ManTech International Corp (MANT) 2006 Q2 法說會逐字稿

Please standby we're about to begin. Good afternoon. My name is [Matt] and I will be your conference facilitator today. At this time I would like to welcome everyone to the ManTech Second Quarter 2006 Earnings Conference Call. All lines have been placed on a mute to prevent any background noise. After the speakers remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS]. Thank you. Mr. Cormier you may begin you conference.

Thanks [Matt]. Welcome to ManTech International Corporation's Second Quarter 2006 Earnings Conference Call. And we thank you for joining us today. My name is Joe Cormier and I am Vice President of Mergers & Acquisitions and Investor Relations of ManTech. Leading today's call from ManTech are George Pedersen, our Chairman of the Board and Chief Executive Officer, Robert Coleman, our President and Chief Operating Officer, and Kevin Phillips Corporate Vice President and Chief Financial Officer.

In our prepared remarks, George will discuss our strategic positioning and future vision for ManTech. Bob will touch on our operational highlights from the quarter. And Kevin will review our financial performance.

Before we begin our discussion it is important that we remind you that on 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. And include the risks and uncertainties identified in our earnings press release under the caption Forward Looking Information.

For a full discussion of these factors and other risks and uncertainties, please refer to the section entitled Risk Factors in ManTech's annual report on Form 10-K filed with the SEC on March 10, 2006 and in ManTech's other public files. Also we undertake no obligation to update any of the forward-looking statements made on this call. During this call we will also refer to certain non-GAAP financial measures, the reconciliation of non-GAAP financial measures discussed during this call to the most comparable GAAP measures can be found in our press release which is posted on our Web site. Now I would like to turn the call over to George Pederson. George?

Good afternoon. And thank you for participating in today's call. I am pleased to announce another solid quarter for ManTech international. As you saw from our press release we continue to drive strong revenue and earnings growth, second quarter revenue grew by 20% while net income from continued operations grew by 22% in the quarter. This strong performance is a result of ManTech's strategic positioning at the center of the global war on terror.

I want to spend a minute providing an overview of the said of the funding process and the way it contributes to the growth of ManTech. As you are aware, the defense [propriations] for fiscal year '06 currently totaled approximately 510 billion up from 479 billion in 2005. This funding came through the original [propriation] bill and several supplemental fundings during the year. While the fundings did not always arrive at the department in a timely manner the fact remains that the defense established was funded at its highest level in history.

As we look at 2007 the President has asked for 462 [band], the House and the Senate has slightly lower for the first funding levels but not significant enough to impact our assets. There is a 60 billion supplemental funding that is currently contemplated although I don't know its precise status. That would mean that [inaudible] fiscal '07 funding would be at least 522 billion. Debating Congress is intense as you know, and various Senators and Congressmen are championing additional funding for specific purposes such as 10 billion assigned to resetting the force for the Army.

In some ways we believe the defense and Intel funding for '07 will be quite robust. We base our future projections on this data thus we continue to see a very strong demand for our services. And we know we're in position to meet those demands in providing our mission critical solution to our clients around the world.

By the very nature of the defense contracting process companies in our industry generate strong cash flow. In the last quarter we had over 20 million of operating cash flow from continuing operations which we used to pay down debt as Kevin will detail for you. We have ample financial capabilities to continue to grow both organically into acquisitions as we have successfully proven over the past four years.

We continue to review acquisition candidates and we have a number of ongoing discussions on selection criteria's and our change. And we will continue to be very selective. If we do not close an acquisition in near terms we hope to repay all of our debt by the end of [inaudible].

There is no way to assess the impact of recent events in the Middle East. And the continued threat of terrorism in the rogue nation. Obviously global instability remains a concern and ManTech has been structured to support the United States and its role as a world leader and peace keeper around the globe.

We were one of the first contractors on the battle field during Desert Storm in 1990. And since that time we have been actively engaged in supporting our own forces in intelligent community and conflicts around the world. As we have stated in the past ManTech is a mission operations company and we will continue to provide these mission critical activities to our country wherever it takes us.

