ManTech International Corporation
Q2 2019 Earnings Call Transcript

Published: 1 Aug 2019

[Operator:]

Ladies and gentlemen, good afternoon, and welcome to the ManTech Second Quarter Fiscal Year 2019 Earnings Conference Call. [Operator instructions] As a reminder, this conference call is being recorded.I would now like to turn the conference over to Stephen Vather, Vice-President, Corporate Development and Investor Relations.

[Stephen Vather:]

Welcome, everyone. Thanks for participating on ManTech's second quarter call. On today's call, we have Kevin Phillips, President and CEO; Judy Bjornaas, Executive Vice President and CFO; as well as Matt Tait and Rick Wagner, our two 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 risk 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.With that, let me hand the call over to Kevin.

[Kevin Phillips:]

Good afternoon, everyone. I'm pleased ManTech’s strong performance in the second quarter. We delivered another quarter of healthy organic revenue growth, improved profitability and remarkable cash flow. Additionally, business development efforts continued to generate strong new business awards and retention of recompetes.Our people first and foremost, combined with our differentiated capabilities, innovation and reputation for strong program delivering are the steadfast drivers behind the success. Our energy remains focused on ways to attract, train and retain talent necessary to meet customer mission requirements. We continue to make concerted efforts to invest in our workforce with a particular focus on the re-skilling towards areas of robust demand.Despite a very competitive labor market, we are seeing a strong ability to attract talent to ManTech. Furthermore, an increasing percentage of new hires or referrals from our own employees. This, coupled with the accolades we have received from a number of well recognized institutions demonstrates our position as an employer of choice within the industry.I am pleased to report that collectively all of these efforts are increasing the speed and security of bringing talent and support from our customers ManTech is well positioned where customer demand is exhibiting strong and sustained growth.In the quarter, we won 657 million of contract awards, resulting in a book-to-bill of 1.2 two times. Contract awards drove total backlog to increase 11% year-over-year to $8.6 billion and funded backlog grew 15% to $1.5 billion.Matt and Rick will go into further details on our contract awards, but I wanted to highlight a couple of key statistics in our bookings. First, over 50% of the awards in the quarter represent new work for ManTech. Nearly 60% of the awards were for Cyber and I.T. and approximately two thirds of the awards came from classified customer. What is clear from those statistics is that demand for our differentiated solutions and innovation is evident across the federal market and our customer set.Long term, customer appetite for technology modernization, full spectrum cyber, agile development and digital engineering solutions remains healthy. As a result, our opportunity pipeline remains well over 20 billion. That said, in the quarter proposal submissions were lighter than expected due to timing of near-term opportunities, many of which have started to be released in this current quarter.We continue to see strong, near-term opportunities, and expect a strong level of wholesale submissions similar to that of last year's level. At quarter end, we had over $4 billion in proposals outstanding even after a solid awards quarter. We are seeing awards occur at a reasonable pace, but somewhat choppy from a timing perspective. Our focus remains steadfast on capitalizing on an opportunity rich market, by delivering thoughtful solutions and leverage our broad portfolio of differentiated capabilities across the federal market.Now to the the current budget environment. Last week, the administration and Congress announced the agreement of a new two-year budget deal known as the Bipartisan Budget Act 2019. The deal sets National Defense spending for government fiscal year 2020 at 738 billion representing a 3% growth from the prior year. Federal civilian or non-defense spending was set at approximately 632 billion, representing over 4% growth year-over-year.We are encouraged by these developments, but with too much left in the current fiscal year remain vigilant on the timing and passage of the appropriations bill. We believe that it is likely that a short, continuing resolution may be required to sort out and finalize the details.Before I turn the call over to Judy, I want to call your attention to the recent announcement of adding Peter LaMontagne to our Board of directors. Peter currently serves as the CEO of Quantum Spatial and previously served as the CEO of Novetta Solutions and Paradigm Solutions. He began his career in government services at ManTech serving in several capacities to include as a Corporate Officer in the early 2000s. I'm excited to have Peter on the board and there's no doubt we will benefit from his energy and expertise.Now Judy will discuss the details and specifics of our financial performance and outlook. Judy?

