ManTech International Corp (MANT) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the ManTech second quarter FY16 earnings conference call. At this time, all participants are in the listen-only mode. Later we will 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 your host Judy Bjornaas, Deputy Chief Financial Officer. Please go ahead.

Thank you Karen, and welcome everyone. On today's call we have George Pedersen, Chairman and CEO; Kevin Phillips, Executive Vice President and CFO; and Dan Keefe and Bill Varner, our 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 full discussion of these factors and other risks and uncertainties, please refer to the section entitled Risk Factors in our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call.

Now I would like to turn things over to George.

Good afternoon, and thank you for participating in today's call.

This second quarter ManTech performed well by providing revenue growth, strong earnings and excellent bookings. We received $462 million in contract awards this quarter which represents a 1.2 times book to bill.

This marks our fifth consecutive quarter with bookings at or above one times. In addition, we had our second consecutive quarter of organic growth. We had strong cash flow as well, collecting $22 million in cash flow from operations. We also executed our stated plan to invest in growth markets through strategic acquisitions.

During this quarter, we acquired Oceans Edge Cyber, which greatly enhances our position in cyber network operations and provides us a strong presence within the service element of the US Cyber Command. As I have said before, there is [various certainty] around funding and our business opportunities continue to grow.

Contract awards are occurring on a regular basis. We believe it is likely we will see a continuing resolution in October of this year; however, we should see approval of the 2017 budget in a reasonable time period. The level of overall threats to our nation remains elevated, as you know. We have over $40 million in cash, no debt, a $500 million line of credit, we are in a strong position to make more acquisitions to grow the Company. We are focused on acquisitions having capabilities that will take us to a higher demand market. We are actively reviewing several promising candidates.

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

Thank you, George.

I'm pleased to see year-over-year growth in all of our key metrics and continued strong performance in winning new business. Revenues for the second quarter were $401 million, up $17 million or 4.4% compared to the second-quarter of 2015, and up $11 million or 2.7% compared to the prior quarter.

As George mentioned earlier, we experienced organic growth this quarter of 1.5%. Direct labor was up 1% sequentially and 3% year over year. We're growing our direct labor base and expect increasing demand for the capabilities we offer our customers. We expect strong contract award activity to support growth in the third quarter.

Our support for overseas contingency operations was consistent with the prior quarter and expectations. For the quarter, prime contracts represented 88% of our revenues. Contract mix was essentially unchanged with 68% of revenues from Cost Plus, 14% on counter material contracts, and 18% on fixed-price contracts.

Operating income for the quarter of $24.2 million was up 15% in the second quarter of 2015. Quarterly operating margin of 6% increased approximately 50 basis points year over year. We benefited from a one-time pickup as we cleared reserves due to favorable final government audits on all contracts.

Our operating margin for the quarter, excluding one-time pickups, was 5.8%. Net income was $15 million and diluted earnings per share were $0.39 for the quarter, which were up 19% and 18% respectively compared to the second-quarter of 2015.

Now onto the balance sheet and cash flow statement. During the quarter we collected $22 million in cash flow from operations or 1.5 times net income. DSOs were 67 days for the quarter, an improvement of 16 days compared to the second quarter of 2015 and an improvement of five days sequentially. Our balance sheet at quarter end shows $40 million in cash and no debt. We will continue to strengthen the balance sheet and move ahead on our focused acquisition activity.

We are prioritizing acquisitions for capital deployment and are actively identifying companies who's customers and capability sets fit our criteria. During the quarter we acquired the Cyber business Oceans Edge Inc, or OEC, for $48 million. OEC is a leading provider of cyber network operations which we expect to provide approximately $12 million in revenue the second half of 2016. Given the advanced tools and solutions developed and offered by OEC, we expect to receive double-digit operating margins from this acquisition.

The Board has authorized us to maintain our current dividend level of $0.21 per share to be paid in September.

