Ladies and gentlemen, good afternoon and welcome to the ManTech First Quarter Fiscal Year 2021 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. As a reminder, this conference call is being recorded. I would now like to turn the call over to Stephen Vather, Vice President, Corporate Development and Investor Relations. Sir, please go ahead.

Thank you. 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 from anticipated results. For a full discussion of these factors and other risks and uncertainties, please refer to the section entitled Risk Factors in our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. On today's call, we will discuss some non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our first quarter earnings release. With that, let me hand the call over to Kevin.

Good afternoon, everyone, and thanks for joining the call. ManTech continues to perform well overall. Our first quarter results demonstrated steady execution and strong profitability, which was evident by our EBITDA, adjusted net income and adjusted diluted earnings per share as well as our margins. While our industry and company have fared better than others on a relative basis over the past year, the pandemic and its duration has created a somewhat choppy operating environment. As a result, quarterly revenue growth was tempered by lighter ODCs and customer procurements shifting to the right. While procurement delays persist in pockets, we made good progress in submitting proposals in Q1 and the volume of our proposals outstanding group. The uneven market environment is likely to linger for a few more quarters. However, the long-term fundamentals and positioning of the business remains sound. Our view is reinforced by a few secular trends, namely the fact that national security threats are not abating and that there is a persistent need for technology modernization for both IT and physical platforms with an increasing convergence of the two. That said, the associated market opportunities are still bound by budget realities. The administration recently provided their FY '22 budget request, which calls for $753 billion for defense and $769 billion for nondefense, which represents proposed increases of approximately 2% and 16% over enacted levels, respectively.

Thanks, Kevin. We are steadily executing with a keen focus on generating long-term value for our stakeholders. Revenue for the quarter reached $633 million, up 4% compared to Q1 of 2020. As Kevin mentioned earlier, lighter ODCs and new business procurement delays drove growth below our expectations for the quarter. That said, direct labor remains strong and cascaded throughout the P&L, with its impact most conspicuous in our profit metrics. Our contract mix shifted slightly year-over-year. In Q1, prime contracts comprised 93% of revenue and the breakout of our contract pricing structure was approximately 66% cost-plus; 21% fixed price; and 13% time and materials. The lighter ODCs shifted our cost-plus mix lower in the quarter. EBITDA for the quarter was $62 million, which grew 12% from Q1 of 2020. This resulted in an EBITDA margin of 9.7%, reflecting margin improvement of 70 basis points year-over-year. The increased margins were primarily driven by two factors

a higher-than-usual labor mix caused by the slippage of ODCs and the consistent strength of our indirect cost management. Our expectation is that those ODCs will eventually be procured and increased indirect spending will return profitability to more normalized levels. The tax rate was 23% in the quarter, just slightly lower than expected with the majority of the bottom line strength coming from operational execution. Net income was $32 million and diluted EPS was $0.79 for Q1, up 13% and 11% from Q1 2020, respectively. Adjusted net income was $36 million and adjusted diluted EPS was $0.88, up 11% and 9%, respectively, from last year. Now on to the balance sheet and cash flow statements. For the quarter, cash used in operations was $8 million. This is exclusively attributable to an expected uptick in net working capital. DSO was 61 days at the end of the quarter, a five-day increase from the fourth quarter of 2020. At quarter end, the balance sheet showed $7 million in cash and $22 million of debt.

Thank you, Judy. Let me walk through the business development and operational highlights from the quarter. We won $561 million of contract awards, resulting in a 0.1 -- 0.9 book-to-bill in Q1. Our differentiated capabilities in cyber, mission and enterprise IT and intelligent systems engineering are apparent in these awards.

Thanks, Matt. In closing, let me emphasize that we remain focused on executing and innovating for our customers; attracting, developing and retaining talent; and leveraging the balance sheet to deliver strong long-term shareholder value. I want to reiterate my thanks to the team for their unwavering commitment to our customers and their critical missions. With that, we are ready to take your questions.

