ManTech International Corp (MANT) 2011 Q3 法說會逐字稿

Good afternoon. My name is Robert, and I will be your conference facilitator today. Today's call is being recorded.

At this time, I would like to welcome everyone to the ManTech third-quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions)

Thank you. Mr. Davis, you may begin your conference.

Thank you, Robert, and welcome, everyone.

On today's call, we have George Pedersen, Chairman and CEO, and Kevin Phillips, Executive Vice President and CFO. In addition, Bill Varner, who runs our Mission, Cyber, and Technology Solutions Group, will describe a major new program win in our recent acquisition announcement. Lou Addeo and Terry Ryan, our other 2 group presidents and Chief Operating Officers, 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 the call over to George.

Thank you, sir. Good afternoon.

In our third quarter, we posted solid results, with double-digit increases in revenue and net income. Our business is in an excellent position. We're a vital partner to our government in support of high-end defense intelligence missions.

Since the last call, we won significant new business and made a strategic acquisition that enhances our position in today's market. Our focus on priority missions give us confidence that we will continue to take market share, we will continue to grow, and we will continue to generate excellent cash flow.

Turning to the industry outlook, the federal government is operating under a continuing resolution, as you know, through November 18. And it is likely that we will have a continuing resolution for most of the government through the end of December. The Senate passed today $182 billion appropriation mini-bus bill for agriculture, commerce, justice, science, transportation, HUD. So there are some hopeful signs. In the end, we expect core DOD spending to be a bit above last year's level of $513 billion, which will still offer growth opportunities for us at ManTech International.

It is too soon to know how fiscal-year 2013 appropriations will turn out. The November 23 deadline for the Joint Select Committee on Deficit Reduction, the super committee, is fast approaching, and there's rampant speculation on potential outcomes and scenarios to avoid the sequestration trigger. But honestly, no one yet knows what will come to pass.

The DOD is conducting its roles and mission review. We are confident that we are well-positioned across most of those scenarios. DOD leadership has signaled that cyber spending will remain a priority. Also, Intelligence and C4ISR become even more important as a force structure diminishes. And they are areas of technology of our focus here at ManTech.

Moving on to mergers and acquisitions, we are ecstatic about the pending acquisition of WINS, which enhances our capability and positioning in information technology, intelligence, and cyber. I will let Bill describe the Company in detail, but it positions us well strategically and creates a force multiplier. After closing WINS, we will have used about $500 million over the past 2 years on 5 accretive acquisitions that will generate more than $1 billion in revenue in fiscal 2012. When we combine these acquisitions with our organic capability, we will continue to deliver strong growth and enhance market presence.

We still have untapped capability. The federal services business offers agile firms a tremendous opportunity to collect cash earnings and redeploy them to grow the business, and that's what we essentially have done as a strategy.

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

Thank you, George.

Quarterly revenue of $735 million represented 12% total growth above last year's third-quarter revenues of $657 million, with 5% coming organically. At a high level, we had 3 major growth drivers. First, S3 revenue was $248 million, up from $193 million a year ago. We had robust growth on several programs, such as elevated sensors and BETSS-C.

Second, our MRAP and route-clearance support work generated $146 million in revenue in the quarter, which is up $4 million sequentially and $22 million compared to the third quarter of 2010.

Third, the ECCS, or Expeditionary Cellular Communication Service, program became fully operational in the quarter, and we began to recognize revenue and profit.

Breaking down revenue, according to the standard metrics, we continued to gain direct customer access with 88% of our revenues as prime contractor, and contract mix is still moving away from time-and-material contracts towards cost-plus and fixed-price contracts. For the quarter, 47% of revenue came from T&M contracts, 36% came from cost-plus contracts, and 17% came from fixed price contracts.

Operating profit was up 7% in the quarter to $58.5 million. The 8% margin was the result of tight cost controls and very strong program performance. G&A for the quarter ran at 6.4% of revenue, which was down 80 basis points from the third quarter of 2010. Moreover, G&A, it was also down in absolute terms, $1.9 million from last quarter and $200,000 from the third quarter of last year.

We continually adapt our infrastructure to meet the needs of the business and respond to competitor pressures in the market. Net income for the quarter was up 10% to $34.5 million, and diluted earnings per share was $0.94, which was up 9%. Because of the statute of limitations on several tax reserves passed, our effective tax rate was 37% compared to 38% at the third quarter of last year, which contributed $0.02 to earnings per share.

