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Edited Transcript of MANT earnings conference call or presentation 20-Feb-19 10:00pm GMT

Q4 2018 ManTech International Corp Earnings Call

FAIRFAX Mar 8, 2019 (Thomson StreetEvents) -- Edited Transcript of ManTech International Corp earnings conference call or presentation Wednesday, February 20, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Judith L. Bjornaas

ManTech International Corporation - Executive VP & CFO

* Kevin M. Phillips

ManTech International Corporation - President, CEO & Director

* Matthew A. Tait

ManTech International Corporation - President of Mission Solutions & Services Group

* Richard J. Wagner

ManTech International Corporation - Group President of Mission, Cyber & Intelligence Solutions Group

* Stephen Vather

ManTech International Corporation - Executive Director of Corporate Development

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Conference Call Participants

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* Brian David Kinstlinger

Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst

* David Neil Williams

Drexel Hamilton, LLC, Research Division - Former Equity Research Associate

* Edward Stephen Caso

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Gautam J. Khanna

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Jonathan G. Ladewig

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Joseph Anthony Vafi

Loop Capital Markets LLC, Research Division - Analyst

* Robert Michael Spingarn

Crédit Suisse AG, Research Division - Aerospace and Defense Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the ManTech Fourth 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 call over to your host, Stephen Vather, Executive Director, Corporate Development. Please go ahead.

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Stephen Vather, ManTech International Corporation - Executive Director of Corporate Development [2]

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Welcome, everyone. Thank you for participating on our fourth 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 2 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 the anticipated results. For a full discussion of these risk 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 these forward-looking statements made on this call.

Finally, 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 these non-GAAP measures discussed on this call in our fourth quarter earnings release.

With that, I'd like to turn the call over to Kevin.

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [3]

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Good afternoon, everyone. Let me begin by thanking the entire ManTech team for their continued dedication and outstanding contributions throughout 2018, which resulted in a truly impressive year.

For the third consecutive year in a row, ManTech delivered accelerating organic revenue growth, evident across our business. Furthermore, I am pleased to see operating margin improvement and steady growth of our backlog, which provides for excellent long-term visibility. We continue to execute on our growth-focused strategy that maximizes value for our customers, our employees and our shareholders.

Now to some thoughts on the market and budget environment. The majority of our customers, including the Department of Defense, intelligence community and our federal health customers entered FY '19 with full year appropriations. I'm pleased that the remaining agencies that were operating under a continuing resolution and were impacted by the shutdown are now funded for the full balance of the fiscal year. As a reminder, the DoD budget increased 3% for FY '19, and the recently approved Departments of Homeland Security and State budgets also exhibited growth.

ManTech's 2018 results were minimally impacted from the shutdown. We saw more of an impact in January, but that said, our exposure and impact was nominal. And we fared better than many others across our industry. Broadly, the shutdown caused uncertainty in the timing of solicitations, awards and contract payments more than any other factor. I'm pleased in the way the team came together and to ensure that those members of the ManTech family who were impacted by the shutdown were taken care of and saw minimal disruption.

Before I move to this FY '20 budget, I want to express how pleased I am in the 22% reduction of the security clearance backlog at the end of 2018 as reported by the National Background Investigations Bureau. This was a strong effort led by the government and with persistent support from industry. I look forward to that trend continuing in 2019, so that we and industry can provide the best talent to support our customers' critical needs on a timely basis.

As we move towards FY '20, ample discussion continues around potential defense budget spending levels. The President's FY '20 budget process has begun and is expected to be submitted to Congress in the mid-March time frame. It is our hope that the administration and Congress will negotiate and reach a deal with respect to the Budget Control Act caps that constrain spending for defense and nondefense activities for FY '20 and FY '21. We believe that there is broad support for increased funding to meet national security needs and view ManTech's capabilities as being well aligned to enduring strategic priorities, such as cyber, IT modernization and mission operation support.

The demand signals from our customers demonstrate a continued need for speed, innovation and effective solutions in support of their mission requirements. As a company, we are focused on national security, homeland security and the security of systems and data that are critical to our nation.

