ManTech International Corp (MANT) 2019 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ManTech Fourth Quarter Fiscal Year 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Stephen Vather, Vice President, Corporate Development and Investor Relations.

Welcome, everyone. Thanks for participating on ManTech's fourth quarter call. On today's call, we have Kevin Phillips, President and CEO; Judy Bjornaas, Executive Vice President and CFO; as well as Matt Tait and Rick Wagner, our 2 group Presidents.

During this call, we will make statements that do not address historical facts, and thus are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from the 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.

Finally, on today's call, we will discuss some non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our fourth quarter earnings release.

With that, let me hand the call over to Kevin.

Good afternoon, everyone. I'm excited to discuss our outstanding 2019 results, driven by ManTech's differentiated market position. We enjoyed another consecutive year of strong and consistent financial performance.

For the year, organic revenue growth accelerated to 9%, EBITDA grew 17% and EBITDA margins expanded 30 basis points. We collected $221 million in cash from operations and our book-to-bill stood at 1.3x, placing us on an excellent path for continued growth.

I want to thank our talented employees whose steadfast support to our customers and their missions resulted in this excellent performance. Overall, I am pleased that we are consistently executing and that our growth-focused strategy is maximizing value across all of our constituents, those being our customers, employees and shareholders.

ManTech was successful in securing new contract awards throughout 2019 across defense, intelligence and federal civilian customers. In Q4, we won $413 million of contract awards, resulting in a 0.7x book-to-bill. In the year, we won a total of $2.9 billion in contract awards, a 1.3x book-to-bill, which provides a solid foundation for continued growth in 2020 and beyond.

New business made up approximately 50% of 2019 awards. We exited the year with a total backlog of over $9 billion, up 9%. Our business development success was evident across our customer base and our key capabilities in systems engineering, cyber, IT and intelligence operation support. Nearly 1/3 of our bookings were on a sole source basis, which, coupled with our competitive wins, clearly indicates ManTech's customer recognized differentiation.

We enjoyed a healthy level of proposal submits in 2019, and are on a path to have another busy year on that front. Our qualified pipeline remains well in excess of $20 billion, and our proposals outstanding sits at over $6 billion. Our customers' appetite remains strong for ManTech's innovative solutions. As a result, we are projecting strong growth in 2020.

Additionally, we recently won a $920 million single-award contract. This award, combined with our strong bookings in 2019 as well as our healthy pipeline, offers us a solid growth -- trajectory for growth. ManTech will speak to additional details on this award later in the call.

Now shifting briefly to customer budgets in the market environment. All of our customers are operating under incorporations enacted in December. With clear funding levels, customers remain focused on speed and innovation of solutions against critical mission requirements.

Last week, the President released his FY '21 budget request, which calls for $705 billion for defense and maintains the spending level set in the FY '20 appropriations. The request calls for increased funding in cyber, systems modernization, space, autonomy and artificial intelligence, all areas where ManTech is strategically aligned and well positioned to deliver innovative solutions.

There continues to be strong, broad bipartisan awareness of the threat environment facing the nation and the required funding to address them.

Lastly, government-wide, there is a continued focus on security that is driving policy and actions to defend against threats in the cyber domain as well as in the supply chain. I'm incredibly proud of what the team has accomplished and look forward to maintaining our success. I'm thankful for our customers for trusting us and our people on delivering success on all fronts.

Continued customer appetite for ManTech's innovation and solutions is clear. As such, we remain focused on strategically investing in talent and capabilities to preserve and sharpen our competitive advantage.

Now Judy will walk through the details of our 2019 financial performance and 2020 outlook. Judy?

Thanks, Kevin. I'm pleased to report our strong finish to the year. Our results exceeded the high end of our expectations across the board.

Revenue for the year was $2.2 billion, up 13% and 9% organically. This growth was primarily driven by new contract wins, growth on existing programs and our strategic acquisitions. For the fourth quarter, revenue was $604 million, up 22% and 15% on an organic basis. Strong direct labor growth was evident in both the quarter and the full year results.