From the business point of view we worry about strong second quarter '06 results continue to demonstrate our success and are a valid indicator for the balance of the 2006 fiscal year and beyond. We remain set [inaudible] in a commitment to our nation, our customers, our employees, and our stockholders. Now I would like to turn it over to Bob. Bob?

Thank you George. As you saw in our press release, second quarter revenues came in at $287 million with operating margins of 8.3% excluding the effect to FAS 123R. Overall revenue gross for the quarter totaled 20% with 14% coming organically. Our strong results were driven by contract winds and our classified customer base in defense support activity.

Bookings for the quarter were 200 million and were consistent with our expectations given the timing of awards. We anticipate greater award activity in the third and fourth quarters of 2006. The bookings number includes over 100 million in classified contract wins and does not reflect any value of our [itez] 2, IMOD, and USAID IDIQ contract vehicles awarded during the quarter. These are important contracts that enhance our strategic market position and will help drive our long term growth.

I would like to briefly touch on our USAID Prime 3.2 contract. As you are aware, ManTech was one of five primes selected for this $4 billion multiple war contract. This is a very strategic win for our company as it relies on our State Department and foreign affairs community experience, leverages our global presence, which we believe is an important discriminator, and it provides a channel for hiring unclear resources. Given our past performance providing enterprise support to the State Department's world wide Network we are well positioned to support AID's global requirements and the eventual migration to the State Departments IT backlog. We have already started to see proposal activity on the effort and we feel well positioned to win more than our fair share of war commence contracts.

The total backlog stood 2.15 billion, up approximately 27% since last years second quarter. Funded backlog grew to about 150 million or over 22% from June 2005. Qualified pipeline stands at 6.5 billion up from 5.7 billion in the previous quarter. The increase is the result of continued investment in our business development infrastructure and a number of opportunities that have moved through the process and now meet our criteria for inclusion in the qualified pipeline. We are optimistic about our continued growth in our national security market space.

In addition to our federal government pipeline of opportunities we have seen a significant increase in [inaudible] opportunities at NADO. We have an established foothold at NADO and we are beginning to see many avenues through which to grow our revenue base. Today more than ever, NADO plays a key role in our ability to transition troops in and out of various regions around the world. We are seeing NADO modernizing our infrastructure and assuming responsibility for infrastructure support in places such as Afghanistan which will continue to drive demand for ManTech type services going forward. We have qualified many of these opportunities but have not yet added them into our pipeline as we are in the process of focusing our NADO strategy and plan.

Based on our recent wins and the strength of our pipeline, we are forecasting third quarter revenue of $290 to $200 million. This implies an 11 to 14% growth rate. The annual revenue guidance remains at 1.15 billion to 1.8 billion which represents 17 to 20% overall growth and 14 to 17% organic growth. Guidance reflects the strength of our market position, anticipated award activity, and increased spending on mission critical services.

Turnover continues to be a priority for us and has increased slightly from 17 to 20% for the quarter. We continue to aggressively work this issue as there is a tremendous demand for our highly cleared and skilled workforce throughout the industry. In closing we are diligent in the execution of our customers' missions and are focused on our goal to be the premier provider of national security solutions within the intelligence, defense, and home land security related community. We will continue to focus on driving strong organic growth coupled with strategic acquisitions that enhance our capabilities and extend our markets through the - throughout 2006 and beyond. With that I will turn it over to Kevin. Kevin?

Thank you Bob and good afternoon everyone. I am pleased to report a solid financial quarter with continued growth in our operations as revenues [grews] $287 million increasing 20% from last years second quarter revenues of $239 million for an organic growth rate of 14% on a pro forma basis. Our organic growth is derived from pro forma revenues for the second quarter of 2005 of $252million which includes second quarter 2005 revenue from Gray Hawk which was acquired on May 31, 2005. Our growth was largely driven by our expanded activities in the intelligence and defense communities and continued support of our nation's efforts on the war on terror.

For the quarter, over 97% of our revenue came from federal government sources. Defense, intelligence, and home land security related business comprised approximately 96% of our revenues. In the second quarter 70% of our work was performed as a prime contractor. There's a portion of revenues coming from contracts build on a timely materials basis was 65% this quarter, while fixed price contracts represented 10%, and cost plus contracts were approximately 25% which is consistent to prior quarter.