Our investors are increasingly focused on cash as the driver of valuation, and George has always had a passion for cash. The federal services market is an excellent cash business. Cash flow is consistently ahead of net income because of relatively large non-cash charges typical to our industry. Adding back the tax-affected stock-related compensation and depreciation and amortization expenses to net income yields cash earnings for the quarter of $44.8 million, or 6.1% of revenue, which is compelling.

Now on to the balance sheet and cash flow statement. So far this year, cash flow from operations is 70% greater than net income, and we expect to reach $200 million in operating cash flow for the year. DSOs were again below our 70 day goal at 66 days, as we maintained our persistent focus on collections.

Capital expenditures were higher than normal, as we completed the purchase of cell-tower equipment for the ECCS program, a new approach to support our customers while providing a reasonable return to ManTech. Absent future expansions to the ECCS program, CapEx will now return to the $10 million to $15 million per-year range. At quarter-end, we had $182 million in cash and cash equivalents.

3 weeks ago, we put in place a new, $500 million senior secured credit facility that gives us the financial flexibility to drive growth organically and through strategic acquisitions. The 5-year credit facility has an accordion feature to expand by $250 million. We wanted to implement a new credit line at least 6 months before our old facility expired, and we took advantage of a very favorable interest-rate climate. The annual interest rate under the facility will initially be LIBOR plus 150 basis points.

It is nice to have this in place as we acquire WINS, although we will be able to fund that transaction solely with cash on hand. We continue to be very aggressive in searching for good acquisition candidates.

WINS is an excellent business with 2011 revenues in the $75 million range, which is up over 40% from the prior year. In 2012, they should continue to grow double digits with EBITDA margins above our base business. Even before considering the tremendous business synergies that we should get with access to the DIA SITE contract view. Based on FY 2012 projections, the $90 million purchase price represents an enterprise value of -- to EBITDA multiple of about 6 times after considering the tax benefit of the 338(h)(10) election. WINS should close by early December and then be nicely accretive for us next year.

You can see from our press release that our broad -- our Board approved the second dividend payment for the year in the amount of $15.4 million, with a record date of November 16 and a payment date of December 8. Our dividend appropriately reflects our financial strength and cash-flow visibility and our desire to generate returns to our shareholders.

Turning to business development, bookings for the third quarter were $1.1 billion, for a book-to-bill ratio of 1.5 times. More than $700 million in awards were new prime work, including 5 of the 6 largest awards we had. This quarter's awards also had relatively high technical content with substantial work in systems integration, cyber, communications engineering, and network management.

We also are showing signs of success unseating incumbents on recent IDIQs, with $43 million on ENCORE II and $32 million on Department of Justice ITSS-4. That included the first task order ever awarded under that vehicle. As we build out our suite of IDIQ vehicles, we look to continue that success going forward.

Backlog at the end of the quarter stood at $4.4 billion, and funded backlog was $1.5 billion. With a 1.5 book-to-bill ratio, total backlog was up 6% from last quarter, and funded backlog was unchanged.

Although there are some uncertainties around timing of awards, procurement activity is heating up as we anticipated. Our total qualified pipeline at the end of the third quarter was $28 billion, which is up $1 billion from last quarter and $3 billion from a year ago. During the quarter, we submitted $6 billion of bids, and the dollar volume of bids outstanding increased to $7 billion, up $4 billion sequentially and year-over-year.

About two-thirds of our proposals outstanding are for new work. Included in the quarter submits is a recompetition of our MRAP and route-clearance support work. Our customers pushed the award date into the first quarter of 2012, and we are working with Taycom on another bridge contract.

The proposal pace will remain high. We expect to submit another $4 billion in bids this quarter. Based on the government's stated adjudication schedule, we should see almost $10 billion of adjudications over the next two quarters. Unlike last year, our customers expect to make awards in the fourth quarter, driven by competitions on customers' existing programs and requirements that can be adjudicated during a CR.

Turning to the forward outlook, as of today, we're projecting 2011 revenue of $2.9 billion, net income of $135 million, and diluted earnings per share of $3.67. Up from 2010 revenue of $2.6 billion, net income of $125 million, and diluted earnings per share of $3.43. We have many proposals that will be adjudicated over the next 4 months, so we are not ready to give 2012 guidance. That said, initial indicators point to being at or near double-digit top-line growth and margins within the 7% to 8% range as a result of contract mix.

Overall, I am pleased with our ability to hit double-digit growth in revenue and net income. We are steadfast in our determination to make this Company the most successful pure-play government services provider, bar none.

