ManTech International Corp (MANT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the ManTech third quarter FY16 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

I would now like to turn the conference over to your host, Steven Vather, Executive Director, Corporate Development. Please go ahead.

Thank you, Karen, and welcome, everyone. On today's call we have George Pedersen, Chairman and CEO; Kevin Phillips, whose promotion to President & COO was announced today, Judy Bjornaas, whose promotion to Executive Vice President and CFO was also announced earlier today, and Dan Keefe and Bill Varner, our two Group Presidents.

During this call, we'll 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 in our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. Now, I'd like to turn things over to George.

Good afternoon, and thank you for participating in today's call. I want to begin by focusing my remarks on the management changes described in the press release issued earlier today. Kevin Phillips has been promoted to President and Chief Operating Officer of the corporation, and Judy Bjornaas has been promoted to Executive Vice President and Chief Financial Officer.

In each case, these promotions will formally become effective on November 7th, after we have filed our Form 10-Q. Under Kevin's leadership, Bill Varner and Dan Keefe will continue to lead their respective business groups. Kevin and Judy's promotions are a smooth natural transition for the Company.

Kevin served as Executive Vice President, Chief Financial Officer for 10 plus years, and has been expanding his overall leadership responsibilities over the last few years. In a similar manner, Judy has served as Deputy Chief Financial Officer since joining ManTech in 2010. Both are highly qualified to their respective new roles and I look forward to working with the entire ManTech team as we continue to grow as a Company.

I will continue as Chairman and CEO to focus on the strategic direction of the Company, evaluating acquisition targets and Congressional relations. I am bullish on a merger acquisition market in 2017, and believe that once the election cycle is complete and several today companies will become actionable. We have $71 million in cash, no debt and a $500 million line of credit.

We are in a strong position to make acquisitions to grow the Company. We plan to be active buyers in 2017. Let me briefly comment on the current political situation. As expected, the government is now operating under Continuing Resolution, which fully funds our programs through December 9. We believe that it's likely we will see another Continuing Resolution to start Calendar 2017.

Our hope is we will get greater visibility into the government's budget and spending priorities following the upcoming election. Regardless of the outcome of the election, the level of overall threats to our nation remain elevated and thus demand for our services should be strong. Now, Kevin will provide you with a view of our operations. Kevin?

Thank you, George. I'm excited about the opportunity that you and the Board have given me. ManTech is well-positioned to differentiate itself to our customers and grow within our core market. I have strong relationships with Bill Varner and Dan Keefe.

Although, they will now report to me, both will continue to lead their respective groups as they have done so effectively over the last few years. Judy has been playing a critical role in the finance and accounting area for many years, so I look forward to her taking on greater responsibilities. The transition and changes in reporting relationships have been smooth.

For 48 years, ManTech has been a mission first, customer-focused company, and I will carry this philosophy and approach forward. We will continue to invest in targeted markets and capability areas that our leadership team has already identified. These investment areas include best-in-class capabilities in cyberspace operations and cyber defense, and increased footprint into enterprise IT and mission IT.

These are areas that require agile software development, cloud environments, mobile, and use of big data analytics. We will expand these capabilities into existing customers within Department of Defense and increase our footprint in (inaudible) civilian and (inaudible) health customers as well as the intelligence community.

In addition to these cyber and IT areas, we have strong capabilities in multi-disciplined intelligence, full life-cycle systems engineering, test and evaluation, logistics, field operations and sustainment operations. We are capable of supporting these needs around the world and on numerous customer platforms, whether they are land, sea, air, space, or cyberspace.

We have exceptional capabilities in cyber defense, cyber (inaudible) services, supporting classified programs and insider threat protection that collectively provide exceptional protection to critical information and networks. My focus and mission is clear, we will help our customers meet their most challenging demands.

We will also provide an environment that will attract and retain talented employees and that will increase shareholder value as we continue to grow the business. Moving on now to our quarterly financial performance and outlook. I am pleased to see continued year-over-year growth in all of our key metrics and strong performance in winning new business.

In the quarter, we delivered strong organic revenue growth and year-over-year improvements on operating and net income. We received $886 million contract work this quarter, which represents a 2.1 times book-to-bill. Our solutions are in demand by key customers, and we are taking share in existing and new markets.

Approximately 44% of our bookings were for new business. Total backlog in the quarter stood at $4.6 million and funded backlog was $1 million. Proposal activity remains high, we expect to submit over $8 million in bids by the end of 2016.

