ManTech International Corp (MANT) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ManTech International Corporation First Quarter Fiscal Year 2018 Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

And now I would like to introduce your host for today's program, Stephen Vather, Executive Director, Corporate Development. Please go ahead.

Welcome, everyone. Thank you for participating on ManTech's first 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 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.

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

Good afternoon, everybody. I am pleased with our excellent results and start to 2018. We continue to execute on our strategy and are building on the momentum from last year. The contract awards we announced over the last few quarters are fueling strong organic growth and financial performance across the business. As a result, our quarterly revenues, operating income, net income and earnings per share were all up year-over-year.

I'd like to take a moment to thank our team for their steadfast dedication as we maintain our focus on growth, helping our customers succeed and increasing shareholder value. People are at the core of ManTech, and they are our most valuable asset. Maintaining our position as an employer of choice remains a key priority for us.

I'm delighted to report that we saw year-over-year and sequential direct labor growth in Q1. As we ramp up on recent awards, we have added hundreds of highly talented employees to our ranks, bringing our exceptional employee base to 7,800 strong. Judy will take you through the quarterly financial detail in a few minutes, so I want to focus my remarks on a few key areas: the budget environment, our market positioning and our opportunity pipeline.

The budget environment is very strong. In March, Congress passed the Omnibus Appropriations for FY '18, mandating $655 billion for defense between base and Overseas Contingency Operations accounts. This 8% increase represents the largest funding increase to defense in over a decade. Our customers are focused on rapidly allocating these additional funds against their mission requirements before the end of the fiscal year.

Additionally, the FY '19 presidential budget contains a $686 billion request for defense, which continues the trajectory for strong budget growth and represents a 5% increase over FY '18 appropriations. Our customers have clear visibility into their funding levels and the technologies required for their missions. The rapid pace of innovation, coupled with the availability of commercial and disruptive technologies, is applying pressure to traditional government business processes.

Customers are demanding speed to swiftly integrate these technologies to ensure readiness and to enhance our capabilities to match and to overmatch threats to our nation and our allies. ManTech's position as a trusted integrator is allowing us to bring these technologies and best-to-bridge solutions to our customers' missions.

Our growth strategy continues to be well aligned with the needs of our customers. In the quarter, we received $430 million in contract awards and our last 12-month book-to-bill remains healthy at 2.2x. Our total backlog remains at $7.1 billion and our funded backlogs stood at $1.2 billion.

On our last call, I previewed our expectations of a rapid acceleration on proposal activity. Suffice it to say, Q1 was very busy. Our customers are increasing the demand across our core offerings in cyber, secured enterprise and mission IT and software and systems engineering.

In the quarter, we submitted a record number of high-quality proposals, highlighting our technology leadership and our successful track record of supporting national and Homeland Security measures. As a result, our proposals outstanding figure grew from $4 billion at the end of 2017 to approximately $6 billion at the end of the quarter. We remain on track to submit between $10 billion to $12 billion in proposals for the year. Despite the record pace of proposal submissions, we see no shortage of opportunities. Our pipeline remains robust at over $20 billion.

Now Judy will provide you with additional detail on specifics of our financial performance and outlook. Judy?

Thanks, Kevin. Revenue for the first quarter was $473 million, up 13% compared to the first quarter of 2017. Over half of our revenue growth in the quarter was organic. Direct labor was up 12% year-over-year and was the primary driver of our Q1 revenue growth.

For the quarter, prime contracts represented 89% of our revenue. Contract mix was approximately 65% cost-plus, 25% fixed price and 10% time and material. Operating income for the quarter of $26.4 million was up 8% from the first quarter of 2017. Quarterly operating margin of 5.6% was consistent with what we had indicated on our last call.

Let me highlight a few factors driving operating margin in the quarter. First, we continue to make investments to support the rapid pace of proposal activity; and second, we saw increased depreciation and amortization compared to last year as a result of our InfoZen acquisition and other capital investments.

