Q1 2022 ManTech International Corp Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Mantech first quarter fiscal year 2022 earnings conference call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time.

If any once you require assistance during the conference. Please press Star then zero on your Touchtone telephone.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Steven <unk>, Vice President corporate development and Investor Relations.

Please go ahead Sir.

Welcome everyone. Thanks for participating on <unk> first quarter call. Joining me today is Kevin Phillips, our chairman CEO and President Judy, but if youre going to start CFO and Matt <unk> our CFO .

During this call we will make statements that do not address historical facts and thus are forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 995.

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.

Make 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 and our first quarter earnings release with that let me hand, the call over to Kevin.

Thanks, Steven and good afternoon, everyone.

Thank you for joining today's call I'm pleased with Manitex healthy start to the year.

Our first quarter results were above our expectations and demonstrated solid execution, particularly on revenue EBITDA cash flow and bookings.

After the unique disruptions to our business in 2021, our Q1 results and the incrementally improving market environment give us reason to be cautiously optimistic about a return to more consistent execution for the balance of the year.

Since our last call FY 'twenty, two appropriations are enacted which provides our customers with the necessary clarity to decisively execute on their priorities against clear funding levels.

The passage of appropriations comes at a critical point.

The global threat environment has escalated meaningfully.

The unprovoked Russian invasion has unleashed devastating impact on the Ukrainian people.

All of us at Mantech are saddened by this humanitarian crisis, and our heartfelt sympathy and support goes out to those who have been affected.

The Russian aggression over the last few months reinforces the necessity behind the national strategic pivot to focus on near peer threats.

And expanding domains of warfare.

The strengthening of U S defense and intelligence full spectrum cyber capabilities remains core to national security.

Deterring encountering near peer threats is receiving overwhelming bipartisan support which is evidenced in the funding priorities into FY 'twenty three presidential budget request.

The recently provided FY 'twenty three request calls for 773 billion for defense and 94 billion for intelligence.

Which represent increases of 4% and 9% over FY 'twenty two enacted levels respectively.

More importantly than the topline numbers are the underlying demand signals for cyber.

Digital and systems modernization data at the edge and automation.

We believe Mantech is well positioned to meet these enduring national security priorities and areas of strong demand with our differentiated solutions and capabilities further.

Furthermore, the current and proposed budget growth for the Navy intelligence community and cyber across the federal government offer long term tailwind to our business.

After extraordinary challenges over the last eight quarters, whether from the pandemic.

With respect to our highly classified work the rapid departure from Afghanistan for more cautious behavior from customers from the last continuing resolution.

The market environment appears to offer better clarity.

Pandemic constraints it seem to be behind us.

I understand risk has been cleared and our customers are beginning to adjudicate.

With even some green shoots within the intelligence market.

While it is early all of these trends are favorable and should be tailwind to our performance.

As a team we are focused on a return to delivering strong organic growth and making continued progress in retaining and recruiting highly cleared and highly skilled talent.

Now I will turn it over to Judy to cover the details of our Q1 financial performance and outlook Judy.

Thanks, Kevin we delivered strong performance to start the year setting the foundation for continued steady execution throughout 2022.

Revenue for the quarter was $676 million, reflecting 7% growth compared to Q1 of 2021.

Q1 revenue came in ahead of expectations driven by better than expected direct labor contributions and an uptick in OTC.

More revenue growth was bolstered by contributions from our recent acquisitions.

Q1, EBITDA was $66 million up 7% year over year.

The resulting EBITDA margin was nine 7%, which is flat compared to Q1 of 2021.

Margins were also ahead of our expectations and were driven by excellent program execution.

Net income for the quarter was $31 million and diluted EPS was <unk> 76 times.

Both figures were down over Q1, 2021 due to higher intangible amortization expense from our recent acquisitions.

Adjusted net income was $37 million and adjusted diluted EPS was <unk> 89.

Both up 1% from Q1 of 2021 alright.

Our effective tax rate in the quarter was 25%.

Turning now to the balance sheet and cash flow statements cash flow from operations was $34 million in the quarter, which represented one one times net income and was driven by a strong DSO of 63 days an improvement of five days from the fourth quarter of 2021.

At quarter end, the balance sheet showed $60 million in cash and $300 million of debt.

On the capital deployment front, we distributed $17 million in dividends in Q1, maintaining a steady return of cash to shareholders.

The board has authorized us to continue our current cash dividend of <unk> 41 per share to be paid in June .

Our balance sheet remains flexible and leverage is well within our comfort level M&A.

M&A remains our preferred capital deployment priority and we are tracking potential targets that could be actionable over the next few quarters.

Moving on to guidance, we are reiterating our previously communicated guidance across all measures.

