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ManTech International (NASDAQ:MANT)

Q2 2014 Earnings Call

July 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

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)

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

Analysts

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

Gautam Khanna - Cowen and Company, LLC, Research Division

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Steven Cahall - RBC Capital Markets, LLC, Research Division

Brian Kinstlinger - Maxim Group LLC, Research Division

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the ManTech International Corporation Second 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 for Strategy. Please go ahead, sir.

M. Stuart Davis

Thank you, Danielle, and welcome, everyone. On today's call we have George Pedersen, Chairman and CEO; Kevin Phillips, Executive Vice President and CFO; and Dan Keefe and Bill Varner, our 2 group Presidents. 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 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. ManTech's second quarter operating performance showed solid sequential growth. Our revenues operating margin, operating income and bookings all improved compared to the first quarter of 2014.

We benefited from our strong positioning in cyber and intelligence on an organic basis, as well as from our recent acquisitions in health care and homeland security markets. Our support for the critical missions in Afghanistan is winding down, which creates tough year-over-year comparison, but we are more rapidly reaching a stable platform for growth going forward.

The market environment, though challenging, has stabilized compared to last year. Customers are executing on full year 2014 appropriations. The Bipartisan Budget Act of 2013 established a top line FY '15 appropriations level, and especially as events in Ukraine, Iraq and elsewhere demonstrate the world is dangerous and unstable, defense and intelligence agency will continue to get funded.

So far, award activity is lighter than anticipated, but proposal activity remains very high. We're investing heavily in major capture activities and could dramatically grow company. We are also pursuing acquisition candidates to spur growth in key markets and technical areas.

During the quarter, we completed the acquisition of 7DELTA to expand our health care practice into the Department of Veterans Affairs. The country is committed to caring for our veterans, and VA will get significant new funding, as you have heard about in recent news reports. ManTech and 7DELTA are well positioned to respond. We are seriously looking at additional companies that will expand our presence in intelligence, cyber and protected defense markets.

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

Kevin M. Phillips

Thank you, George. Overall, second quarter financial results were consistent with our expectations. Revenues for the second quarter were $463 million, compared to $605 million in the second quarter of last year, and up from $452 million in the prior quarter. The year-over-year revenue difference is mostly explained by the expected decline in the Afghanistan-related MRAP and S3 contracts. Growth from last quarter primarily reflects the contributions of 7DELTA and ATG.

The MRAP family of vehicle support work contributed $40 million in the quarter, down $102 million year-over-year and down $1 million from the prior quarter. S3 revenues were $99 million in the quarter, down $36 million year-over-year and up $3 million from last quarter.

For the quarter, the prime contractor in contract mix distributions were steady: 89% of revenue were as a prime, 70% were on costs plus contracts, 10% on time and material, and 19% on fixed-price contracts. The contract mix trends that were pressuring margins have now stabilized.

Operating income for the quarter was $24.1 million for an operating margin of 5.2%, which is an improvement of 80 basis points from the first quarter. As expected, we benefit as some other factors affecting Q1 margins faded, and we had stronger fee performance across many of our programs.

We continue to invest in BMP and commercial initiatives. In addition, we have made investments in our IT infrastructure that will be completed soon and allow us to run more efficiently in the future. Net income was $7.7 million and diluted earnings per share were $0.21 for the last quarter.

Our earnings reflect a onetime charge of $10 million to redeem $200 million in senior notes. Of that charge, approximately $7 million represents a cash outlay, and the remainder represents accelerated amortization of the expenses associated with the original issuance. Paying down the debt enables us to save $15 million in annual interest expense.

Now on to the balance sheet and cash flow statement. During the quarter, we used $2 million net cash to fund operations in the quarter. But year-to-date, cash flow is exceptional at $60 million or 3.5x net income. Collections were stable, as DSOs came in at 79 days, and we expect to end the year in the mid-70 range. Our balance sheet at quarter end shows $31 million in cash and $55 million in debt, after paying off long-term debt and investing $80 million to purchase 7DELTA.

To provide more security for our balance sheet, we amended our credit line in June. We retained the major terms, including the $500 million limit and the same table of interest rate, but the term of the line has been extended until June 2019. We have the financing we need in place for when we identify attractive acquisition candidates to strengthen our position in faster growth markets.