Let me offer a few thoughts on our business development results for the year. Our reinvestments into the business development organization and technical capabilities yielded continued success. Throughout 2018, we were awarded a number of new contract awards to include an enterprise IT effort with a Department of Defense agency, multiple aviation centers and systems modernization effort for the Navy, a contract to enhance the cyber defense posture of federal civilian agencies through the Continuous Diagnostics and Mitigation program as well as many other programs with classified customers providing full-spectrum cyber and security solutions.

In Q4, we received $610 million in contract awards, representing a book-to-bill of 1.2x, which is a solid finish for the year. In 2018, contract awards totaled $3.4 billion, resulting in a book-to-bill ratio of 1.8x, which provides a strong foundation for organic revenue growth in 2019 and beyond.

New business comprised 62% of awards for the year. Furthermore, in 2018, nearly 2/3 of our bookings were for cyber and IT modernization efforts, reflective of the multiyear investments made to strengthen our position in these key growth areas.

The last statistic I want to offer with respect to our 2018 awards is that nearly 1/4 of the awards for the year came from a multiyear contract extensions or sole source awards, which, in conjunction with our competitive wins, underscores ManTech's differentiated solutions and focus on missions that are critical to countering global threats.

As a result of our consistently strong bookings, we exited 2018 with a total backlog of $8.4 billion, up 17% from last year, and funded backlog stood at $1.3 billion. Proposal activity remains very active. We submitted over $9 billion in proposals in 2018, up approximately 30% year-over-year, and expect to submit over $10 billion in 2019.

Our qualified pipeline remains well over $20 billion and our proposals outstanding figure is approximately $4 billion. While proposal activity will remain elevated throughout the year, I would like to remind you that the quarterly book-to-bill terms have significantly more variability.

As we enter 2019, I would note that our customers are focused on bringing technology, talent and modern platforms into mission sets quickly, with an overarching focus on security. Given the vulnerabilities of digital platforms and the use of real-time communications available in the digital domain, our nation's decision makers are increasingly focused on the cyber domain, its opportunities and risks and are increasingly prioritizing policy and funding towards this domain. ManTech is well positioned in the cyber domain and view the demand as strong and increasing for our core offerings in areas of focus.

In conclusion, our 2018 operational and financial results are a fitting bookend to our 50 year anniversary celebration as a company. I'm proud of what the team has accomplished, and I'm excited to carry forward the momentum into 2019 and beyond. I have said this before, but it bears repeating: our most important asset in the underpinning of ManTech's success is our people. ManTech's talented people are out there every day, bringing their passion and delivering innovation in support of our customers and their critical missions. I look forward to updating you on their achievements in the upcoming quarters.

Now Judy will walk through the details around our financial performance and outlook. Judy?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [4]

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Thanks, Kevin. I'm pleased to report that we delivered strong results in the quarter and for the year. As Kevin mentioned, the partial government shutdown had a minimal impact on our fourth quarter results. Revenues for the year were $1.96 billion, up 14% from 2017.

(technical difficulty) was organic, the growth was primarily driven by new contract wins announced in late 2017 and throughout 2018 as well as growth on existing programs.

For the fourth quarter, revenues were $497 million, up 8% organically compared to fourth quarter of 2017. In the quarter, we performed 89% of our work as a prime and our contract mix was approximately 71% cost-plus, 19% fixed price and 10% time and materials.

Operating income for the quarter was $28.6 million for an operating margin of 5.8%. For the year, operating income was $112.7 million, up 15% from 2017. Operating margin for the year was 5.8%, in line with our guidance and accounts for our targeted incremental margin improvement. As a reminder, the Tax Cuts and Jobs Act of 2017 had a favorable $51 million provisional tax impact on net income and earnings per share in 2017. In order to better understand the operational trends, we have removed this one-time impact from 2017. However, our 2018 results are unadjusted.

Net income was $20.2 million for the quarter, up 14% compared to 2017 adjusted net income. For the full year, net income was $82.1 million, up 29% compared to 2017 adjusted net income. Diluted earnings per share was $0.50 for the quarter, up 11% compared to adjusted diluted EPS from the fourth quarter of 2017 and was $2.06 for the full year, up 27% compared to last year's adjusted diluted EPS. The effective tax rate was 28.7% in the quarter, and the higher-than-expected tax rate reduced EPS by $0.02. The full year tax rate was 25.8%.