Our first question comes from the line of Gautam Khanna from Cowen. Sir, please go ahead.

Gautam, are you on?

Gautam?

Sorry about that. I was on mute there.

I know it's a very important. I love it.

That was the easiest one of the day. Hey, I was going to ask on the ODC dynamic, what was the shortfall there relative to your going-in expectation? And do you expect 100% of whatever that shortfall is to be made up later this year? And if so, kind of when? Is it Q3? Is it Q4?

Yes. That's the problem with these materials, they're so lumpy with when they come in and I think some of it was probably supply chain. I don't know if you've tried to order a refrigerator lately, but you just can't get things. But the customers are -- the demand is still there. The timing, we fully expect it to come through at some point this year, whether that's next quarter, more likely second half, but we do expect it to be made up.

And did you give a figure for it? I may have missed it, Judy, if you said how much specifically was -- yes.

No, we did not. No.

Okay. But you would have expected a sequential increase in sales. Maybe could you speak to what the sequential decline in ODCs was quarter-to-quarter?

Yes. I mean direct labor was definitely greater than the total top line growth. The ODCs were down, I think, mid-single digits.

Okay. No, that's helpful and then just on the bookings environment, $8 billion of outstanding bids as of the quarter end. How do those phase in terms of when they're expected to be adjudicated over? Is it like a big Q2 and a big Q3? Or any sort of color you can give us on kind of when those are expected, the bulk of those to be adjudicated?

Gautam, this is Kevin. I think when we talk about the choppiness, it's uncertain as to when they will be adjudicated because there's so much volume out there. I would note in terms of color is that it's -- over half is new business, but we do have an increasing proportion of that total under the half that is recompete. So some of the things that have been kind of pushing to the right we see more likely to be recompeted in our business in the second half of this year and going into early next year. But we still have a very healthy pipeline of new work in that. And adjudications, as we noted, are very much contingent on the workforce in the government, their prioritization, how quickly they can get to things, what they prioritize. And if not, they generally delay. And how that plays out quarter-to-quarter is very hard for us to predict.

Thank you

And sir we do have our next question from Robert Spingarn from Credit Suisse. Sir, your line is open.

Thank you. Hi, good afternoon. Judy, what was the organic sales growth in the quarter? And then what is embedded in the guide, I guess, at the midpoint?

Yes. It's a little over 1% in the quarter, and then the midpoint of the guide is about 5%.

Okay and then, Kevin, on that, just does the reversal in ODCs get you to that 5%? And can you get there with the kind of hiring and award pace you had in Q1? Or does that also have to improve?

The award pace has to improve for our entire industry and for ManTech in order to get to that growth level. I think that the hiring is not a constraint. The ODCs, we expect to be caught up in the end.

Okay. Thanks so much. I'll jump back in.

And sir your next question from Tobey Sommer from Truist Securities. Your line is open.

Hey, good morning. This is Jasper Bibb on for Tobey. I guess following up on first quarter margins and the ODC impact, could you give any color on the cadence of how you, I guess, expect margins to track over the balance of the year as that rolls off?

Yes. I mean, we're expecting the 9.1%, 9.2% for the full year. So clearly, it's going to trend down over the course of the year based on -- as ODCs pick up as well as indirect spending picks up. So I think it will drop in Q2 and then kind of normalize.

And then I wanted to ask about how the company is thinking about total addressable market growth in the current environment. I guess while you've grown above defense top line for some time, does that trajectory change at all with what we're seeing in the President's request for '22?

This is Kevin. I'll speak to that and then if Matt wants to add any flavor behind that or color behind that. So we all are very focused, and I think we've done a good job as a company to position where we think within the overall federal budgets the higher proportion of needs will be, specifically around certain technologies and technology growth and you can see within the current administration that they continue to focus on the need for a technology-driven economic competition as well as military competition. How that plays out within the details of the DoD budget or the federal budget for FY '22 when it comes out, I think we have to all wait and see where that lands as well as for '23 POM and so those are very important to our sector to track. That said, I think that we've done a good job of positioning where we think the budgets will be above average within whatever budget levels they will be.

