Q3 2019 Earnings Call
Ladies and gentlemen, good afternoon, and welcome to the Mantech third quarter fiscal year 2019 earnings conference call. At this time, all participants are in listen only mode.
Later, we'll conduct a question answer session and instructions will follow at that time.
If anyone should require assistance in the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference call is being recorded.
I would now let's turn the conference over to your host Stephen batter, Vice President corporate development and Investor Relations.
Welcome everyone. Thanks for participating in Mantech third quarter call.
Today's call with Kevin Phillips, President and CEO , Judy Bjornaas Executive Vice President CFO as well as mats eight and Rick Wagoner to group Presidents. During this call will make statements that do not addressed historical facts and thus are forward looking statements made pursuant to safe Harbor provisions of the private Securities Litigation Reform Act 1995. These.
Forward looking statements are subject to factors that could cause actual results to differ materially for me anticipated results.
For a full discussion of these risk factors and other risks and uncertainties. Please refer to the section entitled risk factors in our latest Form 10-K , and our other FCC filings. We undertake no obligation to update any of the forward looking statements made on this call with that let me hand, the call over to Kevin.
Good afternoon, everyone Im excited to share with you that mantech delivered another exceptional quarter.
Our financial results exhibited accelerating organic revenue indirect labor growth it was well, it's improved profitability and robust cash flow.
In Q3, we also maintained our business development momentum through a series of new contract awards as well as retention of Recompetes.
These results continue to demonstrate manitex differentiated market position driven by are dedicated and talented employees.
Let me briefly provide an update on the current budget environment.
We are operating hundred continuing resolution through November 21st with the potential of a CR to extend this congress negotiates a finer details of agency level appropriation.
Despite operating under a CR the enacted to your budget deal for F 420 and 21.
Provides our customers with visibility on their priorities in is allowing them to focus solely on their missions.
Mantech remains well aligned with customer spending priorities, particularly in cyber high teens systems modernization analytics and security and mission operation support.
Our strategic alignment coupled with our differentiated and highly sought after innovative solutions drove 1.3 billion in contract awards in the quarter.
Which represents a book to Bill of 2.2 times.
Contract Awards drove total backlog to increased 14% year over year to a record 9.5 billion unfunded backlog grew 17% to 1.5 billion.
I didn't Rick will provide additional details on the contract awards later in the call.
You are a few quick highlights on our bookings for approximately 70% of the awards in the quarter represent new work for Mantech.
Second 80% of the awards, where permission and enterprise I T.
Security emission operation support and cyber.
And finally nearly half of the awards came from the defense customers.
All that said, we're honored continue working at the heart of our customer support missions, we have for over 50 years.
Our customers are continuing their efforts towards procuring with speed and for innovation.
Within our industry the need for talent remains our key constrained.
Our $20 billion plus opportunity pipeline demonstrates both mantech strong industry position into healthy Mark.
I'm pleased to see our proposals outstanding figure grow to 5 billion, even after robust contract award quarter.
As we anticipated proposal submissions in Q3 accelerated from the first half of the year.
We remain on track to have a similar proposal submission volume as we did last year.
In the quarter, we executed on our stated plan to invest in growth markets through strategic acquisitions.
We acquired the age to him group, a leading provider of geospatial imagery intelligence analysis services to Ngs.
There is and will continue to be a strong need for data assurance analytics and automation to support intelligence analysts within the National Security community.
I'm pleased with the addition, and look forward to the team developing new solutions to address the challenges of analysts across the community.
Before I turn the call over to Judy I wanted to touch on an important issue for our customers instrument.
Security is integral to the work, we do as a company and as a key operational element for our customers.
Over the last year, our customers have developed new policies on managing cyber and supply chain risks and are beginning to roll out of these initiatives across the government and the industrial base.
We are committed to being a trusted partner for our customers and a partner to those who are looking to bring the best talent and technology to bear for us national interest.
Now Judy will discuss the detailing specific several financial performance and outlook Judy.
Thanks, Kevin.
So from the quarter surpassed our expectations and we're pleased with the team's continued diligence.
Q3 revenues stood at $579 million, representing an accelerating year over year growth of 16%.
Approximately two thirds of the growth in the quarter was organic.
Direct labor was the integral component of our topline growth.
For the quarter Prime contracts represented 91% of our revenue.
Contract mix was approximately 69% cost plus 21% fixed price and 10% time and material.
Operating income for the quarter, a $38.4 million grew 31% from the third quarter of 2018.