Now on to the balance sheet and cash flow statements. For the year, we collected $93 million in cash flow from operations. DSO increased to 73 days in the quarter, a 6-day increase compared to Q3. The increase in DSO was largely driven by payment delays on one of our larger Army programs and payment delays from customer payment offices impacted by the government shutdown. As a result of the increased DSO, cash collection in the quarter was light. DSO normalization should occur over the course of 2019, but we may see lingering delays in Q1 due to residual impacts from the government shutdown.

For the year, we had capital expenditures of approximately $35 million, reflecting continued contractual requirements from our outcomes-based contracts. Additionally, we distributed $40 million in dividends, maintaining a steady return of cash to shareholders. At year-end, we had $5 million in cash and $7.5 million of debt.

Given the strength of our balance sheet and expected cash flows, the board has authorized us to raise our quarterly dividend by $0.02 to $0.27 per share, an 8% increase from current levels. This dividend will be paid in March and equates to an annualized dividend of $1.08 or a yield of 1.9%.

Now on to our 2019 guidance. The outlook being provided reflects the impact of the partial government shutdown in January, which we estimate to be approximately $2 million in revenue, with a slight impact to margins and cash flow in the first quarter. We expect revenues to be between $2.05 billion and $2.15 billion; net income between $86.9 million and $92.1 million; and diluted earnings per share between $2.15 and $2.28. At the midpoint of the range, over 85% of guidance is expected to come from current contract backlog.

We have a clear path towards growth with our recent awards. The increase in contract length of our recent awards continues to provide great long-term visibility. The implied operating margins guidance for the year is 5.8% to 5.9%, reflecting up to a 10 basis point margin improvement. We remain focused on top line growth in the current robust market environment, and will invest as needed to address the heavy pipeline of opportunities that Kevin discussed.

Built into our guidance are an effective tax rate of 26% and a fully diluted shares count of 40.4 million shares. Cash flow from operations should be between 1.4x and 1.7x net income, and assumes resolution of our payment delays, which should result in DSO normalization.

We expect capital expenditures of up to 3% of revenue, contingent on the timing and ramp of our new outcomes-based program that we won in 2018. Related depreciation and amortization is expected to be between 2% and 2.5% of revenue for 2019.

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

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Matthew A. Tait, ManTech International Corporation - President of Mission Solutions & Services Group [5]

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Thank you, Judy. ManTech Mission Solutions and Services had a successful 2018, particularly in ramping new programs and delivering strong organic growth. In 2019, my key operational focus areas include: continued program execution excellence, with a keen focus on mission success and customer satisfaction; ramping recently awarded contracts, such as the effort under the Continuous Diagnostics and Mitigation program; and further differentiation of our capabilities. We are fortunate that we have limited recompete exposure in 2019, which allows us to focus on new business opportunities. In response to consistent and increasing demand from our customers, we are continuing to strengthen and enhance our mission solutions in cyber, cloud, software development, analytics and rapid prototyping.

We are also further strengthening our management team. I am very pleased to announce that we brought a new executive into the company this quarter, Bryce Pippert. Bryce now leads our Federal Civilian business unit. His technical and leadership experience will be a great asset in helping us grow our federal civilian footprint. I'm excited about our opportunities and growth prospects in the federal civilian market.

There is ongoing debate between the administration and Congress as to the timetable for reductions of U.S. presence abroad, particularly in Syria and Afghanistan. ManTech's total Overseas Contingency Operations presence remains in the low single digits as a percentage of overall ManTech revenues and is largely through our vehicle maintenance contract with the Army. This program and related work have been stable for a number of years, and at this time, we expect it to remain stable in 2019.

Before I turn the call over to Rick, I want to emphasize that we are well positioned for continued growth, given our strong pipeline and capabilities that have excellent alignment with enduring customer demands. Rick, over to you.

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Richard J. Wagner, ManTech International Corporation - Group President of Mission, Cyber & Intelligence Solutions Group [6]

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Thanks, Matt. I'm also very pleased with ManTech's cyber and intelligence solutions performance in the quarter and in the year. We enjoyed healthy organic growth and robust new contract awards as well as strong retention of recompetes.

