Judith L. Bjornaas - Deputy Chief Financial Officer & Senior Vice President-Financial Planning & Analysis George J. Pedersen - Founder, Chairman & Chief Executive Officer Kevin M. Phillips - Chief Financial Officer & Executive Vice President Daniel J. Keefe - President & Chief Operating Officer, Mission Solutions and Services Group L.

William Varner - President, Mission, Cyber & Intelligence Solutions Group.

Gautam Khanna - Cowen and Company, LLC Amit Singh - Jefferies LLC Tyler J. Scott - Wells Fargo Securities LLC Joshua M. Seide - Maxim Group LLC Kwan Hong Kim - SunTrust Robinson Humphrey, Inc. William Loomis - Stifel, Nicolaus & Co., Inc..

Good day, ladies and gentlemen, and welcome to the ManTech Second Quarter Fiscal Year 2016 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. And as a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host; Judy Bjornaas, Deputy Chief Financial Officer. Please go ahead..

Thank you, Karen, and welcome everyone. On today's call we have George Pedersen, Chairman and CEO; Kevin Phillips, Executive Vice President and CFO; and Dan Keefe and Bill Varner, our two Group Presidents.

During this call, we will make statements that do not address historical facts and thus are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results. For a full discussion of these factors and other risks and uncertainties, please refer to the section entitled Risk Factors in our latest Form 10-K and our other SEC filings.

We undertake no obligation to update any of the forward-looking statements made on this call. Now I'd like to turn things over to George..

Good afternoon. And thank you for participating in today's call. In the second quarter ManTech performed well by providing revenue growth, strong earnings and excellent bookings. We received $462 million in contract awards this quarter, which represents a 1.2 times book-to-bill. This marks our fifth consecutive quarter with bookings at or above 1 times.

In addition, we had our second consecutive quarter of organic growth. We had strong cash flow as well, collecting $22 million in cash flow from operations. We also executed our stated plan to invest in growth markets through strategic acquisitions.

During this quarter we acquired Oceans Edge Cyber, which greatly enhances our position in the cyber network operations and provides us a strong presence within the service element of the U.S. Cyber Command. As I have said before, there is greater certainty around funding, and our business opportunities continue to grow.

Contract awards are occurring on a regular basis. We believe it is likely we will see a continuing resolution in October this year. However, we should see approval of the 2017 budget in a reasonable time period. The level of overall threats to our nation remains elevated as you know.

We have over $40 million in cash, no debt, a $500 million line of credit. We are in a strong position to make more acquisitions to grow the company. We are focused on acquisitions having capabilities that will take us to a higher demand market. We are actively reviewing several promising candidates.

Now, Kevin will provide you with details on our financial performance and outlook..

Thank you, George. I'm pleased to see year-over-year growth in all of our key metrics and continued strong performance in winning new business. Revenues for the second quarter were $401 million, up $17 million or 4.4% compared to the second quarter of 2015 and up $11 million or 2.7% compared to the prior quarter.

As George mentioned earlier, we experienced organic growth this quarter of 1.5%. Direct labor was up 1% sequentially and up 3% year-over-year. We are growing our direct labor base and expect increasing demand for the capabilities we offer our customers. We expect strong contract award activity to support growth in the third quarter.

Our support for overseas contingency operations was consistent with the prior quarter and expectations. For the quarter, prime contracts represented 88% of our revenues. Contract mix was essentially unchanged with 68% of revenues from cost-plus, 14% on time-and-material contracts and 18% on fixed-price contracts.

Operating income for the quarter of $24.2 million was up 15% from the second quarter of 2015. Quarterly operating margin of 6% increased approximately 50 basis points year-over-year. We benefited from a one-time pick-up as we cleared reserves due to favorable final government audits on all contracts.

Our operating margin for the quarter, excluding one-time pickups, was 5.8%. Net income was $15 million and diluted earnings per share $0.39 for the quarter, which were up 19% and 18% respectively compared to the second quarter of 2015. Now onto the balance sheet and cash flow statement.

During the quarter, we collected $22 million in cash flow from operations or 1.5 times net income. DSOs were 67 days for the quarter, an improvement of 16 days compared to the second quarter of 2015, and improvement of 5 days sequentially. Our balance sheet at quarter-end shows $40 million in cash and no debt.

