ManTech International Corp (MANT) 2007 Q3 法說會逐字稿

Good afternoon. My name is Deana, and I will be your conference facilitator today. At this time I would like to welcome everyone to the ManTech third quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). Mr. Cormier, please go ahead.

Welcome to ManTech International Corporation's third quarter 2007 earnings conference call. We appreciate you joining us this afternoon and wish you all a happy Halloween. My name is Joe Comer and I am Vice President of Corporate Development.

Leading today's call from ManTech are George Pedersen, Chairman of the Board and Chief Executive Officer; Bob Coleman, our President and Chief Operating Officer; and Kevin Phillips, our Executive Vice President and Chief Financial Officer.

In our prepared remarks George will discuss ManTech's strategic positioning and the budget outlook. Bob will review our operational highlights in the quarter and future business prospects, and Kevin will review our financial performance in detail.

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 9, 2007 and in ManTech's other public filings. Also, we undertake no obligation to update any of the forward-looking statements made on this call.

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

Good afternoon, and thank you for participating in today's call. I'm pleased to announce another excellent quarter for ManTech International. As you saw from our press release, we delivered revenue of $383 million, which represents over 35% growth, with 18% coming organically. Our earnings of $0.51 per share were up 24% over last year's $0.41 in the third quarter.

Our positioning in the center of the national security arena continues to provide impressive growth, and we expect a strong finish to 2007 for our corporation.

Along with very strong operating results, we once again generated exceptional cash flow of $41 million during the third quarter. This was a result of our growing profits in successful receivables collections which resulted in SRS of just 67 days. Based on this outstanding cash flow, we were able to reduce our borrowings by over $47 million during the quarter, bringing our total debt outstanding to $86 million as of September 30. As a reminder, we borrowed $170 million to fund the SRS acquisition in May of 2007, and within five months we have paid down over $84 million.

Given the strength of our balance sheet and ample amount of purchasing power ManTech has today -- that ManTech has today, we're focused on finding the right additional strategic acquisitions to further accelerate our earnings growth in future years. Our acquisition pipeline is healthy, and in fact we're working on several near-term opportunities.

We're very comfortable adding new companies into the fold from an integration point of view as SRS' strong performance has demonstrated our ability to do so.

As I have said many times before, the only concern I have going into any new government fiscal year is having appropriations completed for Defense, Intelligence and Homeland security communities, given that 93% our revenue comes from these sources.

As you are all aware, our government is currently operating under a continuing resolution. I would like to remind everyone that we have been faced with difficult budget environments over these past few years, and still delivered strong results. Again we produced 14% organic growth in '05, 12% in '06, and are projecting 14 to 15% in '07. As I have said many times before, our growth demonstrates the resilience of our Intelligence and Defense markets.

We fully expect to have an appropriation bill by the end of year. And I'm confident that ManTech will be able to deliver continued strong growth in revenue and earnings in 2008.

In closing, we are positioned in the center of the nation's Defense and War on Terrorism missions. We continue to enjoy a trusted relationships with our customers, who are recipients of the priority funding in areas of national security. We have nearly 7,000 dedicated employees ready to meet our customers' critical missions here and in over 40 countries around the world. The third quarter 2007 results continues to demonstrate our success. We look to continue executing in support of our nation, our customers and our employees, and most important, you, our shareholders.

With that I will turn the call over to Bob Coleman.

We are all very pleased with our Q3 results. And you'll see from my comments that we're well-positioned for a strong finish to the year, and we have a solid foundation for growth and continued profitability as we move into 2008. As you saw in our press release, we delivered strong revenue growth for the quarter, and our operating margin improvement plan produced better-than-expected results. Our 7.9% operating margin was up from 7.3% in the first and second quarters, and was the result of continued headcount growth and an ongoing focus to improve profitability across the corporation.

We're very pleased with our business' agility in responding to this initiative. And all of our line managers have done an outstanding job driving utilization rates, controlling costs and managing to our margin goals' objectives.