As Bob mentioned earlier contract awards in the first quarter were 200 million. This awarded activity translated into backlog as of June 30 of 2.15 billion. Funded backlog grew to 550 million at the end of the second quarter. Up 22% from 452 million reported in the previous year and an increase of 30 million from the first quarter of 2006.

Our [upperty] margins in the second quarter was 8.3% excluding the impact of FAS 123R. This margin reflected a larger component of ODC driven revenues than in the first quarter. In addition and as anticipated or bid and proposal and business development costs increased during the quarter by $400,000 as we continued to focus on strategic proposal activities.

This increased activity brought our G&A cost as a percentage of revenues up by 10 basis points in the second quarter. However, through the first six months of 2006 our G&A as a percentage of revenue has declined by over 90 basis points after including FAS 123R expense versus the prior period - the prior year period.

Excluding the effects of FAS 123R, net income from continuing operations was 14.1 million, up 22% from the same period in 2005 which translated into diluted earnings per share from continuing operations of $0.41. Earnings per share grew at 17% compared to last years second quarter. For the second quarter, or effective tax rate rose slightly to 39.5% up from 39.3% in the first quarter.

Turning now to discontinued operations of MSM. We noted last quarter that the office of personnel management issued a new multiple award solicitation for field investigative services. We were notified in early July that MSM was not selected for an award.

To be clear, we priced our bid to ensure a successful divestiture if awarded the contract. With this decision behind us we are in the process of posing out our existing contract and are aggressively moving forward with the divestiture. There is value in the remaining MSM business and the divestiture remains likely in 2006. We expect MSM to incur a net loss of 1.2 to 1.4 million or $0.04 in the third quarter.

Moving on from a balance sheet in cash flow perspective the second quarter was very strong. Our debt borrowings, as of June 30 decreased by 24.4 million from this first quarter. This was due to strong cash collections and receivable days failed outstanding for the quarter dropping to 81 days down 5 days from the first quarter. For the quarter the strong cash collections resulted in 20.4 million in operating cash flows from continuing operations.

As of June 30 the company had $3.1 million in cash and $27.6 million of debt. We expect strong cash flow from operations throughout the remainder of 2006 allowing us to further lower our debt levels. Our working capital level is now at a point that existed prior to our acquisition of Gray Hawk in the second quarter of 2005 and we have no long term debt. Our strong balance sheet positions at - position gives us flexibility to respond quickly to the right strategic opportunities that may arise.

ManTech's operational performance and market positioning support our outlet for achieving continued growth. Our guidance for 2006 anticipates continued demand from our national security customer base. We have maintained a full year 2006 revenue guidance range and slightly lowered our EPS range. Again, our guidance does not include the impact of any discontinued operations, future acquisitions or divestitures.

Focusing on the third quarter, the guidance for revenues is in the range of $290 to $300 million reflecting an 11 to 14% growth all organic. Guidance for diluted earnings per share from continuing operations for the third quarter is in the range of $0.42 to $0.45 per share or $0.40 to $0.43 after the impact of FAS 123R expense based on weighted average shares of 31.4 million in the third quarter. For the year we have maintained our revenue guidance range at $1.15 billion to $1.18 billion which represents 17 to 20% total growth and organic growth of 14 to 17%.

We have updated our guidance range for diluted earnings per share from continuing operations for the full year 2006 for $1.69 to $1.76 per share or $1.60 to $1.67 after an expected $0.09 impact from FAS 123R. Our earnings per share guidance reflects business trends toward the higher [hody c] driven revenues. Full year EPS is based on weighted average shares of 34 million for the full year 2006.

The third quarter and full year guidance includes a 39.4% estimated tax rate and assumes interest expense for the third quarter of approximately $300,000 down from $600,000 in the second quarter and a $1.8 million interest expense for the full year reflecting anticipated cost positive cash flow trends. In closing, we are well positioned for continued growth due to the financial capacity and flexibility provided by our balance sheet, by the performance of our operations, and the opportunity presented by a robust business development pipeline which reflects how well we are positioned and growing national security markets. And now, we would be pleased to take any questions you may have.

Thank you. [OPERATOR INSTRUCTIONS]. We'll go first to John Mahoney with BB&T Capital Market.

