ManTech International Corp (MANT) 2011 Q2 法說會逐字稿

Good afternoon. My name is Marise, and I will be your conference facilitator today. Today's call is being recorded. At this time, I would like to welcome everyone to the ManTech second-quarter 2011 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).

Thank you. Mister Davis, you may begin your conference.

Thank you, Marise, and welcome, everyone. On today's call, we have George Pedersen, Chairman and CEO, and Kevin Phillips, Executive Vice President and CFO. We also have members of our senior team 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. With that, I'd like to turn the call over to George Pedersen.

Good afternoon and thank you for participating in today's call. We had very solid performance in the second quarter with double-digit revenue in earnings growth and outstanding cash collections. These results demonstrate our ability to deliver even in a changing operating environment as a result of our positioning in the nation's top priority programs and our commitment to the mission.

Despite an extended continuing resolution, we are on track to deliver our financial goals for the year. So we are reaffirming our 2011 guidance including revenue of up to $3 billion, which has increased over $2.6 in 2010.

Turning to the industry outlook, all of Washington has been focused on the extension of the debt ceiling and the August 2 deadline. There are still a number of possible outcomes, but ultimately the debt ceiling issue will be resolved because both sides recognize the US government cannot operate without it.

However the intense focus on the debt ceiling has limited discussions of the government's fiscal year 2012 Appropriation Bill. So we will almost most certainly begin the year with another continuing resolution.

In the current environment, the DOD will establish a priority on spending and consider major internal cost drivers such as the [full] structure healthcare retirement pay, as well as global footprint in major weapons systems. Within Technology Services there will be a greater focus on efficiency, which would benefit a cost-effective producer like our firms, especially since the DOD has realized that in sourcing will not save money.

Deputy Secretary of Defense Lynn realized that it was specifically highlighted missile defense C4ISR and cyber as priority funding areas to combat the threats. And these are all areas of focus for ManTech International from a technology point of view.

It is also important to remember that various plans to reduce defense spending the cuts are over many years and generally -- in general, backend loaded. To that end the House has passed a fiscal year 2012 DOD Appropriation Bill with a base budget of $530 billion which is up $17 billion or 3% over last year and an additional $119 billion for overseas [continuancy] operations. A budget of this size will provide robust funding for our customers' missions.

We are also encouraged by the progress on policies that could accelerate cyber spending. Since the last call, the administration provided a framework to unify the many cyber legislative proposals. Also, DOD released its strategy for operating in cyberspace, which was one of the first unified plans incorporating DOD's military intelligence and business operations. It laid out five pillars of defending against cyber attacks and they fit very well with our capabilities and value propositions. We expect our full spectrum computer network operation business to grow rapidly over the years to come.

Another major area, emerging area for us is border security. We support the Department of Homeland Security, Department of State Drug Enforcement Agency, National Drug Intelligence Center, El Paso Intelligence Center, and many other major customers involving this mission. Border security is a complex problem that will require coordination across many organizations and integration of many different capabilities. Border security represents an area of significant increased strategic importance for the nation, and we believe it will be a major growth area for ManTech International.

Moving on to mergers and acquisitions. We have always used acquisitions as an important component of our growth strategy. We are seeing significant pickup in a number of attractive acquisition candidates that are coming to the market.

Although no deal is certain, we are looking seriously at a number of companies that would enhance our capability and position our focus areas, including cyber and intelligence. We are optimistic that we will be able to complete one or more acquisitions before the end of the year and we are well positioned to do so. With a strong net cash position, visibility into future cash collections, an untapped $350 million line of credit and ready access to capital markets, we have sufficient capacity to invest in the growth of our Company to our target of $5 billion.

When we look at companies, our goal is to create a force multiplier that allows us to pursue more and more and larger procurements. With Sensor Tech, we saw almost immediate results. Sensor Tech was acquired a year ago January. We saw almost immediate results and we are now reaching a point where, on our recent acquisitions, we expect to be able to report tangible results over the next few quarters.

In summary, we see clear support for continued double digit growth both, organically and through acquisitions, as we achieve $3 billion in the revenue of the year up from $2.6 billion last year and on our path to $5 billion. Agile cost-effective mission-focused companies like ManTech will be in demand from government customers who need to do more with less.

With that, I will ask Kevin now to provide details on our financial performance and our forward outlook. Kevin?

Thank you, George. The second quarter continued our strong financial performance and on-plan execution. Our positioning on priority programs and focus on critical solutions to the government provided the resilience to expand during an unusual cycle of procurement and awards volume. Despite the late awards during the first half of the year, we are still on pace to achieve our financial targets.

Quarterly revenue of $753 million represented 14% growth above last year's second-quarter revenue of $662 million with 8% coming organically. This growth occurred as we supported mission requirements during procurement delays and general uncertainties within our markets.