Quarterly operating margin was 6.6% 70 basis point improvement year over year.
Margins look quarter were primarily driven by strong fixed price contract performance excellent award fees and efficient management of the business as well as some onetime items.
That said not all of these factors are expected to impact fourth quarter results in the same manner or degree.
Net income was $27.9 million and diluted earnings per share was 69 cents for the quarter at 27, and 25% year over year, respectively.
These increases were driven by our revenue growth and improved margin.
Now looking to the balance sheet and cash flow statement.
Our balance sheet at quarter end show $33 million and cash and $25 million of death.
During the quarter, we generated an exceptional $110 million of cash from operations for 3.9 times net income.
Thanks to the team and their dedicated efforts to drive CFO to a record 57 days in the quarter, which represents a 10 day improvement year over year.
Lastly, the board has authorized us to maintain our current quarterly dividend of 27 cents per share to be paid in December .
Now looking to our revised 2019 outlet.
Compared to our previously communicated guidance, we are narrowing the range on revenue, while raising and tightening the range for net income and diluted earnings per share.
We expect revenue to range between 2.19 billion and 2.21 billion, which represents 12% to 13% total growth compared to 2018.
The midpoint of our revenue guidance indicates an 8% organic growth rate year over year.
We have excellent visibility for the balance of the year the level of material procurements and ramp up on recent contract awards are the key drivers in the variability of our revenue guidance.
While it is premature to offer specific guidance on 2020 topline. Our recent contract awards puts us on a good path for sustained growth.
Despite our strong performance in retaining Recompetes and winning new business, we are being cautiously optimistic given the competitive nature of the market an increased level of recompetes compared to recent years and the potential extended duration of a CR.
Now moving to margin our revised guidance implies an operating margin of 6.1% for 2019, a 30 basis point improvement year over year.
Operating margins for the balance of the year reflect continued bid and proposal investment increased program execution investments, particularly for new programs and an increase in seasonal French.
We are executing well ahead of plan and achieving this new guidance would accomplish not only our targeted 2019 margin improvement of 10 basis points, but also accelerate the delivery of our 2020 goal of 15 to 25 basis points.
As a result, we expect 2020 targeted margin improvement to be more gradual given the constraints of our cost plus contract mix.
We will be providing more fulsome 2020 guidance on our Q4 Carl.
At the bottom line, we are narrowing in increasing our net income guidance range to be between $96.9 million and $97.7 million and diluted earnings per share of $2.41 the $2.43.
Built into our guidance or a full year effective tax rate of 25.8% and a fully diluted share count the 40.3 million shares.
Now to cash flow item.
Hi patients for the capital expenditures and depreciation and amortization for 2019 remain unchanged at 3% and 2.5% of revenue respectively.
Based on the strong cash collection performance year to date, we are increasing our cash flow from operations estimate to be between 1.8, and 2.1 times net income for the full year.
Now, Matt will speak to our defense and federal civilian business.
Thanks, Judy I am pleased to report MSS had an excellent quarter.
We want a number of new contract awards across our diverse customer base.
Within our defense business, we won three different five year programs first a 322 million dollar effort with the Marine Corps intelligence activity to provide mission Nike cyber operations and intelligence analysis support.
Second 832 million dollar effort with army seat count to provide software engineering and Sustainment on the Army's distributed common ground system.
And lastly, we retain easy recompete totaling $82 million to provide that enable air systems command with research and development test and evaluation services to help modernized systems and sensors on U.S. platforms.
These contract awards demonstrate that may affect as a trusted partner supporting the core missions of our customers.
In the quarter. We also enjoyed success within our federal health business through several new contract Awards, we won a five year $83 million reference to provide scientific technical services and data analytics and support of the Navy's Bureau of Medicine, and surgery Force Health Protection mission.
Additionally, we secured a 59 million dollar for your effort to provide Archie modernization cyber and cloud migration services to the defense Health Agency.
These recent contract awards exemplify, how mantech differentiated capabilities and analytics cyber and IP modernization are being leveraged across the entire federal market.
Furthermore, the recent federal Health Awards underscore our commitment to the National Security Mission, which includes supporting the health and wellbeing of our active war fighters and better.
Rick over you.
Thanks, Matt.
Im pleased to report that Mcs had a solid quarter as well.
Strong demand across our intelligence community customers continued to result in sole source expansion for Mantech security admission operation support and cyber solutions.
In the quarter, we maintained our recompete retention bigger through another win on a key cyber program with an intelligence community customer.