Turning to business development. Bookings for the second quarter were $424 million for a book-to-bill ratio of 0.9x. This is the highest quarterly bookings and book-to-bill ratio that we have achieved outside of the seasonally strong September quarter in 2 years. We are moving towards a book-to-bill ratio exceeding 1x, which should put us on the growth path in 2015.

Much of the activity consists of the shorter duration awards, including contract extensions and quick-turn task orders, so that customers can maintain financial flexibility while dealing with heavy procurement activity. As is our practice, the second quarter bookings do not include any contributions from new multiple award IDIQs, which included the $8 billion GSA OASIS contract and a $3 billion award from the Defense Technical Information Center. We had expected a bigger lift in bookings during the quarter, but we are seeing tremendous volume of proposals that will result in awards this year or in early 2015.

With $3 billion of proposals outstanding and almost $2 billion of proposals and process at quarter end, customers are actively evaluating proposals and issuing RFPs. So award activity should be very strong. I'm excited about the number of large proposals in our pipeline and our positioning in areas of importance to our customers.

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 $21 billion. Now to the forward outlook.

As a result of forward and expected award close, we are revising our fiscal year 2014 guidance. We expect to achieve revenues of $1.9 billion, net income of $48 million and diluted earnings per share of $1.30. We will see further drop off in C4ISR and MRAP work in the second half of the year, but expect to achieve $1.9 billion in revenue through a combination of contract awards and acquisitions.

Our focus is to position for growth in 2015. Revenues in the third quarter will be in line with this quarter prior to any year-end surge activity that may occur in select customers. Earnings per share will build from here without the $0.16 debt redemption charge, and with virtually no interest expense for the second half of the year.

We provide this guidance to anticipate a lower operating margin for the year, as revenues are pushed out given award delays. We expect to maintain margins near at current levels of 5.2% or nearing 6%, when we exclude the investments for new markets and technologies we're making this year. Operating cash flow will turn positive again, and we will end the year with operating cash flows north of twice net income. This cash generation will further strengthen our balance sheet for additional acquisitions.

Now Dan will speak to our DoD and federal civil business. Dan?

Daniel J. Keefe

We welcome 7DELTA to the Mission Solutions & Services Group, and I continue to be impressed with their leadership and strong credentials in the VA market space. We are approaching a heavy season of proposals on the T4 vehicle at VA. Some of our opportunities are larger than what 7DELTA was able to pursue in the past, given the combined ManTech and 7DELTA qualifications. We expect this to continue and accelerate 7DELTA's already strong growth trajectory.

As the VA improves its operations, IT will be an important enabler. The addition of 7DELTA and its presence at the VA rounds out ManTech's presence in the government health care IT market, with our 2 previous acquisitions supporting the Department of Defense Health Agency and the Centers for Medicare & Medicaid Services.

The second area of growth that MSS is focused on is the Department of Homeland Security. With our recent acquisition of ATG, we are now very well positioned to compete effectively with the key contract vehicles across the department. ATG not only improves our already strong position at Customs and Border Protection, but it provides us capabilities and work supporting the U.S. Coast Guard. In a dangerous and complex world, we appreciate the opportunity and look forward to being a strong partner to the department in the years ahead.

Finally, our Army and Marine Corps contracts supporting the MRAP fleet around the world remain an important component of our business. The drawdown in Afghanistan in 2014 is generally along the lines of what we projected in a dynamic environment tied to political decisions. The programs will generate about $130 million in 2014, and we will continue to work supporting U.S. forces beyond 2014 in that theater of operation.

In addition, the large CLS MRAP contract extends to the end of 2017. And we see opportunities beyond Afghanistan supporting MRAP work for both the U.S. military and CONUS, as well as other nations around the world through FMS support. Currently, we have worked in 2 countries supporting their MRAP fleets with 3 other countries pending. Bill?

L. William Varner

Thanks, Dan. The key for the mission in Cyber and Intelligence Solutions group now is proposal adjudication. We have a number of takeaway opportunities that should be awarded in the third quarter, many of them are in the $50 million to $100 million sweet spot for us and in areas where we have strong core capabilities and offerings. Even more exciting are several truly game-changing opportunities.

