ManTech International Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: ManTech International (MANT)

ManTech International (NASDAQ:MANT)

Q1 2014 Earnings Call

April 30, 2014 5:00 pm ET

Executives

M. Stuart Davis - Executive Vice President of Strategy & Communications

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

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

Daniel J. Keefe - President of Mission Solutions & Services Group and Chief Operating Officer of Mission Solutions & Services Group

L. William Varner - President of Mantech's Mission, Cyber and Intelligence Solutions Group (MCIS)

Analysts

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

Gautam Khanna - Cowen and Company, LLC, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

Steven Cahall - RBC Capital Markets, LLC, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

William R. Loomis - Stifel, Nicolaus & Company, Incorporated, Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the ManTech International Corporation First Quarter Fiscal Year 2014 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Stuart Davis, Executive Vice President of strategy. Sir, you may begin.

M. Stuart Davis

Thank you, Sam. And welcome, everyone. On today's call, we have: George Pedersen, Chairman and CEO; Kevin Phillips, Executive Vice President and CFO; Lou Addeo, Executive Vice President for Corporate Development and Strategic Acquisitions; and Dan Keefe and Bill Varner, our 2 group Presidents.

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.

Now I'd like to turn things over to George.

George J. Pedersen

Good afternoon, and thank you for participating in today's call. As we discussed on our last call, 2014 is a transition year for ManTech International. The changing mission requirements in Afghanistan in the first part of the year will see declines in revenues and earnings. However, with a stable budget picture, strong balance sheet and excellent position in key markets, we will return to growth as we head into 2015. Everything I've seen so far in the market supports my conviction of this outlook.

With full year 2014 appropriations, our customers are executing their plans to obligate funds by the end of the fiscal year. Spending levels are generally flat compared to last year, but above the customers -- what they were prepared for, meaning that they have additional money to put on contract at this point.

As a result, our proposal activity has increased dramatically. Our entire company is focusing our position for and winning our share of these new opportunities, many of which are substantial. From the awards we're expecting in 2014, we should drive organic growth in our business in 2015. In addition, we are a cash-generating machine, which allows us to grow the company through acquisitions, as we have in the past. Operating cash flow of $62 million in the quarter led to a record quarter-ending cash balance of $276 million, even after paying $45 million for the acquisition of Allied Technology Group that we closed in February.

We have already seen a cursed EAG when based upon the combination of ManTech and ATG's capability and positioning in this market. We will continue to invest in our growth. We signed a definitive agreement yesterday to acquire a firm called 7Delta, Inc., which should bring about $80 million in annualized revenues, almost all of it providing IT solution and services for the

Department of Veterans Affairs.

We made a strategic commitment to the healthcare IT market, and we have now strong capability and presence across the entire spectrum of the federal healthcare including VA, DoD, Health and Human Services.

Going forward, the market dynamics should be more stable than they have been in the past. The full level of spending for 2015 is set about the same as the 2014 level by the Bipartisan Budget Act of 2013.

Since the last call, President Obama submitted a 2013 budget consistent with the BBA, which separately requested an additional $56 billion in spending with 1/2 going to defense. The House of Representatives passed a budget that also adheres to the BBA caps of 2015, but raises the defense budget in 2016 and again in 2017. I do not foresee large cuts to the defense budget.

Now Kevin will provide you with details on our financial performance and outlook. Kevin?

Kevin M. Phillips

Thank you, George. Revenues for the first quarter were $452 million compared to $622 million in the first quarter of last year, and $491 million in the fourth quarter. The revenue differences are mostly explained by the decline in the MRAP and S3 contracts, which are heavily tied to Afghanistan. The MRAP Family of Vehicles support work contributed $41 million in the quarter, down $102 million year-over-year, and down $32 million from the fourth quarter. S3 revenues were $95 million in the quarter, down $38 million year-over-year and down $12 million from last quarter.

More than 3 quarters of the year-over-year and sequential drops in these 2 programs were for material and subcontract costs. For the quarter, the prime contractor in contract mix distributions were relatively steady: 90% of revenues were as a prime; 71% were on cost plus contracts; 10% were on time and material contracts; and 19% on fixed-price contracts. Operating profit for the quarter was $20 million for a margin of 4.4%.

