ManTech International (MANT) CEO Kevin Phillips on Q3 2018 Results - Earnings Call Transcript

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About: ManTech International Corporation (MANT)
by: SA Transcripts

ManTech International Corporation (NASDAQ:MANT) Q3 2018 Earnings Conference Call November 1, 2018 5:00 PM ET

Executives

Stephen Vather - Executive Director, Corporate Development and M&A

Judith Bjornaas - EVP and CFO

Kevin Phillips - President and CEO

Matt Tait - President of Mission Solutions and Services Group

Rick Wagner - President of Mission, Cyber and Intelligence Solutions Group

Analysts

Edward Caso - Wells Fargo Securities

Gautam Khanna - Cowen and Company

Robert Spingarn - Credit Suisse

Joseph DeNardi - Stifel Nicolaus

Brian Kinstlinger - Alliance Global Partners

Tobey Sommer - SunTrust Robinson Humphrey

Joseph Vafi - Loop Capital Markets

Joseph DeNardi - Stifel Nicolaus

Operator

Ladies and gentlemen, good afternoon, and welcome to the ManTech's Third Quarter Fiscal Year 2018 Earnings Conference Call. [Operator Instructions]As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Stephen Vather, Executive Director, Corporate Development.

Stephen Vather

Welcome, everyone. Thanks for participating on ManTech's third quarter call. On today's call, we have Kevin Phillips, President and CEO; Judy Bjornaas, Executive Vice President and CFO; as well as Matt Tait and Rick Wagner, 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 of 1995. 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, I would like to turn the call over to Kevin.

Kevin Phillips

Good afternoon, everyone. I'm pleased with the solid financial performance in the quarter. We reaffirmed our position as the industry's leading growth company by delivering another quarter of consistent organic revenue growth.

Additionally, we improved operating margins, grew net income and earnings per share as well as generated healthy cash flows. Our employees are fundamental to ManTech's continued success so I want to take a moment to thank them for their dedication and support of our customers and their critical mission.

Let me offer some thoughts about the broader market. I have said this before but I want to reemphasize that we are operating in a strong market environment. For the first time in 10 years, the Defense Appropriations Bill was enacted on time.

Additionally, the FY '19 appropriations calls for $674 billion in defense, which represents continued budget growth at a 3% increase over FY '18. While most of the federal government is operating under full year appropriations, there are a number of federal civilian agencies, including the Departments of Homeland Security and State, that are under continuing resolution through at least early December.

Overall, our customers have solid visibility into their 2019 funding levels, and will have sufficient time to spend against their mission requirements. As we look to 2020, the administration is beginning its cycle of reviewing its prior DoD budget estimates.

We as a company remained solidly positioned to provide our capabilities and innovative solutions to meet the critical needs of our customers. Cyber has received renewed focus within the administration. In September, the President unveiled a revised national cyber strategy and the Department of Defense issued its updated cyber strategy as well. These strategies underscore the importance of the cyber domain and articulate the nation's posture and operational policy.

Furthermore, the FY '19 National Defense Authorization Act affirms the authorities provided to the executive branch, particularly the Department of Defense, to conduct military operations in cyberspace. ManTech will continue to be a key player in providing differentiated full-spectrum cyber solutions supporting this important domain. We are committed to delivering best-in-class solutions for our customers.

Our employees are integral to bringing them the thought leadership and innovative solutions they need. In the quarter, we expanded our partnership with Purdue University Global, unveiling a new Bachelor of Science degree program in cloud computing for ManTech employees. This degree is yet another example of how we are committed to the continuing development and education of our employees, as well as ensuring our employees are well-equipped to address the evolving technology needs of our customers.

On the business development front, in the quarter, we saw $1.1 billion of contract awards resulting in a book-to-bill ratio of 2.2x. In Q3, 73% of the awards represented new work for ManTech. Our largest contract award in the quarter was the Continuous Diagnostics and Mitigation contract. While new, it will only provide for incremental growth given our incumbency on the predecessor phase of this overall program.

