Q2 2019 Earnings Call
Ladies and gentlemen, good afternoon, and welcome to the Mantech second quarter fiscal year 2013 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 anyone should require assistance. During the conference. Please press Star then zero on your Touchstone telephone as a reminder, this conference call is being recorded.
I would now like to turn the conference over to Steven Valor, Vice President corporate development and Investor Relations.
Welcome everyone. Thanks for participating on Maintech second quarter call on today's call, we have Kevin Phillips, President and CEO , Judy business Executive Vice President and CFO as well as Matt Tate and Rick Wagoner, Our two group presidents.
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 90 95.
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 with that let me hand, the call over to Kevin.
Good afternoon, everyone I'm pleased with Mantech strong performance in the second quarter, we delivered another quarter of healthy organic revenue growth improve profitability.
And remarkable cash flow.
Additionally business development efforts continue to generate strong new business awards and retention of Recompetes.
Our people first and foremost combined with our differentiated capabilities innovation and reputation for strong program delivering our the steadfast drivers behind this success.
Our energy remains focused on ways to attract train and retain talent necessary to meet customer mission requirements.
We continue to make concerted efforts to invest in our workforce with a particular focus on the re skilling towards areas of robust demand.
Despite a very competitive labor market, we are seeing a strong ability to attract talent to mantech.
Furthermore, an increasing percentage of new hires are referrals from our own employees.
This coupled with the accolades we have received from a number of well recognized institutions demonstrates our position as an employer of choice within the industry.
I'm pleased to report that collectively all of these efforts are increasing the speed and security of bringing talent in support of our customers mission.
Mantech is well positioned where customer demand is exhibiting strong and sustained growth in the quarter. We won 657 million of contract awards, resulting in a book to Bill of 1.2 times.
Contract Awards drove total backlog to increase 11% year over year to $8.6 billion.
And funded backlog grew 15% to 1.5 billion.
Matt and Rick will go into further details on our contract awards, but I wanted to highlight a couple of key statistics in our bookings.
First over 50% of the awards in the quarter represent new work for Mantech.
Nearly 60% of the awards were for cyber and died.
And approximately two thirds of the awards came from classified customers.
What is clear from those statistics is that demand for our differentiated solutions and innovation is evident across the federal market and our customer set.
Long term customer appetite for technology modernization full spectrum, cyber agile development and digital engineering solutions remains healthy.
As a result, our opportunity pipeline remains well over 20 billion.
That said in the quarter proposal submissions were lighter than expected due to timing of near term opportunities.
Many of which we've started to be released in this current quarter.
We continue to see strong near term opportunities and expect a strong level of proposal submissions similar to that of last year's levels.
At quarter end, we had over $4 billion in proposals outstanding even after a solid awards quarter.
We are seeing awards occur at a reasonable pace, but somewhat choppy from a timing perspective.
Our focus remains steadfast on capitalizing on an opportunity rich market.
By delivering thoughtful solutions and leverage our broad portfolio of differentiated capabilities across the federal market.
Now to the current budget environment.
Last week, the administration and Congress announced the agreement of a new two year budget deal known as the bipartisan budget Act of 2019.
The DSS National Defense spending for government fiscal year 2020 at 738 billion, representing a 3% growth from the prior year.
Federal civilian or non defense spending was set at approximately $632 billion, representing over 4% growth year over year.
We are encouraged by these developments, but with two months left in the current fiscal year remain vigilant on the timing and passage of the appropriations Bill.
We believe that it is likely that a short continuing resolution may be required to sort out and finalize the details.
Before I turn the call over to Judy.
I want to call your attention to the recent announcement of adding Peter Lamontagne to our board of directors.
Peter currently serves as the CEO of quantum spatial and previously served as the CEO of Nevada solutions in paradigm solutions.
He began his career in government services at Mantech, serving in several capacities to include as a corporate officer in the early two thousands.
Im excited to have Peter on the board and there's no doubt we will benefit from his energy and expertise.
Now Judy will discuss the details and specifics of our financial performance and outlook Judy.
Thanks, Kevin the result exceeded our expectations in the quarter and we are pleased with the teams focused execution.
Revenue for the second quarter with $537 million up 9% compared to the second quarter of 2018.
Revenue growth in the quarter was evenly split between organic and acquisition revenue.
Direct labor also kept pace with our topline growth.
For the quarter Prime contracts represented 89% of our revenue.
