ManTech International Corp (MANT) 2007 Q4 法說會逐字稿

Good afternoon. At this time, I'd like to welcome everyone to the ManTech fourth quarter and full year 2007 earnings conference call. All lines have been placed on 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 your conference.

Thank you and welcome to ManTech International Corporation's fourth quarter 2007 earnings conference call. And we do thank you for joining us today. My name is Joe Cormier and I am Vice President of Corporate Development. Leading today's call from ManTech are George Pedersen, our 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 our strategic positioning and outlook for ManTech. Bob will touch on our operational highlights from 2007 and provide our growth outlook for 2008. And Kevin will review our 2007 and fourth quarter financial performance and forward guidance.

Before we begin our discussion, it's important that we remind you that the Company's fourth quarter results are subject to year-end financial audit, and that is 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 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 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'd like to turn the call over to George Pedersen. George?

Good afternoon and thank you for participating in today's call. We are extremely pleased to report our 2007 financial results, which were the best in our Company's nearly 40-year history. As you see from our press release, our fourth quarter operating results were exceptionally strong on all fronts. 45% revenue growth, 40% net income growth and 36% EPS growth over the past year's fourth quarter results. Operating margins were 8.6%, up from 7.9% in third quarter and 7.3% in the first half of 2007.

This financial performance was the result of executing our growth strategy. In addition, we made selective acquisitions in the high end intelligence and defense markets to enhance both revenue and operating profit. By diligently executing this growth strategy since our IPO in 2002, we have produced a 24% compound annual growth rate in revenue operating profit and net income.

Today, ManTech's mission-critical services focus on the nation's highest priority government programs. We are very proud of the fact that ManTech's revenue has grown a total of 62% over the past three years for a total organic growth of 42% over the same period.

Our forward guidance implies continued operating momentum for 2008, consistent with our historical performance, and is based upon a robust demand we see for our mission-focused services. To augment our organic revenue growth, we will continue to pursue strategic acquisitions to enhance our mission capabilities, strengthen our market position and increase our revenues and earnings growth. We have the financial capacity to execute this plan.

As I have said many times before, we are confident that the current levels of defense and intelligence spending will continue over the next several years regardless of who is in office. This is due to the asymmetrical warfare the nation now faces, which is forcing our armed forces and intelligence agencies to reposition and reshape their missions. This repositioning and reshaping will come by developing new sources, new methods and technologies to detect, monitor, and assess these global threats.

ManTech has been a key partner to these communities and their current missions and we feel well positioned to continue these partnerships well into the future. This won't change even if the War in Iraq winds down. Our position of trust and partnership with our customers is evidenced by our growth in financial performance.

As we enter 2008, we look to continue executing in support of our nation, our customers, our employees and you, our shareholders.

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

Thank you, George. We are all extremely pleased with our 2007 operating results. And I would like to take this opportunity to thank all of our 7,300 plus employees for another successful year. It is your commitment to our customers and their mission that makes ManTech successful.

In 2007, we delivered exceptional growth with $1.45 billion in top line revenue and earnings per share of $1.95 in an uncertain funding environment. At the same time, we strengthened our capabilities and extended our market position through the acquisitions of SRS Technologies and McDonald Bradley, and we continue to penetrate deeper into the mission-critical intelligence and DoD community. We now have over 1,000 contracts and task orders generating a run rate of over $1.7 billion in revenue, and we are strategically focused in the mission-critical market space and broadly diversified throughout the intelligence and DoD community.

We also continue to see strong demand for our mission-critical services and solutions. Last year, over 75% of our $1.2 billion in bookings came from new business wins and contract add-ons, as counter-terrorism, counter-intelligence, cybersecurity, knowledge management and related mission requirements continued to increase. We also saw increased demand for our logistics and supply chain management services as our Countermine program expanded to support the new MRAP vehicles arriving in theater.

