ManTech International Corp (MANT) 2018 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon, and welcome to the ManTech Second Quarter Fiscal Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Stephen Vather, Executive Director, Corporate Development.

Welcome, everyone. Thanks for participating on ManTech's second quarter call. On today's call, we have Kevin Phillips, President and CEO; Judy Bjornaas, Executive Vice President and CFO; as well as Matt Tait 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 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, everyone. I'm pleased to report that ManTech delivered another quarter of exceptional performance. We maintained an aggressive pace of organic growth, and were awarded a number of new contracts that put us in a solid position for continued growth. All of our key financial metrics, including quarterly revenues, operating income, net income, earnings per share and cash flow, exhibited growth year-over-year.

The market environment remained strong, and from a budget standpoint, we are pleased that Congress appears to be making meaningful headway on FY '19 defense appropriations with draft markups being generally in line with the President's budget request. However, there's potential for FY '19 to begin under a continuing resolution, which could have a slight impact on the timing of new contract awards for the industry. Overall, ManTech's portfolio of capabilities and customers continues to be well aligned with budget priorities.

We are seeing customers apply strong focus within the space and cyber domains with both policy and execution. These efforts lean more broadly toward supporting national security and national defense strategies. Lastly, customers continue to be focused on improving the speed of bringing talent and technology to the mission as well as streamlining the acquisition process.

Over the last few years, I have consistently discussed our steadfast investments in bolstering ManTech's differentiators in full-spectrum cyber solutions, systems and software engineering, security enterprise IT solutions and data analytics. Those investments have taken the form of improvements in our business development engine, improving our technical solution capabilities and strategic acquisitions.

Additionally, we made improvements to our recruiting and systems infrastructure to support anticipated growth. I am pleased to say that our performance in the quarter, particularly around winning new contracts of scale in the enterprise IT and systems modernization area, is a result of that focused strategy. This is a continuation of a multiyear trend that we are experiencing across our business. Customers are embracing ManTech's differentiated solutions, agility and technology leadership. In turn, the operating team is focused on the ramp-up and successful performance of its new contract awards.

As noted on our last earnings call, early in the second quarter, we were awarded a 10-year, $959 million enterprise IT contract with the Department of Defense agency. This contract represents one of the larger IT initiatives awarded to us and is all new work for ManTech.

In the quarter, we won several new contracts supporting the Navy's aviation modernization efforts across manned and unmanned platforms. ManTech will use its engineering expertise to help modernize and enhance the capabilities of ISR and electronic warfare aircraft mission systems on the P-3C Orion and the P-A8 Poseidon platforms. Additionally, ManTech will help modernize systems and sensors, including electrooptics, radar, communications, SIGINT and electronic support measures on the MQ-4C Triton unmanned platform.

In total, we had $1.3 billion in contract awards in the second quarter, resulting in a quarterly book-to-bill of 2.7x. 87% of the Q2 awards represent new work for ManTech. Given the lighter level of recompetes, much of our bookings this year will skew towards new work. Strong bookings drove our total backlog up 9% to $7.8 billion and funded backlog up 11% to $1.3 billion.

Proposal submissions and adjudications are still occurring at a rapid pace, and at quarter-end, we had approximately $7 billion of proposals outstanding. We remain on track to submit between $10 billion to $12 billion for the full year, and through June, we submitted roughly half of our full year goal. Our opportunity pipeline remains healthy at well over $20 billion.

Lastly, before I turn it over to Judy to discuss the details and specifics of our financial performance and outlook, I want to introduce Matt Tait, our new President of our Mission Solutions and Services group. We're extremely pleased that Matt has joined the team and are impressed with his focus and leadership in driving changes throughout the federal market. I look forward to working closely with Matt to continue strengthening ManTech's position as a leading technology provider focused on national and homeland security missions.

Now I'll turn it over to Judy. Judy?

Thanks, Kevin. Revenue for the second quarter was $491 million, up 19% compared to the second quarter of 2017. Over half of our revenue growth in the quarter was organic. Direct labor continued to show strong growth, up 17% year-over-year, and we also experienced increased material procurements driven by customer requirements.

For the quarter, prime contracts represented 88% of our revenue. Contract mix was approximately 66% cost-plus, 24% fixed price and 10% time and materials. Operating income for the quarter of $28.3 million was up 14% from the second quarter of 2017.