We look forward to continue margin improvement through the remainder of the year and into 2008. During the quarter we added another 130 net employees, which brings us to over 430 year to date, which is well ahead of our initial 2007 staffing plan. Even with our success in driving net adds, we still have our 500 open positions, with a significant amount requiring the highest local security clearances. Our annualized turnover rate in the third quarter was again 20%, which is consistent with industry averages.

Bookings were again strong for the quarter and totaled $407 million. We continue to see a number of opportunities shifting to the right, and this could impact our fourth quarter bookings depending on the timing. New business wins and contrast expansions accounted for over 80% of the bookings total for the quarter and 75% of the year to date bookings. This translates into about $150 million of executable annual revenue going into 2008, or over 10% incremental growth on our $1.4 billion revenue base.

Additionally, total backlog now stands at $3.51 billion. This represents a 30% increase from $2.71 billion at the end of September 2006. Funded backlog group 68% year-over-year to $846 million, and was up $100 million on a sequential basis, which provides additional comfort to our 2008 growth expectation, and again points to ManTech's positioning at the heart of national security missions.

Our qualified pipeline now stands at $9.3 billion, and we have 28 opportunities in the pipeline over $100 million. As we discussed in the last quarter, ManTech is extremely well-positioned to support the Army and Marine Corps expending MRAP requirements. As important, we're also well-positioned to support the Army's upcoming Reset and Readiness initiatives. As you know, the MRAP vehicles are beginning to arrive in theater. And in response to these new arrivals, the government has added $90 million to our Countermine contract and extended it through February 2008.

This new funding represents an expansion of the current Countermine program, and also includes one new support location. ManTech is well-positioned to support this effort, and we expect the Army to continue the Countermine program throughout 2008 and beyond.

We are honored to be a part of this potentially life-saving mission. And we view our role in providing logistic support and supply chain management, operations and maintenance, and the installation, maintenance, and training and support of the IED jamming devices to be a key part of mission success.

I would like to turn now to one of our key Intelligence-related programs that we believe provides significant long-term growth for our Company. We have briefed you many times in the past on our strategic position in the Intelligence Community and are focus on knowledge management and information sharing and collaboration within that community. I'm pleased to inform you that ManTech has been tapped to support one of the Director of National Intelligence's key strategic intelligence collaboration and sharing initiatives called AnalystSpace or A-Space.

A-Space is the next generation intelligence analysis work environment spearheaded by the D&I, with the intent to transform the way the Intelligence Community shares information. It is the social networking and collaboration solution similar to MySpace and Facebook that will be the focal point for facilitating information sharing across all 16 intelligence agencies.

ManTech was selected to build this solution because of our mission expertise and extensive experience in developing these types of applications within the Intelligence Community. We expect that A-Space will provide a platform for many innovative add-on applications, similar to the way Facebook provides this type of platform in the commercial world. And as the primary developer we would expect to participate in these new initiatives and efforts.

A-Space is a key step in transforming the way the Intelligence Community collaborates, and we are excited to be a partner on this program.

Based on our market position, recent hires, our new business wins, and our strong business development pipeline, we are forecasting fourth quarter revenue of $389 million to $404 million. This implies 34 to 39% overall growth with an 18 to 22% organic growth rate.

We have raised the bottom end of our full year 2007 revenue guidance by $15 million to reflect the strong revenue performance in the third quarter. The current guidance for 2007 revenue is $1.415 billion to $1.43 billion, which represents 24 to 26% overall growth and 14 to 15% organic growth.

Our continued operating margin improvement and strong cash flow expected in the fourth quarter has allowed us to increase our EPS significantly from our previous guidance range. Our new EPS guidance is $1.87 to $1.90, which is up $0.08 on the bottom end and $0.05 on the top. And Kevin will fill you in on the details.

We continue to execute on our goal of becoming the premier provider of national security solutions within the intelligence, defense and homeland security related communities. We will continue to focus on driving strong organic growth and profit improvement, 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.

Good afternoon everyone. As George and Bob covered earlier, we are pleased to report a very strong financial quarter with continued growth in our operations as revenues grew to $383.4 million, increasing 35% from last year's third quarter revenues of $283.7 million for an organic growth rate of 18% on a pro forma basis.

