Q1 2021 ManTech International Corp Earnings Call
[music].
Ladies and gentlemen, good afternoon, and welcome to the Mantech first quarter of fiscal year 2021 earnings conference call.
At this time, all participants are in a listen on email.
We will conduct a question and answer session and instructions will follow at that time.
The one should require assistance during the on France. Please press Star then zero on your Touchtone phone.
And as a reminder of this conference call is being recorded.
I'd now like to turn the call over to Steven <unk>, Vice President corporate development and Investor Relations. Sir. Please go ahead.
Thank you welcome everyone. Thanks for participating on Mantech first quarter call. Joining me today is Kevin Phillips, our chairman CEO and President Judy B, Jordan, our CFO and Matt tape of our C O L.
During this call we will make statements that do not address historical facts and Thats. The forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
These forward looking statements are subject to factors that could cause actual results to differ materially from anticipated results for a full discussion of these factors and other risks and uncertainties. Please refer to the section entitled risk factors in our latest form 10-K, and our other SEC filings, we undertake no obligation to update any of the forward looking statements made on this call.
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 first quarter earnings release with that let me hand, the call over to Kevin.
Good afternoon, everyone and thanks for joining the call Matt.
Mantech of continues to perform well overall.
Our first quarter results demonstrated steady execution and strong profitability, which was evidenced by our EBITDA adjusted net income and adjusted diluted earnings per share as well as our margins.
While our industry and company have fared better than others on the road relative basis over the past year.
Hey, endemic and as duration has created a somewhat choppy operating environment.
As a result quarterly revenue growth was tempered by lighter otc's and customer procurements of shifting to the right.
While procurement delays persist in pockets, we made good progress on submitting proposals in Q1 and the volume of proposals outstanding group.
The uneven market environment is likely to linger for a few more quarters.
However, the long term fundamentals and positioning of the business remain sound.
Our view is reinforced by a few secular trends, namely the fact that national security threats are not abating and that there is of persistent need for technology modernization for both IP and physical platforms with an increasing convergence of the two.
That said the associated market opportunities are still bound by budget realities.
The administration recently provided their FY 'twenty two budget request.
Which calls for 753 billion for defense and 769 billion for non defense.
Which represents the proposed increases of approximately 2% and 16% over enacted levels respectively.
We look forward to seeing the details of the request later in may to confirm our understanding of the administration's priorities.
It is sort of hope that the budget details of released in the near term to provide our customers with sufficient clarity into their funding levels against the critical mission requirements.
Our country's national security strategy continues to place an increasing priority on the touring near peer threats.
The substantial shift away from the two decade strategy centered on the global war on Terror.
This strategy is materializing on a number of fronts, including of decision to depart from Afghanistan by September 11th of this year.
As a reminder, mantech exposure in country today is relatively small representing low single digits of annual revenue much different from where the business was 10 years ago.
We view the drawdown of our military presence in Afghanistan as a potential opportunity for the Dod to repurpose funds towards technology that will advance modernization and bring new capabilities to meet the near peer of National security threats.
Many of you have been on this journey through us.
With us to evolve the business towards delivering differentiated solutions as well as pursuing customers prioritize innovation.
This focus on positioning of execution remains the top priority as we begin to operate in a potentially more rigid budgetary environment.
I'll round out my market commentary by noting the Ciber remains an enduring national priority.
The administration is recruiting well experienced thought leaders key cyber positions and recently named it as the cyber director and a leader the cyber security and infrastructure security agency, adding breadth and depth per broaden their security team.
The types of solid reputation and distinguish the full spectrum cyber capabilities position us well for continued growth in the stomach.
Shifting gears to talent.
Competitive pressures on the labor market have not related.
Tracking highly cleared professionals is enduring channel.
We are pleased with the steady support from Congress and recognizing the scarcity and criticality of preserving talent supporting critical national security missions.
And applaud his most recent extension of the Cares Act section 36 10 coverage through September 30th.
Our reliance on this provision has been steadily declining as customers move towards normalized operations on.