Contract mix as approximately 69% cost plus 20% fixed price and 11% time and materials.
Operating income for the quarter of $33.3 million was up 18% from the second quarter 2018.
Quarterly operating margin was 6.2% at 40 basis point improvement year over year.
Margins in the quarter benefited from the lower than expected indirect costs strong award fees as well as some onetime items.
Net income was $24.2 million and diluted earnings per share was 60 cents for the quarter up 22, and 20% year over year, respectively.
These increases were driven by our revenue growth and improved margins.
Now onto the balance sheet and cash flow statement.
Our balance sheet at quarter end showed $6 million in cash and $44 million in debt.
During the quarter, we generated $76 million of cash from operations or 3.1 times net income.
Hi, Thanks to the team and their dedicated efforts to drive Dsos were 66 days in the quarter, which represents a four day improvement sequentially.
Cash collections are now fully recovered from the impact of the government shutdown in Q1.
Lastly, the board has authorized us to maintain our current quarterly dividend level of 27 cents per share to be paid in September .
Now onto our revised 2019 outlook.
Compared to our previously communicated guidance, we are maintaining the range on revenue while narrowing the range for net income and diluted earnings per share.
Expected revenues continue to range between 2.13, and $2.21 billion, which represents a 9% to 13% total growth compared to 2018.
The revenue range maintains a 7% organic growth rate at the midpoint of guidance.
We continue to have high visibility for the balance of the year, achieving the higher end of the revenue range will be contingent on the timing and pace of material procurement as well as the timing and ramp of our recent and any new contract awards.
As for profitability, we are on track to deliver our targeted margin improvement of 10 basis points for the year and expect an operating margin of 5.9% for 2019.
Embedded in the margin guidance is an expectation that second half margins will be moderated by an increased level of odcs.
Incremental bid and proposal spend as well as increased fringe in the fourth quarter.
At the bottom line, we are increasing our net income guidance to between $91.6 million and 95 million and diluted earnings per share of $2.28 to $2.36.
Built into our guidance, our full year effective tax rate of 25.7% and the fully diluted share count of 40.2 million shares.
Now the cash flow items, we still expect capital expenditures for the year to be up to 3% of revenue.
This is to support our managed services contracts internal infrastructure investments as well as facility improvements and expansion in support of our recent contract awards.
Related depreciation and amortization is expected to be approximately 2.5% of revenue for 2019.
We are nudging up our cash flow from operations estimate to be between 1.5, and 1.8 times net income for the full year.
Now, Matt will speak to our defense and federal civilian business.
Thanks Judy.
I am pleased to report that MSS retained several re competes in the quarter.
We won a five year contract totaling $92 million with the Army C. Com software Engineering center to provide software engineering and Sustainment support to tactical communication systems.
Mantech also retained its position on a $325 million multi award III Q with the department of Homeland Security to continue providing the science and technology Directorate with scientific technical and programmatic support.
Also in Q2, we opened the cyber center in Orlando to deliver advanced cyber capabilities for current and future requirements from Army PEO STRI.
Mannatech was awarded a three year OTI aid for $21 million with the Army for continued development of the persistent cyber training environment for next generation Cyber Warriors.
Lastly, I am pleased to welcome John Boyle to the team.
John joins us to lead business development efforts for the MSS group, which spans the defense and federal civilian markets.
He has deep knowledge of our customers and an extensive record of driving growth.
I look forward to working with them closely to capitalize on the strong market opportunity.
Rick over to you.
Thanks, Matt.
I am pleased to report that MKS also had a great quarter. We won a new seven year 279 million dollar contract with an agency of the department of defense to provide cyber and enterprise IP services.
We continue to see very strong demand for our cyber capabilities with existing and new customers, particularly with cyber command given a number of recent awards.
This $279 million award along with MSS is cyber OTI, a wind continues to demonstrate the differentiation of manitex compelling cyber solutions offerings.
Additionally, in the quarter, we won over $150 million of primarily sole source contract awards to deliver cyber IP systems Engineering and mission operation solutions to a variety of Telx intelligence community customers.
On the operational front, our focus remains steadfast on ramping our recent contract awards and execution excellence across our programs.
We remain on schedule and ramping our large department of Defense Agency contract that was won in mid 2018.
In summary, Mantech is well positioned to continue maximizing value for our customers employees and shareholders.