Execution on the S3 contract remained strong with about $263 million in the quarter, which was up $26 million sequentially and $84 million from the second quarter of last year. All of this growth is organic, given that we closed the SDI acquisition in January of 2010 and tightly integrated our S3 businesses soon thereafter.

The MRAP and route clearance support contracts contributed $143 million in the quarter, which was up about $24 million sequentially and $4 million in the second quarter of 2010.

The level of labor services and procurement on this contract is now stabilized and we will likely be at or near these levels for the balance of the year.

The other drivers of growth in the quarter were four major systems engineering awards from last year and our recent cyber security operation center awards. Both of these are growth areas for us and based on our pipeline of opportunities, they should continue to drive growth for the next several years.

We are generating increased revenues as a prime contractor. For the quarter, 84% of our revenue came as a prime and this marks the 11th straight quarter that we have increased that percentage. We are seeing the benefit of our market positioning and acquisition strategy in our increased prime positions and a strong prime contractor position will continue to be an important part of our long-term strategy.

Contract mix is still moving away from time and materials towards cost plus and fixed-price contracts. For the quarter, 55% of revenues came from T&M contracts, 31% came from cost plus contracts, and 14% came from fixed-price contracts.

Operating profit was $59.2 million in the quarter for an operating margin at our projected level of 7.9%. Operating profit was only 5% above the second quarter of last year because that quarter included a $2 million adjustment from large forfeiture of stock options. If you exclude this one-time pickup, operating income was about -- was up about 9%.

G&A for the quarter ran at 6.5% of revenue which was consistent with the second quarter of 2010 despite reduction in stock compensation last year. For the year, we expect operating margins to be relatively constant with possible declines in gross margin from changes in contract mix for competitive pressures being offset by continued increments in G&A efficiency. We continually focus on operational efficiency, which is an integral part of our ability to sustain profitability.

We recorded a gain on the other income line of $3.7 million from the sale of our product NetWitness to EMC. In our cyber security practice, we invest in developing innovative, high-end solutions that we can use as a discriminator to offsell our services. When we see a potential opportunity that requires significant investment, we will generally monetize that IP and maintain our focus on services and solutions.

Including this gain, net income for the quarter was $36.4 million which translated into diluted earnings per share of $0.99, both up 13%. Our effective tax rate was 38.3% compared to 39% in the second quarter of last year.

Now on to the balance sheet and cash flow statement. Yet again we demonstrated strong cash management with quarterly operating cash flows of $176 million, or an outstanding 4.8 times net income, which are both records for us. After the seasonally tough first quarter, I challenged our team and I am proud of the way they responded.

We also got 15 days from last quarter's DSOs for a total of 65 days. With this phenomenal performance, we now expect to generate more than $200 million in operating cash flow this year and be a day or two below our 70 day DSO goal.

You will also see an increase in our property and equipment and billings in excess of revenue lines of over $35 million. This comes from equipment purchased as part of our integrated communication system for cell phone coverage for operational forces in Afghanistan. We will provide critical communications access as a fixed-price service using this equipment, with operational fielding beginning this quarter.

ManTech is targeting and proposing solutions to the government on a fixed-price basis. These solutions provide customers what they need at a reasonable price while providing ManTech the opportunity to generate higher returns with fewer staff.

In the financing cash flow section, you'll see that we made our first dividend payment of $15.4 million. We expect to make another $0.42 per share dividend payment in December and we see this regular dividend program as a reflection of our financial strength and cash flow visibility. We believe that the combination of strong growth and a regular dividend program creates a compelling value proposition to our investors.

As of the end of the quarter, we were in a net cash position which gives us the financial flexibility to withstand government funding variations as well as fund acquisitions and cash returns to shareholders. As George indicated, we are optimistic that we can leverage our $207 million cash balance, an untapped revolver, to complete accretive acquisitions in strategic growth areas for us over the next few quarters.

Turning to business development, bookings for the second quarter were $186 million for a book to bill ratio of 0.2. Backlog at the end of the quarter stood at $4.1 billion which was down 8% but funded backlog was up 14% to $1.5 billion. We had expected that the second quarter was going to suffer from the extended from the extended continuing resolution to constrain government contracts and resources. Still, this is a matter of timing. The awards are being delayed not canceled.

Our book to bill ratio for last 12 months, which is a better indicator of growth, is 0.9 times and we are still confident that we will end this year with a more normalized book to bill ratio.

Looking ahead, our total qualified pipeline at the end of the quarter was $27 billion which was steady from last quarter and up $4 billion from a year ago. The dollar volume of bids outstanding increased to $2.9 billion up $400 million sequentially and $900 million or 41% from a year ago. Moreover, we expect to submit in excess of $6 billion in proposals in the third quarter and $10 billion for the second half of this year.

Based upon the government's stated adjudication schedule, we should see more than $7 billion of adjudications in the second half, although there is some uncertainty around the timing of these awards given strained government procurement resources.