But it remains a critical tool relied upon by many of the industry and retaining highly skilled and highly cleared talent.
As national vaccination, the progress rollout.
We are planning for a welcome return from more normalized operations.
Consistent with our operating philosophy since the start of the pandemic.
Safety of our employees customers and partners is our utmost priority.
We recognize that we will all be operating in a new normal and are tailoring our approach in a manner. The supports mantech goal of being the employer of choice in our industry.
Sticking with talent I am pleased to announce that relief, we reinforced our leadership ranks with the promotion of Julianna Barker to the role of Mantech, Chief Human Resources Officer, and the appointment of Joe Cuba, as our Chief growth Officer.
Julianna has served as interim Chr of since last December.
Seamlessly advancing metex initiatives in attracting developing and retaining talent.
Joe joined US in March assuming the charter of our sales and growth activities and is working in tandem with our operations team and technologists to drive Mantech differentiated solutions across the federal market.
I look forward to working closely with them both as they bring their passion experience and hands on leadership to empower our employees and customers alike.
Now Judy will walk through the details over Q1 financial performance.
Thanks, Kevin.
Executing with a keen focus on generating long term value for our stakeholders.
Stakeholders revenue for the quarter weighted fixed.
$633 million up 4% compared to Q1 of 2020.
As Kevin mentioned earlier writer, Ldc's, and new business procurement delays drove growth below our expectations for the quarter.
That said direct labor remains strong and cascaded throughout the P&L impact.
Impact most conspicuous in our profit metrics.
Our contract mix shift shifted slightly year over year in Q1 prime contracts comprised 93% of revenue and the breakout of our contract pricing structure was approximately 66% cost plus 21% fixed price and 13% tangle materials the <unk>.
Later, OTC shifted our cost plus the mix lower in the quarter.
EBITDA for the quarter was $62 million, which grew 12% from Q1 of 2020 the.
This resulted in an EBITDA margin of nine 7%, reflecting margin improvement of 70 basis points year over year the.
The increased margin for primarily driven by two factors.
A higher than usual of labor mix caused by the slippage of OTC and the consistent strength of our indirect cost management.
Our expectation is that those <unk> will eventually be procured and increased indirect spending will return profitability to more normalized levels.
The tax rate was 23% in the quarter, just slightly lower than expected with the majority at the bottom line strength coming from operational execution.
Net income was $32 million and diluted EPS of <unk> 79 per Q1 up 13% on 11% from Q1 2020, respectively.
Adjusted net income was $36 million and adjusted diluted EPS was <unk> 88.
Up 11% of 9% respectively from last year.
Now on to the balance sheet and cash flow statements.
For the quarter cash used in operations was $8 million business.
The exclusively attributable to an expected uptick in net working capital.
DSO was 61 days at the end of the quarter, a five day increase from the fourth quarter of 2020.
At quarter end, the balance sheet showed $7 million on cash and $22 million of debt.
Additionally, we distributed $15 million on dividends in Q1.
The board has authorized us to maintain our current cash quarterly dividend of 38 per share which will be paid in June.
Our strong balance sheet on cash flow position provides us with ample financial flexibility to invest for future organic growth.
Enhancing M&A.
<unk> to return cash to shareholders.
We are actively reviewing potential M&A opportunities and we will.
Execute on those that are aligned to our strategic and financial goals.
Now on to guidance, we are reiterating our previously communicated guidance on all measures.
The factors that we see as having the most significant impact on our ability to perform within the ranges provided include the <unk>.
At which we are able to successfully win new business and retain our recompete as well as the timing of each particularly the new business.
The pace of hiring and ramping new and recent contract awards the.
The level and timing of material procurements.
Direct labor utilization trends and the cadence of normalization of the impact of the pandemic subsides.
Just to refresh you on the expectations, we set in February and are reaffirming here today.
We expect revenue of $2 $65 billion of 275 billion, which represents year over year growth of 5% to 9%.
At the midpoint of guidance, a little more than 80% of the revenue is expected to come from existing backlog.