Just to refresh you on our expectations for 2022, our revenue guidance is $2 6 billion to $2 7 billion, representing 2% to 6% growth year over year.

At the midpoint, we expect approximately 90% of our revenue to come from backlog with the balance largely coming from add ons mods and recompete as well as a smaller contribution from new business.

We continue to chip away at Recompete risk through wins in the quarter as well as securing multi year extensions.

The revenue trajectory for the balance of the year should be relatively even quarter to quarter with a slight step up in the second half of the year as we began to enjoy more fulsome revenue contribution from recently won contract awards.

For margins our guidance continues to assume an EBITA margin of nine 6% as a reminder, 2022 margins assumes the normalization of indirect spending and excludes nonrecurring <unk> enjoyed in 2021.

Turning to our bottom line, we continue to expect our adjusted net income to be in the range of 141, three to $148 5 million with adjusted diluted EPS of $3 42 to.

<unk> to $3 60.

These ranges do assume an effective tax rate of 25, 2% and then fully diluted share count of approximately $41 3 million shares.

Finally cash flow from operations is still expected to be at least $215 million with capital expenditures expected to be one 5% of revenue for the year.

Now I'll turn the call over to Matt to cover the business development and operational highlights in the quarter.

Thank you Judy.

In the quarter, we booked $464 million in contract awards, resulting in a book to Bill of approximately <unk> seven times.

Bookings in the quarter were driven largely by new business, which accounted for approximately two thirds of the awards in the quarter.

Notable awards in the quarter include several new contracts supporting classified customers with full spectrum cyber operations capabilities and solutions.

While I cannot comment on the specific nature of the awards. Further this renewed momentum is what backstops, our belief that mantech has a differentiated market position to capitalize on continued cyber demand over the long term.

Additionally, in the quarter, we want a model based system engineering OTI with the Navy.

Which only further reinforces our long term thesis around acquiring Griffin.

This contract award provides us a new avenue to showcase the breadth of our digital engineering capabilities to a number of new Navy customers.

In Q1, we officially completed the integration of Griffin and are now squarely focused on leveraging the combined strength of our customer relationships and capabilities across the defense market.

Our total backlog exiting Q1 was $10 3 billion and funded backlog was $1 4 billion.

We are continuing to aggressively prosecute our pipeline and had solid proposal submissions to begin the year.

We exited the quarter with approximately $6 billion in proposals outstanding.

Which has a healthy mix of new business and Recompete opportunities.

The awards environment is incrementally improving with an opportunity for further normalization.

With the pandemic restrictions lifting we are seeing our intelligence customers invite face to face interactions.

Welcome change as we look forward to reaccelerate growth in a core market for us.

Overall, we are pleased with progress to date in both the market environment and our performance we.

We are firmly confident and mantech positioning and value proposition to customers and talent alike.

Our steadfast focus remains on driving strong operational performance through delivering excellence for our customers as well as retaining and attracting talent.

Kevin back to you for closing remarks.

Thanks, Matt in closing for over 50 years, we have prided ourselves on doing what is in the best interest of our nation and our customers.

I genuinely thank our employees for their enduring commitment and thank our customers for trusting mantech to advance their critical missions with that we are now ready to take your questions.

Yeah.

Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then one on you touched on the telephone.

My question has been answered all your wisdom would be helpful.

You. Please press the pound key.

Your line of please limit yourself to one question and one follow up.

If you have additional questions. Please re enter the queue.

No first question coming from the line of Tobey Sommer with Joy Securities. Your line is open.

Thank you good afternoon.

I was wondering I was wondering if you could.

Describe.

The factors that kind of drove the.

The improvement in growth in the quarter and.

And then maybe dovetail that into the.

The rate of growth implied in the annual guidance and any sort of nuance and cadence. Thank you.

Sure.

So I would say, we had really strong <unk> in the quarter.

And then ODT is moving to the last was about 60% of the beat.

And as you saw we did not change the guidance.

So we would expect a slight.

Dip in Q2, just to overcome that the OTC as that came in early and then a slight step up in the second half of the year.

As new business starts to ramp up.

And for.

For my follow up I was curious.

You mentioned looking at some acquisitions.

Maybe something over the next several quarters.

How would you characterized.

M&A market.

And what you are seeing both in terms of quality as well as valuations.

Okay.

Yes, I think.

I think theres still some really good companies out there the market is a little slow right now given the.

The heavy level of activity in 2021.

So.

We're aware of opportunities coming and things that we are interested in.

But it's probably going to be second half of the year.

And valuations I think we'll have to see what happens because it hasnt been so quiet right now but.

I don't see anything that's implying that valuations are going to drop meaningfully.

