ManTech International Corp (MANT) CEO Kevin Phillips on Q1 2022 Results - Earnings Call Transcript

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ManTech International Corp (NASDAQ:MANT) Q1 2022 Earnings Conference Call May 4, 2022 5:00 PM ET

Company Participants

Stephen Vather - VP of M&A, IR & Executive Director, Corporate Development

Kevin Phillips - Chairman, President & CEO

Judith Bjornaas - EVP & CFO

Matthew Tait - COO

Conference Call Participants

Tobey Sommer - Truist Securities

Bert Subin - Stifel, Nicolaus & Company

Mariana Mora - Bank of America Merrill Lynch

Gautam Khanna - Cowen and Company

Operator

Good afternoon, ladies and gentlemen, and welcome to the ManTech First Quarter Fiscal Year 2022 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Stephen Vather, Vice President, Corporate Development and Investor Relations. Please go ahead, sir.

Stephen Vather

Welcome, everyone. Thanks for participating on ManTech's first quarter call. Joining me today is Kevin Phillips, our Chairman, CEO and President; Judy Bjornaas, our CFO; and Matt Tait, our COO.

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 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 statement 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.

Kevin Phillips

Thanks, Stephen, and good afternoon, everyone. Thank you for joining today's call. I'm pleased with ManTech's 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 '22 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 as 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 in 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 US defense and intelligence full-spectrum cyber capabilities remains core to national security. The turning and countering near-peer threats is receiving overwhelming bipartisan support, which is evident in the funding priorities in the FY '23 residential budget request.

The recently provided FY '23 request calls for $773 billion for defense and $94 billion for intelligence, which represent increases of 4% and 9% over FY '22 enacted levels, respectively. More importantly than the top line 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.

Furthermore, the current and proposed budget growth for the Navy, intelligence community and cyber across the federal government offer long-term tailwinds to our business. After extraordinary challenges over the last 8 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 seem to be behind us. The Afghanistan 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 tailwinds 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'll turn it over to Judy to cover the details of our Q1 financial performance and outlook.

Judith Bjornaas

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 ODCs. Furthermore, revenue growth was bolstered by contributions from our recent acquisitions. Q1 EBITDA was $66 million, up 7% year-over-year. Resulting EBITDA margin was 9.7%, 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 $0.76, 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 $0.89, both up 1% from Q1 of 2021. 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 dollars in the quarter, which represented 1.1 times net income and was driven by a strong DSO of 63 days, an improvement of 5 days from the fourth quarter 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 $0.41 per share to be paid in June. Our balance sheet remains flexible and leverage as well within our comfort level. 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're reiterating our previously communicated guidance across al 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, modes and recompetes 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 begin to enjoy more fulsome revenue contribution from recently won contract awards.

For margins, our guidance continues to assume and EBITDA margin of 9.6%. As a reminder, 2022 margins assumes the normalization of indirect spending and excludes nonrecurring tailwinds enjoyed in 2021. Turning to our bottom line, we continue to expect our adjusted net income to be in the range of $141.3 million to $148.5 million, with adjusted diluted EPS of $3.42 to $3.60. These ranges still assume an effective tax rate of 25.2% and a 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 1.5% 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.

Matthew Tait

Thank you, Judy. In the quarter, we booked $464 million in contract awards resulting in a book-to-bill of approximately 0.7x. Bookings in the quarter were driven large line new business, which accounted for approximately 2/3 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 moment is what backstops our belief that ManTech has a differentiated market position to capitalize on continued cyber demand over the long terms.

Additionally in the quarter, we won a model-based system engineering OTA with the navy, which only further reinforces our long-term thesis around acquiring Gryphon. 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 Gryphon and are now squarely folk 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, a welcome change as we look forward to reaccelerating growth in a core market for us.

Overall, we are pleased with progress to date in both the market environment and our performance. We are firmly confident in ManTech's 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.

Kevin Phillips

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.

Question-and-Answer Session

Operator

[Operator Instructions]. Now first question coming from the line of Tobey Sommer with Truist Securities.

Tobey Sommer

I was wondering if you could describe the factors that kind of drove the improvement in growth in the quarter and then maybe dovetail that into the rate of growth implied in the annual guidance and any sort of nuance in cadence.

