Q4 2019 Earnings Call

Good day, ladies and gentlemen, and welcome to the Mantech fourth quarter fiscal year 2019 earnings conference call. At this time, all participants are in listen only mode.

They don't get out the question answer session and instructions will follow at that time.

And what sort of course this during the conference. Please press Star then zero and you touched on telephone.

This conference call is being recorded.

I would like to become so would you see the bathroom, Vice president corporate development and Investor Relations.

Welcome everyone. Thanks for participating on me text fourth quarter call on todays call, we had Kevin Phillips, President and CEO, Judy Bjornaas Executive Vice President and CFO.

Matt fate, Rick Wagoner or two group president.

This call will make statements that do not address historical facts and that's are forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act is 1995.

These forward looking statements are subject to factors that could cause actual results to differ materially for me anticipated results for 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 FCC filings.

We undertake no obligation to update any of the forward looking statements made on this call.

Finally on todays call, we will discuss some non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures shouldn't should not be evaluated in isolation or as a substitute forgot performance measures you can find a reconciliation of the non-GAAP measures discussed on this call and 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 result, driven by Manitex differentiated market position.

We enjoyed another consecutive year of strong and consistent financial performance.

For the year organic revenue growth accelerated to the 9%.

EBITDA grew 17% and EBITDA margins expanded 30 basis points.

We collected $221 million from cash from operations and our book to Bill stood at 1.3 times, placing us on an excellent path for continued growth.

I want to thank our talented employees, who steadfast support where customers and their missions resulted in an excellent performance.

Overall I'm pleased that we're consistently executing and that our growth focus truck strategy is maximizing value across all over 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 kind of which seven times book to Bill.

In the year, we won a total of $2.9 billion in contract Awards, a 1.3 times book to Bill.

Which provides a solid foundation for continued growth in 2020, <unk> and beyond.

New business made up approximately 50% 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 in our key capabilities and systems engineering, Cyber hi, tea and intelligence operation support.

Nearly a third of our bookings run a sole source basis, which coupled with our competitive wins clearly indicates manitex customer recognized differentiation.

We enjoyed a healthy level proposals permits in 2019 and run 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, though.

Our customers appetite remained strong for Mantech innovative solutions.

As a result, we're 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 her healthy pipeline offers us a solid growth.

Sure exactly for growth.

Mantech will speak to additional details on this award later in the call.

Now shifting briefly to customer budgets from the market environment all of our customers are operating under the appropriations enacted in December.

With clear funding levels customers remain focused on speed and innovation of solutions. It gets critical mission requirements.

Last week, the precedent released its up about 21 budget request, which calls for $705 billion for defense and maintains the spending level set the f. why 20 appropriations.

The request calls for increased funding and cyber systems modernization space autonomy and artificial intelligence all areas, where mantech is strategically line did 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 in action to defend against threats and 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 innovation and solutions as clear as.

As such we remain focused on strategically investing in talent and capabilities to preserve and sharpen our competitive advantage.

No 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.

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 gross on existing programs and our strategic acquisitions.

The fourth quarter revenue was $604 million up 22% and 15% on an organic basis.

Strong July.

Strong direct labor growth was evident in both the quarter and the full year myself.

Lastly in the quarter, we enjoyed strong contribution from fulsome ramp up of our recent contract awards and an uptick in Odcs.

For the year, we perform 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 billion and diluted <unk> asked with a dollar force per share in Q4.

For the full year net income was $114 million and diluted EPS was $2 and 83 Sir.

Net income and EPS for the quarter and the full year were both up meaningfully compared to the respective 2018 periods. As a result of two primary factors strong operational performance and a discrete tax related pick up.

In Q4, we recorded a reduction to our income tax expense of approximately $12 million, resulting from the reassessment of current and prior years research and development tax credits.

Excluding the impact of the R&D tax credits, 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, Yeah, which excludes discrete tax items as well as the impact of the amortization of acquired intangibles also demonstrate its healthy growth.

