ManTech International Corporation
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the ManTech's second quarter fiscal year 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-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 your host, Stephen Vather, Executive Director of Corporate Development. Please go ahead.

[Stephen Vather:]

Thanks Shannon and welcome everyone. On today's call, we have George Pedersen, Chairman and CEO, Kevin Phillips, President and COO, Judy Bjornaas, Executive Vice President and CFO and Dan Keefe and Bill Varner, 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 risk factors and other risks and uncertainties, please refer to the section entitled Risk Factors on 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 would like to turn it over to George.

[George Pedersen:]

Good afternoon and thank you for participating in today's call. ManTech had another quarter of solid performance. I am proud of our ability to deliver revenue growth and win both new business and key re-competes. Since our first quarter earnings call, we have operated with the greatest level of uncertainty in the FY 2017 appropriations. Additionally, the President released his FY 2018 budget request with costs of $639 billion in defense spending. Current House and Senate FY 2018 appropriation markups show potential funding levels well in excess of the President's request. We are pleased to see additional funding to our customers' budgets to deal with the overall Fed environment. Given ManTech's position as a premier and national security company, our customers at both ends continue to be a priority. Now, Kevin will provide you with a view of our operations. Kevin?

[Kevin Phillips:]

Thank you George. In the second quarter, we delivered strong revenue growth in contract awards as well as improvement across all profit metrics. Revenues, operating income and earnings per share were all up approximately 3% from the second quarter of 2016. Additionally, we are seeing year-over-year direct labor growth in Q2, which reflects the impact of new awards and the expansion of mission requirements on some of our existing contracts. In the quarter, we received $499 million in contract awards, a 1.2 times book-to-bill, which represents the ninth consecutive quarter of bookings at or above one times. Approximately 31% of the bookings were for new business in Q2. Re-competes contributed heavily to award activity in the quarter. Later, Dan and Bill will go into greater detail on our recent contract rewards. At quarter-end, total backlogs stood at $4.9 billion and funded backlog at $1.1 billion. The total backlog decreased sequentially, driven primarily by a customer reducing material procurement expectations from one of our contracts. We are already seeing and expecting a very robust proposal activity in the second quarter of 2017. Based on the healthy level of proposal activity, we are still on track to submit over $7 billion in bids in 2017 with a potential to exceed that figure and we anticipate strong award activity in the third quarter. Exiting the second quarter, our total qualified pipeline sits at $19 billion and we maintain approximately $4 billion awaiting adjudication. The up-tempo in demand for the next 12 months appears to be strong and sustained and as a result our focus for the balance of this year is on supporting proposal activity, recruiting and retention and successfully ramping up and performing on new and existing contracts. The overall operating environment continues to strengthen. There is a clear focus by our customers on improving operational readiness and the speed of delivery. This focus is driving increased requirements and scope on existing contracts. It is also contributing to the continued movement away from LPTA procurements. Protest activity remains elevated and unfortunately has become a routine component for the procurement cycle. Lastly, we are focused on efforts to reduce the security clearance backlog so that we can increase the talent needed to support critical contracts. Acquisitions remained the top priority for capital deployment. We will continue to make internal investments to enhance our position in key technology and capability areas where we see increased customer demand. Now Judy will provide you with additional detail and specifics of our financial performance and outlook. Judy?

[Judy Bjornaas:]

