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ManTech International (NASDAQ:MANT)

Q1 2013 Earnings Call

May 01, 2013 5:00 pm ET

Executives

M. Stuart Davis

George J. Pedersen - Co-Founder, Chairman, Chief Executive Officer, Chairman of Executive Committee and Member of Special Programs Oversight Committee

Kevin M. Phillips - Chief Financial Officer and Executive Vice President

Daniel J. Keefe - President of Technical Services Group and Chief Operating Officer of Technical Services Group

L. William Varner - President of Mission, Cyber & Intelligence Solutions Group and Chief Operating Officer of Mission, Cyber & Intelligence Solutions Group

Louis M. Addeo - Executive Vice President for Corporate Development & Strategic Acquisitions

Analysts

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Brian Kinstlinger - Sidoti & Company, LLC

George A. Price - BB&T Capital Markets, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the ManTech First Quarter Fiscal Year 2013 conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now introduce our host for today, Mr. Stuart Davis. Please go ahead, sir.

M. Stuart Davis

Thank you, Karen, and welcome, everyone. On today's call we have George Pedersen, Chairman and CEO; Kevin Phillips, Executive Vice President and CFO; and Bill Varner and Dan Keefe, our 2 Group Presidents and Chief Operating Officers. In addition, Lou Addeo, Executive Vice President for Corporate Development and Strategic Acquisitions, will join us for the Q&A 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 full discussion of these factors and other risks and uncertainties, please refer to the section entitled Risk Factors in our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call.

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

George J. Pedersen

Good afternoon and thank you for participating in today's call. Financial fulfillments for the first quarter was consistent with our expectations. Despite the disruption in our markets from sequestration and the uncertainty of our funding levels, our revenues were up 4% from the fourth quarter, based upon robust growth in our intelligence inside the business. We also had very strong cash collection, generating $58 million in operating cash flow and increased our cash balance from $135 million to $172 million. We intend to use our strong balance sheet to grow our corporation.

We will continue to invest in our core business and specifically in the strategic growth markets of cyber and health care. So far this year, we have made some small investments in new market areas that will create important discriminator [ph] for us. We are seeing more opportunities come to market, and we are optimistic that we will be able to take advantage because of our excellent cash position to accelerate our growth.

Since the last call, our primary defense intelligence customers have received their full-year appropriations for 2013. That funding is subject to sequestration cuts. But we have seen only modest impacts from sequestration up to this point. Also, the President submitted his FY '14 budget request, which makes explicit the government's commitment to many core ManTech capabilities such as cybersecurity. It is too soon to tell the ultimate outcome for next year's budget, but we are encouraged that a more normal process is underway and that there is support from the administration in both parties and Congress for defense spending at current levels.

Now, Kevin will provide you the details of our financial performance. And thank you again for joining us.

Kevin M. Phillips

Thank you, George. Revenues for the first quarter were $646 million. The substantial deliveries of past [ph] computing systems that we discussed on the last call spurred 4% sequential growth in the quarter. As a result, our Intelligence and Cyber business grew 35% compared to the first quarter of 2012 and 26% sequentially. Our Intelligence and Cyber business will be a growth engine for ManTech throughout 2013.

The MRAP Family of Vehicles support work contributed $142 million in the quarter, up slightly from last quarter as we began to consolidate work across OEMs and other systems providers.

S3 revenues were $133 million, which was down $38 million year-over-year and $6 million sequentially. As with last quarter, S3 and the completion of the mobile cell tower work were the largest drivers of the decline from the year-ago quarter. That said, ManTech offers a compelling value proposition for S3 customers as well as those who will begin using the SSES next-gen contract awarded last year. And we are pursuing several takeaway programs that will offer growth potential.

For the quarter, prime contractor work increased to 92% of revenues, up from 91% last quarter. Having such a large proportion of work as a [ph] prime gives us flexibility to deal with changes in work scope. With the ramp-up of most of our 2012 awards complete, cost plus contracts increased 10 percentage points to 70%. Fixed-price contracts also increased to 18% and time-and-materials fell to 13%. These ratios may fluctuate a bit each quarter but the transition away from time-and-material contracts is virtually complete and there should no longer be a significant headwind to margins from this trend going forward.