Turning to business development, bookings for the quarter were $462 million, representing a book-to-bill of 1.2 times. Approximately 39% of the bookings were for new business. Total backlog at the end of the quarter stood at $4.3 billion and funded backlog was $0.9 billion.

Proposal activity remains high. We expect to submit over $7 billion in bids in 2016. Our total qualified pipeline is $16 billion, and we have about $4 billion awaiting the adjudication.

We anticipate heavy award activity in the second half of the year, which will support continued organic growth. That said, the level of organic growth will be tempered by continued trends toward small business set [asides] within some of our customers.

As I have noted on previous calls, we're responding to a number of large bids in the Army that consolidate some of our existing work and newer. The outcome of these large bids will factor into outlook entering 2017.

We are raising the lower end and tightening the range of our previously communicated 2016 guidance. Before any future acquisitions, we're calling for revenues of $1.585 billion to $1.635 billion. Net income of $54.6 million to $57 million, and diluted earnings per share of $1.42 to $1.48 per share.

The implied operating margin guidance for the year is 5.7% to 5.8%, which has improved since our last guidance due to improved performance and the contributions of Oceans Edge Cyber, driving earnings per share to the upper end of the previously communicated range.

Net income and earnings per share are both expected to be up 5% to 9% from last year, benefiting from revenue growth and margin expansion. Cash flow from operations should be between 1.7 and two times net income.

Built into our guidance for an effective tax rate of 39% and a fully diluted share count of 30.5 million shares. We're pleased with the improved market visibility. Our investments in business development continue to bear results, and we're diligently staffing new contract awards while ensuring that we provide highly capable talent to our existing customers.

Now, Dan will speak to our Defense and Federal Civilian business. Dan?

Good afternoon.

ManTech mission solutions and services had another great quarter. We received a prime position on the $25 billion strategic partners acquisition readiness contract, for SPARC, with the Centers for Medicare and Medicaid services.

This IDIQ was under protest, but we expect resolution in the coming quarter. SPARC is a key contract vehicle win and essential to our strategy in the government health IT market. Similar to the results in Q1, MFS continued to win contracts of scale that are new work to new customers.

For example in Q2 we received a $34 million contract to provide engineering support to the United States Naval Observatory. As Kevin noted, our proposal activity increased significantly. In MSS we will more than double the proposals submitted in 2016 compared to 2015.

This is a reflection of the significant investment we made over the last two years in our business development and technical solutioning resources. That, in conjunction with, improved win rates has contributed to a higher book-to-bill compared to previous years. Of note, a good portion of our increase proposal activity is in the homeland and diplomatic security markets of the Department of Homeland Security and the Department of State, respectively.

We view these as strong markets for the federal departments in the years ahead. With respect to our work overseas, the OCO revenue remains stable with US force levels, as announced by the President, expected to be maintained through 2017 in Afghanistan.

Our Royal Saudi Air Force contract now has over 200 fulltime personnel and we will continue to ramp up an additional 100 personnel. Finally, we continue to add to our foreign military sales work within an expansion of work into Egypt.

Bill?

Thanks, Dan.

The mission, cyber, and intelligence solutions group also had a great quarter marked by strong new business awards and a strategic acquisition that expands our presence in the cyber market. This quarter we received two significant task order awards on the continuous diagnostic and mitigation CDM program for the Department of Homeland Security.

The first of these task orders will provide monitoring, vulnerability scanning and insider threat protection to approximately 40 small-to-midsize government agencies and departments. The second task order, valued at $85 million, will provide privileged access management and on-premises insider threat support for approximately 65 large agencies.

Both of these task order wins are the result of our enhanced positioning in DHS as a result of the KCG acquisition one year ago. We believe that these wins offer strategic value well beyond the immediate $110 million awarded value.

In the quarter we also received a $32 million contract to continue providing the Missile Defense Agency with counterintelligence, advisory, and assistance services. The addition of Ocean Edge Cyber fits exactly with our strategy of expanding in the growing DoD and US Cyber Command markets. Oceans Edge Cyber provides additional vulnerability research, development and analysis capabilities to our existing cyber portfolio. We are excited to add OEC's highly talented people, cutting edge capabilities, and important customers to ManTech.