We will continue to strengthen the balance sheet, while we move ahead on our focused acquisition activity. We are prioritizing acquisitions for capital deployment and are actively identifying companies whose customers and capability sets fit our criteria. During the quarter, we acquired the Cyber business of Oceans Edge Inc., or OEC, for $48 million.

OEC is a leading provider of cyber network operations, which we expect to provide approximately $12 million in revenue for the second half of 2016. Given the advanced tools and solutions developed and offered by OEC, we expect to receive double-digit operating margins from this acquisition.

The board has authorized us to maintain our current dividend level of $0.21 per share to be paid in September. Turning to business development, bookings for the quarter were $462 million, representing a book-to-bill of 1.2 times. Approximately 39% of the bookings were from new business.

Total backlog at the end of the quarter stood at $4.3 billion and funded backlog was $0.9 billion. Proposal activity remains high. We expect to submit over $7 billion in bids in 2016. Our total qualified pipeline is $16 billion and we have about $4 billion awaiting adjudication.

We anticipate heavy award activity in the second half of the year, which will support continued organic growth. That said, the level of organic growth will be tempered by continued trends towards small business set side within some of our customers.

As I have noted on previous calls, we are responding to a number of large bids in the army to consolidate some of our existing work and new work. The outcome of these large bids will factor into our outlook entering 2017. We are raising the lower end and tightening the range of our previously communicated 2016 guidance.

Before any future acquisitions, we are calling for revenues of $1.585 to $1.635 billion, net income of $54.6 million to $57 million and diluted earnings per share of $1.42 to $1.48 per share.

The implied operating margin guidance for the year is 5.7% to 5.8%, which has improved since our last guidance due to improved performance and the contribution of Oceans Edge Cyber, driving earning per share to the upper end of the previously communicated range.

Net income and earnings per share are both expected to be up 5% to 9% from last year, benefiting from revenue growth and margin expansion. Cash flow from operations should be between 1.7 and 2 times net income. Built into our guidance are an effective tax rate of 39% and a fully diluted share count of 38.5 million shares.

We're pleased with the improved market visibility. Our investments in business development continue to bear results and we are diligently staffing new contract awards, while ensuring that we provide highly capable talent to our existing customers. Now Dan will speak to our defense and federal civilian business.

Dan?.

Good afternoon. ManTech Mission Solutions and Services had another great quarter. We received a prime position on the $25 billion Strategic Partners Acquisition Readiness Contract or SPARC, with the centers for Medicare and Medicaid services. This IDIQ is under protest, but we expect resolution in the coming quarter.

SPARC is a key contract vehicle win and essential to our strategy in the government health IT market. Similar to the results in Q1, MSS continued to win contracts of scale that are new work to new customers. For example, in Q2, we received a $34 million contract to provide engineering support to the United States Naval Observatory.

As Kevin noted, our proposal activity increased significantly. In MSS, we have more than double the proposals submitted in 2016 compared to 2015. This is a reflection of the significant investment we made over the last two years in our business development and technical solutioning resources.

That in conjunction with improved win rates has contributed to a higher book-to-bill compared to previous years. Of note, a good portion of our increased proposal activity is in the Homeland and Diplomatic Security markets of the Department of Homeland Security and the Department of State, respectively.

We view these as strong markets for the federal departments in the years ahead. With respect to our work overseas, the OCO revenue remained stable, with U.S. force levels, as announced by the President, expected to be maintained through 2017 in Afghanistan. Our Royal Saudi Air Force contract now has over 200 full-time personnel.

And we will continue to ramp up an additional 100 personnel. Finally, we continue to add to our foreign military sales work with an expansion of work into Egypt.

Bill?.

Thanks, Dan. The Mission, Cyber & Intelligence Solutions Group also had a great quarter, marked by strong new business awards and a strategic acquisition that expands our presence in the cyber market.

This quarter we received two significant task order awards on the continuous diagnostic and mitigation CDM program for the Department of Homeland Security. The first of these task orders will provide monitoring, vulnerability scanning, an insider threat protection to approximately 40 small- to mid-size government agencies and departments.

The second task order, valued at $85 million, will provide privileged access management and on-premises insider threat support for approximately 65 large agencies. Both of these task order wins are the result of our enhanced positioning in DHS as a result of the KCG acquisition one year ago.

We believe that these wins offer strategic value well beyond the immediate $110 million awarded value. In the quarter we also received a $32 million contract to continue providing the Missile Defense Agency with Counterintelligence Advisory and Assistance Services.