Quarterly operating margin of 5.8% came in above our expectations, driven by slightly lower bid and proposal spend and some onetime items. The lower bid and proposal spend was a result of timing changes on RFPs for new business opportunities within our pipeline.

Net income was $19.9 million and diluted earnings per share were $0.50 for the quarter, up 28% and 25%, respectively, compared to the second quarter of 2017. The effective tax rate of 28.2% in the quarter was higher than previously indicated due to a discrete tax item, which reduced EPS by $0.02 in the quarter.

Now on to the balance sheet and cash flow statements. Our balance sheet at quarter-end showed $7 million in cash and $3 million of debt. During the quarter, we generated $53 million of cash from operations or 2.7x net income. DSO was 68 days for the quarter, a 1-day improvement both sequentially and year-over-year.

The board has authorized us to maintain our current quarterly dividend of $0.25 per share to be paid September 21, 2018.

Now to our revised 2018 outlook. Based on our performance to date, we are raising and narrowing the range on revenue compared to what we previously communicated. We are now calling for revenues of $1.92 billion to $1.96 billion, with net income between $79.5 million and $82.6 million and diluted earnings per share of $1.99 to $2.07, impacted by the $0.02 charge booked to this quarter. We have strong visibility and minimal recompete risk in our 2018 revenue guidance.

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. We are maintaining our previously communicated operating margin guidance for the year of 5.7% to 5.8%. The timing changes of pipeline opportunities I mentioned earlier are anticipated to drive higher bid and proposal investments in the second half. And given the complexity of our recent contract awards, we are putting extra emphasis on program execution to ensure our customers are receiving the best from ManTech.

We still expect capital expenditures to be around 2% of revenue and related depreciation and amortization to be around 3% for 2018. Our cash flow from operations estimate remains between 1.2x and 1.5x net income for the full year. Built into our guidance are a full year effective tax rate range of 25.5% to 26.5% and a fully diluted share count of 40 million shares.

Before I conclude, I want to offer some remarks with respect to our recent contract awards. Our contract awards and proposal volumes support growth in 2019. However, it is premature to provide you with detailed guidance and specific expectations for next year. Over the last 12 months, we have seen an increase in the average duration of contract awards, which provides for strong multiyear visibility, but some higher award values will have less of an immediate year-over-year impact.

We generally have not offered program-level commentary and specifics, but given the size of our recent contract awards, I want to offer some additional financial detail. Please note that it is not our intent to provide regular updates on a program-level basis on this program or others moving forward.

On the $959 million enterprise IT contract that Kevin discussed earlier, we expect a multiyear transition period. Additionally, given the nature of the program, there will be capital expenditure requirements. We will have a better view of the level and timing of capital expenditures as we move through the transition period. We will provide an updated view of expected capital expenditures when we discuss detailed 2019 guidance.

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

Thanks, Judy, and it's a pleasure to be here at ManTech. Thank you, George and Kevin, for the opportunity to lead the Mission Solutions and Services group. In my brief time at ManTech, I have been able to observe a truly unique culture that this is genuinely focused on the success of the customer and their mission. I am thrilled at the opportunity to continue driving innovation and technology throughout the mission spectrum and to the tactical edge. Together with my colleagues, I look forward to expanding our market position by bringing digital to the mission as we bring forward solutions to solve our customers' toughest challenges.

Kevin covered our notable wins with the Navy. Additionally, in the quarter, ManTech continued to build on its strong portfolio of IDIQ contracts. We were awarded a position on the GSA Alliant 2 vehicle, a 10-year vehicle with a $50 billion ceiling used by federal agencies to procure a range of IT services and solutions. Consistent with our policy, there is no associated booking with this award. However, it is an important vehicle given ManTech's continued growth in providing secure enterprise and mission IT solutions to the federal government.

Rick, over to you.

Thanks, Matt. As Kevin and Judy have discussed earlier, I am proud of our recent enterprise IT contract award with an important and long-standing customer. This program aligns well with our mission to provide secure enterprise IT to important national security programs.

As we stand up this key program, our focus is squarely on delivering a smooth ramp-up and providing superb program execution to ensure mission success and customer satisfaction. This program, coupled with others in our portfolio, serves as an excellent foundation to build upon and dovetail nicely with the increasing volume and value of cyber and enterprise IT opportunities in our pipeline. With this win and others over the past few years, ManTech is at the forefront of the convergence of cyber and enterprise IT.

