ManTech International Corp (MANT) 2006 Q4 法說會逐字稿

Good afternoon. My name is Tom, and I will be your conference facilitator today. At this time, I would like to welcome everybody to the ManTech fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. Mr. Cormier, you may begin your conference.

Thank you, and welcome to ManTech International Corporation's fourth quarter 2006 earnings conference call. Again, we thank you for joining us today. I am Joe Cormier, Vice President of Corporate Development. Leading today's call from Man Tech are: George Pedersen, our Chairman of the Board and Chief Executive Officer, Bob Coleman, our President and COO, and Kevin Phillips, Executive Vice President and Chief Financial Officer.

In our prepared remarks, George will discuss ManTech strategic positioning and the congressional budget picture. And Bob will touch on operational highlights for 2006 and provide growth outlook for 2007. And Kevin will review our 2006 and fourth quarter financial performance as well as touch on 2007 forward guidance.

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 10K filed with the SEC on March 10, 2006, and in ManTech's other public filings. 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 nonGAAP financial measures. The reconciliation of nonGAAP financial measures discussed during this call to the most comparable GAAP measures can be found in our press release which is posted on our website.

Now, I would like to turn the call over to George Pedersen. George.

Good afternoon, and thank you for participating in today's call. I want to start out by saying that 2006 was an exceptional year for ManTech international. Our strategic position in the high end defense intelligence and homeland security markets was a key differentiator of our company as we demonstrated consistent and strong results.

As you saw from our press release, revenue grew by 16% to $1.137 billion compared to $980 million in 2005. We delivered EPS of $1.73 compared to $1.60 in 2005. In addition we had strong contract awards of $1.8 billion and our backlog stands at $2.9 billion.

We are extremely pleased with these results and we are well positioned to continue our double digit growth into 2007 with our future acquisitions. Given our market position the appropriations bills provide consistency in our funding and growth profile.

2007 looks to be another good year for defense, intelligence and homeland security spending. The '07 appropriations for defense and homeland security have been signed by the President which is good news. In contrast civilian agencies are being funded under a spending scenario for the remainder of FY '07. We do not see this changing giving the political climate.

The President submitted his FY '08 budget request to the congress and it includes defense requests with substantial growth. In particular the operation and maintenance portion of the defense department budget which is where ManTech derives a good portion of our defense funding is projected to grow 11% over FY '07. The classified budgets represent another main source of funding for us and through these -- although these budgets are not public information we believe they contain requests for strong continued growth. Given that over 95% of ManTech's revenue base is derived from the department of defense, intelligence community and homeland security, we continue to be well positioning for maintaining our strong growth into the future.

Again ManTech is a mission focus company and this strategic focus which began in 2007 has positioned us to provide mission activities for our country and deliver strong growth for our stockholders. Consistent with our stated strategy we will continue to look for strategic acquisitions as a mechanism to enhance our mission capabilities, strengthen market position and increase our top line and bottom line growth.

We have been very selectively -- very selective over the past two years closing deals only with the most well positioned companies like Gray Hawk and GRS, while reviewing and negotiating with numerous other potential candidates. Given the strength of our balance sheet with over $41 million in cash and no debt at the end of the year we have significant financial flexibility to complete key acquisitions that fit our strategic criteria.

Before I turn it over to Bob, I want to briefly discuss my recent purchase of MSM from ManTech International. As we have discussed in the past ManTech entered the personal security investigation business. With the expectation the operating model would evolve from a labor intensive business into a technology oriented business consistent with ManTech's strategy and direction. Unfortunately this did not happen. MSM never aligned with ManTech's vision. My purchase of MSM is in the best interest of all of ManTech's shareholders and allows me to honor our commitments to our customers, the MSM employees and the investment community.

The MSM issue is finally resolved and we can all now focus on Man Tech's core national security business.

I would again like to reiterate that we remain diligent in our commitment to our nation, our customers, our employees and our shareholders. Now I would like to turn it over to Bob.

Thank you, George.

As George mentioned, 2006 was an exceptional year for ManTech. Our revenue grew by 16% with 12% coming organically.

Our fourth quarter revenue of $291 million was up 11% compared to $261 million and last year's fourth quarter and over 10% of that growth was organic in nature. During the quarter, we received $300 million in contract awards with over 75% coming from new business. Bookings for the year stand at $1.8 billion not including our new IDIQ awards.