That's still a fair bit of the plan from Recompete and new business.
For margin our guidance continues to assume an EBITDA margin of nine 1% to nine 2% per the year, maintaining the profitability for incremental margin improvement of up to 10 basis points year over year.
Turning to our bottom line, we expect an adjusted net income range of $142 5 million two of $147 4 million and then the adjusted diluted EPS range of $3 48 to.
The $3 60.
These range is still assume an effective tax rate of 24% and the fully diluted share count of approximately 41 million shares.
Lastly, despite our cash flow this quarter, we still expect cash flow from operations of at least $200 million and expect capex to be around two five percentage of revenue for the year now I'll turn it over to Matt to cover the business development and operational highlights of the quarter.
Thank you Judy.
Let me walk through the business development and operational highlights from the quarter.
We won $561 million of contract awards, resulting in a one nine book to Bill in Q1.
Our differentiated capabilities in cyber mission in enterprise It and intelligence systems Engineering are apparent in these awards.
We won a new 123 million of cyber security as a service contract with the longstanding customer the FBI.
We continue to leverage our strong customer intimacy.
All of past performance and innovative capabilities into new wins with the Navy and one of new $110 million platform modernization effort focused on radar and EW systems and subsystems.
Lastly, we secured a $61 million recompete supporting the Dod's irregular warfare technical support directory with technical and analytical services.
As a result of these bookings our backlog exiting the quarter stood at $10 1 billion, which represents 8% growth year over year.
Approximately $1 4 billion of our backlog is funded.
As Kevin mentioned earlier, we are steadily.
We are steadily submitting proposals and our proposals awaiting adjudication stands at $8 billion.
We have routinely spoken to the investments we are making in the business to sharpen our differentiation.
Adding to our Differentiators I am pleased that we have recently announced the strategic partnership with Google cloud to jointly pursue cloud and analytics opportunities across the federal market.
We look forward to leveraging the success, we have enjoyed to date into new customers and use cases.
This adds to our growing list of partnerships with leading commercial technology providers.
Quite frankly further demonstrates mantech position as a trusted partner in federal digital transformation and it modernization efforts.
These partnerships are receiving the validation of both our customers and partners.
A few months ago, we were awarded the best Dod's solution by Red hat for leveraging their hybrid cloud and open source technology solutions.
We were selected for this honor based on our innovative use of the Red hat open shift container platform in support of the U S Army's persistent cyber training environment.
We are excited with the progress we have made and look forward to continue helping our customers leverage best of breed commercial technologies in support of their mission.
With that let me hand, the call back over to Kevin for closing remarks.
Thanks, Matt.
In closing, let me emphasize that we remain focused on executing and innovating for our customers, attracting developing and retaining talent and leveraging the balance sheet to.
To deliver strong long term shareholder value.
I want to reiterate my thanks to the team for their unwavering commitment to our customers in their critical missions with that we're ready to take your questions.
Thank you Sir.
If you have a question at this time. Please press Star then the number one on your Touchtone telephone.
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Our first question comes from the line of Gordon Gautam Khanna from Cowen.
Please go ahead.
Yeah.
Proud of are you on.
Got it sorry.
Sorry about that I was on mute there.
Alright, great.
Or would you.
Okay.
Yes on the easiest one of the day payoffs.
Can I ask on the.
What do you see dynamic.
What was the shortfall there relative to your going in expectation do you expect the 100% of whatever that shortfall is to be made up later this year and if so kind of.
One of the Q3 of the Q4.
Yes.
The problem with these materials, there so lumpy with when they come in.
And I think some of it was the probably supply chain I don't know if you've tried to order a refrigerator.
Just can't get things, but.
So customers are the demand is still there the timing we fully expect that to the <unk> come through at some point this year, whether that's next quarter more likely second half but.
And we do expect it to be made of.
And did you give a figure of four I may have missed the Judy if you felt the how much cash typically was ex.
Now we did that.
Okay, but you would've expected the sequential increase in sales maybe could you speak to what the.