We remain focused on capitalizing on the strong market opportunity that remains in front of us.
With that we are ready to take your questions.
Thank you if you have a question at this time. Please press Star then the one key on your Touchtone telephone. If your question has been answered or you wish remove yourself from the queue press the pound key.
And our first question will come from the line of Tobey Sommer with Suntrust. Your line is now open.
Thanks.
I think you mentioned the FFO award activities Something's got to get pushed out a little bit could you comment about.
Your expectations for.
The final federal fiscal quarter globally.
The pace of award activity. Thanks.
Yes, Kevin I'll go for the second half of the year as I mentioned that we're expecting a strong proposal volume for the full year similar to prior year and because what we basically communicated for the year.
Net loaded into the second half a little bit more than originally expected now most of the work that we're doing in going after this year is new.
And theres lot of certainty about those opportunities, but the timing shifted just a little bit. So we expect between the third and the fourth quarter by heavy proposal volume throughout the balance of the year.
And with respect to the potential.
So for a CR.
Is that the fact that we're coming off a two year budget, we have a spending agreement.
Is there.
Does it represent the same kind of booking man that it has in the past store would would a CR for a period of time of kind of not not be as big an obstacle to contract awards et cetera.
Yes, well I'll say that the agreement that was negotiated is actually really really good news. So we view that.
Because it does clear through a lot of the threat of sequestration issues and it provides a continuity of normal.
Procurement order.
When we're talking timelines here. This is a matter of a month, maybe too it's just getting the markups complete.
So we see this as a very minimal issue is just a lot of good to get done in September to Mike bleed over into October .
Could you give us a commentary on your expectations to be able to.
Leverage your services in the <unk>.
Okay Force acquisition that you consummated recently and how long it might take before you get some tangible results from those efforts.
So this is Matt so the integration with kgs is going well.
Near the culturally it's a great fit they also have a lot of veterans just like us. So we are very much focused on the mission.
And we do anticipate us too.
Meets the business case that we put forth around the kgs integration. So we are excited about the Ti for LNG.
Our focus for us in the pipeline that we see coming.
Thank you very much.
Thank you.
Thank you and our next question will come from the line of Matt Sharpe with Morgan Stanley . Your line is now open.
Good afternoon, and nice quarter.
Thank you Matt.
Just wanted to touch on revenues here real quick so the the 9% year over year growth, maybe you could break that down between what was organic and.
How much kgs contributed this quarter.
Yeah, It was about half and half organic and.
Organic.
Okay and then.
Based on the first two quarters. It appears the company as I think it's about a 14% implied growth rate and then in the back half of the year to hit the midpoint of the guide how should we think about the cadence are there any specific step functions or or programs ramping up in the back half that may make some uneven growth.
As you think you know as as you say there is definitely an obvious step up in the second half I think we start to see some of that definitely in Q3 as we start ramping the programs that we won in Q1 and Q2, particularly in the contract that Rick discussed.
That will be a map how quickly that gets ramped will be a matter of how quickly clearance transfers can occur.
So thats a driver as well as other new business and then the the large cod managed services contract that had the 18 month ramp that continues to ramp over the course.
The balance of the year, and then material procurements, we tend to see more of those in Q3, and four and Q4 and knows it's hard to predict exactly when that will come in.
Got it thanks, and then just on the pipeline I was hoping you guys might be able to just give a little bit of.
Color around whether there is or any needle movers in there over the next say six to 12 months and anything we should be watching for.
Yes, Kevin there is a large volume of work again for the balance of this year a majority of that is new and there are some sizeable activities in there we can't guarantee that we win them. All so I think it'd be better for us to wait and see how those play out in our ability to be successful on them as to what that that means but generally over the last two years that we looked at our internal target of $100 million or above we have more proposals, we expect to submit above $100 million than we did two years ago and we're just excited about where we are on the market.
Got it thanks.
Thank you and our next question comes line I got to my Tama with Cowen. Your line is now open.
Yes. Thanks.
Thank you got some comment here.
Good quarter versus normal bank.
Thanks.
Judy you made a comment in the in your prepared remarks about some of the.
We see activity picking up in the second half, but I just wanted to maybe.
Just to aggregate the 6.2% reported EBIT margin.
In the quarter I mean was it kind of unusual in terms of.
It just seems like you're on pace to maybe do a little better than that.
Does the guidance implies in terms of EBIT margin just.
Yes. Thank you.
