ManTech International Corp (MANT) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ManTech Fourth-Quarter 14 conference call.

(Operator Instructions)

As a reminder, today's call will be recorded. I would now like to introduce your host for today's conference, Mr. Stuart Davis, Executive Vice President for Strategy. Sir, you may begin.

Thank you, Amanda, and welcome, everyone. On today's call, we have George Pedersen, Chairman and CEO, Kevin Phillips, Executive Vice President and CFO, and Dan Keefe and Bill Varner, our two Group Presidents. And Judy is here with us in the room.

During this call, we will make statements that do not address historical fact, 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.

For a full discussion of these factors and other risks and uncertainties, please refer to the section entitled Risk Factors in our latest form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call.

Now I'd like to turn things over to George.

Good afternoon. Thank you for participating in today's call.

In the fourth quarter, ManTech showed solid operating margin and bookings, which is consistent with our view that the market is returning to normal. ManTech's revenue declined in 2014, as the operational requirements in Afghanistan diminished, but we are returning to growth at this point in time in 2015.

Last month, the government passed an omnibus bill to fund the Defense Department and almost all of the federal agencies through the end of the current fiscal year. This bill resolved much of the procurement uncertainty that comes with continuing resolution, CRs. Our customers are taking advantage and moving forward with their acquisition strategies.

We, ManTech, have $4.6 billion in outstanding proposals at this point in time. This is a record for the use of OCO opportunities.

Earlier this month, the President forward the FY16 budget request to the Congress. The proposed budget recognizes that the global security threats and emphasize a number of missions where ManTech provides critical support. The total base DoD budget request is $534 billion, which is up almost 8% from the FY15 final budget.

With a $51 billion OCO request, the DoD budget is $565 billion, which is up 4.5%. Within the budget, there are [sewn] increases for operations, maintenance, IT and cyber.

At this point, we do not know how the new Republican Congress will work with the President and the new Secretary of Defense. What is clear is that the leaders of the House and Senate Armed Services Committee to forward an expanded defense budget.

We expect that we may be able to get some measure of relief, and that the days of further reductions in annual defense spending are behind us. If so, we would see stronger and more certain budget, greater reward flow, and a more rapid pickup in the government services market.

With the market posed to rebound, companies who have invested smartly will be the ones who prosper in our judgment. We believe that the investments that we made in 2014 will help drive ManTech as we move through the year. Growth will come from proposals that we have already submitted or will submit shortly, and include solutions that we have already built by virtue of our investments in R&D.

For example, we submitted $6.7 billion of proposals in 2014. An increase of 58% compared to 2013. We expected to submit [buy-ins] to maintain its elevated level in 2015 and continue that way.

We will also use our balance sheet to fund our growth. Last year, we invested all of our free cash flow that we had generated to acquire two companies that augmented our capabilities, customer presence, and contract portfolio, at the Department of Veterans Affairs and the Department of Homeland Security.

The acquisition market is more active. And with more than $60 million in cash in the bank today and a $500 million line of credit, we are in a strong position to make more acquisitions, to grow the Company as we have done in the past four decades for ManTech.

Now Kevin will provide you the details of our financial performance and outlook.

[Revenues] for the fourth quarter were $411 million compared to $492 million in the fourth quarter of last year, and $447 million in the prior quarter. The revenue differences are mostly explained by the expected declines in Afghanistan related contracts, and pressures on the overall Army budget.

The EMRA family of vehicle support work contributed $28 million in the quarter, down $45 million year-over-year and down $3 million from the prior quarter. Revenues for the S3 and SSES contracts with [C-COM] were $56 million in the quarter, down $51 million year-over-year and down $18 million from last quarter.

Fourth quarter revenues were below guidance, as a result of lower than anticipated material purchases across the business. For the year, revenues were $1.77 billion, down $536 million from FY13. As with the quarterly numbers, the driver of the decline are MRAP and S3.

For the quarter, the percentage of work as a prime contractor and the contract mix were essentially unchanged. We performed 91% of our work as a prime. And our contract mix was 72% cost plus, 11% (technical difficulties) materials, and 17% fixed price.