The entire company is rallying to support these large opportunities, and we are excited about the awards coming over the next several quarters. Winning even one of these could greatly raise the profile of not only MCIS, but the entire company. For that matter, one of these opportunities would more than replace all of our current OCO revenue.

Over the last 2 years, we have really solidified our ability to go after, win and execute large procurements across the intelligence community. When we step up to a large pursuit, we are able to attract the leading terms in the space as teammates and present a compelling value proposition to our customers. We are experiencing the effect of award delays just like everyone else, but these programs will move forward. And I expect that we will win more than our fair share of it.

George?

George J. Pedersen

Thank you, Bill. In closing, second quarter showed positive momentum. And we expect the second half of the year to generate awards that will position us for growth, continued growth in 2015.

With that, we are ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Bill Loomis from Stifel.

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

Just looking at your comments about award, taking guidance down because awards are less than what you thought, I mean, a 0.9 book-to-bill in the second quarter is a pretty good showing. Did you -- what were you expecting in the second quarter to make the guidance?

Kevin M. Phillips

Well, Bill, it's Kevin. When you look at the timing of expected awards for the quarter, the actual adjudications by the government were half of what was originally intended. So -- and majority of the new work that we expected, not all but the majority of the new work, was actually pushed. So that hasn't moved too far to the right. But if the trend continues, we're trying to just build in the expectation in Q3, Q4 and maybe into Q1 '15. There might be some place and ramp-up.

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

Okay. So the -- on the lowered revenue, it sounds like you have more lower MRAP revenue, because I remember from my notes on the last call, I think you were calling for about $150 million this year on MRAP, and now you're saying $130 million. So that's tracking a little bit less and...

Kevin M. Phillips

Right.

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

And what about S3? Do you have similar figures of how much lower that might be tracking in the second half from what you thought?

Kevin M. Phillips

Yes. So S3, we're still thinking in the $350 million to $360 million range, it depends in aggregate. We'll see how that works because there's more variability these days than the ISR component of the business. But roughly that number, which is, I think, $20 million less than last quarter.

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

Okay. And then just -- my last question is, can you talk -- last year or last quarter you talked about how those businesses might play out in 2015. I think it was $120 million for MRAP next year. What are you thinking about now for MRAP and if you could, on S3 also in 2015?

Kevin M. Phillips

Okay. I'll speak and let Dan answer beyond that. We're going to be exiting this year on MRAP at about $100 million run rate. On the S3 side, again, it's much more variable. But that should be in the $300 million potentially run rate, with a lot of that being OCO reduction. But I'll let Dan speak to the specifics on these programs.

Daniel J. Keefe

Yes. And as I kind of alluded to, this contract, our MRAP contract has legs. About a little less than half our employees are actually outside of Afghanistan and continental United States. And also, as I mentioned, working with other countries in foreign military sales. The really unknown is the political decisions that are made in Afghanistan at the end of this year. And that will really kind of -- which makes it difficult right now to put a firm number on.

Operator

And our next question comes from Tobey Sommer from SunTrust.

Unknown Analyst

This is Gillian [ph] for Tobey. I have 2 quick questions for you guys. First, what are you seeing in terms of growth and margins in the cyber security space? And then second, can you elaborate a little bit on the current trends you're noticing in the hiring environment and maybe you like talk a little bit about certain things that's in the business that you're seeing a lack of talent or are there certain segments where there's plenty of supply?

Kevin M. Phillips

Yes. I'll speak to the first and let Bill Varner speak to the supply. So what we're seeing is fairly stable, expected returns bottom line in the cyber market within the federal government. There is potential upside based on the investments we're making in the commercial side, but that's kind of to be seen when they start getting up on top on some programs that we're tracking. Bill?

