WeManTech International Corporation (depending on the circumstances, “ManTech” “Company” “we” “our” “ours” or “us”) provide innovative technologiesmission-focused technology solutions and solutionsservices for mission-critical national security programs for theU.S. defense, intelligence community; the departments of Defense, State, Homeland Security, Healthcommunity and Human Services, Veteran Affairs and Justice, including the Federal Bureau of Investigations (FBI); the health and space community; and other U.S. government customers. Our expertise includes cybersecurity; software and systems development;federal civilian agencies. Now in our 50th year, we excel in full-spectrum cyber, data collection & analytics, enterprise information technology; multi-disciplined intelligence; command, control, communications, computers, intelligence, surveillancetechnology (IT), systems engineering and reconnaissance; program protectionsoftware application development solutions that support national and mission assurance; systems engineering; supply chain management and logistics; test and evaluation; training; and management consulting. Additional information can be found at www.mantech.com.homeland security.

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the U.S., have been condensed or omitted pursuant to those rules and regulations. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesrevenue and expenses. We recommend that you read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, previously filed with the SEC. We believe that the condensed consolidated financial statements in this Form 10-Q reflect all adjustments that are necessary to fairly present the financial position, results of operations and cash flows for the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results that can be expected for the full year.

The preliminary purchase price of $13.2$184.0 million, which includes an estimated working capital adjustment, was preliminarily allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. As we are still in the process of reviewing the fair value of the assets acquired and liabilities assumed and in finalizing the closing working capital adjustment, the purchase price allocation for InfoZen is not complete as of March 31, 2018. The goodwill recorded related to this transaction will be deductible for tax purposes over 15 years. Recognition of goodwill is largely attributed to the value paid for Edaptive'sInfoZen's capabilities to support Department of Health and Human Services customers and, specifically, in modernization, agile software development, testingcloud migration and automationthreat monitoring and business intelligence.assessment capabilities.

In preliminarily allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of Edaptive'sInfoZen's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $1.1$49.2 million and $0.3$5.7 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with Edaptive'sInfoZen's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 1020 years. Backlog is amortized straight-line over its estimated useful life of 1 year. The weighted-average amortization period for the intangible assets is 818 years.

The following table represents the preliminary purchase price allocation for EdaptiveInfoZen (in thousands):

In applying the two-class method, we determined that undistributed earnings should be allocated equally on a per share basis between Class A and Class B common stock. Under our Certificate of Incorporation, the holders of the common stock are entitled

Basic earnings per share has been computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period in which the shares were outstanding. Diluted earnings per share have been computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares that were outstanding during each period.

For the three months ended September 30,March 31, 2018 and 2017, and 2016, options to purchase 363,635310,745 shares and 13,481158,074 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because the options' effect would have been anti-dilutive. For the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, options to purchase 301,985there were 203,854 shares and 470,229 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because the options' effect would have been anti-dilutive. For the nine months ended September 30, 2017 and 2016, there were 202,459 shares and 840,41953,724 shares, respectively, issued from the exercise of stock options. For the three months ended March 31, 2018, there were 86,233 shares issued from the vesting of restricted stock units.

Amortization expense relating to intangible assets for both the three months ended September 30,March 31, 2018 and 2017 and 2016 was $5.5 million. Amortization expense relating to intangible assets for the nine months ended September 30, 2017 and 2016 was $16.6$7.1 million and $16.2 million, respectively.$5.6 million. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):

Unrecognized compensation expense related to non-vested awards was $2.0$5.4 million as of September 30, 2017,March 31, 2018, which is expected to be recognized over a weighted-average period of 23 years.

We have one reportable segment. We deliver a broad arrayThe Tax Cuts and Jobs Act of IT and technical services solutions under contracts with2017 (TCJA) was enacted on December 22, 2017. TCJA reduces the U.S. government. Our U.S. government customers typically exercise independent contracting authority,federal corporate tax rate from 35% to 21%, effective January 1, 2018. At March 31, 2018 and even offices or divisions within an agency or department may directly, or through a prime contractor, useDecember 31, 2017, we have not completed our services as a separate customer so long as that customer has independent decision-making and contracting authority within its organization. Revenues from the U.S. government under prime contracts and subcontracts were approximately 97% and 98% of our revenuesaccounting for the nine months ended September 30, 2017tax effects of enactment of TCJA. We made a reasonable estimate of the effects on our existing deferred tax balances and 2016, respectively. We treat sales to U.S. government customers as sales within the U.S. regardless of where the services are performed. U.S. revenues were approximately 98% and 99% of our total revenueseffective tax rate for the three months ended September 30,matters that are continuing to be evaluated, as noted below. We will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected by additional clarifications and interpretations of the legislation.  As disclosed in our 2017 and 2016, respectively. U.S. revenues were approximately 98% and 99% ofForm 10-K, we have not yet completed our total revenuesaccounting for the nine months ended September 30, 2017 and 2016, respectively. International revenues were approximately 2% and 1%income tax effects of our total revenues for the three months ended September 30, 2017 and 2016, respectively. International revenues were approximately 2% and 1%deductibility of our total revenues for the nine months ended September 30, 2017 and 2016, respectively. Furthermore, substantially all assets from continuing operations were held in the U.S. for the nine months ended September 30, 2017 and year ended December 31, 2016.