Our organic growth is derived from pro forma revenues for the third quarter of 2006 of $325 million, which includes third quarter 2006 revenue from SRs and GRS. This growth continues to be driven by our expanded activities in the intelligence, defense and homeland security communities. For the quarter over 97% of our revenues came from federal government sources. Defense, intelligence and homeland security related business comprised 93% of our revenues.

The portion of revenues coming from contracts billed on a time and material basis was 61% this quarter, while cost plus contracts were 24.4%, and fixed-price contracts represented 14.6%.

Our Countermine contract accounted for approximately $54 million in revenue during the third quarter, while a regional logistic support contract, or RSC, generated over $23 million.

As we have discussed in the past, these contracts consist of a heavy amount of material pass-throughs and therefore generate lower margins in the core ManTech business. Combined these contracts produced 3% operating margins, while the rest of the business delivered over 9% operating margins.

Our overall third quarter operating margin was 7.9%, which was up from 7.3% in both the first and second quarters of 2007. As Bob mentioned, this improvement was ahead of expectations and resulted in $30.4 million of operating profit for the quarter.

Our increased labor growth and continued focus on improving profitability were the main drivers to the better-than-expected margin. Additionally, we had a onetime $900,000 adjustment to the intangible value of a software product. Without this onetime event, operating margin, would have been 8.1% for the quarter.

The better-than-expected cash flow in the quarter also drove our net interest expense in the quarter of $1.7 million. This is less than the $1.9 million we had expected. This translated into net income of $17.5 million, which resulted in diluted earnings per share of $0.51 on $34.6 million fully diluted shares outstanding.

Looking at the balance sheet and cash flows, our cash position was $3.5 million, with $85.7 million of debt. Based on our strong cash collections, DSOs came in at 67 days. I'm very pleased at how quickly SRS was able to adopt our processes and reduce their DSO from what was historically in the low 80s to our corporate average in only their first full quarter within a public company. This allowed us to continue our impressive cash collections.

In regards to our cash flows, the third quarter was excellent. Operating cash flows during the quarter were over $41 million, and allowed us to reduce our borrowings from the SRS deal by over $47 million in the quarter.

Moving to our guidance, which does not include the impact of any future acquisitions or divestitures, we have set initial fourth quarter guidance for revenues of $389 to $404 million. As we look into the fourth quarter, we expect operating margins of 8.15 to 8.25%, which is in line those our normalized operating margin in the third quarter.

Guidance for diluted earnings per share for the fourth quarter is in the range $0.53 to $0.56 based on weighted average shares of $34.9 million in the fourth quarter. Based upon our performance in the quarter, the incorporation of SRS, as well as our ability to continue growing our direct labor for the year, we have adjusted our revenue guidance range up $1.415 billion to $1.43 billion.

We have also raised our guidance range for diluted earnings per share for the full year 2007 up to $1.87 to $1.90 per share. Our 2007 EPS is based on weighted average shares of $34.6 million for the full year 2007.

The fourth quarter and full year guidance includes a 38.9% estimated tax rate. And we expect interest expense to be approximately $1.3 million in the fourth quarter of 2007.

Looking forward to 2008 we have expressed our confidence in delivering strong growth in revenue and earnings next year. In an effort to keep our investors aware of our current views and continued information flow between now and when we report our fourth quarter earnings, we plan to provide our initial guidance for the full year 2008 in mid-December, and we will follow-up with a Formad date and announcement.

We then plan to update this guidance for our 2007 year-end conference call in February. In closing, we are excited about the prospects of our business, as we are operationally well-positioned for continued growth in revenues and profits. Supported by our strong balloting and cash flows. And now we would be pleased to take any questions you may have.

(OPERATOR INSTRUCTIONS). Michael Lewis, BB&T Capital Markets.

Great quarter by the way. George, I was wondering if we could talk about SRS per a second. We had it in for a few months now, and I was wondering if you could tell me about new opportunities that are opening. I would specifically be interested in whether you're seeing new business opportunities over at NRO or NSA as a result of SRS?