Oceans Edge Cyber also brought highly differentiated skills and capabilities within the mobile and wireless arenas. The acquisition is off to a great start, and we are already finding pipeline opportunities to pursue with our breadth of capabilities and past performance.

We remain focused on winning new work and have submitted many proposals in Q2 with expected adjudications later this year and in 2017. Attracting and retaining the strong talent needed to support our customers' missions remains a key priority for us.

In summary, ManTech is positioned for growth based on strong execution in the past two quarters and our recent acquisition. We are committed to leveraging our strong balance sheet to accelerate our growth.

With that we are ready to take your questions.

(Operator Instructions)

Gautam Khanna, Cowen and Company.

Yes, good afternoon. Thank you. Kevin, I was wondering if you could square the guidance. It implies I think the second half relatively flat with the first, and I just wanted to -- you've been winning a lot of new business of late. Is there anything that you can talk about that are known headwinds in the second half?

I think the headwinds that we have frankly are staffing. The ability to staff contracts we've awarded. Frankly there is a delay in getting clearances through. I think that's happening industrywide, and I think that will correct itself at some point.

And the small business trend, we are seeing some contracts coming up to small business and that will impact and is beginning to impact overall review of the growth. But those are the primary drivers from a growth standpoint forward.

Okay. You mentioned having the wherewithal for acquisitions. You clearly have the balance sheet. I was wondering, are there any larger properties that you guys are considering within the pipeline. Would you be surprised if you did not do another acquisition of consequence this year?

There's always a lot of acquisition options of various sizes. I would say that the large ones we have to look at much more closely in terms of what they offer.

We are active in looking, but as you know we're not going to buy sales, we're going to look for the combination makes sense, and that makes us fairly selective acquirers. While there's a lot of businesses out there at mid-range to smaller scale that we have interest in, the question is whether their profile will support what we are looking for from a combination.

I guess what I was trying to get it is do you see anything in that $50 million to $200 million sales range? Is that the pipeline of opportunities better or worse than it was six months ago?

It's fairly consistent.

Okay. Could you just update us on -- you've got a lot of bids outstanding, we're obviously in the September quarter now. What is your expectation for contract award activity in the September quarter, and then what you might expect the follow through will be in the December quarter. Should we be well above 1 times? So if you could calibrate us, that would be helpful.

I will speak to volume. I think Dan mentioned the volume of bids he's submitting compared last year, so we have a heavy volume of submits that are continuing the second half of the year. So the demand from the customer is still very high.

I think that we are expecting for the full-year to have submitted bids somewhere in the $8 billion range, which is very high. And the timing around awards is still expected to be robust.

We can't work the timing of the customers. They always are working through delays and making sure that they have dotted their I's, crossed their T's. But I would say that from -- the timeline that they laid out, we expect both quarters to have heavy volume of potential award activity for us to proceed.

Thanks a lot. I will turn it over.

Amit Singh, Jefferies.

Hello, guys. Thank you for taking my question. If I were to remove the $12 million contribution from Oceans Edge, you've lowered sort of the midpoint of your revenue guidance like 2%. So if you could talk a little bit about what led to that and second, if my math is correct you're I guess getting around $0.02 benefit in EPS from that acquisition.

So that means midpoint of EPS guidance sort of maintained. Is that -- so what is leading to your core margins expanding in the year?

Sure. I will answer both. The top line adjustment is based on the staffing timeline for awards, as well as some of the movement towards small business as we said.

So just the fact that the growth level that we could receive from contract awards we've received hasn't been at the pace that we expect. We are trying to adjust and temper the top line and the midpoint of that range.

That said, we have seen better than expected returns from the Business. We are seeing stronger performance and along with the $0.02 that you mentioned from Oceans Edge, we just think that the overall business is performing to increase our operating margin from the 5.6% up to 5.7% and 5.8% range.