In the quarter, we won nearly $485 million in contract awards with classified customers to provide full-spectrum security and cyber solutions. The customer demand signals are such that I expect continued growth across our portfolio of capabilities, but especially for our cyber, IT and intelligence mission operation solutions.

As a leader in full-spectrum cyber, we are executing on our strategy to further evolve our cyber solutions to include additional differentiators in analytics, automation and outcomes-based solutions that align with customer missions and help address our customers' hard problems.

I am pleased with the progress the team has made on ramping our recent awards, particularly the $959 million enterprise IT contract with a Department of Defense agency, which we won in mid-2018. We are ahead of schedule, and all credit is due to the team that works tirelessly and diligently to get us to this point. Over the course of 2019, we will continue to aggressively ramp the contract until we reach full operating capability later this year.

In quarter 4, we announced that John McNiff joined us to lead business development efforts for the MCIS group. John has intimate knowledge of our customers and their mission. I look forward to working with him to maintain and further strengthen our robust growth engine.

Talent remains our #1 priority. We continue to focus on recruiting, training, developing and retaining our highly cleared and highly skilled talent. I want to highlight that we have implemented unique training and education programs to foster employee development and to enhance technical skill sets in several key areas to include cyber, cloud, analytics and other technology areas of great demand.

Our employees drive ManTech's success, and so in turn, we are keenly aware that investing in them will result in desirable financial outcomes for the company.

In summary, we have great confidence in ManTech's market positioning and growth prospects. We continue to operate in a large and favorable market environment, with customers demanding capabilities and solutions that dovetail perfectly with what ManTech offers. Our customer first, mission-focused culture, coupled with ample training and development opportunities, makes ManTech an employer of choice in an industry. With that, we are ready to take the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Joseph Vafi with Loop Capital.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [2]

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Great year for 2018, so congratulations on that. I was wondering just, Judy, on the guidance for 2019, I know you said 10 basis point improvement. You have any more detail you might be able to provide on some of the moving parts there, maybe between gross profit margin and G&A or bid proposal activity? And how those 2 may shake out relative to that margin guide for the year?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [3]

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Yes. I think in general, we'll see the G&A hold steady or come down a little bit as a percentage of revenue. And then the gross margin will probably drop a little bit just as we look at the mix of business coming through from an ODC standpoint.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [4]

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Okay. And if I just look at that gross profit margin in Q4, was there any shutdown impact there? Or was that a mix, was that mix related, in gross profit coming down a little bit sequentially?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [5]

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That was mix related. We typically see ODCs heavy in the third and fourth quarter of the year.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [6]

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Okay. And then on your outcomes-based contract, how do you think you're trending now versus milestones on that piece of business relative to the -- I mean, it's a risk -- there's higher risk, higher reward; just trying to get a feel for how you're going versus plan on that, so far?

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Richard J. Wagner, ManTech International Corporation - Group President of Mission, Cyber & Intelligence Solutions Group [7]

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Yes, Joe, this is Rick. We've made several wins over the last couple of years that have moved us in that direction, several large wins. So I think we're moving in that direction quite well, and we're looking at new solutions that we can take our customers through existing vehicles to influence them to use outcome-based contracting. So I'm very happy with the progress we're making.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [8]

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I mean, just on -- sorry, go ahead.

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Richard J. Wagner, ManTech International Corporation - Group President of Mission, Cyber & Intelligence Solutions Group [9]

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I think your question specifically on that one program, it's on track, but it's the one that has the full 2019 ramp-up, so it's still an extended process.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [10]

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Got it. Okay. And then just finally, Kevin, I know you mentioned 22% reduction in overall security clearance backlog. Congrats, I know you're involved in that. Is that -- are you starting to see any of the benefits of that backlog being cleared up in terms -- on the supply side of that? Or is it just kind of too macro of a statistic at this point for you to see that benefiting the business yet?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [11]

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Yes. So we are starting to see some. The timeline to get things done is reduced on the DoD side, specifically. And it's spotting some other agencies. But generally, the trending is favorable. There's a lot of focus on it, and I think that it'll continue to see improvement in 2019 so that the government and industry can bring the talent needed. Once we clear through that it's still finding the right people with the right skill set. So the goal is to clear through that so we can focus on that one core issue.

