ManTech International Corp (MANT) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ManTech Fourth Quarter Fiscal Year 2017 Earnings Conference Call. (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, Corporate Development. Please go ahead.

Welcome, everyone. Thank you for participating on our fourth quarter call. On today's call, we have Kevin Phillips, President and CEO; Judy Bjornaas, Executive Vice President and CFO; as well as Dan Keefe and Rick Wagner, our 2 Group Presidents.

During this call, we will make statements that do not address historical facts, and thus, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from the anticipated results. For a full discussion of these factors and other risks and uncertainties, please refer to the section entitled Risk Factors in our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call.

Finally, on today's call, we will discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find the reconciliation of the non-GAAP measures discussed on this call in our fourth quarter earnings release.

With that, I would like to turn things over to our CEO, Kevin Phillips. Kevin?

Good afternoon, everyone. Let me begin by briefly addressing the previously announced executive management changes since our last earnings call. Effective January 1, I became President and CEO, and George Pedersen, our Co-Founder, moved to an Executive Chairman role, and of course, retains his position as the Chairman of the Board. This is a natural progression, one that George and I discussed regularly since I became President and COO in late 2016.

George remains very much active in the business and remains focused on the overall strategic direction of the company, including our M&A strategy. I'm excited about the opportunity that George and the board have given me and look forward to leading this business toward continued success.

Additionally, we named Rick Wagner as Bill Varner's successor to lead our Mission, Cyber & Intelligence Solutions business.

ManTech had another year of remarkable performance in 2017. We delivered solid revenue growth, remarkable bookings and strong cash flow. Our growth-focused strategy continues to deliver value to our customers, our employees and our shareholders. This year, we are celebrating our fifth year anniversary as a company. Foundational to our success since 1968 has been the record of delivering innovation and the steadfast support of our customers' important national and homeland security missions no matter what the challenge. We're extremely proud of the significant contributions ManTech has made across the government throughout our existence and remains committed to leveraging our expertise in supporting our customers and our nation for many more years to come.

On the current budget environment, our customers are operating under a continual resolution through March 23 as Congress works through the finer details of the agreed-upon 2-year budget deal. The deal calls for Budget Control Act cap increases of $80 billion in FY '18 and $85 billion in FY '19 for defense and $63 billion and $68 billion for civilian agencies for FY '18 and FY '19, respectively. If approved at the new BCA cap level, the FY '18 national defense budgets, including OCO funds, will increase approximately 10% over 2017. The DoD base budget increasing 15% year-over-year within that total. Our long-term budget outlook remains optimistic and we believe across our customers that we have increased demand for our technologies and solutions, particularly for full-spectrum cyber, IT modernization and emerging technologies with cloud, digital, mobile and data analytics.

Over the past few years, we have significantly invested in strengthening our business development organization and enhancing our technical capabilities in anticipation for increased customer demand. As a result of those investments, throughout 2017, we were awarded a number of new large contracts within the Department of State, Jet Propulsion Laboratory and the Department of Homeland Security, among others.

In Q4, we received $1.1 billion in contract awards, and for the year, contract awards totaled $4.2 billion, representing a book-to-bill of 2.4x in both periods. This marks our strongest bookings year and the highest annual book-to-bill ratio in the company's history.

New business comprised approximately 50% of awards in the year. The mix of business we won during 2017 continued to weigh towards cyber, IT solutions, intelligence and systems engineering support.

Additionally in Q4, we closed our acquisition of InfoZen, which enhances our positioning within IT modernization and managed cloud services and expands our presence within homeland security missions. As a result of our recent contract awards and the InfoZen acquisition, our business mix has changed meaningfully from the beginning of 2017. We enter 2018 with a well-positioned company, driving about 45% of our revenue from the intelligence community, 35% from defense and 20% from federal civilian customers.

