ManTech International Corp. Q4 2008 Earnings Call Transcript

Feb.25.09 | About: ManTech International (MANT)

ManTech International Corp. (NASDAQ:MANT)

Q4 2008 Earnings Call

February 25, 2009 5:00 pm ET

Executives

Joe Cormier – Senior Vice President, Corporate Development

George Pedersen – Chairman of the Board, Chief Executive Officer

Bob Coleman – President, Chief Operating Officer

Kevin Phillips – Executive Vice President, Chief Financial Officer

Analysts

Mike Lewis – BB&T Capital Markets

Bill Loomis – Stifel Nicolaus

Joseph Vafi – Jefferies & Company

Brian Kinstlinger – Sidoti & Company

Gautam Khanna – Cowen and Company

Tim Quillin – Stephens Inc.

Mark Jordan – Noble Financial Group

Edward Caso – Wachovia Capital Markets

Operator

Welcome everyone to the ManTech fourth quarter and full year 2008 earnings conference call. (Operators instructions)

Mr. Cormier you may begin your conference.

Joe Cormier

Thank you. Welcome to ManTech International Corporation’s fourth quarter 2008 conference call. We thank you again for joining us today. I am Joe Cormier, Senior Vice President of Corporate Development and leading today’s call for ManTech are George Pedersen, our Chairman of the Board and Chief Executive Officer; Bob Coleman, our President and Chief Operating Officer and Kevin Phillips, our Executive Vice President and Chief Financial Officer.

In our prepared remarks, George will discuss our strategic positioning and outlook for ManTech. Bob will touch on our operational highlights from 2008 and provide our growth outlook for 2009 and Kevin will review our 2008 fourth quarter financial performance as well as 2009 forward guidance.

Before we begin our discussion, it is important that we remind you that the company’s quarterly results are preliminary in nature and thus are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Security Litigation Reform Act.

These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results and include the risks and uncertainties identified in our earnings press release under the caption, Forward-Looking Information. For a full discussion of these risk and other risks and uncertainties, please refer to the section entitled Risk Factors in ManTech's annual report on Form 10K filed with the SEC on March 17, 2008 and in ManTech's other public filings. Also, we undertake no obligation to update any of the forward-looking statements made on this call.

Now I would like to turn the call over to George Pedersen. George?

George Pedersen

Thank you Joe. Good afternoon and thank you for participating in today’s call. We are extremely pleased to discuss our record 2008 financial results. As you will see from our press release, 2008 financial results were strong across the board with 29% revenue growth, 18% coming organically, 34% net income growth and 31% EPS growth over 2007. Operating margins improved from 7.9% in 2007 to 8.2% in 2008.

This financial performance was the result of our executing our growth strategy which we have been faithfully following since [2002]. The results of this growth strategy is roughly a $2 billion enterprise today that has achieved 25% compound annual growth in revenue and income since our IPO of 2002 and is poised to continue our growth trajectory in 2009 and beyond.

In addition, during the year we completed two more selective acquisitions in the high end intelligence and defense markets that will enhance revenue and operating profits. Today, ManTech’s mission critical services focus on the nations highest priority programs. Our forward guidance implies continued operating momentum for 2009 consistent with our historical performance and is based upon the robust demand we see for our mission focused services.

As a reminder, this guidance does not include any future acquisitions but we have ample credit available and strong financial cash flows to complete accretive, strategic acquisitions in any given year.

We remain confident that the areas where our business is focused will continue to be a priority under the new administration in terms of funding over the next several years. The threats to our nation continue to grow, not diminish, and the fronts on which we will protect our country continue to expand. The President will be submitting his budget this week and we believe that the Defense portion contains $537 billion for FY10, a 4% growth after FY09 while the remaining supplemental spending for FY09 represents another $83 billion of funding which should come in the March or April time period and is up from $66 billion requested by Secretary Gates previously.

This should bring the total FY09 Defense spending to over $636 billion. We are also convinced that cyber security is going to be a large and growing market for years to come. As we have discussed in the past ManTech has been a key partner to the Department of Defense and these communities in their efforts to combat the cyber threat and we feel well positioned to continue these partnerships well into the future.

Our position of trust in partnership with our customers is evident by our historical growth and financial performance. As we enter 2009 we look to continue executing on the support of our nation, our customers, our employees and you, our shareholders.

With that I’d like to turn the call over to Bob Coleman. Bob?