Operating income for the quarter was $24 million for an operating margin of 5.8%. Year-over-year, comparisons are impacted by the $118 million pretax goodwill impairment in 2013 in our defense business. Primarily as a result of lowered Army requirements, as well as reduced overseas contingency operation support.

Fourth-quarter operating margin continued our overall expansion from the low point in the first quarter. In the quarter, we benefited from strong award fees, cost control, and excellent performance on fixed price contract.

Annual operating margin was 5.3%. Though the quarterly margin was about 50 basis points higher, highlighting the positive margin trend. Our margins are typically higher in the second half, but we look for steady year-over-year improvement in 2015 and beyond.

Net income was $14.5 million for the quarter and $47.3 million for the full year, which led to diluted earnings-per-share of $0.39 for the quarter and $1.27 for the year. Tax rate was not a factor, and it was in line with our history and expectations. Our positive operating margin improvement will provide solid earnings trends as we move towards revenues growth throughout 2015.

Now onto the balance sheet and cash flow statement. During the quarter, we used to $23 million in cash flow to fund operations.

DSOs were 83 days, which was one day better than the fourth quarter of 2013, but worse than last quarter. The fourth quarter is typically the most challenging to collect as a result of government holidays, but returning to DSOs in the mid-70s is a priority for us.

For the year, cash performance was excellent, with cash flow from operations of $127 million or 2.7 times net income. Free cash flow for the year was $115 million, given capital expenditures of a little over $11 million.

During the year, we invested $126 million in the acquisitions of 7Delta and ATG. And distributed $31 million in dividends, which reflects our intent, the first and foremost, for the Company while maintaining a steady return of cash to shareholders.

At year end, we had $24 million in cash and no debt after paying off our high yield notes back in the second quarter of last year. We stand today with over $60 million in cash. Our credit line and balance sheet our strong, and they provide plenty of firepower for further acquisitions.

The Board has authorized us to continue our current dividend level with $0.21 per share to be paid in March. We expect to maintain the annual dividend of $0.84 for 2015.

Turning to business development, the fourth quarter showed a reasonably pace of award's decisions in the quarter. And for the part of our customers, consistent with stabilizing market.

Bookings for the quarter were $361 million for a book-to-bill ratio of 0.9 times. For the year, contract awards totaled $1.6 billion, again for a book-to-bill ratio of 0.9 times. In 2013, book-to-bill for the quarter and the year were 0.7 times.

So we are seeing some steady improvement. We expect to be above 1 times this year, with bookings concentrated in the second and third quarters as our customers work through a large number of pending proposals.

Proposal activity remains high, and we expect this year's submit volume will remain at the same level which was elevated last year for this year. Our total qualified pipeline is $19 billion, and we have about $4.6 billion awaiting adjudication. Backlog at the end of the quarter stood at $3.3 billion, of which $800 million was funded.

Now to the forward outlook. For any acquisitions, we are calling for 2015 revenues of $1.725 billion, net income of $57.8 million, and diluted earnings-per -share of $1.54.

We anticipate our OCO business to decline about $125 million compared to last year. In 2015, OCO related work, which supports both MRAP and C4ISR field sustainment efforts will be less than 5% of our revenue. Going forward, we will report OCO revenue, but we will no longer separately call out the MRAP or S3 contract.

First quarter revenues will be in line with the fourth quarter and then billed throughout the year. Which would lead to organic growth year-over-year growth sometime in the second half of the year.

The implied operating margin guidance for the year is 5.6% or 30 basis points above 2014. Margins will also build over the year, consistent with our normal pattern. Looking out long-term, we are targeting margins to increase 20 to 30 basis each year until we reach about 6.5%.

Net income and earnings-per-share are both expected to be up more than 20% from last year. Benefiting from margin expansion and from the reduced interest expense from paying down our debt.

Cash flow from operations should be slightly above 1.5 times net income, built into our guidance or an effective tax rate of 39.2% on a fully diluted share count of 37.6 million shares. Overall, we're heartened by the improving market dynamics, and look forward to reporting revenue and earnings growth as we progress through the year.

Now, Dan will speak to our defense and fed civil business. Dan?

Thanks, Kevin. At Mission Solutions and Services, we are excited about our prospect for this year as we continue to reposition our business as our presence in Afghanistan declines.