The addition of Ocean's Edge Cyber fits exactly with our strategy of expanding in the growing DoD and U.S. Cyber Command market. Oceans Edge Cyber provides additional vulnerability research, development and analysis capabilities to our existing cyber portfolio.

We are excited to add OEC's highly talented people, cutting-edge capabilities and important customers to ManTech. Oceans Edge Cyber also brought highly differentiated skills and capabilities within the mobile and wireless arenas. The acquisition is off to a great start.

And we are already finding pipeline opportunities to pursue with our breadth of capabilities and past performance. We remain focused on winning new work and have submitted many proposals in Q2 with expected adjudications later this year and in 2017.

Attracting and retaining the strong talent needed to support our customers' missions remains a key priority for us. In summary, ManTech is positioned for growth based on strong execution in the past two quarters and our recent acquisition. We are committed to leveraging our strong balance sheet to accelerate our growth.

With that we are ready to take your questions..

Thank you. Our first question comes from the line of Gautam Khanna from Cowen & Company..

Yes. Good afternoon. Thank you..

Good morning – afternoon..

Kevin, I was wondering if you could square the guidance. It implies I think the second half relatively flat with the first. And I just wanted to – you've been winning a lot of new business of late.

Is there anything that you can talk about that are known headwinds in the second halves?.

I think the headwinds that we have frankly are staffing, the ability to staff contracts we've awarded. Frankly, there's a delay in getting clearances through. I think that's happening industry-wide. And I think that'll correct itself at some point. And the small business trend, we are seeing some contracts coming up to small business.

And that will impact and is beginning to impact the overall review of the growth. But those are the primary drivers from a growth standpoint for us..

Okay. And you mentioned having the wherewithal for acquisitions. You clearly have the balance sheet.

I was wondering are there any larger properties that you guys are considering within the pipeline? Would you be surprised if you did not do another acquisition of consequence this year?.

There's always a lot of acquisition options of various sizes. I would say that the large ones we have to look at much more closely in terms of what they offer. We're active in looking. But as you know we're not going to buy sales. We're going to look for the combination that makes lot of sense. And that makes us a fairly selective acquirer.

So while there's a lot of businesses out there at mid-range to smaller scale that we have interest in, the question is whether their profile will support what we're looking for from a combination..

Yeah.

And I guess what I was trying to get at is, I mean do you see anything in that $50 million to $200 million sales range that – is that pipeline of opportunities better or worse than it was six months ago?.

It's fairly consistent..

Okay. And could you just update us on – you got a lot of bids outstanding. We're obviously in the September quarter now. What is your expectation for contracts award activity in the September quarter? And then what you might expect the follow-through will be in the December quarter? Should we be well above 1 times to be calibrated? That'd be helpful..

Yeah. So I'll speak to volume. I think Dan mentioned the volume of bids he's submitting compared to last year. So we have a heavy volume of submits that are continuing the second half of the year. So the demand from the customer is still very high.

I think that we're expecting for the full-year to have submitted bids somewhere in the $8 billion range, which is very high. And the timing around awards is still expected to be robust. We can't work the timing of the customers. They always are working through delays and making sure that they have dotted their i's, crossed their t's.

But I would say that from the – the timeline that they've laid out, we expect both quarters to have heavy volume potential and award activity for us to potentially receive..

Thanks a lot. I'll turn it over..

All right..

Thank you. And our next question comes from the line of Amit Singh from Jefferies..

Hi, guys. Thank you for taking my question. If I were to remove the $12 million contribution promotions that – you've lowered sort of the midpoint of your revenue guidance by 2%. So, if you could talk a little bit about what led to that? And second, if my math is correct, I guess you're getting around $0.02 benefit in EPS from that acquisition.

So, that means midpoint of EPS guidance sort of maintained.

And is that – so what is leading to your core margins expanding in the year?.

Sure. I'll answer both. So the top-line adjustment is based on the staffing, timeline for awards as well as some of the movement towards small business as we said. So, just the fact that the growth level that we could receive from the contract awards we've received hasn't been at the pace that we expect.

We're trying to adjust and temper the top line and the midpoint of that range. That said, we have seen better-than-expected returns in the business. We are seeing stronger performance.

And along with the $0.02 that you mentioned from Oceans Edge, we just think that the overall business is performing to increase our operating margin from the 5.6%, up to 5.7%, 5.8% range..