40% of these annual contract awards came from new business wins. Our award activity reflects the strength of our market position, our customers mission critical budgets and our continued investment in our business development function. Our bookings momentum over the past year creates a book to bill ratio of 1.6 times revenue and aligns us for what we believe will be at least 10% growth in 2007 without future acquisitions. Our contracts awards have translated into a strong and growing backlog of $2.87 billion, which is up 22% since last year. Funded backlog was $622 million, up 33% from December, 2005.

We continue to see strong demand for our services in the mission critical intelligence and defense sector and our qualified pipeline now stands at $7.8 billion. We have 19 opportunities in the pipeline over $100 million. These larger contracts require more BMP resources and we continue to invest in our business development processes to insure even higher probability of win on upcoming competitions.

In addition to strong 2006 awards in our classified intelligence analysis information sharing cyber security and related activities, we have announced several large new business awards in January and February of 2007. These contracts continue to add to our backlog and support our 2007 growth outlook. For example, we won a five-year $80 million global property management services contract from the army and a seven-year $90 million anti-terrorism contract with a defense agency. Both are mission critical programs which will ramp up over the next several months.

I would like to talk for a moment about our growth profile for 2007, and discuss how we expect to deliver that growth during the year. As I mentioned earlier, 40% of our $1.8 billion in 2006 bookings came from new awards. If you consider an average contract life of five years this translates to approximately $140 million in annual revenue.

As I stated earlier, based on the 2006 bookings alone, we are positioned to deliver at least 10% growth in 2007 without future acquisitions and without major new contract awards during the year.

We expect to deliver this growth in a quarterly pattern of accelerating revenue that I will briefly explain. We have two contracts that at times have represented up to 10% of our revenue. Our regional service center contract and our counter line contract. Both of these contracts have high materials pass through and combined generate over $53 million in revenue for the fourth quarter.

We have factored in 10% growth from the Q4 run rate of these contracts into the low Indiana of our 2007 guidance numbers. In the first quarter the materials pass through on these contracts combined with increases on other direct labor based contracts will offset and replace revenue from contracts that ended had in 2006. This will result in single digit growth for the first quarter.

However, due to our strong bookings, our core business is well positioned to deliver mid teen to 20% growth in the second half of 2007. As we ramp up those new contract awards revenue growth for each quarter will accelerate to achieve the full year revenue growth of 11% to 14%, or $1.26 billion to $1.3 billion. As important we expect to sustain our fourth quarter margins in 2007, will result in solid EPS growth for the year. Kevin will discuss this in further detail.

With regard to our 2007 growth, I would like to point out that the contracts are in place and our customers budgets support the funding requirements of these contracts throughout 2007. Year-to-date we have already added 63 new employees and we expect to hire the incumbent work force from some of our recent contracts awards which will help accelerate contract ramp up and drive growth into the second half of 2007.

Finally, in 2007 we have about 20% of our 2006 business base up for recompete, which is consistent with our historical trends. However the timing of these recompetes is in the back half of the year, which means that less than 5% of our 2007 revenues is at risk related to these recompetes. Overall we are very pleased with our growth outlook for 2007 and beyond.

In closing, we are diligent in the execution of our customers missions and focus on our goal to be the premiere provider of national security solutions within the intelligence, defense and homeland 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 throughout 2007 and beyond. With that, I will turn it over to Kevin.

Thank you, Bob. And good afternoon, everyone.

ManTech delivered another solid quarter of consistent growth as revenues were $291 million, increasing 11% from last year fourth quarter revenues of $261 million. For the year ManTech's growth was driven by our success in positioning ourselves in the intelligence, defense and homeland security communities.

As Bob discussed, our core market continue to be strong, as you will note from our fourth quarter awards in recent press releases we continue to be well positioned in all components of DOD and intel customer base. Many of these will provide expanded staffing and support of our DOD and intelligence customers. For the year revenues grew to $1.137 billion, up 16% with 12.4% coming organically over 2005. This growth was largely driven by our expanded activities in the intelligence defense communities and continued support of our nations efforts in Iraq and Afghanistan.

Contract revenue mix remains relatively unchanged during the quarter and year. Over 97% came from federal government sources both for the quarter and year, defense, intelligence, homeland security related business comprised over 95% of our revenue for the fourth quarter and full year. A portion of revenues coming from contracts billed on a time and material basis was 63% this quarter, our fixed price contracts represented 13%, up slightly compared to the previous quarter. And cost plus contracts were 24%.

For the full year, T&M repaired 64% of revenue, fixed price was 11% and cost plus 25%. In the fourth quarter 62% of our work was performed as a prime contractor as our RSE contract transitioned to a subcontract vehicle. For the year 68% much our work was as a prime contractor.