Last question for me. Could you just update us on how the recompete schedule has been progressing so far this year? And the 20% or so initially up for recompete this year, how much do you have left?

Yes. As I said in the comments, we've got a little over 80% in backlog at the midpoint and the balance is probably split equally between recompetes and new, just given the timing of the recompete wins and we have seen a few decisions came in, and then a lot of the continued proposals outstanding are recompetes and we're waiting for those to be awarded, but it's definitely second half loaded and then into 2022.

Thanks for taking the question and I'll get back in the queue.

And our next question from Louis DiPalma from William Blair. Sir your line is open.

Great. Kevin, Judith and Stephen, good afternoon. You mentioned procurement delays, Kevin and Judy. Has there also been delays to your ramp of some of your recent large contract wins?

So I would say on the ODCs is relative to that ramp-up. But I think all other programs, I think, are going along just fine and like Judy mentioned, right, our DL growth is above the top line growth that you mentioned. So I think that we're -- overall, I think those are progressing nicely.

Great and as it relates to some of the procurement delays that you referenced, would you cite the administration change and COVID as the two biggest drivers behind those procurement delays? Or is there something else that's taking place?

Yes. So I think those are both valid in terms of what we're seeing at large. COVID, a large portion of our workforce, right, is doing shift work in certain mission areas and then there is -- obviously, there's always a little bit of change that happens. So priorities get more reinforced or less. So I think those are things that we're all working through and that everyone is working through, but I think those are two of the bigger things we are seeing at a macro level.

Okay and as it, I guess, relates to both of those variables from December through April, has there been any easing of these headwinds that you've witnessed? And do you expect there to be improvement in the second half of the year?

No and yes. So there hasn't been improvement in the first quarter, but we do expect improvement because people are getting back in the government to help adjudicate and to move to normal operations and that will help with the pace of, hopefully, all things, getting talent as well as adjudicated decisions and procurement decisions within funded amounts.

Awesome. Thanks Kevin, Judith, Stephen.

And our next question is from Mariana Perez Mora of Bank of America. Ma'am your line is open.

Hello?

Hello?

So first question, also related to this choppiness on the task ordering. How -- I know it's hard to predict the future, but how should we read current funded backlog and how that should translate into organic growth in like midterm -- short to midterm?

Yes. We did see an uptick in our funded backlog in Q1, which I think is just kind of the normal timing of them putting funding on it. I don't think there's -- we've seen anything unusual or different in the timing of receiving funding. So I don't think it really has changed anything from our expectations.

Okay and then related to capital deployment, with an increasing market appetite for shareholder, like share buybacks, how those buybacks play a role in your capital deployment strategy and priorities?

Yes. I mean we always look at all of our options. We increased the dividend almost 20% this year and as you know, from our numerous conversations, M&A continues to be our preferred capital deployment method and we're seeing a lot of activity in the M&A market and as Kevin mentioned, we're going to continue to focus on those. So we look at buybacks. But for now, it just hasn't seemed like something that we think makes the most sense for our shareholders and I don't know if our esteemed Chairman wants us to add anything from the Board perspective, but we definitely -- we look at that.

Yes, we do review it. Look, I think it's a very active M&A market and it's one of those markets whether we are successful or not, I think that we're a little bit more aggressive around that because of the properties that are out there and see our positioning around that is our first priority still.

Perfect and what are you looking for in the M&A market?

Well, we have -- there are a lot of good businesses out in the market right now. We know it's very competitive, but we're looking for technology advancement, both for a combination of technology and engineering and certain technologies around the technical focus areas that we've mentioned before in the customer areas where we see growth in the federal budget. We're tracking heavily what the administration's details are on their FY '22 components. That's a very important activity, but it's a very active market right now from an M&A perspective for all of us in our industry.

Thank you. I have one more of a jump back in the queue. All right.

And speakers, we have a follow-up question from Robert Spingarn of Credit Suisse. Sir your line is open.