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Operator [12]

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And our next question comes from Tobey Sommer with SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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First question might be for Judy. Is the expected improvement in DSO all mechanical? Anything you need to do from an operational standpoint or changes in order to kind of normalize things?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [14]

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No. It's definitely a mechanical timing thing. The hope being that we'll see improvement in Q1 from the shutdown delays, but it's a little too early to tell how quickly those customers are going to catch up.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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Okay. But first half, if not first quarter?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [16]

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Yes.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

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Okay. Kevin, how would we compare the pipeline to kind of the current backlog across typical operating metrics, whether it's margin, contract type, duration? Is there much of a difference in the pipeline compared to the backlog?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [18]

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Yes. I'll focus on 2 areas. First of all, the duration. If you look at our backlog today, I think compared to 3 years ago, the backlog might be about double; duration though is going from maybe an average of 4 years to 6 years. So you're -- we're definitely seeing a lengthening of contracts that are awarded. Those are rough order numbers. And within the composition, we're seeing more around technology-specific areas. There is a significant increase in demand around certain cyber operations activities, securing enterprise and mission IT platforms, providing more mission requirements in a digital environment. And all of those are favorable to growth.

The profile of the type of contract still is very much dependent on the customers and how they procure. So some customers are still going to stick with the cost-plus, many customers and the DoD are trying to work towards outcomes-based procurements. And I think that trend over a few years is going to continue. The question is how that gets built into near-term procurements and when and how we see that trend over the next few years.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [19]

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Okay. A follow-up on the clearance backlog. What are the implications of changes in that backlog for the company? If it continues to come down, does that imply you being able to fill open recs in other players in growing faster? What are the implications?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [20]

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In our industry writ large, I think the implication is being able to get talent more quickly if this continues, the trend continues, onto a program. So whereas before it might have taken 90 days to get people once we identified them or sometimes longer. If it takes 30 to 45, then we can bring them to the contract and get them starting on the program earlier. So I think it's going to have a good effect, maybe like a half quarter effect or something like that if you want to think of that from a revenue standpoint. But it's going to be a positive trend.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [21]

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Is it a trend that you would expect to have momentum into this year?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [22]

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I expect it to improve going into 2020. I think that talent is important to our customers, both within the government and within our industry, and I think everybody is focused on that, so we can meet mission requirements.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [23]

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Okay. What are your high-level thoughts on the budget outlook for 2020? After we had our -- the shutdown and kind of argument over a portion of the budget, now that we're looking towards next year, how do you think things shake out at this point?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [24]

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We're most focused on the BCA caps and how the decision makers will work towards clearing that by January of '20. I think that there's a path and everybody wants to make sure that we have the right level of support for defense. That's the foremost item that we're focused on. Beyond that, the ranges of budgets that have been talked about in the DoD side are anywhere between 700 and 750. I think it's too early to tell where that all comes out, but if those are the ranges that are going to be debated, it's somewhere between flat to up year-over-year against the 3% growth in 2019. Again, the BCA cap is the main thing that we're tracking.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [25]

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And kind of through that $50 billion wide lane kind of highway, does the either end of that influence your outlook for growth substantially? Or any of those outcomes within the range palatable to you in the growth aspirations you have for the firm?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [26]

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I think any are palatable to us. They're not going to impact our FY '19 expectations and we have -- because of the areas that we're in. If you think about the type of work that we're doing and the demand for that type of work and just the sheer number of talented people that are needed, we have good visibility on the demand signal for the type of work we do. That said, if it does go in the higher end of that, I think in all of industry, the question would be how we're going to be able to respond and support to that.

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Operator [27]

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And our next question comes from David Williams with Drexel Hamilton.

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David Neil Williams, Drexel Hamilton, LLC, Research Division - Former Equity Research Associate [28]

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I guess from a higher perspective, what do you think in terms of the revenue, the guidance, what really has to go your way this quarter? Or what maybe risks are included in that guidance that, I guess, would kind of take you to the top end or maybe to the bottom end between the spread that was given there?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [29]

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Yes. So at the midpoint of our guidance, about 85% of that number is in existing backlog. So it's really just a timing matter of new contract awards and ramps as well as the level of ODC procurement.