Strong bookings drove total backlog up 7% to $8.3 billion, and our funded backlog stood at $1.3 billion. Given the number of contract awards this year, we are dedicating time and resources to ensure solid program execution across our business. We recognize the importance of exceptional customer satisfaction and mission success. As we discussed on our last call, some of the large contract awards we have received this year will see gradual ramp up over the next year.

At quarter-end, we had $3 billion in proposals outstanding, which is down from prior quarter. In Q3, we experienced significant contract award volume, but a lighter volume of proposal submissions. To help quantify, in the quarter, the government adjudicated nearly double the volume compared to Q1 and Q2. However, the amount of proposals that were submitted in Q3 was about 1/4 of the first half of 2018.

Additionally, of the award decisions made in Q3, we were less successful in larger new contract takeaways than in prior quarters. We remain confident in our competitive positioning and our ability to win our fair share, which has been demonstrated by the volume of contract awards won year-to-date and over the last few years. Additionally, we have a strong pipeline, which remains steady at over $20 billion leading into 2019.

In the fourth quarter, we anticipate an inversion of what we experienced in Q3, as we expect to see a higher level of proposal activity, but adjudications will likely be moderate. We expect to submit about $10 billion in proposals for the full year, which represents an increase of nearly 45% from 2017.

As on the visibility that we are afforded today, we are predicting a similar proposal activity for next year. In total, we have built strong foundations, that positions the company for continued growth in 2019. We remain steadfast in enhancing ManTech's strong competitive position to capitalize on the robust market opportunity over both the short and long term.

On a separate note, I am pleased to announce that we promoted Yvonne Vervaet to Senior Vice President of Growth and Capabilities. As we continue to position the business, we are enhancing our leadership in response to the strong market and increased demand for technology in all aspects of national and homeland security. Yvonne will be responsible for setting the company's growth strategy by aligning business methods, capabilities, and enabling technologies to our business opportunity pipeline.

Now I will turn it over to Judy to discuss the details and specifics of our financial performance and outlook. Judy?

Judith Bjornaas

Thanks, Kevin. The financial results in the quarter surpassed our expectations. Revenue for the third quarter was $497 million, up 18% compared to the third quarter of 2017. Over half of our revenue growth in the quarter was organic. Direct labor continued to show strong growth, up 14% year-over-year, and we also experienced increased material procurements driven by customer requirements. For the quarter, prime contracts represented 89% of our revenues. Contract mix was approximately 68% cost-plus; 22% fixed price; and 10% time and materials. Operating income for the quarter of $29.4 million was up 27% from the third quarter of 2017.

Quarterly operating margin was 5.9%, and came in slightly above our expectations. We achieved our highest quarterly earnings in 5 years. Net income was $21.9 million and diluted earnings per share was $0.55 for the quarter, up 44% and 41% year-over-year, respectively. These increases were driven by our revenue growth, improved margins, and a lower effective tax rate.

Now on to the balance sheet and cash flow statement. Our balance sheet at quarter-end showed $15 million in cash and no debt. During the quarter, we generated $59 million of cash from operations or 2.7 times net income. DSO was 67 days for the quarter, a 1-day improvement both sequentially and year-over-year. The board has authorized us to maintain our current quarterly dividend level of $0.25 per share to be paid on December 21, 2018.

Now on to our revised 2018 outlook. Based on our performance to date, we are raising and narrowing the range on revenue compared to what we previously communicated. We are now calling for revenues of $1.94 billion to $1.96 billion, which represents 13% to 14% growth compared to 2017. We have very high visibility and minimal recompete risk for the balance of 2018.

However, achieving the higher end of the revenue range will be contingent on the timing and pace of material procurement as well as the ramp-up of our recent and any new contract awards. We are maintaining our previously communicated operating margin guidance for the year of 5.7% to 5.8%. At the bottom line, we expect net income between $81.7 million to $83.3 million, and diluted earnings per share of $2.05 to $2.09.

We still expect capital expenditures to be around 2% of revenue and related depreciation and amortization to be around 3% for 2018. Our cash flow from operations estimate remains between 1.2 times and 1.5 times net income for the full year. Built into our guidance, our full year effective tax rate of 25.2% and a fully diluted share count of 39.9 million shares.