<unk> decline in OTC was quarter to quarter.
Yes.
Yeah, I mean direct labor was definitely greater than the total topline growth. The OTC, we're down I think mid single digits.
Okay. No. That's helpful and then just on the bookings environment.
$8 billion of outstanding bids at the after the quarter end.
How do those phase in terms of when they are expected to be adjudicated over is it like a big Q2 in a big Q3 or.
Any sort of color you can give us on.
Kind of when those are expected in out of the bulk of those to be adjudicated.
Got him is Kevin I think when we talked about the choppiness.
Certain as to when they will be adjudicated because theres. So much of volume out there I would note in terms of.
The color is.
Is that.
Over half of new business, but we do have an increasing proportion of that total on.
For the half of it is recompete. So some of the things that have been kind of pushing to the right. We see more likely to be re competed in our business in the second half of this year and going into early next year, but we're still of a very healthy pipeline of new work on that.
The <unk> as we noted on.
Very much contingent on the workforce from the government there of prioritization.
How quickly they can get the things what they prioritize and if not the generally delay and how that plays out.
It was very hard for us to predict.
Thank you.
And Sir we do have our next question from Robert Spingarn from Credit Suisse.
Sir your line is open.
Hi, good afternoon.
Judy what was the organic sales growth in the quarter and then what is embedded in the guide I guess at the midpoint.
Yeah, it's a little over 1% in the quarter and then the midpoint of the guidance about 5%.
Okay, and then Kevin on on that.
Did the does the reversal of an OTC is get you to that 5% and can you get there with the kind of.
Hiring and award pace you had in Q1 or does that also have to improve.
The award pace has to improve for our entire industry and for Mantech in order to get to the gross level I think that the hiring is not a constraint in the Ot sees.
We expect to be caught up.
Okay. Thanks, so much I'll jump back in.
And Sir your next question from Tobey Sommer from Jewish Securities Your.
Your line is open.
Hey, good evening. This is the Jasper Bibb on for Tobey I guess following up on first quarter margins on the OTC impact could you give any color on the cadence of how you expect margins to track over the balance of the year as that rolls off.
Yes.
We're expecting the debt.
$9, one of nine 2% for the full year.
So clearly it's going to trend down over the course of the year.
Based on you know as the Otc's pick up and as well as indirect spending picks up so I think.
It'll drop in Q2, and then kind of normalized.
And then I wanted to ask about how the company is thinking about total addressable market growth from the current environment I.
I guess why you've grown the above defense topline for some time does that trajectory change at all with what we're seeing on the President's request for 'twenty two.
This is Kevin I'll speak to that and then if Matt wants to add any flavor behind the color behind that.
We all are very focused on I think we've done a good job as a company to position, where we think within the overall federal budget the higher.
The proportion of needs would be specifically around certain technologies of the technology growth and you can see within the current administration that they continue to focus on the need for a technology driven.
The economic competition as well as military competition, how that plays out within the details of the the Dod budget of the federal budget from for FY 'twenty two when it comes out I think we have to all wait and see where the debt that.
Lance as well as for 'twenty three pumps and so those are very important to our sector of the track.
That said I think that we've done a good job of positioning where we think the budgets will be above average within whatever budget levels they will be.
No.
Okay.
Question from me.
Update us on how the Recompete schedule has been progressing so far this year and of the 20% of ours. So initially up for Recompete. This year, how much how much do you have left.
Yes.
As I said in the comments, yeah, we've got a little over 80%.
The backlog at the midpoint and the balance of those probably split equally between the recompete the nu.
Given the timing of the Recompete wins, and we have seen.
On a few decisions came in and then you know.
Lot of the <unk>.
The proposals outstanding or.
Our recompete.
And you know we're waiting for that for those to be awarded but it's definitely second half weighted and then into 2022.
Thanks for taking the question, okay ill get back in the queue.
And our next question from Louie Dipalma from William Blair.
Sir your line is open.
Great, Kevin Judy and Dave and good afternoon.