Lastly, in the quarter, we enjoyed strong contribution from fulsome ramp-ups of our recent contract awards and an uptick in ODCs. For the year, we performed 90% of our work as a prime, and our contract mix was approximately 70% cost plus, 20% fixed price and 10% time and materials.

EBITDA for the quarter was $55 million for an EBITDA margin of 9%. For the year, EBITDA was $194 million, up 17%. EBITDA margin for the year was 8.7%, up 30 basis points from 2018, exceeding our expectations and more than accomplishing our targeted incremental margin improvement. Net income was $41 million and diluted EPS was $1 per share in Q4.

For the full year, net income was $114 million, and diluted EPS was $2.83. Net income and EPS for the quarter and the full year were both up meaningfully compared to the respective 2018 period as a result of 2 primary factors: Strong operational performance and a discrete tax-related pickup.

In Q4, we recorded a reduction to our income tax expense of approximately $12 million resulting from the reassessment of current and prior year's research and development tax credit. Excluding the impact of the R&D tax credit, we had an effective tax rate of 23.7% in Q4 and 25.1% for the full year. Adjusted net income and adjusted diluted EPS, which excludes discrete tax items as well as the impact of the amortization of acquired intangibles also demonstrated healthy growth. Adjusted net income was $33 million and adjusted diluted EPS was $0.81, up 39% and 37%, respectively.

For the year, adjusted net income was $117 million, and adjusted diluted EPS was $2.91, up 19% and 18%, respectively.

Now on to the balance sheet and cash flow statement. For the year, we collected $221 million in cash flow from operations, a robust 1.9x net income. DSO was 59 days at year-end, a 14-day improvement from last year. We distributed $43 million in dividends for the year, maintaining a steady return of cash to shareholders. At year-end, we had $9 million in cash and $37 million of debt.

Given the strength of our balance sheet and expected cash flows, the Board has authorized us to raise our quarterly dividend by $0.05 a share to $0.32, a 19% increase from current levels. This dividend will be paid in March and equates to an annualized dividend of $1.28 or a yield of approximately 1.6%.

Now on to our 2020 guidance. We expect revenue to be between $2.375 billion and $2.475 billion. Adjusted net income between $126.2 million and $132.4 million and adjusted diluted EPS between $3.08 and $3.23. The midpoint of the revenue range implies 9% growth and more than 80% of our guidance is expected to come from current backlog with the balance from recompetes and new business.

Our contract awards from 2019, coupled with our year-to-date 2020 wins, including the large award Kevin mentioned earlier, provides us with a clear path to growth.

Turning to margins. Our guidance assumes an EBITDA margin of 8.7% for the year, which is flat from the prior year given the significant margin improvement delivered in 2019. We remain focused on driving top line growth, and we'll continue to invest in innovation, BD and talent development to capitalize on the near-term market opportunity.

Built into our guidance are an effective tax rate of 23.8% and a fully diluted share count of 41 million shares. Cash flow from operations should be at least $150 million for the year. We expect capital expenditures of approximately 3% of revenue with quarterly variability being driven by actual program requirements. Longer term, we expect capital expenditures to trend lower to more normalized levels.

Now Matt will speak to our defense and federal civilian business.

Thank you, Judy. I am pleased with ManTech's Mission Solutions and Services performance in 2019 and look forward to driving the team to another successful year. Throughout the year, we enjoyed success in securing both new business and recompetes.

In the quarter, we successfully retained a $67 million, 5-year recompete, providing scientific and technical support for the Marine Corps Systems Command. Overall, I am pleased with the performance in the year, and carrying forward our momentum in 2020 is a key objective. As such, we have a sharp focus on driving innovation ahead of customer demand and ensuring program delivery excellence.