Thanks Kevin. Revenues for the second quarter were $414 million, up $12 million or 3.1% compared to the second quarter of 2016. Direct labor was up year-over-year and is the primary driver of our Q2 revenue growth coming from ramp-ups on our recent awards and some contribution from the small acquisitions we completed last year. The sequential revenue decrease was driven by lower material purchases. Given increased demand from our customers, growth of our labor base remains a continued focus for us. For the quarter, prime contracts represented 87% of our revenue. Contract mix was essentially unchanged with 67% of revenues on cost-plus contracts, 14% on time and materials contract and 20% on fixed-price contracts. Operating income for the quarter of $24.9 million was up 3% from the second quarter of 2016. Operating margin of 6% was flat year-over-year and year-to-date operating margin of 5.9% is up 10 basis points from last year. Some one-time items, including fixed-price completions and some reserve releases, contributed to operating margin. Net income was $15.6 million and diluted earnings per share were $0.40 for the quarter, which were up 5% and 3%, respectively, compared to the second quarter of 2016. The effective tax rate was 37% in Q2, which was lower than expected due to the changes in accounting rules for stock options and some one-time tax adjustments. The lower tax rates added $0.01 of EPS in the quarter. Now on to the balance sheet and cash flow statement. Our balance sheet at quarter-end shows $108 million [sic - see press release] in cash and no debt. During the quarter, we collected $27 million in cash flow from operations or 1.7 times net income and our DSOs were 69 days for the quarter. The Board has authorized us to maintain our current dividend level of $0.21 per share to be paid on September 22, 2017. Now on to the forward outlook. As compared to our previously communicated 2017 guidance, we are maintaining the range on revenue but are raising the range of our net income and EPS guidance to reflect one-time gains in the first half of 2017 and a revision to the expected full-year tax rate. Before any future acquisitions, we are calling for revenues of $1.65 billion to $1.7 billion, net income of $58 million to $59.7 million and diluted earnings per share of $1.48 to $1.53. Achieving the higher end of the revenue range will be contingent on the timing and pace of material procurement as well as ramp on new contract awards. The applied operating margin guidance for the year is 5.7%. For the balance of the year, we expect margins to be slightly lower than the first half of the year as we respond to heavy bid and proposal activities, continue to make investments and support ramp-up on our new contracts as well as expected higher levels of material procurements in the second half of the year. This is similar to the revenue and profit profile we had in 2016. At the mid-point of guidance, net income is expected to be up approximately 4% from last year, benefiting from revenue growth and an increased percentage of revenues coming from direct labor. Cash flow from operations should still be between 1.6 times and two times net income. Built in to our guidance are an effective tax rate of 37.7% and a fully diluted share count of 39.1 million shares. Now Dan will speak to our Defense and Federal Civilian business.

[Dan Keefe:]

Good afternoon. ManTech Mission Solutions and Services business had another strong quarter. I am pleased to report that we were awarded several re-competes in the quarter. Within the navy market, we won an aggregate of $159 million in contract value across three contracts. The contracts include two contracts to provide engineering and technical services support to the Naval Air Systems Command and a contract to provide fleet support to the Naval Surface Warfare Center. Additionally, we were awarded a five-year $200 million multiple-award IDIQ contract to provide system engineering support to DARPA. We cleared a protest for the DHS Customs and Border Protection business intelligence support services contract. This $229 million five-year contract was successfully transitioned in June, adding 80 additional employees to our roles and we will continue to ramp to support the expanding requirements in intelligence analysis, data analytics and threat assessment and visualization. On a call earlier this year, I mentioned that one of my strategic focus areas would be to continue our expansion into emerging IT capabilities where we are seeing increased customer demand. I want to highlight that we recently won our largest managed service contract to-date, a ten-year contract in excess of $150 million. The awards are Q3 booking but it demonstrates ManTech's success in offering differentiated solutions to its customers. We are aggressively preparing for the transition to ensure that we meet our customer's requirements and look forward to begin performing on this award. Bill?

[Bill Varner:]