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David Neil Williams, Drexel Hamilton, LLC, Research Division - Former Equity Research Associate [30]

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Okay. Great. And then I guess just kind of around the homeland security and some of the border discussions of late, is there anything there in terms of your business that either benefits or maybe impacts? And what do you -- how do you kind of view that entire ordeal there?

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Matthew A. Tait, ManTech International Corporation - President of Mission Solutions & Services Group [31]

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So I think -- this is Matt, David. Thanks for the question. So if understood you correctly around border security and national security for us, the way that they're focused, that's right in the areas that we're focused in. So all the things that have been going on for us, essentially, is areas that we're working with our clients to solve their problems. So I think anything that -- in the environment that you're hearing about, right, and the headlines, those are things that -- or areas that we get actually help, step up and help.

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [32]

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So again, as a technology company, it's around the technology and analytics and the support for the various border patrol agents. And so that's one of our core customers.

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David Neil Williams, Drexel Hamilton, LLC, Research Division - Former Equity Research Associate [33]

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Great. And then lastly, I guess, if you look at the landscape of your labor pool, do you see that -- outside of just the clearance aspect, what are you generally seeing in terms of that labor pool? Is that improving? Is that -- is there anything that's restricting growth or maybe pushing timing out of your ability to maybe ramp some of the programs?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [34]

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Yes. So I would say that for the higher-end skills, it's going to be and it is a very competitive environment, and it's hard to fill folks. We, as a company, generally about 50% of our employee base are veterans. And we're very proud of that. And what we work is to offer internal training and degree program that are company paid to able -- to retrain those veterans and other employees as needed towards newer technologies around cyber, cloud, analytics and the like. So we're going to continue to focus on retraining existing personnel. That said, I think that, broadly, the academia and industry, everyone is seeing the need for this. And I think the -- there's a broader shift about being more targeted on getting the right training, curriculum and the right activities to increase the number of people in the workforce with those skill sets. I think that's a very big trend at least in our region right now.

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Operator [35]

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And our next question comes from Robert Spingarn with Crédit Suisse.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [36]

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Kevin, I tend to ask these backlog questions. We've had a couple, but I wanted to ask one more. You talked about the doubling of the backlog over the 3 years. And then explained that you've also got an extension in duration from about 4 years to 6 years. If we think about those 6 years of backlog, do they -- does it follow a natural fade curve where it's front-ended, x amount of that $8 billion in year 1 and then a little less in year 2? Or is there a particular year, just based on circumstances, where there's a pop in growth?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [37]

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When the customers do a procurement for the type of services and solutions we do, they're pretty much ratable. If anything, they might increase on the back end, unless they have to get an adjustment to the existing contract ceiling based on a redirect of mission needs. So we tend to think that these tend to have back-end growth, not as predictable as you would like against more product-based systems. But they tend to be more back-end weighted in terms of opportunities for growth.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [38]

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Okay. Not that 5% to 10% is anything to sneeze at, I mean that's a good number for 2019. I'm just -- when you see this massive $4 billion to $8 billion move and what you've captured, I just wondered, other than extending out further to the right if there was something else there. Now similar to that question, on the margin side, I wanted to ask you, as best value and fixed price opportunities seem to be rising as a percentage of total mix, might we see some more upward pressure on gross margins here as we go forward? I was thinking we might see a little bit more than the guidance shows.

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [39]

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Yes. I think, in general, the shift away from cost-plus has not happened as quickly as we thought it would have sitting here a year ago. But we do see increased momentum. We are also still having a small headwind from LPTA contracts that are still ramping out. But we do think, looking into '20 and '21, we do think we should be able to accelerate margin expansion to 15 to 25 basis points a year, after this year.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [40]

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Okay. And then Judy, while I've still got you, and if I missed this, forgive me, but the CapEx trajectory, what should we be looking for in 2019?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [41]

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Yes. We said it's going to be up to 3% of revenue, and this is related to that large outsourced services contract. As we work through the ramping of that over the course of the year, we'll get a better insight into when technology refresh is going to be required on that program.