Before I turn it over to Matt, I wanted to provide a quick preview into our potential 2019 financial performance. Consistent with our normal practice, we will provide full 2019 guidance on our Q4 2018 earnings call in February.

The visibility we have today suggest that we should be able to sustain mid- to upper-single-digit organic revenue growth into 2019. We will continue to balance incremental margin improvement with a target of 10 to 15 basis points, while focusing on long-term growth of the business.

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

Matt Tait

Thanks, Judy. I want to begin by taking a moment to highlight the innovation and technical thought leadership happening on one of our key programs today for an important federal civilian customer. On this contract, ManTech is working to consolidated multiple, disparate, mission-critical, on-premise legacy systems into a single unified platform. Our team is using agile development, DevOps methodologies, and open source tools to rebuild the components of these systems into the cloud securely, ultimately creating a suite of modernized and integrated applications.

We are helping drive the transformation of the customers' IT environment and business processes to leveraging best-in-class technologies, all the while ensuring their ability to seamlessly execute their mission. We are excited to leverage this success among many others across ManTech's customer base.

Let me quickly touch on some business development successes in the quarter. ManTech added another important IDIQ vehicle to our portfolio. We were awarded a prime position on the Department of Defense Information Analysis Center Multiple Award Contract, also known as IAC-MAC.

This nine year vehicle, with a $28 billion ceiling, is used across the Department of Defense to procure a range of research and development, and engineering services. Additionally, ManTech won another new contract supporting the Navy aviation modernization effort. This recent contract award is a four year, $45 million contract with the Naval Air Systems Command, to support the modernization of systems and sensors on the Hawkeye and Greyhound Platforms. Rick, over to you.

Rick Wagner

Thanks, Matt. I am pleased to report that MCIS had another great quarter. We continue to reap the rewards of our strategic investments and had success in winning both new work and recompetes.

In the quarter, we successfully cleared the protest of our $669 million, 6-year Continuous Diagnostics and Mitigation award for the next phase of the program called Defend. ManTech has supported the CDM program since its inception through work covering 65 agencies on Phases one and two of the program.

This new award represents a natural progression of the program, and under this contract, we will support DHF's and nine federal civilian agencies by strengthening their cybersecurity posture and improving their ability to rapidly respond to cyber threats.

CDM Defend expands capabilities with the overall CDM program to include cyber security coverage for cloud and mobile devices, automated incident response, enhanced data protection, and the improved user management.

In addition to the CDM win, we were awarded a 10-year, $158 million contract with the Air Force, to continue providing full-spectrum security solutions. I am pleased with the opportunity to continue supporting this important Air Force customer.

Given our strong position on current contracts, our recent wins, and our growing pipeline, we remain well positioned to meet the increasing customer demand, particularly in the areas of cyber, full-spectrum security, and IT modernization.

Lastly, I am pleased to announce that we brought a new executive into the company this quarter, Adam Rudo. Adam came to us from General Dynamics, and will lead our Security Solutions business unit. Adam's long-standing experience with the intelligence community customers and programs will be a great asset in driving growth.

In summary, we remain optimistic about the market environment and believe we are well positioned for continued growth. Given our steadfast investments and continuing employee development and education, our recent leadership promotions, and our focus on recruiting strong talent, we believe ManTech is an employer of choice for professionals seeking to support national and Homeland Security missions. With that, we are ready to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Edward Caso with Wells Fargo.

Edward Caso

Good evening, congratulations. Could you talk a little bit more about what's happening at Homeland Security and state? How important are those clients to the overall ManTech profile? And are you seeing them change any behavior? Obviously, the CR number they're working with this year is a lot higher than it was last year. So are you seeing any sort of hesitation at this point?

Matt Tait

Ed, this is Matt. So first of all, thanks for the question, good evening and good to hear your voice again. So I - on the DHS and Department of State, we are still seeing strong demand for the types of services that we are looking to provide for both of those clients. So being in a CR is not really affecting us in those markets.

Edward Caso

Great. And the organic growth rate in the quarter was what?

Judith Bjornaas

It was a little bit more than half of our total 18% growth.

Edward Caso

Great, thanks. Congrats.

Operator

Thank you. Our next question comes from Gautam Khanna with Cowen and Company.