Thanks Dan. I am pleased to report that MCIS also had another great quarter. As a highlight, we received $124 million in contract expansions and new awards from the Air Force to provide full-spectrum security, integrated management and business systems solutions. These wins were enabled by excellent program execution and past performance as well as our ability to bring innovative approaches to solving the customer's needs. Additionally in the quarter, we had several other new and re-compete contract awards from classified customers. Last quarter, I mentioned that we were seeing increased scope on our full-spectrum cyber programs and now we are seeing similar expansions on our program protection and enterprise IT efforts. Given the pace of new contract awards and expansions of requirements, we are experiencing strong labor growth and our focus is on attracting and retaining critical talent to assure mission success. I am pleased to report that we continued to see staffing successes and we are fully staffed on our recent large win with the FBI. As we speak, we are approximately halfway through the transition on the new Air Force win I mentioned earlier. We are and will be responding to a robust level of proposal activity for the balance of the year. Additionally, we are continuing to invest in the business to enable future growth. Some of the key investment areas include cloud computing, full-spectrum cyber and managed services. We are collaborating across the company in these key investment areas, which is leading to the development of innovative solutions to help solve our customers' most demanding technical challenges. In summary, we remain optimistic about the market environment and strongly believe that our positioning continues to be well aligned with our customers' strategic priorities. We look forward to leveraging our strong balance sheet to accelerate our growth. With that, we are ready to take your questions.

[Operator:]

[Operator Instructions]. Our first question is from Gautam Khanna with Cowen & Co. You may begin.

[Lucy Guo:]

Hi everyone. It's Lucy, on for Gautam.

[George Pedersen:]

Hi Lucy.

[Judy Bjornaas:]

Hello Lucy.

[Lucy Guo:]

Can you please talk a little bit more about this one contract where you are seeing lower material purchases which drove the sequential sales decline?

[Kevin Phillips:]

It's actually a backlog decline, not a sales decline, in terms of the backlog number we mentioned. And what happened is, basically we had a modification of the contract where positively it basically provided us an extension and a continuation of the labor. But the government decided not to have the level of ODC procurements that they had originally expected on that contract, which is fine by us as a company, but they basically moved that off of that contract.

[Lucy Guo:]

Okay. So you will essentially not recover this amount going forward, right? It's a new baseline in terms of your backlog, funded and total?

[Judy Bjornaas:]

Yes.

[Lucy Guo:]

Was there any debooking in the quarter?

[Judy Bjornaas:]

That was all just debooking. Everything we just talked about was strictly related to the backlog and so it was the debooking related to that. No impact on operations or revenue or anything.

[Lucy Guo:]

Got it. Okay. But you also addressed the sequential revenue decline citing lower material purchases, right? So it wasn't through that?

[Judy Bjornaas:]

It wasn't related to that contract. It's just we have a number of contracts that part of what we do is make purchases on behalf of the government and those can be very lumpy and it was just a little bit down this quarter compared to last quarter.

[Lucy Guo:]

Got it. And you talked a little bit about one award that you have booked in Q3 already, the 10-year $150 million emerging IT contract and it sounds like Q3 bookings will be pretty strong. Can you maybe talk a little bit more on that?

[Dan Keefe:]

Yes. This is Dan. I mean, since we haven't got a release from the government agency, we don't release information. We don't make a press release on an actual customer until we have got a release from the government agency. Pretty standard practice for us.

[Kevin Phillips:]

To that point, though, the amount of adjudications and potential awards in Q3 are expected to be strong based on the amount of bids that we have outstanding and their expected decision date.

[Lucy Guo:]

Right. Would it be fair to say, I mean, it sounds like across the board most of the industry is expecting a nice year-end, a fiscal year-end to Q3 in terms of bookings. What would be considered a strong quarter for you for the September Q? Would it be closer to 1.5 times to two times book-to-bill?

[Kevin Phillips:]

Well, our last 12 months has been about 1.6 times book-to-bill. It would be great if we can achieve the same. But we can't guarantee that. We just know there is a heavy amount of activity. Customer has money to obligate and they are moving fairly quickly to try to work through that. So we are fairly confident in the industry at large that there's a lot of movement in terms of decision making and obligations.

[Lucy Guo:]

That's good to hear. And one last one before pass on is, if you can address the larger re-competes that you have coming up over the next 12 to 18 months and where are they in the process?

[Judy Bjornaas:]

So in the balance of this year, each quarter our amount of revenue coming from re-competes has declined and now it's about 3% for the balance of the year. We do have our MRAP contracts coming up for re-compete in the second half of this year, with the start date some time in Q1 of 2018, if the government stays on schedule. And then otherwise, that's our largest re-compete coming up. We do have a number of smaller ones that are equating to, I think, over the term of 2018, a slightly higher amount of re-compete than we normally see.

