Q2 2020 ManTech International Corp Earnings Call
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Oh, not like to turn the conference over to Steven batter, Vice President corporate development and Investor Relations.
Welcome everyone. Thanks for participating on our Maintech second quarter call.
Joining me today, Kevin Phillips, our president and CEO, Judy Bjornaas, our CFO, not eight or newly appointed COO.
During this call we will make a statement that do not a direct historical facts that 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 result.
For a full discussion of these factors and other risks and uncertainties. Please refer to section entitled risk factors and our latest form 10-K, and our other SBC filings, we undertake no obligation to update any of the forward looking statements made on this call.
Today's call, we will discuss some non-GAAP financial measures, which we believe provides useful information for investors. These non-GAAP measures should not be evaluated in isolation orange to substitute forgot performance measures you can find a reconciliation of the non-GAAP measures discussed on this call in our second quarter earnings release with that let me hand, the call over to Kevin.
Thank you Stephen.
Good afternoon, everyone first it is my hope that you and your families are remaining healthy and see given the continued impact to the pandemic across our nation Andacollo.
I will be covering a number of topics as such I will be structuring my remarks into following water.
Some review of the financial performance in the quarter.
An update on the impact of the pandemic owner business.
The broader budget and market environment and conclude my briefly addressing our previously announced management traders.
Mantech delivered another quarter of strong financial performance marked by exceptional organic growth EBITDA expansion robust cash flow and solid contract awards.
Our key financial metrics, all exhibited significant growth both on a year over year and sequential basis, even with that had derek impacting our entire work.
These results are driving us to increase and narrow the range of our 2020 guidance.
Judy will walk through the specifics on the quarter and revised guidance shortly.
Overall I'm pleased at how are people have adapted to change while keeping a steadfast focus on our customers critical missions.
Credit Manitex talented people for the strong continued performance of the business.
Moving to an update on a pandemic and its impact on the business. Today, we are fortunate that our participation of health safety and wellbeing of our employees has resulted in minimal direct impact to our business from the ongoing pandemic.
However, there's no doubt that some her employees their families and our communities have been impacted.
Recognizing this as well as the broader adversity brought on by the Benjamin.
We launched an initiative to fund raised for organizations focused on assisting those indeed.
I'm pleased to announce that we successfully raised over a million dollars just a few months into the effort.
Furthermore, the strength of the business coupled with the cares that coverage.
It's allowed mantech to keep its talent base intact without the need for promos for reductions and in fact.
Your hiring and did so aggressively and remotely and the second quarter.
We're thankful that the near term financial impact from the pandemic remains minimal as evidenced by the strong quarterly results.
Longer term, we are mindful that the impacted the virus on our industry in country will likely be longer lasting than initially anticipated.
We are continually evaluating what the impact may mean for us operationally and look forward to sharing details on the topic as our thinking about it matures.
Now onto the budget market environment.
Debates and negotiations are occurring on both the endpoint 21 in D.A. and appropriations.
However, we are still anticipating that the fiscal year is likely to begin entre continuing resolution.
In addition to the passage of the NDA and appropriations, we're very focused on the extension of the cares that coverage beyond September thirtyth.
The provision has allowed us and the broader industry to maintain tablets critical to national in the one security.
We are hopeful that members of Congress fully appreciate the continuing need for this coverage.
The flexibility to utilize in your appropriated funds to support partial mission ready time.
As these critical employees continue to fees into full time support.
As a significant value to national security and the ability to retain those high declared resources.
Should there be laughs it is possible.
In our broader industry may be forced the perla or take other more drastic measures with respect to the part of the talent base are unable to serve customers remotely in a fulsome capacity.
Our customers operational tempo and the approach remains largely unchanged from last quarter.
Many are continuing to operate remotely where possible and are exercising caution with reduced population densities and facilities.
Travel limitations and other risk reduction measures.
Some of the more restrictive measures enacted earlier this year, particularly within the intelligence community customer set.
Are being selectively and slowly east on a phase basis.
However, the environment remains dynamic and subject to change based on any improvement or worsening of the virus.
As it pertains to the demand side, we are experiencing delays with procurements in certain customers due to covert.
But the volume is picking back up.
