See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172019
UNAUDITED
| |
| 1. | Description of the Business |
We provide innovative technologiesManTech International Corporation (depending on the circumstances, “ManTech” “Company” “we” “our” “ours” or “us”) provides mission-focused technology solutions and solutionsservices for mission-critical national security programsU.S. defense, intelligence community and federal civilian agencies. In business for the intelligence community; the departments of Defense, State, Homeland Security, Health 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; softwaremore than 50 years, we excel in full-spectrum cyber, data collection & analytics, enterprise information technology (IT) and systems development; enterprise information technology; multi-disciplined intelligence; command, control, communications, computers, intelligence, surveillance and reconnaissance; program protectionsoftware engineering 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, 2016,2018, 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.
| |
| 3. | Revenue from Contracts with Customers |
On January 1, 2018, we adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts that were not substantially complete as of January 1, 2018. ASC 606 outlines a five-step model whereby revenue is recognized as performance obligations within the contract are satisfied. ASC 606 also requires new, expanded disclosures regarding revenue recognition. We recognized the cumulative effect of adopting ASC 606 as an increase to the 2018 opening balance of retained earnings in the amount of $0.8 million, with the impact primarily related to fixed-price contracts.
We derive revenue from contracts with customers primarily from contracts with the U.S. government in the areas of defense, intelligence, homeland security and other federal civilian agencies. Substantially all of our revenue is derived from services and solutions provided to the U.S. government or to prime contractors supporting the U.S. government, including services by our employees and our subcontractors, and solutions that include third-party hardware and software that we purchase and integrate as a part of our overall solutions. Customer requirements may vary from period-to-period depending on specific contract and customer requirements. We provide our services and solutions under three types of contracts: cost-reimbursable, fixed-price and time-and-materials. Under cost-reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and paid a fee representing the profit margin negotiated between us and the contracting agency, which may be fixed or performance based. Under fixed-price contracts, we perform specific tasks for a fixed price. Fixed-price contracts may include either a product delivery or specific service performance over a defined period. Under time-and-materials contracts, we are reimbursed for labor at fixed hourly rates and are generally reimbursed separately for allowable materials and expenses at cost. We typically recognize revenue for time and material contracts under the "right to invoice" model.
For contracts that do not meet the criteria to measure performance as a right to invoice under the series guidance, we utilize an Estimate at Completion process to measure progress toward completion. We typically estimate progress towards completion based on cost incurred or direct labor incurred. As part of this process, we review information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenue and costs. The risks and opportunities include judgments about the ability and cost to achieve the contract milestones and other technical contract requirements. We make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the timing in which we recognize revenue on our contracts. For the three months ended September 30, 2019 and 2018, the aggregate impact of adjustments in contract estimates increased our revenue by $5.9 million and $4.5 million, respectively. For the nine months ended September 30, 2019 and 2018, the aggregate impact of adjustments in contract estimates increased our revenue by $9.0 million and $8.8 million, respectively.
We have 1 reportable segment. Our U.S. government customers typically exercise independent decision-making and contracting authority. Offices or divisions within an agency or department of the U.S. government may directly, or through a prime contractor, use our services as a separate customer as long as the customer has independent decision-making and contracting authority within its organization. We treat sales to U.S. government customers as sales within the U.S. regardless of where the services are performed.
The following tables disclose revenue (in thousands) by contract type, customer, prime or subcontractor and geography for the periods presented.
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| Cost-reimbursable | $ | 397,921 |
| | $ | 337,105 |
| | $ | 1,129,538 |
| | $ | 970,647 |
|
| Fixed-price | 120,632 |
| | 108,921 |
| | 323,723 |
| | 341,854 |
|
| Time-and-materials | 60,626 |
| | 51,179 |
| | 164,885 |
| | 148,984 |
|
| Revenue | $ | 579,179 |
| | $ | 497,205 |
| | $ | 1,618,146 |
| | $ | 1,461,485 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| Department of Defense and intelligence agencies | $ | 443,253 |
| | $ | 365,044 |
| | $ | 1,241,609 |
| | $ | 1,055,911 |
|
| Federal civilian agencies | 124,243 |
| | 121,543 |
| | 341,880 |
| | 371,767 |
|
| State agencies, international agencies and commercial entities | 11,683 |
| | 10,618 |
| | 34,657 |
| | 33,807 |
|
| Revenue | $ | 579,179 |
| | $ | 497,205 |
| | $ | 1,618,146 |
| | $ | 1,461,485 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| Prime contractor | $ | 524,370 |
| | $ | 442,413 |
| | $ | 1,448,875 |
| | $ | 1,298,437 |
|
| Subcontractor | 54,809 |
| | 54,792 |
| | 169,271 |
| | 163,048 |
|
| Revenue | $ | 579,179 |
| | $ | 497,205 |
| | $ | 1,618,146 |
| | $ | 1,461,485 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| U.S. | $ | 571,923 |
| | $ | 490,098 |
| | $ | 1,596,365 |
| | $ | 1,439,293 |
|
| International | 7,257 |
| | 7,107 |
| | 21,781 |
| | 22,192 |
|
| Revenue | $ | 579,179 |
| | $ | 497,205 |
| | $ | 1,618,146 |
| | $ | 1,461,485 |
|
The following table discloses contract receivables (in thousands):
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| Billed receivables | $ | 292,323 |
| | $ | 301,716 |
|
| Unbilled receivables | 82,054 |
| | 109,895 |
|
| Allowance for doubtful accounts | (7,335 | ) | | (6,233 | ) |
| Receivables—net | $ | 367,042 |
| | $ | 405,378 |
|
Receivables at September 30, 2019 are expected to be substantially collected within one year except for approximately $1.1 million, of which 100% is related to receivables from sales to the U.S. government or from contracts in which we acted as a subcontractor to other contractors selling to the U.S. government. We do not believe that we have significant exposure to credit
risk as billed receivables and unbilled receivables are primarily due from the U.S. government. The allowance for doubtful accounts represents our estimate for exposure due to compliance, contractual issues and bad debts related to prime contractors.
The following table discloses contract liabilities (in thousands):
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| Contract liabilities | $ | 43,891 |
| | $ | 28,209 |
|
For the three months ended and nine months ended September 30, 2019, the amount of revenue that was included in the opening contract liabilities balance were $0.9 million and $23.4 million, respectively.