As Bob mentioned earlier, our contract awards in the fourth quarter were $300 million. This award activity and the addition of GRS translated into backlog as of December 31st of $2.87 billion, up 22% from last year. More importantly funded backlog grew by 33% to $622 million at the end of the fourth quarter, up from $467 million reported in the previous year. This strong growth from total and funded backlog demonstrates ManTech's positioning in the center of the mission critical operations.

Our operating margin in the fourth quarter was 8.3%, excluding the impact of FAS 123 (R) in the quarter, and 7.7% including FAS 123 expense. The main drivers of the operating margin level was continued increase in the level of ODCs, which pressured growth margin, coupled with higher bid and proposal spending and FAS 123 (R) expense in the quarter. For the year operating margin was 8.5% excluding the impact of FAS 123 (R) and 8% including FAS 123 expense.

For the fourth quarter income from continuing operations was $15.3 million, which translated into diluted earnings per share from continuing operation of $0.45. Our earnings per share include $0.05 primarily from the combination of one time -- a one time gain from our sale of the business and a lower than anticipated tax rate in Q4 of 35.9% resulting in an effective tax rate of 38.5% for the full year. For the full year income from continuing operations was $55.6 million, which translated into diluted earnings per share from continuing operations of $1.64 or $1.73 prior to the impact of FAS 123 (R) expense.

From a balance sheet and cash flow perspective the fourth quarter was once again solid. As of December 31, 2006, the company had $41.5 million of cash and no debt versus $5.6 million of cash and over $42 million of debt at the end of 2005. This net cash swing of almost $80 million in 2006 was a result of our constant focus on our billing and collections processes.

During the year we generated over $90 million in operating cash flows from continuing operations.

Our receivable day sales outstanding at the end of December was 73 days and is down 10 days from last year fourth quarter DSOs of 83 days. We expect to continue at around this this level in 2007. We expect strong cash flows from operation in 2007. We expect strong cash flows from operation in 2007 and we expect to convert over 95% of our net income into cash flow from operations. Our cash flow will improve based upon the sale of MSM which was completed last week.

As we detailed in our press release dated February 15th, we attempted to sell MSM over the past two years and were not able to complete an a transaction with an inquirer even though numerous transactions were diligenced and negotiated.

The offer to purchase MSM by George Pedersen was the best offer we received for the business and management and the board took all the necessary steps to insure that the transaction was fair, independently reviewed and in the best interest of the shareholders. The accounting for the transaction will be completed in the first quarter of 2007 and we expect a slight gain from discontinued operations in the quarter.

Finally, ManTech will have no further involvement with MSM going forward.

Turning now to our guidance, our expectation for 2007 revenues is in the range of $1.26 billion to $1.3 billion. Reflecting an 11% to 14% growth rate. And 10% to 13% organic compared to 2006 revenues of $1.137 billion and is exclusive of future acquisitions. Given the combination of staff on -- staff growth on our recently awarded contracts as well as the increase in ODC generated revenues we anticipate operating margin for the year that will run near fourth quarter operating margin levels.

As Bob discussed our larger revenue contracts, RSC and Countermine have high ODC content and therefore lower margins. Our guidance results in diluted earnings per share from continuing operations for 2007 of $1.76 to $1.84 per share based on weighted average shares of $34.7 million. This represents a 7% to 12% growth from 2006, but as a reminder this growth range is impact by the one-time gains we benefited from in this year's fourth quarter.

As Bob explained earlier in his remarks, we expect our growth rate through the year to accelerate as recent contract awards ramp up. Based on this accelerated growth rate outlook, our first quarter guidance for revenues is in the range of $285 million to $295 million. Our guidance range for diluted earnings per share from continuing operations for the first quarter 2007 is $0.40 to $0.42 per share.

First quarter EPS is based on weighted average shares of $34.4 million.

In closing, we are pleased with our performance in 2006 and the opportunities available to us given our recent contract awards and focus and market position. And now, we would be pleased to take any questions you may have.

Thank you. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] We will take our first question from Ferat Ongoren with Citigroup.

Hi, the first question I have is actually a housekeeping question. I'm looking at the one time gains in the tax rate, is it fair to assume these two items cost about $0.04 to the earnings.

About $0.05.

About $0.05, okay. If you look at Countermine program, we will see the two point [inaudible] pretty soon. How does it impact your business? Is it an extra revenue source for you or will that be business as usual going forward?

The Countermine work is fairly consistent and I don't see that impacting the current efforts at all.