We began the year with two important additions to our leadership team. Steve Comber is now leading ManTech Health. He brings a superb knowledge of this market gained from running a broad-based $800 million health business. The acquisition of 7Delta in 2014 when combined with our organic health business resulted in a stronger performance in this sector than initially planned.

Our customers in the Department of Veterans Affairs, Health and Human Services, and Defense Health Agency are well funded by the government. And we've seen numerous opportunities that enable us to employ our capabilities and past performance to expand our presence in this market segment. With the addition of Steve Comber we bring to the team one of the recognized leaders in the industry, and demonstrate our commitment to invest in and grow a robust health business.

Andy Twomey is now leading our Army business. Andy brings a wealth of knowledge gained through a distinguished army career as a Brigadier General, and extensive business acumen having previously led a $300 million government service business.

We are committed to committing to serve our army customers, and moving in a higher level solutioning services. Both Steve and Andy bring tremendous energy and capability, and I'm excited about what they'll deliver for ManTech and our customers in the years ahead.

Finally, our acquisition in 2014 of the Advanced Technology Group, ATG, has given us the contract vehicles, the customers, and the capabilities to effectively grow our business in the critical Homeland Security market. And as George mentioned, we continue to aggressively pursue addtional acquisitions in the healthcare and [headset] markets.

Bill?

Thanks, Dan.

The Mission Cyber and Intelligence Solutions Group is positioned well within a robust market, with significant opportunities in cyber, full-spectrum security and IT consolidation. Earlier this year, the government resolved protests from some of the unsuccessful bidders on one of the procurements that we discussed on the last call, a blanket purchase agreement for cyber services at the FBI.

The BPA consolidates several contracts, including our work running the security operation centers for the FBI and the Department of Justice. We have already submitted task order proposals for our incumbent work, as well as several new opportunities that fit well within our capabilities. We expect to hear on these task order awards shortly.

We have improved the business operations of our Cyber Products business, and expect modest improvements in both the top and bottom line. Although we will continue to make net investments for the year. The team is currently upgrading the product set, including exporting it to a new platform for launch at the upcoming RSA Conference.

As George indicated, the President's FY16 budget request shows strong support for cyber, with a proposed 10% increase to $14 billion. On the Cyber front, we are well-positioned as a prime on DHS's Continuous Diagnostics and Mitigation contract to receive some of the $582 million in requested Cyber funding for FY16 under that program. The administration has also been taking aggressive steps on the Cyber front, announcing two major actions last week.

First, the Director of National Intelligence will stand up a new Cyber Threat Intelligence Integration Center. That will do for Cyber what the National Counterterrorism Center does for terrorism. This center will coordinate cyber threat assessments and ensure that information is shared rapidly to support operators and policymakers with timely intelligence about the latest cyber threats and threat actors.

Second, the President issued an executive order directing the government and companies to share more information about cyber security threats in response to cyber attacks. This order may spur Congress at last to pass legislation. All of these actions offer expanded opportunities for ManTech.

George?

Thank you Bill. In summary, our market has stabilized and will turn to growth over the next year. Our position within the market has strengthened, based upon the growth in priority areas such as cyber, healthcare and the fading of the OCO overhang.

Investments that we've made position us to take advantage of the improving market. We look forward to leveraging our strong balance sheet to accelerate our growth.

With that, we are ready to take your questions.

( Operator Instructions )

Edward Caso, Wells Fargo Securities.

Hello there. This is actually Tyler Scott on for Ed. My first question is, what was the inorganic revenue contribution in the quarter?

Inorganic revenue contribution to the quarter from acquisitions was $33 million.

$33 million? Okay. So for next year, that includes, ATG and 7Delta. So how much is going to be in 2015 guidance for inorganic?

For 2015, we're building that as normal growth. The acquisition for ATG happened early, and the acquisition for 7Delta happened in May. So we're expecting a reasonable amount of growth for next year. It's not going to be a material component for the year-over-year comp.

Okay, not material. All right. And so on the awards, how did the rest of the quarter after you guys reported Q3, how did that play out as expected -- or did it play out as expected? I think you had $230 million in awards at the end of October, and then there was $130 million in awards that were protested.