The remaining performance obligation as of September 30, 2019 is $3.1 billion. The following table discloses when we expect to recognize the remaining performance obligation as revenue (in billions):
|
| | | | | | | | | | | | | | |
| For the remaining three months ending December 31, 2019 | | For the year ending | | |
| | December 31, 2020 | | December 31, 2021 | | Thereafter |
| $ | 0.6 |
| | $ | 1.5 |
| | $ | 0.5 |
| | $ | 0.5 |
|
We adopted ASC 842, Leases, on January 1, 2019. We elected to apply the provisions of the standard as of the date of adoption, and, therefore, have not restated prior comparative periods. Upon adoption, we recorded operating lease liabilities of $129.6 million and operating lease right of use (ROU) assets of $118.7 million. We elected the practical expedient to recognize the lease payments related to short-term leases as profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments are incurred. We also elected the following transition related practical expedients: not to reassess whether expired or existing contracts are or contain leases, not to reassess lease classification as determined under ASC 840 and not to reassess initial direct costs from any existing lease. We elected the practical expedient as an accounting election not to separate nonlease components from lease components on all classes of underlying assets. Our leases include nonlease components such as common area maintenance (CAM), utilities and operating expenses. Additionally, we implemented internal controls and key system functionality to enable the preparation of financial information upon adoption. ASC 842 had a material impact on our condensed consolidated balance sheet, but did not have an impact on our condensed consolidated income statement. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged.
We determine if a contract is or contains a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of identified property or equipment (an identified asset) for a period of time in exchange for consideration. We have the right to control the use of the identified asset when we have both of the following: the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset. In making this determination, we consider all relevant facts and circumstances. We reassess whether a contract is or contains a lease only if the terms and conditions of the contract are changed. We account for lease components and nonlease components associated with a lease as a single lease component.
Our ROU asset is recognized as the lease liability, any initial indirect costs and any prepaid lease payments, less any lease incentives. Our lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Our lease payments consist of amounts relating to the use of the underlying asset during the lease term, specifically fixed payments, payment to be made in optional periods when we are reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease and the amounts probable of being owned by us under residual guarantees. Our variable lease payments are excluded in measuring ROU assets and lease liabilities because they do not depend on an index or a rate or are not in substance fixed payments. We exclude lease incentives and initial direct costs incurred from our lease payments. Our leases typically do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.
Our operating leases are primarily made up of real estate. Our variable lease payments do not depend on an index or a rate or are not in substance fixed payments. Our leases have remaining lease terms of 1 day to 11 years, some of which include options to extend the leases for up to 14 years, and some of which include options to terminate the leases within 1 year. Our transportation vehicles and equipment leases include a residual value guarantee, which is a guarantee made to the lessor that the value of the underlying asset returned to the lessor at the end of the lease will be at least a specific amount. We sublease some of our real estate
space. Sublease income is immaterial and is presented net with the corresponding lease expense. We do not have any leases that have not yet commenced due to construction or design of the underlying asset. We recognize payments related to short-term leases (less than one year) as expense on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments were incurred. As such, our short-term lease expense for the three and nine months ended September 30, 2019 was $1.4 million and $4.2 million, respectively. For the three and nine months ended September 30, 2019, we incurred variable lease costs of $0.5 million and $1.9 million, respectively.
In our condensed consolidated statement of income, we recognize lease expense within general and administrative expense or cost of goods sold depending on the use of the underlying lease. For leases classified as financing, the interest on lease liabilities is classified within interest expense.
The balance sheet information related to our leases was as follows (dollars in thousands):
|
| | | |
| | September 30, 2019 |
| Operating Leases | |
| Operating lease right of use assets | $ | 116,236 |
|
| | |
| Operating lease liabilities—current | $ | 28,170 |
|
| Operating lease liabilities—long term | 98,979 |
|
| Total operating lease liabilities | $ | 127,149 |
|
| Finance Leases | |
| Property and equipment—gross | $ | 669 |
|
| Accumulated depreciation | (194 | ) |
| Property and equipment—net | $ | 475 |
|
| | |
| Accounts payable and other accrued expenses | $ | 143 |
|
| Other long-term liabilities | 332 |
|
| Total finance lease liabilities | $ | 475 |
|
The components of lease expense were as follows (in thousands):
|
| | | | | | | |
| | Three months ended
September 30, 2019 | | Nine months ended
September 30, 2019 |
| Operating lease expenses | $ | 8,412 |
| | $ | 24,727 |
|
| | | | |
| Depreciation of right of use assets | $ | 45 |
| | $ | 194 |
|
| Interest on lease liabilities | 19 |
| | 33 |
|
| Finance lease expenses | $ | 64 |
| | $ | 227 |
|
The weighted average information related to leases was as follows:
|
| | |
| September 30, 2019 |
| Weighted Average Remaining Lease Term | |
| Operating leases | 5 years |
|
| Finance leases | 3 years |
|
| Weighted Average Discount Rate | |
| Operating leases | 3 | % |
| Finance leases | 5 | % |
Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows (in thousands):
|
| | | | | | | |
| | Operating Leases | | Financing Leases |
| For the three months ended December 31, 2019 | $ | 6,437 |
| | $ | 31 |
|
| 2020 | 33,859 |
| | 176 |
|
| 2021 | 31,033 |
| | 156 |
|
| 2022 | 27,272 |
| | 150 |
|
| 2023 | 22,666 |
| | 41 |
|
| Thereafter | 16,759 |
| | — |
|
| Total future minimum lease payments | 138,026 |
| | 554 |
|
| Less imputed interest | (10,877 | ) | | (79 | ) |
| Total | $ | 127,149 |
| | $ | 475 |
|
Edaptive Systems LLC (Edaptive)H2M Group (H2M)—On December 15, 2016,August 8, 2019, we completed the acquisition of Edaptive.H2M through a membership interest purchase agreement by and among H2M Group, HHM Holding LLC, and the Members and ManTech International Corporation. The results of Edaptive'sH2M's operations have been included in our condensed consolidated financial statements since that date. We funded the acquisition with cash on hand and borrowings on our revolving credit facility. H2M is a provider of intelligence and analysis services and solutions primarily to the National Geospatial-Intelligence Agency (NGA). This acquisition strengthens our ability to help key government agencies implement new automation techniques that enable intelligence analysts to more effectively navigate large amounts of data and to distill the critical information that informs actionable intelligence necessary to make mission-critical decisions.
For the nine months ended September 30, 2019, we incurred approximately $0.3 million of acquisition costs related to the H2M transaction, which are included in general and administrative expenses in our condensed consolidated statement of income.