Many of the factors that drove the margin below our expectations for the quarter were onetime in nature. As is typical in the first quarter, we had more than $1 million in fringe benefit costs that we'll recover over the course of the year. We incurred about $600,000 in acquisition-related costs, including early lease termination as part of the ATG integration. We also had startup costs on a fixed-price DoD health program that we will recover over time.

Other drivers that reduced profit were investments we are making this year in bid proposals, IR&D and commercial initiatives. We believe that now is the time for these investments based on our capability sets and the opportunities at hand. We will drive G&A efficiencies over the year, and the margin trend will reverse as revenues build to new awards and the investments lead to new business.

Net income was $9.6 million and diluted earnings per share were $0.26 for the quarter. The effective tax rate was 40%, which was 1.9% point higher than last year's fourth quarter. Now on to the balance sheet and cash flow statement. We were able to improve DSOs by 6 days compared to the fourth quarter to 78 days, which helped us generate strong cash flows.

For the quarter, we generated $62 million in operating cash flows or 6.5x net income. We expect modest improvements in DSOs over the remainder of the year, with capital expenditures of about $3 million, free cash flow for the quarter was $59 million.

In February, we deployed $45 million to purchase ATG, which strengthens our position in the homeland security market and allows us to access a $33 billion sales channel through the TABSS and Eagle IDIQ's. Since the end of the quarter, we've taken 2 significant actions that use our balance sheet to grow the earnings of the company.

First, in April, the no call provision on our high-yield debt expired, and we paid off the $200 million note. Interest expense will be EPS-neutral in 2014 given the fees to call the note, but we will save $15 million annually in interest-related expense beginning in the second half of this year and into the future years.

Second, yesterday, we signed a definitive agreement to acquire 7Delta, which brings strong qualifications at the VA on the $12 billion T4 view. I won't disclose the deal terms since we haven't closed, but we expect the deal to be slightly accretive to earnings in 2014 and then significantly accretive thereafter given the growing business space. Once the deal is completed, we will be able -- we will be in a roughly cash-neutral position with plenty of firepower through our $500 million line of credit.

Turning to business development bookings for the first quarter, $337 million for a book-to-bill ratio of 0.7x. Although we'd always prefer to generate bookings in excess of revenue, we were at double the rate of last year's first quarter. Awards were, again, strong in cyber and intelligence with a book-to-bill ratio of 1.3x, which should sustain strong top line growth rates. We expect overall bookings to increase substantially, beginning at some point in the second quarter. The value of proposals currently in process increased fourfold compared to last quarter, and is at its highest level in more than 2 years. With $3 billion in proposals awaiting adjudication and almost $2 billion in proposals and process, award activity should be very strong.

We believe the government will adjudicate twice the value of ManTech proposals over the next 12 months as they did in the last 12 months. Backlog at the end of the quarter stood at $3.8 billion, of which $1 billion was funded. At the end of the quarter, we had a total qualified pipeline of $22 billion.

Now to the forward-looking outlook. To the forward outlook, we are maintaining our top line guidance by adjusting our earnings guidance slightly downward. While the 7Delta acquisition is expected to provide around $50 million in revenue in 2014, the volume of new business growth in the second half of the year is subject to the timing of new contract awards. We expect revenues of $2 billion, net income of $52 million, and diluted earnings per share of $1.39

The earnings per share guidance reduction reflects our commitment to invest in bid and proposal, R&D and cyber as we believe -- which we believe are essential to gain substantial awards and capabilities over the next 12 months. Cumulative activity will provide consistent revenues and earnings growth during the latter part of 2014 and into 2015.

Earnings per share will trough in the second quarter, with a $0.12 charge from the prepayments on debt with virtually no interest expense for the second half of the year. All of the estimates for tax rate, share count and cash flow from operations from the February call remain intact.

Our primary focus throughout the remainder of this year is winning new business which requires investments and to ensure a sustainable long-term growth platform. The spending environment is turning more positive, and we are in a position to benefit.

Now we will speak to the 7Delta acquisition in our acquisition outlook. Lou?

Louis M. Addeo

Thanks, Kevin. The M&A team is executing on a strategy-driven acquisition program. We have been tracking 7Delta for some time. As part of our strategic push into healthcare, gaining a strong position within the VA and on the Transformation Twenty-One Total Technology, or a T4 contract vehicle, represented the next logical extension.