Furthermore, as a result of our recent contract awards, we exited 2017 with a total backlog of $7.1 billion, up 14% from our backlog at the end of Q3 and up 45% from our last year. Funded backlogs stood at approximately $1.4 billion. Proposal activity remains robust. We submitted about $7 billion of proposals in 2017, and we expect to submit between $10 billion to $12 billion in 2018. In order to position for this abundant market opportunity, we are making considerable investments back into the business, which is expected to increase our abilities to win an outsized share of these opportunities.

Our qualified pipeline has grown to over $20 billion, and our proposals outstanding figure remains over $4 billion. While proposal award volume is expected to be high in 2018, we expect variability in the timing of awards, and book-to-bill has a potential to be lumpy in 2018.

In summary, 2017 was another strong year for ManTech. We want to thank each and every member of the ManTech team, whose diligent efforts and tireless dedication have enabled that success. I'm invigorated by our employees' steadfast passion for our customers' mission, and I am proud that, together, we are raising the bar on performance.

Earlier this year, we were recognized by Thomson Reuters as a Top 100 Global Technology Leader, which is a testament to the innovation our employees bring to our customers every day. In addition, for the second year in a row, we were recognized by Monster.com as the #1 veteran employer. With approximately 50% of our workforce as veterans, we understand our customers' needs, their missions and the speed at which critical outcomes must be accomplished.

Our people have been, and will be, our most important asset. Given that, I'm pleased to report we continue to make excellent progress in recruiting, training, developing and retaining highly skilled talent in a competitive market. We will continue to invest in our talent, capabilities and innovations to build on our success in 2018.

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

Thanks, Kevin. I am pleased to report that the financial performance in the quarter and for the year met our expectations even after adjusting out the beneficial impacts in the fourth quarter from tax reform.

Revenues for the year were $1.72 billion, up 7% from 2016, with approximately half of our revenue growth coming from organic performance. The growth was driven by new contract wins announced in late 2016 and throughout 2017.

For the fourth quarter, revenues were $462 million, up 17% compared to the fourth quarter of 2016. Nearly 11% of the growth in the quarter was organic attributable to new contracts and growth in existing business.

In the quarter, we performed 89% of our work as the prime, and our contract mix was approximately 63% cost plus, 10% time and materials and 28% fixed price. In the quarter, we saw an increased amount of our revenues coming from fixed price contracts with slight reductions to our cost plus and time and materials mix.

Operating income for the quarter was $25.7 million for an operating margin of 5.6%. For the year, operating income was $98.2 million, up 8% from 2016. Operating margin for the year was 5.7%, in line with our guidance. The enactment of the Tax Cuts and Jobs Act of 2017 had a favorable $51 million provisional tax impact related to the remeasurement of our net deferred tax liabilities. This resulted in GAAP net income of $68.4 million for the quarter and $114.1 million for the year.

Diluted earnings per share was $1.73 for the quarter and $2.91 for the year. Removing the impact of tax reform, our effective tax rate was 29.7% for the quarter and 34.7% for the full year, lower than expected due to the impact of stock option exercises in the quarter.

Our adjusted net income was $17.8 million for the quarter, up 29% compared to the fourth quarter of 2016, and $63.5 million for the full year, up 13% compared to last year. Our adjusted diluted earnings per share was $0.45 for the quarter, up 29% compared to the fourth quarter of 2016, and $1.62 for the full year, up 10% compared to last year.

Now on to the balance sheet and cash flow statement. During the quarter, we collected $38 million in cash flow from operations and $153 million for the year. DSOs were an exceptional 61 days in the quarter, a 12-day improvement from the fourth quarter of 2016. For the year, we had capital expenditures of approximately $39 million. The increase in capital expenditures in the fourth quarter was driven by contractual requirements from a managed services contract we won in 2017.

During the year, we invested $177 million in the acquisition of InfoZen. Additionally, we distributed $33 million in dividends, maintaining a steady return of cash to shareholders. At year-end, we had $9 million in cash and $31 million of debt.

