ManTech International Corp (MANT) 2008 Q2 法說會逐字稿

Thank you, and good afternoon. I will be the conference facilitator today. At this time, I would like to welcome everyone to the ManTech second quarter 2008 earnings conference. After the speakers remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS) Now at this time I'd like to turn the call over to Joe Cormier. Please go ahead.

Thank you, and welcome to the ManTech International Corporation's second quarter 2008 earnings conference call, and again, we thank you for joining us today. I'm Joe Cormier, Vice Present for Corporate Development. With me today, leading today's call, from ManTech is George Pedersen, 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, and Kevin will review our second quarter financial performance, and guidance for the third quarter and full year 2008.

Before we begin our discussion, it's important that we remind you that on this call we will make statement that do not address historical facts and thus are forward-looking statements made pursuit to the Safe Harbour provisions of the Private Security 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 and form 10-K, filed with the SEC on March 17, 2008 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 pleased to report our second quarter 2008 financial results. As you see from our press release, our second quarter operating performance was strong on all fronts, with growth of 33% for revenue, 45% for operating income and net income, and 41% for EPS over last year's second quarter results. Operating margin was 8%, up from 7.3% in the second quarter of 2007.

We have raised our forward guidance as a result of our continued operating visibility and momentum for the remainder of 2008. This is consistent with our historical performance and is based upon robust demand we are experiencing for our mission focus services and solutions here and around the world. 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 revenue in earnings growth. We have the financial capacity to execute this plan, and our M&A pipeline is solid with several near-term candidates. As you know, the DoD '08 Supplemental Funding Bill in the amount of $103 billion was passed in early July, which was a positive factor for the department and industry. The Supplemental also included an advance funding for '09 of $63 billion. This procedure is a new approach which will be helpful for the DoD on 1 October when the new fiscal year begins.

As we look forward to FY '09 DoD appropriation process, we are hopeful that a base bill of $487 billion can be passed in September as currently planned, rather than using the continued resolutions CR procedure. This would be very positive as it will allow funding to continue to flow and new awards to proceed in the fourth quarter of calendar 2008. As the Congress chooses a CR procedure, ManTech's programs tend to be received priority funding and we are likely to continue their current pace because of the focus of the key mission as we indicated on many occasions.

We look forward to continued growth in our business throughout 2008, and we look to continue executing in the support of our nation, our customers, our employees, and you, our shareholders. We are very proud of our over 7,400 employees serving here and 40 nations and around the world, including those on the battle field in Iraq and Afghanistan. They are a key part of the critical mission confronting global terrorism.

The most recent example was the support that ManTech personnel provided to the very successful rescue mission in Colombia several weeks ago. We have already received several Letters of Commendation related to our employees' participation. They were part of the planning and successful execution of this mission by providing support to the intelligence collection, communication, and other strategic technology requirements. We're very proud of our people.

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

Thank you, George. Q2 is another great quarter for ManTech on all fronts. We continued our strong revenue on earnings growth which is driven by our year-to-date bookings, our direct labor growth, and our priority funding position on many of our national security contracts. I am pleased to say that this has driven a 70 basis point improvement in our operating margins over the last year's second quarter. We are all very pleased with these results, and are excited about our growth prospect for the rest of 2008. This growth outlook is a function of the continued demand for our mission critical solutions and services, combined with our market position in the high-end intelligence and defense sector.

Once again, we had another strong bookings quarter with $600 million in bookings. Approximately 40% of our bookings came from expansion of existing contracts and new business awards, such as our $118 million raid or elevated sensor program. We also had approximately $250 million in classified contract awards and our year-to-date book-to-bill ratio now stands at 1.5 times revenue.

Our awards continue to be at the heart of our customers missions, and demonstrate ManTech's strategic positioning and national security market space. As we expand our markets, we continue to see increased opportunities for our mission critical services. Our qualified pipeline currently stands at over $11 billion and we are tracking 27 opportunities that are over $100 million each.

As noted in our release, our momentum from the first half of the year has continued into the third quarter as we have already booked two large contract awards in July. $124 million Department of State Global Information Technology Modernization, or GITM, recompete contract, and our and new $151 million NAVSEA Information Technology Support Contract. Under our five year GITM contract, ManTech continues to be the State Department's contractor of choice for supporting the modernization of their IT systems around the world. Working as a partner with State, we have significantly improved the efficiency and effectiveness of their classified and unclassified IT investments, while reducing total cost of ownership for 1200 systems at 400 worldwide locations. We are pleased that State has selected ManTech to continue our partnership on this mission critical program and we look forward to working with them in the future.