Net income was $20.1 million and diluted earnings per share were $0.51 for the quarter, up 34% and 31%, respectively, compared to first quarter of last year. Since the change in accounting rules for stock option last year, our tax rate has become more volatile. The strong stock price performance drove up a higher level of stock option exercises in the quarter, which resulted in a lower-than-expected effective tax rate of 22.1%. The lower tax rate added $0.03 of EPS in Q1.

Now on to the balance sheet and cash flow statements. Our balance sheet at quarter end showed $10 million in cash and $66 million of debt. As expected, we drew against our revolving credit facility as we invested in our business and had increasing net working capital requirements to finance the growth of the business.

During the quarter, we used $18 million of net cash flow to fund operations and our DSOs were $0.69 for the quarter. The board has authorized us to maintain our current quarterly dividend level of $0.25 per share to be paid on June 22, 2018.

Now on to the forward outlook. As compared to our previously communicated 2018 guidance, we are raising and narrowing the range on revenue, net income and EPS. We are calling for revenues of $1.9 billion to $1.95 billion, net income of $80.1 million to $83.3 million and diluted earnings per share of $2 to $2.08.

Thanks to several recompete wins in the quarter, at the midpoint of the range, about 90% of our 2018 revenue guidance is expected to come from current backlog. Achieving the higher end of the revenue range will be contingent on the timing and pace of material procurements, as well as the ramp up of any new contract awards. The implied operating margin guidance for the year remains at 5.7% to 5.8%.

Consistent with what we communicated last quarter, we are continuing to make investments in the business to support ramp-up of our new contract and to respond to our best level of bid and proposal activity. We still expect capital expenditures to be around 2% of revenue and the related depreciation and amortization to be around 3% for 2018.

Cash flow from operations is expected to be between 1.2x and 1.5x net income for the full year. Built into our guidance are full year effective tax rate of 25.1% and a fully diluted share count of 40 million shares.

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

ManTech Mission Solutions and Services achieved a strong start to 2018. The growth in Q1 was reflective of the strong bookings which we achieved in the second half of 2017. I'm particularly pleased with closing out our Navy and DARPA recompetes in Q1, which leaves us with an extremely low recompete risk for the remainder of the year across the enterprise. In addition, we expanded into new work with contract awards with 2 of our current customers, the Marine Corps and the Department of Veterans Affairs.

Finally, ManTech continued to maintain a strong portfolio of IDIQ contracts across our customer set. We were awarded a position on the defense information systems agency's ENCORE III vehicle. It's a 10-year vehicle with $17.5 billion ceiling used by the Department of Defense and other federal agencies to procure a range of IT services and solutions. While there is no associated booking with this award, it is an incredibly important vehicle, giving ManTech strong and growing presence in providing IT solutions across the federal government.

With respect to contract performance, you have now completed the stand up for the managed services enterprise IT contracts supporting the Jet Propulsion Laboratory in Pasadena, California. We have fully ramped on our recent wins with the Department of State and Homeland Security, and are seeing opportunities for contract expansion to bring additional capabilities to our customers.

We're also pleased with the integration of InfoZen, which we acquired in Q4 2017. Their strong capabilities and agile software development are proliferating across our company. Rick?

Thanks, Dan. I am pleased to report that the Mission, Cyber & Intelligence Solutions group also had an exceptional quarter. We saw increasing requirements from several classified customers for our enterprise IT and security engineering capabilities, which materialized in the form of sole source contract expansions. We've also seen contract extensions on several key contracts reducing recompete activity for the year.

As Kevin noted earlier, our proposal activity increased significantly in the quarter. Of note, a large portion of our increased proposal activity was from cyber and enterprise IT opportunities across the intelligence community. And quite frankly, I think Kevin and Dan would agree with me, across the federal government as a whole. We view these as very attractive markets that will continue to see strong growth given the necessity of secure IT modernization.

I am pleased to report that in early Q1, we were fully ramped on our recent award with the Army Intelligence and Security Command, leading to a record number of hires in the quarter. Attrition in Q1 also dropped to its lowest level in 5 years, resulting in a significant increase in headcount.