Now let me briefly touch on how ManTech continues to differentiate itself. As we all know, change in technology is unrelenting. Coupled with our growth in secure enterprise IT, we are continuing to expand our relationships with technology thought leaders in the commercial world. We are engaged with innovative firms leading the development of technologies focused on big data analysis, automation, machine learning and artificial intelligence. While these technologies vary in maturity, we are taking a view to the future and partnering to develop solutions that utilize these technologies in support of our customers' missions.

Lastly, as I have mentioned on previous calls, we continue to see improvements in our recruiting and retention leading to successful stand up and execution of our growing set of programs. While we are seeing strong business results from these improvements, we keep a steadfast operational focus on our people, given they remain our biggest strength.

Now I'd like to turn the call back over to Kevin for closing remarks.

Before I conclude, I want to recognize the broader ManTech team for their continued dedication and focus in executing to our strategy. Our market focus, size and operating model provides us the breadth and depth of experience and technical knowledge to compete and win large contracts while maintaining strong customer intimacy and agility. Our steadfast focus on our customers and their important national and homeland security missions is resulting in ManTech delivering industry-leading bookings, strong organic growth and a healthy opportunity pipeline. We attribute this success to ManTech's most important differentiator, our people.

With that, we are ready to take your questions.

(Operator Instructions) Our first question comes from Tobey Sommer of SunTrust.

This is Kwan Kim on for Tobey. First, on the enterprise IT services contracts for the DoD. What would be an appropriate range of the time period required for the multiyear transition you mentioned? And would the transition seem more linear or have somewhat of a multistep, multiyear function?

On that contract there is a fairly prescriptive ramp-up, and I can't comment on all the specifics of that. But it will happen sequentially over about an 18-month period.

Okay. And could you talk about the hiring environment today versus what it was like at the beginning of this year? Has the bottleneck of obtaining security clearances for employees become more loose in your view? Or has it become more difficult since last year?

So 2 components. In terms of the labor market, we've been very successful at hiring people to meet the contract awards over the last 3 quarters and also being able to successfully continue our focus on adding to that as we continue to win contracts. That said, the market for the higher-end labor continues to be very tight. The time line on clearances is beginning to show some improvement; it's not material, but some improvement. And I'd also note that our federal customers are very focused on this and doing some heavy lifting to make sure that we improve the ability to bring talent to meet national security missions.

Our next question comes from Gautam Khanna of Cowen and Co.

First, I was wondering if you could expand upon your comments that there were some onetime items in the quarter. What specifically were you referencing besides the tax headwind?

It really was nothing specific. It was just we had originally guided that the first half of 2018 was going to be about 5.6% to 5.7% in margin, and we're coming in a little bit higher. Q2 came in a little bit higher than we expected, nominally due to, like I said, the B&P and the onetime items but kind of related to just typical contract closeouts, EAC adjustments, things like that. But no one specific large item.

Okay. Got it. And Kevin, from your remarks on the potential for a continuing resolution, I wanted you to maybe elaborate on what you think based on what you have in the contract pipeline, what the bookings might actually be in Q3 relative to maybe historical Q3s. I mean, could this actually be more in line with prior years? Could it be better? Just based on the actual pipeline of what you guys have outstanding.

Yes. Sure. So what I'd say is that we're seeing a continuous high volume of requirements from our customers for the things we do. So our overall proposal volume is higher for the year and on a quarter-to-quarter basis, and the anticipated award level is higher. So within that, it's harder for me to say what's our Q3 or Q4 specific event. I think that there's just a higher demand across the board, and I wouldn't say that, that I'd expect a high surge in Q3 compared to every other quarter we're seeing based on expected time lines. But they're all heavy. So if you think about $7 billion for proposals outstanding, we'd expect that those would be adjudicated fairly ratably, and we'll see how it plays out quarter-to-quarter. But it's a high volume regardless of which quarter it comes in.

Okay. And do you have a view on whether the use it or lose it kind of mentality will be a forcing function on seeing stuff get obligated by the government fiscal year-end this time around? Or do you think that's not as big a factor as it may have been in prior years?