Our total qualified pipeline is $18 billion, and we have about $3.5 billion in proposals waiting adjudication. Our capabilities and past performance allow us to effectively compete for larger contracts against larger competitors. Over the next 12 months, we anticipate continued heavy proposal and award activity.

Overall, we're pleased with our improved market visibility and resulting growth potential. While I'm very optimistic on our outlook, protest activity remains elevated, and small business set-aside trends remain in some customer areas. Collectively, these may temper or delay growth.

I want to echo what George mentioned earlier -- we will continue to prioritize capital deployment for selective acquisitions and are actively identifying companies that are well-positioned for growth. I'm excited about our market position, record proposal activity, and the long-term value of the capabilities that Dan, Bill, and the rest of the Company's strong leadership team are creating.

Now, Judy will provide you with some additional detail on specifics with respect to our financial performance and outlook. Judy?

Thank you, Kevin. I am honored to be given this opportunity and look forward to undertaking my expanded duties and responsibilities. Over the past six years, I've gotten to know the Company and the role well quite well by serving as Deputy CFO.

Revenues for the third quarter were $415 million, up $22 million or 5.7% compared to the third quarter of 2015, and up $14 million or 3.5% compared to the prior quarter. We experienced strong organic growth this quarter of 4.7%. 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 67% of revenue on cost-plus contracts, 13% on time and materials contracts, and 20% on fixed-price contracts. Operating income for the quarter of $23.5 million was up 11% from the third quarter of 2015.

Operating margin of 5.7% increased approximately 30 basis points year-over-year. Net income was $50 million and diluted earnings per share were $0.38 for the quarter, which were up 13% and 9% respectively, compared to the third quarter of 2015. Now, onto the balance sheet and cash flow statement.

During the quarter we collected $32 million in cash flow from operations, or 2.2 times net income. DSOs were 63 days for the quarter, an improvement of six days compared to the 3rd quarter of 2015, and an improvement of four days sequentially. Our balance sheet at quarter-end shows $71 million in cash and no debt. We will continue to strengthen the balance sheet while we move ahead on our focused acquisition strategy.

The Board has authorized us to maintain our current dividend level of $0.21 per share, to be paid on December 23, 2016. Moving on to guidance, we are narrowing the range of our previously communicated 2016 guidance. Before any future acquisitions, we're calling for revenues of $1.59 billion to $1.61 billion, net income of $55.5 million to $56.2 million, and diluted earnings per share of $1.45 to $1.47.

The implied operating margin for the year is 5.7%. Net income is expected to be up 9% to 10% and earnings per share is expected to be up 6% to 8% 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 are an effective tax rate of 38.3%, and a fully diluted share count of 38.5 million shares.

We're in the process of building our plan for 2017. We have cleared through some large bids, but we are still awaiting the outcome of several others that will factor into our outlook for next year. We have responded to a few solicitations from the Army that consolidate some of our existing work with work held by competitors.

The outcome of these procurements will factor into our outlook entering 2017. When we provide our 2017 outlook in February, we expect this uncertainty to be resolved. Now, Dan will speak to our Defense and the Federal civilian business.

Good afternoon. ManTech Mission Solutions and Services had another strong quarter, as reflected in the Corporation's results. We're also pleased with the continued strong program execution across the board that has resulted in award fees in line with expectations. In October, we delivered to NASA and Northrop Grumman, the final flight materials supporting the James Webb Space Telescope.

This completes our portion of production as a major subcontractor on this CAT 1 NASA program. Additionally, some of the re-competes that we have described in previous calls were awarded successfully to ManTech in the third quarter. Those awards include a $208 million award with the Marine Corps ISR Enterprise, and a $32 million award with the Defense Health Agency. Bill?

Thanks, Dan. The Mission, Cyber and Intelligence Solutions Group also had a great quarter. We received a $322 million award from a new customer, the National Geospatial Intelligence Agency, or the NGA, to provide enterprise management and cybersecurity support.

In addition, we had several contract awards, both new and recompetitions, as well as contract add-ons and extensions in the quarter from classified customers. I am pleased to announce that we brought a new Executive into the Company this quarter, Damian DiPippa. Damian came to us from Engility Tasc and prior to that, Coleman Research.

Damian's technical and leadership experience with many of MCIS' programs and customers is a great asset in helping us expand our business across an advanced technology and emerging service market. We remain focused on winning new work and have submitted many proposals in Q3 and earlier this year with expected adjudications in 2017.