The investments we are making in training, education and other benefits are showing great dividends. We remain focused on the development of cyber and IT solutions aligned to our customers' growing budget areas. Our growth team has been extremely busy this quarter. And with the increased level of proposal submissions in the quarter, we expect to see those efforts translate into bookings for the balance of the year and in 2019.

I would now like to turn the call back over to Kevin for closing remarks.

Thanks, Rick. As many of you know by now, Dan is retiring at the end of Q2. Dan, congratulations on a stellar career. It has been a pleasure working with you and we thank you for your service. You have been an integral member of the leadership team here at ManTech, and we appreciate everything that you have done not only for ManTech, but also for your service to our country.

Before I conclude, I want to note that yesterday, ManTech was awarded a contract with an agency of the Defense Department to provide managed enterprise IT services. I'm not at liberty to discuss many specifics regarding the contract, but it is of similar nature to other IT and technology programs we won in 2017, and it is of meaningful size.

This contract has not yet cleared its protest period, and we will provide more details as soon as we have the necessary customer approval. We do not expect any meaningful contribution from this award until 2019. We believe this win will provide us a strong foundation for ManTech's continued organic growth.

In summary, I am pleased that the execution of our strategy is resulting in industry-leading organic growth. I'm optimistic about the future of the business, and I am proud that across all levels of the company, we are focused on bringing innovative and differentiated solutions as well as speed and agility to our customers and their critical missions.

There is absolutely no question that this is a very exciting time for all of us here at ManTech. But it's important to remember that our success is a result of putting our customers and their missions above all else for 50 years.

With that, we are ready to answer your questions.

(Operator Instructions) Our first question comes from the line of Rob Spingarn from Credit Suisse.

Well, on the back of such impressive bookings last year, I think you saw about 6%, 7% organic growth in the quarter, and you're guiding to an overall growth number of 12%. So I wanted to dig into that a little bit. What your organic growth for the year? What's embedded in the top line guidance? You may have said it earlier, I didn't catch it. And then how we should think about those very strong bookings last year translating? I know they're on some longer-term contracts, but I just want to understand how we calibrate a 1.4 book-to-bill in 2017 into what we should realistically be looking for going forward.

Yes. So at the midpoint of the guidance range, it's a little over 7% organic growth rate for the year. So -- and I think, through Q1, we pretty much finished ramping on most of the awards from last year.

I'd note that some of our contracts are now longer term. Many of them may be up to 10 years versus 3 years prior, so we have a longer runway and sustainability on the contracts and the revenue for much longer periods in the company as well.

Okay. And what kind of bookings do you think you get this year? Going forward, is there any kind of expectation? And to what extent does the omnibus and the extra money that you spoke to earlier, Kevin, play into that?

So first, I'll speak to getting $10 billion to $12 billion. Our recompete rates this year are low. It's less than 10%. So most of the work that we're bidding on is new, and how that plays out is very much depending on our new business win rate. I believe that in both Q2, Q3 and Q4, our Q2, 3, 4 of this year, heavier volume of expected awards, with a higher weight in Q3. And we believe that provides a strong foundation for growth going into '19. It's hard to tell what that provides until we see how those play out in terms of contract awards.

Is it fair to expect some of the extra money to start to flow in Q3 as you just mentioned? I know some other contractors are saying this is really a calendar '19 opportunity, but it seems like O&M money might come sooner. It sounds like that's what you are alluding to there.

Yes. I believe our customers have had clear knowledge of what they need and they've been able to focus on it. And now that we have the funding, as you know, the funding is -- there's more going to procurement, there's more going to RDT&E, but there's also money going to sustainment and development around cyber and space resilience. So I think that there will be more money around those areas that will be supportive of our position in the market.

Okay. And then just one final one, it's very high level. But given the kind of selling pressure we've seen in general with defense stocks, less so on the government services area, heavier on the hardware side, but do you think that there's much risk if we should see a political change in Congress with the midterm elections to the outlook or do you not think about it that way?