Operating profit was $36.4 million in the quarter for an operating margin of 5.6%, consistent with our expectations. Margins was affected by a heavy flow of materials on AMBIANCE and the full impact of lower returns on recent in-theater awards. Even with the additional $24 million in revenue, G&A spending was lower compared to the fourth quarter and it will continue to drop throughout the year. With an effective tax rate of 38%, net income was $20.2 million and diluted earnings per share were $0.54 for the quarter.

Now onto the balance sheet and cash flow statement. During the quarter we generated $58 million of operating cash flow, which is 2.9x net income. With capital expenditures of $3 million, free cash flow was $54 million compared to the fourth quarter. DSOs improved 3 days to 76 days.

On the investing and financing side, we paid $10 million to purchase ALTA and $8 million in dividends. Given this cash flow performance, we grew our cash and equivalents balance to $172 million, up from $135 million at year end. Our balance sheet gives us the firepower we need to position the business for growth. For example, ALTA provides our evolving business with an avenue into the Centers for Medicare & Medicaid Services through the $4 billion enterprise systems development contract, which supports IT modernization efforts at CMS. Looking ahead to next quarter, the board has authorized a $0.21 per share dividend to be paid in June, consistent with our intent to distribute $0.84 over the course of the year.

Onto business development. Bookings for the first quarter were $306 million for a book-to-bill ratio of 0.5x. Over 50% of the bookings were for new work. The bookings total excludes $110 million in recompete wins that have been protested or are in final negotiations.

Backlog at the end of the quarter stood at $6.1 billion and funded backlog was $1.4 billion. Both figures were up nicely from last year, based on strong 2012 bookings. But backlog is down from last quarter as a result of delays in award decisions. We believe that customers have been husbanding resources throughout the year, so they may be in a position of needing to obligate funds at the end of the fiscal year and award activity to be robust in the September quarter.

Business development activity continues to be very high, and our pipeline metrics shows again. At the end of the quarter, we had $32 billion of qualified opportunities and $4 billion in bids awaiting adjudication, many of which should be adjudicated in the second and third quarters and generate revenue in 2013. In total, we have about $12 billion in expected adjudications remaining this year.

We are maintaining the revenue guidance of $2.6 billion that we gave on the last call, based on on-plan performance in the first quarter. We have received preliminary planning guidance for decreases in overseas mission requirements, which will impact the level of new and replacement personnel headed into Afghanistan. We will be tracking our customers plans for reductions in requirements and reflect them if they are decided.

As a counterbalance, a strong proposal activity and large pipeline of submitted proposals will support growth in our non-OCO business. Compared to our expectations at the time of the last call, more of our revenue for the remainder of the year will come from ODCs and cost-plus contracts, which will negatively impact our profitability. We now expect to achieve net income of $84.5 million and diluted earnings per share of $2.28. This corresponds to an operating margin of 5.9%, which is 10 basis points lower than the guidance we gave last quarter.

We continue to expect margins to expand from Q1 levels. We believe our guidance appropriately reflects sequestration risk. We had relatively little direct impact from sequestration in the quarter because our customers have been holding back funds for some time now, which has limited both growth on existing programs and awards on new programs. We do not expect the effects to accelerate because we believe that most customers are on track with funding levels. We are tracking our customers obligations very closely.

Now, our group presidents will speak to the performance and outlook of our 2 operating groups. Dan?

Daniel J. Keefe

Good afternoon. As I mentioned on the last call, we were consolidating the labor from OEMs and other providers onto our MRAP contract. Since then, after completing the majority of the staff transitions onto our new program, our customer instructed us to stop the buildup and to reduce slightly our footprint in Afghanistan. We are continuing our support in theater at levels consistent with prior requirements. However, the mission requirements may cause the program to begin to draw down in 2013 instead of 2014. Our customers are currently working these draw downs to the scenarios.

Still, with the fighting season beginning and potentially additional activities that will be required in a drawdown, it's hard to forecast the final financial impact to us at this time. This is not a sequestration issue, just the uncertainty that surrounds overseas contingency operations. As an example of the uncertainty, the President's FY '14 budget request only has a placeholder for OCO funding.

Throughout the rest of our business, we have seen relatively little impact of sequestration. We do have some customers that will close their facilities 1 day per week when and if their civilians are furloughed. In that event, our people will not be able to work but their numbers are relatively small.