The new $151 million, five year NAVSEA award positions us for growth with the Norfolk naval ship yard delivering IT support to the Navy's legacy ship maintenance and logistic support information systems program. Our work includes the development of formal processes and lifecycle planning documentation, program management, program control, testing, training and deployment.

Finally, I want to provide you with an update on our Countermine sole-source award. We believe that the government has concluded its review of our proposal and we hope to sign the contract shortly. We look forward to continuing our route clearing mission under a new prime contract vehicle. The current Countermine contract delivered $83 million of revenue during the second quarter, which is a result of increased requirements in theater. Based on our visibility into continued demand for support on the program, we have increased our outlook for revenue on the contract and we are now expecting $85 million in the third quarter and $315 million from Countermine for the full year.

There are numerous growth initiatives occurring throughout the Company. And I want to take a moment to talk about our focus on the national cyber initiative. This initiative, which is driven by the increased cyber threat against US government and domestic computer systems and networks, is a comprehensive initiative to improve our computer network operations capabilities over the next decade. We believe that Congress will commit billions of dollars in new funding for this mission critical initiative and we look forward to playing a key role in that program going forward.

As I mentioned last quarter, we were the recipient of a major contract award related to the cyber initiative with a classified agency. We have already seen increased demand from the initial contract award value, and we are ramping as quickly as possible. Our contract is one of many large opportunities that we are tracking and we look forward to leveraging across the government agencies tasked with this critical initiative. This is a key area of growth in the Company as we look forward into 2009 and beyond.

The combination of strong bookings and potential growth and existing contracts creates significant demand for additional employees. Through July, we have added 184 full-time equivalents and today we have over 700 open job requisitions, which, combined with the expected ramp-up on recent wins, provides us confidence in meeting our labor requirements for 2008. Turn-over remains consistent at 20%, driven by the tight labor market for highly cleared employees in the region. That said, during the quarter, our percentage of top-secret cleared employees rose to over 44%, up from 40%. A clear differentiator for ManTech.

Going forward, we will remain -- we will maintain our focus in mission critical markets, yet remain diversified across the intelligence and DoD community. We are well positioned for continued long term growth in revenue and earnings. As a result of the demand we see across our contract base, and our expected head count growth, we have significantly increased our 2008 revenue guidance to $1.845 billion to $1.88 billion. This represents 27% to 30% revenue growth off our 2007 base.

In closing, we are excited about our growth prospects for the rest of 2008, and going forward as we continue to leverage 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. Kevin?

Thank you, Bob. As you saw in our press release, second quarter revenues of $465 million represents 33% total revenue growth. With 20% coming organically for the second quarter, compared to last year's second quarter revenues of $349 million. Our core markets continue to be strong and we continue to benefit our positioning across the DoD and intelligence community customers. As Bob mentioned, Countermine generated over $83 million in revenue in the second quarter based on increased mission requirements. We expect the increase to continue in the second half of 2008, and as such, are expecting $85 million in revenue from the contract for the third quarter and $315 million for the full year.

Contract revenue mix remained relatively unchanged during the quarter. 98% of our revenue came from federal government sources, while defense, intelligence, Homeland Security, State Department and law enforcement related business comprised 94%. A proportion of revenues in the quarter coming from contracts billed on a time and material basis was 65% of revenue, fixed price was 14%, and cost-plus was 21%. As of June 30th, total backlog was $3.44 billion, and funded backlog grew 33% over last year to $989 million at the end of the second quarter. This continued strength in funded backlog demonstrates ManTech's positioning in the center of the nation's mission critical security operations.

Our operating profit was $37.1 million in the second quarter, up from $25.5 million in last year's second quarter. Our operating margin of 8% was up significantly from 7.3% in last year's second quarter. In the second quarter, Countermine contributed approximately $2.2 million in operating income. The rest of ManTech's core services business delivered over 9% operating margin. Based on our business expansion and strong operating margin, our second quarter net income was $21.9 million, up 45% from $15.1 million in last year's second quarter. Our effective tax rate for the quarter was 39.6%. Performance translated into diluted earns per share of $0.62, up 41% over last year's second quarter.

Turning to the balance sheet and clash flows, as of June 30th the Company had $10 million of cash and $98 million of debt, down from $148 million at the end of the first quarter. During the quarter, we generated over $35 million in operating cash flows, of over 160% conversion to net income. This was primarily driven by improvement in receivables days sales outstanding at the end of June, which was down five days to 69 days. We expect to maintain cash flows from operations of approximately 100% of net income during the remainder or 2008 while we fund our strong organic growth. As a reminder, we receive a deferred tax benefit from 338(h)(10) tax elections on prior acquisitions of approximately $7 million annual.