Before I turn the call over to Rick, I want to note that we have been awarded a 5-year, $920 million contract by FEDSIM. Even though this contract award is not in our Q4 bookings or backlog, given the size of the award, we wanted to make you all aware. The government is currently reviewing the press release and specifics about the program, and the objective of the contract will be detailed in a forthcoming press release upon formal approval.

Rick, over to you.

Thanks, Matt. ManTech Mission's Cyber & Intelligence Solutions enjoyed a stellar 2019, particularly in driving growth, retaining recompetes and hiring differentiated talent.

In quarter 4, we successfully delivered full operating capability on our large DoD enterprise IT program and fully ramped other contract awards won earlier in the year, keeping our commitments to provide the very best to our customers. We enjoyed the continuation of a number of favorable trends in 2019. There are 2 in particular that I would like to call to your attention. First, over half of our contract awards came on a sole source basis. And second, we saw increased customer demand on existing programs in the form of significant contract expansions and extensions. The extensions helped reduce our 2020 recompete risk within our intelligence community customer stat. Both of these trends further prove our differentiation and the value that customers find in our solutions.

As we look to the rest of 2020, we will continue to focus on both our customers and our people. For our customers, we remain focused on developing and delivering innovation coupled with strong program execution. On the people front, we have a steadfast focus on growth through recruiting, developing and retaining highly skilled and differentiated talent.

With that, let me hand the call back over to Kevin for closing remarks.

Thanks, Rick. In closing, let me reiterate that we are very pleased with our 2019 performance, and I want to leave you with 3 key messages before we jump into questions. First, the work that ManTech performs is very much at the heart of our customers' mission, and we are thankful for their steadfast trust in us. Second, our talented employees are the source of our differentiation, and as such, growing and developing them has been and will continue to be a key management priority. Finally, ManTech's unique growth story remains very much intact, and our confidence is rooted in the strength of our talented people, deep customer relationships and differentiated capabilities.

With that, we are ready to take your questions.

(Operator Instructions) Our first question is from Gautam Khanna of Cowen and Company.

Just a couple of questions on the guidance first. I was wondering if you could frame the implied organic growth in the sales guidance. And then relatedly, on the new presentation of earnings -- adjusted earnings, what level of intangibles amortization specifically is contemplated in that -- was excluded from that number, just so we can compare apples to apples?

Yes. So the first question, on an organic basis, it is -- we did one acquisition at the end of Q1, and we did one acquisition in mid-Q3, and they were both relatively small. So the total inorganic growth from '19 to '20 is about 1% or so. And then as far as the intangible, in 2019, it was about $20 million of the intangibles that you can see in the press release, and we think it's going to be relatively similar to that in 2021.

Okay. So it's about $0.40 or so. Was that what the rough math would work out to be?

Yes.

Thereabouts?

Yes.

Okay. And then on the $920 million contract win, could you talk a little bit about -- could you say anything about it? Is it cost plus? Is it time -- sort of the margin profile? And how quickly it might ramp in 2020, sort of, what the contribution is or what the transition is to ramp up the program?

Sure. Gautam, it's Matt. So the one thing that we can say about the contract is similar to our other large contracts, we expect this to ramp over an 18- to 24-month period. So that's the expectation there. It's about all I can answer on your question there. So hopefully, that helps.

And then may I ask a different one then? Perhaps on -- was it a greenfield project? Or was it -- was there an incumbent and therefore, might there be a protest and might there be an extended transition to that 18 to 24 months?

Yes. It's Kevin. Look, we're near the end of the evaluation award and then protest period on that, which is why we're communicating it. It could be protested. To our knowledge, it has not been yet. But we're in a time line where it's important for us to communicate to you this award given its size. So it's possible. To our knowledge, it has not yet been protested.

And is it new, new work to the industry? Or is it -- was there an incumbent?

Yes, it is. There is. For the most part, this is mostly new work for us.

Our next question comes from Edward Caso of Wells Fargo.

Congrats on a nice print here. Curious, Kevin, on your thoughts on the timing of the budget decision for '21 given the election. I've heard some say early, some say CR until after. Just curious, your thoughts?