Well, with any election, there has been more time between the time of the election and any changes in how the procurement cycle or the budget cycle pass, and they're just much lower in changes. So it's hard to tell what will happen with the midyear or any election for that matter. We tend to think that the overall environment around national and Homeland Security doesn't change between administrations nor elected officials within Congress. So we'll have to play that by ear, but we tend to think there's longer runway on the demands for our services.

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

Kevin, I was wondering if you could elaborate on your comment about the bid pipeline. So it went up quite a bit. You mentioned the contract win that just happened that could be protested -- could not be. But are there -- within that pipeline, is there any way to characterize like how many of them are over $100 million a year? How many kind of big jobs you're pursuing because it looks like you guys are actually scaling up on some of the things you're going after. I'm just curious if there's anything you can give us about the profile of what you're pursuing maybe in terms of size and margin. (inaudible)

Yes. So I'll speak at a high level, and then Dan and Rick can weigh in. So generally, the timeline it takes to procure is improving the certainty about a procurement once it's [let sustaining as improving], and there's actually more speed and demand for getting things done within the federal government. Now if you look at our bid pipeline today, it is stronger. If you look at our bid pipeline compared to 2 years ago, I would say that the amount of procurements that are above $100 million are about 50% greater than 2 years ago. But that's more of a shaping of the customers deciding to their bundle or bid large, but also our position to go after them as well. So we've been strategically working on acquisitions combined to go after [$100 million cost] procurements as a prime contractor. We continue to do that, yet it's showing in both pipeline volume and the amount of bids that are scaled, but also there's consolidations in some procurements. And to that end, I'll let Dan [speak to that].

Yes. And I would just add 2 points, Kevin. First, certainly across the market, contracts are larger because some are being consolidated and the time period for the contracts is longer. So that makes a number of the contracts larger. And then my other comment would be, if you compare to where ManTech was, say, 5 years ago, and as we moved upscale, we now have the capability not only to go after but to win. Examples would be enterprise IT contracts that are of scale.

Yes. And I would add that our focus on IT and cyber is driving us toward some of those larger contracts as well.

And do you think these could be accretive to the corporate average EBIT margin? I mean, is there a difference in either the pricing dynamics or contract structures like less cost plus more T&M and fixed price? Anything or just billing rates, generally. I'm just curious [how we should think about].

Yes. So I think -- yes, so clearly, that's a focus of ours, is to improve the forward-looking margins. We're seeing a little bit of shift more towards fixed price contracts, especially in some of the enterprise IT solutioning jobs. Those, over time, have the potential to have much higher margins. But initially, they're probably in line with our profile. But in general, we're looking long and hard on the impacts of bidding anything that's less than -- that would be dilutive to our margins.

And I'll add that we're very focused on investing to respond to the market today.

Right.

And to follow up on Rob's question. I remember a quarter ago, you guys mentioned Q1 may not be as strong a bookings quarter just based on how the calendar fell in terms of when things would be adjudicated. Do you feel that Q2 has a lot of balls in the air where they are going -- there's going to be a lot of adjudication, so there's potential for bookings to really move higher or is this kind of Q3 weighted? I'm just trying to get a sense for the seasonal aspect of what you have.

I would say that Q2, Q3 and Q4 all have a heavy amount of adjudication. So it's not all lumped into Q3, and we see a lot of activity this quarter as well.

Okay. Last question. Any competitive implications of General Dynamics and CSRA combining? Is there any -- is it a threat to ManTech incrementally and just what are your perspectives on that?

So like any acquisition and any combination we have to look at and then see how it plays out over time. It in one way reduces what normally would have been a competitor in a competitive market, and another way it may add to the higher weighting of the probability of their ability to win. But we have to play it out by each bid to be able to decide that and how to make that combination work. Rick, do you have any...

I think the other part is just all the work that goes into that combination will certainly draw energy from them in the short term.