And our full your expectations remain at a level comparable 2019.
That will give you a bit of color on the business development statistics for the quarter a little later on the call.
It is important to note that while customer demand has remained steady uncertainty seeping into our market driven by the economic social and political environment as well as the growing national debt.
It is premature to speak to how these factors may influence or 2021 and long term growth outlook.
However, we are increasingly cautious about the level and impact as well as potential longer term implications.
Lastly, we announced a new organizational structure and the Matt Taylor Chief operating officer affected the beginning of July.
We reevaluated our historic two group approach and decided to reconfigure our approach to three sectors.
Closely aligned to the segmentation of our federal customers.
The being intelligence defense and federal civilian.
This new structure will enhance our ability to leverage mannatechs differentiated capability across several markets.
No Judy will walk through the details of our Q2 financial performance and revised outlook Judy.
Thanks, Kevin I'm very pleased with the performance of the business in the first half of 2020.
Finding our footing and navigating through the complexity by the pandemic.
Overall the results in the quarter exceeded our expectations across all of our key measures.
Revenue for Q2 was $632 million up 18% and nearly 90% of the growth plus organic.
Sustained customer demand in the form of new contract wins and growth on existing programs served as the major drivers of growth.
Direct labor remains pivotal to our revenue growth.
In the quarter it perform 91% of our work as a prime contractor and our contract mix remains largely unchanged with approximately 69% cost plus.
19% fixed price and 12% cotton material.
EBITDA for the quarter was $57 million and grew 22% over Q2 2019.
EBITDA margin of 8.9% outpaced our expectations and represented a 30 basis point improvement year over year.
Margin in the quarter was driven by a number of factors.
The main driver was our robust direct labor growth due to strong hiring in the quarter and was bolstered by reduced leave taken by our workforce.
We expect to significantly below average lead friends to normalize and the balance of the year and certainly next year.
The second key driver was strong indirect cost management, most of which comes from nonrecurring cost containment measures enacted in the face of uncertainty from the pandemic.
The more notable items include productions to executive compensation, and the freezing of investment spend as well as reduced spend on travel conferences medical and other normal spend due to pivot.
Also as a quarter progressed, we experienced less than anticipated impact from those that were in a mission ready state as customers began to slowly ease restriction.
Now that we have a better sense for the actual level of the impact of that pandemic. We're in a position to adjust spending accordingly for the rest of the year.
The last noteworthy items that drove stronger margins in the quarter were positive adjustments of our estimates at completion for a couple of contracts that are approaching and this year.
The bottom line benefited from a higher than expected revenue growth and solid margins as well as a slightly lower than expected tax rate.
Net income was $30 million and diluted EPS was 74 cents for Q2, both up meaningfully compared to last year.
Strong growth was also evident in our adjusted figures for the quarter adjusted net income of $34 million, an adjusted diluted EPS was 84 cents up 21, and 20% respectively from last year.
Now onto the balance sheet and cash flow statement.
For the quarter, we collected $62 million and cash flow from operations, representing 2.1 times net income.
Customers continue to pay on a timely basis and our DSO was 63 days at quarter end Expedia improvement from last year, and one day better than last quarter.
We distributed $13 million in dividends for the quarter.
The board has authorized us to maintain our quarterly dividend level of 32 cents per share to be paid in September.
Given the current rate environment and the quality of our balance sheet. We believe the current yield of approximately 2% is quite attractive.
At quarter end, we had $30 million in cash and 20 million of debt.
Over the course of the quarter, we repaid a majority of the draw against the revolver as thankfully the need for increased liquidity did not materialize given normal payment processing and that the capital markets began to show greater stability.
Our stellar balance sheet and strong cash flow continues to afford us flexibility in investing for growth.
We are actively reviewing M&A opportunities as we have seen the market return and we will execute on those that are strategically and financially compelling fits for mantech.
Now onto our revised 2020 guidance.
Based on the strength of the performance to date, we are raising and narrowing our ranges for revenue adjusted net income and adjusted diluted EPS as compared to our previously communicated guidance.
We now expect revenue to be between 2.4, or 5 billion and 2.5 billion, which represents 10% to 12% year over year throat.
Our backlog continues to provide good visibility for the balance of the year.