The preliminary purchase price of $38.8 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 H2M is not complete as of September 30, 2019. Recognition of goodwill is largely attributed to the value paid for H2M's capabilities to support government agencies in the implementation of high-quality geospatial and professional services. The goodwill recorded for this transaction will be deductible for tax purposes over 15 years.
In preliminarily allocating the purchase price, we considered, among other factors, analysis of historical performance and estimates of future performance of H2M's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $9.6 million and $2.3 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with H2M's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 20 years. Backlog is amortized using the pattern of benefits method over its estimated useful life of 2 years. The weighted-average amortization period for the intangible assets is 17 years.
The following table represents the preliminary purchase price allocation for H2M (in thousands):
|
| | | |
| Cash and cash equivalents | $ | 15 |
|
| Receivables | 4,011 |
|
| Prepaid expenses | 199 |
|
| Other current assets | 2 |
|
| Goodwill | 25,382 |
|
| Other intangible assets | 11,900 |
|
| Operating lease ROU asset | 145 |
|
| Property and equipment | 57 |
|
| Other assets | 7 |
|
| Accounts payable and accrued expenses | (1,775 | ) |
| Accrued salaries and related expenses | (1,000 | ) |
| Operating lease liabilities - current | (86 | ) |
| Operating lease liabilities - non current | (60 | ) |
| Net assets acquired and liabilities assumed | $ | 38,797 |
|
Kforce Government Solutions (KGS)—On April 1, 2019, we completed the acquisition of KGS. KGS was a wholly owned subsidiary of the publicly traded commercial technology and staffing company KForce, Inc. The results of KGS's operations have been included in our condensed consolidated financial statements since that date. The acquisition was completed through a membership interestan equity purchase agreement dated December 15, 2016,February 28, 2019, by and among Edaptive, Everest Holdco, Inc.,Kforce Government Solutions, Inc and certain members of Edaptiveother beneficiaries and ManTech Advanced Systems International Inc. Edaptive provides innovative information technology (IT) solutions primarily to federal health agencies, with a significant focus on the Centers for Medicare & Medicaid Services. The acquisition strategically expands our reach within the federal health community.Corporation. We funded the acquisition with cash on hand. The membership interest purchase agreement did not contain provisions for contingent consideration.hand and borrowings on our revolving credit facility. KGS provides services, IT solutions, transformation and management consulting and data analytics - most notably in the healthcare IT market. This acquisition will expand our presence with important customers such as the Department of Veteran Affairs (VA).
For the nine months ended September 30, 2019, we incurred approximately $1.0 million of acquisition costs related to the KGS transaction, which are included in general and administrative expenses in our condensed consolidated statement of income.
The purchase price of $13.2$114.6 million, which includes the finalized working capital adjustment, was preliminarily allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. The goodwill recorded related to this transaction will be deductibleAs we are still in the process of reviewing the fair value of the assets acquired and liabilities assumed, the purchase price allocation for tax purposes over 15 years.KGS is not complete as of September 30, 2019. Recognition of goodwill is largely attributed to the value paid for Edaptive'sKGS's capabilities to support Departmentcustomers in IT solutions, transformation and management consulting and data analytics. A majority of Health and Human Services customers and, specifically, in agile software development, testing and automation and business intelligence.the goodwill recorded will not be deductible for tax purposes.
In preliminarily allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of Edaptive'sKGS's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $1.1$33.1 million and $0.3$1.6 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with Edaptive'sKGS'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 819 years.
The following table represents the preliminary purchase price allocation for EdaptiveKGS (in thousands):
|
| | | |
| Cash and cash equivalents | $ | 154 |
|
| Receivables | 17,835 |
|
| Prepaid expenses | 368 |
|
| Other current assets | 168 |
|
| Goodwill | 80,025 |
|
| Other intangible assets | 34,839 |
|
| Property and equipment | 361 |
|
| Accounts payable and accrued expenses | (6,887 | ) |
| Accrued salaries and related expenses | (4,421 | ) |
| Deferred income taxes | (7,319 | ) |
| Other long-term liabilities | (571 | ) |
| Net assets acquired and liabilities assumed | $ | 114,552 |
|
|
| | | |
| Cash and cash equivalents | $ | 1,955 |
|
| Receivables | 10,892 |
|
| Prepaid expenses and other | 261 |
|
| Goodwill | 6,193 |
|
| Other intangible assets | 1,689 |
|
| Property and equipment | 502 |
|
| Other assets | 116 |
|
| Accounts payable and accrued expenses | (5,777 | ) |
| Accrued salaries and related expenses | (2,324 | ) |
| Billings in excess of revenue earned | (326 | ) |
| Net assets acquired and liabilities assumed | $ | 13,181 |
|
We have not disclosed current period, nor pro forma, revenues and earnings attributable to Edaptive as our integration of these operations post-acquisition and the entity's accounting methods pre-acquisition make it impracticable.
Under Accounting Standards Codification (ASC)ASC 260, Earnings per Share, the two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under that method, basic and diluted earnings per share data are presented for each class of common stock.
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 to participate ratably, on a share-for-share basis as if all shares of common stock were of a single class, in such dividends as may be declared by the Board of Directors. During each of the nine months ended September 30, 20172019 and 2016,2018, we declared and paid quarterly dividends in the amount of $0.21$0.27 per share and $0.25 per share, respectively, on both classes of common stock.
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.