Before I get to our forward outlook, I want to spend some time discussing our capital deployment strategy, especially in light of tax reform. We expect to continue our strong cash flow generation and maintain a strong balance sheet. Our focus remains on deploying capital that creates long-term value for our customers and shareholders. We view this strategy to be threefold: internal investments to support organic growth, making acquisitions that offer force multipliers and providing a cash dividend to our shareholders.

When I get to our guidance, I will address the specifics of the increased investments in the business to support organic growth. From an acquisition standpoint, we remain very active in reviewing opportunities, and we'll continue to focus on businesses that are additive from a customer capability and technology standpoint and that take us into high-growth and higher-end areas.

Given that our strong balance sheet can accommodate future acquisitions and other investments, coupled with the incremental cash flow from tax reform, the board has authorized us to increase our current dividend level from $0.21 per share to $0.25 per share to be paid in March. This equates to an annualized dividend of $1, resulting in an industry-leading dividend yield.

Now on to our 2018 guidance. Before any acquisition, we are calling for revenues of $1.88 billion to $1.95 billion, net income of $78.6 million to $82.3 million and diluted earnings per share of $1.96 to $2.05. At the midpoint of the range, approximately 85% of guidance is expected to come from current backlog. And we have a clear path to growth with our recent awards.

In Q4, earlier than expected, we successfully won our largest recompete, an $847 million contract with the Army, which Dan will speak to later. This is driving a lighter-than-usual recompete level in our guidance. Furthermore, in our recent contract awards, we continue to see an increase in contract length, which provides for greater long-term revenue visibility.

The implied operating margin guidance for the year is 5.7% to 5.8%, reflecting up to a potential 10 basis points margin improvement. Our first half of 2018 operating margins will be impacted by increased transition and ramp-up cost related to a number of new major program starts to ensure mission success. Additionally, our operating margin reflects the continued investment in business development throughout the year but is weighted more heavily in the first half of the year given the volume of proposal activity that Kevin mentioned.

Lastly, our operating margin for 2018 reflects increased intangible amortization resulting from our acquisition of InfoZen. The ranges for net income and earnings per share compared to 2017 are positively impacted by the new reduced corporate tax rate and reflect a projected slight increase in share count. Built into our guidance are an effective tax rate of 26% and a fully diluted share count of 40.1 million shares.

Cash flow from operations should be between 1.5x and 1.7x net income. In addition to increasing our quarterly cash dividend as a result of tax reform, we have decided to make additional capital investments in the business. As such, we expect capital expenditures to be around 2% of revenue and related depreciation and amortization to be around 3% for 2018. We will have continued program-related capital requirements in support of our managed services contracts, and we are increasing our investments in internal IT systems and facilities expansion to accommodate our current and future growth.

Now Dan will speak to our defense and federal civilian business.

ManTech Mission Solutions & Services had a strong 2017, particularly in winning new business. As Kevin mentioned, the mix of our business has shifted in a large part, that is thanks to the record number of large new contracts we secured with federal civilian customers as well as the acquisition of InfoZen.

In 2017, we won contracts to provide data analytics to the Custom and Border Protection, provide enterprisewide managed services to the Jet Propulsion Laboratory and provide comprehensive security solutions to the Department of State. We are ramping up on these programs, among others, and are already seeing expansion opportunities to deliver additional capabilities.

As Judy mentioned, in Q4, we cleared through a major recompete and successfully won the Vehicle Engineering Maintenance and Operations Support contract with the Army. This contract is a 5-year effort valued up to $847 million, where we will continue to provide a wide range of sustainment and logistic support services to the Army's MRAP fleet. Winning this contract substantially reduced our recompete risk in 2018, and my focus will be on program execution and capturing new business.

I've mentioned on previous calls that my strategic focus has been on continuing the expansion of the business and to emerging IT capabilities. I'm pleased to report that we successfully began to execute against that strategy in 2017 by investing organically in our technical and solutioning talent and through our acquisition of InfoZen. In 2018, we will continue adding to our capabilities and further leverage organic success and the capability we have gained through acquisition. We are seeing strong demand signals for these capabilities.