The five principal drivers and variability in our guide continue to include the timing of contract awards, our success in winning new and Recompete business the pace of hiring in ramping new and recent contract awards.
The level of material procurement.
And whether the cares Act 36 10 coverage is extended for Q4.
Turning to margins our guidance assumes an EBITDA margin now of 8.8% for the year, representing a 10 basis point improvement over 2018 solidifying the upper range of what we previously communicated.
Second half margins will be impacted by the expectation that employee leave and other indirect costs will normalize a catch up a full year investments over a six month period and lastly, the uncertainty of 36 10 coverage for Q4.
To clarify the 36 10 extension risk our guidance reflects our best estimates based on our current observed impact in the first half, but should there be material changes and the trajectory of the pandemic there could be incremental impact to the guidance provided.
At the bottom line, we are expecting.
Adjusted net income between 127.6 million and a 130 point threemillion and adjusted diluted EPS between $3 in 14 cents and $3.21.
Underlying these guidance ranges are an effective tax rate of 24.7% and fully diluted share count at 40.7 million shares both of which are down slightly from previous guidance.
Now to cash flow, we're increasing our expectations for cash flow from operations to be at least the 175 million for the year.
This represents a 17% increase from our prior guide.
We continue to anticipate capital expenditures to be between 3% to 4% of revenue.
Now over to map to cover the business development and operational highlights in the quarter.
Thanks Judy.
I'm excited to join the call today at Mantech, Chief operating officer and share some business development and operational highlights.
Bookings totaled 663 million, resulting in a little over 1.0 book to Bill.
Sole source expansions in extensions with classified customers drove the majority of bookings in the quarter.
New business awards represent over half the bookings over the past 12 months.
Our total backlog was 9.2 billion and funded backlog stood at 1.4 billion both holding steady.
We are seeing contract consolidations continue to occur in segments of our market and over the last few years Mantech has strongly benefited from this trend.
However, this quarter, we experienced a mixed outcome on a couple of efforts.
Most of this work would have been new for Mantech, but I wanted to note that there were components of the overall awards, where we were unencumbered.
Our success rates will not be perfect on these consolidations, but overall, we expect it will remain strong.
Exiting the quarter, our proposals outstanding figure stood at a healthy level of approximately 6 billion.
I am confident that we have the right team differentiated capabilities and competitive pricing to drive bookings consistent with our record over the last few years.
We continue to see ample opportunities for continued growth and I look forward to leveraging mantech strong capabilities across the federal market.
On the operational front, our ramp up of the Navy NPR Ray program is going well and at a steady gradual pace.
Hi, My name is holding to 18 to 24 months to fully ramped the program.
Has touched upon earlier, we are seeing very strong hiring in the quarter.
Certainly higher than anticipated despite the pandemic.
This as well as they reduced employee Lee and less than expected impacts from individuals and a mission ready state are all driving factors in the robust level of direct labor in the quarter.
With that let me hand, the call back over to Kevin for closing remarks.
Thanks, Matt.
In closing, let me leave you with a few thoughts before we take questions.
The business has shown incredible resilience and remains focused on growth, even amidst the more uncertain macro and budget environment.
When emphasized that mantech into his customer in contract diversity with differentiated capabilities in cyber analytics and ITM Simpson's modernization, where we expect demand to remain steady.
Demand is being bolstered by the persistent elevated global threat environment.
Changing customer operating postures brought on by the pandemic and the broader trend of cyber and digital transformation across federal government.
We are working at the heart of critical customer missions, and our focus on technology to enable customer emissions as favorable.
Our continued commitment to shareholders is to drive value through growth, both organically and through M&A.
Before we turn to questions one off from my continued thanks to those who are operating on the front lines in fighting this pin debit.
We are genuinely grateful for all your efforts over the past few months and for the foreseeable future.
Operator, please open the line for questions.
Thank you as a reminder to ask a question you'll need to press Star then one on you touched on telephone to withdraw your question from the Q. Please press the pound key.
Please standby will be compile the Q in a roster.
Our first question comes from Tobey Sommer Suntrust. Your line is now open.
Hey, good afternoon. This is jasper beds filling in for Tobey I was hoping you could update us on the space range program and some of the opportunities you're seeing on that front.