[Lucy Guo:]

Very helpful. Thank you.

[Operator:]

Thank you. Our next question is from Joseph Vafi with Loop Capital. You may begin.

[Joseph Vafi:]

Hi everyone. Good quarter. Good afternoon. I was wondering if we could talk a little bit about trends in direct labor margin. It sounds like direct labor is picking up and there's been more hiring recently as a result. And I was just wondering how the margins in direct labor are looking right now.

[Kevin Phillips:]

Well, I will talk about direct labor and a little bit about margins, but I will also let Judy add more flavor. So we have been very focused on, as you know, investing and going after contracts. We are starting to see good movement on that. The staffing of the contract awards that we have received in all of our business, we have been successful at ramping those up. And we are seeing the fruit of that in terms of the labor growth, which is very healthy and very good for our business. And that's not only on new contract awards, but that's also on expansion of work on existing contracts, which is an indicator of the customer's demand in the type of work that we do. So those are all good trends. We are investing heavily in the second half of the year based on a combination of just a heavy proposal volume expected. Not just award volume, but a heavy proposal volume expected for the next six to 12 months and we want to continue our investments in differentiation and preparation for that activity so that we can continue our growth pattern in the out-years. And so for the second half of this year, that's going to kind of restrict our overall returns on the bottomline in terms of improvement and we will have to see in 2018 how everything plays out in terms of how that positions itself. Judy, you want to add that?

[Judy Bjornaas:]

Yes. I think just in general, we see a higher growth in operating margin coming, the higher percentage of revenue coming from direct labor. But as Kevin mentioned, yes, we are making these investments. Also, typically, we see in the second half of the year a higher level of ODC procurement on behalf of the government and that we have planned kind of into our modeling for the year, especially this year, as they have got funding that they are trying to get under contract and that's one of the ways that they can do it.

[Joseph Vafi:]

Okay. And then just kind of a higher level question on this managed service deal and kind of just the inevitability of more cloud computing and things like that. I think some of your peer companies have made the investment in doing some kind of near-shoring or on-shoring and lower geographic, lower cost geographic areas where access to labor may be better than the Northern Virginia area. I was wondering if that is something that may fit into your business model at some point in the future.

[Kevin Phillips:]

So yes, this is Kevin. A lot of the work that we are seeing, I am going to go back to contract types first, the government has cost-plus, T&M and fixed price. And this was a fixed price. So they are going to transition the overall risk profile into a, you-manage-the-whole-thing, type of procurement. That's just a baseline. I think you know that, obviously. But within that, the customers that we are dealing with, we are pretty much dealing with work on their premise and asking us to manage certain IT capabilities on their premise, not near-shore. And I think that some of our customers also are still focused on retaining, I guess, access to their information locally as well and trying to work through how they would do that long-term away from their premise. So we see a lot of shift towards managed services, which is positive. There's a risk transference, which has positive and negatives with that from a return standpoint. The risk is the endpoint. We have yet to see a shift in moving away from their premise, the type of work that you are talking about. I am sure that's out there. I am sure it could move over time, but we haven't seen that as their desired state right now.

[Joseph Vafi:]

Okay. Fair enough. And then if I just look at your funded backlog number and I know you indicated that there were some ODCs that were taking on a backlog. Were those taken out of the funded too?

[Judy Bjornaas:]

No. They weren't funded.

[Joseph Vafi:]

Okay. Good All right. Thanks very much.

[Operator:]

Thank you. Our next question comes from Brian Kinstlinger with Maxim Group. You may begin.

[Brian Kinstlinger:]

Great. Thank you. With the improving budget environment, can you talk about your appetite for more sizable acquisitions? I think you mentioned, clearly your guidance is before any acquisitions, right? When you say it that way, I wonder, does that assume something maybe your appetite for acquisition's a little greater than in the past? Sorry.