Focusing now on the guidance in our press release, we have provided our initial third quarter 2008 guidance and increased our full year 2008 guidance. Our third quarter 2008 revenue guidance of $473 to $488 million represents 23% to 27% total growth over last year's third quarter with 20% to 23% coming organically. We are forecasting an operating margin between 7.95% and 8.05%. Our net income range of $22.3 to $23.3 million results in earnings per share guidance of $0.63 to $0.66 per share on weighted average shares at $35.5 million. This represents 24% to 29% growth over last year's third quarter earnings per share. This guidance assumes an interest expense of $650,000 in the third quarter, and a 39.6% effective tax rate.

Based upon our strong performance and outlook, we are increasing our full year 2008 guidance, which is not including any future acquisitions or divestitures, to between $1.845 and $1.88 billion This represents 27% to 30% revenue growth from our 2007 full year results and applies organic growth of 17% to 19% in 2008. Based on our head count growth, balanced against the increased amount of ODCs, we are forecasting operating margins of 8% for the full year 2008, which is up from the 2007 operating margin of 7.8%. We estimate our 2008 net income to be $87.1 to $89.3 million, which results in earns per share guidance of $2.46 to $2.53 per share based on weighted average shares of $35.35 million. This earnings per share range represents 26% to 30% growth over the 2007 results of $1.95. Our guidance assumes an overall interest expense of $3.5 million, and a 39.6% effective tax rate for 2008.

In closing, we are excited about the prospects of our business, as well, and we are well positioned for continued growth in revenue and profits, supported by a strong balance sheet and cash flows. We'll be pleased to take any calls you may have.

(OPERATOR INSTRUCTIONS) Our first question will come from a Michael Lewis with BB&T Capital Markets.

Nice quarter. And Bob or George, I was wondering if we could talk about Countermine for just one second here. Should we assume going forward in say 2009 -- I know the contract hasn't been awarded yet, but just from modeling purpose -- should we assume almost like a lock step increase equivalent to say the Q3 revenue guidance of $85 million in the quarter going out into 2009? In other words, should our expectation be between $330 million to $350 million in revenue off Countermine next year?

Yes, Mike, given the -- Again, it's a requirements driven contract, but it's safe to assume those levels of burn on the contract.

And just remind me, Bob, are you applying some of these services in Afghanistan as well?

Yes, absolutely.

And if I could just shift gears real quickly on CNTPO -- Have you been seeing any activity on this contract, and if so, has this been accelerating at all due to the surge in activities that we're witnessing right now in Afghanistan?

I assume your talking about our DNDO effort?

The counter-narc work?

No, we have not seen any increase in demand on that program. It's been steady-state.

Okay. Thank you very much.

Our next question is from Joseph Vafi from Jefferies & Company.

Hi, guys, good quarter here.

Thanks, Joe.

Just back on the Countermine contract. Historically, we've been at run rates that included a lot of ODCs on them, on Countermine, and just listening to Mike's question here a second ago, it sounds like given that the run rate's going to continue on this contract at current levels, are we just assuming that the army's still kind of staffing up on spares, and the like, on the contract and that's going continue to drive these high levels of -- is that's what is going to be driving the high levels of revenue moving forward?

Yes, I mean, it's a combination. It's primarily driven by the ODCs, but there is an increase in DL as well.

Joe, it's Kevin. There continue to be an increasing number of vehicles being fielded and supported and that's driving it. It's not a static number.

Right. So we're seeing more spares for the new vehicles? As that comes online, then more labor activity on the fielded vehicles?

Correct.

Yes, there's over 6000 in theater now.

So, in general, it sounds like, given that we'll have a larger amount of fielded vehicles over time, we might see margins actually come up on this contract at -- with revenue run rates that are going to stay pretty healthy?

Yes, we do expect continued expansion. The labor components of the business -- what is unclear is how quickly the ODCs will expand based on mission requirements. That variability is still unknown. But we do expect higher returns on the labor component.

Great. Okay. And then this NAVSEA contract -- that's a new contract, if I'm not --?

Yes, it's a new award for us.

And have you disclosed if that's time and materials or a cost-based contract?

We haven't said.

Okay.

It's a CPFF contract.

Okay. And then, sounds like your labor force with now 44% cleared, that's a nice bump up. Is that a function of hiring or are you getting more people through the system of your own people and getting them clearances? What's -- is there anything that's driving that? Specifically that we should be thinking about. And is that kind of higher level in growth in the cleared employee base -- is growth there sustainable?