Yes. So there is definitely on the a couple of factors with that that margin in Q2, a big driver as I mentioned in the comments was indirect rates coming in lighter than we expected friends was a little bit low that will pick up.
Especially in Q4 that that gets high.
As well as bid and proposal costs to puts a little bit lighter as Kevin talked about some things slipping into Q3, but now currently being worked so indirects will definitely be higher in the second half than the first half and we did have that in our really strong award fee quarter and then there were some onetime items, but I would say, that's probably less than a third of that differential.
Okay Thats helpful.
Very helpful.
And speaking to the bid and proposal activity do you anticipate Q3, we'll have a bit of a.
Budget flush it out for bookings or.
Are your expectations Tamped down just given the slide to the right on some of the adjudication timing you've already seen they've got a minute and amid the majority of the customers. I think there are two years into a strong budget cycle and have continuity. So I think that the my general view is that the quarterly year end flush.
Maybe on procurements, but less on awards and then we still have to clear through the protest periods, but theres cyclical so I'm less focused on the timing within the quarters with the second half and what we accomplished in the second half full.
Okay, and then I was wondering if you could.
Maybe comment on the M&A pipeline as it stands right now are you seeing anything of consequence, that's closer at hand.
You know there is a normal flow in an M&A.
At this time of the year kind of drops a little bit, but we're very excited about what's out there and.
I would say that that it's the normal flow we are very selective about what we look for.
Based on the market focus that we have and I expect for the balance of this year that we'll still see us fund flow for opportunities to acquire.
Okay.
Okay, and just one last one Kevin just to put a finer point on your earlier comment.
I think it was last quarter you thought maybe Q2 Q3 Q4 would have.
Similar bookings.
But would it be too dramatically skewed one quarter to the next is that you're you're still feeling like December could actually be.
A pretty.
Decent.
Yeah Buck in the seasonal trend yeah, I think this upcoming Q4 just based on.
The timeline of everything is still going to remain a healthy option or potential for further success in the fourth quarter. This year.
Okay. Thank you so much I appreciate it.
Thanks.
Thank you and our next question will come from Edward Caso with Wells Fargo. Your line is now open.
Hi, it's Justin Denardi on for Ed. Thank you for taking my questions.
Can you talk about the hiring environment in in your plans maybe over the next 12 months and have you seen any significant changes now that end VIP has reduced its backlog by about half.
Yes. This is Rick doctrine.
I think the the hiring environment is it still remains difficult in some of the areas that we're looking at like cyber.
But we're seeing very strong higher across the board and we're putting a lot of investment into that.
I think there's probably three areas our focus on mission very much attracts people.
In the recent investment in technology, we've made around client cloud automation and analytics is really starting to draw people into the company and the third pieces that were investing a lot in our managers to create engaging with employees and thats starting to drive more employee referral in terms of security clearances.
They are reducing the backlog I think it will still be a little bit of time before we see a major change in terms of the amount of people available through that though but they are making progress and so thats set that looks good.
I appreciate the color there.
And then.
My one follow up it is given some of the.
New managed service contracts that you've taken on over the past 18 months here.
Are you getting higher margins on those to kind of offset the additional asset intensity.
Yeah, I think you know, we well over the life of the contract I think going into the contract Theres a lot more startup and making sure things are getting in the flow appropriately. So so in the first year or so of those contracts they tend to not be as profitable and then move towards higher margins over the life of the contract.
Thank you.
Thank you and our next question will come from the line of Rob Spingarn with Credit Suisse. Your line is now open.
Good afternoon.
No.
I had a couple of questions one for Kevin.
On for Judy.
So Judy maybe I'll start with you just on on working capital you gave your cash flow guidance for what are some of the trends in working capital and is there some opportunity on Dsos long term and then Kevin for you I just wanted to get a sense of the latest on LPTA versus best value, where you see those trends heading these days.
Thank you guys. So on your first question on working capital I think.
Given our current customer mix I think you know mid Sixtys is probably the best that we can do.
Near term, we are pleased with the with the improvements we've made since the end of last year and that really is that the one thing that kind of drives that cash flow is if the sale goes up or down a couple of days, but I would say our target right. Now is the mid sixtys to low seventys, depending on where we are with the government budget cycle, we tend to see a little bit of a spike at the end that at the end of our calendar year there their first quarter as paperwork is still working through the system.
Miami, it's definitely a best value procurement.