Not included in our bookings, but certainly worth noting we want to position on a $950 million multi award IDI Q on the secretary of the Air Force concepts development and management analytical and technical services contract.
On this contract we will provide services and solutions in the areas admission IP advanced analytics as well as applied in emerging technologies to help solve complex national security challenges.
Earlier, Kevin mentioned, our recent acquisition of the age to answer I.
Im pleased to welcome nearly 200 highly skilled employees, who joined the Mantech family in August .
The integration is complete and we are leveraging our combined customer relationships and capabilities to bring new solutions to the intelligence analytics market.
Moving to talent and program execution.
Recruiting and retaining highly skilled talent remains a core focus for us across the company.
This focus goes hand in hand would providing our customers with the very best for Mantech and ramping our recent awards quickly to deliver our innovative solutions.
I am, particularly focused on accelerating the growth of our cyber talent base to meet consistent customer demand for our capabilities in this arena.
Our key efforts in expanding cyber talent has centered on training existing employees as well as building them next generation of cyber warriors through a rigorous internship program.
I'm pleased to report that our differentiated work in supporting National security and our reputation for investing in employee training and development has proven successful in attracting new talents of the company.
In summary, manitex competitive market position as a clear, resulting prioritizing customers and their critical missions.
Delivering innovative and reliable solutions and investing in the development of our employees.
We look forward to continued execution of our growth focused strategy and with that we are ready to take your questions.
Thank you if you have a question at this time please press the star than the one key on your Touchtone telephone maybe a question has been answered all your wish movies that MCU. Please press the pound king.
Our first question comes from what Tom Kinda Cowen and company. Your line is open.
Yes, thanks, guys.
Okay.
Hi, Judy I was wondering if you could quantify the one the net one timers that were favorable.
In the quarter, just so we don't overestimate as we move forward.
Yeah, I think you know.
Some of its onetime items items on more of it just the timing of regular items like the award fee.
Award for each grew up some EA Ssi adjustment, so I would say, it's probably less than the half of the.
The profit be in the quarter is from onetime items and the rest of its just normal items that all happened to collide in the same quarter.
Okay.
That's helpful. And then what are your assumptions for each two m. in terms of revenue contribution this year and the revised guidance.
Very little they there I'm not a big impact or swing in FY 2019 performance.
Okay have you given any metrics on bill annual revenue run rate of the a and.
The acquisition.
Yes.
Okay.
In terms of the 5 billion of outstanding bids could you characterize sort of what the adjudication.
Pipeline looks like with respect to Q4 and maybe Q1.
Are you expecting a late Q4 as a seasonally the case any color there would be helpful. Yes.
As I think I've mentioned that we have a strong well proposals submits this year and its little bit back ended in the second half of the year. So.
Poser volume for this quarter as well as Q4, sending it to the federal government is really heavy.
The timeline of when they had heavy adjudicate that between Q4 Q1 is hard for us to predict.
But they're all going to be.
Pushing between Q4 Q1, so I would suggest that it's in my view not going to.
Five any major impact in terms of.
Growth outlook in 2020 based on the fact that that much volume is happening.
Q3 Q4.
Okay and last one for me you mentioned, the Recompetes pick up a bit.
Last year, what what is sort of the percentage of sales that are up for rebid and if you could call at any kind of.
Lumpier ones, you know significant ones.
That may carry more binary risk due to their concentrations and things so.
So there is no major recompetes and I think you know we've spent in the past it looks to be 20% to 25% of of our work up for Recompete I think thats moderating some.
As we are starting to see even some continued extensions, but we'll have a better view on on the true 2020 impacts that we give guidance in February .
Thank you very much guys.
Thank you. Thanks. Thank you. Our next question comes from Edward CAISO of Wells Fargo. Your line is open.
Hi. This is just and did not have you on for education. So I'm kind of piggybacking on that can you talk about your large deal pipeline.
On the new work side any large contracts submitted that could be announced here in the near term.
Well I as Kevin again look the flow for proposals small and large is heavy and we are.
Able to compete for larger bids more consistently now and we're very excited about that so.
So in the routine course, we do have large ones, we're going after and we'll see how how successful we are in the timeline again the gets indications, but the 5 billion of proposals outstanding reflects strong set of opportunities to include some of the large ones that are out there. So.
I can't give you a timing, but I would say, it's a good healthy mix of scale within our pipeline as well as for summit.
Appreciate that and then.
In your comments you mentioned that.
Set up is looking pretty strong into next year, but given the really strong growth here in 2019 is there any risk of pulling forward some revenue.
That's right now what you mean, but.