I think it is fair to say we are seeing additional opportunities. I don't know if we can go into precise detail. Bob, are we allowed to do that?

No, not on some of the programs.

We have worked very closely with them, and in a couple of areas we see opportunities. Their sales exceeded what we expected. I think the opportunities are greater than we expected, but I can't give you precise details.

This is Bob. SRS doesn't do a lot of work at NSA, so we don't see a lot of future growth there. But where we are seeing expansion is on the DHS programs, particularly the VNDO contract that they have. That contract is ramping up nicely, and the government we believe will continue to fund it strongly going forward.

In the NRO --.

Tell them what the DNDO means.

Domestic nuclear detection. In DNDO, as you know we support a space-based radar program there and a couple of other programs. DNDO is changing some of their organizational structure. We believe that we'll play a significant role in supporting that structural change as well.

Bob, are you seeing any budget pull backs specifically at NRO right now, or is it just flowing through?

I think there is some delays, but I wouldn't say pull backs.

I think they're looking also -- they're making some changes structurally. And some different people are moving around taking new assignments, but I don't think there's going to be a reduction in their mission.

That's helpful. Just one quick question for Kevin and I will get out of the way. With regard to the EBIT margin os going to come in higher in the fourth quarter than I was expecting. Now is this a sustainable level north of 8% going into '08? Because typically what we see in the model is a strong September and then a slight decline in the December quarter. Can you help us out there?

I think that it is a sustainable margin, primarily based on the labor growth we have had, and we expect to continue to have based on the requirements that we support. So I do expect the 8.1% to be sustainable.

Thank you. Great quarter.

Joseph Vafi, Jefferies.

Happy Halloween, and great results. Let's see here what are the questions? Maybe we could talk -- I now a little bit -- I think it might have been you, Bob, you were talking a little bit about Reset work and your positioning there. Maybe some commentary around some of the vehicles you have in place to maybe take advantage the Reset work here, if we see that start to grow here over the next year or so?

I think with regard to the Reset initiative, if you look at the type of support we currently do on Countermine, components of that work are heavy on the repair and maintenance side, which we think lends itself very well to the Reset initiative. And how they will use those contracts to support those efforts, I don't know, but it remains to be seen. But certainly with our RSC contract there is plenty of opportunity to do that.

Then if we look out into '08 is there any large recompetes we should be looking at? Obviously Countermine going through early February '08, but outside of Countermine is there anything we should be looking at?

I would say Countermine is the major driver. This year we have had a lot of our recompetes slide into next year. And some of those are already being extended, so we think those may push out even into '09. So probably the major competes in 2008 would be Countermine.

Then extrapolating here looking at strong new contract wins in the quarter combined with an increase in the funded backlog sequentially, is it fair to say that some of these new contracts are making their way into funded backlog at this point, or is that other work is driving the funded backlog, at least as we exit Q3 and looking at those numbers?

The increase in funded backlog was primarily driven by the Countermine add-on and the JERRV add-on which came late in the quarter in our [well funded] tasks.

Then some of the increase in the new awards that we have seen in the quarter are an expansion of existing scope. That really hasn't really made its way into funded backlog metrics yet?

I would say it is a mixed bag there. It depends on the organization issuing the contract and the mission support. But it is really a mix of funding from those customers.

It is Kevin. I would say that most of our operating units had an increase in funded backlog at the end of quarter, but the most identifiable, or largest one, is in -- related to the Countermine activities, but all were up.

Then maybe just one final question. I know that organic growth includes contribution pro forma from SRS and GRS. I would imagine -- I just wanted to get confirmation that those organic growth rates were indeed higher than the base business in the quarter?

Yes.

Anymore color there on the way the growth in the base versus some of the recent additions here?

ManTech's core growth is only a couple of basis points between the 16% that we have -- 18%, I am sorry. So it is about 15% for ManTech core, and the other two were above 30%.

Thanks a lot. Great quarter.

Tim Quillin, Stephens Inc.

With regards to the Countermine, first of all, what was the term of the $90 million extension, the term of that contract?

It was extended through February of '08.

From what period, is that --?