Finally, attracting and retaining the strong talent needed to support our customers' missions remains a key priority for us. I would like to turn the call back over to George for closing remarks.

In summary, ManTech is positioned to grow based upon strong execution over the past three quarters, and our recent contract awards. We are committed to leveraging our strong balance sheet to accelerate our growth. I'm looking forward to a more strategic role and procurement to grow the business, and continue the 48-year history supporting the customers' most critical missions. With that, we're ready to take your questions.

(Operator Instructions)

Brian Kinstlinger, Maxim Group

Congratulations to both of you.

Thank you.

Wanted to start with the Army consolidation comment, if that's okay? I'm curious, what's the annual contract value that you currently generate under those contracts that are being consolidated with others?

Generally, there's a lot of -- there are a few contracts among many that we are bidding that consolidate some of our work with other competitors. The range of those outcomes can have a great positive impact or some downward pressure as well, it totally depends. We're waiting to see how they play out --some of them have been awarded to us, some not to us and still some outstanding.

I think the range of outcomes is still early to say. I would say for internal planning, we're viewing the general Army needs to be net down, but not such that it would be more than, in my view, a mid-single-digit impact. But we will wait to see how these play out.

Okay. And then, wanted to ask about the operating margin? I look at some of the PRs, they are slightly higher, so I'm curious, your opportunity long term to close the gap with some of the public peers -- is that with volume, is that with contract type? I'm curious over time how you see that playing out?

I think we are definitely suffering from contract type. We've got about 70% of our revenue from cost-site contracts. Every time we make actions to reduce our indirect spending, $0.70 of every $1 goes back to the government, so its hard to leverage growth, like in the past when it was heavy T&M and fixed price.

As the mix starts to shift and as we grow, we will see at some point some improved margin, but we're not expecting anything tremendous for the balance of this year or into next year.

Brian, this is Dan. I would add one of the reasons you see us really moving into the health market, there's a lot more firm fixed-price contracts there and also in the enterprise IT space. Certainly something that we're focused on.

Great. Last one I've got and I will get back in queue. I may have missed it, did you say $8 billion in awards being, -- I mean, proposals being prepared and over what time frame? Did you say $3.5 billion awaiting awards? Then maybe, how much is new versus re-compete? Thanks.

Yes, for the full-year 2016, if you recall the budget approvals over the last couple of years have provided our customers certainty around the budgets, and they have much more clarity about what they consider important. For 2016, ManTech will have submitted over $8 billion in submittals for work.

And I think that's a very strong representation of the efforts that the entire team and Bill and Dan have done to position ourselves in the market and take on some of these larger programs. We have got $1.8 billion of contract awards here today. We got $3.5 million in proposals outstanding, and, generally, if you look at the proposals we've been going after, between 35% of 45% of that work has been new business. I think it speaks well to the position we have.

Great, thank you.

Amit Singh, Jefferies

Full-year guidance for your topline, if you could talk about what is the organic revenue growth at the midpoint of that guidance? And at this point, what could get you to the upper end of the lower end? What are the puts and takes for that range?

The midpoint of the guidance as a total growth of about 3% and organic of 1% for the full year. And then to get -- as we kind of narrowed the range, to get to the upper end, it's really going to be dependent on hiring and any [OTC] surges that we might see.

Okay. Great. Then you talked about the contracts coming up for re-compete? Can you give us an idea as in this year, what percent of revenues were up for re-compete? And early next year, or full next year, I guess, what percent of revenues are going to come up for re-compete, so we can get an idea of the risks that you talked about?

So, for the balance of the year, very little revenue is at risk due to re-compete. I would say the first half of next year it's pretty light as well, a normal trend. We have seen over the course of the last year or two, delays in awards. We end up working under bridges and extensions and delay the re-compete. Again, the second half of next year starts to spike up a little bit above the normal 20% trend.

Its Kevin. I'll add that generally the re-compete level for 2017 within the intelligence community side would be less than average and within the DoD side would be greater than average. If you recall, the government had shortened their time period for certain contract awards on the DoD side. And that's kind of putting them in a constant re-compete. I think that will level off over time.

Thank you very much.

Bill Loomis, Stifel

Thank you, good quarter, congratulations, Kevin and Judy.

Thank you.

I imagine there's not going to be too much role changes. When I first saw the press release I thought for half of a second, weren't they already that? So congratulations. On the re-competes, first of all, on the Army consolidation, I did not understand the answer on that? If you could clarify a little more on how much revenue, is it mid-single-digits of revenues impacted in total by the consolidation?