All statements and assumptions contained in this Quarterly Report on Form 10-Q that do not relate to historical facts constitute "forward-looking statements." These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include the use of words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate," "plan" and words and terms of similar substance in connection with discussions of future events, situations or financial performance. While these statements represent our current expectations, no assurance can be given that the results or events described in such statements will be achieved.

Forward-looking statements may include, among other things, statements with respect to our financial condition, results of operations, prospects, business strategies, competitive position, growth opportunities, and plans and objectives of management. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of our control, and include, without limitations, the risks and uncertainties discussed in the section titled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017.

Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to, the following:

We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to update any forward-looking statement made herein following the date of this Quarterly Report, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

The primary driver of our increase in revenuesrevenue relates to revenuesrevenue from new contract awards, acquisitions and growth on certain existing contracts and acquisitions.contracts. These increases were offset by contracts and tasks that ended and reduced scope of work on some contracts.

  

The increase in cost of services was primarily due to increases in revenues.revenue. As a percentage of revenues,revenue, direct labor costs increased towere 48% for the three months ended September 30, 2017,March 31, 2018, compared to 46%49% for the same period in 2016.2017. As a percentage of revenues,revenue, other direct costs, which include subcontractors as well as equipment and materials used in the performance of our contracts, decreased to 38%was 37% for the three months ended September 30, 2017, compared to 40% for the same period in 2016. The decrease in other direct costs, as a percentage of revenues, was primarily due to lower material purchases on our contractsMarch 31, 2018 and increases in direct labor.2017.

The increase in general and administrative expenses was primarily due to an increase in bid and proposal spending, incentive compensation expenseamortization of acquired intangibles and expenditures to support infrastructure.

Our effective tax rate is affected by recurring items, such as the relative amount of income we earn in various taxing jurisdictions and their tax rates. It is also affected by discrete items that may occur in any given year, but are not consistent from year-to-year. Our effective income tax rates were 35%22% and 37%38% for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively. The decreasesignificant reduction in our effective tax rate primarilyfor 2018 is relateddue to favorable performance in our executive supplemental saving plan assetsthe Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017, which reduced the U.S. corporate tax rate from 35% to 21%. Our effective income tax rate was further reduced by the tax benefit frombenefits for stock option exercises in the exercise of stock options during the period ended September 30, 2017.

At September 30, 2017 and December 31, 2016, our backlog was $6.3 billion and $4.9 billion, respectively, of which $1.5 billion and $1.0 billion, respectively, was funded backlog. The increase in backlog is due to new contract awards. The current trend is that contracts are awarded for a longer term, which increases the time over which backlog will be recognized as revenues. Backlog represents estimates that we calculate on a consistent basis. For additional informationWe define backlog as our estimates of the remaining revenue from existing signed contracts, assuming the exercise of all options relating to such contracts and including executed task orders issued under Indefinite Quantity/Indefinite (ID/IQ) contracts.

We define funded backlog to be the portion of backlog for which funding currently is appropriated and allocated to the contract by the purchasing agency or otherwise authorized for payment by the customer upon completion of a specific portion of work. Our funded backlog does not include the full value of our contracts because Congress often appropriates funds for a particular program or contract on how we computea yearly or quarterly basis, even though the contract may call for performance over a much longer period of time.

A variety of circumstances or events may cause changes in the amount of our backlog seeand funded backlog, including the execution of new contracts, the extension of existing contracts, the non-renewal or completion of current contracts, the early termination of contracts, and adjustment to estimates for previously included contracts. Changes in the amount of our Annual Report on Form 10-K forfunded backlog also are affected by the fiscal year endedfunding cycles of the government.

At March 31, 2018 and December 31, 2016, previously filed2017, our backlog was $7.1 billion. Our funded backlog was $1.2 billion and $1.4 billion as of March 31, 2018 and December 31, 2017.