Good afternoon guys. Great quarter.

Hey John.

I just have a couple quick questions. The - just in some - you know, we're kind of in the middle of earnings season. We've heard some other people talking about funding problems affecting them. You guys think that, you know, it had been relatively [unscaved] particularly as we enter the September quarter?

I'm curious about that. What you attribute that to. And also what your outlook is for kind of the normalized year and budget flush given all the talk about funding problems but also, you know, I guess the '07 budget might start on time. Could you kind of give us an update on your thinking on the industry?

Yes, sure John. It's Bob Coleman. The - I think what you're seeing is our market condition relative to our peers. You know, when we hear about some of the spending issues, you know, I think that's being put in place so that the money can continue to flow into the mission areas where we're currently supporting our customers. I think the outlook through the remainder of the year for us is good. And, you know, I think we even expect to see some sweep up money toward the end of the year come through.

That's it. Thank you very much.

[Inaudible]

And we'll take our next question from Erik Olbeter with Stanford Financial.

Yes, hey guys. Very nice quarter. Just real quick if you could go over some of the things you're talking about, Kevin, when you were discussing third quarter. You said interest rate expense was going to be $300,000?

That's correct.

Okay. And for the full year what was that number?

$1.8 million.

Okay great. In terms of the turnover rate, could you talk a little bit about what's driving that and what steps you guys are going to take to try and get that back down?

Yes. You know, turn over is obviously an issue that we continue to have particularly with this business because of the types of clearances that our people have. They're in tremendous demand. One of the things that we've done we've talked about I think in previous calls is we have done an assessment of the work force trying to understand the - what's driving the turnover within the company.

We're compiling the results right now. And we're obviously putting a plan in place to address that. We've made turnover - a component of all of our senior managers and set a comp plan as well. So they definitely have a vested interest in, you know, working to reduce it across the company.

It's a tough market. That's, you know, and we're doing the best we can to address the problem. We also, you know, as a result of the DL issue we've subcontracted more of that labor out so we're able to meet our customers requirements in our contract obligations.

Okay. That sounds great. Just a final question and I apologize I jumped on the call a little bit late, you may have already discussed this. But can you give us a sense of how the Intel business is going? There's been some talk among other companies in this earnings season that they're seeing some slowness in their Intel business. Have you seen any of that? Is there any sort of color you can give?

I'm sorry. Could you just repeat the last part of that question? I'm sorry.

Sure. I just wondered if you could provide any color on some of the Intel business, if that is holding up steady in this environment, in this budget environment or if you're seeing some trail off.

I think we're seeing consistency in that market. And as we've mentioned in the past we are positioned at the heart of where the shifts in spending are occurring. And for us it's been a steady growth area.

That's great. Thank you very much.

We'll take our next question from Joseph Vafi with Jefferies & Co.

Hi gentlemen. Good afternoon. Good result. I was wondering if we could talk a little bit about the [inaudible] ropes and the funded backlog over the last couple quarters. We're not seeing any change to the revenue guidance from the company [inaudible] saw nice sequential gains in year over year gains there. And I was wondering if you can kind of comment on maybe you're forecasting or on your outlook on the top line relative to that funded backlog number is continuing to trend up. Thanks.

On the funded backlog, that's heavily an issue of the timing of when the government is going to fund specific contracts, option periods, their availability. And I think that our upward momentum is more based on where we are and the customers having the availability to fund those less, you know - more frequently than maybe a quarterly increment and things like that. We focus more on the waterfall, the entire contract to figure out where that growth is going to occur. And more managed by exception is if there's going to be a funding issue on specific contracts.

So I'd say the trend probably will stay at that point or maybe improve but it's really not going to drive our revenue growth more than provide comfort that, you know, what we have in hand is pretty much hatched.

Okay. So is it fair to say that that funded backlog number kind of moving around relative to its duration? And that's kind of the way to look at it then? I mean if…

Yes. Correct.

Okay.

Yes.

And then I was wondering maybe some high level comments on your Army business in general. Obviously everyone's a little nervous about the Army funding being a little bit stretched and what you see there relative to your own business. Thanks.