Recruiting was also strong in 2007, and we increased our staff by over 600 net adds without acquisitions, or 1,700, including SRS and McDonald Bradley. We now have over 700 open requisitions, which demonstrates continued strong demand for our services and the strength of our markets. Overall, we are very pleased with our results.

Going forward, we maintain our focus in mission-critical markets yet remain diversified across the intelligence and DoD community. We are extremely well positioned for continued long-term growth in revenue and earnings. As a result, we are projecting 2008 revenue of $1.725 billion to $1.785 billion and we are forecasting operating margins of 8.15% to 8.25%, which implies an operating profit of $140 million to $147 million. This represents a 19% to 23% increase in revenue growth off our 2007 base and an expansion of our 2007 margins. Kevin will fill you in on these details.

Bookings for the quarter were $200 million. This was consistent with our expectations, as we had a number of opportunities shift the right due to shortages in the federal acquisition workforce coupled with budget delays. We expect to win a large share of new business in 2008 that will drive double digit organic growth consistent with our mission-critical markets. Our qualified pipeline currently stands at over $10 billion, up from $7 billion at the end of 2006. And we are tracking over 26 opportunities in our markets that are over $100 million.

We already are seeing stronger award activity in the first quarter and we have received several large awards in January and February. We received the bridge contract for our Countermining contract program this month, which is approximately $270 million over the next 12 months. As you know, the government has announced intentions to provide ManTech a direct contract for this work. We expect this recent bridge contract to run into the second quarter, at which time we will likely transition to a new ManTech prime contract. The new contract is expected to have a two-year period of performance, taking us into 2010.

With regard to our 2008 growth, I would like to point out that the contracts are in place and our customers' budgets support the funding requirements of these contracts. Less than 15% of our 2008 business base is up for recompete, which is below our historical trends. The timing of these recompetes is spread throughout the year, which means that only 5% of our 2008 revenue is at risk. Of course, we feel well positioned for our recompetes and protecting our base remains a priority.

In closing, we are excited about the growth opportunities for 2008 as we continue to leverage our market position to build ManTech into the premiere mid-tier national security company.

At this point, I would like to turn the call over to Kevin Phillips to discuss our financials. Kevin?

Thank you, Bob. As you saw in the release, fourth quarter revenues of approximate $422 million represents 45% total revenue growth with 28% coming organically for the fourth quarter compared to last year's fourth quarter revenues of $291 million.

For the year, revenues grew to $1.448 billion, up 27%, with 16% coming organically over 2006. Our core markets continue to be strong. We continue to be well positioned in all components of our DoD and intelligence community customer base. Our revenue is well diversified with only one contract contributing over 10% of revenue. Our top 10 contracts contributed 37% of revenue in 2007 and after Countermine, the other nine contracts represent 23%. Countermine generated $66 million in revenue in the fourth quarter and $209 million for the full year.

The contract revenue mix remained relatively unchanged during the quarter and year. Over 97% came from federal government sources for the year. Defense, intelligence and Homeland Security-related business comprised 93% for the full year. The proportion of revenues coming from contracts built on a timely material basis was 63% of revenue; fixed-price was 14%; and cost-plus was 23% for the full year.

As of December 31, total backlog was $3.24 billion and funded backlog grew 22% over last year to $758 million at the end of the fourth quarter. This continued strength and funded backlog demonstrates ManTech's positioning in the center of the nation's mission-critical security operations and provides solid visibility into future quarters.

Our operating profit was $36.4 million in the fourth quarter, which yielded a margin of 8.6% profit, which was up significantly from 7.9% in the third quarter. Key drivers of the strong performance was the higher than anticipated direct labor contribution of revenue -- to revenue in the quarter and a $1.3 million software sale. Normalized margin for the fourth quarter excluding these items was above 8.2%. For the year, operating profit of approximately $114 million represented a 7.85% of operating margin.