Bob Coleman

Thank you George. We are all extremely pleased with our 2008 operating results and I would like to take this opportunity to thank all of our almost 8,000 employees for another successful year. It is your commitment to our customers and their mission that make ManTech successful. In 2008 we delivered exceptional growth with $1.87 billion of revenue and earnings per share of $2.55.

At the same time we strengthened our capabilities and extended our market position with the acquisitions of ETG and EWA Services and we continued to penetrate deeper into the mission critical Intelligence and DoD communities. We now have over 1,000 contracts and task orders generating a run rate of $2 billion in revenue and we are strategically focused on the mission critical market space and broadly diversified throughout the Intelligence and DoD community.

Our national security customer focus has positioned ManTech for strong demand across our mission critical services and solutions. Our bookings highlight this demand as we won roughly $3 billion in contract awards in 2008, a record amount, and 35% of those bookings came from new business wins and contract add ons.

Specific areas of our business such as cyber security and our global logistics and supply chain management services had very strong growth in 2008 and we expect this to continue. To meet these increasing requirements and ramp up new contracts our recruiting continues to deliver as we increased our staff by over 600 net adds in 2008. Overall we are very pleased with our results.

Going forward we maintain our focus in mission critical markets yet remain diversified across the Intel and DoD community. We are extremely well positioned for continued long-term growth in revenue and earnings. As a result we are projecting 2009 revenue of $2.1-2.2 billion and we are forecasting operating margins of 8.3% which implies operating profit of $174-183 million. This represents a 12-18% increase in revenue growth off our 2008 base and an expansion of our 2008 margins. Kevin will fill you in on these details.

Consistent with our expectations, bookings for the quarter totaled $180 million. We expect to win a large share of new business in 2009 that will drive double digit organic growth consistent with our mission critical markets. Our qualified pipeline currently stands at $12.6 billion and we are tracking about 30 opportunities in our markets that are over $100 million. We are off to a good start in 2009 as we received the new $355 million 2-year award with SOCOM for MRAP and clearance support in Southwest Asia in January. As a reminder, $50 million annually of our existing work on the JERRV contract will move through this program. This award expands ManTech’s customer set in the counter IED market with specific focus on Afghanistan.

With regard to our 2009 growth, I would like to point out that the contracts that are in place and our customers’ budgets support the funding requirements for these contracts. Roughly 15% of our 2009 business base is up for re-compete which is below average for a typical year. The timing of these re-competes is spread throughout the year which means that only 77% of our 2009 revenue is at risk. Of course we feel very well positioned for our re-competes and protecting base remains a priority.

As we have discussed in the past our work in the cyber security space but I think it is important to provide a bit more depth in this area. As you are aware, the Comprehensive National Cyber Initiative protects all agencies of the government and critical infrastructure and will drive upwards of $15 billion of new spending over the next five years. The lion’s share of the dollars will go towards Intel, DHS and DoD. ManTech’s history in supporting and partnering with these lead agencies positions us to capture a significant share of the new program funds being directed towards this initiative.

For example, we mentioned a classified program we were awarded in April 2008. We have already seen the requirements expand significantly from day one and we continue to see additional opportunities and funding for future expansion. To strengthen and expand our presence we will continue to seek out acquisitions like the Emerging Technologies Group. ETG brought us two new customers and added depth to our cyber capabilities.

Additionally, we see 2009 as a critical year for winning new cyber-related programs which will position ManTech for significant growth in our cyber business in 2010 and beyond. In closing, we are excited about our growth prospects for 2009 as we continue to leverage our market position to build ManTech into the premier, mid-tier national security company.

At this point I’d like to turn the call over to Kevin. Kevin?

Kevin Phillips

Thank you Bob. As you saw in the release, fourth quarter revenues of approximately $495 million represent 17% total revenue growth with 12% coming organically for the fourth quarter compared to last year’s fourth quarter revenues of $422 million.

For the year, revenues grew to $1.71 billion, up 29% with 18% coming organically over 2007. Our core markets continue to be strong. We continue to be well positioned in all components of our DoD and Intelligence Community customer base. Our revenue is well diversified with only one contract contributing over 10% of revenue. This contract, Counter Mine, generated $100 million in revenue in the fourth quarter and $342 million for the full year.