Gautam Khanna

Thanks. I was wondering if you could give us a little more color on the margin expansion potential next year and where do you expect it to come from? Is there any going to be any significant change in contract mix, given the recent bookings and tuck-ins? I'm talking cost that's T&M, fixed price? Or is this volume leverage on the fixed cost base?

Judith Bjornaas

Yes. I think it's - we're still targeting kind of that 10% to 15% basis improvement. We are not seeing a significant shift in our contract mix. In fact, this year, it's actually crept up a little bit each quarter, and we've still been able to deliver expanded margins on top of that. So I think it's going to be leveraging on the fixed price and T&Ms, a little bit more - we're seeing a little bit more of a shift in the proposals, but nothing significant, and it's going to be a long time to see a major shift in the mix to drive margins beyond that kind of 10 basis point.

Kevin Phillips

Gautam, it's Kevin. Customers are looking for outcomes-based options, but the requirements are a little bit difficult to work through. So I think the desire is there, but it's a difficult process, the transition to that type of procurement.

Gautam Khanna

Fair enough. I appreciate that. And maybe you could just comment a little bit about any lessons learned? Or if there's any common theme to some of the larger procurements you're pursuing that will adjudicate in someone else's favor? Is there anything common as...

Kevin Phillips

Yes. No, I mean, there's no common theme around that. And we've been going after some very large bids the whole world for '18 and '19, given the position as we've talked about, had the capabilities in past performance and the offerings to go after large procurements. And we've been very aggressive at that for last year, and for the other part of this year, have been very successful.

For these - this one quarter, we were less successful. But I wouldn't say there's any one indicator, other than the timing of some of the big takeaways having less success. So no, the answer is no. We're still on path, we're doing well. It's just a timing issue of when we win business, and we're less successful in these larger takeaways.

Gautam Khanna

And last one for me, if you could just comment on, and the balance sheet's obviously very strong. How's your M&A pipeline looking these days? Do you anticipate anything of consequence - anything that maybe moves the needle over the next six to nine months in the M&A pipeline getting done?

Kevin Phillips

Yes. So the number of businesses that we've looked at this year year-to-date is less than the number that we've looked at last year and the year before. I do think that there are fewer businesses that have been in the market, but some of the larger ones had been, which was taking the headlines.

That said, once we find, because we're fairly focused on what we're looking for in terms of opportunities, we've been aggressive on when we find the right opportunity, but have not been successful, I think it's just because the overall pricing in the market.

So again, we're fairly disciplined in what we're going after. Just been on the pricing, and I think there's - there are a lot of good businesses out there. We're focused very heavily on when they come out and how they go after them. But I really can't time when they come out. Or frankly, given the pricing that's been in the market, whether we would get to the right price to get the deal done.

So we're going to keep taking a stab at it. Still heavily focused on it, but we have to see how those two factors play out.

Gautam Khanna

Understood. Thank you guys.

Operator

Our next question is from Robert Spingarn with Credit Suisse.

Robert Spingarn

Hi, good afternoon.

Kevin Phillips

How you're doing.

Robert Spingarn

All right guys, thanks very much. Couple of things. First, I wanted to ask you if we could parse out that DoD book of business a little bit. Perhaps by category, O&M versus the other accounts like R&D, maybe procurement. Is there any way to think about your percentage exposure to the various DoD accounts?

Kevin Phillips

I'll try to get everything highlighted. Most of our work is on the O&M side, all right? We don't do much on procurement. I will say that some of the work in the procurement arena is driving up some requirements on the O&M work that we do. And I can't get the specifics of that, but I do see that there's an alignment, some submission needs that are very closely aligned.

In the DoD arena, I'd say that a lot of the work that we see is potential, a lot of systems engineering work, a little bit of RDT&E work, but potential for expansion in the balances in the O&M arena.

Robert Spingarn

Okay. And then, just from a service Air Force, Army, Navy perspective, is there a majority pointing one direction?

Matt Tait

Well, I would say - I mean, I don't think there's any one service that is kind of having a larger pool than any of the other ones. I think we see all the markets have a very good potential for us as we're coming to FY '19.