It's a wide range of potential outcomes, which is why we keep emphasizing that these are out there. They can be net positive and they can drive downward, but I think that the range of outcomes to be -- rough order, plus 5%, 6%, 7%, minus 10%. Our internal planning purposes, we don't know what that pushes into next year until the contract awards are adjudicated.

Generally, the overall requirements are going to be a little bit lower. And if you would think low-to-mid single-digit planning right now, not knowing the outcome. This is just an internal planning number, but it's a wide range of outcomes but I'm trying to frame it as to less than 10% down, 5% up and we will see how it plays out.

Are these just task orders under IDIQs? Or are you talking about the IDIQ, and then the task orders will get re-competed?

Task orders under existing IDIQs.

The IDIQ vehicles themselves are not being consolidated? Just task orders within an IDIQ?

Correct.

And then you mentioned small business and protests? Everybody's mentioning that, but why do you think it's going to get worse, because I assume you factored that into your guidance? Everybody at some point of the year seemed to have slipped their guidance because of the impact of these two issues. Do you think it could get worse? And what are you seeing in terms of client behavior on the different types on the small business issue?

Yes, this is Dan. It does vary by client. I would say within the last six months it seems to have leveled off. I wouldn't say it's gone away but its certainly the Administration's guidance to the agencies and the services. Its kind of leveled out. What was the second part of the question?

Have you seen it different in different areas, when you talk to customers, if you think it's going to get worse, or what have you?

It's pretty balanced. The Administration's guidance is across the services and agencies so its relatively balanced. Certainly, some areas have more than others, as they may not have met the goals that they had to meet.

Broadly, it's created for the last few years a headwind for our part of the industry. Over time, if it has not already leveled, it will level. The question is, is this the new normal in terms of what we see today?

Okay. Great. Thank you.

Edward Caso, Wells Fargo

This is Tyler Scott on for Ed. Kevin and Judy, congratulations to you both. My first question is just on award activity in the intelligence community? Have you seen any fallout from the whole NSA contractor being arrested?

Maybe if you could comment in any sort of slowdown or impact you saw with the Snowden arrest a couple of years ago? Any thoughts there? Thank you.

Sure, this is Bill. Of course we can't comment on anything going on internally in any of our customer areas. We actually have not seen any slowdown in awards or any delays we would attribute to either of those events. Of course, you could say the recent events, it would be too soon to see anything resulting from that at this point.

Okay, great. And then just on the book-to-bill, the bookings in the quarter, obviously, it was a really strong number? What kind of visibility does this give you? 2.2 times book-to-bill, do you have visibility into the first half of next year? Further, or only over the next couple of quarters?

It's Kevin. The general proposal volume is high. It's expected to be high for the next 12 months in our view. And the adjudications and award activity, I think, will still be robust.

The timing between quarters is uncertain, but there's still a lot of volume being submitted. There's still a lot of volume to come in terms of awards and we will see how successful we are but I think we're in a good position to continue winning our fair share of the work.

Has there been any change in revenue conversion of the strong awards? It seems like the numbers have been really good this year? You know, the revenue guidance at the high end keeps coming down, so is there something going on there that you could talk about? Or anything else we should be reading into?

Yes, will there are two factors that have dampened the ramp-up time on staffing. One is, there is a just a greater supply and demand gap in some of those skill sets. We are aggressively dealing with that and have been. The other is, frankly, there are some delays in the clearance process that are normal and appropriate.

But they are occurring as a result of the previous action at OPM to address issues, and also on the customer side to make sure that we have the appropriate issues to address what we may consider entire threat risks. So those are all important things to address, they're creating some delays in the clearance process that I think the entire industry is aware of.

That's just slowing down some of the ramp-up time. Those are the only unique or different things, than the norm.

Okay, and the final one, was there anything unique in this quarter -- 5% organic growth is obviously very, very good? Was there something, an award fee or something like that? What are you seeing that would make you think that growth rate going to step down moving forward?

Some of the -- you asked a question about the size of the awards, and some of the awards do have money set aside for ODC procurements. And in Q3 we did see a spike on some of those new awards and some of the ODCs.

Great. Thank you very much.

Gautam Khanna, Cowen & Company

This is Lucy on for Gautam, who is traveling. Good evening, everyone. I wanted to follow up on the conversation around the Army consolidation? I was wondering if there are any other swing factors or large drivers to your organic growth in 2017? Perhaps, in terms of programs or set asides?