Here, we researched all the companies who would be complementary to ManTech's current healthcare business and who hold T4. And 7Delta, one of the most successful T4 primes, was our overwhelming choice. 7Delta has won 66, over 66 past quarters, totaling $235 million on T4. And their work is at the heart of the VA modernization effort. The acquisitions should close in about a month. We still have plenty of acquisition capital left, and would like to complete additional acquisitions this year. We are keenly focused on intelligence, cyber and enterprise IT, and our established presence there allows us to be disciplined around price.

Now our Presidents will speak to the performance and outlook for our 2 operating groups. Dan?

Daniel J. Keefe

Thanks, Lou. Within the Mission Solutions & Services Group, We are focused on 4 major activities. First and foremost, we are investing in solutions development, account management and bid and proposal to qualify, bid and win work. This is the lifeblood of a service firm like ManTech, and I'm committed to enhancing our capabilities in this area. Second, we are leveraging the ATG acquisition. Integration is complete, and went smoothly. We are bidding our combined capabilities on the TABSS IDIQ. We have bid legacy ManTech work that is migrating to TABSS, and we want our first TABSS task order for work that is new to both companies. This past quarter, we'll establish the combined ManTech-ATG organization to our DHS customer. Third, we are preparing for the integration of the 7Delta acquisition, which will complete our initial set of healthcare acquisition targets. 7Delta's presence in the VA healthcare IT is the perfect complement to our current positions with the Defense Health Agency and HSS. Not only will the acquisition give us access to a large and growing budgeted VA, but it will provide essential capability and knowledge as the Defense Health Agency and VA revise their separate electronic health record systems with the requirement to be interoperable.

Our combined work on the Virtual Lifetime Electronic Record, or VLER program, will make us one of the leaders in this space. Post acquisition, ManTech will have $130 million-plus federal health business with a reputation for innovation that can compete with anybody.

Finally, we are effectively managing our core army and navy business in this dynamic DoD services market. With respect to the downturn in support of overseas contingency operations, our Army MRAP business is stabilizing.

Assuming the future Afghan President signs the bilateral security agreement, and there's a continued U.S. presence in Afghanistan, the program should generate about $120 million in 2015, slightly down from the current run rate. We are experiencing continued drawdown on S3, especially on ODCs. That is where we have the most volatility within the group and where we are focused on keeping our share of work.

Our navy business is stable at the NAVAIR and Nav C Systems Command. In the first quarter, we opened a C4ISR integration facility in Charleston, South Carolina for SPAWAR that has already brought in new business and put us in a stronger position as we compete for work on the SPAWAR Pillars contracts.

Bill?

L. William Varner

Thanks, Dan. For the fourth quarter in a row, the Mission, cyber and intelligence solutions group posted a book-to-bill ratio of 1.2 or higher. This track record of wins, despite all the uncertainty in the market, speaks to our compelling value proposition to the intelligence community. The wins over last year support our plan to continue to grow the cyber and intelligence business in 2014.

I'm even more confident in our growth prospects when I go and visit our proposal teams. Proposal activity is stronger than at any time in my 5-year tenure here at ManTech. We are very well-positioned for prime positions on large, important, intelligence community opportunities that will be adjudicated over the next 12 months. And I am convinced that we have the right team in place to win and execute that work. This is an exciting time for MCIS and ManTech.

George?

George J. Pedersen

Thank you, Bill. In closing, ManTech is well-positioned for growth later in the year through organic investments and future acquisitions and the 2 we have. Our cyber and intelligence group is a true national treasure and a growth engine for the company. And defense and civil group is gaining strength and health in homeland security markets.

We will make the investments necessary to drive sustainable growth in earnings in 2015 and beyond. And with that, we're ready to take your questions.

Question-and-Answer Session

Operator

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

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

What is the current run rate of the MRAP on an annualized basis?

Kevin M. Phillips

For 2014, our MRAP business will be $150 million for the year. We had $41 million for the quarter, so it's going to be fairly stable, decline just a little bit between now and end of the year.

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

Okay. And how much revenue -- I didn't catch the details on S3, so I apologize. Could you recap that real quick?

Kevin M. Phillips

Our S3 revenue dropped $12 million compared to prior quarter, Q4, and it's running around $95 million for the quarter.

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

Okay. And shifting gears to cyber and intelligence, it sounds like proposal activity there is very good. Are there areas of spending focus that you could describe as the customer set is kind of honing in on? That would be helpful.

