ManTech International Corporation
Q4 2019 Earnings Call Transcript

Published: 20 Feb 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to the ManTech's Fourth Quarter Fiscal Year 2019 Earnings Conference Call. At this time, all participants are on a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to turn the conference over to Mr. Stephen Vather, Vice President, Corporate Development and Investor Relations.

[Stephen Vather:]

Welcome everyone. Thanks for participating on ManTech's fourth 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 the 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.Finally, on today's call, we will discuss some non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our fourth quarter earnings release.With that, let me hand the call over to Kevin.

[Kevin Phillips:]

Good afternoon, everyone. I'm excited to discuss our outstanding 2019 results driven by ManTech's differentiated market position. We enjoyed another consecutive year of strong and consistent financial performance. For the year, organic revenue growth accelerated to 9%, EBITDA grew 17%, and EBITDA margins expanded 30 basis points. We collected $221 million in cash from operations, and our book-to-bill stood at 1.3 times, placing us on an excellent path for continued growth.I want to thank our talented employees, whose steadfast support to our customers and their missions resulted in this excellent performance. Overall, I am pleased that we are consistently executing, and that our growth focused strategy is maximizing value across all our constituents; those being our customers, employees, and shareholders.ManTech was successful in securing new contract awards throughout 2019 across defense, intelligence, and federal civilian customers. In Q4, we won $413 million of contract awards resulting in a 0.7 times book-to-bill. In the year, we won a total of $2.9 billion in contract awards, a 1.3 times book-to-bill, which provides a solid foundation for continued growth in 2020 and beyond. New business made up approximately 50% of 2019 awards. We exited the year with a total backlog of over $9 billion, up 9%. Our business development success was evident across our customer base in our key capabilities and systems engineering, cyber, IT, and intelligence operations support. Nearly a third of our bookings were on a sole source basis, which coupled with our competitive wins clearly indicates ManTech's customer recognized differentiation.We enjoyed the healthy level proposal submits in 2019 and are on a path to have another busy year on that front. Our qualified pipeline remains well in excess of $20 billion and our proposals outstanding sits at over $6 billion. Our customer's appetite remains strong for ManTech's innovative solutions. As a result, we are projecting strong growth in 2020. Additionally, we recently won a $920 million single award contract. This award combined with our strong bookings in 2019, as well as our healthy pipeline offers us a solid trajectory for growth. ManTech will speak to additional details on this award later in the call.Now, shifting briefly to customer budgets and the market environment, all of our customers are operating under the appropriations enacted in December. With clear funding levels, customers remain focused on speed and innovation of solutions against critical-mission requirements. Last week, the President released this FY '21 budget request, which calls for $705 billion for defense, and maintains the spending level set in the FY '20 appropriations. The request calls for increased funding in cyber, systems modernization, space, autonomy, and artificial intelligence, all areas where ManTech is strategically aligned and well-positioned to deliver innovative solutions. There continues to be strong, broad bipartisan awareness of the threat environment facing the nation, and the required funding to address that. Lastly, government-wide, there is a continued focus on security that is driving policy and actions to defend against threats in the cyber domain as well as in the supply chain.I'm incredibly proud of what the team has accomplished and look forward to maintaining our success. I'm thankful for our customers for trusting us and our people on delivering success on all fronts. Continued customer appetite from ManTech's innovation and solutions is clear. As such, we remain focused on strategically investing in talent and capabilities to preserve and sharpen our competitive advantage.Now, Judy will walk through the details of our 2019 financial performance and 2020 outlook. Judy?

[Judy Bjornaas:]

Thanks, Kevin. I'm pleased to report our strong finish to the year. Our results exceeded the high-end of our expectations across the board. Revenue for the year was $2.2 billion, up 13%, and 9% organically. This growth was primarily driven by new contract wins, growth on existing programs, and our strategic acquisitions. For the fourth quarter, revenue was $604 million, up 22%, and 15% on an organic basis. Strong direct labor growth was evident in both the quarter and the full-year results. Lastly, in the quarter, we enjoyed strong contribution from fulsome ramp ups of our recent contract awards, and an uptick in ODCs.For the year, we performed 90% of our work as a prime, and our contract mix was approximately 70% comp plus 20% fixed price and 10% time and materials. EBITDA for the quarter was $55 million, or an EBITDA margin of 9%. For the year, EBITDA was $194 million, up 17%. EBITDA margin for the year was 8.7%, up 30 basis points from 2018, exceeding our expectations, and more than accomplishing our targeted incremental margin improvement. Net income was $41 million, and diluted EPS was a $1 per share in Q4. For the full-year, net income was $114 million and diluted EPS was $2.83. Net income and EPS for the quarter and the full-year were both up meaningfully compared to the respective 2018 periods as a result of two primary factors

[Matt Tait:]