December, I'm sorry. It was extended from December '07 through February.

So a two-month extension just --?

Yes.

That implies obviously a very big runrate right now.

Keep in mind though Countermine is rquirements riven. And with all the new vehicles arriving in theater, yes, you would expect to see an increase in those requirements, but it is too early to tell what the spend pattern is going to be like on that.

My understanding of your work to date for Countermine has been for a narrow subset of MRAP vehicles. Is the number of vehicles that you're supporting expanding? In other words, are you supporting all of the manufacturer's (multiple speakers)?

Yes, it has expanded out beyond the Buffalo. It includes the Cougar, the RG 31, the Aardvark, and just about all of them now.

How should we guess, I think I ask this question every quarter for the past year or so but how should we think about this in '08, or what kind of feedback are you getting from the customer? I under understand it might be a little episodic in terms of the initial rollout of MRAPs, but it is a big program. Do you expect it to kind of continue at a very high rate through 2008?

We expect it to continue through 2008. Remember they are currently developing the procurement strategy, so we don't know what kind of delay that will impose on the existing funding. In other words it is extended through February right now with $90 million, but it could extend out beyond that based on the procurement strategy.

Please remember also this program is a high-priority for Chairman Murtha. That doesn't guarantee funding, but Chairman Murtha is very focused on this one.

Kevin, just one detail question. Was there any revenue from the JERRV contract? And is that vehicle being used at all or is Countermine just the main -- the [pilot]?

JERRV for the third quarter was about $6.5 million. Again it is slightly up from prior, but not significant. There are additional task orders that were placed on there for potential use, but again it is going to based on the flowing requirements.

Great quarter guys.

Ferat Ongoren, Citigroup.

Good numbers. The first question is on the cash flow side. What is our expectation for the fourth quarter for cash flow?

Obviously we have had a very good year in cash flow. And we had previously targeted cash flow to be about 1 times net income. I think that trend is increasing. And I expect to see it above 1.1 times. But given the fourth quarter, I have been thinking about 1.1 times net income.

In terms of the further liquidation on the acquisition, on SRS, do they have still further upside with that in terms of monetizing some of the receivables?

No, I think they have become, or come in line, with the rest of ManTech. And I don't expect to see a lot of additional reduction in their DSOs. We are just happy that they were able to get there as quickly as they did. And again is a good group of people and a good combination.

In terms of this opportunity you talked about A-Space, how should we think about the revenue contribution rest of this year and maybe in 2008?

For the remainder of this year it is not significant. But we have had experience with programs like this in the past, Feratm where we start out with a prototype system, and then it expands to a several hundred million dollar program within an individual organization. This one, of course, goes across the entire community, so we're optimistic that there will be significant growth in this program. I can't give you details on the amount though right now.

In terms of the Countermine and maybe the MRAP opportunity, do you think you'll have enough visibility going into 2008 by mid-December, and tHEN you provide the guidance?

It is Kevin. We expect to have more visibility, whether we have enough is going to be again subject to the acquisition process. But at the same time we don't want to delay providing an initial look until the end of February. So I think we're going to have enough to visibility provide a look at that time.

Then a final one. Is it possible for you -- and I know sometimes it mixes up other departments, but would it be possible for you to comment on the organic growth of the intelligence business this quarter?

No, it is not something we disclose. Again, all of our business is healthy. We are well-positioned. All of our funded backlog is increasing. But again it is just not a measure we provide.

Gautam Khanna, Cowen and Company.

It has been a great quarter. Could you walk us through -- I know you have an upcoming recompete with the State Department under [SSD], kind of what the timing is, what the size is, and how you would set your odds?

It is Bob. The CS recompete is what you are referring to. That contract has currently been moved over to our -- one of our internal State Department contracts, intact with all of our subs in place. It is in recompete right now. Oral presentations are going on. We're scheduled for orals later -- or early November.

Of course, we are very comfortable with our recompete position on that contract. We understand the customer's priorities. We know their strategy and direction. And we're pretty comfortable that we will end up on top of this program. We have over 100 people supporting the program. About $20 million -- I think about $20 million, if I recall right.