So the $130 million in protest awards, we'd expected some adjudications to happen in Q4 and get a little bit of revenue out of that. Over $100 million of that still had not been adjudicated by the time we rolled into Q1. We got a little -- maybe $15 million of that awarded to us. So it didn't turn out favorably or unfavorably, just more delays.

Just more delays. Okay.

Just more delays on the decisions around that. And that, in part, impacted our Q4 revenue. Did that answer your question?

Yes, that's great. Thank you very much.

Gautam Khanna, Cowan and Company.

Hello, this is Bill Ludley on for Gautam tonight. A couple quick ones for you. So, can you size up the amount of the in-theater revenue in the quarter? And then for FY15 and FY16?

I will do so for 2015, and I'll do so for the quarter and the year. So when we talk about overseas contingency operations, it's a combination of field sustainment support for C4ISR under the S3 contract. And a component of the MRAP work that's done in theater.

They also have work under MRAP that's done in the US as well. So it's not one-for-one when you look at the MRAP revenue or the S3 revenue.

The revenue for the quarter, Q4, in theater, was $31 million. And the total revenue overseas in-theater for 2014 was just under $200 million, and we expect the revenue for OCO in 2015 to be about $75 million.

Okay, thank you. Secondly, on your capital deployment strategy, you said -- you mentioned you guys are looking at more healthcare deals. Can you talk about the acquisition environment currently and what are you looking at, and what should we expect in 2015 and beyond?

I'll make a comment on that for other folks to put in, and if Dan wants to speak specifically to Health, he can do that. So there's a lot of potential activity out there. There has been a set of consolidations.

There have been some acquisitions that have happened in this space. And I think that there's an increased amount of potential activity based on what we've seen over the last three, six months. And we are seeing higher volume at different levels of size.

So I think that there's a good set of opportunities for us. The question is, where they fit in and how quickly those happen within the market.

Specific to Health, there are businesses out there. I don't think they're of the same scale, but I'll let Dan speak to anything that he's learned from --

I would say, we're well-positioned in the three major health segments. The customers being Veterans Affairs, the Defense Health Agency, and then Health and Human Services.

And not to be understated, Steve Comber, who joined us in January is really one of the experts in this market space, and has given us a lot of insight into where the growth potential is. Other than that, not much else I could add. It's certainly a market we're looking hard at.

So as we think about capital deployment, is acquisition -- is that the primary driver? Or are you guys considering a buyback or -- ?

No, we still consider acquisitions our primary use of capital, with dividends as the second component, consistent with prior-year's distributions. But we think it's a good time in the market to focus [there's more certain] around budgets. We have greater clarity around the prioritization of those budgets, and believe it's a good time for us to focus on acquisitions.

Okay, thanks. And then one last quick one, how much of your revenue is up for recompete this year, and what is that as a percent of total?

So the percentage of total, it's a little bit less than the average run rate. About 17% of our business is up for recompete in 2015.

Okay, great. Thank you very much.

Bill Loomis, Stifel Nicholas.

My question is on the Cyber side. It's been a while since we got anything specific as far as how much Cyber is as a percent of ManTech's revenue and growth specifically on that. Can you -- now that OCO is dropping, is getting lower and lower, can you give us more specifics on the Cyber side with how much business you are doing there, and the growth you've achieved in 2014 and expect to in 2015 in your guidance? Thanks.

So we're not going to break out the Cyber component specifically. It has been increasing as a percentage of our overall revenue. It has been growing slightly in the business, even with the uncertainty in the market.

I would say though that in the Intelligence and Cyber business, over half -- a greater proportion of the overall proposals that we're going after are in that market. And that leads to the strength of our positioning to go after it.

And I think that we're in a really good position heading into 2015 to grow the combination of Cyber and Intelligence. And I will ask Bill to provide any additional flavor on that.

Sure. Thanks, Kevin. And, Bill, thank you for your question.

2014 really was a year where we submitted more proposals, I believe, than at least I have ever seen in my career. And most of those, in my case, of course, were in the Cyber and Intelligence community.