No. I think that both strategic need and funding availability are driving decisions more quickly. That includes the quarter we just completed and we're reporting now. So I would not say a specific quarter, and I'd say it's generally a tone that [things need to meet] more quickly to meet national security demands, and that will apply to Q3 as well. It may be more heavy. But at the same, the anticipated timing for heavy volume of proposals we see as fairly consistent. But there may be variability based on delays or things moving up. It's hard to push that quarter-to-quarter view.

Okay. And just one last one for me. Perhaps, Judy, could you quantify your organic growth in the quarter?

It's more than half of the total growth.

Our next question comes from Edward Caso of Wells Fargo.

I believe you guys won a really big contract, CDM DEFEND, which has been protested. Has that shown up in any -- was that in the Q2 numbers? Is that a possibility for a Q3 award? I believe it's $669 million.

Yes. This is Kevin. It is not in our Q2 awards and these protests are not recorded as bookings until the protest is cleared. We always have to wait for the government to work through the debates around any protest. And if we're successful in maintaining our award, then it's likely that, that would be in our Q3 number.

Great.

I'd note one thing around that, that there are both combinations of new and existing work within that. So it's all not new work. A lot of the CDM work has existing work with many contractors that roll into these larger bundled bids.

Right. And since more of your opportunity this year is new, can you talk about your win rates and any change that you've had since last year?

Broadly, volume for demand has been increasing. Time lines to adjudicate by the government side have been improving, and our win rates have improved as well. I would not say that those win rates are something that we would expect to be continuous at the current level. [It's a vital] competitive market. But we work every day to make sure that we put the best capability, solution and proposal for anything that we bid.

Let me sneak in one more. You got the best balance sheet in the sector. What are you thinking on M&A?

We continue to be very focused on the areas where we have need in our strategy and customer depths. That narrows the field. There's a normal flow, I'd say, of opportunity sets. And we're very focused on that. But again, it's hard for me to say that we're going to be doing anything different than our ordinary course activity of looking at every opportunity when it comes up and taking a heavy view of how important it is to our overall strategy and positioning in the market.

Our next question comes from Joseph Vafi of Loop Capital.

I may have missed it, but could you disclose on this new large defense agency win contract structure type, its price, cost-plus or another contract structure type?

Yes. We don't typically give out details on specific contracts.

Okay. And then I was wondering if it's -- if staffing on this large new contract is something that you see as difficult. Or is this a situation where you could do some re-badging from the existing incumbent?

This contract is in line with other contracts like it we've been staffing, and we're being successful on this one as well in our initial staffing. And that staffing will continue over a fairly long transition period. And we expect to do well throughout the transition.

Okay. That's helpful. And then just there was just an update on some of the large wins last year. I think some of those are fully ramped and fully and -- in full production at this point. I was wondering if there's any that have yet to really fully ramp. And just an overall update on those contracts.

So this is Matt. Yes, the contracts from last year are fully ramped for the 2 previous wins that we had within our MSS group.

So we're pretty steady state on that. We've been very successful. So I think that everything else is kind of current work, laying new work and ramping that up.

Our next question comes from Joseph DeNardi of Stifel.

Kevin, just 2 questions for you, maybe. I think we've heard from some of your peers that we're seeing more bridges and extensions being used. I'm just wondering if you can talk about what do you think that means for your recompete or roll-off risk going forward and whether bookings need to kind of fill a smaller gap than they typically would.

So yes, extensions and expansions on current work are becoming more routine based on mission need. That has reduced the second half of this year's recompete win rate. And it has not materially increased the overall win rate -- the recompete rate for next year, which we expect to be market-average.

Okay. And then you mentioned that the recent win rates that you've had may not be sustainable, I appreciate, maybe wanting to temper expectations. But can you talk about why the rate has been as good as it has or some of the opportunities just kind of really in your wheelhouse?

Sure. I will, and if anybody else wants to add in. But as I've mentioned, we have spent a lot of time investing during the time when the market was generally down, on improving our leadership and the quality of our proposal team, our solutioners, our ability to retain and attract talent, all of the above. And that was an intentional (inaudible) thing to do, and it's paying dividends today. But I would say that it, as I mentioned, is a very competitive market and it's always something we have to be very focused on, improving our game every time we submit a bid. But that's generally the investments we've made and the commitments our team has made to getting to this point over the last few years.

Our next question comes from Ben Klieve of NOBLE Capital Market.