[Judy Bjornaas:]

Thanks, Kevin. The results exceeded our expectations in the quarter and we are pleased with the team's focused execution. Revenue for the second quarter was $537 million up 9% compared to the second quarter of 2018.Revenue growth in the quarter was evenly split between organic and acquisition revenue. Direct Labor also kept pace with our top line growth. For the quarter, prime contracts represented 89% of our revenue. Contract mix was approximately 69% cost plus 20% fixed price and 11% time and materials.Operating income for the quarter of $33.3 million was up 18% from the second quarter of 2018. Quarterly operating margin was 6.2% a 40 basis point improvement year-over-year. Margins in the quarter benefited from lower than expected indirect costs, strong award fees as well as some onetime items.Net income was $24.2 million and diluted earnings per share was $0.60 for the quarter, up 22% and 20% year-over-year respectively. These increases were driven by our revenue growth and improved margins.Now on to the balance sheet and cash flow statement, our balance sheet at quarter end showed $6 million in cash, and $44 million of debt. During the quarter, we generated $76 million of cash from operations or 3.1 times net income. My thanks to the team and their dedicated efforts to drive DSO to 66 days in the quarter, which represents a four day improvement sequentially.Cash collections are now fully recovered from the impact of the government shutdown in Q1. Lastly, the board has authorized us to maintain our current quarterly dividend level of $0.27 per share to be paid in September.Now onto our revised 2019 outlook, compared to our previously communicated guidance, we are maintaining the range on revenue while narrowing the range for net income and diluted earnings per share.Expected revenues continue to range between 2.13 and 2.21 billion, which represents a 9% to 13% total growth compared to 2018. The revenue range maintains a 7% organic growth rate at the midpoint of guidance. We continue to have high visibility for the balance of the year, achieving the higher end of the revenue range will be contingent on the timing and pace of material procurement as well as the timing and ramp of our recent and any new contract award.And for profitability, we are on track to deliver our targeted margin improvement of 10 basis points for the year and expect an operating margin of 5.9% for 2019. Embedded in the margin guidance is an expectation that second half margins will be moderated by an increased level of ODCs, incremental bid and proposal spend, as well as increased fringe in the fourth quarter.At the bottom line, we are increasing our net income guidance to between $91.6 million and $95 million and diluted earnings per share of $2.28 to $2.36. Built into our guidance, our full year effective tax rate of 25.7% and a fully diluted share count of 40.2 million shares.Now the cash flow items. We still expect capital expenditures for the year to be up to 3% of revenue. This is to support our managed services contracts, internal infrastructure investments as well as facility improvements and expansion in support of our recent contract awards.Related depreciation and amortization is expected to be approximately 2.5% of revenue for 2019. We are nudging up our cash flow from operations estimate to be between 1.5 times and 1.8 times net income for the full year.Now Matt will speak to our defense and federal civilian businesses.

[Matt Tait:]

Thanks, Judy. I am pleased to report that MSS retained several recompetes in the quarter. We want a five year contract totalling $92 million with the Army CECOM SEC Software Engineering Center to provide software engineering and sustainment support to tactical communications systems.ManTech also retains its position on a $325 million multi-award IDIQ with the Department of Homeland Security to continue providing the Science & Technology Directorate with scientific, technical and programmatic support.Also in Q2, we opened a cyber center in Orlando to deliver advanced cyber capabilities for current and future requirements from Army PTO shrine [ph]. ManTech was awarded a three year OTA for 21 million with the Army for continued development of the persistent cyber training environment for next generation cyber warriors.Lastly, I am pleased to welcome John Boyle to the team. John joins us to lead business development efforts for the MSS Group, which spans the defense and federal civilian markets. He has deep knowledge of our customers and an extensive record of driving growth. I look forward to working with him closely to capitalize on the strong market opportunity.Rick over to you.

[Rick Wagner:]

Thanks, Matt. I am pleased to report that MCIS has also had a great quarter. We won a new seven year $279 million contract with an agency of the Department of Defense to provide cyber and enterprise IT services. We continue to see very strong demand for our cyber capabilities with existing and new customers, particularly with Cyber Command given a number of recent awards. This $279 million award along with MSSs cyber OTA win continues to demonstrate the differentiation of ManTech's compelling Cyber Solutions Offering.Additionally in the quarter, we won over $150 million of primarily sole source contract awards to deliver cyber, IT, systems engineering and mission operations solutions to a variety of health intelligence community customers.On the operational front, our focus remains steadfast on ramping our recent contract awards and execute execution excellence across our programs. We remain on schedule in ramping our large Department of Defense agency contract that was won in mid-2018.In summary, ManTech is well-positioned to continue maximizing value for our customers employees and shareholders. We remain focused on capitalizing on the strong market opportunity that remains in front of us. With that, we are ready to take your questions.

[Operator:]

Thank you. [Operator Instructions] And our first question will come from the line of Tobey Summer with SunTrust. Your line is now open.