Joe, it's really a combination of increased requirements for those types of people across the company. We continue to hire across all areas from the secret level up to the top secret level. So that's really what is driving that increase.

And finally, just wanted to make sure it sounded like, including Countermine, you were running over 9% operating margin in the business now, is that right?

That's correct.

Great, thanks a lot.

Our next question is from Ed Caso with Wachovia

Ed Caso, Wachovia. Thanks for taking my question. I'd like to talk a little bit about the balance sheet and acquisitions. I see you have $98 million in current maturities. Could you talk about how -- if that's going to be refinanced or what you plan to do about that? And could you maybe give us a sense of dry powder, and then maybe a sense of what areas you might be looking for acquisitions?

I'll speak to the first part, and the areas I'll leave to George and Bob. We have $98 million, $88 million of net debt. We expect to get cash conversions for the next half of the year at one times net income. Very strong balance sheet is going to bring us somewhere below $50 million in debt at the end of the year. We have a $300 million line that has an accordion future to $400. So we have a lot of dry powder to use, should the right opportunity come along. We don't need to refinance. We don't plan on refinancing. We have a very good facility right now And I'll leave the opportunities to --

In terms of the focus areas for the company, the strategically, anything that we see that will enhance our cyber capabilities, increase our global logistics and supply chain management capabilities, and biometrics, particularly in the analysis side of that, we would be interested in.

A number of firms that we've been talking to as we always engage with. There were two or three that we hope one or more of them can be closed in a reasonably short period of time. There's no lack of opportunities out there, as far as I'm concerned. Depends on whether they meet our criteria, and our criteria is always that you cannot buy sales, you have to have new technology, new customers, new people. It has to be a creative bump from the get-go. We think we will find more of them as we have in the past.

Does your guidance assume a completion of the Defense Appropriations bill in September or this guidance hold --- if we go CR into the January, February time frame?

Our guidance from my point of view holds whether we do an appropriation bill or wether we do a CR. It's a little unusual this year, in that I've never seen it before, but they had advanced funding of the '09 bill of $63 billion. There is hope to put the funding in place, 487 as a base bill by September. The House and the Senate have worked very hard on these bills. It's not a normal process this year because of the political type thing, and it is not likely that any of this will be resolved until the second week of September. And until that point in time, it's kind of hard to predict something with certainty, other than there will be no such thing as a gap as we experienced in 1994 where there will be no bill in any form. That's not in the cards. And whether it's a CR or whether it's an appropriation bill, in the programs that we are involved in, we will be funded

Any reason why -- last conference call you sounded very confident that Countermine would be all signed, sealed and delivered in the June quarter. Anything you can offer as far as potential risks that this thing may not be signed?

No, Ed, it's a high profile, high biz contract. It's a sole-source award. So the government's dotting the Is, crossing the T's. They want to make sure everything's done properly. The award should be imminent. We expect to sign that contract shortly.

Our next question is from Bill Loomis with Stifel Nicklaus.

Thank you. Great quarter. Can you just give the revenues for the regional support contract and Countermine and [Jurip]? And then the second question just on the backlog -- why is it flat sequentially with awards higher than revenues. I thought we would see a couple hundred million bump on that.

Sure, Bill. Countermine again, $83 million, JERRV was about $21 million for the quarter. And RSC bummed up to over $38 million for the quarter.

In terms of the backlog, we post the awards that we have, and we review for non-IDIQ contracts, our regular contracts and contract value, our run rate, and if there are adjustments and changes to the expected run rate, we will adjust downward the contract value that we have and bring it back up as performance grows or increases. So what we did is we adjusted the amount of backlog on the existing contracts and now (inaudible) in the quarter based on expected run rate.

Is there anyone in particular that dominated that adjustment?

No, no one that is having performance issues or anything like that. It's just expected run rate for several contracts.

And is there anything we can extrapolate from that in terms of the government maybe phasing out, generally, some older contracts that they renew, or anything unusual?

No, I think that as we near the end of some contracts, it may be rotating into other ones. There may be amounts that aren't going to be used that we have to reflect accordingly. Now, that's not government intent, it's more the timing of the lifecycle, the contract that we have.

And on the regional support contract, that's at a very strong sequential growth. Where is most of that level of effort? Isn't that mostly a US -- supporting areas in the US?

Yes. RSC is mostly US support. There are two sites overseas. The growth has been driven by the raid program or the elevated sensor program that was initially prototyped on that contract and we continue to do work under that, even though we have the other award as well.

Is that contract RLC going to decline a little bit as you move on -- on rates for your new contract?