Okay. And in terms of the cash flow guidance, I mean this year you had a pretty good cash flow, about 1.7 times net income, when I take out about $6 million, $7 million Capex, I come up with 5% cash conversion. Why are we seeing that kind of decline into 07?

Our DSOs, we had a very good collection year for receivables in '06 and that driver is not something that will continue to decline. Our Capex for '07 will be about $10 million, so that's going to be fairly consistent, a little bit more than this year, but consistent. So I think the primary driver is just the amount of DSOs and the level of receipts we will get on our receivables.

Okay. Now, final question on the intelligence side, what was the intelligence growth compared to last year?

We don't typically break that out, however, growth on that side has been higher than usual. As witnessed by the award activity we have had.

I mean, are we talking about 20% or so growth?

I think the core business overall has the ability to generate close to 20% growth on the back half of the year. But we don't break out the components of that growth.

Okay, thank you very much.

We will take our next question from Michael Lewis with BB&T Capital Markets.

Hi, George, it's Mike Lewis with BB&T. George, I was wondering if you were to strip out the Countermine contract from the overall business where are you seeing more significant growth? Are we seeing it out of the domestic intelligence operations or from the international intelligence operations?

It depends on how you define those two terms you just used, I'll turn that over to Bob for the details. But we see continued growth across the entire intelligence market for the reasons you know well. We support those customers both here and we support them around the world. As you know, we're in 40 countries around the world and that's -- that makes us a little bit different than others. But let me ask Bob to give you a bit more detail.

Mike, it's really a combination of the two. If you think about the expanding role of the intelligence community as their mission takes them overseas, obviously, we gear up to support them in that initiative. So it's really a balance between the two.

Okay, thank you.

And we will take our next question from Joseph Vafi with Jefferies & Co.

Hi guys, good afternoon, good results here. I was wondering, at this point, given your underlever balance sheet, George, are you in a position it at this point to kind of really look at acquisitions of -- I mean materially larger size here at this point.

We haven't really done anything that big here for awhile, and I know you have been talking about growing the company significantly. Just kind of the thoughts here on the structure and the operational capability to really do maybe a potentially much larger acquisition here that you have got the balance sheet to do it.

We are very, very much interested in a much larger acquisition, as you know. If takes the same amount of time to acquire a large firm as it does a small firm. So we are looking and have some candidates at the present that are far larger than we have looked at before. We have the balance sheet, we have good relationships with our bank, and what we need is the right candidate and we will make it happen.

Then a follow up to that, it looks like ManTech is really bucking the trend here a little bit relative to some of the closer peers in terms of keeping the growth profile going organically, and it's really kind of caused a little bit of shakeout in some of the peer companies. Do you think this creates an opportunity from an M&A perspective industry wide, maybe given some of the sell off here in the stocks, or do you think that a lot of the companies here are really focused on their own organic business plans?

I can't answer for all of them, but I think all of them, because they're in a basic defense intelligent business, are always candidates and they're good. I have a lot of respects for all of the companies. Now, they have had a different profile, as you know five years ago we set out to focus almost exclusively on high end defense and high end intel. And for us it turned out to be the right decision.

But there are a lot of companies out there -- you know the number of companies that are available in our industry. We are targeting the larger ones just as you said. So we hope before the year's end to have success in bringing some of those all the way across the goal line.

Okay. I don't mean to push you here George, but would you be open to doing a public acquisition?

Absolutely.

Okay. Maybe a question then for Kevin and for Bob, I guess. It looks like we hired 63 people in the quarter and we do have a growth profile moving forward, and I know you're bringing on some hires here maybe from some of the contracts that you have won away from incumbents. Is there any way you can give us kind of an idea of what kind of head count hiring we should be looking for in '07 to kind of hit the growth numbers that we're talking about?

Joe, as I mentioned year-to-date we're up 60 people, about 60 people. And even though it's early I'm confident that we're on track to meet our staffing goals for the year. The recruiting has been strong even though the labor market is fairly tight and obviously this is a priority for our company.

With the number of awards we have had in 2006 and with the staffing activity we plan for the year, we should get back close to 6,000 for the year after the 5,600 we're currently at.

So we're looking for 400 net during the year.

Somewhere around that range.

Okay. Then maybe just one other question here on the operational front. A lot of the new business signed, a fair bit of the business signed in '06 was new business. And obviously there's maybe a little bit more uncertain ramp to some of that business versus a continuing on with renewal business.

If we could get a level of confidence in how you're seeing the visibility on those new contracts relative to maybe delays that might pop up given the environment, that would be helpful.