L. William Varner

Yes. Tobey, this is Bill. Regarding your question about the availability of the right kind of people, it's -- we see this business area go sort of in cycles. When the economy is really good, then we find that we're competing with all of the commercial companies. When the economy decreases a little bit, we find that we're in more of a better position than the commercial companies are. So it is always difficult to find the right kind of developers, the right kind of cyber developers. But we are finding that we have a lot of programs that a number of these people find very exciting. We're in very important government spaces. And people find that the excitement of the missions that we are supporting is really better than the opportunities that they find in some of the commercial spaces. So I hope that helps.

Operator

And our next question comes from Gautam Khanna from Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

A couple of questions. First, if you could comment on the bookings in the quarter on kind of what you anticipate the margin embedded within it to be. I mean, is it -- is this accretive to the current segment average? I'm just talking like-for-like, obviously, we know the Countermine mix skews things. But are you seeing any sort of stabilization in pricing? And then I have a follow-up.

Kevin M. Phillips

Yes. So we're just seeing stabilization in the overall fees that we're getting from the business. There are some bits where the scope may be reduced, which we're filtering into our expectations. So I'd see more of a requirements, not a bottom line return of the requirements.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. Secondly, I think you mentioned the S3 exit rate will be tracking to $300 million next year. How much of that decline is recompete losses? And can you comment also, I mean, we saw like GITM, I think, was recompeted. What is still in the base this year that may not be that you know of right now next year?

Kevin M. Phillips

There's a heavy level of work going on that has new work, i.e. takeaways that we're having from other programs and some other programs being split up with components going to other awardees, it mixes out. We are going to see a decline in some of the work, but would say that it's more directed towards reduced scope on certain recompetes with the mix of new work and the mix of some takeaways by other companies to get to that exit number. So it's a mix.

Gautam Khanna - Cowen and Company, LLC, Research Division

And is it limited to the S3 program? Or have you suffered any other kind of meaningful recompete losses in the first half of this year?

Kevin M. Phillips

I wouldn't say meaningful. I mean, we've had some, but nothing that is of large scale that would call us concerned of how we're going to grow into next year.

Gautam Khanna - Cowen and Company, LLC, Research Division

And could your soft circle kind of the relative size of those in aggregate that you've lost on an annual sales rate?

Kevin M. Phillips

Some of it is hard to say because the decline in the requirements. But on an annualized run rate, I would say it’s between $30 million and $50 million.

Gautam Khanna - Cowen and Company, LLC, Research Division

And is that fairly typical, I mean, if you're to compare that to first 6 months of last year?

Kevin M. Phillips

I would say that it is typical for the last few years and actually potentially declining as we enter next year, given all the other awards that we're going to get. So I wouldn't say it's inconsistent.

Operator

And our next question comes from Edward Caso from Wells Fargo.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

It's Rick Eskelsen on for Ed. First, I just want to circle back on the award activity. Why do you think it was slower than you thought in Q2? And what still gives you -- what leads you to think it's going to remain pretty positive here in the third quarter?

Kevin M. Phillips

I'll answer the second question first. We believe that the government is moving fairly quickly on doing proposals, letting awards for response, which is why it's still busy, it's a very busy time. And the reason there are delays in awards is just because, frankly, the government has to work on procurement obligations for government fiscal year money before they make the awards, and that's causing delays. Believe that the government is moving fairly smartly, and once -- and has the ability to obligate now, but they have to get current year funding done first, and that's been their priority. If anybody wants to add to that? No, okay. And the expectation in the first -- second quarter on awards was because the stated timing of award, I guess, the high volume of proposals we've been submitting. And those are the items in part of the delay based on the -- basically, they overloaded the acquisition workforce in the government.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Okay. So kind of a similar trend to what you've seen here for the last several years, actually?

Kevin M. Phillips

I would say, in some cases. The last several years, the government has been uncertain about making awards. I think, now, they're just at capacity. And you think what happened last year with sequestration and everything at the end of '13, it just built up a demand activity, which they're playing catch up on.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Okay. And then you touched on this a little bit in the prepared remarks, but just wondering if you could talk about 7DELTA in the VA, particularly given the -- some of the recent headlines and what you're expecting there.

Daniel J. Keefe

Yes. This is Dan. I think with -- the fourth quarter is traditionally when the VA has its largest amount of activity, many of its 1-year contracts come back around. Certainly, the VA is going to be well funded with everything that you're certainly tracking in the news. And that ties in well with our capability of combining our current work with 7DELTA. And we've already seen some success.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

And just to clarify, by Q4, you mean the government fiscal fourth quarter?