[Tobey Summer:]

Thanks. I think you mentioned the award activities something you've got -- got pushed out a little bit. Could you comment about your expectations for the final federal fiscal quarter [Indiscernible] in the pace of award activities? Thanks.

[Matt Tait:]

Yes, Kevin. I'll go for the second half of the year. As I mentioned that we're expecting a strong proposal volume for the full year, the March prior year and that is what we basically communicated for the year, that loaded into the second half a little bit more than Richard expected now. Most of the work that we're doing is going after this year is new, and there's a lot of certainty about those opportunities, but the timing has shifted just a little bit. So we expect between the third and the fourth quarter, a heavy proposal volume throughout the balance of the year.

[Tobey Summer:]

And with respect to the potential for a C.R. Is that the fact that we're coming off a two year budget, we have a spending agreement. Is there – does it represent the same kind of boogey man that it has in the past or would with a C.R. for a period of time kind of not be as big an obstacle to contract awards etcetera.

[Kevin Phillips:]

Yes, well I’ll say that the agreement that was negotiated is actually really really good news. That's how we view that, because it does clear through a lot of the sequestration issues and it provides a continuity of normal procurement order. When we're talking timelines here, this is a matter of a month maybe two. It's just getting the markups complete. So we see this as a very minimal issue. It's just a lot of get to get down to September, it might lead over into October.

[Tobey Summer:]

Could you give us a comment on your expectations to be able to leverage your services in the Kforce acquisition that you consummated recently, and how long it might take before you get some tangible results from those efforts?

[Matt Tait:]

So this is Matt. So with the integration with KGS is going well. Culturally, it's a great fit. They also have a lot of veterans just like us. So very much focused on the mission and we do anticipate us to meet half the business case that we've put forth around the KGS integration, so we are excited about the T4NG focused for us, and the pipeline that we see coming.

[Tobey Summer:]

Thank you very much.

[Matt Tait:]

Thank you.

[Operator:]

Thank you. And our next question will come from the line of Matt Sharpe with Morgan Stanley. Your line is now open.

[MattSharpe:]

Good afternoon. Nice quarter. I just wanted to touch on revenues here real quick. So the 9% year-over-year growth maybe you could break that down between what was organic and how much KGS contributed fourth quarter?

[Judy Bjornaas:]

Yes, it was about half and half organic and inorganic.

[MattSharpe:]

Okay. And then so based on the first two quarters it appears the company has I think it's about a 14% implied growth rate in the back half of the year to hit the midpoint of the guide. How should we think about the cadence? Are there any specific step functions or programs ramping up in the back half that may make some uneven growth?

[Judy Bjornaas:]

as you say, there's definitely to be a step up in the second half. I think we start to see some of that definitely in Q3, as we start ramping the programs that we won in Q1 and Q2 particularly the contract that Rick discussed that will be a matter of how quickly that gets ramp will be a matter of how quickly clearance transfers can occur. So that's the driver as well as other new business. And then, the large COD managed services contract that had the 18 month ramp that continues to ramp over the course of the balance of the year. And then, material procurements we tend to see more of those in Q3 and Q4 and those it's hard to predict exactly when they'll come in.

[MattSharpe:]

Got it. Thanks. And then just on the pipeline, I was hoping that you guys might be able to just give a little bit of color around whether there's any needle movers in there over the next say six to 12 months. And anything we should be watching for?

[Kevin Phillips:]

Yes, it’s Kevin. There is some large volume of work again for the balance of this year, a majority that is new and there are some sizable activities in there we can't guarantee that we win them all. So I think it'd be better for us to wait and see how those play out and our ability to be successful on them as to what that that means. But generally over the last two years, if we look at our internal target of $100 million or above, we have more proposals, we expect to submit above $100 million than we did two years ago. And we're just excited about where we are on the market.

[MattSharpe:]

Got it. Thanks.

[Operator:]

Thank you. And our next question will from Gautam Khanna with Cowen. Your line is now open.

[Gautam Khanna:]

Yes. Thank you, Gautam Khanna here. Good quarter, first and foremost. Judy, you made a comment in the – in your prepared remarks about some of the ODC activity picking up in the second half. But I just wanted to maybe just aggregate the 6.2% reported EBIT margin in the quarter. I mean, was it kind of unusual in terms of -- it just seems like you're on pace to maybe do a little better than the guidance implies in terms of EBIT margins just…

[Judy Bjornaas:]

Yes. I think. So there is definitely a couple of factors with that margin in Q2. A big driver as I mentioned in the comments was indirect rate coming in lighter than we expected, fringe was a little bit low. That will pick up especially in Q4 that gets high, as well as beating proposal cost was a little bit lighter as Kevin talked about some things slipping into Q3, but now currently being worked. So indirects will definitely be higher in the second half than the first half. We did have a really strong award fee quarter. And then, there were some onetime items but I would say that's probably less than a third of the differential.