[Kevin Phillips:]

Yes. I will speak to that. So capital deployment preferences around acquisitions, with more certainty in the budget environment we will have more comfort if acquisitions come along in terms of executing because we look to follow customer budgets, their priorities and our decision making process in acquisitions. So we can not time when acquisitions come out, obviously, but we do have a stronger appetite for them as they come through. Size wise, we are still at a 3 times to 3.5 times leverage. We haven't seen anything that would change that view because the combination has to provide a greater topline from the combination, meaning one plus one equals three versus just getting bigger for the sake of getting bigger. And that view, within ManTech, has not changed. So yes, we are interested in acquisitions. Yes, we want to use capital for that purpose. No, we are not going to look for sizable ones just for the sake of getting bigger.

[Brian Kinstlinger:]

Got it. And I joined the call late. I just missed the awards awaiting adjudication and the proposals you are expecting to bid over whatever timeframe you provided. I missed that.

[Kevin Phillips:]

So awards expecting adjudication, we have $7 billion this year we are expecting to submit. The back half of this year has about $4 billion or more, depending on whether they stay on pace for the contract awards. They could extend, as they often do. But right now, based on customer decision dates, they are about $4 billion we would expect in the second half of this year.

[Brian Kinstlinger:]

Yes. Given the awards awaiting adjudication?

[Kevin Phillips:]

Yes.

[Brian Kinstlinger:]

So what was that number, sorry?

[Kevin Phillips:]

$4 billion.

[Brian Kinstlinger:]

Oh, $4 billion is awaiting adjudications, not the submissions.

[Kevin Phillips:]

Yes. correct.

[Brian Kinstlinger:]

Got it. Okay.

[Kevin Phillips:]

Right.

[Brian Kinstlinger:]

Sorry. And then of that $4 billion, how much of that is new versus re-compete?

[Kevin Phillips:]

It's a mix that's much heavier towards new work than re-compete work, just based on the timing and the lower re-compete year we had this year.

[Brian Kinstlinger:]

Great. And then the $150 million IT contract that you haven't PR-ed yet, is that a single award IDIQ? Or is it a firm number over 10 years?

[Kevin Phillips:]

It's a single award contract. Not an IDIQ.

[Brian Kinstlinger:]

But my question is, IDIQ, have you put $1 into backlog? Or is there a much bigger portion you put in the backlog knowing that you will recognize certain revenues?

[Judy Bjornaas:]

There's nothing in backlog right now because it's a Q3 award.

[Brian Kinstlinger:]

Okay. And that's all new business, right?

[Kevin Phillips:]

Yes.

[Brian Kinstlinger:]

Great. And then you mentioned twice the one-time benefits and awards piece. Can you quantify that in the quarter?

[Judy Bjornaas:]

I think it was kind of similar to last quarter. I think it was $0.01 to $0.015 of one-time items. We would have been about 5.7% operating margin without those one-time items.

[Brian Kinstlinger:]

Okay. Great. Thank you so much.

[Kevin Phillips:]

Thank you.

[Operator:]

Thank you. Our next question comes from Tobey Sommer of SunTrust. You may begin.

[Tobey Sommer:]

Thanks. In terms of the increased investment on proposal activity, could you quantify like just the order of magnitude that you are thinking about investing? And did I hear right that you said maybe six to 12 months of elevated investment? Thanks.

[Kevin Phillips:]

Based on the pipeline in front of us, there's a lot of demand for the services we provide today. It has been that way for the last year, year-and-a-half. We expect, based on the visibility we have, the proposal activity for the next 12 months to be as elevated as it has been for the first six months and frankly, potentially more than last year in total, which was, I think, $6 billion to $7 billion. So yes, for the next 12 months, we see a lot of proposal activity. And that will require business and proposal investment and it will require solutioning and it will require an above average amount, even though we have already baked in to the organization some of that proposal activity. It is going to be a little bit higher, based on the up-tempo that we see within our customer set and the opportunities in front of us.