L. William Varner

Well, this is Bill. We're seeing a continued release of RFPs pretty much throughout our entire intelligence community customer set. I think it's very well distributed across the broad spectrum of all of the agencies we support. So I don't think we're seeing any one agency doing more than anyone else. It's just a lot of activity going on, and we're eagerly participating in all of it.

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

Could you describe it? How is the adjudication process working there in terms of projects or RFPs that came out a while back? Just to get a sense for how we should set our expectations for this surge in RFPs eventually translating into growth in revenue and profits.

L. William Varner

The timing is slower than any of us would like, I believe. We continue to await numerous awards. In my case, we are awaiting adjudication of almost $1 billion worth of awards as we sit here on this call. We do get periodic questions from the government. There's usually a process where the government will ask all of the bidders pretty much the same question; we get to respond again, maybe we get to make some adjustments, maybe we don't. But the pace is slow, but we do see indications that things are picking up. And we're anticipating numerous awards very, very soon.

George J. Pedersen

Tobey, I'll add to that. As I mentioned, when we talk about 2 times the volume, we're looking at, over the next 12 months, over $8 million of our bids the government is deciding on. And that's a number that is light compared to what we're submitting, assuming some delays. So there's a lot of volume going on.

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

Is -- from a broad perspective across the entire business, is the next 5 months likely to be among the busiest you've seen in terms of awards?

L. William Varner

Well, in -- at least, I think we can say that right now is the busiest time most of us have ever seen. And we've seen no slowing down of that, at least through the summer.

Operator

Our next question comes from Gautam Khanna of Cowen.

Gautam Khanna - Cowen and Company, LLC, Research Division

A couple of questions. I guess, first, I want to make sure I understand the guidance reduction on earnings reflects to incremental investment. But if I recall on the last earnings call, when you provided guidance, the $1.50, you had assumed something like $0.10 of investment. So have we just raised the investment number or is there a shortfall on the demand side or elsewhere?

Kevin M. Phillips

What we're doing is looking at the entire set of activities, the R&D, the commercial-to-commercial cyber as well as proposal volume, which is increasing. And the R&D and the proposal volume is going up. And we'll take a fairly cautious view of when we expect the levels of revenue pickup to happen from that, in order to provide the revised guidance. We do expect there to be a pickup on that, but we're trying to be cautious about that until it starts occurring.

Gautam Khanna - Cowen and Company, LLC, Research Division

So previously, you had assumed some of those sales kicked in earlier in the year?

Kevin M. Phillips

We assumed that there would be a higher level of return from them for the course of the year. And we're trying to be cautious and investing additional money, because of the opportunity is at hand.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And then, Dan, should I assume, because I don't believe the revenue guidance was changed, that the revenue guidance includes the pending acquisition of 7Delta?

Kevin M. Phillips

We're including the 7Delta acquisition. However, given the proposal volume, there's a wide range of potential revenues from the new business. Over 1/2 of the proposals that we expect to adjudicate in the next 12 months are for new work. And depending on how we perform on that, the timing of that, it could have a fairly positive impact on that outlook, but it's too early to tell where that comes on.

Gautam Khanna - Cowen and Company, LLC, Research Division

Should I assume that you've put it in your guidance at around $45 million, $50 million in sales this year, just based on $80 million run rate that closes in 1 month?

Kevin M. Phillips

That's correct.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. On S3, I think last quarter, we talked about it being down somewhere in the $100 million range year-over-year in calendar '14. What's your updated thinking?

Kevin M. Phillips

Our current updated thinking is it's about $25 million under that. So somewhere in the $125 million to $140 million range based on the early drop of some DoD sea [ph] activity in this quarter.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And you're not obviously excluding the $0.12 debt retirement charge in Q2, and that's included in the guidance of $139 million, correct?

Kevin M. Phillips

That's correct. That's all in.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And so sequentially in Q3, we'll have de minimis interest expense, we'll have interest income. And that will explain a lot of the plus-up sequentially? Fair? That's a fair...

Kevin M. Phillips

Yes.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. One other thing, if I may. So in terms of just seeing more award activity, are you seeing anything, with the pace of procurement itself, and not just new contracts coming in, but once they are in, the pipeline that the government's actually engaging as opposed to just kind of stretching out the time from an RFP being written to when questions are asked and what have you, the interactions with the contractors that are bidding, is there any indication that, that timeline is speeding up?