Adjusted net income was $33 million and the delivered adjusted diluted EPS was 81 cents up 39, and 37% respectively.

For the year adjusted net income was $117 million and adjusted diluted EPS was $2, a 91 cents up 19% and 18% respectively.

Now onto the balance sheet and cash flow statement.

For the year, we collect a $221 million in cash flow from operations, a robust 1.9 times net income.

Yes, I was 59 days at year end, a 14 day improvement from last year.

We distributed $43 million and dividends for the year, maintaining a study return of cash to shareholders.

At year end, we had $9 million in cash and $37 million of death.

Given the strength of our balance sheet and expected cash flows. The board has authorized us to raise our quarterly dividends by five cents per share to 32 cents, a 19% increase from current levels.

This dividends will be paid in March and equates to an annualized dividend of $1.28 or a yield of approximately 1.6%.

Now onto our 2020 garden.

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, an eight cents 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 29 team coupled with her.

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 topline 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% kind of fully diluted share count at 41 billion shares.

Cash flow from operation should be at least $150 million for the year.

We expect capital expenditures approximately 3% of revenue was 400 week.

[laughter] variability being driven by actual program acquirements.

Longer term, we expect capital expenditures to trend lower to more normalized level.

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

Thank you Judy.

I am pleased with Mantech mission solutions and services performance in 2019, and look forward to driving the team to another successful year.

Throughout the year, we enjoyed success and securing both new business and Recompetes.

In the quarter, we successfully retained a 67 million dollar five year recompete, providing scientific and technical support for the Marine Corps systems Command.

Overall I'm pleased with the performance in the year and carrying forward 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 work.

I want to know that we have been awarded a five year 920 million dollar contract by fed Sir.

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 the where.

The government is currently reviewing the press release.

Specifics about the program and the objective of the contract will be detailed in a forthcoming press release upon formal approval.

Right over to you.

Yes, Matt.

Rentech mission cyber and intelligence solutions enjoyed a stellar 2019, particularly in driving growth.

Painting, Recompetes and hiring differentiated talent.

In quarter four we successfully delivered full operating capability on our large cod enterprise I T 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 29.

There are two 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 help reduce our 2020 recompete risk within our intelligence community customers.

Both of these trends further from for differentiation and the value that customers find it under solutions.

As we look for 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.

Hi trick in closing, let me reiterate the we're very pleased with our 2019 performance and a one leave you with three key messages before you jump in the questions first the worked at Mantech reforms is very much at the heart of our customers mission, we're thankful for their sets asbestos.

Second our talented employees or the source of our differentiation and as such growing in developing them has been and we'll continue to be a key management priority. Finally, Mantech unit growth story remains very much intact and our confidence is rooted in the strength of our talented people.

Deep customer relationships and differentiated capabilities. We said we are ready to take your questions.

Thank you have you have a question at this time. Please press the Star then one key on your Touchtone telephone.

Your question has been answer you what do you wish moved yourself into Q. Please press the pound here.

Our first question is from glottal comment of Cowen and company. Your line is open.

Hi, Thanks, Good afternoon, guys, Hey, Brad Hello.

Hey, 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 related Lee.

On the new presentation of earnings adjusted earnings.

What a level of intangibles amortization, specifically is a is contemplated.

And that was excluded from that number just so we can compare apples to apples.

Yeah. So that's the first question I'm on an organic basis. It is.

Yeah, We did one acquisition at the end of Q1, and we did one acquisition.

And you know mid Q3, so 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 it's going to be relatively similar to that and 2021.

Okay. So it's about 40 cents or so is that what the rough math would work out to be.

Yeah.

Yeah Okay.

Then on the 920 million dollar contract win could you talk a little bit about.

Did you say anything about it as a cost plus as a time and.

Sort of the margin profile and how quickly it might ramp.

In 2020 sort of what the contribution is there.