So my view is the authorization process will work in, call it, regular order. The appropriations process, though, may get hung up into a CR after the election, simply because of the timing of decisions around funding. It could move earlier, but my general view is authorizations will move quickly, appropriations may be delayed.

Can you talk a little bit about employee attrition here, voluntary attrition?

Well, it's been running fairly consistently for the last 2 years. It's important for us. We spend a lot of time and energy on that. I would say that the market continues to be very robust for talent. We are all working towards 2 things within the company, investing and retraining individuals into these future careers. And externally in the market, making sure that we provide competitive packages to attract the talent.

Can you remind us how much percent of total you have of your employee base in the greater D.C. area and how much outside? And if you could make that attrition comment for that -- those 2 geographies?

I don't have the 2 geographies in my head. A little over half of our employee base is in the region. And yes, I think it's competitive everywhere. It's a matter of our customers' ability and willingness to distribute the workforce based on where people want to work and live, and there's an active discussion that has happened with the industry and our customers on that.

Our next question comes from Joseph DeNardi of Stifel.

Kevin, I think the growth rate that you guys are generating continues to surprise the investment community, maybe it's not surprising you all, but certainly surprising us. Can you talk about what you think is driving that? Is it better win rates? Is it alignment? There's just more coming to market? And then when you look at what you expect to bid on this year, assuming you win kind of your fair share, does that sustain the growth rate kind of continuing into 2021? Or does the budget environment start to moderate growth?

That's a lot of questions, so I'll make sure I can unwrap that. The 2020 -- the FY '20 and '21 budgets that got cleared through, in my view, allow us all a pathway into a 2-year budget cycle. And I think the customers have fair certainty for '20 around what they need to procure, and they're procuring in a regular, if not rapid, pace depending on the type of work. Customers are looking more for speed. They're looking for innovation, and those are areas that we've been focused on because we generally view the global threat environment as driving different behaviors in the customer. We're investing towards where we think that and have been towards where that's headed. And I think that, along with the capabilities that we have around cyber, IT, some of the analytics capabilities and intelligence operations support, provide us a good placement in the market at a point where there's a greater demand.

And then, it's kind of -- to date, within the government fiscal year, are you seeing customer behavior, procurement activity accelerate? Slowdown? And what's your expectation for what the election cycle means for their procurement environment?

Procurement activity is heavy. Timing of awards is uncertainty, but procurement activity is heavy and it's expected to be at or above last year's levels.

(Operator Instructions) Our next question comes from Tobey Sommer of SunTrust.

I wanted to ask you a question about contract type. Are there any changes in your mix of new wins or maybe in your backlog or pipeline that could inform what the future margin profile of the firm looks like?

Yes. I mean to date, we haven't seen, in either our backlog or the wins, a significant shift. We do continue to hear discussions around moving towards more solution-based contracting, which I think is helping on the margin side and seeing a little bit more movements on potentially the DoD side to move towards a little more fixed price. But to date, that has not flowed through all the way to the backlog and performance.

Yes. I think what we're also seeing in the market as well, customers they want to have more of a value-based and outcome-based and what we prefer, a solution-based conversation. So all of those things are kind of happening, but that's separate from the type of contract. So it's almost 2 different conversations that you're having out there in the market as we move forward.

This is Rick. [And we felt there is some impact] , we're beginning to see them look at this, especially in the IT side, look at more outcome-based contracting. But it's a contract-by-contract type of thing, and they're not moving quickly.

That's helpful that there are multiple vectors to think about there. And when you think about your new business win rate, what has that been like and does it convey to you that you should bid more or you're bidding the right amount? Kind of what's the takeaway from the win rate from your perspective?

It's Kevin. Look, we're pleased with our overall win rate, both recompete and new. We don't give the specific numbers, but we're pleased. We have been investing heavily in solutioning and proposal activity and an ability to compete on a broader scale against these efforts. And so I'm happy with what we have. I think we're in a strong position to compete. It's a very competitive market. We'll see how it plays out. But generally, we're winning our fair share. We're doing a lot of solutioning to differentiate ourselves, and we think that, that's paying dividends.