All right. Great. And I heard at the beginning of the year you had mentioned for FY16 around 30% of your contracts up for recompete. And I think a good portion of that, especially the Army related contracts, are back-end of the year loaded.

Any updates over there and your confidence in sort of winning those contracts?

I will say that the proposals were pushed to the right a little bit, which significantly reduces our amount of recompete. I'll let Dan speak to the specific Army programs.

Well first on the Navy contracts we have cleared through a lot of our Navy re-competes successfully. The Army contracts, as Kevin just mentioned, primarily SCOM and CCOM, but elsewhere, are pushed towards the end of year, so we will see if it impacts.

Thank you very much.

Edward Caso, Wells Fargo Securities.

Good evening, this is actually Tyler Scott on for Ed. Thank you for taking my question.

Talk a little bit about the new versus recompete in the quarter. I think I just heard that maybe there was a little less recompete than you thought. What clients are actually moving forward with decisions on awards, and where are you seeing the most success?

Well all clients are active in their award activity. While we didn't see the amount of awards this quarter we were expecting -- there were delays from that -- it's still fairly robust. I will let both Dan and Bill speak to their pipelines and what we're seeing, but the timeline isn't getting shorter. It was for a while, but it's not getting shorter right now.

I think the government is very focused on making sure that their procurement decisions are well documented. But they're not really extending either. Each agencies -- has a fairly robust set of requirements they're sending it out.

Bill, do want to speak to yours?

This is Bill, and in my case I think we are seeing the timelines back I guess about similar to what we saw maybe one year ago. But the awards are still happening. Awards are being made regularly. The new RFPs are still being released.

We are not seeing any significant delays in any of the proposals or the programs that we are working in on. Dan?

The only thing I would add to that is there still a lot of protest activity that slows down the cycle. The awards.

I think this has been touched on a few different ways, but the strong award activity and the inorganic contribution isn't moving the revenue up, and that's primarily from small business set aside to pressure. Where are you seeing that the most? Any clients in particular or areas in particular, and are you expecting that to continue?

Well the areas that we've seen it most are in the Veterans Affairs Department and the Navy. Within customer sets that we have today.

But it's hard to say whether the trend will continue, because has been there for a while and it seems to be leveling in some customer sets. So it's very customer specific. Where they think they need to be from an overall profile.

Is there anything that happened that sort of -- it seems like -- not that it came out of the blue, but this is been a noteworthy headwind across the industry. Was there something that changed with the government clients that brought this back into focus, or is it just because we are seeing it more because award activity has turned?

I think there has a greater emphasis on assuring that we meet goals within the current administration. And that every service is trying to make sure that they meet those objectives.

Okay. Thank you very much.

Brian Kinstlinger, Maxim Group.

Hello, this is actually Josh Seide in for Brian. Firstly, have there been any major protests to your awards in the first half of 2016? I think you mentioned the SPARC contract in the prepared remarks, but are there any other protests that we should be mindful of?

We have one contract that we were successfully awarded that has been under protest and is going through corrective action. But like with any protest we have to work through, the customer's proposal response and how they work through the corrective action on awards.

Okay. And can you comment at all on the awards trends thus far into July?

So far they have been pretty decent. I think we are on pace. I think the volume within the quarters is running as expected. It's not either stronger or light. I think that we're doing okay.

Okay. Last quarter you had discussed some pricing pressures easing a bit. Would you still feel that that's tending to be the case?

Yes. Our general view -- and I'll ask Dan and Bill to add to this -- is that there's more focus on solutioning. They're still a very price sensitive, but they also want to get the right solution and they're focused on modifying their structures and things like that. Dan?

Yes, I do think in some areas the customer sees the downside of low-price definitely acceptable bid, and we do see some customers moving back to a more balanced approach.

And this is Bill. We've had at least two or three of my key customers tell us outright that they will no longer do LPTA bids. That everything will be best value still. That means cost is always going to be important. It hopefully will not be the primary factor.