Thank you, Judy. I am pleased with ManTech Mission Solutions and Services performance in 2019, and look forward to driving the team to another successful year. Throughout the year, we enjoyed success in securing both new business and recompetes. In the quarter, we successfully retained a $67 million five-year recompete, providing scientific and technical support for the Marine Corps Systems Command.Overall, I am pleased with the performance in the year and carrying forward a momentum in 2020 is a key object. As such, we have a sharp focus on driving innovation ahead of customer demand, and ensuring program delivery excellence. Before I turn the call over to Rick, I want to note that we have been awarded a five-year $920 million contract by [Fedco] [ph]. Even though this contract award is not in our Q4 bookings or backlog, given the size of the award, we wanted to make you all aware. The government is currently reviewing the press release and specifics about the program and the objective of the contract will be detailed in a forthcoming press release upon formal approval.Rick, over to you.

[Rick Wagner:]

Thanks, Matt. ManTech Mission Cyber and Intelligence Solutions enjoyed a stellar 2019 particularly in driving growth, pertaining recompetes and hiring differentiated talent. In quarter four, we successfully delivered full operating capability on our large COD enterprise IT program, and fully ramps other contract awards won earlier in the year, keeping our commitments to provide the very best to our customers.We enjoyed the continuation of a number of favorable trends in 2019. There are two in particular that I would like to call to your attention, first, over half of our contract awards came on a sole source basis, and second, we saw increased customer demand on existing programs in the form of significant contract expansions and extensions. The extension helps reduce our 2023 recompete risk within our intelligence community customers [indiscernible]. Both of these trends further prove our differentiation and the value that customers find in our solutions. As we look to the rest of 2020, we will continue to focus on both our customers and our people.For our customers, we remain focused on developing and delivering innovation coupled with strong program execution. On the people front, we have a steadfast focus on growth through recruiting, developing, and retaining highly skilled and differentiated talent.With that, let me hand the call back over to Kevin for closing remarks.

[Kevin Phillips:]

Thanks, Rick. In closing, let me reiterate that we are very pleased with our 2019 performance and I want to leave you with three key messages before we jump into questions. First, the work that ManTech performs is very much at the heart of our customer's mission. We're thankful for their steadfast customers. Second, our talented employees are the source of our differentiation, and as such, growing and developing them has been and will continue to be a key management priority. Finally, ManTech's unique growth story remains very much intact and our confidence is rooted in the strength of our talented people, deep customer relationships, and differentiated capabilities.With that, we are ready to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Gautam Khanna of Cowen & Company. Your line is open.

[Gautam Khanna:]

Hi, thanks. Good afternoon, guys.

[Kevin Phillips:]

Hi.

[Matt Tait:]

Hello.

[Gautam Khanna:]

Hey, just a couple questions on the guidance. First, I was wondering if you could frame the implied organic growth in the sales guidance, and then relatedly, on the new presentation of earnings -- adjusted earnings, what level of intangibles amortizations specifically is contemplated in that, you know, was excluded from that number, just so we can compare apples to apples?

[Judy Bjornaas:]

Yes. So, the first question on an organic basis, it is -- we did one acquisition at the end of Q1, and we did one acquisitions in mid Q3, and they were both relatively small. So, the total inorganic growth from '19 to '20 is about 1% or so, and then, as far as the intangible, in 2019, it was about $20 million of the intangibles that you can see in the press release, and we think -- yes, it's going to be relatively similar to that in [2021] [ph].

[Gautam Khanna:]

Okay. So, it's about $0.40 or so, is what the rough math would work out to be…

[Judy Bjornaas:]

Yes.

[Gautam Khanna:]

Okay. And then, on the $920 million contract win, could you talk a little bit about, can you say anything about it as a cost plus, as a time -- you know, sort of the margin profile, and how quickly it might ramp in 2020, sort of what the contribution is, or you know, what the transition is to ramp that program?

[Matt Tait:]

Sure. Hey, Gautam, it's Matt.

[Gautam Khanna:]

Yes.

[Matt Tait:]

So, the one thing that we can say about the contract is similar to our other large contracts, and we expect this to ramp over an 18 to 24-month period. So, that's the expectation there. It's about all I can answer on your question there. So, hopefully that helps.

[Gautam Khanna:]

And then, may I ask a different one then, perhaps on -- was it a Greenfield project, or was there an incumbent and therefore, might there be a protest, and might there be an extended transition to that 18 to 24 months?

[Kevin Phillips:]

Yes, it's Kevin. Look, we're near the end of the evaluation award and then protest period on that, which is why we're communicating it. It could be protested. To our knowledge, it has not been yet, but we're in a timeline where it's important for us to communicate to you this award, given its size, so it's possible, to our knowledge it has not yet been protested.

[Gautam Khanna:]

And is it new work to the industry, or is it -- was there any comment?