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Operator [42]

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And our next question comes from Joe DeNardi with Stifel.

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Jonathan G. Ladewig, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [43]

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This is Jon on for Joe. Now this has been the second time in as many years where you've increased your dividend. Can you kind of elaborate on the company's capital deployment priorities, especially in returning cash back to shareholders?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [44]

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Yes. I think we felt like it was the right thing to do, given the company's growth and looking at what we think our cash flow's going to be going in 2019. But our clear preference for capital deployment continues to be M&A.

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Jonathan G. Ladewig, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [45]

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Okay. And Judy, can you kind of touch on the current M&A environment? When you guys look out there, are conditions favorable in your view? Or is it still a little bit too frothy?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [46]

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I think it's favorable in the sense that there's a number of properties. I think the good properties are going for high values. There's increased competition. But it's a focus area for us, and we're hopeful that we will continue to be successful in getting deals done when they make sense for us.

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Jonathan G. Ladewig, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [47]

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Okay. And then just lastly, kind of talking about the mix. Does ManTech need to really expand its fixed price type of work to hit some of those targets? Or is there growth potential in the cost-plus work, especially in the cyber environment and maybe in the analytics areas that you guys are trying to pivot to and expand into?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [48]

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Yes, I think there's a little bit of room to move those margins up, especially when we're starting to look at best value. We do see some customers looking for more innovation and solutioning, even in a cost-plus environment, which can allow for higher fees. So a little bit of room, but the big swing is going to come from changing the mix.

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Operator [49]

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And our next question comes from Brian Kinstlinger with Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [50]

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I only have one question because a lot of questions have been asked. If I look at the last decade, the first 7 years, I would say, ManTech was a laggard in terms of the top line metrics, and more recently, you have outperformed. I'm wondering what the lessons learned were for the management team and how -- what's changed and how you sustain that going forward?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [51]

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Sure. So broadly, we're a mission-focused company, and if there's a mission that expands greatly, like it did in Iraq and Afghanistan to support the warfighter, we will do that. We do have to expect that time to time that that will also decline because that's, frankly, why the contract things out from time to time, right. It's a surge specific area that's not going to be a program of record forever. That said, we very much look forward to future technologies and future capabilities that are needed and have been spending a quite amount of -- a bit of time focused on building the capability and getting the talent to do that. And we just positioned ourselves to where we thought the market was headed from a newer technology, and we're seeing the rewards of that. I think the main takeaway is our view is that we want to make sure we have enough investments to continue to be industry leading on the top line and position ourselves into future technologies and then support those in the mission sets that are critical to our nation.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [52]

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Post [counter mine] dropping down towards a very small level, there were still a few years of laggard on the top line. Do you think there's a different in how you're investing and where you're investing? And the lesson learned is to continue to invest a huge portions of those profits that are in the proposal? I'm just trying to understand what shift in the last 2 years?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [53]

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I think you're just seeing the success of those investments that we made during those drawdown years. I think you have the laggard years you're talking about is just kind of when everyone was struggling with the budget reduction -- cut.

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Operator [54]

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(Operator Instructions) Our next question comes from Gautam Khanna with Cowen.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [55]

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I was wondering if you could talk about when you think the bookings will come through this year, like which might be, just based on the schedule of adjudications, heavier award quarters, like will Q1 be? Or is this going to be another big Q3 year? Anything you can say around that.

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [56]

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Yes, so generally, the first half of the year, because it's hard to bridge between Q1 and Q2 right now, the first half of the year will be above average in terms of both bid volumes and award volume. But I think the Q3 will still be one of the more heavier periods from an award standpoint, just based on the patterns that have been developing.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [57]

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Okay. And could you also remind us on any -- it's a below-average recompete year, if I recall. But how does 2020 look in terms of recompete-based sales?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [58]

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Yes. I think it's a little early because we're still waiting to see on the length of some of these extensions if they're 1 year, 2 year. But from where I'm sitting right now, I don't see it being a higher than what you would say your typical 20% to 25% is.