Contract revenue mix remained relatively unchanged in the quarter and year. 98% came from Federal Government sources for the quarter and year. Defense, Intelligence and Homeland Security related business comprised 95% for the quarter and 94% for the full year. The portion of revenues coming from contracts billed on a time and material basis were 69% of revenue. Fixed price was 12% and cost plus was 19% for the fourth quarter and 66%, 14% and 20% for the full year respectively.

As of December 31, total backlog was $3.97 billion and funded backlog grew 55% over last year to $1.18 billion at the end of the fourth quarter. This represents over 50% of 2009’s mid point revenue guidance. This continued strength in funded backlog demonstrates ManTech’s positioning in the center of the nation’s mission critical operations and provides solid visibility into future quarters.

Our operating profit was $41.4 million in the fourth quarter which yielded a margin of 8.4% which is up from 8.3% in the third quarter. The key drivers of this strong performance were the higher than anticipated direct labor contribution to revenue in the quarter and increased award fees and returns on some fixed price contracts in the quarter as well.

These gains were partially offset by investments in infrastructure and business development during the fourth quarter which increased G&A expense. For the year, operating profit was over $153 million which represented an 8.2% operating margin. We had expansion margins in the second half of the year as our strong support of customer needs resulted in improved returns on contracts and direct labor additions.

As a reminder, of the $153 million of operating profit Counter Mine contributed approximately $12 million in operating profit in 2008 or 3.4% of margin. The rest of ManTech’s core business delivered 9.2% margin. Our effective tax rate for the year increased to 39.8% resulting in a 40.3% effective tax rate for the quarter. The increase in the effective tax rate was driven by the decline in the asset based investments in our deferred compensation plan otherwise called our ESSC.

Based on the significant operating margin contribution, our fourth quarter net income was $24.6 million and translated into diluted earnings per share of $0.69. For the full year net income was $90.3 million which was up 34% from 2007. This produced $2.55 in diluted earnings per share for a growth rate of 31%.

Turning to the balance sheet and cash flow metrics, during the year we generated record operating cash flows of over $127 million which represented over 140% conversion of 2008 net income. The operating cash flow was more impressive given the working capital needs associated with our accelerated organic growth during the year.

Our receivable day sales outstanding at the end of December was 74 days due to slightly higher than expected receivable delays that occurred during the holiday season. As of December 31st, the company had $4 million cash and $44 million of debt and an equity base of $681 million.

Turning now to our guidance, we have provided our initial first quarter 2009 and full year 2009 guidance in our earnings release. Our first quarter 2009 revenue guidance of $485-505 million represents a 14-19% total growth over last year’s first quarter with 12-16% coming organically. We are forecasting an operating margin of 8.4%. Our net income range of $24.6-25.6 million results in earnings per share guidance of $0.68 to $0.71 per share on weighted average shares of 36 million. This represents 20-25% growth over last year’s first quarter earnings per share.

This guidance assumes net interest expense of $275,000 in the first quarter and a 39.4% effective tax rate. Our full year 2009 guidance which does not include any future acquisitions or divestitures of between $2.1-2.2 billion represents 12-18% revenue growth from our 2008 full year results. This guidance implies organic growth of 10-16% in 2009. Based upon the improvement in the operating margin we delivered in the second half of 2008 and our strong headcount growth and our focus on improving profitability across the corporation we are forecasting operating margin of 8.3% for the full year 2009 which is up from 2008 operating margin of 8.2%.

We estimate our 2009 net income to be $105.5-110.6 million which results in earnings per share guidance of $2.91 to $3.05 per share based on weighted average shares of 36.3 million. This earnings per share range represents 14-20% growth over the 2008 results of $2.55. Our guidance assumes $200,000 net interest expense for the year and a 39.4% effective tax rate.

Looking at our balance sheet and cash flows for 2009, based upon the strong growth and consistent receivables conversion we expect strong cash flows from operations of over $120 million with modest capital expenditures of $10 million. As a reminder, our cash flow includes the benefit of $7 million of deferred tax benefits related to goodwill amortization for prior acquisitions for tax purposes.

Additionally, we anticipate non-cash expenses, depreciation and amortization to be approximately $18 million and expense from stock option grants to be approximately $8 million during 2009. We are targeting receivable day sales outstanding of 70 days for 2009.

Our continued strong cash conversion performance will allow us to pay down our debt and provide additional flexibility to fund future strategic acquisitions. As a reminder, we have a $300 million credit facility along with $120 million of positive cash flow we expect to generate in 2009 which provides significant additional capacity to grow our revenue and earnings base going forward.