Included in the 2011 pipeline is the re-compete of our MRAP and route clearance support work. Proposals are due in early August and the customer is on track for a November award. We are very well positioned to continue our support of this critical mission.

We are also beginning to see orders flow on our DISA ENCORE II contract, Department of Justice ITSS-4 and FBI SSS contracts. These multiple award contracts gives us important entre to sell cyber and IT services to the intelligence and federal law enforcement communities.

Turning now to the forward outlook, we are reconfirming our fiscal year guidance for 2011 of revenue of $3 billion and net income of $138 million and diluted earnings per share of $3.73. This is supported by our market position on plan performance [to] the first half of the year and our near-term pipeline.

Before handing it back to George, I want to address one of the most frequently asked questions we get from our investors. Roughly 30% of our revenue is in support of missions in theater and most of that revenue is on the S3 and MRAP family of vehicles contracts. When we evaluate the sustainability of that revenue, two factors stand out.

First, our support levels are tied to mission sustainment, not the number of ground forces. So we expect present levels to maintain through at least 2014. Our customers' announced requirements point to increased mission demands for sustainment and possible regional shifts.

Second, even after the current conflicts draw down, the equipment and missions will remain. As has occurred throughout our history, we see revenues in support of these missions, systems and vehicles continuing at reasonable levels beyond in theater mission requirements.

For example, the market is expansive for [CF4ISR], biometric and other service offerings that are accessible through the S3 contract. Customer requirements show strong service demands in support of the Army's broader mission, including enhancing the Army's distributed Common Ground System and integrating various sensor components into a total solution.

As regional missions draw down, the Army will continue prioritizing C4ISR funding, given its critical role in all future scenarios.

As with S3, the MRAP and MATVs are now part of the Army's standard equipment and they will invest to maintain operational readiness of the 17 billion of vehicles in their inventory. While requirements may come down once the military exits Afghanistan, support for these vehicles will still be in the hundreds of millions of dollars each year.

Overall, I am pleased with our resilience as evidenced by our ability to hit double-digit organic growth revenue and earnings in a turbulent environment. We have some challenges ahead, but we expect to capture market share in the priority missions in customer markets that we support and leverage our strong balance sheet to target additional growth. George?

Thank you, Kevin. In closing, I am pleased with the solid growth in revenue and earnings and delighted with the tremendous cash collection. We have a strong balance sheet and an improving supply of acquisition candidates that we can use to grow the Company. Our first-ever dividend that we issued in June is testimony to our visibility and confidence in the business and our ability to pursue growth strategy as well as focus on shareholder returns and fairness to the shareholder.

With that, we are ready to take your questions.

(Operator Instructions). Joseph Vafi with Jefferies.

Good afternoon. Was wondering, Kevin, on the -- I guess it was 8% organic growth, I may have missed it. Did you state what percentage of that growth was direct labor versus maybe pass-throughs, subcontractors, etc.?

I didn't communicate that. I think that the overall performance of the second quarter this year was fairly in line from a labor and ODC growth compared to the second quarter of last year, but I don't have specifics to provide you. But both were in line up.

Okay, and I know bookings weren't too strong here this -- in Q2. Was that -- how would you characterize the bookings that did hit in the quarter in terms of new versus renewal business?

About 40% of the total business, 30% was new. About 1/3 was add-ons and the balance was recompete.

And then I know you kind of provided some commentary on adjudication expectations for the second half of the year. We are kind of sitting here I guess halfway through the quarter. How is it -- have you actually started to see a pick up yet in the adjudications now that the budget for fiscal 2011 finally got passed?

We haven't seen a pickup on a quarter to date basis, but we have seen a significant pickup going out of last quarter and into this quarter in total proposal activities. So when you look at our proposals outstanding of $2.9 billion, we also have a very significant increase of proposals in process that are to be submitted over the next two months that will be adjudicated, beginning in August if the government holds to its schedule. So, you will see a lot of activity starting in the middle of this quarter through the balance of the year.

Got it. And so I guess would it be fair to say that you are responding to heightened RFP activity post the budget deal versus, say, there were already submitted proposals that were delayed because of the budget process?

You will see that our proposals outstanding went up because of delays and our proposal activity is much higher based on volume and I'll ask if any of the Presidents want to add to that. Terry?

It's pretty accurate. We -- it's a mix. It's both awaiting awards, delays in awards, as well as additional monies coming to the services in the agencies that they need to execute. So it's a mix.

Okay. Great. Thanks.

Michael Lewis with Lazard.

Thank you so much. George, I wanted to ask you a quick question on a competitor recently acquired a company offering them access to ENCORE II. You know, ManTech picked up TranTech for the same contract. Are you seeing any momentum there? And what are your expectations for revenue from ENCORE II over, say, the next 12 to 18 months? And then I will have a follow-up as well.

Relative to the TranTech acquisition, in keeping with what Kevin just described in his talk, the proposal, contribution, the pipeline, the submits are consistent with and perhaps even larger than what we had thought in the acquisition. And so we would expect to be on plan or a little bit greater.