I think the customers have the budgets necessary to fund the contracted awards, I don't know that we're worried about that. And keep in mind everything that we have won is mostly in that mission critical space and the funding in there continues to be pretty strong. With regard to staffing again, because of the tight labor market, we forecasted that to occur mostly on the back half of the year.

The only thing I would add to that is again the supplemental process. The congress hopes to pass a bill -- they're going to consider a bill on or about the 14th or 15th of March which would add $99.6 billion, including $93.5 billion for defense.

Earlier in the year there was talk that would not happen. They had given the President a $70 billion supplemental. Now they have, there's no longer any question he will get another $93 billion. So we see that the funding will be there for the type of growth we hope to achieve.

Hi, Joe, in addition to that, if you look at the work we have done over the past several years, a lot of it has been funded out of the CT supplementals. And those programs have now converted into core budgets for our customers, so we expect the sustainment of those programs to continue over the long term now.

Okay, that's helpful. Thanks a lot, gentlemen. Kevin, congratulations on bringing that DSO down in 06.

We will take our next question from Bill Loomis with Stifel Nicolaus.

Hi, thanks. Can you just talk about when you mentioned 10% growth factored into the low end guidance on the regional logistics support contract, was that both Countermine and the regional logistics support contract you talked about?

Yes, the $53 million included both.

So when I'm looking at the -- what was the regional logistics revenue for the fourth quarter.

$38 million.

Just that one without the Countermine?

No, I'm sorry, the Countermine ways $38 million and the regional logistics about $15 million.

In your forecast for '07, are you assuming that the regional logistics ramps up sequentially and doesn't get back to say the $29 million quarter level got to in the first quarter '06?

We have it ramping up, but it's not ramping up to that same level, we're still waiting on customer requirements to flow through. We know there's a large contract value associated with that, but we're not ramping up to that level.

Okay. So some of the upsided in this Countermine -- we should basically assume kind of stable at the current revenues. The regional logistics support contract could see sequential growth above and beyond the forecast. Is that a reasonable assumption?

They both can see growth, but based on the value of the contracts I think that you're correct, that the regional service contract has more upside.

Okay. On the Countermine support contract, is it fair to assume kind of a $36 million run rate on that one through '07, or do you think you see growth in that?

There's potential for growth again, combined they're about 10% growth, but $36 million run rate is reasonable baseline.

Okay. And what kind of visibility do you have on both of those programs if we should get into a situation where we start to see some redeployments later in the year? How does that, how do these contracts react to that? Is it pretty much real time, or do you have heads up on that?

I think that IDs and EOD's will be part of the army's longer term strategy, regardless of what happens in Iraq and Afghanistan. So I think we're well positioned now to be able to support the army's continuing interest in these type of vehicles for the long term.

Okay. Okay. Thank you.

There's also a larger mission for that technology as you know. They recently conducted some tests here as to what would happen and what the response would be, I think there was an it test last week involving the White House. Okay, thanks.

[OPERATOR INSTRUCTIONS] We will go next to Alex Hamilton with The Benchmark Company.

Hi, good evening. One housekeeping item, and maybe I just missed it. You used to break out on the income statement and as a cost of sales. You didn't break that out, do you happen to A, have that number and B, are you going to break that outgoing forward?

We are not going to break it it outgoing forward. If you go to the cash flow statement the DNA was about $10 million, and it's a line item there. Use that.

Okay, great. Then the supplemental, the 07 supplemental is expected to pass by mid April. How much of that is in guidance if that does slide to the right, what kind of impact would that have on your guidance, if any?

I think for the moment we are funded adequately out of the current money that's there. That supplemental really represents, in a broader sense, additional growth to us.

Okay. Then just lastly, there were comments today that Defense Secretary Gates is requesting an additional $2.4 billion, I believe for research and development for the IED market. Do you have any comments on that? I assume this kind of place into your sweet spot, have you heard any further color on that?

I haven't heard that specifically, but as you know going back, I think it's a year and a half, the congress did fund $3 billion separately for that program. They established a new office. It's a very high priority, and I would be surprised if the congressman does not grant the Secretary's request. I hadn't heard the $2.4 billion number before, but it doesn't surprise me.

Fantastic, thank you.

And, ladies and gentlemen, thank you for participating in today's conference call. This call will be available for replay beginning at 9:00 PM this evening through March 14th.

To access the replay please dial 1-888-203-1112 for domestic calls or 719-457-0820 for international calls. And use the ID number of 3819354. This concludes our conference call for today. Thank you, all, for participating.