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [59]

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And on that, I'd note that 1/4 of our bookings in 2018 were basically for multiyear extensions on existing programs or sole source awards. So what you may see is you may see less competitive activity because those have already been booked in based on those trends with the customer set.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [60]

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Okay. That's helpful. And then Judy, maybe just for you, in your prepared remarks you talked about the cash flow delays, Q4. So presumably, Q2 will be the bigger quarter. I'm just curious how this gets caught up?

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [61]

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Yes. I think it's going to be split between Q1 and Q2. And it's just going to be dependent on how quickly we see those things catch up.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD and Senior Analyst [62]

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And did you guys have any impact to your sales in 2019 from the shutdown? I'm just curious of what was the lost sales.

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Judith L. Bjornaas, ManTech International Corporation - Executive VP & CFO [63]

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We said it was about $2 million in Q1.

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Operator [64]

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And our next question comes from Edward Caso with Wells Fargo.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [65]

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A lot of conversation lately around space and, obviously, space and intel and cyber and so forth all tend to go together. How active are you on the space agenda? Are you turning your focus there? Is it anything in your pipeline? Whatever color you can give.

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Matthew A. Tait, ManTech International Corporation - President of Mission Solutions & Services Group [66]

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Hey, Ed, this is Matt. Good question. And so I'll start, and I think Rick will finish. So we're very focused in this area. I'd say space is one of the strategic areas that we're in. We've got good work across all the major aspects. And when you combine that with how we want to be bringing digital to the mission, this space is a great area for us to focus on. So I think, at least from the DoD and Fed Civ areas where that pertains, we're definitely making our mark there. Rick?

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Richard J. Wagner, ManTech International Corporation - Group President of Mission, Cyber & Intelligence Solutions Group [67]

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Yes, clearly across the intelligence community, it's a big push. And I think you hit on something. It's that combination of cyber and the resilience of satellites. And that's a big area, and it's a big area that we're going to be pushing into.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [68]

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Some of your competitors seem to be stepping up their focus on intellectual property investments, kind of quasi products. So where does ManTech fall into that category of willingness to put some skin in the game to help drive some contract awards?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [69]

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Our general view is, our goal is to provide the nation's best talent and technology to support the warfighter and to support our intelligence community customer. When we develop things, it's going to be very narrowly focused to things that aren't going to be on what I'd call broad use. They have to be tailored to like CNO stuff, things like that. So we're more focused on being agnostic providers of solutions and using open source capabilities and offering or trying to work towards building into open architectures so we can further advance whatever technologies there are. There may be selective development things that we do internally or selective acquisitions, if it looks like that's going to provide the right solution and answer to the customer. But we're not going to trend towards becoming a mix of product and services and then selling that product because that's something we have to do to meet the mark.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [70]

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And my last question is around competition, both at the top end and the bottom end. We've obviously consolidated to sort of a short list of larger players. Has that become the calling card as the clients have also consolidated to these larger contracts? And is ManTech sufficient in size to play on the big IDIQs? And then on the other end, are you seeing any change in the impact from the small business set-asides?

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Kevin M. Phillips, ManTech International Corporation - President, CEO & Director [71]

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Sure. So the small business set-asides are fairly static. Haven't seen a lot of change there. I'd say that there might be some activities that are consolidating certain programs for mission requirements that would be more favorable to largers, but that's very spotty. And on the other side, we look for the types of procurements and the size of procurements the government procures, and to decide whether we can go after those as a prime contractor and how to position ourselves. And we have not found the consolidations of procurements -- I'm going to say the customer side, not our industry -- such that we're not able to compete. If anything there might be fewer competitors as a result of the consolidations. And so we think that we're in a good position. We had haven't found that those -- the need to become scalable for the sake of scale in our growth over the last 2 years and our pipeline, we think, supports the acquisition.

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Operator [72]

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And I'm not showing any further questions at this time. I would now like to turn the call back over to Stephen Vather for any further remarks.

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Stephen Vather, ManTech International Corporation - Executive Director of Corporate Development [73]

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Thanks, Daniel. As usual, members of our senior team will be available for follow-up questions. Thank you all for your participation on today's call and your interest in ManTech.

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Operator [74]

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