George J. Pedersen

I will give a broad indicator, but leave it to Dan and Bill to comment. I do think the government is more focused on awarding activity kind of -- as well as obligating funds. And there's a little bit more of a sense of urgency based on the fact they have a budget and they have more certainty. How that plays out is kind of where the framework and range of our outcomes for the year are. Dan, do you have anything on your end you want to add?

Daniel J. Keefe

No. I would just kind of add to that is a bit of pent-up demand and certainly more activity is, as Bill and Kevin have already articulated. I wouldn't say that their timeline on awarding has necessarily increased. I mean, we're still getting a number of DMs and questions. There's a lot of due diligence from the government on the awards. But certainly, the amount of activity has certainly increased.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And last one for Kevin or George or whoever, if you could just comment on M&A opportunities beyond the 2 you hope you've already announced. Is there anything that you're looking at beyond these 2? Or do you feel like you're somewhat constrained either from opportunities or from bandwidth internally to manage acquisitions after those 2 close?

Louis M. Addeo

This is Lou, and a couple of things. As to the acquisition pipeline, I'd say that the supply is reasonable, better than it was 6 months ago. It's not as full as we'd like, relative to choice. But I think that the supply of companies will pick up. We continue to reach out prospectively to the opportunities. And I do believe that we are not constrained, relative to either appetite and for due diligence and for integration. So we don't feel constraints, and nor do we feel constraints relative to cost at this time.

George J. Pedersen

The other thing we have to ask, for 1.5 years, almost 2 years, we were afraid to proceed in our normal pace of acquisitions because of the appropriation process. Always, when we look at acquisitions, we will not buy sales. It has to be new technology, new customers and new funding. And we couldn't find the funding for some of these candidates in the acquisition process because there hasn't been -- in the appropriation process because there hasn't been one. Things are returning to what is normal. And as always, we will again pursue acquisitions. We will not buy sales, but we're going to build the company in some of these new areas, and we think with great success.

Operator

Our next question comes from Brian Kinstlinger of Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

I'm curious about the revenue guidance. It suggests an average of $16 million more per quarter than the first quarter. With the first quarter being a seasonally weak bookings quarter, and continued drawdown, a little bit of S3 and MRAP, I think you mentioned, even if the proposals go your way in the next 2 quarters, can they ramp up that quick to generate an average of $16 million or more per quarter?

Kevin M. Phillips

The answer is, based on the timing of awards and the volume, if it occurs on a reasonable path, yes. And if not, we're supplementing that by maintaining guidance with the additional acquisition of 7Delta, which provides $50 million of revenue.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. The percentage of new bookings, maybe on the first quarter, could you provide that? New work, sorry.

Kevin M. Phillips

Most of the work that we've obtained in the first quarter was extension or add-on business to current work. The new business was fairly light, it was about 10%.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And then can you touch on the re-compete environment and related pricing? How much -- and then how much of the work is up for renewal in 2014?

Kevin M. Phillips

I'll start with the later part of the question first. 2014, our re-compete rate is total, about 25%, which would drive about 10% of revenue at risk. It's more heavily weighted in the S3 area, meaning that piece of the business aggregates Dan's business about 25%. But the NCIS or intel business is only about 10% in total. So when Bill talks about new opportunities he's going after, there's a huge upside because there's very little re-compete risk in this business. And your first part of the question was?

Brian Kinstlinger - Sidoti & Company, LLC

It was on the re-compete, especially S3 that it might be a little bit more competition, what is the pricing environment like when you're trying to retain one?

Kevin M. Phillips

I'd say that it's more important that the -- and Dan can add to this, that we do the right solution against our current and future demands rather than the overall returns of the business. Dan, do you want to add to that?

Daniel J. Keefe

Certainly, the solutioning is key. And the government still looks for that. But on the same token, a lot of our contracts are in a low price environment. And so we have to be competitive there. It's not draconian, but we'd have to be competitive on our price to win.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And my last question is for George. You mentioned a return to growth. Are we talking about total revenue, organic revenue, earnings per share? And are we talking about as we exit the year in the fourth quarter? Is that how we're looking at it?

George J. Pedersen

We're talking about growth across the board. We think the whole marketplace has changed again because of the funding being available to the customers that was not there before. So we see growth across the board.

Operator

Our next question comes from Steven Cahall of Royal Bank of Canada.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Maybe just a first question on what we've got going on in the SG&A line. You talked about the one-off costs related to the fringe benefit, the startup costs, the acquisition costs. I'm just sort of looking at that line, and as we project forward, might of sort back in the envelope suggests that there's still quite a few million in the investments and bidding proposal and the IRADs. So I was just wondering, if we think about that going forward, how does that phase through the rest of the year? Does it stay at a sustained rate? Do we see it come down at some point? How do we think about that new run rate?

