plan to submit to OMB. In terms of the $100 billion, this is a traditional bottom-ups review. Every year DOD as far as, even when I was in there 12 years ago, does a bottom-up O&M review of the bottom 10% in O&M to put back into the investment accounts, R&D and procurement. And what happens is they look at everything, everything's on the table. But in this case, Gates says it's mainly the advisory and assistance type services. We actually are really tied to some major force programs in terms of T&E, operational experimentations. So we see our business more aligned to those type of investment accounts than we do the O&M. So if you look at the color of money that really comes out to our contracts, a lot of it is tied to he procure aren't in R&D. So we're pretty bullish on where we're going to be out in 2012.

One other comment on the 2012 numbers and Secretary Gates, the gentleman is going at this very legitimately in trying to make decisions on where to cut costs. And then he runs into political land mines. As you know, he proposed eliminating one command, head quartered here in Virginia. And he set forth his reasons for that. And the local political structure is determined that he will not be allowed to do that. In deed one member has put out a ruling that if he proceeds with that without approval of the Congress, they're putting restrictions on whether he can promote generals and senior civil servants. So there's a political factor in this that I think hopefully will go away after the election. And then we can hear what the Secretary is really trying to do and what the reasonable chances are of that happening, sir.

I guess my overlying point here, not to be unfair specifically to ManTech, is we don't know what's going to happen but everybody in the community tries to suggest that they're not vulnerable. It's the other guy.

Well, look at the mission we're involved in. And again, I would turn to the gentlemen here. The mission we are involved in cannot be eliminated as if they're throwing out mops. We are crucial to what the mission is. And that's why we say with enormous conviction that market we are in is not going to go down. How I do amplify that?

The only way I can look at this, too, is from a macro economics. So George is correct, $708 billion this year. And next year the secretary said it's going to be 1% to 2% higher. And if you look out at the FIDA it's a 2% growth year-over-year. They're already forecasting and saying that. And then you look at the mix, and again the investment counts versus O&M. ManTech, yes, is it going to be affected? Absolutely. But if you look at total addressable market of the $700 billion, ManTech has such a small growing piece of that. If you look at what we've done over this past year, the number of take aways, that's what we're going to be focused on over the next three years. We are in a large addressable market. We have a small percentage today. The way the administration continually goes out, look at budget savings as part of their deficit reduction is to go after capabilities. And the Senate appropriations committee, just like this administration, they go from 42 to 35 joint strike fighters to hit that bogey for their fair share of reducing the deficit. It's really hard for them to peanut butter spread the type of capabilities that we offer around the testing and evaluation and engineering support services, especially when the secretary comes out and says, "my main tenet of acquisition reform is to be able to do more testing, more evaluation, more fly before we go and buy, more sail before we buy, and a lot of that comes back into our core competencies."

So would you say then just to wrap the discussion up that really the only negative pressure you face and have faced this year, which of course is behind some of these guidance adjustments, is the in-theater work and pretty much everything else is on a growth trajectory? Well, the pressures I'll let Lou talk about the in-theater work. But if you look at -- in terms of Afghanistan, in terms of spending there, in 2008 and 2009 they spent $43 billion. I'm sorry, $50 billion. In 2009. And then they spent $110 billion now in 2011 in Afghanistan. That's a huge growth. It's really tough to drop off a cliff of $110 billion a year in Afghanistan. Lou?

Yeah, I mean, I would just say that I look at 2011 and even beyond, you know, in Southwest Asia -- again and I said before relative to direct labor alone in those areas are growing our direct labor over 30%. And so what's not going away is a core competencies relative to sustainment, maintenance, reset. And what's really starting to evolve relative to business model is the work that we do relative to the supply chain, logistics, and management of that work in-theater that can be duplicated elsewhere. So I think that our business model is to support where the mission is, and then our business model is to support where the mission's going and using those sets of capabilities.

We continue to believe in what we see here. So you'll have to excuse us because we go through this thing every day. And we just believe in the position that we're in.

Thank you very much.

We're right up against our wire. I think we can take maybe one more question and then we'll have to call it a night.

Okay. Our final question is from Jeff Rosenbaum with York Capital.

Hi. Two quick questions. One from a top line perspective, your comments of your business quote, unquote at-risk from potential austerity measures. Is that factored into or included in your comments on included double-digit organic growth or is that separate and apart from that?

No. The $3 billion target that we have for next year includes reductions in ODC flows that we've already anticipated and built into it.

Okay. And then second, it looks like the high-level guidance you gave for 2011 assumes kind of 20 to 25 dips of margin degradation, which I think you alluded to. How would you characterize that margin degradation from competitive contractor pricing pressure versus negative mix shift away from the time and materials to cost plus?

We're building it fairly rateable and even amongst those components because not all of the contracts are moving from all to cost plus and we can manage through that as a team. So it's fairly even mix.

Okay. So as we think about the business in the longer term, should we expect continued mix towards kind of a negative 20, 25 dip degradation each year? Is that kind of a one time thing in 2011?

I think what we're dealing with is a trend in market this year that we can evaluate for out years but I don't see that continuing going into 2012, and beyond. It hits a certain point where everybody is effectively managing multi year programs. And that's kind of where we expect to be.

All right. Thank you so much.

So Keith, I think that is all the time we have today. Behalf of the ManTech team I want to thank you for your participation and your interest in ManTech. Thank you and good night.

Ladies and gentlemen, this does conclude tonight's discussion. We appreciate your participation.