Robert Spingarn

Okay. All right. And then, I know I ask about this with regularity, but I just - Kevin, I wanted to understand better, tie together, your backlog to your sales growth. I see you just commented, next year we'll have some nice growth. And I do see that in the total backlog. The funded backlog is down year-on-year.

What's the best way to think about - what's the best metric to follow in order to more accurately model your forward growth? Because I'm thinking, if I went with funded backlog, and I get the opposite conclusion, and that sounds like - again, we talked about this last time, there's a duration disconnect there. So it's probably the wrong way to go.

Kevin Phillips

Yes. It is very hard right now to do that, and I fully understand that. So the overall backlog increase represents our ability to win contracts, larger contracts, and generally, within that though the number of years that, that contract term is for is longer. So what we're seeing is a little bit longer term for the contract awards we have that - while those contract awards are increasing.

Within that, though, that is still mainly one year money that we're supporting. And so those government customers are working to work within that one year money to allocate it, incrementally. So that they can manage to and through that. That's pretty much how they have operated within the O&M side. So what you're seeing is more wins, longer term, increase in the overall backlog, longer certainty of a revenue stream, but still under annual funding restriction.

Judith Bjornaas

Yes. And I'll just add to that. We do have a number of customers who really - I mean they've got their budgets in place. They still like to fund on a 2- to 3-month basis. So that is kind of skewing the overall funded backlog, and that behavior has not changed, despite having better budget certainty.

Robert Spingarn

So some of that is just even intra quarter? So it's little shorter?

Judith Bjornaas

Yes.

Robert Spingarn

Okay. That's probably a big piece of it. And just while we're on the topic, anything major that sunsets next year?

Judith Bjornaas

No.

Kevin Phillips

Recompetes are below average next year.

Robert Spingarn

Okay, very helpful. Thank you both.

Operator

And our next question comes from Joseph DeNardi with Stifel.

Joseph DeNardi

Thank you very much. Kevin, you mentioned the adjudication of volume in the quarter versus B&P, and how that looks in the fourth quarter. Maybe I should be reading between the lines, and I can't, but is there a message there that you were trying to send to us.

Kevin Phillips

Yes. I know I can be confusing sometimes, I've been - even inside this business here, they tell me that. So anytime I say something incorrect or confusing, let me know. So basically, the messages in Q3, the quarter we just ended, decision-making on the what to award was high, the request for what they want, proposals to submit were low, compared to the first half of the year.

That's reversing to where we have a heavy amount of proposals we're submitting in the fourth quarter, but they have less they expect to award in the fourth quarter. So the adjudications or the award volume may be lighter and their proposal value might be at or above average for the first half of the year, not Q3. I hope that's better.

Joseph DeNardi

Got it. Yes. That make sense. And then, Kevin, I would imagine, when you look at M&A, you have to have a view on what the budget's going to look like over the next few years. I'm wondering if you could just share with us what your perspective is, just given some of the recent commentary around spending in FY '20? Thank you.

Kevin Phillips

Yes. Sure. So we - a couple of things we know, is that the FY '18 appropriations for DoD, and I'll focus there, because of the concentration we currently have went up 8%. FY '19 appropriations, again, first time in 10 years got approved on time, went up 3%. And there's a lot of discussion about for FY '20, a drop.

But the drop that is being discussed is against the requested amount. So if you look year-over-year, that overall amount would be less than a 1% drop compared to the appropriations for FY '19. So I would just caution about up or downward ranges against that backdrop.

Within that, our concentration in areas like cyber is an example in FY '19, the cyber budget went up 8%. And we just see within the national defense strategy, a focus in areas where we have strength, and where we have been committing to place ourselves strategically for several years. So I think that the overall budget environment will be decent. It's been great. And we'll see what happens after that.

Joseph DeNardi

Thank you, it's helpful. Thank you.

Operator

Our next question comes from Brian Kinstlinger with Alliance Global.

Brian Kinstlinger

Hi, guys, thanks for taking my question.

Kevin Phillips

How you're doing.

Brian Kinstlinger

Great, thank you. I'm curious of the - as it relates to the GSA award, $668 million, what percentage of that represents growth? Or expanded work? Sorry.