Kevin M. Phillips

Yes. I'll give you full year percentages first and then talk about the components on the R&D. If Bill would like to add, he can. So our G&A percentage was roughly 8.6% in Q1. For the full year, it will be in the 8.2% to 8.3% range, if things go according to plan. There's always an area of focus we're making in efficiencies around our infrastructure. That said, it's not the time to walk away or reduce the amount of expense that we've talked about in those areas that can support growth. So the trend should bring it down to an 8.2%, 8.3 percentage for the whole year. Bill, you want to add anything?

L. William Varner

Sure, I'll be happy to. So we're -- in the special investments we're making, most of that is in the cyber security area. And we're trying to build up both our commercial cyber business by adding some new capabilities that we don't currently have; and we're also trying to build up our government cyber business by enhancing and providing some capabilities that our customers have strongly suggested they're interested in. So we're spending a combination of IRAD money and additional funding to try to build up the cyber area to add our capabilities to make us much more of a full-service provider.

Steven Cahall - RBC Capital Markets, LLC, Research Division

That's very helpful. And then just as a second one on MRAP and some of the other Afghanistan-related revenues. You mentioned the assumption of the signing of the Status of Forces Agreements. Can you give us any sense because that is, in some political analyst's mind, still a bit of a big if, or if we go into a run-on election in Afghanistan, where that maybe doesn't happen. Can you tell us a bit when you have that assumed in the plan? And if there's some sort of delay in that, would you have a sense of how much that run rate could drop within the fiscal year and what that might do to revenue?

Daniel J. Keefe

This is Dan. Our plan is based on what our customer, the government, has told us they expect before the year. And so -- and everything we're hearing is there will be troops through December, for sure. Now what happens politically with the agreement? I mean, that's pretty much you read the same things we read in the open source. It seems like the election is moving along, there's going to a runoff election. And I'm confident that it will be signed, but time will tell. Kevin, anything to add there?

Kevin M. Phillips

No, I mean, we've mentioned the MRAP revenues. I would note that out of the MRAP revenues that we have, and the number of personnel supporting MRAP in total, a little under or roughly 1/3 of the headcount is now in the U.S. So there is some sustainable business beyond this that we will expect regardless of what happens in the overseas environment.

Louis M. Addeo

That's a good point, Kevin.

Steven Cahall - RBC Capital Markets, LLC, Research Division

That's very helpful. Just a final housekeeping one. The cash conversion was so exceptionally strong in the quarter. Is that down to receivables? And do we expect it to be at or around what it's been in the past, which is still strong? Or do we think it will be up for the full year?

Kevin M. Phillips

Cash flow was strong because of our improvement in DSOs, it was receivables-based. We do expect to maintain a slightly better DSO to get to the cash that we have, and we'll hold to roughly $130 million plus operating cash flow for the whole year. The first quarter was very strong, and it could be better than that.

Operator

Our next question comes from Robert Spingarn of Crédit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

You just talked about organic outlook, and I wanted to ask what the organic growth was in the first quarter separating, really, for defense and nondefense?

Kevin M. Phillips

I don't have a specific percentage between defense; nondefense, it was 30% down for the full year. The majority of that, as you mentioned and we mentioned, in terms of the dollar value drop the quarter was MRAP and S3 related for the balance of the business. And as we've mentioned before, Q1, there's recovery from government budgets in January and movement. So we did not expect any significant growth in that quarter based on the timing of the government ramping back up.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay, all right. Kevin, going back to the bookings discussion, you've talked about the proposals in the pipeline and the big increase in the size of those. Just maybe if I could ask the question a little differently, what would you expect based on that book-to-bill to look like for the year, and how would you expect it to trend? I understand you said it's a little bit unclear right now, but overall, what are you thinking for the year?

Kevin M. Phillips

We certainly believe that -- or are confident that will be above one based on these awards. And the level above that -- and again a reminder of the new business component in it. So either that's about one, given the lower rate of re-compete, that's a growth pattern. And it totally depends on when those new awards happen, but it could be significantly stronger than that. It's just too early to tell.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then just lastly, I wanted to ask you about margins. In the quarter, given that it looks like -- I guess, the mix on the business, how would you characterize the mix, the margin mix on the business that declined in the quarter and the resulting impact on your reported margin?