[Tobey Sommer:]

So is it a handful of million dollars? What's the financial impact on the back half?

[Kevin Phillips:]

Well, I guess, about 68% cost-plus. So it's not going to be huge, but at the same time, we are trying to make sure we temper the fact that we have a lot of expenditures in that 5.7% margin. Maybe temper it down a little bit from that as we spend money towards the top line over the next six to 12 months. We will see how the first half of next year plays out.

[Tobey Sommer:]

Okay. Where does direct labor stand today in terms of its contribution to company? And do you have a goal for driving that higher like over several years? Not asking for a guidance or something like that. But do you have a target? And could you kind of frame where we sit today numerically to where we might be able to go? Thanks.

[Kevin Phillips:]

That is a hard thing to answer because we are a services company. The more we win, the more we want to staff and it becomes a demand issue in finding the right talent to do that. But I would say that as long as we continue our strong book-to-bill and we are not going to change the profile of the type of work we do, you should expect the labor component of our business to continue to grow and it will be fairly good. And we still have subcontract works we have to provide to small businesses to meet goals. That's not going to change. And we have partnerships in order to win business. That's not going to change. But overall, we are seeing a significant increase in the type of work and demand for the work that we do, of ourselves and the partners that we team with.

[Tobey Sommer:]

And another follow-up on M&A. You referenced kind of your markets and demand being good for your services so that it increases your propensity to want to be involved in acquisitions. Conversely, like what's happening on the other side in terms of properties for sale? Could you characterize today's climate versus last year's?

[Kevin Phillips:]

It's spotty. I would say that just based on the overall market environment, there are more businesses that we are seeing come out. And that's a good thing for our industry at large as well as ManTech. But I wouldn't say that it's going to be, as a full year, any different than any the other year. I just think that more companies are looking at the market and are seeing a greater opportunity to exit if that's what they are planning to get a return.

[Tobey Sommer:]

Okay. And last question for me. You mentioned, I think, when you discussed the guidance that net income and diluted earnings were benefited from the one-time. What was the benefit to both of them, just so we can compare it to the prior guidance?

[Judy Bjornaas:]

So for the tax rate? Yes, it was about 0.5% tax rate. So in general, it's now trending down lower than we have projected. We had started the year at 38.5% and now we are projecting 37.7% for the whole year.

[Tobey Sommer:]

And that's the only difference?

[Judy Bjornaas:]

Yes. I mean, so does the change in the stock options and then in Q1 we also had some other discrete one-time tax items.

[Tobey Sommer:]

Okay. Thank you very much for your help.

[Kevin Phillips:]

Thanks.

[Operator:]

Thank you. Our next question comes from Ed Caso with Wells Fargo. You may begin.

[Rick Eskelsen:]

Hi. Good evening. It's Rick Eskelsen, on for Ed. Just first question is, you have talked in the past about finding people as being a gating factor to revenue growth. Could you talk a little bit more about sort of the ability to find people with the steps you are taking in terms of your recruiting efforts, maybe your training efforts? And if there's any steps that the government or the industry could do to help on that talent acquisition front?

[Kevin Phillips:]

Yes. It's great question and I will lead in and let Bill or Dan add behind it. So the market, the environment, generally, not just in our sector but in the economy we are at large, is very open to technologists. So there's a broader opportunity for people to go different places. And so we have to be very focused on how we attract and retain talent. We spent a lot of investment on that as well, along with the business development side. We are seeing success from that. Our voluntary turnover has leveled off. Our ability to attract and retain talent has increased. That is hard, hard work, but it's important. We are also focused on in creating specific training programs to try to make sure that we can get the talent in-house for areas where we know clearly that there's going to be a demand in the market and we are focused on that as well. So a lot of effort in and around that. The biggest constraint that I see is more around the clearances and getting people cleared just because the backlog is high. And that's why we are focused on that to make sure we work with our customers as well as the visibility on getting people cleared through that pipeline just based on the demand and the amount of time it takes to get a clearance.