That's helpful. Thank you. If we look at the midpoint of 2016 revenue guidance, how much revenue does the Company need to generate from contracts not yet won?

Not yet won in the midpoint is about 2%.

Thanks. That's helpful. Lastly, just a quick one. I don't think I heard in the prepared remarks how much of the revenue was attributable to the MRAP family of vehicles this quarter?

We provide OCO but not MRAP specific. I would say that MRAP's work is consistent with prior quarters and our expectation.

Thanks.

Tobey Sommer, SunTrust.

Hello, this actually Kwan Kim on for Tobey. Thanks for taking my questions. First off, could you please breakout for us the percentage of revenue generated in the intel markets and give us an update on the current pace of the awards coming in? How they compare to the prior quarter? Thank you.

Roughly 40% to 45% of our work comes from the intelligence community, per quarter.

What was the second question?

The current pace of the awards coming in?

Fairly consistent on a heavy basis. So the award activity has been heavy, the submit up activity has been heavy, and although spotty the award activity has been on pace with what we've been expecting.

Thank you. You mentioned in the last quarter that in terms of contract durations, there's a trend of two-year contracts moving out to three to five years. Are you still seeing the same trends?

This is Dan. We're certainly seeing that trend moving on to longer period, and also some consolidation, which makes some of the contracts larger.

Thank you.

Bill Loomis, Stifel.

Hello, thanks. Just on OEC, I missed what you said about how much that revenue factored into the guidance?

It's $12 million in the second half of the year and it's providing double-digit bottom line returns.

Is that low double-digit or high double-digit?

(laughter)

It's providing enough to provide the $0.02 adjustment that we had, one to the other end, what is estimated.

Are you seeing other opportunities like OEC, smaller cyber related, is that when you look at your deal pipeline are you seeing multiples of those, or are those hard to come by?

Bill, this is Bill. Companies like Oceans Edge are very unique in terms of being some of the smaller boutique cyber companies. That's one reason why we were so eager to move forward with this one when the opportunity came up.

There are other companies out there that we are highly interested in. There are not that many pure cyber companies.

KCG, which we acquired a year ago, you probably remember, is a pure cyber company. Oceans Edge is a pure cyber company. There are that many of those, so when we do see them we certainly get very interested in them.

Okay, so most of acquisitions that you guys would be looking would be the more traditional services and the intelligence and other areas?

Yes. Broadly, that's correct.

Great. Thank you.

Gautam Khanna, Cowen and Company.

I was wondering if you could comment or give us an update on the Groundbreaker recompete, which is being split into three different contracts? I think the Greenway or some such nomenclature to it.

What's the deal with timing? How are you positioned? Are you bidding one of them as a prime? Any color there would be helpful.

So we generally don't talk about specific bids underway. The timing within the overall profile. I would say that we are a part of the effort up there. And we will keep you informed in terms of how that progresses within the community.

Bill, do you want to speak?

Well without being specific, we can say that the government is still right on target with the original timeline that they proposed. As Kevin pointed out, we are involved. We think we are in a nice position. We're looking forward to the government moving along forward with the process.

Can you give us -- can you remind us what the timing is on bid submission, award date, what have you?

We are expecting -- the proposals have been submitted. We are expecting rounds of questions in August.

And then usually following that there is the opportunity to resubmit the bid. And the award will be sometime in the -- at least we been told -- the late second quarter or early third quarter of 2017.

It's your understanding that the -- since you are one of the incumbents of contactors -- do you think the work that may result on whatever you bid on is going to be greater than the existing work you do? In other words, I've heard like access and other contracts are being added to the work scope of the recompete as parts. Is that consistent with your view?

I think that's very hard for us to tell at this time. We will have to see how well procurement shapes out and how it's determined by the customer. So I think we will have to delay on answering that.

Okay guys. Thanks a lot.

Thank you, and that concludes our question and answer session for today. I would like to turn the conference back over to ManTech Management for any closing comments.

No, we thank you all for participating on today's call, and if you have any follow-up questions as usual the Management team will be available for questions. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.