Judith Bjornaas

Sure. So I would say we had really strong DL in the quarter and then ODC moving to the left 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 the ODCs that came in early and then a slight step up in the second half of the year as new business starts to ramp up.

Tobey Sommer

And for my follow-up, I was curious, you mentioned looking at some acquisitions that may be something over the next several quarters. How would you characterize the M&A market and what you're seeing both in terms of quality as well as valuations?

Judith Bjornaas

Yes. I think there's still some really good companies out there. The market is a little slow right now given 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 has been so quiet right now, but I don't see anything that's implying that valuations are going to drop meaningfully.

Operator

Our next question is coming from the line of Gautam Khanna with Cowen.

Matthew Tait

Gautam, we can't hear you.

Operator

Next question come from the line of Bert Subin with Stifel.

Bert Subin

So I guess my first question, how has your customer exposure changed past year? I appreciate you obviously had the drawdown in the Middle East, I'm just curious how that's changed and how you expect it to continue changing from here.

Matthew Tait

I think customer exposure a bit large, it's -- and the macro is still steady. I mean our intelligence and defense are still the franchise positions for us within the industry that we're staying with. And so we don't see anything -- any macro appreciable change there.

Bert Subin

Okay. And then I don't know if, Judy, I didn't hear this in your prepared remarks, but can you say how Gryphon performed on a revenue basis during the quarter? Or I guess, put another way, can you say what your organic growth was during 1Q?

Judith Bjornaas

Yes. So as I mentioned on the last call, our organic growth for the full year is expected to be negative mid-single digits in Q1 is in line with that.

Operator

Our next question coming from the line of Mariana Mora with Bank of America.

Mariana Mora

So my question is going to be. You mentioned in the prepared remarks how encouraging are both like the recently appropriated FY '22 budget and the request. How fast can we see the higher defense spending impact your top line?

Kevin Phillips

It's Kevin. Let me briefly comment on that. So look, it's going to be choppy. I think that directionally, the funding is there. The FY '23 view is very positive, but we have to see how the actual execution of procurements and decisions move. They're 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?

Matthew Tait

I think a couple of things is that we're seeing incremental improvement, especially in the intelligence area. A lot of, I'd say, in terms of submissions, right, that has -- feels like that's really gotten close to normal back again in that area of the woods. But in terms of -- I think they're still not fully up to speed yet on the adjudication side, positive progress. And so we're encouraged by what we've seen so far.

Mariana Mora

Perfect. So then my follow-up is also related to that. You mentioned some improvement in the work and adjudication environment. Could you please give us some color around that? And what you saw in the quarter? And how has that changed or improved so far second quarter?

Matthew Tait

Yes, sure. So while we don't have a crystal ball to give you a prediction on the quarterlys, we are happy with the bookings in the first quarter, especially that's really in line with what we would view as a seasonally softer quarter and you had the CR that really covered the majority of Q1. And so with the $6 billion that we have in proposals outstanding, much of that is expected adjudications over the next several quarters. And as you heard in the remarks, right, with a healthy mix of new and recompete business. So excited about the trends, but obviously, we're still being conservative in terms of how we view.

Operator

Our next question coming from the line of Tobey Sommer with Truist Securities.

Tobey Sommer

I wanted to ask a broad question about your view of the budget and sort of more medium-term impact of the Russia-Ukraine war on that process? As we look into federal fiscal '23, do you have any kind of tentative expectations relative to growth and considering all this inflation in relative smoothness of the budget process if we juxtapose it with this year's budget that took 6 months award catalyze?

Matthew Tait

So when you speak about Ukraine, I think for us, the EUCOM support is 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'd say we view that within the context of Ukraine. I mean that's a terrible situation, obviously. And so we obviously -- our hearts go out to the folks involved there, but in terms of that now. And the macro environment, from a budget perspective, I'll pass it over to Kevin if he's got any additional comments there.

Kevin Phillips

Yes. Thanks, Matt. Look, directionally, bipartisan support for countering China, supporting Ukraine, you can see the shift in the federal budget drive in terms of more defense and intelligence. I think that, that's likely to stay for the foreseeable future. Now how that plays out? Again, I think we're pretty well positioned. But we need to see how it plays in terms of the final numbers, just like all of our industry to see where those money 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, I think for all of our industry, the environment is getting better, not worse, which is the key takeaway.