We do believe all of those proposals that are supposed to be awarded in 2015 will get awarded in 2015. And this will lead to some very nice, very exciting, very large opportunities for us.

Okay. And then, Bill, just staying with your group on Intelligence side, what are you seeing right now with your customers on the Intel site? It looks like the budget request for 2016 was better than we've seen in several years.

What are you seeing in terms of proposal activity, not necessarily specific Cyber, but just generally on the Intelligence side? Do you think that agency has bottomed this year on funding and given the transitions they've gone through?

Bill, that's hard to tell, and a lot of people believe that. I honestly have to say I have not asked any particular customers about that. So I really can't answer that.

But what I can say is that I just mentioned that we had a huge a proposal volume in 2014. Nothing has slowed down in 2015 so far. So we are still writing just as many proposals at the same rate as we wrote them in 2014.

Great, thank you.

( Operator Instructions )

Tobey Sommer, SunTrust Robinson Humphrey.

This is actually Michael Erwood in for Toby. Most of my questions have been addressed. But I just was wondering if you could provide any color on quarterly sales and EPS progression, anything you'd like to highlight in 2015 as we work through our models?

Sure, so I'll give you broadly, Q1 tends to be a little bit harder on the bottom line. Based on a combination of the number of man days that are billable as well as the frontloaded benefits costs and holidays is consistent with last year in terms of how it drives down and it comes back up.

So for modeling, I would say Q1 on the bottom line, maybe a little bit more tempered than that. And then we'll start bringing back up towards at or above the operating margin that we're guiding to.

It tends to expand as it has this last year based on our growth, and focus on improvements, and contract awards, frankly. We expect G&A to be, for the year, somewhere around 9% and our gross profit to be somewhere around 14.6%. And that should give you a good guide to put in your model.

Excellent, thank you.

Robert Spingarn, Credit Suisse.

Good afternoon, everybody. I just wanted to go back, Kevin, to what you were talking about earlier in the Q&A and just nail down the organic growth expectation for 2015, just based on truing up the acquisitions. And so I think you're guiding down about 3% at the headline level, but what underlies that?

It's less than 5% organic growth that we have year-over-year. Is that helpful?

Negative 5%?

Negative 5%.

Negative 5%. Okay, yes, that is helpful.

And then a high level question for George as a follow on to that. George, when do you think we bottom here organically? When is the turning point?

You talked about the budgets. I know there's a fair amount of uncertainty still. We don't yet have a sequestered deal out there.

But how to you think about that? Is that going to happen in one of the 2015 quarters, or is it sometime in 2016?

I don't think you can identify precise actions that will happen or the exact timing. But I think it's important that the Congress and the White House appear to be trying to find a way to work together. They don't agree with one another, but they seem to be learning to work together.

I'd say as the first half of 2015, we're near that inflection point from a revenue standpoint. But I think it's very close, because the OCO overhang is gone, a lot of proposal activity. We're seeing uptick in the build area from a staffing point. So I think that we are near that.

The other thing that is crucial here as you know, there's been a lot of focus on the acquisition workforce in the department. And we are hearing words that they are seriously going to address those issues.

Okay. And then just, Kevin, adding on to what you just said a minute ago, I think you said there's $75 million in OCO related revenues in 2015, down from about $250 million. I get those numbers right?

Down from $214 million.

I'm sorry, okay. Is the $75 million a maintenance level, or could we actually see that -- do you think about that eventually just going to zero?

This is Dan. No, I don't see it eventually going to zero. As Kevin mentioned, we do have some [konus]-based work in there.

But it's really dependant on what the nation does in Afghanistan. It certainly has the potential to go down. But I think we're close to a steady-state, but not there yet.

Your close, okay. And then the last question is just for anybody on how competitive things are getting. A lot of people have started focusing on specific businesses, healthcare being one. You're there.

How should we think about margin trends going forward? Which of your businesses would you say has become the most price competitive or price-sensitive?

This is Kevin. I'll provide some comment, and then let both Dan and Bill. Because it's very customer specific, and very competency specific, in my view. Obviously, the Army work has trended down. I think it's still very competitive. I think some of the traditional DoD work is staying competitive or stabilizing.