Kevin Phillips

That's an effort that we've been working for several years. Given that award, we expect minor growth on that, but it won't be significant growth over the work that we've been doing.

Brian Kinstlinger

Got it. And the $3 billion in proposals outstanding, can you roughly characterize what percentage of that is for new business versus recompetes?

Kevin Phillips

It's heavily new. I mean, again, the recompete mix for the next 12 months is below average.

Brian Kinstlinger

Yes. So it looks like if I adjust it for the GSA award, the awards from new or expanded business are down significantly in the first 9 months of this year versus last year. So I'm wondering if - when I take into context mid to high single digits for next year organic growth, to get to the midpoint of the high kind of end of that, does that assume a couple of really large awards in the next six months or faster-than-expected ramps on your larger programs? I mean, how should we think about that?

Judith Bjornaas

I think it's going to be a combination of the - of timing of new awards, and the ramping of them. The big billion dollar award that we had in Q2, it doesn't fully ramp until the end of next year, so that's going to add.

You kind of increase growth over the year. As Kevin mentioned, a lighter amount of recompete next year gives us a little more stability into the growth. And we've had some other task, but smaller task orders award in the Navy in the last quarter and that will provide growth into next year as well.

Brian Kinstlinger

Understood. And then, I guess, lastly, with organic growth accelerated this year, and still remaining elevated, it sounds like next year, can you talk about the ease and or challenges of staffing and recruiting, given the low unemployment rate, obviously, for talented staff that has clearances in the industry?

Kevin Phillips

Yes. So it's multifaceted, but the clearest backlog is starting to improve on that side. There's recognition around that, I think, that we've talked about that before. If you notice, internally, we have 2 degree programs. We've created one around cyber defense, one around cloud, to train internal staff, to retool them towards the technologies. And we have other similar programs we're working to develop.

And within the market, it is all about the type of work you do, and the excitement around that. And we're very much focused on being able to attract the talent. I would say that we've done a very good job this year of hiring people, and positioning into the markets that we want to be in. That said, it is definitely a tight market, and it is a day to day effort to try to fill the slots, and we've been fairly successful so far.

Brian Kinstlinger

Okay, thanks so much guys.

Operator

And our next question comes from Tobey Sommer with SunTrust.

Tobey Sommer

Thanks. I'm curious, are there any changes to incentive compensation metrics or weightings that you're envisioning as you look out into 2019, to either take advantage of further revenue growth or margin expansion opportunities in the environment next year?

Kevin Phillips

Yes. Kevin here, we've always bantered about what the mix of incentives are. At the executive level, we find that if we have a fairly even distribution between contract awards growth and returns on the bottom line, it makes sure that on a continual basis, they're all factored and very important in how we make decisions.

So I don't see broadly major changes around that. Within that, within each organization, we are looking to figure how to advance at programmatic level incentives that are more targeted on, say, bottom line in some areas or growth in areas. It very much depends on the market they're in, and what objectives we want out of that component of the business.

Tobey Sommer

But at this point, nothing discernible that would represent a change in aggregate for the firm?

Kevin Phillips

No.

Tobey Sommer

Okay. Kevin, where are we in the recompete process for the company's kind of book that had exposure to LPTA-priced work? I know we're - some of it has been kind of probably rebid under best value, but there's still probably a little bit more of that to go. So where are we? And when do you think we'll kind of - that will have run its course?

Kevin Phillips

Yes. So if you think on the average contract life of - what we had 3, 4 years ago, was somewhere between 3.5 and 5 years. And we're in year 2, in my view, of moving away from an LPTA trend that we're basically halfway through the overall renewal and desire for each client to have higher end work and have more outcomes-based and best value awards.

Tobey Sommer

And could you refresh me on the exposure to LPTA at the peak? And maybe what proportion of that is best suited for an LPTA format, versus being recompeted on their best value in the current climate?

Kevin Phillips

I can't say specifically what was LPTA when the government had reduced cost because of the overall national debt, they had to do what they had to do, and now they're looking for talent. And it's just a general approach to their procurements for almost everything they're looking for, and we're focused generally on the higher end work and the more advanced systems engineering, where national security needs are far high.