Just one question for me. Kevin, I was hoping you can elaborate a bit more on your earlier comments regarding the pacing of award adjudication. You said the time lines for adjudication are probably improving, but I'm wondering if you can break that comment down a bit between new awards versus existing awards. Did you see these being prioritized and the time line improving kind of at the same rate during the second quarter? And then how do you see that dynamic evolving here over the next quarter or 2?

So the improvement is based on the acquisition process and they're focused on industry and mission need. So as long as the mission needs are going, whether it's an existing set of work or recompete, new, it doesn't matter. So I can't split it out that way. I don't think our customers are thinking that way. And going forward, again, our customers are very focused on how to improve the time line to get things that they need to be responsive to the mission needs that they have. And we'll see how that plays out in terms of time line improvements. But it's definitely -- has been improved since 2 years ago.

Got you.

There's more certainty on what they're bidding and more certainty on what they want as well, which is a big factor.

Our next question comes from Brian Ruttenbur of Drexel Hamilton.

So I have a macro question just real quick on the CR. If you could talk a little bit about -- you mentioned at the top of your comments, what you believe the likelihood of a CR happening this year. I've heard a variety of things off-line from a couple of the companies reporting. And what do you anticipate? And what you are seeing on the CR? And what's in your guidance for the CR?

Sure. So generally, the federal government is moving fairly quickly on making decisions about what they need and the amount of the budget that they're requesting. And you can see that in the activities last week and this week within Congress. So I think that's a very positive trend towards regular order. That said, I mean, everything has to run through a process of final negotiations, and you never can tell. And we don't make that [format]. We just want to make sure we're ready to support any requirement whenever those decisions are made. So I can't bank on or tell you what the government decision makers are going to do about CR.

Okay. And just as a follow-up, given your backlogs, you say that maybe the win rate won't continue at this rapid or high rate. Given what's going on with your wins, do you see an acceleration in your internal growth in '19 where you stand right now?

It's a little premature for us to talk about '19. But as we've mentioned, the tenor of the new contract awards has been increasing. So a lot of these bookings are giving us much more multiyear visibility versus having a really short-term, high-growth impact.

(Operator Instructions) Our next question comes from Robert Spingarn of Credit Suisse.

A couple of questions. First one for Judy, and then one for -- Kevin, I think the second one's for you. But Judy, on the organic growth, which you said is just over half of growth, how do we think about that on direct labor? Because it sounds like there were some material acquisition or -- included there. So that's question one. And then the second question is a higher level, more complex one. So I want to wait a second to do that.

Okay. Yes. No. I would say that our direct labor and our ODC subcontractor content have grown in line with the revenue growth. So it's coming from both components. Our DL is doing well, yes.

Okay. So Kevin, at a high level, I think one of the things we're all trying to do is look at this much higher level of total backlog. You've had these tremendous wins. Some of them are understandably long duration. We don't know what the funding outlook will be for those. But when I look at your total backlog, off the bottom, it's about 2.6x higher at $7.8 or so billion. Funded backlog's a smaller number. It's about 1.4x, 1.5x. And sales off the bottom is about 1.2x. So all of this leads me to think that there's some real nice sales opportunity here that at some point, you catch up to what this total backlog's doing. But I'm trying to figure out what the right construct is to do that. How do you guys think about that? Is there a way that you annualize the total backlog and then sort of impute a growth number from that? So Judy, I'm not asking Kevin for '19 guidance, but I am thinking at some point this translate...

Actually, it's an important factor. So I'll comment on that. So if the government has -- if we're not supporting procurement, major long-term procurements, multiyear, but it's more O&M or things like that, more 1-year money versus multiyear money, that's what's going to drive your funded backlog on any given year because it's current. The contract award level and duration support that overall backlog, the total backlog. And so what we're seeing is an increased link that is real in the overall length of contract awards that is significantly different than it was 3 years to 5 years ago. I mean, 3 years to 5 years ago, the average length was maybe 3 years to 5 years. And now the average could be anywhere between 5 years and 10 years. And that does factor into that increase in the total backlog, and it will provide longer assurance of a revenue stream. I can't say it will provide near-term growth as quickly as people would think based on that increase in the time of the awards that are built into the backlog.

Is it fair to conclude at a very basic level that growth is accelerating here and will for some time?

It's accelerating. It's going to hit a level, and it'll be more sustained based on the term or average length of a contract.

Ashley, it appears that we have no further questions at this time. As usual, members of our senior team will be available for any follow-up question. 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 evening. You may now all disconnect.