We like the acquisition. We are confident in our ability to add and create value with existing customers and capabilities with new customers. People that are at TranTech, from TranTech to ManTech now, are creating good value in customer sets that we weren't at before notably in the DISA area, DHS.

So we reconfigured the program management office. We have a large number of submits that are going through the pipeline now and it is an across-the-board group ManTech value. So we are pretty excited about it.

And, Lou, just as a follow-up, ENCORE II was expected to have a lot of cyber work in the future tests. Is that what you're seeing right now or expecting to see more of in the future?

Well, we expect to see more. There are already, there is a large sum of opportunities out there already. We are seeing more work in the DISA area, more work that will go to cyber, but the pipeline is pretty robust.

Thank you. And then just one quick question for Kevin. Kevin, can you give us the actual dollar amount acquisition revenue in the quarter?

Yes. I believe it was about $33 million.

Thank you.

Bill Loomis with Stifel Nicolaus.

Kevin, can you just, when you talked about the CapEx increase in the quarter, could you just run that by me again exactly what that was?

Yes. So, we have construction in process for -- back in November, I think we announced an award for building and installing cellular towers overseas. And we have been working towards completing those and putting them into fielding them to become operational and as milestones hit, we have also been receiving payments so our billings in excess component has also been increased.

And that will be fielded in operational starting this quarter, and those are driving up because what we're doing is focused on providing fixed services that may have a hardware component in that and some of the customers have interest in that and have a potential need. And I think it's a -- it's within the CFR -- C4ISR domain and related. It is a good potential market for us.

And I'll see if Lou wants to add anything to that.

No. Just that we've reached a point of FOC so they are operational, gone through tests and they can pass calls throughout the domain.

So we take that out of CapEx and it was just a normal quarter?

Very normal.

And then what -- are you taking any fixed-price? Are you taking any inventory risk as that pass-through?

No, no inventory risk. It is all a service once it is functional which it will be this quarter and just a fixed fee that includes our staff component, as well as the material and the build of the actual systems.

And then, I'm curious because you won a contract last November, how come we haven't seen this before in terms of the increase in the P&L -- in the cash flow statement?

Timing of the development and the build based on the timing of design versus purchase, and had a slight increase last quarter, but it wasn't significant enough to drive anything.

On the M&A activity with -- now that you are in a net cash position, what is your --? What comfort level do you have in terms of leveraging up? Is it $300 million, $400 million or even higher than that? What would you be comfortable at?

Well, what we've communicated to our rating agencies and to our banks is 2.5 times, potentially three times, would be the higher end of what we could lever or would be comfortable levering up to. And we have really never had, I would say, the need to evaluate that heavily because of the strong cash flow we have.

But I think we have a lot of capacity should the right properties come along, and fairly consistent with that leverage ratio -- level.

And we continue to look for acquisitions because of the cash flow and the lines of credit with the bank. The banks are quite willing to go above our current levels if we find the appropriate acquisitions. So, cash will not be a deterrent in our pursuing acquisitions.

And are you seeing bigger deals out there?

It's hard to say. It's a mix right now. Some deals depend on how you define big. There's nothing out there right now that I am pursuing equal to let's say task.

Oh no, I didn't mean that. (Laughter). No, just several hundred million kind of size.

Oh yes, there are several hundred million dollar opportunities, there are a number of them out there frankly. But when you -- I'm sorry, when you sent that question up to me, that was [past ].

You have to be careful to define large with an entrepreneur.

Thanks a lot.

George Price with BB&T Capital Markets.

Thanks very much. I wanted to go back to signings and ask a little bit more about the environment. I mean, we had the [CRR] signed in mid April.

I was wondering, I guess, if you could give us a little bit more color maybe on obviously there are some delays coming out of that situation. But I guess a little surprised maybe that more didn't get signed before the end of the quarter. Can you just talk about the funding and award flow environment and maybe what you're seeing as you progress through what you see maybe quarter to date, in the third quarter, what you've signed, and how you see that progressing through the second half of this year?

I mean, are we going to be more heavy in 4Q than we normally are, for example?

I'll speak to the first and second halfs. So that -- we had [it] expected a very heavy volume of proposal activity based on the customers' stated procurement in RP dates in the first half. And from going into the year, toward exiting the year, the amount of proposals we submitted is roughly half of what we anticipated when we started the year. And that's due to slippages and the procurement offices having to re-evaluate their timing of when they are going to drop RFPs so that could be a combination of the CR, or just a combination of their procurement strategy and a limited workforce.

So, even we're a little bit surprised about the timing of the submittals of RFPs for contractors to respond to, and also their adjudication has been slipping to the right. So it's a combination of our proposal of outstanding going up because of the timing of award determination and also slips in the RPs being dropped, and when they're going to be submitted. And that's really pushing the second half of this year and I think that the customers and people can add in here are going to be very focused on what do they want to award before the end of this government fiscal year, and need to award and obligate.