We are focusing our business development activity on areas of our business that are not affected by OCO. For example, our largest win in the quarter was to support the custom and border protection within the Department of Homeland Security. Under a 5-year, $96 million award, we will provide comprehensive training services for IT systems, wireless, voice communication equipment, [indiscernible] troopers' inspection equipment and enforcement technology to all CBP personnel, as well as other federal, state and local law enforcement agencies. We see training as a growth area for ManTech so we're excited by this new business win. Bill?

L. William Varner

Thanks, Dan. The Intelligence and Cyber business showed strong growth in revenue and profit in the first quarter, and we are forecasting robust organic growth in 2013. In addition to the cloud computing system deliveries, we also had good growth across our law-enforcement business, especially at the FBI.

HBGary showed an uptick in revenue, which reduced our net investment to $1 million in the quarter. We expect HBGary to generate positive returns by the end of the year.

We begin the second quarter with strong awards in our cyber and intelligence programs, including 2 large awards that represent new business for ManTech. Sequestration provides minimal overhang, and I feel confident in our growth outlook, based on the continued ramp up of existing programs, our large pipeline of submitted proposals that should be adjudicated soon and the high degree of activity in our proposal rooms.

In addition, there is strong support for cyber in the President's FY '14 budget request, and just last week Defense Secretary Hagel emphasized that cyber is one of his top priorities. We are seeing momentum on cyber legislation with 3 bills now through the House. Most importantly, they would limit liabilities on companies sharing cyber attack data, which is critical to encouraging private companies to participate in data sharing initiatives. ManTech is well-positioned to support all of the government's data sharing initiatives. George?

George J. Pedersen

Thank you. In summary, we see positive signs for ManTech across our business space and are encouraged that the Congressional appropriators are looking to restore normal order to the process. We are seeing the early signs that will lead to a long anticipated draw down and OCO missions we support. We are proud of the work we are doing to support war fighters and other key government agency customers. And we'll provide whatever support they require.

ManTech is a vital partner in securing the nation. Even if we look to expand into new growth markets such as cyber health care, we will always do all that we can and must to help our national security customers perform their most important missions. We are now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Tobey Sommer from SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

I was hoping to get some further color, to the extent you're able to provide it, on the growth that you're seeing within cyber and the cloud. Does this relate to the 1 major contract that you won some time ago? Or are there new sources of funding or contract vehicles that ManTech is benefiting from?

L. William Varner

Yes. This is Bill. The answer to your question is, it's in both of those areas. We're seeing increased activity on the AMBIANCE program. You remember probably from a couple of calls ago that the program was ramped up a little bit more slowly than we expected. And we're now at about the level we felt we would be for AMBIANCE. We're also seeing continued new opportunities. And as I mentioned a few minutes ago, we've just won 2 large awards, that we can't really talk about yet, that are going to offer great growth opportunities for us this year, in 2013. So I think it's a good combination of growth on existing programs, that is organic growth and growth through brand new programs that we're winning.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Relative to the overall company's margin profile, how does the work in cyber, in cloud, both the AMBIANCE as well as the way you expect on the new awards, how does that compare?

Kevin M. Phillips

It's Kevin. I'll speak to that. When you look at the non-OCO business at large, the returns on that business exceed 7%. And the cyber and intelligence components are on the upper scale of the range of the non-OCO business. So we're fairly happy with the performance and the returns and the types of work that we do within the cyber and intelligence communities.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

And my last question, I'll let someone else get in the queue. You've got an awful lot of firepower, whether it's cash or available liquidity. I'm just curious, in this environment, in the areas in which you'd like to invest, is sequestration keeping sellers at bay? Or is there something else going on? Because we've written out a couple of quarters with the cash balance kind of increasing, which I guess speaks to good cash flow?

George J. Pedersen

P

I think sequestration is an issue for both the buyer and the seller, because we really don't know what that term means at this point in time in terms of forecasted sales, profits, etc. We, over the past 1.5 year, have had a policy of looking to a marketplace for the moment other than defense. We have continued on the Intel side but other than defense until we know. So I don't think sequestration is having that much of an impact, if that's the right way to put it. We have not been hurt by sequestration, to my knowledge, at this point in time.