Asked in a different way, are you -- is your growth in DD, is that growing at about the rate of the company in your guidance for this year? Or is there a difference?

The proposal volume is over $20 billion. Our investments are higher because we feel that we can afford to do that. We're redirecting the money, and we're going to continue to focus on that to expand our top line.

Last question for me. You mentioned several areas of the President's budget request. What are sort of the top 2 areas of spending growth in that request where the company plays and you stand to benefit the most?

Look, if you think about the use of cyber and automation, you can call it AI, ML, whatever advancement to work to speed the decision making. Those are areas that companies like ManTech can differentiate ourselves and need to make sure there's a greater security around data and systems, will also continue to be growth. The areas that we don't play that have increased like hypersonics, right, the major new developed systems that they're building to compete more globally for new weapon systems.

Our next question comes from Gautam Khanna of Cowen.

Sorry to keep asking questions. I thought it was worth asking though, the $6 billion-plus of outstanding bids, is that net of the $920 million win?

It's a Q4 number that had it included in it.

Okay. And so it's subsequently been awarded. I was curious, what do you anticipate the profile of the -- of contract awards will be by quarter this year? Do you have a sense for -- obviously, Q1, by definition is going to be strong given this win, but are you also seeing a lot of other awards come through in Q1? And maybe if you could speak to just the pacing of adjudications.

It's really hard -- it's hard to speak to pacing. We can speak to when they're requesting submittals. But timing of their evaluation and the following award, that is not something we can provide consistency on or visibility into.

Understood. Is it worse than before? Or is it kind of the same in terms of -- are things moving out? Or is it the same?

It's the same. Yes, in the last few years, you've seen more certainty around the budget and there's more activity, but I think it's a consistent pattern now and totally depends on the procurement shop and delays with time lines.

Got it. And then on the M&A pipeline, can you speak to what you're seeing? Are there promising targets in the pipeline? And if so, any sense for the scale of the opportunities, midsized candidates, larger ones? What [it basically kind of...]

Yes, I mean, I'll start and then any of the other gentlemen here with me can chime in. There is a very active pipeline of opportunities. The M&A market is very active right now with all sizes of opportunities from the typical tuck-ins that we tend to do around $50 million to $100 million, up to some larger properties. So we're continuing to look. We're very focused on maintaining our disciplined strategy that Kevin talked about with looking at capabilities and customer sets, and still trying to maintain our pricing discipline in an expensive market.

And I would say that we're also focused on capabilities and customers as part of our overall M&A strategy. And that's important, that will maintain our discipline as we continue forward.

Yes. And to that last point, any thoughts to -- I mean is there any greater emphasis put on non-DoD, non-intel, traditional federal civilian agencies or expanding kind of the pie for what traditionally has been ManTech from -- traditionally been ManTech's core?

It's Kevin. Broadly, we think as DHS is sort of equal national security and homeland security demand and need as DoD. And so we are continuing to focus on there. We also continue to focus on the overall health care component for our veterans as well as our active duty, and we'll selectively look into other federal civilian agencies based on their mission requirements invited.

Our next question comes from Joseph DeNardi of Stifel.

Just one more. Kevin, you mentioned the 2-year budget agreements providing a good kind of backdrop for you all. Does that apply to your 2019 and 2020? Or does that more benefit in '20 and 2021 for you?

Well, 2019 was based on the prior 2 years. I think '20 and '21 is what we're looking at. And I think that's the year budget deal will allow for the mission requirements and the proposal volumes to continue for the next 12 to 18 months. And we'll see what happens later on based on election cycles and requirements.

It appears that we have no further questions at this time. As usual, members of our senior team will be available for any follow-up questions. Thank you all for your participation on today's call and for your continued interest in ManTech.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. Have a wonderful day. You may all disconnect.