[Gautam Khanna:]

Okay, now that's helpful. Very helpful. And speaking to the bid and proposal activity, do you anticipate Q3 will have a bit of a Budget flush for bookings or your expectations tapped down just given this slide to the right on some of the adjudication time that you've already seen?

[Kevin Phillips:]

Gautam in a majority of the customers, I think there are two years into a strong budget cycle and have a continuity. So I think that the -- my general view is that the quarterly year-end flush maybe on procurements, but less on awards. And then we still have to clear through the protest periods that they is cyclical cell, so I'm less focused on the timing within the quarter. So the second half and what we accomplished in the second half full.

[Gautam Khanna:]

Okay. And then I was wondering if you could maybe comment on the M&A pipeline as it stands right now. Are you seeing anything of consequence that's closer at hand?

[Kevin Phillips:]

There's a normal flow in M&A at this time of the year it kind of drops a little bit, but very excited about what's out there. And I would say that that it’s the normal flow we are very selective about what we look for based on the market focus that we have. And I expect for the balance this year, they will still see a strong flow for opportunities to acquire.

[Gautam Khanna:]

Okay. And just one last one Kevin, just for the finer point on your earlier comment, I think it was last quarter you thought maybe Q2, Q3, Q4 would have similar bookings, would it be dramatically skewed one quarter to the next. Is that you're still feeling like December could actually be a pretty decent in the seasonal trend.

[Kevin Phillips:]

Yes, I think this upcoming Q4 just based on the timeline of everything is still going to maintain a healthy option or potential for success in the fourth quarter of this year.

[Gautam Khanna:]

Okay. Thank you so much I appreciate it.

[Operator:]

Thank you. And our next question will come from Edward Caso with Wells Fargo. Your line is now open.

[Unidentified Analyst:]

Hi. It's Justin Finnerty [ph] on for Ed. Thank you for taking my questions. Can you talk about the hiring environment and in your plans maybe over the next 12 months? And have you seen any significant changes now that NBIB [ph] has reduced its backlog by about half.

[Rick Wagner:]

Yes. This is Rick talking. I think the -- the higher environment is it still remains difficult in some of the areas that we're looking at like cyber, but we're seeing very strong hiring across the board and we're putting a lot of investment into that. I think just by three areas that our focus on mission very much attracts people. The recent investment in technology we've made around cloud, automation, analytics is really starting to draw people into the company.And the third piece is that we're investing a lot in our managers to create engaging with employees, and that's starting to drive more employee referral. In terms of security clearances, they're reducing the backlog. I think it'll still be a little bit of time before we see a major change in terms of the amount of people available through that though. But they are making progress and so that looks good.

[Unidentified Analyst:]

I appreciate the color there. And then my one follow up is given some of the new managed IT service contracts that you've taken on over the past 18 months here, are you getting higher margins on those to kind of offset the additional asset intensity?

[Judy Bjornaas:]

Yes. I think we will over the life of the contract. I think going into the contract there's a lot more startup and making sure things are getting in the flow appropriately so. So in the first year or so of those contracts they tend to not be as profitable and then move up towards higher margins over the life of the contract.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. And our next question will come from the line of Rob Spingarn with Credit Suisse. Your line is now.

[Robert Spingarn:]

Good afternoon. I had a couple of questions. One for Kevin. One for Judy. Judy, may we'll start with you. Just on working capital, you gave your cash flow guidance. What are some of the trends in working capital and is there some opportunity on DSOs long term. And then Kevin for you, I just wanted to get a sense of the latest on LPTA versus best value where you see those trends heading these days? Thank you.

[Judy Bjornaas:]

Yes, so on your first question on working capital, I think given our current customer mix, I think mid 60s is probably the best that we can do near-term. We are pleased with the improvements we've made since the end of last year, and that really is the one thing that kind of drives the cash flow as DSO goes up or down a couple of days.But, I would say our target right now is the mid-60s to low 70s depending on where we are with the government. Budget cycle, we tend to see a little bit of a spike at the end at the end of our calendar year. Their -- their first quarter as paperwork is still working through the system.

[Kevin Phillips:]

[Indiscernible] is definitely a best value procurement environment right now, it is not an LPTA environment. People are looking for innovation. They are looking for solutions. They are looking for paths to provide the current technologies. And that's in large part based on the National Defense Strategy and the mandate to do that. And I think that's a good time for our entire sector. And importantly, for the government we're going to be fully supportive of that.