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

Maybe -- perhaps we could talk a little bit about ENCORE III. If you could remind us, were you a participant on ENCORE II? And is there a triangulation we can make here between some of these large wins in IT and managed services relative to maybe some of the tasks that might come out on ENCORE III? And then I have couple of follow-ups.

Yes. To answer the first part, yes, we were an ENCORE II winner. But what I would tell you that is that, during the ENCORE II period, we weren't as capable as a company 4, 5 years ago in these marketplaces. And I think we're really excited about the ENCORE III. We've invested in people in that arena, and we'll see how it plays out.

Okay. And then I know you commented that JPL, Department of State and the DHS new wins have kind of fully ramped now. I was wondering, is there a margin implication over the next quarter or 2 based on those now being fully ramped and volume and perhaps efficiency gains that may ripple through into the numbers moving forward?

Yes. So I think in general that pretty much played out in Q1. The bigger impact we've been talking about the last 2 quarters now was the heavy, heavy proposal volume. So Q2 I think is going to be very on par with what Q1 looks like and any leveraging on the growth is going to be in the second half of the year. And again, we're still 2/3 cost plus mix, so not getting the full benefit of the leveraging right now.

Okay. And then on this new win, which is good news. I don't know [if I'm] kind of going back to, I think, what Gautam was asking. Maybe a little bit different way to ask it though is, if you look at these particular large wins where, at least from the outside, it feels like you have a higher win rate than perhaps you may have expected or versus some of your other bid and proposal business. I was wondering if you could help us to maybe confirm that win rates on these types of contracts is indeed kind of outsized, at least perhaps on a dollar volume basis versus some of the other business? And then if you think there's more of this specific type of work in your bid and proposal pipeline moving forward.

So I'll answer the last first, and then -- to that. So yes, our overall mix of our pipeline is more focused on IT, data analytics and cyber in terms of the overall profile. I think that we had a very good win rate in 2017, that's not something that we would presume to sustain. But we are feeling fairly good about the fact that we've been able to get on the playing field and win our fair share of work. So we'll have to see how that plays out, the level of new work we have. But we do feel that, given the increased pipeline and the increased volume, our -- that solution that we put in place over the last 2 years in both groups -- that we're on a good playing field to have a -- not as sustainable at the last year level, but a sustainable win rate that may be beneficial to us. Dan, do you want to mention any...

Well, I would just say that our [volume] of work is up over -- '16 over -- '17 over '16, and '18 over '17. So if we can sustain a decent win rate, then our bookings will be strong.

Great. And then, Judy, I just missed the organic growth rate in the quarter, I'm sorry.

It's about half of the growth, so close to 7%.

Our next question comes from the line of Ben Klieve from NOBLE Capital Markets.

A couple of questions. First, with regards to the ramping of new awards over the -- that you've won over the last year. My impression was that, that ramp was going to be taking a little bit longer than it seems to have taken. Was I just mistaken or did this -- did the process go a little bit quicker than you had thought on previous calls?

No. I think we fully expected that we would be close to fully ramp at the end of Q1. So I think we're pretty much on par with (inaudible).

Okay. All right. So I was mistaken. Okay. Not a problem. Perfect. And the other question I have is with regards to CapEx, I'm wondering if you can elaborate a bit on CapEx spend this year and kind of give us a bit of color on how that will fall between the ramping of new awards versus maintenance versus other growth initiatives? I mean, how can we really think about where that money is being applied?

Yes. So I think we talked about it in the last call, Q4 we had a big spike in CapEx because of the managed services award, the JPL award. That was a kind of an initial upfront CapEx. But over the course of the year, it's going to kind of -- I think we're going to be on par with what we have in Q1, maybe ramping a little bit over time. But -- so it's primarily those types of projects where it's a fully outsourced managed services job and then we are making internal investments to support our solution and capabilities as well as our own internal systems.

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

We hear a lot of clients, government clients, want to embrace new technology, they want to embrace the cyber, yet the contracting process is still sort of 1950s. Are you seeing any movement at all in accelerating the contract process to actually be relevant to what they're asking for?