Okay I'll try to respect the rules and get back in the queue. Thanks.

And our next question coming from the line of Gautam Khanna with Cowen Your line is open.

Okay.

Got it and we can't hear you.

Okay.

Okay.

Still no luck gautam.

Please check your mute button.

Yeah.

Would you like me to go to the next question in queue Sir.

That work.

Our next question coming from the line of Bernstein with Stifel. Your line is open.

Hey, good afternoon.

Hello.

So I guess my first question how is your customer exposure changed over the past year I. Appreciate obviously had the drawdown in the middle East.

Just curious how thats changed and how you expect it to continue changing from here.

I think our customer exposure.

Large.

And the macro is still steady.

Yes.

<unk> and defense are still the franchise positions for us within the industry that we're that we're staying with and so we don't see anything any macro appreciable change there.

Okay, and then I don't know if Judy I Didnt hear this in your prepared remarks, but can.

Can you say, how Griffin performed on a revenue basis during the quarter or I guess put another way can you say what your organic growth was during <unk>.

Yes.

I mentioned on the last call or our organic growth for the full year is expected to be negative mid single digits. In Q1 is in line with that okay.

Okay.

Thank you very much.

Okay.

Yeah.

Our next question coming from the line of Mariana Perez Mora with Bank of America. Your line is open.

Now I'll turn on everyone.

Hello Hello.

So my question is going to be you mentioned in the prepared remarks, how encouraging our both like.

Can we have worked in an offer period FY 'twenty to bad debt and the request.

How fast can we see.

Higher defense spending impact your top line.

Okay.

This is Kevin let me briefly comment on that.

So look it's going to be choppy I think the directionally. The funding is there the FY 'twenty three view is very positive.

But we have to see how the actual execution.

Procurements and decisions move they are starting to move we're very optimistic about that but the timing is pretty uncertain right now so with that Matt do you have any other comments you want to add.

I think a couple of things is that we're seeing incremental improvement, especially in the intelligence area.

A lot of.

I would tell you in terms of submissions right that is it feels like thats really gotten close to normal back again in that area of the woods, but in terms of I think there is still not fully up to speed yet on the adjudication side positive progress.

So we're encouraged by what we've seen so far.

Perfect. So then my follow up I'll turn it to two that you mentioned.

Improvement in our warrant dedication biomarker could you please give us some color around that.

You saw in the quarter.

Is that.

Change or improve so far.

Sure.

Yes, sure. So while we don't have a crystal ball to give you a prediction on the quarterly as we are happy with the bookings in the first quarter, especially Thats really in line with what we would view as a seasonally softer quarter than <unk> had the CR that really covered the majority of the of Q1.

And so with the 6 billion that we have in proposals outstanding much of that is as.

As expected adjudication is over the next several quarters.

And as you heard in our remarks with a healthy mix of new and Recompete business. So.

Excited about the trends, but obviously.

Being conservative in terms of how we view.

And our next question coming from the line of Tobey Sommer with Joy Securities. Your line is open.

Thank you wanted to ask a broad question about your view of the budget.

Sort of more medium term impact of.

The Russia, Ukraine war on that process.

As we look into federal fiscal 'twenty three.

Do you have any.

Kind of tentative expectations relative to growth.

<unk> well this inflation and relative smoothness of the budget process if we.

Juxtapose that with this year's budget.

Six months.

Award of capitalized.

So when you speak about Ukraine I think.

For us.

The Yukon support Theres really not a meaningful part of our portfolio, we view it more as a potential opportunity for growth given the focus of near peer threats.

And the capabilities that are applicable to those mission sets.

So that's kind of how I would say, we view that within the context of Ukraine, I mean, that's a terrible situation obviously.

So we obviously hearts at Neal.

And go out to the folks involved there.

But in terms of in terms of that now in the macro environment from a budget perspective.

Pass it over to Kevin if he's got any additional comments there.

Yes.

Yeah, Thanks, Matt look.

Directionally.

Bipartisan support for countering China supported in Ukraine.

You can see the shift in the federal budget drive in terms of its more defense and intelligence.

Think that Thats.

Likely to stay for the foreseeable future now how that plays out again, I think we're pretty well positioned but we.

We need to see how it plays in terms of the final numbers just like all of our industry.

To see.

Where are those monies shift and where we're positioned to take them on to provide you a longer term view of the upside in the business, but directionally, yes I can.

For all of our industry and the environment is getting better not worse, which is the key takeaway.

Great.

Okay.

With respect to margins and incremental profitability at the company.

As growth does improve.

Is there anything we should think about it.

In terms of the.

Incremental profitability any different than in prior periods when you might have had.