So, that would be a big push for certain efforts. And then going into the fourth quarter, there will be also an unusually high amount of awards that they expect to be awarded during that timeframe. So it is a combination.

Okay. And I guess, can you comment at all on maybe what you've signed third quarter to date?

No, we are not going to comment on activity today.

Okay. What, I guess, would have to happen at this point, given what you are seeing in terms of funding flows and procurements for you to have to revise your guidance down? What's the major risk factor? What would have to happen at this point?

Well, we have $1.5 billion of funded backlog, we have 550 funded open wrecks and I think we have to focus on trying to fill those open-funded wrecks and respond to our customers near-term requirements within the [task] quarters capacity they have and anticipate that they will start awarding procurements because of the government fiscal year ending in a timely basis. If they really continue to push this high a volume of proposal activity far to the right, that could impact our whole industry, including ManTech.

Okay, all right. Great. Thank you.

Edward Caso with Wells Fargo.

Kevin, I was hoping to get a few more granularity here on the guidance. But I think last quarter on organic growth you indicated it was slightly below 10%, 10 points of the 15, is that still right or is it a little award?

Still right. Same.

And tax rate?

38.2%.

The interest assumption?

It is 11. -- [15.6 total and 11.7] net with the one-time gain from NetWitness. (multiple speakers).

And if NetWitness totally taxed? In other words what is the EPS impact of NetWitness?

It is about $0.06. So the $0.99 we had this quarter about $0.06 of that was related to the NetWitness transaction.

And I apologize, just on the spike in the CapEx, does that get reversed out or does that stay -- I mean once these systems are deployed, or are you --?

It would be depreciated over the customers' expected life or needed life for that service.

And --

Totals are coming down.

Okay and I guess I'm a little confused why you are -- seem so comfortable that there will be this uptick in activity here, given all the noise out there and the distractions in the market. Do you have any sense or your shops, are they talking to the CEOs? Are the CEOs focused on getting stuff out the door now or is there a little bit of a deer in headlights as they wait for direction?

I think you will hear from each of the Presidents right now, the volume of proposals is quite, quite high and the indications are that volume will continue. It is a little difficult for us to assess the continuing resolution issued this year because the Congress is totally focused on this debt issue, which we have not seen before. And from our point of view, they have to at some point in time put that behind them and get back to how they fund 2012.

2012 is, I believe, in the House a proposal for $530 billion basic and $119 billion the overseas contingency or a total of $649 billion, which would be an increase. I don't think they will get around to doing an Appropriation Bill, but I think the thinking is -- or at least I'm not hearing anyone talking about the defense side going down.

I guess my question is a little different. I think it's been asked several times and the answer -- the question has been what is your expectation for things coming out of the machine and the response has been, well, we are still jamming more stuff in the front end of the machine. So what gives you that confidence that that contracting officer is going to be able to get stuck, first by the 9/30 deadline so he doesn't lose the money and then in the back half of the year for the sort of the non-F11 (multiple speakers).

Well, I feel confident, but let me turn to Terry and ask. Terry has had some experience on the Hill, so he might be able to comment.

At first I think the principal reason for the lack of volume early on is what I would call this continuation of more like a CR hangover where disbursement of payments and just the movement of activity by the services was, everything was done like in 1/12ths. So they were really during the CR paying and thinking by the month because they were trying to figure out when it was going to close.

And now there is this frustration because all these new activities, plus the delayed awards, need to get out, and it's more an issue of volume of talent to get the things out, to get the procurements out. And there's just intense pressure now by these agencies and services leadership to get these awards out prior to another impending CR. So it is kind of top-down pressure on the acquisition community.

Again, it's the volume of talent, but they are under intense pressure to get these things out.

So as we are throwing over proposals each day into the hundreds of millions, we are attending -- we are doing that in the mornings. In the afternoon, we are attending dozens of industry conferences for the impending RFPs that will be coming out in another week or two. Just an unseasonal amount of volume going on right now at both ends.

I would suggest or submit that we have, at least in my organization, well over $500 million in submittals. A large portion of them have to be adjudicated in the year. And if they are not, they generally have to because of continuing of the mission. So there's enough in the pipeline and there's enough of activity going on so as to move more to the adjudication in Q3, Q4.

Thank you very much.

Mark Jordan. Noble Financial.

Good afternoon. A question on M&A pricing. A couple of the most recent larger deals this year have been in private capital versus industry participants. Do you see the private capital activity in the marketplace inflating prices or how do you think the M&A prices are here, the deals that you are looking at?

The pricing of task was most certainly impacted significantly, but if you look at some of the programs ranging with revenue of $100 million and $300 million, I don't think we are seeing that kind of pressure. And I don't see extraordinary prices that are beyond our ability, assuming we are interested to complete a transaction.