[Kevin Phillips:]

Yes, it is. For the most part, this is mostly new work for us.

[Gautam Khanna:]

Thank you very much, guys.

[Kevin Phillips:]

Thanks.

[Matt Tait:]

Thanks, Gautam.

[Operator:]

Thank you. Our next question comes from Edward Caso of Wells Fargo. Your line is open.

[Edward Caso:]

Hey, good evening. Congrats on a nice print here. I'm curious, Kevin, and your thoughts on the timing of the budget decision for '21, given the election, I've heard some say early, some say CR until after, just curious your thoughts?

[Kevin Phillips:]

So, my view is the authorization process will work in, call it, regular order. The appropriations process, though, may get hung up into a CR after the election simply because of the timing of decision from funding. It could move earlier, but my general view is authorizations will move quickly, appropriations may be delayed.

[Edward Caso:]

Can you talk a little bit about employee attrition here, a voluntary attrition?

[Kevin Phillips:]

It's been running fairly consistently for the last two years. It's important for us to spend a lot of time and energy on that. I would say that the market continues to be very robust for talent. We are all working towards two things in the company, investing in retraining individuals into these future careers, and extremely in the market making sure that we provide competitive packages to attract the talent.

[Edward Caso:]

Can you remind us how much percent of total you have of your employee base in the greater DC area, and how much outside, and if you could make that attrition comment for those two geographies?

[Kevin Phillips:]

I don't have the two geographies in my head, a little over half of our employee base is in the region, and I think it's competitive everywhere. It's a matter of our customer's ability and willingness to distribute the workforce based on where people want to work and live, and there's a active discussion as you know, that has happened with industry and our customers on that.

[Edward Caso:]

Great, thank you.

[Kevin Phillips:]

Thanks, Ed.

[Operator:]

Thank you. Our next question comes from Joseph DeNardi of Stifel. Your line is open.

[Joe DeNardi:]

Yes. Hey, good evening. Kevin, I think the growth rate that you guys are generating continues to surprise investment community, maybe it's not surprising you all, but certainly surprising us. Can you talk about what you think is driving that, is it better win rate, the alignment? They're just more coming to market, and then, when you look at what you expect to bid on this year, you win kind of your fair share, does that sustain the growth rate kind of continuing into 2021, or does the budget environment start to moderate growth? Thank you.

[Kevin Phillips:]

That's a lot of questions. So, I'll make sure I can wrap that. The FY '20 and '21 budgets that got cleared through, in my view allow us all a pathway into a two-year budget cycle, and I think the customers have fair certainty for '20 around what they need to procure, and they're procuring in a regular, if not rapid pace, depending on the type of work. Customers are looking more for speed. They're looking for innovation, and those are areas that we've been focused on because we generally view the global threat environment is driving different behaviors in the customer. We're investing towards where we think that and have been toward where that's headed, and I think that along with the capabilities that we have around cyber, IT, some of the analytics capabilities and intelligence operations support provide us a good placement in the market at a point where there's a greater demand.

[Joe DeNardi:]

And then, it's kind of to date with it, within the government fiscal year, are you seeing customer behavior, procurement activity accelerate, slow down, and what's your expectation for what the election cycle means for their procurement environment? Thank you.

[Kevin Phillips:]

Procurement activity is heavy. Timing of awards is uncertainty, but procurement activities' heaviness is expected to be at or above last year's levels.

[Joe DeNardi:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Tobey Sommer of SunTrust. Your line is open.

[Tobey Sommer:]

Thanks. So I wanted to ask a question about contract type, is -- are there any changes in your mix of new wins, or maybe in your backlog or pipeline that could, inform what the future margin profile of the firm looks like?

[Judy Bjornaas:]

Yes, I mean, today, we haven't seen either our backlog or the wins of significant shift. We do continue to hear discussions around leading towards more solution-based contracting, which I think is helping on the margin side and seeing a little bit more movement on potentially the DoD side to move towards a little more fixed price, but today that has not flowed through all the way to backlog and performance.

[Kevin Phillips:]

Yes, I think what else is seen in the market is while customers, they want to have the more of a value-based and outcome-based and what we prefer solution-based conversation. So, all those things are kind of happening, but that's separate from the type of contract. So it's almost two different conversations that that you're having out there in the market as we move forward.

[Rick Wagner:]

This is Rick, we're beginning to see them look at this, especially in the IT side, look at more outcome-based contracting, but it's a contract-by-contract type of thing, and they're not moving quickly.

[Tobey Sommer:]

That's helpful. There are multiple vectors to think about there. And when you think about your new business win rate, what does that been like, and does it convey to you that you should bid more or you're bidding the right amount kind of what's the takeaway from the win rate from your perspective?