Operator

And our next question comes from the line of Edward Caso from Wells Fargo Securities.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

I sort of wanted to drill down more on your sequestration comment. You indicated it is not at this time. I'd be curious, what are you here -- is that your view or is that what your clients are telling you? And also what is your view as to sort of the tail nature? Although they may cut down aprops this year, the actual cash outlays may be diminished in out years. Do you see a scenario like that? If you could sort of flesh out the sequestration, sort of who's telling you what and what you think -- how you think it's going to roll out?

Kevin M. Phillips

It's Kevin. I'll speak and if others want to add, they can. You've seen some level of decline in the Services business. ManTech is 1 example over the last 6, 9 months as customers have been planning for a more tightening budget environment. So when we do a review of the sequestration-specific activities, we're looking at a handful of people in our company who may be furloughed. We're looking at a handful of people who may be impacted by reductions in scope on programs because the customers have already focused very heavily. And I think that's something that may be more of a trend than our services area where we have Mission Support, that is a little bit more protected. They have customers that have already been planning through it. And what we don't see is, we don't see a lot of customers saying in a month, in 2 months, in 3 months, we have a large number of people who are going to be impacted. It seems have been relatively small, even in the forward planning cycle, given that there's only 5 months left in the government fiscal year.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Can you offer some metrics here on your guidance, stock comp, D&A, and tax rate, please?

Kevin M. Phillips

Tax rate, 38.3%. D&A for the full year is 30. And stock comp is at 6.5.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

6.5?

Kevin M. Phillips

Yes.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

And the final question is sequential organic growth Q1 year-over-year?

Kevin M. Phillips

Sequential growth is down 5%.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

I'm sorry. Organic growth year-over-year?

Kevin M. Phillips

5% down.

Operator

Our next question comes from the line of Bill Loomis from Stifel.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

On the OCO, Kevin, can you just -- I am a little confused because you commented that OCO is probably peaking, and clarify that if I misread that. But you left your guidance unchanged but yet OCO will be a higher part of the mix but you have S3 dropping off, which has a lot of OCO in it. Intel and Cyber, you mentioned, is growing quite rapidly. You mentioned 2 new wins that are going to have strong growth. How could OCO be a higher part of the mix driving revenues down if it's declining and everything else is growing so much quicker?

Kevin M. Phillips

SO Bill, I said the cost plus business is a higher part of the mix. That's not just the OCO component of our business. What we've seen is a leveling off of in-theater requirements for people to go into Afghanistan. We do expect it to peak and then, depending on the mission requirements, it will start coming back down. But it's not -- I'm not seeing that OCO is going to become a higher portion. I'm seeing that the cost-plus component, which is driving down our expected returns.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Got it. And so the AMBIANCE contract, just as an example of cost types...

Kevin M. Phillips

As an example, right.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

And then on that AMBIANCE contract, you mentioned the margins were hurt with a lot of equipment coming through. What would be -- any way you can give us kind of a direct labor figure on your Cyber and Intelligence business, kind of excluding any of the lower-margin equipment? What kind of growth that was in the quarter?

Kevin M. Phillips

I don't have a specific number.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Is it fair to say it -- most of it was equipment or any way you can just quantify that a little bit on the...

Kevin M. Phillips

I would say a majority of it, over 75% for the quarter, would be equipment. But there's also growth in the personnel side of the business supporting both cyber and cloud.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

And then just 1 more final question on the intelligence. I know the '14 budgets is a long ways from being set, but we had a 8% reduction in the budget for the national intelligence programs and clear language and they're producing contractors to sustain government workers. That's the second year in a row. I know your program, AMBIANCE in particular, is growing quite rapidly but just kind of broader, what are you're seeing in the non-Defense intelligence agencies? Because certainly, from a high-level budget standpoint, it looks like it's getting a lot tougher over the next couple of years.

L. William Varner

Bill, this is Bill. I think the way to address that is, you're correct, AMBIANCE is growing and is staffed up fully. And to elaborate on Kevin's comment a minute ago, while a lot of the direct revenues in Q1 were related to hardware, we also built the direct labor substantially. And of course, the direct labor stays. That's revenues that we intend, that we fully expect to stay for the life of the program and grow. Generally, in my belief, and I'm sure you've seen the same thing, as we find that the defense budgets are reduced, the need for intelligence becomes greater, not less. So as we have fewer military people in-theater, we need more intelligence, not less. And I think most of the customers we are supporting are not seeing significant declines in their budgets. We're seeing awards occur, sometimes they're delayed but sometimes they're right on schedule. We're seeing a lot of RFP activity which means a lot of proposal activity for us. And normally, the government will not issue RFPs until they are sure they have the funding. So I think we're seeing a lot of solid progress in the budgets for those parts of the intelligence community that we directly support.