And with that, I'll turn it over to Bill. Bill?

Thanks, Kevin. Good afternoon. I'm excited to be able to talk about 2 unqualified success stories for my group and for the Company, AMBIANCE and WINS.

With the value in excess of $400 million over 7 years, AMBIANCE is the largest contract award ever for the MCTS group. In our strategy, we have always emphasized mission areas with high growth potential and healthy margins, and this win shows our success at employing that strategy. This was a highly competitive single award.

We will act as the lead integrator on complete refresh of the analytical tool set for a major DOD customer. As part of this effort, we will enable the customer to transform their enterprise to a cloud-based service-oriented architecture. AMBIANCE solidifies ManTech's status as a leading full-spectrum systems integrator, with the ability to integrate and govern large-scale developers, in this case Northrop Grumman, Lockheed Martin, and Boeing.

I'm also looking forward to bringing WINS on to the ManTech team. WINS is a fast-growing IT solutions provider specializing in network and infrastructure engineering, enterprise architecture and systems development, cyber security, software development and integration, and end-user work space management. WINS has long-standing positions at the Department of State and the Defense Intelligence Agency. They hold many IDIQs, including the $6.6 billion Solutions for Information Technology Enterprise, or SITE contract, for the Defense Intelligence Agency. SITE is becoming an increasingly important contract in the intelligence community, and we expect WINS to generate the same kind of synergies as Sensor Tech and TranTech acquisitions have done.

In less than 18 months, the DIA has adjudicated more than $1 billion on the SITE contract, and WINS is an important player. In fact, WINS is the third-largest provider, the largest small-business provider, and the only small business to have won a full and open task order under SITE.

WINS customers are in areas of increasing priority, and they should be well funded. For example, the DIA recently became the executive agent for cyber security for the Joint Worldwide Intelligence Communication System, or JWICS. As our military withdraws from Iraq, the State Department mission will significantly increase. These are both obvious areas where we should be able to combine our capabilities to support important customers and grow ManTech.

With that, let me turn it back to George.

Thank you, sir.

In closing, I am confident of ManTech's future. High-end defense intelligence-service firms like ManTech will remain essential in a dangerous world. Moreover, our ability to win highly technical mission-critical work like AMBIANCE, and to bring emerging companies that provide a new market opportunity like WINS, convinces me that our growth and financial performance will remain at the top of our peer group. You have seen our success over these past years.

With that, we are ready to take questions.

(Operator Instructions)

George Price, BB&T Capital

Hi, good afternoon. Thanks for taking my questions. First, just as of the last quarter conference call, you're still on pace to achieve the targets that you had laid out. And just curious if you can give a little bit more detail around why the lower revenue outlook, and in addition to that, the assumptions that you've made for the revised revenue guidance.

Sure. Well, there's a lot of variability going on in the market right now. We've had anticipated and are seeing and anticipate reductions from operations tempos in Iraq, and we're building that into guidance. And that's happening more quickly than we had anticipated when we did the call last time. We also have some change in maintenance and logistics support programs that we're beginning to see and reflect in terms of not the MRAP related but other programs where the operations tempo is temporarily declining. And there's some timing around moving requirements out of Iraq and into Afghanistan that we expect will pick up into 2012 in Afghanistan that is creating a temporary disruption in our overall view for Q4 of this year.

We also have some anticipated impacts for positioning ourselves for large roles in competitive efforts. We've got additional prime roles we're taking on, and our positioning around that has resulted from some reduced support as a subcontractor during that period or this period of competition. Having said that, we have awards in the Q3 of this year, anticipated awards in Q4, that have already started to increase our direct staffing role heading out of Q4 into 2012 around these competitions. So it's a mix of these components, Iraq timing, sub positioning, as well as some logistic support, that all move towards good growth in 2012, a temporary disruption as we exit Q3 and head into Q4.

Segueing off of that, given the recent announcement of the withdrawal by year-end and some of the recent industry estimates around a pretty significant near-term over the next couple of years decline in OCO-related spending, how do you see that playing out for your business over the next year or so?

I'll speak and let others who may want to add in. What we've seen is an increase in the amount of requirements in Afghanistan. And generally, if Iraq as an example, if troops initially withdraw, there is usually an increase in the amount of the type of work that we do in those theaters where we are sustaining and maintaining a presence. So we expect that for 2012, we'll still see strong requirements in-theater and have seen some movement from Iraq and Afghanistan that up-to-date has been fairly consistent in terms of offset. And I think it'll offset it going into 2012, but we're trying to provide for the visibility in Q4 in Iraq as requirements roll into Afghanistan. So we still see a good future outlook.