I believe that ManTech has a compelling set of services and solutions that are well aligned with the robust market opportunity. With the strong execution in 2017, I look forward to maintaining our current momentum.

I would like to welcome Rick Wagner as President of our Mission, Cyber & Intelligence Solutions group. Rick has already made a strong and positive impact to the business. Rick?

Thank you, Dan. It's a pleasure to be here. And thank you George and Kevin for giving me the opportunity to lead the Mission, Cyber & Intelligence Solutions group. I'm excited to bring my energy and passion for the mission to the business and to carry forward the success that my predecessor brought in his tenure.

I am pleased to report that MCIS had a great quarter and year, marked by a strong organic growth and a number of key wins across both new awards and recompetes. In the quarter, we won a new $133 million contract from the Army's Intelligence and Security Command to provide intelligence analysis in support of counterintelligence and counterterrorism missions. Over the course of the year, we experienced strong customer demand for our full-spectrum cyber, IT modernization and mission operation services and solutions from several classified customers and expect that trend to continue in 2018.

Additionally, in 2017, we continued our focus on recruiting, training, developing and retaining our highly cleared and highly skilled talent. We experienced record hiring, expanded training opportunities and improved retention.

In summary, we are optimistic about the market environment and strongly believe that our positioning is well aligned to 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 Instructions) Our first question comes from the line of Tobey Sommer with SunTrust.

This is Kwan Kim on for Tobey. First off, post-Tax Cuts, in addition to raising the quarterly dividend by $0.04, do you plan on increasing the compensation expense as well as part of your internal investment strategy? And what are your priorities, I guess, when it comes to your internal strategy?

Yes, it's Kevin Phillips. So the dividend is a direct result of the cash available from the taxes. Our objective from capital deployment continues to be focused on targeted acquisitions to build into the business where we can advance our top line and our positioning in the market. We do not have any components of our cash from the taxes, which is about $6 million, so it's not a significant amount against the overall cash flow that we get from the business and towards that additional compensation.

And are you seeing the same level of challenges on the small business set-aside and the protest environment?

Small business set-aside is very much dependent on the customer and their overall trends. We think it's fairly stable at this point and some trending more favorable, others still trending more towards small. Protest environment remains very active. It's about consistent with last year's history.

Our next question comes from the line of Rob Spingarn with Credit Suisse.

I don't know if this is for Kevin or Judy, but could you talk a little bit about the 2018 guide? And what portion of the sales there is currently in the $1.4 billion in funded backlog?

At the midpoint of our guidance, about 85% of our guided revenue is in existing backlog, not all of that funded but currently under contract. So about 15% to be won to hit these numbers between recompetes and new business. Did that answer your question? The majority of our funded backlog will burn in 2018. Some customers fund slightly longer than the full year, but not too many.

No, I understand. I was trying to get an idea. You had this big order quarter, but a lot of it, I guess, is unfunded or options and so forth. How do we look at book-to-bill from a funded perspective? Is that the right way to think about it?

I don't think so. Our customers typically have -- their standard funding is between 3 to 6 months of funding. And we're operating under a CR. So I'm not too concerned about the fact that the funded backlog didn't go up proportional to the total backlog.

I guess the reason I'm...

We don't see downside from the funded level.

Right. What I'm getting at, Kevin and Judy, is trying to think about the longer-term growth, organic growth rate and the revenues because the bookings are coming in strong but there's a difference between funded and unfunded. I guess you're growing -- what's your organic growth embedded in the '18 guide?

That's 7%.

Okay. And do you expect that to be a run rate going forward? Or with this robust budget environment, might there be upside to that over time?

I would say there's going to be upside. We're seeing a lot of proposal activity going on right now.

Okay. And then from a...

A lot of that, by the way, is based on how well we work against the competitions in bids, right. Just like anything else. There's a high volume of bids, but we have to win our fair share to see that growth that could be...