But in much of the Intel space as well as some other spaces, there's kind of a push back on an LPTA concept because of its impact. And I think it will be interesting to see how it plays out in procurements over the next 6 to 9 months.

No, I think you hit it there, Kevin. I look at my major markets of the Army and the Navy, and certainly, we've see the LPTA cost-plus fixed fee contracts that certainly pressure margins.

And then in some of those other areas, like [FETSIV] and health and [mine], and I can let Bill comment on his markets, that pressure is less. So there's clearly some market segments that provide advantage from a margin improvement standpoint.

This is Bill, and I can certainly concur with what Dan says. In my business area, in the Intelligence community and in the Cyber area, we're seeing, I would have to say, we're seeing very little LPTA-type of activity. And I think we're seeing fewer protests in many cases, maybe than we see in the general defense business.

Okay.

I'll add to that for 2014, and it's not related to the environment but to our positioning. We have spent a fair amount of time increasing talent as well as improving our ability to go after bids. And I think it's going to play out over the next 12 to 18 months in terms of our positioning and just winning business and growing.

Thank you all.

Rob, this is Stuart. I want to put a bow around something that Kevin said and George said to make sure you -- we're all clear as the models are being built. We're expecting to get sequential revenue growth early in the year, but we expect to turn to organic year-over-year revenue growth in the back half of the year.

The back half of the year. Yes. Okay, Stuart, thank you. Thank you all.

Steven Cahall, RBC Capital Markets.

Thank you. I was wondering if we could maybe talk a little bit about the Cyber portfolio. So maybe a couple questions in there. First is, can you give us a sense of either on a percentage basis or a dollar basis, how much of the portfolio you would consider in that Cyber and Intelligence space for 2014 and/or 2015?

Kevin, if you would take a cut as to rough percentage, I'll be happy to talk about the details just a little bit.

Okay. So, less than half of our business is in the Intelligence and the Cyber business. Again, we're not going to imply to specific component of Cyber. But it is a substantial piece of Bill's business.

It is one of the very important areas based on the fact that it's pure Cyber work, and it supports very complex missions. But generally, Bill's business is less than half of the overall business that we have. Bill, the specifics on the program?

Sure, and just to give a little color to that. Many of the programs that we support, especially for some of the government intelligence agencies, are what we would call flagship cyber development programs. They require very special people, and we're fortunate to have many of those very special people.

And the work is very, very complex and very important. And even though we can't talk too much about it, you see every day in the paper the results of some of the things that our people are doing.

Okay. And then I think you've talked in the last couple of quarters about some large bids within this business area that are out there. Can you maybe give us an update on are those still awaiting adjudication? Have you had some on some?

How is the wind ratio looking? Are there more coming up ahead, et cetera?

I'd be happy to. And the simple answer is, we are still waiting on award on almost every one of those large programs we talked about. The largest bid we have outstanding now, as a matter of fact one of the largest programs proposals that ManTech is ever submitted, is a large information technology consolidation effort for several intelligence community agencies. And we submitted that last Fall, and we are expecting award sometime in the late Spring or early Summer.

The other one we mentioned, the FBI blanket purchase agreement, as I mentioned, we did win that. We're now awaiting for awards on the various task orders.

So on many of these programs which are basically IDIQs, indefinite quantity, indefinite delivery, you win a position on the vehicle and then you have to submit task orders to win the real work. So we have won multiple positions on vehicles. We're waiting in almost all cases for task orders to either be released, or for task orders that we've already submitted to be awarded.

Great. And then maybe just a last one on cash. And I apologize if I missed this, as I joined a little late.

Do we still expect 2015 to be a -- I think we called it a normalized year for cash conversion? Maybe around that 140%, was there any reason to think it will be more like 2014 or less than that normalized rate?

It will be somewhere in the 150% to 170% conversion rate.

Great, thank you.

One of the things you have to remember too, is we're sitting today with a good cash balance. And we have a $500 million line of credit with the banks not used that they're willing to take to $1 billion. So from the financial point of view, we are really positioned to grow and grow drastically.

Amanda, it appears that we have no further questions in the queue at this time. So as usual, member of our senior team will be available after the call for follow-up questions. I want to thank you for your participation on today's call, and your interest in ManTech.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.