Kevin M. Phillips

And Bill, it's Kevin. I think that within that budget decline, it has a little bit more targeting towards specific programs rather than across the board.

Operator

And our next question comes from the line of Brian Kintslinger from Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

The first question I had in relationship to the declining requirements [ph] overseas, is part of your guidance -- how you do MRAP contract where you had $142 million of revenue in the first quarter? Will that be coming down over the course of the year? Will it be flatlined? Could you maybe give some specifics on that?

Kevin M. Phillips

It's Kevin. I'll have Dan follow up. We're expecting that the continuous current run rate based on the mission requirements that there is planning going on that could reduce it, depending on the timing of actual execution of these plans. I mean, they're finally working plans, they started that in the last month or 2. And so we have to plan that ourselves. But the actual timing of those actions isn't something that we have been communicated in terms of contractual modifications, and we don't want to get ahead of the customers. Dan, do you want to...

Daniel J. Keefe

Yes, I would just add to that, Brian, that we still are working upsides from our S3 wins in the fall and, for example, we've just taken over, from an OEM, the mine rollers to go on the front of the MRAP and maintain those, and we've picked up that work. So it's a bit of a balance of actions like that, that come to us versus what the planning scenario may be down the road.

Brian Kinstlinger - Sidoti & Company, LLC

And as the volumes do come down, will it be an equal amount of the labor portion versus the hardware portion that you have?

Daniel J. Keefe

Yes, I would expect it to be generally an equal volume as there's less systems to maintain.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And then you mentioned the margins getting better throughout the year. I'm curious, what drives that? Is that reducing cost? Is that -- you had a lot of that hardware from the cyber side of the business in the first quarter. I'm just curious, with all of the pressures with cost-plus especially for the year, what drives the increase in margins?

Kevin M. Phillips

It's Kevin. We are expecting our G&A as a percentage to come down. I think that it's going to be in the 7.1% range, which will increase our returns. Also the mix, I think that intelligence side of the business will have more services-based growth, that will increase our returns. And obviously, Q1 had a heavy ODC component that pushed that down a little bit.

Brian Kinstlinger - Sidoti & Company, LLC

And that growth from the Intel services work, is that mostly booked work already? It's coming from backlog or do you need to go in that?

Kevin M. Phillips

We're off to very good start with wins so far already this year. So I think most of the growth we're seeing, we're pretty -- if it's not already booked, it's certainly growth that we're well aware of and have high expectations of seeing.

Brian Kinstlinger - Sidoti & Company, LLC

I think you mentioned you had two awards. Were those first quarter awards included in the bookings? Were they second quarter awards? And can you give you give us size if you can't name customers, obviously?

L. William Varner

The answer to most of those questions, Bill, is no. But let me try to elaborate a little bit. They are second quarter awards, early in the second quarter and we actually received more than two. I just cited two because they are especially large, but these are -- I'm not permitted to talk about the specific customers. We will be able to at some point, but we're not able to yet. But they're awards that are large enough to make a difference. That's why I called those two out specifically.

Brian Kinstlinger - Sidoti & Company, LLC

Understood. Last question I have is, recompete rates have -- are at the lowest point they've been probably in a decade. I'm curious how that's impacted your business for the better and for the worse, and what that's doing to margins on recompete?

Kevin M. Phillips

If you look at recompetes last year, 2012 was a heavy recompete year for ManTech. This year, I think less than 8% of our revenue is at risk from recompete. It is fairly back end-loaded. So from a current year risk standpoint, it's low. But you can see coming into the year the overall return change based on moving to cost-plus contracts being more competitive and overseas work. And that pattern is very much dependent on the type of work we do for customers and their level of demand for the service.

Brian Kinstlinger - Sidoti & Company, LLC

And has your win rate come down with the market as well like everyone's else has, or have you been able to hold that a little bit more steady?

Kevin M. Phillips

I'd say that our win rate has been down a little bit but not nearly as much as many of our competitors have communicated to you. And I'd also note that our new business win rate has gone up.

Operator

And our next question comes from the line of George Price from BB&T Capital Markets.