[Rick Eskelsen:]

Thank you. That's helpful. Also just wondering, you have mentioned the MRAP re-compete. I wonder if you could put some size parameters around that in terms of length? And then also, the potential size of the contract? And then, just remind us what the rough revenue contribution of that is, at this point in time? Thanks.

[Judy Bjornaas:]

So that's a contract that's under re-competing. For competitive reasons, we are not going to discuss that information.

[Rick Eskelsen:]

Last question, just in terms of the pricing environment. You have talked about it moving away from LPTA in terms of more desk value. Just maybe a little more details on the pricing dynamics as you see it in the market? Thanks.

[Dan Keefe:]

This is Dan. Certainly, there is a movement away from LPTA. I think there's been some lessons learned within the agencies. That said, however, it is somewhat specific on customers and although we see the move away from LPTA, still a large number of best value contracts are won by the person at the lowest price. So it's definitely trending, but the cost is still a customer dynamic.

[Bill Varner:]

Ed, this is Bill. As you probably are aware, LPTA has really never been much of a big issue in my business, the intelligence community. That said, we are very careful, as Dan said, with cost on everything we did.

[Rick Eskelsen:]

And just in terms of, like when does the business overall kind of anniversary the impact of the move towards lower pricing? I mean, are we getting towards the end of really seeing an impact, especially on the margin side this year? Or is it more into next year or the year beyond? Thanks.

[Judy Bjornaas:]

I think it's beyond next year. I mean, if we had five-year contracts that were awarded two years ago, they would still have three years left. So I mean, it will start to shift, but we will be all the way through it for a couple of years.

[Rick Eskelsen:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Brian Ruttenbur with Drexel Hamilton. You may begin.

[Brian Ruttenbur:]

Yes. Thank you very much. First of all, a lot of my questions have been asked and answered. But on the CR, I don't think anybody has hit that. Can you talk about timing? What I have been hearing pretty consistently is that probably a CR is through the end of this calendar year and a January pass. Are you hearing anything different from that?

[Kevin Phillips:]

No. That's what we are hearing. The only add to that is the debt ceiling some time at the end of Q3 being a primary focus and that will drive the CR until January, some time in that for a timeframe.

[Brian Ruttenbur:]

Okay. And then, moving on to some just details on LPTA. With that going down, what does that potentially mean for you guys? Is that a general drifting up of margins? You say that it's positive but it's not super positive. I am just trying to figure out what that means for you guys.

[Judy Bjornaas:]

So I would say, in general, it's positive in that it allows us to bid a better solution, higher-quality people and some margin assistance there, because price isn't going to be the ultimate decider. For us, though, for margins to ultimately see an increase, it's not only away from LPTA but a shift in the mix of business too, from cost-plus to fixed price.

[Brian Ruttenbur:]

Okay. And then my last question is about re-competes coming up over the next 12 months. Can you talk about your percentage of your portfolio coming up for re-compete? Is that 15%? 20%? Can you give us some kind of number?

[Judy Bjornaas:]

Yes. We have said that we are looking at potentially about 30% of our revenue at some point in 2018 coming up for re-compete. It's a heavy re-compete year for us next year.

[Brian Ruttenbur:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Robert Spingarn with Credit Suisse. You may begin.

[Robert Spingarn:]

Hi. Good afternoon. On the back of that pricing question, I was just going to ask you, in terms of competition, have you seen any change? Not so much from a pricing perspective but from a competitive targeting perspective, do you see your competitors narrowing their focus or widening the aperture? In other words, we went through this period where the budget was compressing and everybody was reaching for bidding more, if you will, to offset the pressure. Has that reversed?

[Kevin Phillips:]

Not really. I mean, I think that there are clear opportunities. There are clear players who have the capability to go after those opportunities. And we are in a competitive environment in that regard and people are still working towards that. I think the customers have made clear and are making clear what their priorities are. And that is a positive thing. And I think that different companies are in different positions around reacting to that. But that's kind of the forward positioning play that you are seeing and will see play out.

