The defense industry has been one of the most vulnerable over the past decade, as the constant threat of budget cuts and policy changes has weighed on the sector. ManTech International (NASDAQ:MANT) played a critical role in supporting U.S. military efforts in Afghanistan, and its cutting-edge technology has been a valuable asset for defense and security arms of the federal government. Still, from a business standpoint, ManTech investors have been uncertain about how the company will bounce back from U.S. moves to withdraw from Afghanistan, and the company's first-quarter financial report did little to allay fears of further contraction in revenue. Let's take a closer look at how ManTech did and what it'll take for it to improve on its disappointing results.
ManTech still faces falling revenue
As we saw last quarter, ManTech International faced its biggest challenge on the top line, as revenue dropped 18% to $370.3 million, falling at about double the pace that most investors had expected to see. Even with that decline, though, ManTech made the most of what money it did bring in, and net income jumped 22% to $11.76 million, producing earnings of $0.31 per share. Despite those gains, though, shareholders had expected ManTech to earn $0.33 per share.
ManTech once again pointed to the reduction in requirements related to military operations in Afghanistan and surrounding areas, where it has seen its staffing drop by close to 90% from early 2013 levels. Just in the past three months, funding for Overseas Contingency Operations support has fallen by about a quarter, extending the declines that ManTech suffered throughout 2014.
Cost management played a vital role in helping ManTech keep its profits up, though. Operating margins improved by a full percentage point to 5.4%, and smart capital moves like the redemption of high-interest debt in the middle of last year started paying off in lower overall debt-maintenance costs.
ManTech once again pointed to the future as looking brighter. CEO George Pedersen pointed out that "Contract activity across the industry is starting to increase, and more high-quality companies are becoming available for acquisition." With the company actively looking for buyout targets, ManTech is clearly hoping to grow through industry consolidation to offset organic business losses.
When can ManTech bounce back?
One sign of success on the acquisition front came after the end of the quarter, with ManTech agreeing to buy Welkin Associates. ManTech hopes that Welkin's high-end engineering services experience with the Defense Department and various intelligence organizations will complement ManTech's own business offerings, making it more likely for the company to earn contract wins.
As upbeat as ManTech tried to be, its guidance left much to be desired. The company cut its revenue estimates for 2015 to a range of $1.6 billion to $1.7 billion, down from $1.725 billion, and it now believes it could earn as much as $0.11 per share less than it projected in its last report. Contract awards of just $149 million for the quarter fell well short of the hopes that investors had for ManTech, and despite confidence about high levels of proposal activity, ManTech's backlog fell to $3 billion, with $900 million in funded projects. As CFO Kevin Phillips explained, "Revenues were lower than expected as projected new contract awards did not materialize, and customers held back on material purchases."
With shares already having fallen back from higher levels earlier in 2015, the quarter's poor results didn't seem to surprise ManTech shareholders enough to create any substantial move in its share price in after-hours trading. Even so, ManTech needs to overcome the sizable obstacle of finding a way to tap into what it perceives as a rising opportunity to grab up a bigger piece of the government-contractor pie, even as many look at that pie as shrinking. Industry consolidation might well prove to be a smart strategy for ManTech to pursue, but it will need to show the success of buyouts like Welkin in order to convince skeptical investors that it's moving in the right direction.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends ManTech International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.