Daniel J. Keefe

Yes. Thank you. Yes, the government Q4.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Okay. And then just the last one for me, Kevin, a few guidance pieces. The tax rate and the share count, what are those numbers in the new guidance?

Kevin M. Phillips

Tax rate for the full year is 38.9%. Share count is 37,300,000.

Operator

And our next question comes from Steven Cahall from RBC Capital Markets.

Steven Cahall - RBC Capital Markets, LLC, Research Division

The first question is just a clarification on something I think I heard around some cyber bids that you have out there. Is it correct that you said that there's a few of those out there and that any of them would replace the current revenue that's being obtained from OCO. And so just a confirmation of that. And then related is, is the margin on those bids accretive to the OCO revenue, equal or diluted?

L. William Varner

Okay. This is Bill. I think the better way of expressing that would be that there is at least one of our cyber and IT bids out there, that would be capable of replacing the OCO business. If I said any of them would, I did not intend to say that. But there's one particularly large one that would put us in a very nice position, and it would certainly be a higher margin than the OCO work.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay. And then just related on the cyber. I noticed, just in the cash flow statement, continued spending in the capitalized software. Is it fair to assume that this is more for the commercialization? And should we expect that run rate to continue for the rest of the year and going forward?

Kevin M. Phillips

Okay. So the capitalization of software is a mix of this primarily internal system completion that should decline next year in terms of this level. The amount that we're spending that, whether its expense wise or capitalized for research and development programs that we want to maintain the IT for would be fairly consistent.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay. That's great. And then just a final one on M&A. Can you just talk about the decision to retire the senior notes and is it fair to conclude, with the way the balance sheet looks now that you have a preference for bigger deals because you've delevered so much that -- can we read into this, that that's to give you more scope for something bigger or are you looking at all size of deals and there's no sort of preference for size at this point?

Kevin M. Phillips

I'll talk about that real quick and then hand it over on the size and scale. So it was just a fairly straightforward thing for us, given the level of interest expense on the bond and the timing of the previous note confirmation to clear that out and also, to renew our line of credit. Just that we're in a good position and strong to be able to react to market as the opportunities come up. Lou, do you want to speak to size?

Louis M. Addeo

Just briefly, relative to size and scale, we look at many opportunities. And it's not as if there's a huge influx of opportunities right now of scale. So we spent our time both on the outreach side and with banks coming in with books. That said, if we see an opportunity that has some size and scale, we'll definitely look at it. But for right now, I'd say that the volume, the inventory of deals is fairly light.

Operator

[Operator Instructions] And our next question comes from Brian Kinstlinger from Maxim Group.

Brian Kinstlinger - Maxim Group LLC, Research Division

Kevin, you mentioned in order to get to your revenue guidance, it would take a combination of awards and acquisition. Did you mean acquisitions that have not yet been announced or were you suggesting 7DELTA?

Kevin M. Phillips

I'm suggesting both. The timing of the award activity that we have. The proposals outstanding in that ramp-up. Any delays on that in terms of the ramp-up once we get awarded those contracts organic. The growth of 7DELTA, which is contributing to the growth, but also other acquisitions, as we look through them over the next few months or 3 months, could all contribute to us meeting or achieving that number exiting the year.

Brian Kinstlinger - Maxim Group LLC, Research Division

Got it. And can you quantify the implied revenue guidance that's in your backlog versus maybe what needs to be awarded or acquired?

Kevin M. Phillips

I don't have the information in front of me. So I'd have to get back to you on that.

Brian Kinstlinger - Maxim Group LLC, Research Division

Okay. And the large deals, which sounds like they're a bunch in the pipeline, are they generally takeaways from incumbents or new programs?

Kevin M. Phillips

They're a mix. Mainly, takeaways these days. But there are a couple of new programs that I would say are more consolidations of existing programs. They're more consolidations of IT capability.

Brian Kinstlinger - Maxim Group LLC, Research Division

Two more of these. Second quarter awards, how much -- what percentage was the expansion or new business of existing program?