George A. Price - BB&T Capital Markets, Research Division

I'd like to just push a little bit more on sequestration. And then I have a couple other questions. But on -- again, you talked about the minor impacts. Based on what I've heard, the cuts haven't really been fully communicated, much less implemented. And I wanted to, I guess, hear if you could be specific about your assumptions in guidance going forward. For example, you mentioned some of your customers might see furloughs, a minor impact. But is that baked in? You talked about that there is ongoing planning, potentially for a reduction In levels on the MRAP contract. Is that factored in your guidance?

Kevin M. Phillips

The sequestration components are baked in. The overseas work on the MRAP program, what we're providing is what we expect based on current statements from the customer, built into our contracts modifications, i.e. no more incoming staff, things like that. If that changes based on their decisions and there's more rapid modification to what we have to do to support the number of systems, things like that, it could bring that number down. But we don't want to get ahead of customers' op tempo as they start this summer season and project what that range could be.

George A. Price - BB&T Capital Markets, Research Division

Okay. And you mentioned that your customers, your customers weren't telling you that a lot of people are going to be furloughed or taken off contract. But are they not telling you that a lot of people will be? But are they specifically telling you that they won't be, or they just not saying anything too specifically about those levels?

Daniel J. Keefe

I think, George, you've seen in the press on the furlough what the government plans are. It seems to go back and forth. As we said, what they're telling us is, I think what they know at the level of our customers on what's being -- on what is to be furloughed, and it is minimal across my business.

George A. Price - BB&T Capital Markets, Research Division

Okay. Shifting gears over to cash and capital, where do you stand based on the environment that you see now? And where do you stand in terms of capital deployment for M&A versus returning possibly additional capital to shareholders?

Kevin M. Phillips

We're going to continue to focus on M&A programs. We actually, with Lou's assistance, are going to be more focused on that. And I think that the overall capital deployment strategy we have will continue as is.

George A. Price - BB&T Capital Markets, Research Division

Okay. And you may have commented on it, but -- I apologize if I missed it. But you're going to be primarily continuing to be focused on areas like cyber and health care and commercial, as opposed to the core DoD Intel space, or is that view on the DoD Intel space, core DoD Intel space changed as a result of the appropriation that we have or what you're seeing in the market?

Louis M. Addeo

This is Lou. I think we are going to focus on the investments that we've already made over the past few years, continue in the health care area, particularly with the Health Care Act; in the areas of IT, in the areas of analysis. So health care is a good place for us to continue to look and to add to our business. Similarly, in the Cyber area and Intelligence, we'll continue to examine opportunities for Bill to improve his capabilities and his business. The core, we get a lot more information relative to that budget. We'll continue to look at core from the value perspective. And relative to other areas, whether it's commercial or other capabilities, we're going to examine. I think the sequestration has allowed us to be patient. But we are really looking at things in earnest.

George J. Pedersen

Okay. We talked about intelligence business. We obviously focus on that coming from the agencies where we are seeing significant growth. But there's a much broader definition of the intel community, and we are reaching out and we are being chartered with working for a number of other agencies that are not classified as intel, let's say the FBI, where we see enormous potential growth.

Operator

And our next question comes from the line of Robert Spingarn from Crédit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

Talking about the guidance, George, you've had a couple of quarters here in a row, where the book-to-bill is shy of 0.5. Yet your sales guidance holds at $2.6 billion. Kevin did note some near-term opportunities. So in essence, the question is, what type of bookings do you need in the second and third quarter to make your revenue guidance?

George J. Pedersen

We have some numbers in here. So did you have a second part of that question?

Robert Spingarn - Crédit Suisse AG, Research Division

Well, I was just going to say -- or do you rely a little bit more heavily on acquisitions there? Maybe you can talk about the mix of the two?

Kevin M. Phillips

Sure. Well, we don't have acquisitions built into the 2.6. If that happens, that'll certainly help us get to higher growth targets and expanding customer bases. There's are a lot of -- there's the $4 billion worth of proposal outstanding. We're starting to see more movement and actually more op tempo within the intelligence community. First quarter was very heavy from a proposal perspective. And beginning of the second quarter seems to be fairly successful from an award perspective. So we do expect and would require that the book-to-bill in the second and third quarters to exceed 1x to be able to get there. And it's going to be more focused -- and the main point here is going to be more focused on higher return services business if the OCO business, which is now lower return, starts to decline more quickly than expected.