The net income available to common stockholders and weighted average number of common shares outstanding used to compute basic and diluted earnings per share for each class of common stock are as follows (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Distributed earnings | $ | 10,823 |
| | $ | 9,928 |
| | $ | 32,360 |
| | $ | 29,687 |
|
| Undistributed earnings | 17,114 |
| | 11,995 |
| | 40,909 |
| | 32,218 |
|
| Net income | $ | 27,937 |
| | $ | 21,923 |
| | $ | 73,269 |
| | $ | 61,905 |
|
| | | | | | | | |
| Class A common stock: | | | | | | | |
| Basic net income available to common stockholders | $ | 18,729 |
| | $ | 14,623 |
| | $ | 49,048 |
| | $ | 41,226 |
|
| Basic weighted average common shares outstanding | 26,822 |
| | 26,421 |
| | 26,706 |
| | 26,293 |
|
| Basic earnings per share | $ | 0.70 |
| | $ | 0.55 |
| | $ | 1.84 |
| | $ | 1.57 |
|
| | | | | | | | |
| Diluted net income available to common stockholders | $ | 18,798 |
| | $ | 14,682 |
| | $ | 49,203 |
| | $ | 41,402 |
|
| Effect of potential exercise of stock options | 306 |
| | 322 |
| | 257 |
| | 340 |
|
| Diluted weighted average common shares outstanding | 27,128 |
| | 26,743 |
| | 26,963 |
| | 26,633 |
|
| Diluted earnings per share | $ | 0.69 |
| | $ | 0.55 |
| | $ | 1.82 |
| | $ | 1.55 |
|
| | | | | | | | |
| Class B common stock: | | | | | | | |
| Basic net income available to common stockholders | $ | 9,208 |
| | $ | 7,300 |
| | $ | 24,221 |
| | $ | 20,679 |
|
| Basic weighted average common shares outstanding | 13,188 |
| | 13,189 |
| | 13,188 |
| | 13,189 |
|
| Basic earnings per share | $ | 0.70 |
| | $ | 0.55 |
| | $ | 1.84 |
| | $ | 1.57 |
|
| | | | | | | | |
| Diluted net income available to common stockholders | $ | 9,139 |
| | $ | 7,241 |
| | $ | 24,066 |
| | $ | 20,503 |
|
| Diluted weighted average common shares outstanding | 13,188 |
| | 13,189 |
| | 13,188 |
| | 13,189 |
|
| Diluted earnings per share | $ | 0.69 |
| | $ | 0.55 |
| | $ | 1.82 |
| | $ | 1.55 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Distributed earnings | $ | 8,174 |
| | $ | 8,089 |
| | $ | 24,475 |
| | $ | 24,007 |
|
| Undistributed earnings | 7,008 |
| | 6,575 |
| | 21,296 |
| | 18,655 |
|
| Net income | $ | 15,182 |
| | $ | 14,664 |
| | $ | 45,771 |
| | $ | 42,662 |
|
| | | | | | | | |
| Class A common stock: | | | | | | | |
| Basic net income available to common stockholders | $ | 10,030 |
| | $ | 9,619 |
| | $ | 30,213 |
| | $ | 27,842 |
|
| Basic weighted average common shares outstanding | 25,684 |
| | 25,164 |
| | 25,617 |
| | 24,784 |
|
| Basic earnings per share | $ | 0.39 |
| | $ | 0.38 |
| | $ | 1.18 |
| | $ | 1.12 |
|
| | | | | | | | |
| Diluted net income available to common stockholders | $ | 10,062 |
| | $ | 9,654 |
| | $ | 30,304 |
| | $ | 27,915 |
|
| Effect of potential exercise of stock options | 245 |
| | 265 |
| | 228 |
| | 188 |
|
| Diluted weighted average common shares outstanding | 25,929 |
| | 25,429 |
| | 25,845 |
| | 24,972 |
|
| Diluted earnings per share | $ | 0.39 |
| | $ | 0.38 |
| | $ | 1.17 |
| | $ | 1.12 |
|
| | | | | | | | |
| Class B common stock: | | | | | | | |
| Basic net income available to common stockholders | $ | 5,152 |
| | $ | 5,045 |
| | $ | 15,558 |
| | $ | 14,820 |
|
| Basic weighted average common shares outstanding | 13,191 |
| | 13,192 |
| | 13,191 |
| | 13,192 |
|
| Basic earnings per share | $ | 0.39 |
| | $ | 0.38 |
| | $ | 1.18 |
| | $ | 1.12 |
|
| | | | | | | | |
| Diluted net income available to common stockholders | $ | 5,120 |
| | $ | 5,010 |
| | $ | 15,467 |
| | $ | 14,747 |
|
| Effect of potential exercise of stock options | — |
| | — |
| | — |
| | — |
|
| Diluted weighted average common shares outstanding | 13,191 |
| | 13,192 |
| | 13,191 |
| | 13,192 |
|
| Diluted earnings per share | $ | 0.39 |
| | $ | 0.38 |
| | $ | 1.17 |
| | $ | 1.12 |
|
For the three months ended September 30, 20172019 and 2016,2018, options to purchase 363,6357,641 shares and 13,481242,789 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, 20172019 and 2016,2018, options to purchase 301,985331,994 shares and 470,229268,013 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, 20172019 and 2016,2018, there were 202,459255,376 shares and 840,419387,926 shares, respectively, issued from the exercise of stock options.
We deliver a broad array of IT and technical services solutions under contracts with For the U.S. government, state and local governments and commercial customers. The components of contract receivables are as follows (in thousands):
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Billed receivables | $ | 260,481 |
| | $ | 247,114 |
|
| Unbilled receivables: | | | |
| Amounts billable | 43,675 |
| | 52,640 |
|
| Revenues recorded in excess of funding | 10,177 |
| | 20,078 |
|
| Retainage | 12,985 |
| | 8,353 |
|
| Allowance for doubtful accounts | (6,237 | ) | | (7,508 | ) |
| Receivables—net | $ | 321,081 |
| | $ | 320,677 |
|
Amounts billable consist principally of amounts to be billed within the next month. Revenues recorded in excess of funding are billable upon receipt of contractual amendments or other modifications. The retainage is billable upon completion of contract performance and approval of final indirect expense rates by the government. Accounts receivable atnine months ended September 30, 2017 are expected to be substantially collected within one year except for approximately $1.3 million, of which 97% is related to receivables from sales to the U.S. government or from contracts in which we acted as a subcontractor to other contractors selling to the U.S. government.
We do not believe that we have significant exposure to credit risk as accounts receivable2019 and the related unbilled amounts are primarily due2018 there were 76,346 shares and 86,233 shares, respectively, issued from the U.S. government. The allowance for doubtful accounts represents our estimate for exposure to compliance, contractual issues and bad debts related to prime contractors.vesting of restricted stock units.
| |
6.7. | Property and Equipment |
Major classes of property and equipment are summarized as follows (in thousands):
|
| | | | | | | |
| | September 30,
2019 | | December 31,
2018 |
| Furniture and equipment | $ | 131,114 |
| | $ | 97,577 |
|
| Leasehold improvements | 48,421 |
| | 43,065 |
|
| Finance leases | 669 |
| | — |
|
| Property and equipment—gross | 180,204 |
| | 140,642 |
|
| Accumulated depreciation and amortization | (107,211 | ) | | (89,215 | ) |
| Property and equipment—net | $ | 72,993 |
| | $ | 51,427 |
|
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Furniture and equipment | $ | 55,166 |
| | $ | 51,806 |
|
| Leasehold improvements | 38,700 |
| | 36,439 |
|
| Property and equipment—gross | 93,866 |
| | 88,245 |
|
| Accumulated depreciation and amortization | (71,166 | ) | | (65,124 | ) |
| Property and equipment—net | $ | 22,700 |
| | $ | 23,121 |
|
Depreciation and amortization expense related to property and equipment for the three months ended September 30, 20172019 and 20162018 was $2.0$6.9 million and $1.8$6.4 million, respectively. Depreciation and amortization expense related to property and equipment for the nine months ended September 30, 20172019 and 20162018 was $6.1$19.4 million and $6.0$19.1 million, respectively.