Just some programs that started earlier.
Anything like that.
No. It's Kevin there's nothing that pull forward early everything is about as we projected when we actually entered the year were on path for that so nothing is moving more quickly than expected.
Our current awards ramp up or pipeline.
Okay. Thank you.
Thank you.
Again, if you like to ask the question. Please press Star then one when you touched on telephone.
Our next question comes from Tobey Sommer Suntrust. Your line is open.
Thanks.
Kevin you made some comments about CR I was curious to get your.
Business.
Do you have any.
Yes, it can bid that would represent new starts and potentially be impacted by a CR, even if the cadence of awards in the activity customers is sufficient to drive continued growth.
The CR itself, if we look at this year and our performance against.
Frankly, I'm certainly going into this year, it's been pretty strong.
The underlying up like 20, and 21 budget deal is important to note and how that CR process clear through.
We'll be important but I do think that the majority of the work that we're going after we're bidding on will likely continue to be awarded.
Of course, there are new starts, but nothing that I would suggest would impact.
Significantly the long term outlook of the company and as you may recall once the Crs are cleared through they still have that annual obligations clear through and they have to work that in year so that.
May impact the timing of awards.
More than it does the the likelihood of at occurring.
Thank you.
Yes, good actually the question.
Oh, sorry, I wasn't sure if I've been moved on Kevin How many described the Companys positioning and act business activity around.
Cloud and kind of digital transformation of your customers.
Sure. So we're emission focused company and we help our customers migrate to future platforms that helps them with their critical aspect.
We're frankly excited that.
Our customers are moving to.
Environments and also that.
Commercial companies are investing in.
The right level security cloud environments that allow our customers to use multiple platforms and and cloud environments, it's going to help a lot from speeds it standpoint.
Standpoint.
So we're frankly excited it's a normal part of our part of our customers migration I'm going to let met Rick Let me comment on that.
With that as we from a capabilities perspective, as we go into cyberspace.
Mission IP and analytics, how that plays into that is all part of where we're heading as a company. So so we like the overall trends that we're seeing within the market in regards to your question I guess I would add that at our expertise and cyber uniquely positions us to two worked very well in that area.
Is it that would you say the if you were kind of parse out the elements contracts and so forth.
His fanatically is cloud and digital transformation of meaningful part of the business now and if not you expected to be in some sort of medium term.
We look at cyber enterprise I see secured enterprise IP admission IP all of those.
Currently have.
For we'll have some cloud migration cloud support activity and that just based on National policy direct so we do expect continued movement into that environment long term.
If I could ask a modeling question.
Judy if it's about 8% of the.
Annual guidance for revenue is organic that would make about four points are so if my math is right inorganic what sort of carry over.
No contribution.
Question from acquisitions should we be thinking about for 2020.
You don't need a dollar figure, but even some trite rough range would be helpful.
It's it's very small because in the Kgs acquisition was completed yes, right at the start of Q2, and then H. too and as I said is not.
Meaningful contributor.
And that of itself obviously, we've got it for a reason and we expect to expand within that customers that and on the vehicles, we got with that but it's not a meaningful inorganic component.
From 19 to 20.
Thank you.
Our next question comes from Bryan Keane Solar of Alliance Global Partners. Your line is open.
Hi, great. Thanks, so much for taking my questions.
You added more than 900 million in new awards during the quarter.
Im curious do you expect the majority of these programs are going to ramp in the fourth quarter. They already begun or will first half 20 be the stronger ramp period for you guys.
Hi.
I think it'll be there'll be a mix spent most of them are.
Starting off slowly and so you're we're working through that right now with customers. So we probably won't have a real good sense of it for until probably when we do the next quarterly call.
Okay.
Then.
You mentioned in 2019, you expecting that you'll have submitted the same amount of proposals than in 2018 actually that by 2019 2018 will be similar.
You made at least one sizable acquisition, obviously annual growing about 8% organically I'm curious in order sustained growth should we expect submissions are going to increasing 2020, and you'll be making some significant investments there.
Well our.
Level proposal pipeline is this healthy it remains healthy.
In the expected amount of business that we're going to submit next year.
Very good.
Depending on the customers moving forward and executing on the timeline that they've stated.
Or estimates are in and around that.
So so broadly we see a strong set of opportunities next year that we're going to be competing on.
And we think that'll help us situate ourselves for 2021 for continued growth.
How much more sizable it is against this year or last year is very much depended on the timeline.
Total government actually excuse for these RFP.
Great I guess related to that last question I have.