Tobey Sommer

Right. And with respect to margins and incremental profitability at the company, as growth does improve, is there anything we should think about in terms of the incremental profitability being different than in prior periods when you might have had better rates of organic growth, given the sort of margin tailwinds that occurred over the last couple of years as well as headwinds of labor inflation, that kind of thing?

Judith Bjornaas

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 2022 baseline.

Tobey Sommer

So even with those variables. Okay.

Operator

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

Gautam Khanna

Can you hear me guys?

Kevin Phillips

Yes. Got you.

Gautam Khanna

Okay. Sorry about that earlier. I was hoping maybe, Judy, you mentioned in the prepared remarks that ODCs were a little higher I assume than expected, there was a pull forward or something. Just wondering if you could quantify that. And then just to your point on this is sort of the run rate, obviously, you take $675 million, multiply times 4, you get to $2.7 billion. Are there any things that are rolling off besides this ODC thing ? Is there anything that maybe is rolling off that's dampening what should be, I think, a seasonally better Q2 and Q3 just based on seasonality.

Judith Bjornaas

Yes. So I think I mentioned about 60% of the beat from the ODCs. So that's roughly $20 million of pull forward. I don't think any of it was really new or unexpected. And then DL was running a little bit higher than we expected just from, I think, higher utilization rates. We did I have -- I think we talked about it at the year-end call, there was a little bit of runoff in some of the Department of State work in the beginning of Q2, but it was really nominal. It was it's not a driver of Q1 performance.

Gautam Khanna

Okay. In Q1, the whole country was [indiscernible] with COVID in January, did that -- I'm surprised DL was as strong as it was in the first quarter. Did that not bite you guys or?

Judith Bjornaas

We had 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 was kind of after the first week or so was kind of back to business as usual.

Gautam Khanna

Okay. And just given the late passage of the DoD budget in March and they 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 ODCs or anything else? Or I mean should we just conclude that, hey, it's going to be a year where the customer sends money back to the treasury? I'm just curious how you're...

Kevin Phillips

Gautam, it's Kevin. I think that we're all focused on how that funding will be spent I hope that for '23, it looks like a regular order, we'll start playing a little bit just to be responsive to the global needs I would just say it will be sporting. We're ready to support our customers in any way to help them in obligating and supporting critical missions.

Gautam Khanna

Okay. And then just lastly, you guys have talked about 90% of the sales visibility and backlog. Can you remind us on the recompete exposure over the next, I mean, 12 months, maybe 24 months as well? Just to calibrate.

Judith Bjornaas

Yes. So the balance of the year is really kind of back-end loaded. And I think the total of this year into next year, it's kind of that normal 20%, 25%.

Gautam Khanna

And are there any chunky concentrated recompetes? Anything worth like 5% of sales or...

Judith Bjornaas

No, none of our contracts are greater than 5%.

Operator

Our next question coming from the line of Bert Subin with Stifel.

Bert Subin

Just had one follow-up. Kevin, in regards to the comments you were making on the FY '23 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?

Kevin Phillips

Well, two parts to that. I think on the appropriation side, as well as the authorization, there's more rapid movement and trying to get towards decisions and conclusion in both sides of the aisle. Now how that plays out in terms of preparedness and timing. I think it will be quicker than this year, but we don't know how it's going to play against the overall election season.

So in my head, it's going to be December, January time frame, but we'll have to see how it plays out. I would say there's more urgency on getting something done, just based on the global environment, but still recognizing that there's other factors at play.

Operator

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

Mariana Mora

So if you don't mind, could you mind giving us some color around the labor market, how it's hiring for you in the moment?

Matthew Tait

Sure. Yes. So I think 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, I'd say in the macro, right, the environment has always been competitive. So I wouldn't say there's like a big change. It just feels like it's going back to a pre-pandemic view of the market.

Operator

And I am showing no further questions at this time. I'll turn the call back over to Stephen Vather.

Stephen Vather

Great. Thanks, Olivia, 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 you might have. Thank you, and have a good evening.

Operator

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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