Okay --.

The main competitors are the typical guys within our peer group, you know, SRA, Northrop Grumman, [Khaki], a couple of others.

Terrific. You mentioned there is some near-term potentials in the M&A pipeline. Could you characterize the size of what you're seeing and what areas you're targeting?

I think they range from probably $50 million on up to the $200 million that we typically see. I don't think they have changed in profile from what we get in a normal month.

And areas of focus are the Supreme Court, (multiple speakers)?

The same as before. With the focus we started with five years ago has served us well, so we don't intend to change it.

Ed Caso, Wachovia.

Just one add-on to the last question. I am wondering if you were focusing on acquisitions in Johnstown, Pennsylvania at all? All my questions were asked, so I will just say congratulations.

Do you want an answer to Johnstown, Pennsylvania?

Not in a public forum, no.

Well I have to be -- I read all the articles you have. Chairman Murtha is not as bad a person as portrayed in those articles. In fact, he serves this nation well. That is all I will have to say. And, no, we're not looking for acquisitions in Johnstown.

Bill Loomis, Stifel Nicolaus.

Great quarter guys. Kevin, when you have talked about the $53 million in Countermine, does that include the $6.5 million in JERRV?

No.

So that is separate. And then the $23 million for RSC, does that include the old RSC contract that is winding down? Do you have anything left on that?

No, that is it.

That is combined?

Combined, right.

On the $90 million extension for two months, is that implying like -- your runrate now is $53 million on Countermine -- is that implying that the government is potentially funding up to $135 million a quarter? Is that how I should be looking at that?

I think, as Bob said, they have requirements that they are not defined or determinable at this time, just like when we started the other tasks and requirements on it. There may be an extension on the period of performance and there would be other requirements around the procurement strategy. We are trying to get our handle around how things are coming in (inaudible) requirements. So certainly the government is trying to make sure that they have continuity for the support, but the level is not something that we are projecting about, at least for the rest of this year, the $54 million on that.

So in the fourth quarter guidance you are assuming roughly $54 million for Countermine?

Yes.

On the RSC what type of growth -- I think the $23 million was down slightly sequentially. What type of growth is there going to be in that $23 million, $25 million range for awhile?

It is going to be in the $23 million to $25 million range for a while.

On the -- as far as some of your upcoming opportunities, you mentioned some of the pipeline may slip. It depends on the acquisition process. How do you see that working out if we get say some of the budgets passed -- the regular defense budget passed this year, but the supplemental pushed to next year? How do you see that impacting potential awards, if we get that regular defense budget passed before the end of year, but the supplemental is pushed to next year?

I think that is difficult to answer, because I think a lot of the delays are again the results of some of the tightness of the acquisition workforce, and of course the time it has taken to evaluate these things. We have seen that the time that the government spends evaluating these things increase significantly. So whilst -- let's put it this way. As things are sliding to the right, Q4 bookings could be a little bit lighter than expected, but obviously the first half of next year than would be very strong for us in terms of our bookings.

Just a final question on the recompetes. You said some of it slipped into '08. What would you estimate the amount of your revenue will be under recompete in total next year?

I think if you look at those recompetes that have slid into '08, they are also being -- some of those are also being extended. So right now if I had to guess, I would say about 30% of our revenue is up for recompetes next year, but that includes Countermine, which is about 14% of our '07 revenue.

(OPERATOR INSTRUCTIONS). Alex Hamilton, Jesup & Lamont.

I missed the first part of the conversation when you were talking about the amount of backlog that you expect to generate or turn into revenue next year. Can you repeat that?

We didn't, but generally the number is somewhere between 30 to 35%. Our funded backlog gives us good visibility for Q4 and early into next year. And we tend to think it is the same pattern in terms of the overall visibility into next year from total backlog.

With no further questions, thank you for participating in today's conference call. This call will be available for replay beginning at 8.30 PM this evening through November 14. To access the replay, please dial 1-888-203-1112 for domestic calls or 719-457-0820 for international calls, with an ID number of 1463992. This concludes our conference for today. Thank you all for participating.