Environment right now it is not an LPTA environment people are looking for innovation, they're looking for solutions. They are looking for past to provide the current technologies and invest in large part based on the National defense strategy in the mandate to do that.
And I think Thats, a good time for our entire sector and importantly for the government and we're going to be fully supportive of that.
Okay and then just.
As a follow up to that have you found that the environment.
The competitive environment has been impacted at all by these big mergers that we've seen around you. So I'm not talking about the more strategic M&A that you've been doing but.
These larger companies or are they just going for giant contracts it doesn't really necessarily impact you.
Of the customer and how they procure is what matters to us and being positioned to go after those things that we're worried about and making sure. We can compete on the Plainfield.
So for the majority of procurements out there I think that we're in a good position to compete with other larger companies.
If they do a super bundling of things some of those may or may not be things that we would go after.
Just based on the overall profile, but thats a very selective.
Set of.
Procurements, I don't see that as a restriction on us.
By and large for our strategy or focus.
Okay. Thanks for the color.
Sure.
Thank you and our next question will come from Joe Denardi with Stifel. Your line is now open.
Hey, guys. This is John on for Joe.
Just want to say a good quarter and when you think about growth in the various markets.
Hi.
Where are you seeing the most growth and how does mantech capabilities aligned to that growth.
Let me, let me, Kevin Beggs, I'll say something that add to others. So you can weigh in so.
Start with fiber to the domain of conflict.
It is a growth area because of the maturation of that in the concerns within the federal government around that.
So that's pretty straight forward based on the National defense strategy, and where things are headed.
Within that our focus on cyber is now an important factor of Allied things IP.
And so that's been a benefit and you see that in some of the things that we've spoken about and with that I'll hand, it over to Rick in that way.
Yes, I think in the intelligence community, obviously cyber is a big portion of our growth there.
But also also IP monetization as they move to the cloud and.
As they work towards automation that that's creating a lot of additional opportunity for us as well.
And I would say as you know is a national security focused company right the areas where.
That budgets are aligning our REIT and our our strengths. So when we talk about things like bringing digital to the mission in ways that other others are not we're seeing that alignment right.
The budgets.
Okay and given this is the focus of inside of a modernization and the broader macro trends in the federal government, where should we kind of focus our attention for mantech too.
Perhaps outperformance in W.P. or is it going to be in the civilian side and cyber.
Where is the real opportunities for mantech to kind of leverage its.
Really strong capabilities.
Better than some of its peers and the government service industry.
There are a lot of opportunities out there. So we're very excited about where we are on the market in terms, whether we outperform or not I think that's all based on how well we position ourselves collectively and go after them the market each opportunity.
So I just think that the market is positive for those of us in the power sector, where we're focused right now.
And we certainly hope to to be competitive in all that we do.
All right. Thank you guys.
Thank you and our next question will come from the line of Brian Kinstlinger with Alliance Global Your line is now open.
Great. Thanks, just one question I was hoping you could comment on revenue guidance I was a bit surprised that it was an adjusted given the twoq bookings were lighter than you expected and it sounds like Threeq you will be solid on procurements, but also again later on bookings, which means you're not ramping some the work you may have thought so maybe talk about how confident you are at the midpoint. It sounds I mean, the high point is not what you're thinking, but it's still an acceleration to 8.5% organic growth. So maybe you can talk about company you are with that.
Yeah, I think you know we have really high confidence I think we've got at the midpoint more than 90% of that is already in in backlog.
So it really is just a matter of like I said that the program that Rick talked about how quickly those people get onboard.
Oh, we did win from some other new programs in Q2, so the new business that we do have out there as Kevin mentioned, it's a very light recompete year from us forever for us. So the bookings that we expect for the balance of the year I think we'll continue to be essentially 50 plus percent new work that well add grow.
So to me I think you have to lower and very very solid and then it becomes the ramp and the materials to get above you know to get.
To the upper end.
Great just one follow up if you don't mind.
You talked about the materials and Odcs does that typically come out of backlog or is there often times, where we won't see that in backlog.
For the most part it's in backlog.
Okay. Thanks, so much.
Brian It appears that we have no further questions at this time as usual members of our senior team will be available for any follow up questions. Thank you all for your participation on todays call and your interest in Mantech.
Ladies and gentlemen, this does conclude today's conference. Thank you for your participation have a wonderful evening you may now disconnect.