In closing, we are excited about the prospects of our business as we are operationally well positioned for continued growth in revenue and profits supported by our strong balance sheet and cash flows.

Now we would be pleased to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Mike Lewis – BB&T Capital Markets.

Mike Lewis – BB&T Capital Markets

George, a quick question for you kind of at 30,000 feet here. I attended a briefing today with Senator McCain speaking. He was discussing Afghanistan. One of the interesting comments he made with regard to Afghanistan was that, and I’m quoting him here, “the increase in troops was not a surge but just an increase in strength that could last for a number of years.” With that said I’m wondering about the JERRV and the other RV3133 work. Based on the expectation we saw from the contract release in January on this work what is your expectation on the ultimate level of business you can derive from this over the next, assuming we are in Afghanistan for the next five years?

George Pedersen

I can’t look out five years but as the troops move there our support operations, not just JERRV but a number of other areas, will have to go with them. I am aware of some of the comments the Senator made and I won’t get into the business of defining anything said. As you have heard me say for the past 2-3 years now we did not believe this mission would be over any time soon. Bob would you like to amplify at all?

Bob Coleman

We are already seeing a ramp up in requirements in Afghanistan. As you know that is much tougher terrain than Iraq so I think we have our work cut out for us there. I am worried that is going to be a long endeavor as Senator McCain has said though I think we will continue to grow in that area in 2009 and 2010.

Kevin Phillips

I will comment because I know the question is coming that as we mentioned, $50 million of the JERRV program is related to SOCOM and is rolling into that effort. We are projecting at least $75 million at the low end of our guidance coming from that program and obviously if requirements come up we can provide some more detail as we get better visibility as well.

George Pedersen

I think you know that they are looking at an $82.2 billion plus up which would take them through. That is a bit higher. I think the last time Secretary Gates was talking about $66 billion and that number has increased. If you look at some of the components of where they are spending their money you will find that the systems that they are sending in require the kind of support we have provided the past five years. That is too long an answer.

Kevin Phillips

I would like to just add to that we do not get a lot of funding through those supplementals though. Most of the work we have is in the base budget of our customers. We are not at risk for that.

Mike Lewis – BB&T Capital Markets

Bob I was wondering, of the new business awards I think it was north of $1 billion in actual new business or expansions of business. Where did you experience the greatest demand within your customer base? Was it from the individual military services or specifically related to some of your three major intelligence customers?

Bob Coleman

I think the majority came in the DoD spaces but we have experienced strong growth in the Intel space particularly in the cyber area. As you know we won a classified program I mentioned back in April. We have seen some good growth on that contract and we expect that to continue over the next several years. There is a lot of money, as you know, in the NCI and I think we are well positioned to continue to capture that.

Operator

The next question comes from Bill Loomis – Stifel Nicolaus.

Bill Loomis – Stifel Nicolaus

Can you just clarify on the Counter Mine and JERRV when you talked about your guidance the $100 million you had in the fourth quarter and $105 million in the first quarter which contract specifically are we talking about? Are you including the older JERRV contract in that number?

Kevin Phillips

I will crosswalk that because we do have the $40 million in the fourth quarter from the JERRV program that is going to be split with part of it going into the SOCOM contract that we mentioned which is the $15 million annually and the balance going to the Counter Mine program. So between the $100 million in Q4 on Counter Mine and approximately $15 million on the current JERRV program, the baseline we consider in Q4 for comparative purposes about $115 million in Q4 and our low end of our guidance are projecting $105 million related to that. If you may recall from last year the first quarter’s ODC flows have stronger variability in them and go down a bit based on the timing of the holidays and the like for some of the vendors and we have to factor that in the first quarter.

Bill Loomis – Stifel Nicolaus

So when I’m looking again at the $105 million number that is equivalent you said in the fourth quarter you had the $100 million on Counter Mine, $15 million on JERRV, did I hear that right?

Kevin Phillips

Correct.

Bill Loomis – Stifel Nicolaus

So in the fourth quarter did you have $115 million in total, Counter Mine, JERRV including the older JERRV contract?

Kevin Phillips

That is correct.

Bill Loomis – Stifel Nicolaus

Then your $105 million is a low end equivalent to that $115 million?