Kevin M. Phillips

A lot of expansion on existing contracts with incremental additions and some of them within that. But largely extensions on current work. I would say that less than 15% would be for new work. So same base [ph] as the current phase.

Brian Kinstlinger - Maxim Group LLC, Research Division

And then, finally, a competitive question. I think I saw that the SSES is merging with S3. I'm wondering how you think that impacts ManTech and the other prime contractors of S3?

Kevin M. Phillips

You're talking about S3 merging with R2-3G into the single -- a larger CECOM contract? It actually puts us in a better position. We think we'll compete well. We're not a holder on one of those. And so it will broaden our opportunity.

Operator

We do have a follow-up from Gautam Khanna from Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

Could you update us on whether HBGary is in the black at this point? And if not, what the losses are?

Kevin M. Phillips

Sure. For this quarter, it is not in the black, its loss was $1.3 million, which is improved from the last 2 quarters and is trending in the right direction.

Gautam Khanna - Cowen and Company, LLC, Research Division

Do you anticipate it will be breakeven at some quarter this year?

Kevin M. Phillips

At this point, we do not. We think it will be entering next year, moving towards breakeven.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. Can you talk again quickly about the free cash flow in the quarter, I know its negative [indiscernible]. But it looks like salaries were up. Was there anything just bizarre about the timing in the quarter of number of paydays or something? What drove the -- you haven't had a negative cash quarter in a while?

Kevin M. Phillips

Yes. So we have -- every other quarter has an additional payroll. This is one that had an additional payroll. So that's part of it. And also, clearing through some prior payables for some of the large overseas work that had to be paid out.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And you're still targeting what exactly in terms of operating cash and free cash this year?

Kevin M. Phillips

So we expect the end the year, in total, to have about $125 million to $135 million in operating cash flow, and a consistent amount of CapEx to bring that down on a free cash flow basis.

Gautam Khanna - Cowen and Company, LLC, Research Division

Got it. And let's see, one other thing. Is there -- when you -- can you help us just thought cycle [ph] all of the Afghan exposure? I mean, does S3 -- what percentage of S3 do you think is really more sensitive at this point? And are there other things beyond CLSS or Countermine that we should keep in the back of our mind as items that might continue to roll?

Kevin M. Phillips

So roughly, it becomes a hard thing to split, but roughly, 1/3 of the overall S3 work is OCO specific. And that is in part what is declining exiting this year compared to the beginning of the year. And then, on CLSS MRAP work or just MRAP work, I just tend to think that we have equal amount of upside and downside once we hit a certain point next year because, as Dan may have mentioned, over half of our employee base on that program exiting the year will be in the United States.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And -- okay. And could you just remind me how much of the, call it, $100 million run rate, at the end of this year on CLSS Countermine relates to labor as opposed to some of the pass-through product, if you will?

Kevin M. Phillips

It's a much higher component because the amount of material buys from the government has gone significantly down because they have less requirements given the reduced number of systems that have battle damage repair requirements.

Gautam Khanna - Cowen and Company, LLC, Research Division

So whereas back in the day, it was like 2/3 ODC, 1/3 labor. I mean, is it reversed? Is that a good rule of thumb?

Kevin M. Phillips

DO should be in excess of half, the question is how much above that. But yes, it will be closer to reverse.

Operator

And our next question comes from Patrick McCarthy from FBR.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

In the recent past you guys have given out a book-to-bill in Cyber and Intel business, and I didn't hear that. Do you have it available?

Kevin M. Phillips

No. We've stopped reporting that.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Okay. Do you have a sense as to how much of your funded backlog right now might be cyber and intel related?

Kevin M. Phillips

I would -- there's a significant amount of proposal activity that's intel and cyber related. And I would say that roughly half of our overall backlog is related to that business. And it's likely to be increasing.

M. Stuart Davis

It appears that we have no further questions at this time. So I think we'll go ahead and conclude the call. As usual, members of our senior team are available for follow-up questions. We thank you all for participation on today's call and your interest in ManTech.

Operator

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

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Source: ManTech International's (MANT) CEO George Pedersen on Q2 2014 Results - Earnings Call Transcript

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