I'm curious the trends in when rates in new business opportunities I'd be slower than we can between 19 versus 18 17, I'm curious if theres been any material change is I'm trying to understand based on how much you're proposing how to think about growth going forward.
So generally we've been very much focused on and I think we admissions for the last few years, creating capabilities and bringing in more strong technical colleges to be able to answer innovation for the customer and provide solutions towards using future technologies.
And that has frankly paid off and we've seen increased overall when rates so that that just ups. The game in the environment and I can't guarantee that that win rate will sustain itself, but we think we've been doing fairly well and that the investments that paid off so were fairly pleased with the outcome. So far this year.
Great. Thank you.
Sure.
Thank you Sir our next question comes from Joe Denardi of Stifel. Your line is open.
Hey, guys. Thanks. This is John on for Joe Kevin in your prepared remarks, you talked about the new cyber security effort. That's been initiated by the Pentagon can you kind of elaborate on that a little bit more and is this an opportunity for mantech.
Well our industry needs to support the federal governments activities to protect the supply chain and to make sure that our cyber security infrastructure.
Support protection of critical data and systems.
Because we look into the day, an extension of the federal government on behalf of them in on that responsibility. So at a minimum we we say its table stakes for the future. If you want to do business for the government and where National Security company will be dedicated to do this on long term, we'll see what that does favorably for contractors.
It's very much dependent on.
On how the federal government works to execute that right now it is it governance driven activity.
We consider something we'd have to meet in order to do the types of where if we want to do for the customers that matter most.
Thanks, Hi, pivoting over to the labor market.
Can you kinda talk about the trends you're seeing in the marketplace. When it comes to recruitment and retention and are you where you want to be in terms of.
Being the destination for the technologists, who can help you with the cyber and the enterprise IP.
If not how you're going to get there.
This is Rick.
So obviously the labor market is.
Still extremely competitive for highly skilled and highly cleared people. We have put a lot of investment into two on recruitment engines and yes, it's paying off we're having record.
Creating this year.
You can see it NRG l., which is which is driving our revenue growth.
We continue to to improve our training programs, we're growing people from within.
I'm very pleased on that side and we continue to work on on our retention and improve those rates as well.
Excellent actually right now.
[laughter].
Very focused on this.
Perfect. Thanks, guys.
Even Judy can spell club now we're in good shape there [laughter].
Thank you. Our next question comes from Matt Sharpe of Morgan Stanley . Your line is open.
Good afternoon, and thanks for taking my question.
I just wanted to talk a little bit about cash here, specifically the DBSO dynamic at hand, when we look at the last several quarters. Obviously, you guys have done a nice job of.
Driving that down I think this quarter was 55 and last was call. It mid Sixtys traditionally the company I think it's been high Sixtys Seventys is there any opportunity there to to keep it at these sort of subdued levels and support cash flow or maybe you could just peel back the layers and just help us understand what.
Dynamic has been driving it roughly.
Yeah, I think you know in general we but we've been very focused on it I think we put some new processes in place a with with our finance teams and that and the customers on getting invoices approved faster getting things bells faster.
And then we historically, we see kind of a push on the government side in Q3 to make payments.
Before the end of the government fiscal year. So we definitely benefited from that this quarter I'm, So I'm not counting on it staying at this level at what.
Going to be a goal, but I think you know probably low to mid Sixtys. What are we spent the last few quarters is probably our risk realistic long term target right now.
Got it and then maybe just one question on competition. Obviously, we're a few years in here to an up cycle in the budget authority and outlays are starting to at least the budgets already starting to flatten out here a bit.
Has that dynamic started to change any of your should have competitive or your peers competitive dynamics are you seeing a more aggressive environment. At this point. It seems to me there's been a bit of an uptick in protest since late not necessarily for you guys, but the industry as a whole so I want to just get a sense of what you guys are seeing out there right now.
I think this is Matt I think that from a protest perspective, we're seeing really the normal level of activity that really just hasn't changed in this environment.
I think overall from when you talk about the budgets and other things. We our strategy is focused in the areas, where the government is putting their money and and growth areas. So we think that our strategy is well aligned to where the government is actually putting their dollars and then.
So we feel like we're well positioned for the future is to move forward.
Got it thanks.
Do you.
Valerie appears that we have no further questions at this time as usual and members of our senior team will be available for any follow up questions. Thank you all for your participation on today's call and your interest in Maintech.
Ladies and gentlemen. This concludes today's conference. Thank you participating and have a wonderful evening you may now disconnect.