I can't comment -- I'll add to Kevin's comments. I can't comment on 2013, but we believe in 2012, there continues to be opportunities for us in the way of growth. And as you know, the Congress is making faster progress than I thought they would make. And everybody's tending to indicate that the basic continuing resolution will be at the probably the $513 billion level. And there will be OCO additions, maybe as much as $157 billion -- $117 billion, I'm sorry. But the short version is we do not see a downside to the real opportunities for us in 2012.

And Kevin --

Let me add quickly, a lot of the efforts that we're bidding and we have proposals outstanding on are not OCO-related. So we do see a heavy increase in the amount of bids and efforts that are being pushed that aren't OCO-related as well.

Okay. Last couple things. Just what's your revised organic growth assumption for 2011? Am I correct in back of the envelope, that you will have negative organic growth in the fourth quarter?

Yes. Negative organic growth in Q4, 11% total growth for the year, and 5% organic growth out of the year. And again, strong growth going into 2012.

Okay. And what -- any thoughts about best guess about March quarter? Would you expect to be positive again at that point on the organic -- on an organic basis?

We're seeing a ramp-up this quarter in a lot of the wins that we had in Q3, many of which are new. The timing of those and how quickly they ramp up through Q1 of next year, as well as the awards that we expect to get in Q4, are going to largely determine what Q1 of next year looks like. So I think there's going to be a high amount of variability that could either be very positive or neutral. But we see very good positioning to grow. It's a matter of how that works in Q1 of next year.

Okay, great. Thanks very much.

Edward Caso, Wells Fargo Securities.

Hi, thanks for taking my call. Kevin, a couple of quick modeling questions on the guidance here. The Q4 tax rate?

38.1%.

Okay. The depreciation and interest for the year -- or depreciation number, interest number for the year given it's kind of distorted with the cell towers?

I think we'll add $16 million for Q4 on top of what we have year-to-date, which I think is running at $28 million -- $28.7 million year-to-date.

Okay. And the interest number expected, sorry?

$15.5 million.

$15.5 million. And average share count?

37,000, 36,900.

And the operating margin then becomes about 8% then with the little higher than we expect the quarter?

Yes. It will be 7%, 8% roughly for Q4, 7.9% full year, about that range.

Okay. And the contribution from WINS, it sounds like you got about a month or less from them. Is that -- so we're talking less than $10 million?

It's less than $10 million.

Okay. Thank you very much.

Rob Spingarn, Credit Suisse.

Good afternoon. I had a few questions here. George, you started earlier by talking about the super committee and the unknowns there, but could you elaborate a little bit at least on what you're hearing when inside the Beltway?

I think no one really knows how the process will work out, but I'm beginning to hear a bit more optimism. And I can only speak in general terms that they will get something accomplished. And in weeks past, there have been days when it appeared there was a question whether they would get the mission accomplished, but I'm hearing more optimism. But I can't give you dates or dollar amounts.

Would you say that there's any sensitivity? I understand these are tough questions to ask and probably even tougher to answer. Any sensitivity to the jobs discussion, that these are high value, high-end jobs out here, in the obvious environment. Has that gotten anywhere?

I don't know how they really look at the high-value jobs because, for instance, in our world, because of the technology, every job we have you can essentially calculate that way. And it's the same thing with the missions in Iraq and Afghanistan. You -- a lot of those folks are high-end jobs. Now there's talk about changing some of the responsibilities and giving some of it to the State Department, but I don't hear at this point in time a reduction. So what you're defining as high-quality jobs is basically the market we're in, and we see growth continuing.

Okay. And then just a couple questions on the bookings cadence. If you could talk a little bit about what level of budget flush we may have seen here in the September quarter. How much of the bookings was driven by that? What might you expect for the next quarter or two in terms of bookings? And then what your organic growth expectation is embedded for 2012. I think, Kevin, you mentioned around double digit, but what would be the organic number within that?

Well, the organic number, I'll speak to that. Generally, when we look at a future year, we target organic when we speak to it and then add acquisitions as they come in. So we're looking at strong organic growth hitting double digits based on the amount of proposal volume. For Q3, the $1.1 billion, there really was not much budget flush in that. It wasn't a lot of parking of anything. It was a lot of competitive activities that frankly have some good long-term growth for us in many areas and a lot of new areas. So I don't see a lot of budget flush in that. I think some people took some excess backlog we may have had to maybe $10 million or $20 million to put through, but that's pretty ordinary for year-end. Not a huge amount of money.