| |
7.8. | Goodwill and Other Intangible Assets |
There was no change in the carrying amount of goodwill during the nine months ended September 30, 2017. The change in the carrying amount of goodwill during the year ended December 31, 2016 is2018 and nine months ended September 30, 2019 are as follows (in thousands):
|
| | | |
| | Goodwill Balance |
| Goodwill at December 31, 2017 | $ | 1,084,560 |
|
| Acquisition fair value adjustment | 1,246 |
|
| Goodwill at December 31, 2018 | 1,085,806 |
|
| Acquisitions | 105,407 |
|
| Goodwill at September 30, 2019 | $ | 1,191,213 |
|
|
| | | |
| | Goodwill Balance |
| Goodwill at December 31, 2015 | $ | 919,591 |
|
| Acquisitions | 36,283 |
|
| Goodwill at December 31, 2016 | $ | 955,874 |
|
Other intangible assets consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Other intangible assets: | | | | | | | | | | | |
| Contract and program intangible assets | $ | 402,532 |
| | $ | 215,942 |
| | $ | 186,590 |
| | $ | 355,932 |
| | $ | 201,298 |
| | $ | 154,634 |
|
| Capitalized software cost for internal use | 53,322 |
| | 36,665 |
| | 16,657 |
| | 50,925 |
| | 33,597 |
| | 17,328 |
|
| Total other intangible assets—net | $ | 455,854 |
| | $ | 252,607 |
| | $ | 203,247 |
| | $ | 406,857 |
| | $ | 234,895 |
| | $ | 171,962 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Other intangible assets: | | | | | | | | | | | |
| Contract and program intangible assets | $ | 301,082 |
| | $ | 172,962 |
| | $ | 128,120 |
| | $ | 301,082 |
| | $ | 158,671 |
| | $ | 142,411 |
|
| Capitalized software cost for internal use | 44,570 |
| | 29,109 |
| | 15,461 |
| | 39,332 |
| | 26,815 |
| | 12,517 |
|
| Other | 58 |
| | 58 |
| | — |
| | 58 |
| | 55 |
| | 3 |
|
| Total other intangible assets—net | $ | 345,710 |
| | $ | 202,129 |
| | $ | 143,581 |
| | $ | 340,472 |
| | $ | 185,541 |
| | $ | 154,931 |
|
Amortization expense relating to intangible assets for both the three months ended September 30, 20172019 and 20162018 was $5.5 million.$6.1 million and $6.8 million, respectively. Amortization expense relating to intangible assets for the nine months ended September 30, 20172019 and 20162018 was $16.6$18.0 million and $16.2$20.3 million, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):
|
| | | |
| For the remaining three months ending December 31, 2019 | $ | 6,710 |
|
| For the year ending: | |
| December 31, 2020 | $ | 25,301 |
|
| December 31, 2021 | $ | 23,072 |
|
| December 31, 2022 | $ | 20,139 |
|
| December 31, 2023 | $ | 16,858 |
|
| December 31, 2024 | $ | 15,151 |
|
|
| | | |
| For the remaining three months ending December 31, 2017 | $ | 5,449 |
|
| For the year ending: | |
| December 31, 2018 | $ | 20,367 |
|
| December 31, 2019 | $ | 17,799 |
|
| December 31, 2020 | $ | 15,464 |
|
| December 31, 2021 | $ | 12,595 |
|
| December 31, 2022 | $ | 11,207 |
|
Revolving Credit Facility—We maintain a credit facility with a syndicate of lenders led by Bank of America, N.A,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. OnThe maturity date is August 17, 2017, we amended and restated our revolving credit facility, which among other things increased the letter of credit sublimit to $75 million and extended the maturity date to August 17, 2022. We deferred $2.2 million in debt issuance costs, cumulatively over the agreement, which are amortized over the term of the credit agreement.
Borrowings under our credit agreement are collateralized by substantially all of our assets and those of 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 basedbase rate plus market-rate 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).
The terms of the credit agreement permit prepayment and termination of the loan commitments at any time, subject to certain conditions. The credit agreement requires us to comply with specified financial covenants, including the maintenance of certain leverage ratios and a certain consolidated coverage ratio. The credit agreement also contains various covenants, including affirmative covenants with respect to certain reporting requirements and maintaining certain business activities, and negative covenants that, among other things, may limit or impose restrictions on our ability to incur liens, incur additional indebtedness, make investments, make acquisitions and undertake certain other actions. As of and during the nine months ended September 30, 20172019 and 2016,2018, we were in compliance with the financial covenants under the credit agreement.
There was no$25.0 million and $7.5 million outstanding balance on our revolving credit facility at both September 30, 20172019 and December 31, 2016,2018, respectively. The maximum available borrowing under the revolving credit facility at September 30, 20172019 was $484.7$467.3 million. As of September 30, 2017,2019, we were contingently liable under letters of credit totaling $15.3$7.7 million, which reduces our availability to borrow under our revolving credit facility.
| |
9.10. | Commitments and Contingencies |
Contracts with the U.S. government, including subcontracts, are subject to extensive legal and regulatory requirements and, from time-to-time, agencies of the U.S. government, in the ordinary course of business, investigate whether our operations are conducted in accordance with these requirements and the terms of the relevant contracts. U.S. government investigations of us, whether related to our U.S. government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting activities. Management believes it has adequately reserved for any losses that may be experienced from any investigation of which it is aware. The Defense Contract Audit Agency has substantially completed our incurred cost audits through 20122016 with no material adjustments. The remaining audits for 20132017 through 20162018 are not expected to have a material effect on our financial position, results of operations or cash flow and management believes it has adequately reserved for any losses.