Kevin M. Phillips

Margin mix for the overseas work is fairly consistent, for the MRAP a little bit larger return drop on some of this S3 activity. The other balance, I would say, that there are some margin pressure in the other pieces of the business that are not cyber, but the balance of it is more Q1 performance-specific.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then just one more thing. You've done a number of acquisitions, George, in healthcare. How would you size that business at this point, within the context of the $2 billion in revenues for 2014?

George J. Pedersen

I don't have a precise number for the healthcare, but we just see the funding for that area has grown very significantly. We didn't have a real position in there before to be able to compete for, and now we do. And I don't have a number at the tip of my tongue here as what that would be, but it will go up substantially.

Robert Spingarn - Crédit Suisse AG, Research Division

Can you comment at least to the relative profitability of that business versus your core defense business?

Kevin M. Phillips

It’s Kevin, I can. If you exclude the amortization for deal-related costs, the -- first of all, the core business we have today in health is above average. It's running more along the lines of our higher-end intel work. And we would expect these acquisitions to bring in excess of 7% prior to amortization.

M. Stuart Davis

This is Stuart. I mean, one of the things that we do see in this segment of the business is a higher degree of fixed-price work that supports the higher margin. And that's one of the reasons that this market is attractive to us.

Operator

Our next question comes from Bill Loomis of Stifel, Nicolaus.

William R. Loomis - Stifel, Nicolaus & Company, Incorporated, Research Division

What was the cyber and intel revenues in the quarter?

Kevin M. Phillips

They were fairly consistent to slightly down from prior quarter.

William R. Loomis - Stifel, Nicolaus & Company, Incorporated, Research Division

Sequentially slightly down?

Kevin M. Phillips

Sequentially, yes.

William R. Loomis - Stifel, Nicolaus & Company, Incorporated, Research Division

And the progress on the investments in the commercial -- I know you're developing products, so that's going to be a little bit longer-term. But can you give us an update on any progress that we made there with commercial customers?

Kevin M. Phillips

I'll speak to the financials, and then I'll leave it over to Bill on the commercial side in terms of the customers. So the operating performance for the first quarter was consistent with the prior quarter as well. And I'll leave it to Bill to talk about customers.

L. William Varner

Yes, Bill, to answer your question, we have actually completed at least 1 of the 4 or 5 different projects that we've identified that we need to know -- that we need to build. And we're offering that to current customers as we speak. I don't know if I can claim we've had any awards yet, but we've only been doing this for 1 quarter so far. But we think the future is good there. We think we have picked the right opportunities, and we think we've identified enough funding to really be able to produce something that will be helpful to us.

William R. Loomis - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then when you guys talked earlier about awards picking up, it sure sounded like you thought it might happen even in the second quarter. You said pretty soon. Where do you think, more in the third quarter or do you really think we could see actual award activity show up before the end of the second quarter here?

Kevin M. Phillips

We believe it will happen this quarter. If the government delays, there are a lot of things that are imminent in that proposal outstanding, that it is time and the indicators are they've gone through all their questions. That said, we you can't rush the government on their decision. So we just see heavy volume for the next 3 quarters.

L. William Varner

Realize also that the funding is in the fiscal year ending 30 September. So they don't have the whole year to make that commitment to those funds. They've got to be completed by that time period. That's another reason we are confident that they're going to accelerate the awards in the next couple of months very aggressively.

William R. Loomis - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then just last on S3. I missed, Kevin, when you talked about S3, expected S3 revenues for the year?

Kevin M. Phillips

Yes, it was $100 million down last quarter. It's between $125 million and $135 million down from last year at this time.

William R. Loomis - Stifel, Nicolaus & Company, Incorporated, Research Division

So the full year will be $125 million to $135 million down year-over-year for the full year?

Kevin M. Phillips

Yes, $375 million to $400 million, roughly, but probably close to $375 million.

Operator

[Operator Instructions] Our next question comes from Edward Caso of Wells Fargo Securities.

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

On the awards that are out there, what's the mix between IDIQ and sort of direct orders?

Kevin M. Phillips

The amounts we're looking at that we stated are new single or bookable IDIQ, meaning that we'll have work immediately out of it. The IDIQ component would be above and beyond that. And we haven't valued that.

