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Background Investigation Shortfall Sends ManTech to a Loss

By Ellen McCarthy
Washington Post Staff Writer
Tuesday, August 17, 2004; Page E03

Despite an increase in revenue, ManTech International Corp. swung to a loss during its second quarter when a contract to conduct background investigations for the Department of Defense turned out to be far less lucrative than previously expected.

The Fairfax government contractor lost $5.2 million (16 cents a share) during the three months ended June 30, compared with an $8.9 million (28 cents) profit in the same period of the previous year. ManTech said it incurred the loss because MSM Security Services Inc., a company it acquired in March 2003, was conducting fewer security clearance investigations than anticipated and the cases it was handling were often complicated and time consuming.

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The root problem, ManTech executives said, is a delay in the proposed transfer of the Defense Department's investigative arm, the Defense Security Service (DSS), to the Office of Personnel Management. DSS assigned ManTech fewer cases as it wound down operations in anticipation of the transfer, causing ManTech to lay off a third of the 300 employees in its clearance investigation unit last month. Its MSM subsidiary recorded a $14.5 million loss in the second quarter.

In July ManTech was awarded a new contract with OPM. The company said the deal, awarded a month later than originally expected, could be worth between $50 million and $100 million annually. But the new contract will not erase problems with ManTech's subsidiary, because its employees will not begin learning to use OPM's computer system until November and cannot take on new cases unless its investigators are properly trained on the system.

"At this point in time, we have stopped trying to forecast until we get to the training phase. . . . We don't want to fall into the trap of predicting things until we actually see the paper work," said George J. Pedersen, ManTech's chief executive.

The company said the new contract is more advantageous because ManTech will receive a portion of its payments as it takes on each new case. Under the old contract it was paid only when investigations were completed.

"This was a fairly unique situation, clearly an unfortunate one, but this contract had a unique risk profile," said Mark C. Jordan, an analyst with A.G. Edwards & Sons in St. Louis. Without MSM, he added, "the rest of the business looks pretty reasonable."

Most of ManTech's revenue comes from providing information technology services to federal agencies. Its overall revenue for the second quarter rose 12 percent year-to-year to $198.6 million from $177.1 million. The company's stock fell 16 cents to close at $12.17 yesterday.

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