Of course. Of course. That makes perfect sense. And then sort of in that light, Kevin, what do you make of the consolidation that we continue to see in the group? And how do you guys -- where do you see ManTech playing within that? You've obviously done some smaller add-ons, but do you see yourselves participating in bigger consolidation?

So ManTech's objectives haven't changed. We think that the tuck-in acquisition strategy is very good, and our market position is strong. I think our contract awards last year, our pipeline, our win rates all support that we are of a reasonable size. And if you think about the contract awards, our size hasn't preclude us from winning 2 $800 million contracts, that hasn't precluded us from winning $4 billion of bookings. So every company has its focus on where it wants to head, and we think we're confident in our current focus, our M&A strategy and where we want to take the company going forward.

All right. Has anything we've seen, does it change the competitive landscape? Does it do anything with regard to best value versus LPTA?

I don't think so. Every acquisition we've looked at very closely to see if the combination immediately and over time changes the landscape. The more recent announcement about the General Dynamics' acquisition of CSRA is an example. We see CSRA as a competitor in some components of the market. We see General Dynamics in the services side and others. How that plays out over time in the market from a competitive standpoint very much depends on the integration and the overall procurement, patterns and strategies of the customers going forward.

Our next question comes from the line of Gautam Khanna with Cowen and Company.

So I think in the prepared remarks, you mentioned that bookings can be lumpy, which is always true. Is there anything you want to calibrate us on Q1 versus Q2 versus Q3 this year? Like should we -- with $4 billion of outstanding bids, is there -- do you have visibility that, geez, it's possible to actually do another similar to Q4 kind of level in Q1? Or is that the adjudication dates fall outside of that window and we shouldn't be expecting a stronger Q1 given the CR and everything else?

So very broadly, the proposal volume is going to be very heavy in the first half of the year. The award volume is going to be heavier in the back half of the year. That doesn't mean it's all or nothing. It just means that against the larger volume of bids, the award activity will be more back-end weighted in the year based on what we see. The lumpiness is not only first half, second half, but there are timing of contract awards, say, above $100 million that are on a bubble between quarters that it's hard to tell if the government -- whether they will execute on time or not. And it could significantly change the bookings levels between these quarters. So it's hard for us to know that for the customer. We just know the expected time line, puts it in that range that it could shift over between quarters fairly easily.

Okay. That's helpful. And you mentioned kind of this mix -- the ramp-up cost, if you will, on some of the new contracts. I shouldn't say ramp-up cost. Rather they start off at a lower margin until you've actually optimized. What type of pressure should we see first half, second half in terms of EBIT margin?

So we're expecting kind of the combination of those startup costs and getting the programs off to a good strong start as well as the proposal volume that Kevin mentioned. We're expecting that the first half margins will be similar to the second half of 2017, so 5.5 to 5.6 range, and then building in the second half of the year.

Okay. That's helpful. And a follow-up on Rob Spingarn's question. Kevin, could you characterize the M&A pipeline a little bit? I mean, are you seeing InfoZen-sized type acquisitions in your pipeline at this point? Or are we looking smaller in terms of what we might expect [to trend after this]?

No, I would say that given the upturn or the view of the budget moving over the next 2 years, there's more discussion about opportunities. I don't know if they happen in the first half or second half of this year or into earlier '19. But there seems to be more discussion about potential M&A opportunities or candidates coming out over the course of the next 12 months. We're not -- they have to prove that out but that there's more discussion around that.

About middle-sized acquisition, it's not some hundred million dollar acquisition. Is that what you mean?

They're going to be broad. They're going to be the normal mix that can be $500 million, $300 million, $100 million. And as you know, ManTech will look at the capability and the customer set and the combination of value it brings in determining for each acquisition its value in the combination.

And last one for me. I just -- any evidence that tax reform will actually put pressure on billable rates?