Okay. Question for Kevin. Given the light bookings in the second quarter, if we were to take the second quarter at $0.93, taking out the gain as sort of a baseline, does the weak order flow in the second quarter dampen or potentially put pressure on sequential growth before a strong fourth quarter?

It could if adjudications are delayed, but if you look at the earnings build for the second half, it is not that much above the second quarter's trends. So I think we are trying to -- we talk about the guidance targets. Look at that as getting comfort around the ability to hit that and or exceed that.

Thank you.

Brian Kinstlinger. Sidoti & Company.

Great, thanks. Just one on the bookings. You keep men -- you mentioned that most awards will be awarded by the third quarter, but if we are in a CR like you mentioned, probably in 2012, why would bookings be any different in the fourth quarter seasonally than they have been in the last bunch of years?

Well, I believe that a number of these awards are -- were worked at as either being done by a competitor that will be a take away for us, but it is probably a lot of stuff that is not new within the system and if there are a fair amount of this that would be mission-specific, I think the government is going to have to adjudicate that and move it forward.

Now we all assume that debt ceiling will be lifted. In the case that it is not, does that impact bookings, receivables, anything whatsoever in your business, do you think?

We have not experienced this before. So I don't have a basis for answering that. The only thing we are looking at from the point of view if there's some craziness in the debt ceiling, do we have enough cash and financial ability to keep our operations going? And the answer to that is we do.

But we cannot forecast. Having not lived through this one before, we can't forecast what that is going to mean in terms of contract renewals.

I would say we have $1.5 billion of funded backlog and we -- in terms of [holds] checks on the contracts side, the customers haven't done their prioritization yet of what they are going to pay and not pay. And I think given our financial strength, we may have potentially impact on the receivables side of it, but I think we can certainly weather through that giving our strength.

Now, I saw comments earlier this month about you guys thinking about offering services in cyber outside the federal market. Can you speak to that? Is that happening right now? Is that something you're building, you're going to inquire into? Maybe some color would be helpful there.

Thanks Brian, this is Bill Varner. We certainly see a large commercial market for cyber defense services although that market is still forming. At the moment, we have had introductory conversations with a number of financial services firms, healthcare, and energy firms. At the moment, however, we do not have any material commercial work. But we do believe that if our cyber business is going to reach its full potential, then the commercial market is a natural extension for us.

Great. And the last question, I think you mention the number of planned submissions, I just didn't write it down fast enough in the second half of the year 2012. And then if you could include how much of that is related to that MRAP work that you expect to be awarded in November?

So, the overall second half submissions is in the $10 billion range. I can't give you a specific on what we're going to submit on a competitive proposal. But you know as we said before, we expect requirements to be fairly consistent with what we have done in the past.

And are you bidding prime on that MRAP?

Yes.

Great. Thanks.

Tim Quillin with Stephens Inc.

That was a heroic performance on the cash flows. Let's hear it for the CFO.

We give credit to the deputy CFO and the team on that one.

They'll never give me credit for that. But we have cash.

I just had a couple of quick questions regarding, first of all, what CapEx is going to be like for the rest of the year. And then if -- and I think you alluded to this, but what is the term or how years are you going to depreciate that comps equipment in Afghanistan over? And when does that depreciation start in and then how does that ramp up? Exactly how is that fixed price service rolled out? Thanks.

So, on the CapEx side, we tend to run and last year we ran a little bit lighter so we ran somewhere around $10 million a year and I think the second half of this year will be roughly $5 million. It could be a little bit higher based on some activities we have, but not a lot.

On the timing of the depreciation, it depends on the customers stated term for use. So they have option periods once this thing is working, which is functional. If they can extend it out, but when we evaluate each period, it will be based on the known service life for that. And so I can't give you a hard date. But it generally is going be somewhere between eight and -- eight months or longer depending on the customer requirements. I can't give you a hard date on that.

We saw this as an opportunity to utilize our cash and lock in a segment for the market. We see this as a very good approach and if the opportunity comes again, we will be happy to do it.

And how do you price the service?

High.

When we built this proposal, we built it based on a combination of the services that would be required to sustain the development of the systems and the fielding of the systems and obviously for a fixed price still rebuilding and a level of return on that.

No, really, this is a unique opportunity for us to support our customers and the mission, use our technical skills and be able to put a program together and fund the upfront cost. And again, because of our cash position we are able to do that, and we would welcome more opportunities like this.

And would you just add cellular subscribers? Is that the way it works? Or how would it -- how you add revenue on a fixed price basis?

This is Lou. There could be additional sites. Remember it is a DOD program. And so it depends upon various missions.

Okay, fair enough. Thanks.

Tobey Sommer with SunTrust.

Thanks. I was wondering if you could describe the rate of growth that your cyber business has currently? So I was thinking in the prepared remarks you've mentioned there may be some conditions forming for a potential acceleration in that spending. Thanks.

Yes. So historically the cyber growth has been somewhere north of 20%. I think for the first half of the year, slightly less than that based on the timing of awards and the proposal volume. But we expect it to uptick up and our goal is for it to continue to exceed 20% growth rate.