In the normal course of business, we are involved in certain governmental and legal proceedings, claims and disputes and have litigation pending under several suits. WeCurrent legal matters are individually immaterial and we believe that the ultimate resolution of these mattersitems will not have a material effect on our financial position, results of operations or cash flows, exceptflows. Management believes it has adequately reserved for the matter noted below.any losses that may be experienced from legal proceedings, claims and disputes and pending litigations of which it is aware.
We areAn officer of our Company was party to an arbitration proceeding with a defendant informer employer relating to a lawsuit filed by two former employees alleging retaliation under both the False Claims Act (FCA) and the Defense Contractor Whistleblower Protection Act (DCWPA). In November 2016, we wentbreach of a contract claim. Pursuant to trial and the jury returned a verdict in favor of both plaintiffs, finding us liable for retaliation under both the FCA and the DCWPA, and awarded $0.8 million in compensatory damages for emotional distress. As a result of the jury's verdict, these plaintiffs are also entitled to awards of (i) back pay, (ii) front pay and (iii) attorneys' fees and costs. We challenged the jury’s verdict at the trial court level - both in terms of liability and in terms of the amount of the compensatory damages awarded. Specifically,indemnification arrangements we have askedwith this officer, we were exposed to a loss related to this claim. In the trial judge to: (i) grant us judgment as a matter of law and dismiss the retaliation claims under both the FCA and the DCWPA, and (ii) vacate the jury’s awards of compensatory damages. On May 19, 2017, the court, by a Memorandum Opinion and Order, vacated the jury's verdict with respect to the awards of $0.8 million in compensatory damages for emotional distress and awarded damages in the total amount of $1.8 million for back pay and front pay. On August 30, 2017, the judge awarded attorneys' fees and costs and the judgment entered on May 19, 2017 in favor of both plaintiffs was amended as follows: (i) to plaintiff #1, $0.3 million in attorneys' fees and costs; $0.9 million in back pay with interest at the rate of $16.92 per diem from November 18, 2016 through the date of the amended judgment, and $0.3 million in front pay; and (ii) to plaintiff #2, $0.3 million in attorneys’ fees and costs; $0.5 million in back pay with interest at the rate of $9.79 per diem from November 18, 2016 through the date of the amended judgment, and $0.2 million in front pay. We filed an appeal in the Fourth Circuit Court of Appeals. As ofperiod ending September 30, 2017,2019, we accrued a liability and recorded a receivable for $2.3 million. Throughsettled the appeals process,claim. The settlement amount was not material to our liability could be further reduced or, if the plaintiffs are successful, increased an additional $0.8 million. We have an insurance policy that covers the amount of the liability, therefore, no loss was recognized as of the nine months ended September 30, 2017. We determined that it is remote that future events in connection with this matter will result incondensed consolidated financial statement losses.statements.
We have $15.3$7.7 million outstanding on our letter of credit, of which $15.2$7.6 million is related to 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.
| |
10.11. | Stock-Based Compensation |
Our 2016 Management Incentive Plan (the Plan) was designed to attract, retain and motivate key employees. The types of awards available under the Plan include, among others, stock options, restricted stock and restricted stock units (RSUs). Equity awards granted under the Plan are settled in shares of Class A common stock. At the beginning of each year, the Plan provides that the number of shares available for issuance automatically increases by an amount equal to 1.5% of the total number of shares of Class A and Class B common stock outstanding on December 31st of the previous year. On January 2, 2017,2019, there were 581,139596,422 additional shares made available for issuance under the Plan. Through September 30, 2017,2019, the Board of Directors has authorized the issuance of up to 13,963,43515,148,321 shares under this Plan. Through September 30, 2017,2019, the remaining aggregate number of shares of our common stock available for future grants under the Plan was 6,226,851.6,727,002. The Plan expires in March 2026.
The Plan is administered by the compensation committee of our Board of Directors, along with its delegates. Subject to the express provisions of the Plan, the committee has the Board of Directors’ authority to administer and interpret the Plan, including the discretion to determine the exercise price, vesting schedule, contractual life and the number of shares to be issued.
On January 1, 2017, we adopted Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718), which simplifies several aspectsExpense—For the three months ended September 30, 2019 and 2018, we recorded $2.0 million and $1.3 million of the accounting for employee share-based payment transactions. All excess tax benefits (deficiencies) will be recognized as income tax expense (benefit) in the condensed consolidated income statement.stock-based compensation expense. For the nine months ended September 30, 2017,2019 and 2018, we recorded $0.4$5.2 million and $3.6 million of stock-based compensation expense. NaN compensation expense of employees with stock awards,
including stock-based compensation expense, was capitalized during the periods. For the three months ended September 30, 2019 and 2018, we recorded $(0.9) million and $(1.2) million, respectively, to income tax expense for tax benefits(benefit) related to the exercise of stock options, vested cancellations and the vesting of restricted stock.stock and restricted stock units. For the nine months ended September 30, 2016,2019 and 2018, we recorded $0.7$(1.6) million and $(2.9) million, respectively, to paid in capitalincome tax expense (benefit) related to tax deficiencies from the exercise of stock options, vested cancellations and the vesting of restricted stock. The ASU eliminates the requirement to estimate forfeitures. We have elected to account for forfeitures when they occur. Upon transition we recognized a cumulative-effect adjustment to retained earnings of $0.2 million related to previously estimated forfeitures. Under the ASU, excess tax benefits no longer represent financing activities as they are recognized in the income statement; therefore, excess tax benefits are not separate cash flowsstock and will be classified as operating activities in the same manner as other cash flows related to income taxes. The ASU eliminates the requirement to reclassify excess tax benefits from operating activities to financing activities. The change in the presentation of the cash flows was applied prospectively starting January 1, 2017. Therefore, prior periods were not adjusted. Furthermore, there was no effect on the condensed consolidated statement of cash flows related to statutory tax withholding requirements on prior periods because we do not withhold shares from an employee's award for tax-withholding purposes.restricted stock units.
Stock Compensation Expense—For the three months ended September 30, 2017 and 2016, we recorded $1.3 million and $1.0 million of stock-based compensation expense, respectively. For the nine months ended September 30, 2017 and 2016, we recorded $3.6 million and $2.3 million of stock-based compensation expense, respectively. No compensation expense of employees with stock awards, including stock-based compensation expense, was capitalized during the periods.
Stock Options—Under the Plan, we have issued stock options. A stock option granted gives the holder the right, but not the obligation to purchase a certain number of shares at a predetermined price for a specific period of time. We typically issue options that vest over three years in equal installments beginning on the first anniversary of the date of grant. Under the terms of the Plan, the contractual life of the option grants may not exceed eight years. During the nine months ended September 30, 20172019 and 2016,2018, we issued options that expire five years from the date of grant.