Better rates of organic growth given the sort of margin tailwind that occurred over the last couple of years as well as <unk>.

Headwinds on labor inflation.

Paul.

Yes, I think we're still committed to our 10% to 15 basis point improvement in margins over the next couple of years from kind of this new 2020 to baseline.

So even with those variables okay. Thank you very much.

And our next question coming from the line of Gautam Khanna with Cowen. Your line is now open.

Yes.

Hey can you hear me guys, yes, yes, gotcha, okay, sorry about that earlier.

I was hoping maybe Judy you mentioned in her prepared remarks that OTC as were a little higher.

I assume than expected there was a pull forward or something yes.

If you could quantify that and then just.

To your point on.

This is sort of the run rate obviously, you take 675 multiply times four you get to $2 7 billion are there any things that are rolling off.

Besides of OTC thing is there anything that maybe.

Is rolling off Thats dampening.

What should be.

I think the seasonally better Q2 and Q3.

On seasonality.

Yes, So I think I mentioned about 60% of the beat from the OTC, so that roughly $20 million of pull forward.

I think any of that was really new or unexpected.

And then.

<unk> was running a little bit higher than we expected just from I think higher.

Utilization rates, we did have I think we talked about at the year end call there was a little bit of.

Runoff in some of the department of state work.

At the beginning of Q2, but it was really nominal it was not a driver of Q1 performance.

Okay and in Q1, the whole country was beset with Covid in January did that.

Surprise deal was as strong as it was in the first quarter did that not by you guys or.

We had a.

A little bit in the beginning of January but I think we recovered well our people take good precautions and it really wasn't much of an impact it was definitely in December but January .

After the first week or so was kind of back to business as usual.

Hey.

Just given the.

Passage of the Dod budget in March.

And the use it or lose it kind of nature of some of the O&M dollars.

Do you expect Q3 to have like a big budget flush for OTC or anything else.

Or should we just conclude.

Conclude that hey, it's going to be a.

A year, where the customer sends money back to the treasury.

I'm just curious.

Gautam, it's Kevin I think that we're all.

Focused on how that funding will be spent.

For 2003, and it looks like a regular order will start playing a little bit just to be responsive to the.

Global needs.

I would just say it'll be sporting, but we're ready to support our customers in any way to help them.

And obligating are supporting critical missions.

Okay and then just lastly, you guys have talked about 90% of the.

Sales visibility and backlog.

Can you remind us on the Recompete.

The recompete exposure over the next 12 months, maybe 24 months as well.

Just to calibrate it so.

The balance of the year is really kind of backend loaded and I think the title.

This year into next year.

Kind of that normal 20%, 25%.

And are there any chunky.

Concentrated recompete anything worth like 5% of sales.

None of our contracts are greater than 5%.

Okay cool. Thank you very much guys I appreciate it.

Yes, thanks, Kevin Thank.

Thank you.

And our next question coming from the line of Bernstein with Stifel. Your line is open.

Great. Thanks, just had one follow up so thank you.

Kevin in regards to the comments you were making on the FY 'twenty three budget can you specify how you're actually planning for 2023 are you expecting a CR runs well into the calendar year similar to what we saw last year.

Hi.

Well two parts of that I think on the appropriation side.

As well as the authorization there is more rapid moving and movement and trying to get towards.

Decisions in conclusion.

Now how that plays out in terms of preparedness and timing I think it will be quicker than this.

And this year, but we don't know how else can play against the overall election season. So.

My head is going to be December January timeframe.

We'll have to see how it plays out I would say, there's more urgency on getting something done.

We anticipate on the global environment, we're still recognizing that there are some other factors at play.

Okay understood. Thanks for the follow up.

And as a reminder to ask a question. Please press star one.

And our next question coming from the line of Mariana Perez Mora with Bank of America. Your line is open.

Thank you very much for the follow up.

So if you don't mind would you mind, giving us some color around the labor market tightening per year.

In a moment.

Sure, Yes, so I think it is.

It's a competitive market I think we feel like we're kind of back to the future in terms of what we're seeing is pre pandemic normals.

In terms of the market it's competitive.

But again, because we see things like our Glassdoor ratings are solid and all the other programs that we're doing from a hiring perspective.

In the macro rate environment has always been competitive so I wouldn't say there is like a big change it just feels like it's gone back to pre pandemic.

<unk> of the market.

Thank you and I am showing no further questions at this time I will turn the call back over to Mr.

Even better.

Okay.

Great. Thanks, Livia and thank you all for joining us on today's call and for your interest in Mantech as usual the senior team and I will be available for any follow up questions that you might have thank you and have a good evening.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful evening you may now disconnect.

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