We had a significant expansion of margins in the second half of the year, as the direct labor additions and operational efficiencies were borne out. As a reminder, of the $114 million of operating profit, Countermine contributed only $6 million in operating profit in 2007, or 3% margin. The rest of ManTech's core services business delivered approximately 9% margin. Based on this significant operating margin contribution, our fourth quarter net income was $21.4 million, up 40%, and translated into diluted earnings per share from continuing operations of $0.61, up 36% over last year's fourth quarter. For the full year, net income of $67.3 million, up 21% from 2006, produced $1.95 in diluted earnings per share for the year or growth rate of 19%.

Turning to the balance sheet and cash flow metrics -- during the year, we generated approximately $65 million operating cash flows from continuing operations, which represents over 96% conversion of 2007 net income while funding our strong organic revenue growth. Our receivable day sales outstanding at the end of December was 70 days prior to the impact of adding over $10 million in receivables from McDonald Bradley in mid-December. As of December 31, the Company had $8 million of cash and $165 million of debt. As we have seen strong growth and consistent receivables conversion, we expect strong cash flow from operations in 2008 of over $100 million with modest capital expenditures of $5 million. This cash flow includes $6 million of tax benefits related to our 338 H10 elections from prior acquisitions. This will allow us to pay down our debt and provide additional flexibility to fund future strategic acquisitions.

Turning now to our guidance. We have provided our initial first quarter 2008 guidance and maintained our full year 2008 guidance that we updated on January 31, 2008. Our first quarter 2008 revenue guidance of $425 million to $435 million represents 44% to 48% total growth over last year's first quarter with 19% to 22% coming organically. We are forecasting an operating margin between 8% and 8.15%. As in prior years, our first quarter margins are impacted by slightly higher payroll-related expenses.

Our net income range from $19.7 million to $20.6 million results in earnings per share guidance of $0.56 to $0.59 per share on weighted average shares of 35.1 million. This represents 44% to 51% growth over last year's first quarter EPS. This guidance assumes interest expense of $1.75 million in the first quarter and a 39% effective tax rate.

Our full year 2008 guidance, which does not include any future acquisitions or divestitures, of between $1.725 billion and $1.785 billion, represents 19% to 23% revenue growth from our 2007 full year results. This guidance implies an organic growth rate of 10% to 13% in 2008.

Based on the significant improvement in operating margins we delivered in the second half of 2007 and our strong headcount growth, we are forecasting operating margins of between 8.15% and 8.25% for the full year of 2008, which is up from the 2007 operating margin of 7.85%. We estimate our 2008 net income to be $82.7 million to $86.8 million, which results in EPS guidance of $2.34 to $2.46 per share based on weighted average shares of 35.3 million. This earnings per share range represents 20% to 26% growth over the 2007 results of $1.95. Our guidance assumes an overall interest expense of $5 million and a 39% effective tax rate for 2008.

In closing, we are excited about the prospects of our business as we are operationally well positioned for continued growth, and revenue and profits supported by our strong balance sheet and cash flows.

And now we would be pleased to take any questions you may have.

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

Good morning, everyone. Kevin, I was wondering if you could just tell me what your first quarter interest expense expectation was again? And what was the EBIT margin range you're expecting? I missed that.

It's $1.75 million of interest expense and it's 8% to 8.15% operating margin.

Okay, thanks. And George, wondering if we can get an update with regard to Mr. Murtha's -- any commentary he's had on the timing of the defense supplemental passing?

We met with Chairman Murtha this morning. The bill is effectively completed in the House. We do not believe that the Senate will take up the bill until April. He hopes to have his bill totally completed in early March. And then he will negotiate with the Senate. And it's $100 billion.

$100 billion now? All right. And just one more question for Bob and I'll get out of the way here. You said that you saw about 77% of your bookings coming in for new business. Now, I don't think that you're going to offer which potential customers these are coming from, but can you tell us about the breakout, international business versus domestic-based business?

Pretty widespread across the business space. We said new business and contract add-ons, keep in mind. So, we're seeing it pretty evenly distributed across this community classified DoD programs. And I think you're aware of the international component from what you see on our Countermine program.