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

Okay. Can you just -- Kevin, can you just do a couple of numbers here on the guidance, margins, tax rate and share count?

Kevin M. Phillips

Share count is 37.3 million for Q2, 37.3 million full year, effective tax rate 39.7%, margins for the full year at 5.1%.

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

5.1%. Okay. And on the acquisition front, I heard that the pool was good, maybe not great. But I'm more curious on the bid-ask spread; is the -- are the sellers getting more rational or are the buyers getting more hungry? Has that spread narrowed at all?

Louis M. Addeo

This is Lou. I'm not so sure yet. I mean, I do believe that the things that we look at, we've been able to look at markets where the spreads are rational. That said, there are irrational buyers out there -- I'm sorry, sellers, but we're not necessarily an irrational buyer.

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

One of your competitors talked about sort of contract consolidation and a greater push towards more small business work. Are you seeing any of that impact and is it either positively or negatively?

Kevin M. Phillips

It's Kevin, I'll speak, and then if others want. On the consolidation, in some customer sets, they are looking to consolidate certain IT architectures and the like. And that is at net-net to our benefit likely, given our positioning over time and those customer sets and ability [ph] to prime. Small business has been a trim for a while. It's been filtering for over a year. I think a lot of the work that heads that way is on a lot of systems engineering-type work, something we have factored in and have to take care of, but it's just part and parcel of the environment now. Do you want to add to that, Bill?

L. William Varner

Sure. Ed, this is Bill. I think, first of all, in the consolidation programs, particularly in some of the IT consolidation efforts, we actually think we're in a pretty good position to be a strong bidder for a lot of those efforts. A lot of that is new work for us. We may be supporting part of what the government's doing, but if you're the incumbent and the work pool is a lot larger then you -- then these consolidations are a real opportunity. And in terms of the small business, I really don't think I'm seeing any different trend than we've seen over the last couple of years. Those of us who are large or midsize businesses always think that too much of it is going to small business. I don't see that that's any different than it was last year, for example.

Operator

Our next question comes from Tobey Sommer of SunTrust.

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

A follow-up on your commercial effort. Have you put in a different kind of infrastructure and sales organization to kind of go to market with those? Or are you utilizing infrastructure that you've had in place?

L. William Varner

Well, this is Bill. We do have a completely separate sales and development and even management infrastructure for the commercial cyber business than we use with the government business. The 2 markets are sufficiently different. We call it sales in the commercial world; we call it marketing in the government world. So the types of people who are successful in those 2 different businesses are different. And so we keep them different here within ManTech.

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

How many people in total would you have involved in the commercial side at this point?

Kevin M. Phillips

70 people.

L. William Varner

Off the top of my head, without committing, it's probably about 70 people.

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

Okay. And just in general terms, ballpark terms, not holding it to a specific account, a year or more from now, kind of where would you see that going?

L. William Varner

Well, I'm always success-oriented, of course. So if I look at some of the investments we're making and some of the new activities we're undertaking, I would certainly like to see us at least double our revenues in the commercial business area. That might not necessarily correspond to a doubling of the headcount. You would hope that with products, we wouldn't need twice as many people to sell twice as many products. So that's the way I see it for next year.

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

Just one last question from me. A doubling of revenue, what would that mean? How big of a base of commercial sales are there currently?

L. William Varner

It would mean we would be very happy.

Kevin M. Phillips

So our objective in the commercial enterprise is to take advantage of a market that's very reactive, and we would expect that will exceed $20 million in revenue in total commercial from our investments. But we'll have to wait and see, and we're not committing to that.

Operator

Our next question comes from Brian Kinstlinger of Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

Bill, I have one more question for you. That one commercial product where the project is complete, is it software? And what function does it play in this cyber landscape? Is it logging, is it analytics, is it detection? Is it more specialized? Maybe just give us a sense of what that is.

L. William Varner

It is software, Brian. At the moment, all of our commercial products are essentially software. And so it is complete, and it's more of, I would call it, a platform capability. It allows users to easy -- a much easier user interface to some of our products. And we've received good feedback on it so far.

Brian Kinstlinger - Sidoti & Company, LLC

Sorry, a user interface to other people's products or your products?

L. William Varner

Our products.

Kevin M. Phillips

Sam, I was going to say it doesn't like we have any more questions at this time, but I'd like to offer to everybody that our senior team will be available for follow-up questions, and thank you all for participating on today's call.

Operator

Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.

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