Thanks. I wanted to follow up on M&A. There's a couple of questions around M&A, Kevin. One is, do the proposed tax changes accelerate the number of properties that are coming on to the market? So is there more in the pipeline recently? So that's the first question.

The answer is, I believe, that's a driver, yes. It has certainly through last year -- this year has been inferred as something that has people thinking about options.

Okay and then related to that, when you think about valuations, how have those trended relative to a year ago as we get through the pandemic or maybe the proposed budget possibly affects that? And then in addition to that, are you looking at companies in the -- in nondefense, more in the civilian markets or even in the hardware areas like some of your peers have, so maybe defense but defense hardware?

Yes. So for quality businesses, the market is fairly hot in terms of demand. So I think the multiples are at or above where they've been. They're not declining in any way and that's great in terms of the view of where the federal budgets are headed in those areas. That's why they are such high demand and high value. In terms of positioning, yes, we are looking to expand in federal civilian selectively, nondefense. We still focus on defense and intelligence, cyber as core business areas. But at the same time, we do see a lot of opportunity but from a budget placement as well as capability placement into the federal civilian market.

Okay and then, Judy, just one more question. Just on the five day increase in the DSOs, and I think you said you anticipated working capital headwind here. Will that reverse? Or does it reflect some kind of change in progress payments?

No, we actually don't have any progress payments. It's just a timing issue. It is an actual -- it's an improvement over where we were in Q1 of last year and we do expect that we should get another day or two improvement over the course of the year.

Thank you both

And your next question is from Brian Kinstlinger of Alliance Global Partners. Sir your line is open.

Brian, we cannot hear you

Sorry, can you hear me now?

Yes.

This is Jacob on for Brian. Can you quantify any onetime benefits on SG&A during the first quarter? And then with growth in defense spending expected to slow, does management plan to increase the amount of proposal activity that will lead to slightly lower operating margins in the near term?

I'll answer the first question and then have you repeat the second part. We had a couple of small onetime items, nothing major. It was more just timing of indirect spending still in kind of the pandemic, your indirect fab was low. There's no trade shows and things like that, so not really any specific onetime items.

And it's Kevin, I'll answer your second piece. So we're not anticipating the business profile of what we're going after to change our approach to the overall price or overall fee we're trying to achieve when we compete. If the market changes on that, we'll all be addressing it. It's certainly competitive. But we don't expect to be lowering our overall margin profile in order to compete and win business.

All right. Thanks so much.

And speakers, we have a follow-up question from Mariana Perez Mora of Bank of America. Ma'am your line is open.

Thank you very much. So my follow-up is on free cash flow. Any color on free cash flow burn this quarter? And how should we think about it for the rest of the year and especially about working capital conversion and also capital deployment -- sorry, CapEx?

Yes. I mean I think over the -- for the balance of the -- or for the full year, we expect cash flow to be roughly equivalent to net income. We expect it to pick up next quarter and then the balance of the year, just as we modified the working capital and the CapEx drops over the course of the balance of the year.

Okay. Thank you very much.

And speakers, we still have one follow-up question from Gautam Khanna of Cowen. Sir, your line is open. Please ask your question.

Yes, thank you. Just wanted to ask on recompetes. If you could remind us again what percentage of sales this year is up for rebid? When most of those are expected to occur? And did you have any meaningful recompete losses in the first quarter?

So as I said a little bit earlier, of the 20% -- approximately 20% of the midpoint of guidance that's coming from newer recompete, it's about 50-50, so 10%-ish or so of the 2021 revenue from recompetes. It's obviously a slightly higher number of actual annualized revenue because it is definitely back-end loaded and going into 2022, it's still that probably normalized 25% or so of recompetes.

Okay and in Q1, was there anything of consequence that was lost?

No.

Okay, thank you very much.

It looks like we have no further questions. So thank you all for your participation on today's call and your interest in ManTech. As usual, members of our senior team will be available for any follow-up questions. Have a good evening, and please stay safe.

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