So yeah. This for the space range, we actually are having a lot of very good conversations with customers. We actually have built up a very.
Very significant pipeline. So we're excited about that I'd say more details to come on that in the future.
But we're very excited about the traction we're getting there.
Thanks, and then just on the updated revenue guidance.
How much of a top line headwind does assume for cobot billing impact.
Really not that much it's.
We.
Got you most of.
Everything covered in Q in Q2, it's been dropping as Kevin talked about in Q3, and then depending on what happens in Q4, we feel like the guidance range is broad enough to cover most reasonable possibilities around what might happen with that.
Great. Thank you very much.
Thank you and our next question comes from South Hong Kong with Cowen. Your line is now open.
Yes, Judy I was wondering if you could first give us some color on the margins how much of a benefit was isn't the.
Hey, see adjustments in the quarter.
I would say.
You know a little bit more then that we usually see from quarter to quarter.
But probably it was offset.
Was enough, but offset basically the lost fee on the code that labor so it kind of washed out.
Okay.
And then just stepping back and looking into next year based on what you've booked this year on what's in the pipeline.
Do you see a case for margins to expand next year.
I think it's a it's a little premature right now to talk about 2021, there's a lot to happen in the next six months I'm. We're outperforming this year and I think the Q3 call maybe we'll be in a position to give a little more color on 2021.
Okay and.
You did talk a little bit about the M&A pipeline starting up again I was wondering if you could talk about.
Just the types of things you're seeing are you seeing.
Smaller.
Acquisition opportunities or they are you seeing some big ones as well sort of what characterizes the pipeline if you can characterize.
It's Kevin it's fairly broad I mean, there was a pause based on uncertainty as you know in terms of financing and just your role environment and early Q2, and it's a fairly broad range of businesses and assets.
So I take the normal plus a little bit heavier flow on smaller to mid size, but you know some of them are fairly attractive and it's it's good to be able to.
To get back in the into group and looking at opportunities and seeing how they couldn't the business.
Thank you very much.
Thanks, Don.
Thank you ladies and gentlemen, our next question comes from Brian Kinstlinger with Alliance Global Partners. Your line is now open.
Great. Thanks, so much and Twoq is not seasonally a strong awards quarter and I'm wondering how cobiz impacting I think you talked about it last quarter as a potential risk the and the sales cycle on the procurement cycle. So do you think that in spite of cope with the third quarter will still be as typical.
Early seasonally strong as it usually it in terms of awards and then how do you think.
Co bid impacts if at all contractors ability to displace incumbents on existing programs.
So I think what we're saying is we're expecting to see choppiness through the rest of the year just because there is so much variability with what's called it.
We thought our 1.0 book to Bill was pretty reasonable given all the circumstances that we're going on there.
And then on terms of.
Hi, I think you asked a question about you know do transitioning work from an incumbent or to an incumbent.
And I think Thats really that's very specific to each program into each customer in terms of how they're dealing with it I mean, you have to remember a lot of our workforce actually is their day did not change they are still out in the field still on a lab still a secure.
So we still have a lot of folks that are still going corn fed government places every day.
And when you talk about bookings.
Spreading are you seeing that typical third quarter, a seasonal strength may slip into the fourth quarter and third quarter might not make up as high a percentage of bookings is it typically guys.
Yeah look theres a lot of proposal activity just picking back up but the timing what we're seeing is uncertain. We don't know when the government will be awarding those based on these conditions.
So yeah, it's uncertain can't and how you get away.
And then did I hear.
Correctly, you Didnt Mantech and you see meaningful contracts exactly what you're trying to say and if so can you size those losses on an annual basis in terms of revenue.
No that sorry that was not what we're trying to say, it's just set to look at the in the past consolidations have helped us but this quarter. We were just less successful we have a very diverse.
Business and we have no large contracts or anything like that that we are concerned about.
Great last question again can you talk about what percentage of your billable staff is working remotely versus which ones.
And are able to work at the program site.
Sure and or.
What percentage of your programs may be more frozen or delayed.
Yeah, I'll speak to the ladder for take about the number of people that were put into a mission ready state at the beginning of this crisis.