So I tend to think that they're going to look for best value, broadly. It's a matter of how they do the overall business mix when they select awards.

Tobey Sommer

Okay. And then, I'm curious, have you - is anything revealed itself following tax reform, such that you may have preliminary thoughts on tax rate being higher or lower as we look at it next year?

Judith Bjornaas

No. I mean we're still kind of assessing that. There's so much volatility now with some of the changes around stock options and things like that, that it's hard to pinpoint on any particular quarter. We are seeing a little bit of an impact on some of the state tax rates that are driving up our potential effective tax rate a little bit.

So we'll clearly give a little more color in that in our - when we give our guidance for next year. But I don't see anything that, right now, is telling me we're going to have a significant change.

Kevin Phillips

I think that's good to know.

Operator

Thank you. Our next question comes from Joseph Vafi with Loop Capital.

Joseph Vafi

Good afternoon, good results. Just a question on bid and proposal engine as it stands now, the company continues to grow, execute well, good win rates and the like. Do you need to continue to invest more in the bid and proposal engine? Or is it at a run rate now in terms of cost that you think that can sustain a good tempo of bid submitted to kind of keep up with the excellent execution you've done so far on continuing to grow the business?

Rick Wagner

This is Rick. Given the funding environment we're in, we're investing in it. And we've got a strong pipeline and strong adjudication. So we're just continuing to push forward.

Matt Tait

All right. And this is Matt. I think that we've got the right-sized team to go attack the market space that we're looking at. So I think we're feeling good as we move into '19 with the opportunities in front of us.

Joseph Vafi

Okay. Fair enough. And just kind of taking that, and then kind of taking that to a broader picture of the puts and takes of operating leverage in the business next year, if the current pace of growth continues, and you have strong growth, and perhaps, we have modest tailwinds from higher-end contract mix, perhaps a little less LPTA and the like.

Just trying to get a feel for - if the amount of operating leverage that we could potentially see on the growth for next year, at least theoretically, is more than perhaps we've seen this year on the strong growth that we've seen so far.

Kevin Phillips

Joe, I appreciate that. So the cost plus mix is going to restrict how far that upside can go, just because of the overall - as you know, the overall component of that and how it weighs through. I do think that there could be potential if more of the procurements go into an outcomes-based bid, and that we can make sure we're managing it well, which is why we're focused on program execution right now.

So there is upside, but we're very cautious about how that plays out, given the overall environment and business mix of costs. Plus contracts in our segment of the industry really hasn't shifted as much as it could if people really were going to move to the outcomes-based in the manner that they want. So we have to follow that shift first before we have confidence in the ability to move significant to the bottom line.

Joseph Vafi

Okay. And then, I dialed in a little late, so hopefully none of this was asked before. But I know that the company's done pretty well on win rate on new business, kind of through the earlier part of this year. And it's been pretty impressive. Is that win rate on - did that win rate and new business get sustained here in Q3?

Kevin Phillips

No, the win rate and new business was lower than the higher win rate that we had. It's more towards the average for new business this quarter.

Joseph Vafi

Okay and thanks Kevin.

Operator

And we have a question from Joseph DeNardi from Stifel.

Joseph DeNardi

Thank you. Kevin, just one more on 2019 outlook. One of you just put that into context, given the pretty strong bookings this quarter, but also maybe fewer wins on some of the larger opportunities. Did the outlook for '19 get better or worse, compared to 3 or 6 months ago for you guys?

Kevin Phillips

We haven't messaged out here until - just providing a little bit of view right now, and I hesitate to say that whether it'd be better or less than that, every quarter we have to evaluate based on the overall pipeline timing of awards and how successful we are. I just think you're in a good environment.

We have a lot of proposals we're going after. And depending on where they're let, when we - they're awarded, and how well we do in the market. We'll continue to update you on our overall outlook.

Joseph DeNardi

Okay, thank you.

Stephen Vather

Carmen, it appears that we have no further questions at this time. And as usual, members of our senior team will be available for any follow-up questions.

Thank you all for your participation on today's call, and thank you for your interest in ManTech.

Operator

And ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful evening. You may now disconnect.