Broadly, they are becoming more sizable procurements around cyber and in some areas of cyber is defining the IT procurements and it is becoming more mature. Which means there are larger, bigger opportunities, but their timing is a bundled offering. You know it could be more, I don't know the specific on the requirements of the customer.

Bill, can you comment on that?

I sure will. I think Kevin is right on the mark. We are seeing cyber opportunities being bundled across broader opportunities, whether it is for battlefield systems, integrated security, or just IT jobs. So, it is rare, very rare that we see what we would call a purely cyber offering. It is being bundled with IT services or some other sort of security opportunity; and we think we are well positioned, particularly in those IT and security opportunities to add cyber to the offering.

Thanks. And in terms of the opportunities that you are seeing, is there any kind of change in the mix versus thinking of different buckets perhaps the three letter intelligence agency, DOD, or civil agencies. I think you already commented on the commercial opportunity.

No, I don't think we are seeing any different mix in terms of what we have seen traditionally. There are cyber opportunities all throughout the intelligence community and the DOD and as we mentioned, we are hoping to participate in some of the commercial opportunities as we go forward also.

I think you must also await the 2012 Appropriation Bill or CR. You have all heard the words that they would like to have an allocation of $17 billion for cyber over some time period. So and when that funding comes, I think you will see the increase that everyone expects.

Thank you. We will look for that. And my last question just had to deal with SG&A expenses and the control that you are planning on having on those. Are there any identifiable expenses that are rolling off in the second half of the year?

There are. Nothing that I would say is going to move the needle in a big way, but we are very focused on proving processes that basically require less cost over time. We do expect based on our actions to continue to reduce our G&A as a percentage of revenue.

But in terms of absolute dollars, kind of more like a flattish trajectory than a decline?

Yes. For now.

Thank you very much.

Robert Spingarn. Credit Suisse.

Good afternoon. George, back to M&A for a moment, you talked about the -- you revisited the $5 billion goal and talked about the adequate pattern to do some significant acquisitions.

What is your appetite for some of the businesses that might be available at the larger defense contractors in your area?

Well, we look at segments of the major companies. As -- we are seeing in particular in some other European firms, as you know, they are offering up sectors of their business. And we of course did acquire one from the Brits. So we are seeing some of the larger firms that are looking to change out some of their operations that are of interest to us. In some cases, they are just trying to solve their cash flow problem. But we see a lot of potential opportunities coming in that area.

And then on cash flow, I guess this is for Kevin. Kevin, did you give a full year on cash flow guidance number?

I said over $200 million. (multiple speakers).

Operating cash flow.

Over $200 million. Okay. Then back to bookings again. There has been a lot of discussion on this call on the second quarter number. You did mention the trailing 12 months, but with the specter of another CR here, should -- what kind of bookings are you expecting in Q3? I mean it has got to be a substantial reversal of what we saw in Q2 and then some.

So, we have a lot of proposals that were supposed to be adjudicated through Q3 and Q4, and we expect that to occur. Again, if there are delays from the customer side we, like other members of the industry, will work through that, but there are a lot of procurement customer is pushing through the system that we would expect to be adjudicated in a timely fashion.

Okay. And then just going back to the MRAP contract, a clarification. You were asked this earlier. The re-compete, is that at the same scope and run rate that you're been operating on so far?

Generally, as we have communicated in the past, it is stated as a five-year term and requirements roughly in line with our current requirements.

So we would see a similar annual run rate? I guess, what are you now? At about $140 million in -- on MRAP quarterly?

It's roughly in line, right.

Roughly in line with that. Then, just a final question. With regard to the Afghanistan cellular project, how do we think about the contract relative to the investment costs and the recovery period? Do you have -- is this contract very open-ended? Is there a term? What is the recovery period? For the investment?

The recovery period is going to be dependent on the requirements and the length that the customer needs and utilizes those systems. And since it has just been fielded, it's uncertain how long that will be. But they have prepaid or the delivery of some of the systems are ready and so that is built into the overall service and cash flow requirement.

Okay and that made me think of one last one if I can. You said earlier in your discussion, when you were talking about your in theater work and talking about S3 and MRAP, that you expect present levels through 2014. And so, it is not really dependent on force structure itself, but really on the mission. And I assume that 2014 ties to the President's stated exit date. Is that -- am I drawing the right conclusion there?

Yes, for purposes of a date. It doesn't necessarily mean that comes to fruition. You know S3 is a large contract vehicle. It has $19.5 billion of ceiling. Maybe $10 billion to $11 billion of it, maybe a little bit more has been utilized. So it is a market in and of itself. There's $5 million to $8 million -- billion dollars more of ceiling and $10 billion to $12 billion of market opportunity.

Right.

It's a robust vehicle.