Maybe 12, 13% of our population had some number of hours that they had to spend not on site because that's the adjustments customers were making for social distancing and things like that.
Full time.
On the cobot charge, but part of that time now that members closer to 8% of our population is is.
On some number of hours, but those number of hours that are dependent I would say on this mission ready state coverage is declining as well.
So it's it's declining it's not a huge number but for companies in our sector. It's still a large number of people.
That are needing to use some of that mission ready time until the customers are fully operation, where we have a good safe.
Now I would also note that.
There are a lot of stringent measures at federal facilities in our facilities that are really making a difference in preventing ur cobot spreads.
If theres any cobot spread happening that we're seeing recently, it's more for people that are kind of working so I'm very optimistic about what we're seeing with the customer sites and our facilities about security measures of safety measures.
Great. Thanks, So much you are doing.
Yes.
Thank you. Our next question comes from Joe Denardi with Stifel. Your line is now open.
Hey, guys. This is John on for Joe Good quarter.
I want to first just touch on the labor market you guys are up about 300 employees.
This quarter can you guys just give us some color on what you're seeing broadly in the labor market and.
Kind of talk to your success in.
Ramping up the number employees given that shoot six months ago, we were in such a tight labor market.
So look I think that first of all the labor markets still competitive for sure, but one of the things that we feel that we've done a great job of is we already had some full virtual onboarding programs to start with just because the bus beans, and 30 different countries and that has really been something we were able to scale varies.
Quickly to continue to higher without really.
Having any get whatsoever. So we felt so we've actually.
Found that that was something that I would say was a program. We just we didn't through to accelerate the hiring for us.
Got it.
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I'll briefly the infrastructure in the investments we've put in place over the last few years to help grow the business, but also to to make sure that our workforce can securely work.
In the location is really paid off.
Well it concerns the national structure for Teleworking is really strong too. So I think thats things really worked out well it was uncertain, but there's really worked out well in terms of our ability to bring on a remote workforce and also support our remote.
Thanks, guys good color.
Well just have it now to the M&A environment.
You guys had been always been very disciplined above your approach I just want to get your thoughts around.
How you approach now going into a very different election year than we've seen in prior years.
Are you starting to kind of place in that that.
Political risk and how does that kind of affect your decisions when it comes to defense versus civilian customers.
That's great question. We appreciate that if you look at the general I'd say view platforms of administration. So it's hard to see ultimately what the overall discretionary budgets will be in how they allocate that but just the macro would suggest that there's going to be a lot of focus on that spend.
That said.
There's a continuing prioritization to focus around space around cyber around all things digital.
And we believe that.
Within whatever that budget framework is gonna be we're in a good space.
To be able to continue to grow the business.
Once.
Elections are over into termination sure about who's going to be in what role both in the executive branch and Legislative. France. Then then we'll look at the federal budget trends and be able to move quickly.
About that and see what we wanted to just like we have for the last 50 years, we'll adjust on the flies things as they start looking.
But.
We still are focused on in defensive DHS department of state.
Federal health those continue to be areas of focus for us on that side of equation regardless.
Awesome and then just lastly, if you guys could.
Kind of talk to you are two different customer sets again defense and civilian are you seeing a difference in their awards approach thus far in third quarter.
Specifically, our certain contract customer sets opting to do more sole source or extensions.
Is that kind of what's driving the.
Choppiness or is it simply more a function of working remotely and not being able to perhaps.
Team with the numbers as effectively as they did last year.
That probably give you to answer of all the above right. I mean, I think all of those things are contributing to the what we're talking about in terms of Choppiness moving forward.
Thank you guys.
Yes.
Thank you question comes from Louie Dipalma with William Blair. Your line is now open.
Kevin Judy Matt and Steven Thank you for taking my questions.
Yeah.
And Matt Congratulations on your promote.
Thank you Sir I appreciate it.
So there there has been a lot of investor discussion about election risk and Kevin you just addressed the topic, a little bit and during the defense downturn in 2012, and 2013 and which Kevin you are.
Yeah. So mantech had its m. rap S. Three and mobile cell tower contracts that were heavily tied to OCO funding and Afghanistan and then the wind down of these programs obviously pressured revenue back then.
Am I correct to assume that things are are different now and you don't have these types of transitory contracts today in your and your revenue base.