Davidson.
You mentioned procurement delays, Kevin and Judy has there also been delays.
Some of your ramp of some of your recent large contract wins.
So I would say on the.
The Odysseus is relative to.
To that ramp up but I think all other programs I think are going along just fine.
Judy mentioned Wright, our <unk> growth is above the topline growth of.
Of that you mentioned, so I think that we're at.
Overall, I think those are progressing nicely.
Great and as it relates to.
Some of the procurement delays that you referenced would you say the <unk>.
Administration change and COVID-19 as the two biggest drivers behind.
Those procurement delays or is there something else that's taking place.
Yes, so I think those are both valid and in terms of what we're seeing writ large.
Current COVID-19.
A large portion of our workforce.
Doing shift work.
On certain missionaries and then.
There is obviously, there's always a little bit of.
Change that happened.
The priorities.
Get more reinforced or less so.
So I think those are things that we're all working through net to everyone's working through but I think those are two of the bigger things we are seeing macro level.
Okay and as it relates to both of the variables.
From.
December through April has there been any easing of of these headwinds that you've witnessed and do you expect there to be improvement in the second half of the year.
Yes.
No no and yes.
So there hasnt been improvement in the first quarter, but we do expect improvement because people are getting back in the government to help the adjudicated to move to normal operations and that will help to of the pace of hopefully all things getting.
As well as adjudicated decisions and.
And procurement decisions within funded amount.
Awesome, Thanks, Kevin Judy and Steven.
Yes.
And our next question from Mariana Perez Tomorrow.
Bank of America Ma'am your line is open.
Good afternoon, everyone.
Mhm.
So first question also related to the Choppiness on the task.
I know, it's hard to predict the future of but how should we the current funded bad luck on how that should translate into organic growth in debt.
The mid term short to mid term.
Yes, we did see an uptick in our funded backlog of in Q1, which I think is just kind of.
The normal timing of them, putting funding on it I don't think we've seen anything unusual or different than the timing of receiving funding. So I don't think.
Yeah.
Really on.
Has changed anything from a from our expectations.
Okay, and then related to capital deployment.
We have on increasing market appetite for share of color like share buybacks, how does <unk> play a role of capital deployment chart, the GM Brian <unk>.
Yeah, I mean, we are.
Always look at all of our options.
We increased the dividend almost 20% this year and.
As you know from from our numerous conversations of M&A continues to be our preferred capital deployment.
Method and we are seeing.
Lot of activity on the M&A market and as Kevin mentioned that we're going to continue to focus on those.
So we look at buybacks.
Pronounce it just hasnt seems like yes.
Something that we think makes the most sense for our shareholders and I don't know for sure.
<unk> chairman of wanted to add anything to that from the board perspective, but we definitely look at that.
We do review of look I think it's a very active M&A market.
And it's one of those markets, whether we are successful or not I think that we're a little bit more aggressive around that because of the properties that are out there.
And see our positioning around that is our first priority is still.
Perfect on what are you looking for an M&A market.
Well we have.
There are a lot of good businesses out in the market right now we know it's very competitive but we are looking for technology advancement of both for the combination of technology and engineering and certain technologies around the technical focus areas that we've mentioned before in the customer areas, where we see growth in the federal budget we're tracking.
With the administration's details are on the FY 'twenty two.
Components, that's a very important activity.
But it's a very active market right now from an M&A perspective for all of us in our industry.
Thank you I have one more of on ill jump back in the queue.
Alright, and as a reminder, if you would like to ask a question you May press star one on your telephone keypad.
And speakers. She has the follow up question from Robert <unk> of Credit Suisse. Sir Your line is open.
Thanks, I wanted to follow up on the M&A in a couple of questions around M&A. Kevin One is did the proposed tax changes accelerate the number of properties that are coming on to the market. So is there more in the pipeline.
Recently, so that's the first question.
The answer is I believe that's the driver yes.
It is settled.
Of this year been inferred is.
Something that has people thinking about it.
Options.