Kevin Phillips

That is correct. Of the $28 million on JERRV, the remaining balance the $12-13 million is the SOCOM related portion for the quarter.

Bill Loomis – Stifel Nicolaus

What are your assumptions in terms of level of activity? Can you talk a little more subjectively about the level of activity you are expecting in Iraq and the level of activity you will expect as you grow in Afghanistan? What are you assuming in terms of number of MRAP’s in theater? I don’t need specifics but just more generally what are you assuming in terms of actual MRAP in theater, split between Iraq and Afghanistan and what your thoughts on the security agreement may have impact on this contract this year?

Bob Coleman

First, just one of the things I’d like to say is I think Counter Mine mission in Iraq is going to continue at some level as we shift our support to the Strategic Overwatch Mission even when the combat troops decline. The number of MRAP’s in theater are now over 10,000 and if you recall we really haven’t done a lot of MRAP support and we are expecting a large increase in that in Afghanistan. We have already seen the requirements double and we expect it will go up from there. So I think that we are going to be there for awhile. I think there is going to be strong growth in this program through 2009 and I don’t see a reason why it wouldn’t continue through 2010.

Bill Loomis – Stifel Nicolaus

So Iraq stays where it is versus what you did in the fourth quarter plus you are getting incremental growth in Afghanistan, is that correct?

Bob Coleman

That is correct. I expect it to level off in Iraq. Correct.

Operator

The next question comes from Joseph Vafi – Jefferies & Company.

Joseph Vafi – Jefferies & Company

Maybe we could talk a little bit about kind of how you got to your guidance number for 2009 if we kind of rewound the clock and were beginning at the same time last year what kind of level of visibility did you have to your guidance then versus now? Is it about the same? Is it different? Also there would be some other puts and takes in there that would be interesting to get some commentary on. Re-competes and secondly pipeline last year versus this year kind of comparing the two years and figuring out where guidance came out.

Bob Coleman

I’ll take a crack at this and then I’ll let Kevin add on to it. I think the data for formulating the guidance is similar this year to last year. We did expect a little bit higher re-compete level last year but that went down and a lot of those opportunities were extended or shifted to ride on us. If you are looking at comparisons quarter-over-quarter remember that Q4 2007 was a big revenue quarter for us and I think we did a good job this year growing the business. I think those bookings along with 35% of that being new business wins and add on’s position us for another strong year. I think all of that together really is how we developed our guidance and our margins for the year. I’ll let Kevin add on to that.

Kevin Phillips

Just a couple of data points, if you look at the end of last year we had $758 million in backlog funded that went to $1.177 so there is an increase there the visibility is very good. On the commitments to the customers we had an expected pipeline of about $10.3 billion that has gone up to $12.6 billion. We also had over $1 billion in new contract awards in FY08 and as importantly the second half of 2008 had the highest level of net labor adds during that period so in terms of the margin driving the piece of the business we have got a stronger baseline going into 2009 and better visibility.

We are widening the range for the year in terms of the revenues because of the variability in the ODC’s but generally I think that we out paced where we though we would be at the beginning of last year and we are trying to reflect the strong continuance of the business with what we have in hand and what we know in current visibility and what is going on.

Joseph Vafi – Jefferies & Company

So in essence we are about the same level of visibility visa vie last year’s guidance or maybe a little better or relative to the range of guidance and the visibility you have to the guidance today versus a year ago when you provided guidance?

Bob Coleman

A little bit better. On the re-compete side the revenue risk for re-competes is about 7% for 2009 and the re-compete amount for total business is about 15%. So again, below the average 20% annual amount and that provides us good visibility as well.

Joseph Vafi – Jefferies & Company

Have you seen any kind of slow down yet in terms of decision making given new department heads or agency heads at this point?

Bob Coleman

We have not seen a slow down as a result of that. There is always opportunity to shift into the ride as they try to formulate the requirements and then of course the acquisition of workforce and the strain on the acquisition of workforce causes delays as well. But nothing as a result of the change in heads.

George Pedersen

I think there is another factor here as well. A year ago we were looking at the velocity we would be out of Iraq in a year’s time and I think the budgeting and thinking reflected that. We now know that is not exactly the plan that President Obama has [any idea to ship] setting soldiers. It is a totally different philosophy that are supporting the appropriations that are likely to come.

Joseph Vafi – Jefferies & Company

Maybe one quick follow-up question. SOCOM/MRAP margin we kind of look at that as similar to Counter Mine type margins?