All right. Great. And I heard at the beginning of the year you had mentioned sort of for fiscal 2016 around 30% of your contracts up for re-compete. And I think a good portion of that, especially the Army-related contracts, are back end of the year loaded.

Any updates over there and your confidence in sort of winning those contracts?.

I'll say that the proposals were pushed – delayed a little bit, which significantly reduces our amount of re-compete. I'll let Dan speak to the specific Army programs..

Yeah. Well, first on the Navy contracts, we have cleared through a lot of our Navy re-competes successfully. The Army contracts, as Kevin just mentioned, primarily up in CECOM, but elsewhere are pushed towards the end of the year. So we'll see the impacts..

All right. Thank you very much..

Thank you..

Thank you. And our next question comes from the line of Edward Caso from Wells Fargo Securities..

Good evening. This is actually Tyler Scott on for Ed. Thank you for taking my question..

Hey, Tyler..

Can you just talk about – hey, how are you doing? Talk a little bit about the new versus re-compete in the quarter. I think I just heard that maybe there was a little less re-compete than you thought.

But what clients are actually moving forward with decisions on awards and where are you seeing the most success?.

Well, all clients are active in their award activity. While we didn't see the amount of awards this quarter we were expecting, there were delays in that. It's still fairly robust. And I'll let both Dan and Bill speak to their pipelines in what we're seeing. But the timeline isn't getting shorter. It was for a while; it's not getting shorter right now.

I think the government is very focused on making sure that the procurement decisions are well-documented. But they're not really extending either. And each agency has a fairly robust set of requirements they're sending out.

Bill, do you want to speak here?.

Sure. So this is Bill. And in my case, I think we're seeing the timelines back, I guess, about similar to what we saw maybe one year ago. But the awards are still happening. Awards are being made regularly. The new RFPs are still being released. We're not seeing any significant delays in any of the proposals or the programs that we're working on.

Dan?.

Yeah. The only thing I'd add to that is there's still a lot of protest activity that slows down the cycle, the award cycle..

Okay. And so I think this has been touched on a few different ways. But the strong award activity and the inorganic contribution isn't moving the revenue up. And that's primarily from small business set aside pressure.

Where are you seeing that the most? Any clients in particular or areas in particular? And are you expecting that to continue?.

Well, the areas that we've seen it most are in the Veterans Affairs Department and the Navy, within customer sets that we have today. But it's hard to say whether the trend will continue, because the trend has been there for a while. And it seems to be leveling in some customer sets.

So it's very customer specific and where they think they need to be from an overall profile..

Is there anything that happened that sort of – it seems like this – not that it came out of the blue, but this has been like a noteworthy headwind across the industry.

Was there something that changed with the government clients that brought this back into focus? Or is it just because we're seeing it more because award activity has kind of turned?.

I think there has been a greater emphasis on assuring that we meet goals within the current administration. And that every service is trying to make sure that they meet those objectives..

Okay. Thank you very much..

Thank you. And our next question comes from the line of Brian Kinstlinger from The Maxim Group..

Hi. This is actually Josh Seide in for Brian..

Great..

Firstly, have there been any major protests to your awards in the first half of 2016? I think you mentioned the SPARC contract in the prepared remarks.

But are there any other protests that we should be mindful of?.

Yeah. We have one contract that we were successfully awarded that has been under protest and is going through corrective action. But like with any protest, we have to work through the customer's proposal response and how they work through their corrective actions on awards..

Okay.

And can you comment at all on the awards trends thus far into July?.

So far they've been pretty decent. So I think we're on pace. I think the volume within the quarters is running as expected. But it's not either strong or light. I think that we're doing okay..

Okay. And then last quarter you had discussed some pricing pressures easing a bit.

Would you still feel that that's tending to be the case?.

Yes. Our general view, and I'll ask Dan and Bill to add to this, is that there's more focus on solutioning. They still are very price sensitive. But they also want to get the right solution. And they're focused on modifying their structures and things like that. Dan, do you want to....

Yeah. And I do think in some areas, the customer sees the downside of a low price/technically acceptable bid. And we do see some customers moving back to a more balanced approach..

And this is Bill. We've had at least two or three of my key customers tell us outright that they will no longer do LPTA bids. That everything will be best value. Still, that means cost is always going to be important. It hopefully will not be the primary factor..