I think we're already having pressure on hiring people because of those supply and demand issue. But I don't see that being a driver in increased wages.

Right. If you have a question with the margin compression, it's effectively LPTA by another means, and I don't see that trend happening in our industry. If something changes, we surely have to track it, but we don't see that.

Our next question comes from the line of Edward Caso with Wells Fargo Securities.

Judy, you had a great DSO this quarter, which usually means it's a good cash flow. But there were some other working capital items, I guess. Can you articulate what held back the operating cash flow?

It was pretty much kind of the impact of the tax reform, the changes and the deferred tax liabilities.

Okay. You mentioned IT modernization. I know that got stuck in one of the bills. Are you actually seeing any money flow on that side?

This is Dan. I'll tell you, in the DoD especially, a lot of the systems require upgrade, and we are absolutely seeing the contracts along those lines. Additional cyber still is very important to all our customers across the board, and we're seeing demands on SOCs and operating centers in support of customers in cyber. Rick, I don't know if you have anything to add?

Yes. On the intel side, there's a large push to go to integrated enterprise management, and that's forcing a lot of large contracts to integrate capabilities across the intelligence community. They've gone a long time without significant modernization in their IT, and so that's now coming forth in that effort.

Are you -- the budget again is coming late this year, hopefully not quite as late as last year. Is there a risk that this huge influx of money for government in '18 might not get deployed like it was not all deployed in '17?

The order of talent that are gapped out within our customer sets and ourselves are in order talent for technical and then talent for acquisition. So acquisition workforce is a little light. I do think it's going to be a push to do that, and we will collectively have to figure how to help with that process. It's going to be a high volume.

And finally, just help my math. I think I heard you said 7% organic implied in the guidance. But I think a quarter ago, you were thinking more in the 8% to 9% range. Do I have my math, right? And...

That's the midpoint. The upper end of the guidance is 9%.

Okay. So it's similar. It's not that -- you haven't dialed back what you said a quarter ago?

No.

Our next question comes from the line of Brian Ruttenbur with Drexel Hamilton.

Just a couple of housekeeping. Depreciation and amortization for '18. What do you have? Is it roughly $40 million? What is the value?

We said it's going to about 3% of revenue. So it's about $58 million.

$58 million. Okay. And then tax rate, again, can you repeat that for '18?

26%.

Okay. And then in terms of recompetes, you are going to have a normal year or light year? A normal year is 15%, if I'm not confused, and so it will be something less than 15%?

Yes. A normal year, I would say, is between 20% and 25%, and we're going to be less than 10%.

Less than 10%. Okay. Any single contract that's large, up for recompete?

No, the largest was the VEMOS contract that Dan spoke to.

Our next question comes from the line of Joseph Vafi with Loop Capital.

Sorry, I'm on an airplane right now. So I missed a little bit of the early discussion. But did you say if Army INSCOM was new or renewal business? And then I'll have a quick follow-up.

Yes, that's a new business that we won in the INSCOM IDIQ.

I'm sorry, Kevin, I didn't hear that.

That's new business.

It's Rick Wagner. This was new business that we won.

Joe, it's new, new business.

Just secondly, on the bid and proposal (inaudible) work in the bid and proposal top line, should expect the same thing out of your pipeline in 2018?

You're breaking up a little bit, so we didn't get the full comment.

Just on the bid and proposal pipeline for '18, in '17 we saw a lot of more pure IT work come out of their pipeline into new bookings. And I'm just wondering if your pipeline is composed of more of that same mix of business that we saw won in 2017.

Yes, so -- yes. Generally, it is more shifted towards cyber, enterprise IT, other IT-related or mission IT components, some data analysis as well. We still have a lot of other work that we do, but the weighting is shifting more towards that type of work.

And I'm not showing any further questions in queue at this time. I'd like to turn the call back to management for any closing remarks.

Great. As usual, members of our senior team will be available for any follow-up questions. Thank you all for your participation in today's call and your interest in ManTech. Have a good evening.

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