You know what the transition as to ramped up from sure I got them its Matthew.

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 that's the expectation that's about all I can answer on your question. So hopefully that helps.

And then May I ask a different one then perhaps on the was that a greenfield project or was it a was there an incumbent and therefore.

Might there be a protest and might there be.

And extend to transition to that 18 to 24 months.

Yes, 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 so our knowledge. It has not been yet, but we're in a timeline, 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 and protest.

And is it new new work to the industry or is that.

Was running card.

Yes. It is there is for the most part this is mostly new work for us.

Thank you very much guys.

Thanks, Doug.

Thank you. Our next question comes from Edward Caso of Wells Fargo. Your line is open.

Hi, good evening, congrats on a nice print chair.

Sure, Yes, Kevin them your thoughts on the timing of the budget decision for for 21, given the election I've heard some say.

Early some say CR until after I'm just curious your thoughts.

So my view at the authorization process will work in color regular order the appropriations pop process, though may get hung up into a CR. After the election simply because of the timing of of decision from funding it could move earlier, but my general view us authorizations will move quickly appropriations.

Absolutely.

[noise] can you talk a little bit about employee attrition here are a voluntary attrition.

Hi, it's been running fairly consistently for the last two years, it's important for US we spend a lot of time and energy on that I would say that market continues to be very robust for talent.

We're all working towards two things in the company investing in re training individuals into these future careers.

The next certainly in the market, making sure that that we provide competitive packages to attract.

Can you remind us how much percentage of total you have of your employee base and a greater DC area and how much outside and if you could.

Make that attrition comment for that to those two geography.

Don't have the two geographies in my head a little over half of our employee bases in the region.

And.

Because competitive everywhere, it's a matter or customer's ability and willingness to distribute the workforce based on where people want to work and listen there's active discussion as you know.

What has happened with industry and or customers on that.

Great. Thank you.

Thanks, Ed.

Thank you. Our next question comes from Joseph Denardi of Stifel. Your line is open.

Hey, good evening, Kevin I think the growth rate that you guys are generating continues to surprise investment community, maybe maybe it's not surprising you all but.

Really surprising us can can you talk about what do you think is driving that is it better win rate that alignment there just more coming to market and then when you look at what you expect to bid on this year Cindy you win.

You kind of your fair share.

Does that sustain the growth rate kind of continuing into 2021 or is it does the budget environment start to kind of moderate growth. Thank you.

As a lot of questions. So make sure I can I'll wrap up the 2020 infrequent that's why 20 and 21 budgets that got cleared through in my view allow us all a pathway into a two year budget cycle and I think the customers have fair.

The for 20 around what they need to procure and their procuring Andy.

Regular if not rapid pace sitting 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 is driving different behaviors from the customer.

We're investing towards where we think that and have been toward where that's headed.

I think that along with the capabilities that we have around cyber I see somebody analytics capabilities and.

Huh.

Intelligence operation support provide us a a good placement in the market at a point, where theres a greater demand.

And then kind of to date with it within the government fiscal year are you seeing customer behaviour procurement activity accelerate slow down whats your expectation for what the election cycle means for their procurement environment. Thank you.

Criminal activity is heavy.

Coming of awards this uncertainty, but preferred German activity to seven is expected to be at or above last years level.

Thank you.

Thank you.

Again, if you like ask question. Please press Star then one on your Touchtone telephone.

Our next question comes from Tobey Sommer Suntrust. Your line is open.

Thanks wanted to ask your 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 from looks like.

Yeah, I mean today, we haven't seen in either on our backlog or the wins a significant shifts 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 deo decide to move towards a little more fixed price, but today that has not.

Fluid flow through all the way to backlog and performance.

Yeah, I think what we're also seeing in the market is while customers. They want to have the more of a value based an outcome based and what we prefer solution based conversation. So all those things are are kind of happening, but that's separate from the type of contract. So it's almost two different conversations that that you're having out there in the March.

As we move forward.