Should we also consider or does your thinking there think about Iraq as separate to that? Or just because as Iraq continues to wind down, might those levels adjust as we see a focus more specifically toward Afghanistan?

Well, we have seen a drawdown in Iraq. We have almost 500 people in Iraq. We have exchanged people between Iraq and Afghanistan on a constant basis depending upon the mission. And so that's been a good news story for us relative to direct labor.

Thank you.

Peter Arment with Gleacher & Company.

Good afternoon. I don't know if this question is for Kevin or Bill, but just on the cyber pricing or the margin opportunity, I think in the past we have kind of always understood that the cyber contracts came with a potentially higher margin opportunity, but now with the kind of bundling approach that I think you described, should we think about the margin opportunity differently for cyber going forward? Maybe you could just give us a little color on that?

Yes. This is Bill Varner. No, we are still seeing good healthy margins in the cyber business and we do expect that to continue. The market is very much dominated by the requirements for the -- some of the highest end and smartest people in the industry to work the cyber problem. So we think that will still come, continue to come with a higher margin. You know, we are not seeing it diminish anymore as a result of combination with security or information technology.

Now if there was a program that maybe was 90% security and 10% cyber, maybe you would expect to see the margin change. But in general, we are not seeing that.

Okay. Very helpful. Thank you.

Bill Loomis with Stifel Nicolaus.

Thanks and sorry to -- talking about the cellular contract, but on that eCCF contract, I guess from the way you've answered other people's questions, I just want to be clear on this. Do you own the cellular towers and infrastructure or were you holding it until you get it developed and then the government takes -- pays for that?

We own it. It is part of our services and solutions we are providing.

So when I look through research on this and they talk about the [CCCS] infrastructure rolling out to Afghanistan and these different towers, you are going to own it and so two years from now, for example, that will still be your infrastructure?

Correct.

And what's the -- so obviously you are planning -- you are betting that we are going to have a significant presence in Afghanistan for quite a while to do that. Now when you answered another question, you said you will depreciate it over eight months. That's certainly a lot quicker than I would think for this type of equipment. I mean, is that -- and yet you're still getting a high return. Am I reading that correctly?

Yes. This is Lou. I will answer as much of that as I can. Number one, we own it. But in over the period of time that it is there, it is supporting and performing a mission for the Department of Defense. It doesn't necessarily mean that it becomes anything more than what it is in terms of that solution.

Okay, but you're -- .

(inaudible--microphone inaccessible)

It could and we haven't been down this road before, but I continue to see this as a unique approach that's a good opportunity and it could continue to have value and utilization.

So, Bill, I would say that there is no risk of a loss because it has already been funded back in terms of its production and completion and it's a fairly unique offering that will provide -- that could provide aside for a longer duration depending on how well it works and the customers requirements beyond the term that I mentioned. And I can't define that for you because they haven't decided they like it, whether they want it long term and we have to see how it's fielded and what are its requirements.

Okay so I'm back at your normal CapEx and say it was around $25 million in the quarter, maybe, related to this?

$35 million for year-to-date. $25 million, $27 million, I think, for the quarter.

25 for the quarter. And then your total -- total contract value on this I think was it $68 million or $70 million?

It was $68 million including the production and the services which were not associated purely with that CapEx. So be careful about that alignment.

Okay. Thank you.

I think we have time for just one more question.

Gautam Khanna with Cowen and Company.

Yes I was just wondering if you talk about how happy you are with the portfolio as it is configured given shifting priorities and the like? I mean, are there any areas in the portfolio you would divest? Are there parts -- you mentioned on the commercial cyber side, are there parts kind of outside of DOD that you are pursuing? If you could just expand on some of the strategic markets you are trying to target the M&A and perhaps divestitures. Thanks.

This is Terry Ryan. We are -- in terms of divesting nothing really. In terms of areas where we are not, at least in the DOD area, we think growing around C4ISR is continuing to be important. It is one of our primary targets and acquisitions. So we think that the C4ISR segments of the budget will be sustained or even have slight growth above some of the others. So for our area, it is particularly around the Air Force where ManTech seems to be lighter versus some of the other services. So a lot of our attention will be focused around just how to exploit the new opportunities that UAVs and other collection assets are given to our customers. Anything else?

And outside of DOD?

And outside the DOD really if you look at the national security counts which include DHS and DOE, we were recently awarded a prime contract in DOE around the new program called SunShot which is this administration's highest priority on how to make solar energy affordable to the consumer. And so we hired the prime contractor on developing and involving some of that technology with commercial entities. That is a new area for us.

That is a new area for us and is an example of where we are trying to find a mechanism to go outside of just the government and -- energy along with finance, and medical is certainly a market we would like to go into.

Thank you.

That concludes the question-and-answer session. At this time I'd like to turn the conference back over to our speakers for any additional or closing marks.

Thank you, Marise. Appreciate your help on the call. The team and I want to thank everyone for their participation on the call and thank you for listening.

That concludes today's conference. Thank you for your participation.