Fair Value Determination—We have used the Black-Scholes-Merton option pricing model to determine the fair value of our awards on the date of grant. We will reconsider the use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that cannot be reasonably estimated under this model.
The following weighted-average assumptions were used for option grants during the nine months ended September 30, 20172019 and 2016:2018:
| |
| • | Volatility—The expected volatility of the options granted was estimated based upon historical volatility of our share price through weekly observations of our trading history. |
| |
| • | Expected life of options—The expected life of options granted to employees was determined from historical exercises of the grantee population. The options had graded vesting over three years in equal installments beginning on the first anniversary of the date of grant and a contractual term of five years. |
Volatility—The expected volatility of the options granted was estimated based upon historical volatility of our share price through weekly observations of our trading history.
| |
| • | Risk-free interest rate—The yield on zero-coupon U.S. Treasury strips was used to extrapolate a forward-yield curve. This “term structure” of future interest rates was then input into a numeric model to provide the equivalent risk-free rate to be used in the Black-Scholes-Merton model based on the expected term of the underlying grants. |
| |
| • | Dividend Yield—The Black-Scholes-Merton valuation model requires an expected dividend yield as an input. We have calculated our expected dividend yield based on an expected annual cash dividend of $1.08 per share. |
Expected life of options—The expected life of options granted to employees was determined from historical exercises of the grantee population. The options had graded vesting over three years in equal installments beginning on the first anniversary of the date of grant and a contractual term of five years.
Risk-free interest rate—The yield on zero-coupon U.S. Treasury strips was used to extrapolate a forward-yield curve. This “term structure” of future interest rates was then input into a numeric model to provide the equivalent risk-free rate to be used in the Black-Scholes-Merton model based on the expected term of the underlying grants.
Dividend Yield—The Black-Scholes-Merton valuation model requires an expected dividend yield as an input. We have calculated our expected dividend yield based on an expected annual cash dividend of $0.84 per share.
The following table summarizes weighted-average assumptions used in our calculations of fair value for the nine months ended September 30, 20172019 and 2016:2018:
|
| | | | | |
| | Nine months ended
September 30, |
| | 2019 | | 2018 |
| Volatility | 27.00 | % | | 26.34 | % |
| Expected life of options | 3 years |
| | 3 years |
|
| Risk-free interest rate | 2.38 | % | | 2.46 | % |
| Dividend yield | 2.00 | % | | 2.00 | % |
|
| | | | | |
| | Nine months ended
September 30, |
| | 2017 | | 2016 |
| Volatility | 25.13 | % | | 23.74 | % |
| Expected life of options | 3 years |
| | 3 years |
|
| Risk-free interest rate | 1.67 | % | | 1.16 | % |
| Dividend yield | 2.75 | % | | 3.00 | % |
Stock Option Activity—The weighted-average fair value of options granted during the nine months ended September 30, 20172019 and 2016,2018, as determined under the Black-Scholes-Merton valuation model, was $5.65$10.10 and $4.15,$9.98, respectively. Option grants that vested during the nine months ended September 30, 20172019 and 20162018 had a combined fair value of $0.9$1.2 million and $1.4$0.7 million, respectively.
The following table summarizes stock option activity for the year ended December 31, 20162018 and the nine months ended September 30, 2017:2019:
|
| | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value
(in thousands) | | Weighted Average Remaining Contractual Life |
| Stock options outstanding at December 31, 2017 | 1,169,408 |
| | $ | 35.88 |
| | $ | 16,731 |
| | |
| Granted | 466,828 |
| | $ | 54.87 |
| | | | |
| Exercised | (420,524 | ) | | $ | 30.05 |
| | $ | 12,411 |
| | |
| Cancelled and expired | (122,312 | ) | | $ | 43.85 |
| | | | |
| Stock options outstanding at December 31, 2018 | 1,093,400 |
| | $ | 45.34 |
| | $ | 8,776 |
| | |
| Granted | 256,006 |
| | $ | 53.81 |
| | | | |
| Exercised | (255,376 | ) | | $ | 35.82 |
| | $ | 7,038 |
| | |
| Cancelled and expired | (97,005 | ) | | $ | 50.89 |
| | | | |
| Stock options outstanding at September 30, 2019 | 997,025 |
| | $ | 49.42 |
| | $ | 21,927 |
| | 3 years |
| | | | | | | | |
| Stock options exercisable at September 30, 2019 | 221,597 |
| | $ | 41.09 |
| | $ | 6,719 |
| | 2 years |
|
| | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value
(in thousands) | | Weighted Average Remaining Contractual Life |
| Stock options outstanding at December 31, 2015 | 2,495,310 |
| | $ | 30.86 |
| | $ | 3,583 |
| | |
| Granted | 199,938 |
| | $ | 34.22 |
| | | | |
| Exercised | (1,045,789 | ) | | $ | 29.24 |
| | $ | 8,858 |
| | |
| Cancelled and expired | (489,040 | ) | | $ | 37.91 |
| | | | |
| Stock options outstanding at December 31, 2016 | 1,160,419 |
| | $ | 29.93 |
| | $ | 14,299 |
| | |
| Granted | 271,390 |
| | $ | 36.96 |
| | | | |
| Exercised | (202,459 | ) | | $ | 29.46 |
| | $ | 1,950 |
| | |
| Cancelled and expired | (44,858 | ) | | $ | 32.86 |
| | | | |
| Stock options outstanding at September 30, 2017 | 1,184,492 |
| | $ | 31.51 |
| | $ | 14,973 |
| | 3 years |
| | | | | | | | |
| Stock options exercisable at September 30, 2017 | 565,724 |
| | $ | 28.73 |
| | $ | 8,722 |
| | 1 year |
The following table summarizes non-vested stock options for the nine months ended September 30, 2017:2019:
|
| | | | | | |
| | Number of Shares | | Weighted Average Fair Value |
| Non-vested stock options at December 31, 2018 | 774,402 |
| | $ | 8.77 |
|
| Granted | 256,006 |
| | $ | 10.10 |
|
| Vested | (161,114 | ) | | $ | 7.38 |
|
| Cancelled | (93,866 | ) | | $ | 9.23 |
|
| Non-vested stock options at September 30, 2019 | 775,428 |
| | $ | 9.44 |
|
|
| | | | | | |
| | Number of Shares | | Weighted Average Fair Value |
| Non-vested stock options at December 31, 2016 | 562,927 |
| | $ | 4.66 |
|
| Granted | 271,390 |
| | $ | 5.65 |
|
| Vested | (185,516 | ) | | $ | 4.78 |
|
| Cancelled | (30,033 | ) | | $ | 4.82 |
|
| Non-vested stock options at September 30, 2017 | 618,768 |
| | $ | 5.05 |
|
Unrecognized compensation expense related to non-vested awards was $2.0$5.1 million as of September 30, 2017,2019, which is expected to be recognized over a weighted-average period of 2 years.