Yes, so we have a much more diverse set of contracts both in revenue size as well as the type of work we do.
And over the last five or six years, we've been very focused on investing in areas, where we think the long term growth will be supporting our expansion into his work out and if you again, if you look at zero.
Platforms and priorities, we think that those are going to need to be within whatever that framework is in terms of the budgets positive. So so we we are done a lot to reposition the business and we're very.
Uh huh.
Great and Kevin and for the team I guess you highlighted in your press release, how a large portion of your $667 million in bookings this quarter came from extensions of classified contracts.
And Mantech is generally unique in that you don't have a lot of these you know mega.
Contracts.
I was wondering.
For your your revenue base are you able to share like the general split break down between classified revenue and revenue that comes from.
Non classified contracts and you know related to this would you say that.
Classified contracts have the same degree of of stickiness as like General I T and cyber contracts.
So yes. The answer is we if you look at our Investor information about 40, 45% or businesses, where do the intelligence community.
It is sticky and that you do have to have approval to support the government and those in the people have to have clearances.
But.
Look at the business, whether it's in the intelligence community or outside of it.
We're over half of our businesses and sovereign until I see today.
Those are going to come to be a priority.
And again the to the need for the types of technology as across all the different customers since we have.
It's going to continue to grow the space on the overall global environment and depressed.
Thanks.
Thank you and as a reminder to ask the question you will need to press Star then one on your touched on telephone to withdraw your question from the Q. Please press the pound key.
Our next question comes from Mariana Reservoir with Bank of America. Your line is now open.
Good afternoon, everyone.
Hello.
So I will follow up on the elections and budgets questions.
They are increase like investor concerns on the flattening defense budget and the defense services contract source are being punished in most of everyone. Since then.
Long term town.
Both purchase any sense Brian.
So can you discuss how its month its position now with the setup sits on top of Edcs with the body.
The longer on larger contracts the party bundling Paula Deen.
Flows to the flattening defense budgets.
Yeah. So if you look at Great question. If you look at the $9 billion backlog, we have the term of contracts is on average five years.
So that gives you some visibility and those are already.
Kind of baked in in terms of the demand signals that by 21.
You know appropriations and then da that's already fairly set in terms the amount.
So most of the discussions that we view would begin to 22 forward.
You have how how.
Funding would be prioritize injury appropriated if need be.
But again everything we're seeing is states for suggests that the technology use in different customer sets is going to continue if not go faster.
The more dynamic based on what's happening in the market. So we again were fairly comfortable with where we are recognizing that it's fluid situation than we have to look at broader set of.
Outcomes.
Our industry.
And I would just to add kevins point is that you know the threat environment is he's not changing and so we still see where we are focused as where those demand signals. We believe will continue.
Your next time.
It is related to taxes.
According to the last tax reform.
Targeting 2020 to research and development. These actions will will have to start the almost twice over five years like one here how is that.
Good I bunch of cash taxes.
They'll be they'll be a little bit higher we don't we don't have we had a big picked up from the R&D credit that'll that'll start being amortized in 2022 over five years, but the per year amount of that was not big we we basically had a big pickup for.
Re filing multi years.
And then we'll have you know we'll have to pay they.
The payroll taxes that were not paying right now because of the cares Act also in 21 and 22, but that doesn't flow through that the tax line.
Okay, but those are not expected to be a significant headwind.
No not on it.
If we especially and you on our M&A front, you know our tax cash rate significantly lower than our book tax rate.
Okay.
One could you please remind us the recompetes. We competed with forward that remain healthy year next year.
So next year, we're expecting a normalized recompete year about 20% to 25%.
Theres not a lot of Recompete a risk in the 2020 guidance.
The Recompetes that we have our you know kind of spread over the next six months and not a significant amounts. So I'm kind of worked through a lot of the 2020 recompete risk in the normal 2021 Recompete grass.
Oh, Thank you very much.
Thank you. Thank you.
Thank you and I'm showing no further questions in the queue at this time I'd like to turn the call back Stephens author for any closing remarks.
Thank you all for your participation on today's call on your interest in Mantech as usual and members of our senior team will be available for any follow up question I have a good evening complete stay safe.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.
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