Kevin Phillips

I would say it is going to be slightly higher than Counter Mine because of the labor mix but it is closer to the Counter Mine than the other core business.

Operator

The next question comes from Brian Kinstlinger – Sidoti & Company.

Brian Kinstlinger – Sidoti & Company

Can you talk about cyber security a little bit with bookings should begin in 2009 and revenue maybe and then can you talk if you have already submitted proposals and maybe quantify the pipeline in terms of number of programs in dollars you are tracking?

Bob Coleman

I will say that the dollars have started flowing a little bit faster than we had expected but what we are seeing is them flowing onto existing contracts. I know some folks out there have announced cyber wins but I doubt those are CNCI related wins and are probably cyber support to other IT solutions. We are seeing strong growth in the pipeline in cyber. I’m not going to get into the specific details but you know the agencies we serve; the Intel community, DHS, Justice Department, FBI and DoD all have a major roll in this mission. I believe ManTech and I know this is a big statement but I think we are probably the most qualified company in this market to support our customers’ requirements because we have been doing this for so long. Our capabilities are very deep, very broad, they are well known in these tight circles in the community. I am confident we will have some good growth in this area going forward.

Brian Kinstlinger – Sidoti & Company

Considering these programs are black or a lot of them are, how will we be able to discuss them? Will you be able to discuss bookings related to cyber security particularly and how do we trend for the year and do you expect to have announcements throughout the year?

Bob Coleman

We will be able to announce the bookings amount. We won’t be able to say anything about the customer really or the mission but you can expect those to come out in probably our quarterly announcements. We won’t go into details though.

Brian Kinstlinger – Sidoti & Company

Can you tell us the numbers that were booked in 2008 related to cyber?

Bob Coleman

Related specifically to the CNCI?

Brian Kinstlinger – Sidoti & Company

Maybe both, I don’t know. Whichever you can give.

Bob Coleman

Over 120 just in CNCI but remember cyber is about 5% of our business. That has been growing and there is a little bit better margins in that business because of the nature of the work and we do expect that to double by2011.

Brian Kinstlinger – Sidoti & Company

When I look at the margins Counter Mine is obviously going to grow a lot slower this year especially if you combine JERRV and add the two year-over-year. This year you grew 30 basis points despite that growing so aggressively in terms of operating margin. So now that Counter Mine is slowing and a lot of the longer pieces of your business in terms of profitability growing why might we not see the same amount of operating leverage in the business?

Kevin Phillips

I’ll speak to that and then Bob can add comments. As we have said for the last year and a half our goal is to be able to go after as a prime $100 million plus procurements to position ourselves and what we are doing is focusing on our business development capabilities, the processes, the systems underlying companies of our size that need to go after large procurements as well as differentiators to include IRAD and other components so we are investing into certain areas so that we can ensure we can go after these procurements as a prime and win and continue our growth in the out years.

Bob Coleman

I’d like to also just add to that you are hearing a lot of people report there has been a lot of pricing pressure in this market over the past year and just like them we have had some of that pressure particularly in our non-mission critical business areas. Even with that pressure we grew the margins by 30 basis points and we are still forecasting a 10 basis point increase in 2009 so I think that is pretty good.

Brian Kinstlinger – Sidoti & Company

When I take a look at SG&A from the answers you discussed it went up a lot in the third quarter to the fourth quarter and it sounds like that was bid and proposal activity. Is that something that is going to be as you talk about building a stronger team for bigger programs the higher sort of run rate? Is it going to be a little more choppy than it has been and maybe can you talk about proposals outstanding or the ones you expect to be bid in the first quarter?

Kevin Phillips

I’ll speak to the G&A. For 2009 you should expect about an 8.2% G&A to revenue. It was higher than that in the fourth quarter. Not only did we have some development activities but we also had some infrastructure, one-time infrastructure activities in there as well again trying to make sure that we are positioned. Not all of that is continuing going forward. For 2009 you should target 8.2% G&A as a percentage of revenue.

Brian Kinstlinger – Sidoti & Company

You haven’t talked a lot about the A space in a long time and a long time ago I remember that being a very small program that had huge potential. Maybe you can update if it still has that potential, where it is in the life cycle and what we might be able to expect from that?