So you're I think at 0.95 book-to-bill through 9 months. Can you get to 1.0 for the year?

There are, as I mentioned, $7 billion of proposals outstanding, another $4 billion that we're submitting in the fourth quarter. I think that we are well positioned to have a strong bookings in the fourth quarter. Having said that, the timing of those awards is very much up to the government to adjudicate. But we're very high and heavy and up-tempo. Each of the groups is very focused on BD and the top line. And I think that we're in a good position to exit this year or enter early next year with strong bookings.

Okay. And then just a couple quick ones to finish up. Is the AMBIANCE margin below the corporate average? And what would the directional margins be for 2012 overall for the Company?

The AMBIANCE contract award, as well as some other contract awards, are -- tend to be at or above. The general direction, we'll see some margin compression generally as we head into next year, still staying within the 7% to 8% range, and we'll have to look and see based on the awards that we have where it falls out within that. But general direction is going to be downward slightly.

Okay. Thank you very much.

Okay.

Michael Lewis, Lazard Capital Markets.

Thank you, and congratulations on AMBIANCE, a really strong sole-source win for you. And along those lines, funded backlog, what proportion of AMBIANCE was included in the funded backlog number this quarter?

Very, very little. The award had maybe less than $10 million in funding as we start looking at initial ramp-ups. That'll happen in Q4 and Q1 of next year.

Okay. With regard to the ramp, when do you think you'll be fully staffed on that? Will that be completed by the end of Q1?

Either -- this is Bill. Either by the end of Q1, or more likely somewhere in Q2. But based on experience of standing up similar large programs, it takes a couple of quarters to really get everything working together and stood up the way it will be in the long term.

Okay. And Bill, if I may, with regard to subcontractor content on the award, what proportion of this contract do you think you'll be able to keep in your own direct labor?

Well, clearly we -- our goal is to keep as much as we can. We're aiming for about 50% ManTech labor over the life of the contract.

Okay. And just one more question to shift gears for a second. I wanted to get an update on the protest, the ILSS Global Property. Do you have any additional information on that, where that stands right now?

Yes. It's Kevin. Two things, and I'll hand it over to Lou. One is there's been and was a decline in the overall requirements for that contract that was protested. That's part of the reductions we are seeing in the maintenance- and logistics-related activity. Sometime in late Q3, we actually had a notice that, that protest was not upheld. So we have had a reduction in that work as well exiting Q3. Lou, do you want to speak to that?

Yes. This is Lou. We had that notice. But because of the type of contract that it is, the contract goes right back into if not that area, other areas within the Army, go back into recompete next year. So if we have 1 of the 5 zones-related divisions, 1 of the 5 divisions, we have an opportunity to go back in and recompete.

And if I recall, you maintained about third, that was the Pacific region. And was that a $100 million run rate, or was that the total contract prior to the protest?

That was -- it was a little bit less than that, but it was prior to that.

Okay. Thank you so much.

Mark Jordan, Noble Financial.

Good afternoon, everyone. Question relative to D&A. You said that it would be about $16 million in the fourth quarter, which would imply a pick-up of about $8.5 million to $9 million on a quarterly run rate, I assume related to the cellular business. How long will it take to write off that investment?

The depreciation on that investment currently is going to be running through the end of next year, 2012. So I think that going into 2012, you should expect about $4.5 million per month for the balance of 2012.

Secondly, a couple of quarters ago, you I think scaled the employee base that you had in-theater at about 1,800. Is that still roughly where you are, or was that where you'll be when -- in the first quarter once you've gotten through the Iraq-to-Afghanistan transition? And do you expect that to be relatively level moving forward then?

Yes, this is Lou. I would say that in southwest Asia, Afghanistan, Iraq, Kuwait, other places, we're around 1,700. Most of that right now is positioned in Afghanistan. And it's been the result of some movement in Iraq, where we probably have a 200 people left still. Most of those people are slated to, particularly in the MRAP programs, head to Afghanistan.

Okay. And if you were looking out beyond 2012, as troop levels will probably start declining in 2013 and 2014, how much of that 1,700 is -- would be sensitive to troop level and activity? And how much would be what you call more infrastructure support?

