ManTech not sounding apt for megadeals as organic growth shines

ManTech feels almost no pressure to make the same type of megadeal that many of their competitors have as they look to gain market share on their own accord.

ManTech International’s long-standing thesis of competing in the market has been somewhat straightforward: they are just fine as is at their current size amid consolidation among both their competitors and the contracts to compete for.

That thesis remains unchanged and the megadeal activity that has reshaped the government services landscape in the past few years may work in ManTech’s favor to an extent, executives said Thursday in their fourth quarter and year-end earnings call with investors.

“We have not found the consolidations of procurements… such that we're not able to compete. If anything there might be fewer competitors as a result of the (industry) consolidations,” CEO Kevin Phillips told analysts. “And so we think we're in a good position. We haven't found… the need to become scalable for the sake of scale in our growth over the last two years in our pipeline.”

Herndon, Virginia-based ManTech’s ongoing resurgence accelerated in 2018 as revenue grew on an organic basis for a third straight year, this time by 9 percent to $1.96 billion. Including acquired revenue such as that from InfoZen, the growth rate was 14 percent.

A foundation for future growth also is in place as the company expects $2.05-$2.15 billion in revenue this year. Underpinning that are $3.4 billion in awards booked last year for a book-to-bill ratio of 1.8, or contracts added to the backlog versus drawdowns to recognize revenue. A number more than 1 is a sign that growth is coming.

But given the company’s long history of dealmaking, ManTech executives did give some glimpses into what the merger-and-acquisition universe is currently like on the buyer side from their perspective.

ManTech’s “clear preference for capital deployment continues to be M&A,” Chief Financial Officer Judy Bjornaas told investors.

So the company is looking, but she indicated the current deal picture is somewhat complicated.

“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,” Bjornaas said. “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.”

The M&A landscape certainly continues to be active but what makes it murky is a supply-demand imbalance that is still working its way through the system. Valuations of prospective targets remain elevated and some businesses are simply taking more time to chart their own course before starting to look at an exit.

There is one other significant market-wide headwind clearing up that ManTech and its peers will welcome: the security clearance backlog. Much responsibility for handling security clearances is shifting from the Office of Personnel Management to the Defense Department to try and break through the logjam of talent in industry and government waiting to be cleared.

The overall backlog declined by 22 percent last year, according to figures from OPM’s National Background Investigations Bureau agency. Ability to get talent cleared for sensitive projects is key for government services companies to take on more work, especially for firms whose backlog of contracts is growing like ManTech’s.

“In our industry at large, I think, the implication is being able to get talent more quickly if this continues… onto a program,” Phillips said. “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 (days), then we can bring them to the contract and get them starting on the program earlier.

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

Clearing through the backlog and growing the overall pie of talent then helps to set up the next part of the equation.

“Once we clear through that it’s still finding the right people, right skill set. So the goal is clear through that so we can focus on that one core issue,” Phillips said.