That's helpful. Thank you.

And then if we look at the midpoint of 2016 revenue guidance, how much revenue does the company need to generate from contracts not yet won?.

Not yet won in the midpoint is about 2%. 2% to 3%..

Thanks. That's helpful. And then lastly, just a quick one.

I don't think I heard in the prepared remarks, how much of the revenue was attributable to the MRAP family of vehicles this quarter?.

We provide OCO, but not MRAP specific. I would say that MRAP's work is consistent with prior quarters and our expectation..

Thanks..

Thank you. And our next question comes from the line of Tobey Sommer from SunTrust..

Hi. This is actually Kwan Kim on for Tobey. Thanks for taking my questions. First off, could you please break out for us the percentage of revenue generated in the intel markets and give us an update on the current pace of the awards coming in? How they compare to the prior quarter? Thank you..

Yeah. So roughly 40% to 45% of our work comes from the intelligence community order.

What was the second question?.

The current pace of the awards coming in?.

Fairly consistent on a heavy basis. So the award activity has been heavy, the submit activity has been heavy, and although spotty, the award activity has been on pace with what we've been expecting..

Thank you..

Sure..

And you mentioned in the last quarter that in terms of contract durations, there's a trend of two-year contracts moving out to three years to five years.

Are you still seeing the same trends in contract values?.

Yeah. This is Dan. We're certainly seeing that trend moving on to the longer period and also some consolidation to make some of the contracts larger..

Thank you..

Thank you. And our next question comes from the line of Bill Loomis from Stifel..

Hi. Thanks.

Just on OEC, I missed what you said about how much that revenue is factored into the guidance?.

It's $12 million in the second half of the year and it's providing double-digit bottom line returns..

Okay.

Is that low-double-digit or high-double-digit?.

It's providing enough to provide the $0.02 adjustment that we had wanted to be listed at (26:53) today..

Okay.

And then are you seeing other opportunities like OEC, smaller cyber-related? When you look at your deal pipeline, are you seeing multiples of those or are those hard to come by?.

Bill, this is Bill. Companies like Oceans Edge are very unique in terms of being some of the smaller boutique cyber companies. That's one reason why we were so eager to move forward with this one when the opportunity came up. There are other companies out there that we are highly interested in. There are not that many pure cyber companies.

KCG, which we acquired a year ago, you probably remember it as a pure cyber company, Oceans Edge is a pure cyber company. There aren't that many of those. So, when we do see them, we certainly get very interested in them..

Okay.

So most of the acquisitions that you guys would be looking at would be kind of the more traditional services in the intelligence and other areas?.

Yes. Broadly, that's correct..

Okay. Okay. Great. Thank you..

Okay..

Thank you. And we have a follow-up question from the line of Gautam Khanna from Cowen & Company..

Hey, guys. I was wondering if you could comment or give us any update on the Groundbreaker recomplete, which is being split into three different contracts. I think they're greenway, or some such nomenclature to it. What's the deal with timing? How are you positioned? Are you bidding one of them as a prime? Any color there would be helpful..

So we generally don't talk about specific bids underway, the timing within the overall profile. I would say that we are a part of the effort up there. And we'll keep you informed in terms of how that progresses within the community.

Bill, do you want to speak to anything?.

Well, without being specific, we can say that the government is still right on target with the original timeline that they proposed. As Kevin pointed out, we are involved. We think we are in a nice position. We're looking forward to the government moving along forward with the process..

Can you give us – can you remind us what the timing is on bid submission, award, what have you?.

So we are expecting – so the proposals have been submitted. We are expecting rounds of questions in August. And then, usually following that there's the opportunity to resubmit the bid. And the award will be sometime in the – at least we've been told, late second quarter or early third quarter of 2017..

And it's your understanding that the – since you are one of the incumbents of contractors, do you think the work that may result or whatever you bid on is going to be greater than the existing work you do? In other words that sounds like access and other contracts are being added to the works built on the recomputed parts.

Is that consistent with your view?.

I think that's very hard for us to tell at this time. We have to see how our procurement shapes out and how our bid is determined by the customer. So I think we'll have to delay on answering that..

Okay, guys. Thanks a lot..

Thank you..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to ManTech management for any closing comments..

Now we thank you all for participating on today's call. And if you have any follow-up questions, as usual, the management team will be available for questions. Thank you..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day..