The following table reconciles our backlog to our remaining performance obligations as disclosed in Note 3. Revenue from Contracts with the SEC.Customers to our condensed consolidated financial statements in Item 1 (in billions):

Our primary liquidity needs relate to managing working capital, financing acquisitions, making cash dividend payments, financing acquisitions, purchasing property and equipment and investing in capital software. Our primary sources of liquidity are cash from operating activities and borrowings under our revolving credit facility. On September 30, 2017,March 31, 2018, our cash and cash equivalents balance was $148.7$10.4 million. There were no$65.5 million outstanding borrowings under our revolving credit facility at September 30, 2017.March 31, 2018. The maximum available borrowings under our revolving credit facility at September 30, 2017March 31, 2018 were $484.7$419.2 million. As of September 30, 2017,March 31, 2018, we were contingently liable under letters of credit totaling $15.3 million, which reduces our availability to borrow under our revolving credit facility. After the close of the quarter, we completed the acquisition of InfoZen, LLC, which was funded with cash on hand and borrowings on our revolving credit facility.

Our operating cash flow is primarily affected by our ability to invoice and collect from our customers in a timely manner, our management of vendor payments and the overall profitability of our contracts. We bill most of our customers monthly after services are rendered. Our accounts receivable days sales outstanding were 6869 and 6368 for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively. For the ninethree months ended September 30, 2017 and 2016,March 31, 2018, our net cash flowsused in operating activities were $18.0 million. For the three months ended March 31, 2017, our net cash flow from operating activities were $115.2 million and $83.2 million, respectively.$36.5 million. The increasedecrease in net cash flows from (used in) operating activities during the ninethree months ended September 30, 2017March 31, 2018 when compared to the same period in 20162017 was primarily due to the timing of payments related to accounts payable and accrued salaries and related expenses as well as an increase in net income and billings in excess of revenue earned.receivables.

For the ninethree months ended September 30,March 31, 2018 our net cash used in investing activities was $9.0 million, which was primarily due to the purchase of equipment to support a managed IT service contract, infrastructure investments and capitalized software for internal use. For the three months ended March 31, 2017 our net cash outflows fromused in investing activities were $11.6was $3.4 million, which were duerelated to capital expenditures. ForWe expect increased levels of capital expenditures, as compared to prior years, for the nine months ended September 30, 2016, our net cash outflows from investing activities were $55.2 million, which were primarily relatedpurchase of equipment to the acquisition of Oceans Edge, Inc, Cyber Division.support managed IT service contracts.

For the ninethree months ended September 30,March 31, 2018, our net cash flow from financing activities were $27.9 million, which were primarily due to net borrowings under on revolving credit facility and exercise of stock options partially offset by dividend payments. For the three months ended March 31, 2017, our net cash outflows fromused in financing activities were $19.9$6.4 million, which were primarily due to dividends paid partially offset by the proceeds from the exercise of stock options. For the nine months ended September 30, 2016, our net cash inflows from financing activities were $1.6 million, which were primarily due to the proceeds from the exercise of stock options and the excess tax benefits from exercise of stock options offset by dividends paid.

We maintain a credit agreement with a syndicate of lenders led by Bank of America, N.A., as sole administrative agent and PNC Bank, National Association as swing line lender.agent. The credit agreement provides for a $500 million revolving credit facility, with a $75 million letter of credit sublimit and a $30 million swing line loan sublimit. The credit agreement also includes an accordion feature that permits us to arrange with the lenders for the provision of additional commitments. The maturity date is August 17, 2022. Borrowings under our credit agreement are collateralized by substantially all the assets of us and our Material Subsidiaries (as defined in the credit agreement) and bear interest at one of the following variable rates as selected by us at the time of borrowing: a London Interbank Offer Rate (LIBOR) based rate plus market spreads (1.25% to 2.25% based on our consolidated total leverage ratio) or Bank of America's base rate plus market spreads (0.25% to 1.25% based on our consolidated total leverage ratio). There was no$65.5 million outstanding balance on our revolving credit facility at September 30, 2017.March 31, 2018. As of and during the ninethree months ended September 30, 2017,March 31, 2018, we were in compliance with the financial covenants under the credit agreement.

We believe the capital resources available to us from cash on hand, our remaining capacity under our revolving credit facility, and cash from our operations are adequate to fund our anticipated cash requirements for at least the next year. We anticipate financing our internal and external growth through cash from operating activities, borrowings under our revolving credit facility or other debt and issuance of equity.

To the extent possible, we invest our available cash in short-term, investment grade securities in accordance with our investment policy. Under our investment policy, we manage our investments in accordance with the priorities of maintaining the safety of our principal, maintaining the liquidity of our investments, maximizing the yield on our investments and investing our cash to the fullest extent possible. Our investment policy provides that no investment security can have a final maturity that exceeds six months and that the weighted average maturity of the portfolio cannot exceed 60 days. Cash and cash equivalents include cash on hand, amounts due from banks and short-term investments with maturity dates of three months or less at the date of purchase.

During each of the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, we declared and paid quarterly dividends in the amount of $0.25 per share and $0.21 per share, respectively, on both classes of our common stock. While we expect to continue the cash dividend program, any future dividends declared will be at the discretion of our Board of Directors and will depend, among other factors, upon our results of operations, financial condition and cash requirements, as well as such other factors that our Board of Directors deems relevant.