No, no, I think it's all -- frankly, we are bidding on larger bids. I think in Dan Keefe's area we are more successful on taking on bigger bids, which is great, and Bill as well. It all boils it down to our ability to win those contracts and expand the business. I think we are in a really strong position.

We've done a great job over the last few years to get there, and we're very optimistic about the potential for the market and our positioning in the market.

I think it all comes down to timing of the awards and then the protests, and clearing through those so that we can start work.

Got it. And secondly, on the M&A pipeline, are there any large potential (inaudible) out there that you are looking at?

It's Kevin. As George mentioned, once the election cycle is done, if you think about the overall budget footprint, we think it's going to be flat to up, and we're in a good position so we're going to be more aggressive on the acquisitions. There's some good targets out there and we think after January we will be more active. Yes, we're actively seeking and looking at candidates, and expecting more in 2017 and we are very focused on that.

Great. Thanks, very much.

Okay.

Brian Kinstlinger, Maxim Group

Sorry if I missed this, but first of all, did you mention or quantify the contract values that are in protest? If there are some, are they in bookings yet? Are they not yet in bookings?

First, we don't put any protest in bookings until the protests are cleared. And within that, there are a large number of bids we have been going after, some successful, some not. I don't have a specific number to provide you, but I do think there is some large bids that are going through the adjudication process, that once they are cleared -- in our favor or not -- will provide some good visibility on the level of growth that we can expect.

So, it's pretty heavy in terms of the bid volume. It's pretty heavy in terms of the amount that's above normal, I would say, in terms of the protest volume, and I think that's industrywide. And we will have to see how they plays through.

Is it accurate to say you have a couple of hundred million dollars right now of wins in protest?

We have a sizable amount of wins and losses in protest and I would say that numbers is light, and I think industry-wide everybody's in the same boat. And about over half, probably 60% of the bids that are in any protest position, are actually for new awards. Once they get cleared through, if they're in our favor, that's potential upside.

Finally, again, you may have answered this as well? If I look at 4Q revenue versus 3Q sequentially, is the lower revenue for less billable days (inaudible) pass throughs, is what I think you may have said? Is it because some programs are coming to their natural conclusion at a loss?

It's a combination of both of those. About half of it is from fewer workdays, and then people taking time off for holidays. And then a slightly lower level of ODCs in the quarter.

Great, thanks so much.

Okay.

Tobey Sommer, SunTrust

Wanted to ask a question about backlog? With the upcoming guidance about backlog and how that's supposed to be treated, are you comfortable that your methods and processes are aligned with that? Or do you envision any kind of changes you might have to make?

I'll tell you that I don't think anybody's reporting is in line with the guidance. I think everyone's still trying to figure out how we're going to report the guidance. It is not clear. It is clearly not what we reported backlog.

In fact, I don't even think what we report as funded backlog is in line with the guidance. So, I think, industry-wide, we will probably continue to report backlog like we have. The GAAP reported backlog, that's going to be required in the financial statement will be based on what they require. But it is not an industry norm definition that they've come out with for that.

Okay. Wanted to ask a question about pricing and the dynamics there? With LPTA maybe not being used as prevalently going forward, some contracts being viewed and awarded on a best value that used to be based only on price? Do you think that provides the Company any kind of margin tailwind as a portion of what had been formally bid and won on an LPTA basis, can be re-competed on a best value?

It's Kevin. I will answer that. First, different customers are still running through different methodologies. Some customers still tend to focus on price as a very important factor. Generally though, the trending is moving away from that to try to find the right solutions and the right outcomes to support the mission requirements, which is positive.

That will support, over time, potential in our sector as well as ManTech for that upward movement. But I think we have to wait and see how those play out, because there is still some that are focused on price. Some that are focused on solutions and capabilities.

Okay. Thank you. That's helpful. The last one I was going to ask, if I missed this in the earlier part of the call, I apologize, but did you comment on M&A? And what you are seeing in the market as opportunities, versus a couple of quarters ago? Thanks.

Yes, I did. We expect after the election cycle in 2017 there will be more assets out there. I would say there is some decent businesses out now and decent businesses we expect out next year.

And we are actively engaged, but once we clear through the budget cycle, I think we noted, George always has been and will continue to be focused on acquisitions strategy and the growth potential, because that's our primary driver for capital deployment. We expect to be aggressive next year add I think there is some good businesses.

This year it's kind of normal. Next year we expect it too be a little bit above normal.

Thank you, Kevin, and congratulations.

Thanks.

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

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