Yes. We're starting to see customers talking about using contracting practices that are more flexible. The [Geolink] conference this past week, there was a lot of discussion about that, the idea of how can we make contracts flexible and agile so that we can bring in new technologies. And as technologies change quickly, be able to adapt these contracts to match that. So they are investigating how to do that. And as you know, in the government contracting area, that takes a lot of work and they are working on it.

My other question is around the supply side, the people. It sounds like you had a good quarter on that front. Can you find these generally younger new tech-enabled people that have security clearances? And I know Kevin is very active in that -- on that front, but are you finding what you need?

Well, the answer is no and yes. I mean, we've been able to, over the last 6 months, increase our staff supporting customers mission pretty significantly based on contract awards and still have about the same number of open requisitions today that we had 6 months ago that we're trying to fill. But the harder to fill one is around the technologist in a -- what I would call a negative unemployment rate, is very challenging. And that's why we're very focused on that from an internal training perspective, as well as from [pricing] -- and from industry side towards the security clearances so we can provide the talent at all levels to be responsive to the needs of the nation.

And last question from me. We're hearing that given the sort of relatively short time frame till the end of the government year, that a lot of money will just be put on to existing contracts, expanding them, extending them. Are you -- do you have the right contracts for that? Is there some M&A maybe to help you capture contracts to get in position to sort of get this sort of IDIQ fill out?

Yes. I think we definitely do, and we're already starting to see evidence of that. That's what we're seeing in terms of some of the contract expansion in the IT modernization area and in our security engineering area, that the customers have that money and they're expanding work into these contracts that are already existing and have long period of performance to be able to do this work.

Our next question comes from the line of Tobey Sommer from SunTrust.

Wonder if I could start out with what was the growth in the direct labor in the quarter? And I'm kind of leaning towards expanding on the question about hiring that was just asked.

It was 12%.

Do you have to make any changes in the way you're going about hiring or in the kind of engine and processes to be able to accommodate not only the growth that you've already got in new contracts, but the outlook?

Yes. I would tell you that we've definitely ramped up our marketing aspect of recruiting. The company had a successful year, and success attracts strong people. And also we offer some training through Purdue University, as an example, that is attractive to people in the cyber arena. So the number of initiatives we're taking at the marketing and our recruiting team and really, with some recent hires, have really ramped up the talent of our HR and recruiting department.

[What I think too] is a lot of these new wins have been -- it's not new work. It's either consolidation or it's takeaway, and so there is an in-place workforce for us to start with.

Right. And shifting to margins. It's been a while now that LPTA seems to have been receding as a mechanism to -- for at least some customers [to let certain] work. Where are we in that process, do you think? And is there still kind of a potential for a margin tailwind as some of that work comes off those old contracts and as relet where appropriate under a different format?

Well, I think there is tailwind and I think we'll see some improvement. But I'll tell you as far as how customers evaluate with respect to the price. It very much varies by my customer set. I have some customers that their best value, they seem to always go to lowest price. And I have some customers that are very much best value, and they -- you could see where best value wins as long as the prices are reasonable.

And I'll add that customers are looking for solutions to complex issues. Where they're not looking for solutions to complex issues, more sustainment, they're looking for cost effectiveness in order to retool their budget towards these higher needs. So it's very mixed.

Okay. Is there any noteworthy thing to kind of isolate in terms of investments or particularly maybe involving ramping large contracts that are dampening near-term margins but that you have visibility into those kind of reversing or being alleviated in a quarter or 2?

I'll let Kevin talk to the program side of it. But the biggest margin issue we're dealing with in the first half of the year is this high level of bid and proposal activity.

[That said], on the programs, yes, we're investing in ensuring that we have great success on the programs and for those that are more fixed price in nature. It totally depends on how we ramp that up and what the overall performance is long term, just like any other contract. So there is potential upside in out years, it's a matter how well we execute operationally as we ramp up these programs.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Stephen Vather for any further remarks.

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

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.