Again I think we have mission support areas of the Army we're in have been strong for us. But, you know, we also have other areas where things have slowed down a bit. It's balanced out for us. And I think that growth in this sector will continue to be strong through the remainder of the year.

Yes, Kevin. [Inaudible] our overall funding in that area actually went up quarter over quarter than declined.

Thanks very much gentlemen.

I think the other aspect with the Army, there is a move afoot to add some more money to the Army's appropriation bill. As I mentioned they're talking - they're debating the appropriation bill in the Senate as you know and the House has approved it. And there's agreement in general on the amount of money however there are those who are proposing to add 10 billion for the Army for what they refer to as resetting the force. And that includes the trucks and all these other things. So it's not inconceivable to me that what you're seeing for the Army right now might change down the road a piece.

All right. Thank you George.

[OPERATOR INSTRUCTIONS]. We'll go next to Tom Meagher with Friedman, Billings, Ramsey.

Yes. Thanks again. Good quarter. Kevin, maybe we can start first. The ODC's that you talked about, are those primarily equipment related or would that be subcontractor labor that's passing through there?

It's a combination. I wouldn't say it's an even mix but they both went up. And I say that our subcontractor and ODC component as a percentage of revenue on a combined basis went up about 4% this quarter compared to the prior quarter. That's pretty substantial. And we expect that fin to continue for the rest of the year.

Okay. And then so when we look at the long term guidance then with the revenue estimate remaining the same and the EPS numbers coming down, is that directly related to the ODC component that you're talking about?

Yes.

Okay. And then I don't know maybe Bob for you, you talked about the turnover how it was higher and whatnot. I'm just wondering does that have to do with the kind of work your guys are doing. In other words if they're on the ground in places like Iraq and Afghanistan obviously it's a high stress environment, you know, when they come back is it generally, you know - do they leave the company? Do they go to other positions within the company? Has that got something to do with the turnover perhaps trending upward?

Yes. I mean we've talked about that in the past. And that is a factor that contributes to our higher turnover percentage. You know, as those people are overseas, they are as you pointed out, in a high stress environment. And after a period of time they do come back and take a break, spend some time with their families. So they discontinue employment at that time. And that does generate some higher turnover for us.

Okay. Thanks very much. I appreciate it.

Thanks Tom.

And we'll take our next question from Mark Jordan with A.G. Edwards.

Good afternoon gentlemen. Could you talk a little bit about ESO's? You know, obviously very positive trend declining to 61 days in the second quarter from 86 in Q1. What is your goal for that? Where are you going to drive that over time and once you achieve that goal, what will be the variability around that target?

It went from 86 to 81, not 61 - so to clarify that. Our goal is to stay in the low 80s and long term goal is to get below 80. I hope not to have this much variability as we've had. Our goal is basically to be within two to three days, but at the same time that's just an objective not a - it's just an internal target.

Okay. Obviously the US AID Prime 3.2 contract just is one that is very much of interest to you. And it's not in backlog given the IDIQ format. Could you try to scale what the legitimate opportunity of that contract and the other two that you want here in the quarter in terms of, you know, what might that reflect as a task becomes award?

Yes. Mark I can't, you know, really put a value on those awards. You know, AID is really, you know, the fact that it's available to the state department, foreign affairs community, AID, and other civilian agencies is a positive for us. I think what's important is - what we have is a variety of vehicles that are customers can use to get to our services. And that's what we're looking at. That's what makes those vehicles important to us.

Okay. A final question if I may. You mentioned that ODC [mexas] is higher in this quarter and moving forward and you're maintaining the same sales guidance implicate therefore that you did see a little bit of decline in the business that you had assumed of direct work by ManTech. Can you identify specifically where some of you direct work has been pulled in a little bit?

It's Kevin. One of the factors is we did have a decline in labor based - if you recall this FS - this [efstas] re-compete broke down on some of our staffing. But no other major declines.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. And we have no further questions at this time. Thank you for participating in today's conference call. This call will be available for replay beginning at 9pm this evening through August 17.

To access the replay, please dial 888-203-111 2or domestic calls. Please dial in at 719-457-0820 for international calls with an ID number of 5973744. This concludes our conference for today. Thank you for all participating. You may disconnect at this time.