I think it's a little difficult for us to forecast that at this point in time. We don't know how these missions will be assigned and to whom. And whether State Department picks up an identical mission or a redefined mission. And I think we will just have to await some outcome as to what that looks like.

This is Lou. One more thing related to that, because it is speculative. But the Army's putting out major contracts that would be worldwide, that would be competed on in the next year or so. And so, the ebb and flow, the tempo of the work, may also be impacted by that. And so these would be new contracts in the area of supply chains, supportive group clearance vehicles, and maintenance transportation, which would be a 5-year contract called Eagle, which would be out next year. So we'll be able to bid on worldwide contracts.

Okay. A final question if I may. You've had obviously success in the third quarter on new-business awards, lot of new business awards in the pipeline. Has the ratio of your existing business that is maturing and going away, has that changed with the tighter budget?

No. I haven't seen -- we haven't seen any change in the requirements on our existing work that would reduce that, other than those that we mentioned in terms of the timing and transitioning of personnel between Iraq and Afghanistan and some of the logistics work. But it's not like they've had a decline in requirements outside of the logistics side, which is the Global Property piece.

Okay. Thank you very much.

Brian Kinstlinger, Sidoti & Company.

Great. Just one clarification. First, you mentioned next year double-digit revenue growth. So that suggests double-digit organic plus WINS, which is another 4% of revenue. So we're talking about total revenue growth of low teens to mid-teens?

Generally, we include when we do organics the acquisition's prior-year revenues in doing our comp. So when we look at double-digit, that would include the WINS revenues in 2011 in the base. So it's still going to be in the low double-digit range as we see it today.

I see. And can you talk about the procurement cycle and how it's been impacted in the past from election years and maybe give us a sense for how you think today is the same or different than some of those past election years?

I'm not sure the election year itself is a real factor at this point in time. It's more the capability of the Department and their acquisition staff. They are significantly understaffed, and I'm not expecting to see political issues there.

Okay. And then there's been a lot of discussion that the government would issue recompetes at lower prices as part of their cost-cutting efforts. Was there any evidence this quarter of any more pricing pressure than, say, a year or 2 years ago?

I would say that in some of the competitions, there is some margin pressure that we're anticipating going into 2012. Having said that, some of the areas that we bid in, looking at Bill's win as an example, aren't impacted. So a lot of it is supply and demand, and a lot of it is the availability and ability of other competitors to bid. So generally yes, but not in all areas of our market.

And can you remind us on countermine, is that a cost-plus contract? And what's your expectations? Will there be modest pricing pressure to whoever the winner is? Or do you think you can keep the margins on that, should you win it, equal to where they've been in the past?

It's a combination of time and material and cost-plus. Material parts are largely cost-plus in nature and have no fee associated with them. And going into next year, the competition is a mix of cost-plus and TM and -- fixed price, I'm sorry, with the majority of the work, or a higher percentage of the work, moving to cost-plus. That will have some impact on the margins going into next year, which is why we're building into slight compression in our returns.

Got it. And then over the last two quarters, your revenues dropped from its peak. At the same time, your costs have come down substantially, both on direct costs as well as your overall SG&A. Talk about where the cuts are. Are they people, are they subcontractors? What has allowed you to augment those -- your costs?

I'll speak to it and let any of the Presidents who want to add. Generally, on a direct-cost basis, obviously if you're supporting a program and there's a change in the requirements, the revenue and direct costs will change consistently. I think that we've had both a mix of subcontract material flows and labor. We think the labor is more of a temporary thing as we have bids outstanding, as well as some of the subcontractors like Bill had mentioned when we get the win. We, ManTech, look at our indirect structure, very much focused on what we can afford to deal with, what the returns are expected to be. And if we have to delay initiatives or try to streamline things, we're very adaptive in that regard.

Do you have more -- do you have less people, though? Have you cut personnel?

Yes. We have reduced personnel as required in the past and will do so in the future.

Great. The last question I have is in free cash flow. It's been excellent over time. Particularly in this quarter, it seems that working capital increased, and I'm wondering is that a function of your new covenants, or is that just a seasonal situation where payables went down so much compared to receivables and correct itself in other quarters?

It's more seasonal this quarter. We had a heavier outlay of cash for payables. So it's just more timing. And we had more payrolls this quarter than prior.

Great. Thank you very much.

Tobey Sommer, SunTrust.

Wanted to get your thoughts on the acquisition environment. You've just done a nice acquisition here. But are you seeing more out there on the horizon, and what are multiples looking like as well?