Robert Spingarn - Crédit Suisse AG, Research Division

So what you're saying is the new business will be higher margin? So you don't need as much of it to offset what's been lost so far.

Kevin M. Phillips

Not from an earnings perspective.

Robert Spingarn - Crédit Suisse AG, Research Division

Right. Okay. But the -- and the interesting thing here is the trend is you've been holding up on the revenue guidance. But of course, we've seen margins erode. So the implication there is a lot of the newer business has been lower margin except for, I suspect, intelligence and cyber, which I'm concluding is fairly small since it hasn't boosted the margin.

Kevin M. Phillips

So the timing of the awards for the bids is -- they keep getting pushed to the right. We've had, we ManTech and generally for the industry, have had somewhere in the 45- to 60-day extension on the timing between submittal and awards. And that extension on the Intel side, which we have expectations of higher returns is in part contributing to the decline in our margins.

Robert Spingarn - Crédit Suisse AG, Research Division

Ad then just, Kevin, the clarification on the organic growth year-on-year in Q1. I think you said it was minus 5. And I believe it was minus 11 in Q4. So that's an improvement. But on the other hand, you had some cloud computing move from one quarter to the other. So when we think -- if that indeed ends up happening as you plan, does that equalize the two quarters on an organic basis?

Kevin M. Phillips

It would equalize them fairly level, yes.

Robert Spingarn - Crédit Suisse AG, Research Division

And then just one other question, and I'm not sure if maybe this is for Dan on the MRAP. I know you talked about before how you're planning your long-term planning there. What happens if those vehicles end up going to other nations, as that's been discussed recently?

Daniel J. Keefe

Well, it's part of our business plan. That's foreign military sales. There's a service component to that. And so that's certainly an opportunity for ManTech.

Robert Spingarn - Crédit Suisse AG, Research Division

Is that a better outcome than relying on reset, which may or may not actually happen?

Daniel J. Keefe

Well, I think some of those vehicles are going to get to reset, for sure. And so I don't -- whether it's a better outcome, it's multiple avenues for our capabilities that we're pursuing.

Robert Spingarn - Crédit Suisse AG, Research Division

And then just a final question. Maybe this is for Kevin, the employee count.

Daniel J. Keefe

9600 [ph].

Operator

[Operator Instructions] Our next question comes from the line of Gautam Khanna from Cowen & Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

Kevin, I know you mentioned the OCO requirements. You still have some timing questions as to when it winds down. But could you maybe frame for us what you think it ultimately re-baselines to? Because when they add up S3 and Countermine, which has some relationship to OCO, last year it was 46% of sales, $1.185 billion. What do you expect those to equal this year? Maybe the S3? And then where does this end up going 2, 3 years out? Does it go to 0?

Kevin M. Phillips

I can't predict the final outcome. I do know that the MRAPs, the S3 C4ISR work isn't going to 0. It is going to continue at some level. What that level is, I think is exactly what the government is working to determine, based on how many systems they need, where they're going to position them and how much support is going to be needed. So we will know more as the next X number of months and quarters plays out from a planning perspective. So for this year, as we've started the year for guidance, I mentioned that we expect about $600 million out of the MRAP program. And the S-3 program could be up to $600 million, of which about half would be OCO-related. It's fairly consistent, what we've provided in the past.

Gautam Khanna - Cowen and Company, LLC, Research Division

Can you give us an order of magnitude though? As it trends lower, I mean, what is sort of the stable rate? Do you have any visibility on that?

Kevin M. Phillips

It's too early to tell.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And could you comment on kind of the Prompt Payment Act and how that might change the DSO trend going forward, if at all?

L. William Varner

I think it will. We are starting to see an uptick in the amount of time it takes to get paid. So the government is working that. How much it impacts us, they basically said they're going to go from 15-day payment to 30. I think it may have a 5-day impact on us on average. But we're going to have to play that by ear with the customers because they do work very hard to honor commitments within the constraints that they have. So we may see a 5-day increase in DSOs.

George J. Pedersen

It appears that we have no further questions at this time. So I'd like to thank you for your help on the call and remind the listeners that, as usual, we've got members of the team here to -- available for follow-up questions and I want to thank everybody for their participation in the call and interest in ManTech.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and you may now disconnect.

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