In the ordinary course of business, we use letters of credit issued to satisfy certain contractual terms with our customers. As of September 30, 2017,March 31, 2018, $15.3 million in letters of credit were issued but undrawn. We have an outstanding performance bond in connection with a contract between ManTech MENA, LLC and Jadwalean International Operations and Management Company to fulfill technical support requirements for the Royal Saudi Air Force. This performance bond is guaranteed by a letter of credit in the amount of $15.2 million. We have off-balance sheet arrangements related to operating leases. For a description of our operating leases, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, previously filed with the SEC.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Application of these policies is particularly important to the portrayal of our financial condition and results of operations. The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesrevenue and expenses. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies for 2017 are described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, previously filed with the SEC. There have been no material changes to our critical accounting estimates and policies from those discussed in our 2017 Annual Report on Form 10-K, other than revenue recognition and cost estimation as part of our implementation of ASC 606, which is described below.

We recognize revenuesaccount for a contract when persuasive evidenceboth we and the customer approve and commit; our rights and those of an arrangement exists, services have been rendered,the customer are identified, payment terms are identified; the contract has commercial substance; and collectability of consideration is probable. At contract inception, we identify the distinct goods or services promised in the contract, referred to as performance obligations. Then we determine the transaction price for the contract; the consideration to which we can can expect in exchange for the promised goods or services in the contract. The transaction price can be a fixed or variable amount. It is common for our contracts to contain award fees, incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and historical, current and forecasted information that is reasonably available to us. The transaction price is fixedallocated to each distinct performance obligation using our best estimate of the standalone selling price for each distinct good or determinableservice promised in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and collectabilitythen add an appropriate margin for that distinct good or service promised. Revenue is reasonably assured. We have a standard internal process that we use to determine whether all required criteria for revenue recognition have been met.

We deriverecognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the majoritycustomer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of our revenues from cost-plus-fixed-fee, cost-plus-award-fee, fixed-price or time-and-materials contracts. Revenues for cost-reimbursable contracts are recorded as reimbursable costs are incurred, including an estimated shareany work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the applicable contractual fees earned.performance obligation. Based on the nature of the products and services provided in the contract, we use our judgment to determine if an input measure or output measure best depicts the transfer of control over time. For performance-based fees under cost-reimbursableservices contracts, we recognize the relevanttypically satisfy our performance obligations as services are rendered and use a contract cost-based input method to measure progress. Contract costs include labor, material and allocable indirect expenses. Revenue is recognized proportionally as contract costs are

Other ASUs effective after September 30, 2017March 31, 2018 are not expected to have a material effect on our condensed consolidated financial statements.

Our exposure to market risk relates to changes in interest rates for borrowing under our revolving credit facility. At September 30, 2017,March 31, 2018, we had no$65.5 million outstanding balance on our revolving credit facility. Borrowings under our revolving credit facility bear interest at variable rates. A hypothetical 10% increase in interest rates would have noa $0.2 million effect on our interest expense for the ninethree months ended September 30, 2017, as there were no borrowings during the year.March 31, 2018.

We do not use derivative financial instruments for speculative or trading purposes. When we have excess cash, we invest in short-term, investment grade, interest-bearing securities. Our investments are made in accordance with an investment policy. Under this policy, no investment securities can have maturities exceeding six months and the weighted average maturity of the portfolio cannot exceed 60 days.

Management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over financial reporting. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Quarterly Report on Form 10-Q, is accurately recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result, our disclosure controls and procedures are designed to provide reasonable assurance that such disclosure controls and procedures will meet their objectives.

As of September 30, 2017,March 31, 2018, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), management evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level described above.

There were no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are subject to certain legal proceedings, government audits, investigations, claims and disputes that arise in the ordinary course of our business. Like most large government defense contractors, our contract costs are audited and reviewed on a continual basis by an in-house staff of auditors from the Defense Contract Audit Agency. In addition to these routine audits, we are subject from time-to-time to audits and investigations by other agencies of the U.S. government. These audits and investigations are conducted to determine if our performance and administration of our government contracts are compliant with contractual requirements and applicable federal statutes and regulations. An audit or investigation may result in a finding that our performance, systems and administration are compliant or, alternatively, may result in the government initiating proceedings against us or our employees, including administrative proceedings seeking repayment of monies, suspension and/or debarment from doing business with the U.S. government or a particular agency or civil or criminal proceedings seeking penalties and/or fines. Audits and investigations conducted by the U.S. government frequently span several years.

Although we cannot predict the outcome of these and other legal proceedings, investigations, claims and disputes, based on the information now available to us, we do not believe the ultimate resolution of these matters, either individually or in the aggregate, will have a material adverse effect on our business, prospects, financial condition or operating results.