Bob Coleman

Sure, A Space has grown very nicely. We are over 5,000 users on A space and most importantly it has grown across communities so it started with one agency, as you recall, the DIA and now it has expanded across all of the Intelligence agencies. Going forward we will expect to add additional capabilities onto A space that will serve a broader set of our customer requirements. Another example of where A space is about to be used as well is in the Cyber Initiative. The government has realized this is probably a good tool for helping to identify and collaborate on cyber threats. The program was originally sole sourced to ManTech and it is increasing in size. We expect we will see competition come up for A space over the next second or third quarter. So at that point I think we will see an increase in the value but I also believe it will expand from there.

Brian Kinstlinger – Sidoti & Company

It was pretty small I remember in the grand scheme of things.

Bob Coleman

Very small but like all these programs as they get adopted into the community, requirements continue to get added on and the revenue grows for us.

Operator

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

Gautam Khanna – Cowen and Company

Is it fair to assume $12 million for EW services? If so if I recall it was $20 million in sales so what is the accretion implied in your guidance?

Kevin Phillips

Yes it was $12 million with a couple pennies accretion so you should expect the $20 million in revenue run rate.

Gautam Khanna – Cowen and Company

I don’t know if you can answer this question but perhaps you can help us frame it, with respect to Counter Mine presumably there is a piece that is more provisional equipment than more the spares tale as well. Can you give a break down percentage wise or a ballpark figure as to how much is recurring revenue or spares base versus dealing with original equipment?

Kevin Phillips

I’ll try to answer that a little bit. As you know the route clearance systems lead the way for routes that are going to have trips run through it which means they are likely to sustain a slightly higher level of repair and maintenance on an ongoing basis if there is a threat and if those systems are doing their job. I would say that we expect to have a continuing requirement for those systems on an ongoing basis. I can’t give you specifics of how many systems fielded in, which location or which locations are coming in to Afghanistan but if your concern is the continuity and the continuance of it they are a high sustainment and maintenance requirement.

Gautam Khanna – Cowen and Company

The basis for the question is how it is guided of 22.1 systems down roughly 3,000 this year, 30%, versus new deliveries and I just wondered if that did show up in Counter Mine results in the back half?

Kevin Phillips

It is not something we see in our view over the next year and a half to two years based on the information we have.

Gautam Khanna – Cowen and Company

Kevin could you give us the RSC revenue for the quarter?

Kevin Phillips

RSC for the quarter was $34 million.

Operator

The next question comes from Tim Quillin – Stephens Inc.

Tim Quillin – Stephens Inc.

In terms of the ongoing or what is rolled up into the Counter Mine contract that was $115 million in Q4. You are looking for $105 million in 1Q. Then back up I guess to $115 million type of run rate to get to that $450 level for the year. What is happening there that the downward move in 1Q?

Bob Coleman

What you are seeing is a pattern in Q1 2009 similar to a pattern that occurred in Q1 of 2008 that is the buys tend to go down again based on the longevity of the program and we don’t have a lot of history beyond that but it seems to be a pattern based on the vendors shutting down certain activities during a certain period of time during the holidays and the delays that result of that on the receipt of some of the shipped product.

Tim Quillin – Stephens Inc.

So you are only on the SOCOM RG3133 contract only assuming about $25 million in incremental revenue even though the contract ceiling implies the potential for significantly higher revenue. What will need to happen for you to get more comfortable you will realize more closely to that ceiling value?

Bob Coleman

That is at the low end of our range and we have a higher range $100 million for the year to try to reflect for that potential upward need. Again, as we get requirements from the customer and as we have better visibility we will be certain to tell you how that is playing out.

Tim Quillin – Stephens Inc.

RSC and JERRV for the year, was RSC about 134 and JERRV 88 for the full year?

Kevin Phillips

Yes.

Tim Quillin – Stephens Inc.

Lastly, on the re-billable, one of the reasons the margins are so low is low labor content and a lot of re-billiables in Counter Mine. Is there anything we have to think about in terms of re-billable potentially falling off or would increased labor content offset that even at the top line?

Kevin Phillips

I will mention and then Bob can add if he wants, our visibility on the re-billable is that it is going to be constant or potentially increasing and the labor will be increasing based on the additional locations.

Bob Coleman

That is exactly right. I don’t really have anything else to add to that.

Operator

The next question comes from Mark Jordan – Noble Financial Group.