Okay, and then relate.
Related to that when you think about.
Valuations how of those trended relative to a year ago, as we get through the pandemic or where maybe the the proposed budget.
Possibly.
Effects of that and then in addition to that are you looking at.
Companies in the in non defense more on the civilian markets or even in the hardware areas like some of your peers have so maybe defense, but defense hardware.
Yeah, so for quality businesses the.
The market is fairly.
Hot in terms of demand so I see from the multiples or are at or above where they've been declining in any way.
And that's great in terms of the view of where the federal budgets, we're headed in those areas, that's why they're such high high.
High demand and high value in.
In terms of positioning yes, we are looking to expand.
In federal civilian selectively non.
Non defense, we still focus on defense and intelligence cyber it's core business areas, but at the same time, we do see a lot of opportunity, but from a budget placement.
As well as capability placement into the federal civilian market.
Okay, and then Judy just one more question just on the five day increase in the Dsos and I think you said you anticipated working capital headwind here will that will that reverse or does it reflect some kind of change and progress payments.
No we actually don't have any progress payments on it.
Just on.
The timing issue.
There's the actual income improvement over where we were in Q1 of last year and we do expect that we should get another day or two improvement.
Over the course of the year.
Okay. Thank you Paul.
And all of your next question from Brian Ken's Linger.
Of Lions Global partners, Sir your line is open.
Brian we cannot hear you.
Sorry can you hear me now.
Yes.
Hi, This is Jacob on for Brian can you quantify any one time benefits on SG&A during the first quarter and then with growth in defense spending expected to slow its management plan to increase the amount of proposal activity that will lead to slightly lower operating margins in the near term.
Okay.
The answer the first question and then have you repeat the second the second part.
We had a couple of small onetime items nothing major it was more just timing of indirect spending still in kind of of the pandemic era of indirect time of low.
There's no trade shows and things like that.
Not really any specific one time items.
It's Kevin I'll answer your second piece, so we're not anticipating.
The business profile of what we're going after to.
Change our approach to the overall price of our overall fee, we're trying to achieve when we compete if.
If the market changes on that will all be addressing it is certainly competitive but.
But we don't expect to be lowering our overall margin profile in order to compete and win business.
Alright, thanks, so much.
Yes.
And speakers, we have a follow up question from Mariana Perez Mora of Bank of America, Yeah on your.
Your line is open.
Thank you very much so my follow up is on free cash flow.
Any color on free cash flow burn this quarter on should the athene consolidated towards the rest of the year and especially of our working capital on conversion.
Copies of the deployment.
Capex.
Thank you yeah.
Thank over the you know for the balance of the air for the full year, we expect free cash.
Cash flow to be roughly equivalent to net income.
Yeah, we expect it to pick up net.
The next quarter and then the balance of the year.
Just as we you know modify the working capital and the Capex.
<unk> over the course of the balance of the year.
Yeah.
Okay. Thank you very much.
And speakers, we still have one follow up question from Gautam Khanna of Cowen sorry.
Your question. Your line is open the session of question.
Yes. Thank you just wanted to ask on Recompete.
Okay.
Remind us again, what percentage of sales the tears up for rebid.
When most of those are.
The expected to occur and did you have any meaningful way.
<unk> losses in the first quarter.
So as I said, a little bit earlier, you know of.
Of the 20% <unk>.
The only 20% of.
At the midpoint of guidance Thats coming from newer Recompete. It's about 50 50. So so you know 10% ish or so of the 20.
'twenty one revenue from Recompete, that's obviously, a slightly higher number of actual annualized revenue because it is.
The only backend loaded and going into 2022, it's still that probably normalized 25% of ourselves recompete.
Okay.
And in Q1 was there.
A consequence of the loss.
No.
Yeah.
Okay. Thank you very much.
Okay.
It looks like we have no further questions. So thank you all for your participation on today's call on your interest in Mantech as usual of members of our senior team will be available for any follow up questions have a good evening and please stay safe.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful evening you may now disconnect.
Yeah.
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