In terms of -- we see quite a few acquisition opportunities, and we expect we will see the same level as we have in the last year. But we're very selective, so we were only able to accomplish the 1. But there are a lot of companies, very good companies, out there that are for sale, large and small.

Okay. Great.

It's Kevin. In terms of the multiples, it's very much dependent on the business and its positioning, the contract vehicles, and the budgets that they're basically in.

And if you could remind us the exposure to the intelligence and cyber work as a firm. You have, I know, contracts get -- have various content. But if you could characterize it as a percentage of revenue and your view on the growth rate going forward there?

We don't split out Intelligence in total, Cyber's about 7% of ManTech's total revenue and has been a critical component of our growth. Bill, do you want to talk about its presence?

Sure. Cyber has been about 7% consistently. Intelligence is much greater than that, of course. But we do expect a level of cyber spending to continue to increase as we go forward.

All right. Great. Thank you very much.

Bill Loomis, Stifel Nicolaus.

Hi, thank you. Just on the AMBIANCE program, you mentioned margins will be at or above current average over the life of the contract. Is that true on the first year in 2012, as well?

Yes, it'll be consistently applied.

And how much of -- is $400 million, or is there a higher amount in your bookings you announced -- the amount you announced in the quarter?

The contract award was over $400 million, but it's -- $400 million is within the range, say, between $400 million and $450 million, closer to the $450 million range in terms of the overall bookings.

Okay. And then on the S3 contracts, it looks like the amount of S3 work was down sequentially by about 20 or down sequentially slightly and more from what we were estimating. What happened? What's going on in that quarter -- I mean for S3 in the quarter?

That's -- the S3 component is where we had some of the reductions where we were a sub-position that took our overall S3 position down. And we expect to make up for that in prime positions as we go into 2012 based on Q3 and Q4 awards.

Okay. And then do you expect that trend to continue in terms of that S3 work declining in the fourth quarter, as well? Is that part of the revenue guidance?

Our guidance reflects the some of the reduction in that S3 part, but it will be ramping up into Q1. So for Q4, yes. For Q1 next year, probably reversing back towards a higher growth pattern.

Okay. And then on the MRAP support business, it sounds like that's going to be most of the dollar amount going in the fourth quarter in terms of the decline. Can you just tell us what you -- what the range? Normally, you would give us the year, but we only have one quarter left, so --

We're still expecting about $550 million. I don't see a significant decline in the MRAP work in Q4. The other declines are more the other property and maintenance work that we're dealing with some of the sub-positions in Iraq. So it's not as much MRAP support as other activity.

Okay. And then on the pricing, you mentioned some pricing pressure going to 2012. What -- to what extreme, because obviously you guys have done a great job on your margins. You're near the upper end of some of your peers. But if you're larger contract, CLSS, when it's recompete, it's lower margin. Then we're seeing lower pressure on other areas. When you say 7%, 8%, obviously, if it's closer to the 8%, that's pretty much what you have in 2011. Do you think it's the lower end's more realistic, or do you really think it could be at the upper 7%, with cost-cutting offsetting that in 2012?

Broadly, I think the overall returns will go down. The level, though, they go down is very much dependent on the amount of awards that we have, the $7 billion, the timing and adjudication of that and just how effectively we're able to ramp up those programs. So I think it would be better to wait until we give guidance for 2012 as to within that framework where it ends up.

And then the awards you have outstanding, is that a comparable number, the $7 billion? Is that a comparable number to the $2.9 billion you gave in second quarter?

Yes.

And what was the bulk of the increase? Was there any particular bids that drove the bulk of that increase?

We have a large number of new awards that we were submitting, as well as the MRAP procurement. So it's a combination, with over two-thirds -- or about two-thirds of that being new efforts that we're going after.

Okay. But outside of CLSS, nothing material, no 1 or 2 big jobs driving the rest of the increase?

No.

Okay. Thank you.

Gautam Khanna, Cowen and Company.

Yes. Perhaps I missed it, but did you mention when you expected CLSS to be awarded? Is it November 15, or is it pushed out?

This is Lou. The award date is January 27.

January 27.

We would expect between now and then, the government would bridge the contract so that they could adjudicate properly.

Okay.

Contract end date is in December.

Got it. Thank you. Just a follow-up, Kevin, to your opening remarks about the guidance reductions and the piece that you just mentioned with Bill on the S3 side, where you declared your intention and the prime took some of that in house. Is that isolated to that particular task order or what have you, or is that a more broad trend you're seeing as you bid more and more, the $7 billion? Is that an incremental risk to the guidance from here?