As we said on the call, we just recently received the bridge contract for $270 million on that program. And in the government -- we're expecting a directing contract from them in the second quarter.

And Bob, just one more question. Did you say that you had -- I know you said you had 700 open positions right now on the books, but did you have 600 on February 1 when you pre-released?

Q3 we had 500. I think we might have had 600, yes, when we pre-announced, yes, I think you're right, Mike.

All right. So, okay. Well, thank you very much. Great quarter. Good luck in '08.

Joseph Vafi, Jefferies & Company.

Nice results here and in the year. Maybe we could just drill down into some of the things that you were talking about in the prepared commentary. I know you said that you had a software sale license here at the end of the year. If you could maybe provide some more color on what that was and should we be looking for any kind of upside or any kind of margin enhancements in '08 due to software sales?

Yes, Joe, this is Bob. That software sale was a one-time event. And it was to upgrade older early warning radar systems to be able to detect a threat from pulse Doppler radar systems.

Again, that was a one-time event. We don't expect future sales around that area. However, one of our customers has initiated an R&D program with us around that software that we think will lead to other opportunities for us. But we don't expect any additional software sales specific to that one.

Okay. And then maybe other software sales -- I know SRS had some software and you guys had some software. Is there more software opportunities in general as we look into '08?

We don't have any forecasted into our current guidance.

Okay. But is it something that could potentially --

It would be upside.

It would be upside, okay. Great. And then, let's see here, Countermine -- if we do get the kind of direct contract that that's supposed to go through or into 2010, I guess, would be the way we look at it, is there any kind of view or visibility into that contract having a steady or a certain run rate? Or is it going to be based on the mission and the requirements and changes in the requirements and the mission over time?

Yes, Joe, that contract has always been very demand-driven. And you're seeing the increase in that program as a result of the new MRAPs arriving in theater. Plus our support is expanded to do some additional locations.

Another twist on that is that the new MRAPS that are coming in theater, a lot of them have different model numbers. So not only do we have new vehicles, but we have new models within each of the vehicles. That adds complexity to the logistics supply chain management, the O&M and service of those vehicles as well. So again, it will be very demand-driven.

Fair enough. And then anything we should kind of read into and to maybe kind of sequentially down funded backlog other than maybe just timing of funding here?

Joe, it's Kevin. It's the timing of funding. I mean, we had a very strong funding amount at the end of last government fiscal year and again with the new Countermine contract, that that's going to vary a little bit as more funding gets [bound to get rich].

Okay. And then just one quick -- one more quick one on -- sounds like there's some decent award activity early here in '08. Just kind of trying to get a flavor for tasking coming off some of the '07 wins, if visibility into that is kind of tracking along plan at this point?

Yes, I mean, we're ramping up for those contracts and we're on track to do that. Hiring has been strong. And I think it will continue. From a bookings perspective, I think we expect Q1 to be strong. I think conservatively, though, I think we would say that we expect it to be equal to our revenue. But obviously, we're projecting much higher than that.

Great. Great job, guys. Thanks.

(OPERATOR INSTRUCTIONS). Mark Jordan, Noble Financial.

Could you address -- your guidance for the first quarter assumes revenues of on the midpoint of $430 million. If you extrapolate that out to the midpoint of your full year guidance range, it calls for a very muted sequential growth through the year. Could you talk about your assumptions for quarterly revenues moving through the year? Are you assuming that Countermine is flat to down? Or is something weakening and offsetting, to some extent, the growth you have in your core business?

It's Kevin. We're assuming that the RSC and Countermine contracts are fairly flat. They may have upside again, as Bob mentioned, and we do have some upside built into the high end of our range, but it's not a huge variance. So most of the drivers of growth we're expecting are going to be outside of those two programs. And we're expecting fairly modest growth in the other programs, but growth nonetheless.