I think we expect it to hold pretty steady going forward.

And I know when you went through that re-compete a couple years ago, year and a half ago, and then revenue got down to $14 million a quarter, you thought it would go up a little bit, but certainly not to the level now. Is work coming from other areas into this contract?

Bill, I'll speak briefly, there are continued discussions about it, additional requirements in the United States. There are also additional up tempo in our existing areas. So it looks like there's a lot of opportunity in that area and it is proven out over the last few quarters -- and we didn't expect, I think speaking for Bob, but we didn't expect the level of growth, but demand is certainly there for the support.

Thank you.

Our next question is from Mark Jordan, Noble Financial.

Good afternoon, gentlemen. A question first, relative to the organic growth that you saw in the second quarter and what you are estimating for the full year, if you were to back out Countermine, do you have what the organic gross would have been for those two periods?

Yes, it would have been 11% for the quarter and 13% to 14% -- 13% for the year.

Okay. Would you give any guidance, at this point in time, as to what would be a reasonable target, organic growth goals that you would have for '09?

All we can tell you is we do continue to expect to have double digit growth and most -- through all components of our business.

Final question relative to Countermine - under the new contract, will there be any enhanced -- any changes in the profit margin opportunity that you have or should it be consistent with the run rate that you are currently experiencing?

Should be consistent with the run rate we are experiencing.

Thank you.

Next question is from Brian Kinstlinger with Sidoti Company.

The first one I had related to the classified programs, $250 million -- how much was new work?

I don't have the exact number of that that was new work. We might be able to look it up here.

Okay. Second question - the new naval contract. When do you expect that to be fully staffed?

Ramp up is underway right now, but, in terms of getting to full staffing levels, I expect that to take quite -- by next year we'll be fully staffed on it.

Great. And you mentioned a pipeline of $11 billion. I'm curious, are you going to provide the expected amount of bids in terms of value you expect to bid on for the remainder of the year?

No, we typically don't give out that information. I will tell you that we have a significant dollar volume of proposals outstanding and in process waiting awards.

That was going to be my next question. I take it you can't give us in a dollar value of what is outstanding?

No, we're not going to provide that.

My final question -- are you able to provide direct verses indirect costs, what percentage you are at right now? ODC's versus direct labor?

ODC's versus direct labor, I believe, in terms of total cost percentages, our direct labor component went to slightly over 31% and ODC's were about 45% of revenue.

What did that look like last year?

Same period last year?

Yes

32% and 42%.

Great.

(OPERATOR INSTRUCTIONS) We'll go to Tim Quillin with Stephens Inc.

Good afternoon. Kevin, with regard to the Countermine contract in the first quarter, on the conference call you had said $61 million in revenue, and $2.1 million of operating income, but in the 10-Q it was a little bit of a different number, $55.8 million in revenue, and $1 million in op income. Which is more apples to apples with your $315 million full year guidance?

It's the $2.2 million per quarter. We were transitioning to a new bridge contract that the government had put in place, as you recall, that was awarded and allowed the government to continue support for the remainder of this year. And that was not in the queue, because it had not reached the 10% level.

And then and the RSC and JERRV contracts, are the EBIT margins there still in the 4% to 5% range or are either of those trending upward?

I don't have a specific percentage, but the JERRV contract has a slightly higher labor mix, but the RSC contract is still in that range we discussed.

Okay. And in terms of some of these recent contract wins, where do we stand in terms of ramp-up? I guess, one on the classified cyber contract; and two, on the raid contract? Are those fully staffed yet?

No. We're still -- we've met a lot of the requirements on the cyber, but as I mentioned in script, we had an increased demand on there, so we're still ramping up on that, as well as the raid program.

Can you give us some sense of where you are relative to full staffing levels on both those?

Well, if you look, we have over 700 openings across the company. And the cyber program has probably, in terms of staffing levels, increased by about maybe 30%? And raid, we're continuing to ramp up on. Which -- and both those are good news stories.

And you said NAVSEA will ramp up slowly through the course --?

You know, we're close to 50% on NAVSEA now. We'll work that going forward.

Okay. Great quarter.

It is new work, right. The NAVSEA work's new, so it will take a little time.

All good.

All good.

It is all good. Thanks.

With that, there are no further questions in the queue. Thank you for participating in today's conference. This call will be available for replay beginning at 9 p.m. this evening through August 13th, 2008. To access the replay, please dial 1-888-203-1112 for domestic callers, or 719-457-0820 for international calls, with an ID number of 279-4431. This concludes today's conference call. We would like to thank everyone for your participation.