[Kevin Phillips:]

It's Kevin. Look, we're pleased with our overall win rate both recompete and new. We don't give the specific numbers, but we're pleased we have been investing heavily in solutioning in wholesale activity and ability to compete on a broader scale against these efforts, and so, I'm happy with what we have, I think we're in a strong position to compete. It's a very competitive market. We'll see how it plays out. But generally, we're winning our fair share. We're doing a lot of solutioning to differentiate ourselves and we think that that's paying dividends.

[Tobey Sommer:]

Asked in a different way, is your growth inBD is that growing at about the rate of the company and your guidance for this year or is there a difference?

[Kevin Phillips:]

The proposal volume is over $20 billion, our investments are higher because we feel that we can afford to do that, we're redirecting the money, and we're going to continue to focus on that to expand our company.

[Tobey Sommer:]

Thank you. Last question from me, you mentioned a several areas of the President's budget requests. What are some of the top two areas of spending growth in that request where the company plays and you stand to benefit the most?

[Kevin Phillips:]

Let's think about the use of cyber and automation you can call it AI, ML whatever advancement to work to speed to decision making. Those are areas that that companies like ManTech can differentiate ourselves and the need to make sure there is greater security around data and systems, we'll also continue to be growth, the areas that we don't play that have increased or like Hypersonics right, the major new developed systems that we're building to compete more globally for new weapon systems.

[Operator:]

Thank you. Our next question comes from Gautam Khanna of Cowen. Your line is open.

[Gautam Khanna:]

Hey, sorry to keep asking questions. I thought it was worth asking though, the $6 billion plus of outstanding bids is that net of the $920 million win?

[Kevin Phillips:]

It's a Q4 number that had it included in it.

[Gautam Khanna:]

Okay, and so it's subsequently been awarded. I was curious, what do you anticipate the profile of contract awards will be by quarter this year? Do you have a sense for obviously, Q1, by definition is going to be strong given this win, but are you also seeing a lot of other awards come through in Q1 and maybe if you could speak to just the pacing of adjudications?

[Kevin Phillips:]

It's really hard to -- it's hard to speak the pacing, we can speak to when they're requesting submittals. But the timing of their evaluation in the following award, that that is not something we can provide consistency on or visibility into.

[Gautam Khanna:]

Understood, is it worse than before? Or is it kind of the same in terms of or things moving out or?

[Kevin Phillips:]

It stays the same. It's the same. Yes, last few years, you've seen more certainly around the budget, and there's more activity, but I think it's a consistent pattern now.And totally depends on procurement shop is the delays with timelines.

[Gautam Khanna:]

Got it. And then on the M&A pipeline, can you speak to what you're seeing? Are there promising targets in the pipeline, and if so, any sense for the scale of the opportunities, mid-size candidates, larger ones? What it is kind of?

[Judy Bjornaas:]

I mean, yes, I'll start and then any of the other gentlemen here with me can chime in, there is a very active pipeline of opportunities the M&A market is very active right now, with all sizes of opportunities from the typical tuck-ins that we tend to do around the $50 million to $100 million, up to some larger properties. So, we're continuing to look, we're very focused on maintaining our disciplined strategy that Kevin talked about with looking at capabilities and customer sets and still trying to maintain our pricing discipline in an expensive market.

[Kevin Phillips:]

And I would say that we're also focused on capabilities and customers as part of our overall M&A strategy, and that's important that we'll maintain our disciplines as we continue forward.

[Gautam Khanna:]

Yes, into that last point any thoughts to I mean, is there any greater emphasis put on non-DoD, non-Intel traditional federal civilian agencies or expanding kind of the pie for what tradition is the ManTech from previously it's been ManTech core?

[Kevin Phillips:]

It's Kevin. Broadly, we think DHS is equal national security and homeland security demand in need as DoD and so we are continuing to focus on there. We also continue to focus on the overall healthcare component for our veterans as well as our active duty and we will selectively look into other federal civilian agencies based on their mission requirements.

[Gautam Khanna:]

All right, thanks a lot guys.

[Judy Bjornaas:]

Okay.

[Operator:]

Thank you. Our next question comes from Joseph DeNardi of Stifel. Your line is open.

[Joseph DeNardi:]

Yes, thanks. Just one more, Kevin, you mentioned the two-year budget agreements providing a good kind of backdrop for you all, does that apply to your 2019 and 2020? Or does that more benefit in 2020 and 2021 for you? Thank you.

[Kevin Phillips:]

2019 was based on the prior two years, I think 2020 and 2021 is what we're looking at, and I think that's budget deal will allow for the mission requirements and proposal volumes to continue for the next 12 to 18 months, and we'll see what happens later on based on election cycles and requirements.

[Joseph DeNardi:]

Got it, thank you.

[Operator:]

Thank you.

[Stephen Vather:]

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 for your continued interest in ManTech.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for participating, have a wonderful day. You may all disconnect.