Could you tell us what the depreciation and amortization run rate would be subsequent to -- are we going into the first quarter, given the McDonald Bradley acquisition?

Yes. We're expecting McDonald Bradley amortization to add $1.5 million. We're expecting total '08 depreciation and amortization to be $16 million, because we do have some other prior acquisition -- amortization on other prior acquisition is going to roll off this year. So $16 million for the quarter, ratable each quarter -- $16 million for the year, each quarter ratable.

Okay. A question on M&A values. Somewhat recently, at least CACI made a couple of large -- or meaningful acquisitions in the intelligence area. And it looks like, on a run rate basis, paid in excess of 1.5 times revenues. Is this a sign that other people have started to see the value of building the base of business intelligence? Or have you not seen any meaningful change of pricing in intelligence-related acquisitions?

Well, I think we've been at the focus on this community as you know since we went public. And some of the others are now joining us that had not been in the queue before.

The pricing always depends upon the make-up of the individual company and it value in terms of its technology, its customers, its people. And sometimes the standard evaluation factor is not a valid indicator of value. I don't know what CACI -- I don't know the details of CACI's numbers. But I don't think there's a difference -- we haven't seen a particular uptick in the ones that we've looked at.

Yes, I think we -- for our acquisitions that we've done, we haven't paid that level -- we have not paid 1.5 times.

But you have to look inside the acquisition. So you cannot just go on that assumption.

So if you, just looking at your traditional matrix that you would pay, you haven't, at least what you have seen, you have not seen a change in pricing in the marketplace to date?

No, not really.

Well, we haven't paid the amount you just subscribed to CACI, so we have no -- now I'd like to say that when we did the SRS, did very nicely, did a good bit better than we had projected.

Bill Loomis, Stifel Nicolaus.

Thanks, great quarter. Looking at the bookings, Bob, did you imply when you said about the revenue level that bookings for the first quarter will be at least in the $430 million range? Is that -- did I understand right?

Yes.

Is that including Countermine at the full 270? Or is that discounted back?

Yes, that's at the full 270 mark.

Okay. And you haven't press released any other larger ones, other than the $10 million. Is there any that you could talk about that you've won so far this quarter? Or (multiple speakers) --?

Unfortunately not, Bill, and we've also had some obviously extensions or expansions of our existing contracts that are in that number. As I mentioned also before, we're projecting higher bookings for the quarter than that.

Okay. And just finally about your full year guidance for revenue, what kind of assumptions do you have that in as far as contract awards -- you mentioned that you have pretty much that already in the current contract and pipeline, so that implies you still have to win a certain amount of business through the year. Can you give us some kind of rough guideline of how much?

It's Kevin. If I'm tracking you correctly, I think that we have about a $60 million range of revenue we expect to get from the awards. And over a five-year period, that's going to be $300 million, minimum. And again, it depends on the timing of the awards and what component they are.

Gautam Khanna, Cowen.

Thanks, guys. I had a question on Countermine. I know you mentioned the fairly low margin contracts, around 3% EBIT margin. Do you have a sense for what the earning sensitivity would be if, indeed, it went to 0? I mean what are kind of the overhead absorption benefits, if you will, the negative operating leverages that if that contract went away, what would be the impact on earnings?

Well, we mentioned the amount of operating margin we received on that Countermine contract. That operating margin is driven by the labor and services component of that contract. And we do not see that demand going away; the variability that we see as the demand for the materials, the mission-critical materials, as they flow through. The absorption that that might cover could be in a range, again, based on the timing, of between $1.5 million to $2.5 million. But again, that's totally dependent on services and support of the services and meeting the purchase requirements. Again, it's variable, is my point.

Okay. So it'd just be modestly higher than the 3%; it wouldn't be a 5% impact in terms of contribution margins?

No.

And in truth, also, if it went away, some of the costs would go away.