[Robert Spingarn:]

Okay. And then just as a follow up to that, have you found that the environment, the competitive environment has been impacted at all by these big mergers that we've seen around you. So I'm not talking about the more strategic M&A that you've been doing. But these larger companies, or are they just going for giant contracts. It doesn't really necessarily impact you.

[Kevin Phillips:]

The customer and how they procure is what matters to us. And being positioned to go after those things that we're worried about, and making sure we can compete on the playing field. So for the majority of procurements out there, I think that we're in a good position to compete with other larger companies if they do a super bundling of things. Some of those may or may not be things that we would go after, just based on the overall profile, but that's a very selective set of procurements. I don't see that as a restriction on us by and large for our strategy or our focus.

[Robert Spingarn:]

Okay. Thanks for the color.

[Operator:]

Thank you. And our next question will come from Joe Donato with Stifel. Your line is now open.

[Unidentified Analyst:]

Hey guys this is John on for Joe. Just want to say good quarter, and when you think about growth in the various markets, where are you kind of seeing the most growth, and how does ManTech’s capabilities align to that growth?

[Kevin Phillips:]

I’m Kevin. I'll say something and add there to say and weigh in. So start with cyber is a domain of conflict. It is a growth area, because of the maturation of that and the concerns within the federal government around that. So that's pretty straightforward based on the national defense strategy, and where things are headed. Within that our focus on cyber is now an important factor of all things IT, and so that's the benefit and you see that some of the things that we've spoken about and with that I'll hand it over to Rick and Matt to weigh in.

[Rick Wagner:]

Yes I think in the intelligence community, obviously cyber is a big portion of our growth there, but also IT monetization as they move to the cloud and as they work towards automation, that that's creating a lot of additional opportunity for us as well.

[Matt Tait:]

And I would say as you know as a national security focused company like the areas where that budgets are aligning right in are our strengths. So when we talk about things like bringing digital to the mission in ways that other others are not, we're seeing that alignment right now in the budget.

[Unidentified Analyst:]

Okay. And given this -- the focus of IT and cyber modernization and the broader macro trends of the federal government, where should we kind of focus our attention for ManTech to perhaps outperformance their peers. Is it going to be in the civilian side in cyber, where is the real opportunity for ManTech to kind of leverage its really strong capabilities better than some of its peers in the government service industry?

[Kevin Phillips:]

There are a lot of opportunities out there so we are very excited about where we are on the market in terms of whether we outperform or not. I think that's all based on how well we positioned ourselves collectively, and go after the market each opportunity. So, I just think that the market is positive for those of us in the sector, where we're focused right now. And we certainly hope to be competitive in all that we do.

[Unidentified Analyst:]

All right. Thank you guys.

[Operator:]

Thank you. And our next question will come from the line of Brian Kinstlinger with Alliance Global. Your line is now open.

[Brian Kinstlinger:]

Great. Thanks. Just one question. I was hoping you would comment on revenue guidance. I was a bit surprised that it wasn't adjusted given the 2Q bookings were later than you expected and it sounds like 3Q will be solid on procurements, but also again later on bookings, which means you're not ramping some of the work you may have thought. So maybe talk about how confident you are at the midpoint. It sounds to me the high point is not what you're thinking, but it's still an acceleration at 8.5% organic growth, so maybe you can talk about how confident you are with that?

[Judy Bjornaas:]

Yes. I think we have really high confidence. I think we've got at the midpoint more than 90% of that is already in backlog. So it really is just a matter of like I said that the program that Rick talked about how quickly those people get onboard. We did win some other new programs in queue to the new business that we do have out there as Kevin mentioned, it's a very light recompete year for us. So the bookings that we expect for the balance of the year, I think we'll continue to be potentially 50 plus percent new work that will add growth. So to me, I think the lower and very, very solid. And then it becomes the ramp and the materials to get above to get to the upper end.

[Brian Kinstlinger:]

Great. Just one follow up if you don't mind. You've talked about the materials and ODCs, does that typically come out of backlog, or is there often times where we won't see that in backlog?

[Judy Bjornaas:]

For the most part, it's in backlog.

[Brian Kinstlinger:]

Okay. Thanks so much.

[Stephen Vather:]

Brian, it appears that we have no further questions at this time. As usual members of our senior team will be available for any follow up questions. Thank you all for your participation on today's call and your interest in ManTech.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. Have a wonderful evening. You may now disconnect.