No, I don't see it as incremental to where we are. We're 88% prime. There's only about so much additional risk there. And broadly, it's very dependent on the timing of competition, our positioning. And I think it's pretty well laid out for this year in our guidance.

Okay. And just on the --

Kevin talked about it on the S3 contract, but we are seeing it in other areas of our business. I think it's a trend in the marketplace.

Okay. Thanks. Then lastly on the M&A picture. I think it was a year ago, maybe you mentioned that you'd start to see some of these properties come out of the larger defense companies, some of the bigger properties. Have you seen that? Are you seeing it? And should we anticipate in 2012 that you're going to move beyond some of the smaller tuck-in deals and pursue something a little larger?

Yes -- this is Terry. We are still seeing that, but we are seeing also the option that some of these companies are electing to divest off and either keep them as independent activities off to venture capitalists or even into the public market. So we still see that trend occurring. So we expect more over the next few quarters.

And obviously, Gautam, when we look at those opportunities, we're going to make sure that they're consistent with what we're looking for. We're not likely to buy lots more of OCO exposure, and sometimes that's what's being spun out.

Sure.

We have one question remaining in queue at this time. George Price, BB&T Capital Markets.

Hi, thanks. Most of my questions have been answered. But just -- I apologize if I missed it, but did you give acquisition revenue in the quarter? Kevin?

Did not. And having the Q, I think it's from prior acquisition, somewhere around $35 million. But I don't have it off the top of my head. Rough order from the previous acquisitions.

Okay. Okay. And then just something you mentioned in your comments. How much of WINS is small-business revenue?

A majority of it is actually full and open in the DIA SITE contract. It's a very large opportunity for them. They have some small business activity within the Department of State, but we expect the majority of that will continue through the end of its term and likely be competed full and open after that.

And what's the end of term?

End of term would be 2 years roughly. Year-and-a-half to 2 years based on the task of the contract.

Okay. And you don't see risk in the interim of the client at their discretion shifting that away?

No. We don't. When we have gone through this process, they're very well-positioned in their customers, and the business that we have jointly made that Bill attended show a lot of strength in the core markets they're in and basically a very, very strong positioning in terms of their customer relations. It's a very, very good acquisition, very good management team.

Okay. All right, great. Thanks for taking the follow-ups.

And we've had a few more questions come in to the queue. Rob Spingarn, Credit Suisse.

Just to follow up on the countermine compete, did you say how large you expect that to be from a run-rate perspective compared to the current contract?

The general requirements that have been put in the solicitation are fairly consistent with what past support has been.

And what length of time again?

1 year with 4 1-year renewals.

Thank you very much.

Tobey Sommer, SunTrust.

Thank you very much. I just had a question, a different perspective on your acquisition program. In the current environment, as far as the continuing resolution, the budget uncertainty, are you finding that the smaller firms that you may be in discussions with have less visibility because of their size and scope and maybe being boxed out and losing some market share to larger competitors like yourself that may be better suited to bid on some of the things out in the marketplace currently?

I don't know exactly how to answer that. I don't see them being hurt. There may be a little bit of a concern on their part as to whether the funding is there and that type of thing. But I don't see the current environment giving them a disadvantage.

So you don't see any kind of bell curve or -- excuse me, a barbell, where there's not a lot of opportunities for those firms to navigate well in the current contracting environment?

I don't think -- I think it's very much -- that's dependent upon the individual companies and the sector that they're in. So I don't see the small businesses being hurt, if that's your question.

Yes, okay. Thank you very much. Appreciate it.

Brian Kinstlinger, Sidoti & Company.

Thanks, sorry. You had mentioned that the quarter's off to a strong start in bookings. Can you share with us how much in bookings you've been awarded quarter-to-date?

No, we will not provide that. Don't have it to provide. But at the same time, what I'm saying is there's a lot of procurement activity that's being adjudicated, so it hasn't frozen. We've seen a lot of activity and some pretty decent awards, but total dollar value, I think we'll just going to wait and see how the quarter plays out.

Okay. Thank you.

And at this time, there are no more questions.

Robert, given that, I think we'll call the call to an end. Appreciate your help on this call and everybody, thanks for dialing in and asking questions. Obviously, if you have follow-on questions, reach out to us over the next few weeks. Thank you.

And this does conclude today's conference call. We thank you for your participation, and have a wonderful day.