Okay. That's fair. Another question I guess, you said Countermine did $66 million in the fourth quarter. And I think your guidance on your pre-announcement was 240 for the year. Is there a reason why it will step down? And what's sort of the run rates in Q1 and Q2, et cetera?

And then secondly on that, you mentioned this is an extension. You'll get a -- the word hopefully in the second quarter. Is there a switchover to this new contract when you get the sole source? And is there better profitability associated with it? Thanks.

I'll speak to the first part and let Bob speak to the switchover component. We're projecting, in the low end of our guidance range, $60 million a quarter coming from Countermine for the full 240.

Again, it's based on the mission driven requirements and the amount of materials to support those missions. And we have seen an uptick in that in last year but what's hard to tell how much is going to flow through per quarter based on the requirements in the deal.

With regard to the switchover, it's going to be pretty much business as usual. There's no additional margin that's going to be squeezed out of it because of the new contract vehicle. The rationale behind the switchover is that it saved the government pass-through dollars going direct to us.

Okay, and lastly, can you -- I know you mentioned only 5% of '08 sales were at risk with respect to recompetes. Can you walk us through what the assumptions there are for the State Department thing that we know went away, the NASA recompete that went away, and if there'd been anything else since those two losses?

Obviously, we're pretty upset by those recompetes, protecting the bases of priority for us. But no, there is no State Department revenue factored into our guidance. And I think on the NASA one, we have about half a year factored into it. That contract, as you know, is currently under protest. And we're pretty confident that a half year guidance is about right -- half a year into the guidance is about right.

Last question, and I'm sorry to take up so much time. Is there any reason to believe the -- I mean, the Q4 margin ex the software sale, like you said, was 8.2 plus. We know the mix is getting richer with respect to labor sales. Why should an 8.3 or something higher than that be the baseline margin going forward? Is there something that's going to dilute that over the course of the year? Thanks.

It's Kevin. If we look out at the guidance we provided for the second half of '08, we're expecting an 8.2% to 8.3% operating margin based on continued expansion of the services component of our business. We do see us trending toward that 8.3% margin consistently for the first half of the year; though, especially Q1, based on the timing of some of the fringe benefits we have, that's not factored into Q1 in terms of getting to an 8.3% number. But I do think that coming into the second half of '08, 8.2 to 8.3 is a reasonable margin expectation.

What is your expectation in Q4? How are we going to exit '08?

Expectation in Q4 I believe was between 8.25 and a little bit above 8.3, if you need me to give you a range. But again, 8.3 is a reasonable number to get into the end part of this year.

Thanks a lot, guys. Really appreciate it. Great job.

(OPERATOR INSTRUCTIONS). Greg Wowkun, Banc of America Securities.

Great quarter. Could you please address the attrition in the quarter? Is it still about 20% or has that trended lower given your continued solid performance?

No, turnover remains at about 20%. And that's pretty consistent with our industry, particularly given the high number of cleared individuals that we have. I think what we've been focusing on and what's important is the recruiting aspect of the business has been very strong. As you can see, we had 600 net adds for the year.

Great. Thanks. And as a follow-up, while DoD has been your core focus, can you provide really any update on the traction you're making in the federal civilian marketplace?

The strategy for penetrating the federal civilian marketplace is by taking down large GWAC vehicles and using that as the base to build from. The Alliant program that we won six months ago that has been under protest was a strategic vehicle and us being able to penetrate those markets. That, combined with McDonald Bradley, has a civilian component to their business that we'll also leverage is been our path to move into those markets.

Have you seen any initial success at this point?

I'm sorry?

Have you seen any initial success in doing so?

No, I mean, we've only been together with McDonald Bradley for a couple of months now. And we see some opportunities to leverage their capabilities, their penetration and use Alliance to build off of.

Great. Thank you.

Thank you. And at this time, there are no questions. Thank you for participating in today's conference call. This call will be available for replay at 8:00 p.m. this evening through March the 12th of 2008. 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 894-5916.

This concludes our conference for today. Thank you all for participating.