[Robert Spingarn:]

So I did get the impression at one point that you just had a lot of extra players showing up for competitions who maybe didn't have the expertise or experience in a particular area. I think what you are saying is that if that was the case, that really hasn't dropped off, that you just might not be positioned to win, but they are still there?

[Kevin Phillips:]

Yes. The universe for competition is fairly fixed, if that's your question.

[Robert Spingarn:]

Well, yes, I suppose. I guess, what I was saying is people were reaching further afield from their normal core strengths in order to capture more business and then coming in and talking about bigger bid numbers and greater opportunities when a lot of those weren't necessarily realistic. And I just wondered if a more supportive budget environment would mitigate some of that and allow people to focus on what they are think --?

[Kevin Phillips:]

Yes. If you are asking [ph] if they are making a lot of stretches in the areas that they really don't have core competency, I don't think that's the case. I think it's more positive for their companies. Yes. Sorry, I cut you.

[Robert Spingarn:]

Okay. And on that note, are there any areas, you already got asked about M&A, are there any areas that you don't focus on and that you would like to build a capability in organically?

[Kevin Phillips:]

No. I think that we have fairly clear line of sight on what we are building organically right now. I think that Bill spoke to some of that in terms of the capabilities. And if you think about our strong position in cyber, our increasing position in secured enterprise IT, the demand for data and analysis and what we call mission IT, how to collect and analyze data specific to missions, those are not changing in the underlying technologies and the underlying capability sets that we have to offer is defined or definable and we are very heavily focused on that.

[Robert Spingarn:]

Okay. And then, just one last one on competition. Where you have seen some competitors acquire and become much, much larger, there are a few out there that have done that, has that changed the landscape at all? Have you seen that having any impact on the competitive nature of the business with some of these larger companies coming through now with bigger capability sets?

[Dan Keefe:]

Yes. Thanks. This is Dan. You know, actually, I haven't. I mean, we have successfully won contracts this year against some of those large competitors you are talking about. We have certainly lost some. But I don't see it at a greater rate. And our book-to-bill is much stronger in the last 12 to 18 months than it was in previous years. So at this point in time, no, I haven't seen an effect.

[Robert Spingarn:]

Okay.

[Bill Varner:]

This is Bill. I would echo that. I don't think, just scale itself doesn't really help someone bid for a job that they are not qualified to bid for. So I don't think we are seeing any difference at all.

[Robert Spingarn:]

Even where they might be putting together some disparate capabilities that once together allow for a different solution set?

[Bill Varner:]

Well, you know, if you look at those large combinations you referred to, they were all companies that existed before those large combinations. So it hasn't really increased their capabilities, in my view.

[Robert Spingarn:]

Okay. Has it married certain things that therefore make them a stronger option?

[Bill Varner:]

Well, you know as Dan said, I think our book-to-bill and our win rates and everything this year would indicate that we are not seeing any difficulty brought upon by those companies.

[Robert Spingarn:]

Okay. Fair enough. Thank you.

[Operator:]

Thank you. Our next question is a follow up from Tobey Sommer with SunTrust. You may begin.

[Tobey Sommer:]

Thanks. I wanted to ask a question about the slow pace at which political appointees are filling jobs broadly in federal agencies. Is that impacting contract awards for any kind of new larger programs that you may be involved in bidding on? Or is that not a factor in your business and pipeline in kind of getting deals across finish line? Thanks.

[Kevin Phillips:]

Well, I think it's a factor in the industry for those companies who requires an ACAT I program or have multiyear funding or large platforms that just need the executive level sign-off on the types of procurements that exist. So I think that's a very real issue for some companies. For us, given the work that we are doing and the demand for that and frankly the level of procurements, we are not seeing that impact our business nor the opportunity set.

[Tobey Sommer:]

Thank you very much.

[Stephen Vather:]

Shannon, it appears that we have no more 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 continued interest in ManTech.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thanks for your participation and have a wonderful evening. You may now all disconnect.