This is Rick can you tell you that.

We are beginning to see them look at this especially in the ITC 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 the.

And when you think about your new business win rate, what does that Ben like in or does it so conveyed to you that.

You should bid more or you're bidding the right amount kind of what's the.

What's the take away from the when right from your perspective.

It's Kevin look we're pleased with our overall win rate vote, Recompete and new real give a specific numbers, but we're pleased we've been investing heavily in solutioning and proposal activity in an ability to.

Compete on on a broader scale against these these.

These efforts and.

So I'm happy with what we have I think we're in a strong position to compete it's 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 a different way or use your growth and.

BD it is that a growing at about the rate of the company in your guidance for this year or is there a a difference.

[noise] proposal volume has over $20 billion or investments are higher because we feel that we can afford to do that we're directing the money and we're going to continue to focus on that.

To expand our public.

Thank you last question for me you mentioned, a several areas of the President's budget request, what are sort of at the top two areas of spending growth in that request, where the company plays and you stand to benefit the most.

Let's think about the the use of cyber and automation you can call AI ml, whatever advancement to work to speed to decision making.

Those are areas that that companies like Mantech can.

Can differentiate ourselves and the need to make sure that are greater security.

Around data and systems.

We'll also continue to be growth the areas that we don't play that have increased for like hypersonic trade to major new develops systems that they are building.

To to compete more globally for new weapons systems.

Thank you.

Our next question comes from Gautam Khanna of Cowen Your line is open.

Hey, sorry to keep asking questions like I thought it was worth asking though the 6 billion plus of outstanding bids as that net of the $920 million win.

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

Okay and so its subsequently been award.

I was curious what do you anticipate the up.

The profile of the contract awards will be by quarter. This year do you have a sense for obviously Q1 by definition is gonna be strong given this win but are you also see in 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 to it's hard to speak to pacing, we can speak to when they're requesting submittals, but the timing of their evaluation in the following award.

That said, it's not something we can provide consistency on or visibility into.

Understood as it is it worse than before or is that kind of the same.

In terms of our things moving out core.

It's it's safe to say, it's the same yeah. 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 procurement shop is that the delays with timelines.

Got it.

Then on the M&A pipeline can you speak to what you're seeing other promising targets in the pipeline and if so any sense for the scale of the.

The opportunities midsize candidates larger ones.

Yeah I.

Yeah, I'll start and then yeah and any of that other gentlemen, here with me Ken can chime in.

There is a very active pipeline of opportunities. The the M&A market is very active right now with all sizes of opportunities from you know the typical tuck ins that we tend to do around the you know 50 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 you know looking at.

Capabilities on customer side.

And you know so trying to to maintain our pricing discipline in a and then expensive markets.

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 we'll maintain our discipline as we continue forward.

Yeah into the last point any thoughts to I mean is there any greater emphasis put on.

Non diodati non Intel you know traditional federal civilian.

Agencies were expanding kind of the pie.

For what traditionally has been manitex from data Yeah, certainly has been Matt. This is Kevin need a broadly we think is DHS is an equal.

National security and how much security demand and need.

As Cody and so we are continued to focus on there. We also continue to focus on.

The overall health care component for our veterans as well as her I could do.

And we'll selectively look into other federal civilian agencies based on their mission requirements.

All right. Thanks, a lot guys.

Thank you next question comes from Joseph Denardi of Stifel. Your line is open.

Yes, thanks to just one more.

And you mentioned the two 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 than a 20 2021 for you. Thank you.

Okay, well 2019 was based on the prior two years I think 2021 is what we're looking at and I think Thats your budget deal.

Will allow for the mission requirements from the proposal volume to continue for the next.

12 to 18 months.

And we'll see what happens later on based on election cycles and requirements.

Got it thank you.

Thank you.

On yet.

Here is that we have no further questions at this time as usual members of our senior team will be available for any follow up question.

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 participating.

Have a wonderful day you may now disconnect.

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