Mark Jordan – Noble Financial Group

Bob, you talked about the emerging CNCI marketplace but yet many players in the industry claim they are heavy into the cyber security also. Could you differentiate or educate us a little bit on anything incremental that is being done under CNCI versus what I guess everybody used to call Information Assurance?

Bob Coleman

There is a huge difference between the two elements of cyber. Information Assurance is more of, if you will, a governance in compliance role where it takes a completely different individual than you would find in the cyber mission. The cyber mission is going to be a lot more extensive. You have kernel developers, reverse engineers, you will have an analytical component, cyber threat analytics centers are springing up all over to do intelligence analysis and counter-Intel on the cyber threats. You are going to have damage assessment requirements and you will have just like any combat system you would have a response area as well. So it is a much broader area. As you know they added $3 billion to the budget this year for the CNCI and they plan to continue that over the next several years.

Mark Jordan – Noble Financial Group

How will CNCI be centralized? I assume if you are going to do this efficiently you need to have some centralization to share best practices because this is pretty esoteric technology?

Bob Coleman

Remember, DNI is the Executive Agent for it and I think the rules are very well defined. ManTech is fortunate that we sit on the Defense Industrial Based Cyber Council along with I think we are probably the smallest company on there. It is mostly the major primes and that is because of our capabilities in this area. The one thing I have learned from that is the roles are very well defined. NSA has a main role in it. DHS is going to be the domestic side along with FBI and then DoD has a different plane in this as well. In terms of the funding, NSA and DHS will get the majority of it from what we can tell. NSA and CIA and DSH.

Mark Jordan – Noble Financial Group

You did talk about the increase in G&A in the quarter with some one-time investments. Also you saw 100 basis point sequential improvement in gross margin so overall operating margins were up 100 basis points sequentially. What was the cause for that up tick in gross margin in Q4 and what implications does that have moving into 2009?

Bob Coleman

I’ll answer the last one first and then explain the variability. I think for 2009 the gross margin expectation should be around 16.5%. It could be higher or lower based on the labor growth but that is the target. The one time activities, there are a number of them, unfortunately that had less fringe related expenses in the quarter. We had some pick up and award fees based on the good performance of our people. We also had some fixed price contracts that delivered a stronger level of return for the quarter. If it was any one thing I would certainly spike it out but there are just a number of good things that happened in the quarter.

Mark Jordan – Noble Financial Group

So they effectively balanced out what the controls or whatever the higher G&A activities all balanced out so you came in where you thought you were going to be? You had a lot of moving pieces for the year?

Bob Coleman

Yes sir.

Operator

The next question comes from Edward Caso – Wachovia Capital Markets.

Edward Caso – Wachovia Capital Markets

My question is on use of capital. It looks like your cash flow remains terrific as it has for years. What are you doing in the share repurchase area or what are your thoughts there?

Kevin Phillips

Our belief is that our best return is through acquisitions and targeted acquisition areas that we have gaps in our customer sets. We will continue to use our cash to that end. Share repurchases aren’t in our plan.

George Pedersen

As you know when we went public we stated that the objective is to grow not only internally but through acquisitions which we obviously have done and we think the opportunities out there right now continue to be very significant. Before the end of the year we are certain we will find one or two or more that we will close.

Edward Caso – Wachovia Capital Markets

Can you talk a little bit more about what percent of your work, you mention pricing on the commodities side you were seeing, what percent of your work would you say is more at risk to current pricing pressure?

Bob Coleman

Like I said before it is really the non-mission critical areas. Again, I think we have done a good job of managing and reacting to that pricing pressure. Like I said before we grew our margins nicely in 2008 and I think we will continue in 2009.

Edward Caso – Wachovia Capital Markets

You mentioned the $300 million bank line. If you did a bigger deal and you approached the upper end of that line would your rates step up?

Kevin Phillips

Yes. As you now in today’s market if we were to expand beyond that it would certainly require higher levels of cost for the capital.

Operator

The next question comes from Mike Lewis – BB&T Capital Markets.

Mike Lewis – BB&T Capital Markets

Kevin just a quick follow-up on the balance sheet, what is your current level of debt coming into the end of February here? I’m just trying to figure out if you are going to have it paid off by the first quarter or whether we should leave this thing out?

Kevin Phillips

We expect that we will have at least in our current plan the debt paid off by the end of the second quarter not the first.

Operator

At this time there are no further questions. Thank you for participating in today’s conference call. (Operator Instructions) This concludes our conference for today. Thank you for participating.

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