Restricted Stock—Under the Plan, we have issued restricted stock. A restricted stock award is an issuance of shares that cannot be sold or transferred by the recipient until the vesting period lapses. Restricted stock issued to members of our Board of Directors vests invest on the one year.year anniversary of the grant date. The related compensation expense is recognized over the service period and is based on the grant date
fair value of the stock. The grant date fair value of the restricted stock is equal to the closing market price of our common stock on the date of grant.
Restricted Stock Activity—The following table summarizes the restricted stock activity during the year ended December 31, 20162018 and the nine months ended September 30, 2017:2019.
|
| | | | | | |
| | Number of Shares | | Weighted Average Fair Value |
| Non-vested restricted stock at December 31, 2017 | 24,000 |
| | $ | 37.90 |
|
| Granted | 24,000 |
| | $ | 52.83 |
|
| Vested | (28,000 | ) | | $ | 40.03 |
|
| Non-vested restricted stock at December 31, 2018 | 20,000 |
| | $ | 52.83 |
|
| Granted | 24,000 |
| | $ | 62.66 |
|
| Vested | (20,000 | ) | | $ | 52.83 |
|
| Non-vested restricted stock at September 30, 2019 | 24,000 |
| | $ | 62.66 |
|
|
| | | | | | |
| | Number of Shares | | Weighted Average Fair Value |
| Non-vested restricted stock at December 31, 2015 | 21,000 |
| | $ | 28.98 |
|
| Granted | 18,000 |
| | $ | 33.84 |
|
| Vested | (21,000 | ) | | $ | 28.98 |
|
| Non-vested restricted stock at December 31, 2016 | 18,000 |
| | $ | 33.84 |
|
| Granted | 24,000 |
| | $ | 37.90 |
|
| Vested | (18,000 | ) | | $ | 33.84 |
|
| Non-vested restricted stock at September 30, 2017 | 24,000 |
| | $ | 37.90 |
|
RSUs—Under the Plan, we have issued RSUs.restricted stock units (RSUs). RSUs are not actual shares, but rather a right to receive shares in the future. The shares are not issued and the employee cannot sell or transfer shares prior to vesting and have no voting rights until the RSUs vest. Employees who are granted RSUs do not receive dividend payments during the vesting period. Generally, ourOur employees arehave been granted performance-based RSUs and time-based RSUs. ThesePerformance-based RSUs will result in the delivery of shares only if (a) performance criteria is met and (b) the employee remains employed, in good standing, through the date of the performance period. The performance period is two years. In addition,Time-based RSUs vest in 2016 we granted 26,788 time-based RSUs to an officer, which do not contain performance criteria (half will vest four years afterone-third increments on the first, second and third anniversaries of the date of grant and the other half will vest five years after the date of grant).grant. The grant date fair value of the RSUs is equal to the closing market price of our common stock on the grant date less the present value of dividends expected to be awarded during the service period. We recognize the grant date fair value of RSUs of shares we expect to issue as compensation expense ratably over the requisite service period.
RSU Activity—For performance-based RSUs that vested in 2019 and 2018, each RSU awarded resulted in the issuance of 1.5 shares, which were issued net of applicable payroll tax withholdings. The following table summarizes the non-vested RSU activity during the year ended December 31, 20162018 and the nine months ended September 30, 2017:2019:
|
| | | | | | |
| | Number of Units | | Weighted Average Fair Value |
| Non-vested RSUs at December 31, 2017 | 161,343 |
| | $ | 31.36 |
|
| Granted | 76,713 |
| | $ | 53.97 |
|
| Vested | (87,200 | ) | | $ | 28.40 |
|
| Forfeited | (13,260 | ) | | $ | 38.98 |
|
| Non-vested RSUs at December 31, 2018 | 137,596 |
| | $ | 45.11 |
|
| Granted | 99,675 |
| | $ | 53.27 |
|
| Vested | (59,452 | ) | | $ | 42.46 |
|
| Forfeited | (10,677 | ) | | $ | 51.88 |
|
| Non-vested RSUs at September 30, 2019 | 167,142 |
| | $ | 50.48 |
|
|
| | | | | | |
| | Number of Units | | Weighted Average Fair Value |
| Non-vested RSUs at December 31, 2015 | 93,450 |
| | $ | 30.84 |
|
| Granted | 132,988 |
| | $ | 29.50 |
|
| Cancelled and expired | (20,100 | ) | | $ | 29.56 |
|
| Non-vested RSUs at December 31, 2016 | 206,338 |
| | $ | 30.10 |
|
| Granted | 55,830 |
| | $ | 35.34 |
|
| Cancelled and expired | (87,725 | ) | | $ | 30.79 |
|
| Non-vested RSUs at September 30, 2017 | 174,443 |
| | $ | 31.43 |
|
| |
11. | Business Segment and Geographic Area Information |
We have one reportable segment. We deliver a broad array of IT and technical services solutions under contracts with the U.S. government. Our U.S. government customers typically exercise independent contracting authority, and even offices or divisions within an agency or department may directly, or through a prime contractor, use 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 revenues for the nine months ended September 30, 2017 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 revenues for the three months ended September 30, 2017 and 2016, respectively. U.S. revenues were approximately 98% and 99% of our total revenues for the nine months ended September 30, 2017 and 2016, respectively. International revenues were approximately 2% and 1% of our total revenues for the three months ended September 30, 2017 and 2016, respectively. International revenues were approximately 2% and 1% 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.
Management has evaluated subsequent events after the balance sheet date through the financial statements issuance date for appropriate accounting and disclosure.
Acquisition of InfoZen, LLC
On October 2, 2017, we completed the acquisition of InfoZen, LLC (InfoZen). We funded the acquisition with cash on hand and borrowings on our revolving credit facility. InfoZen provides leading IT solutions primarily to agencies within the Department of Homeland Security. The acquisition strategically enhances our offerings to support the use of today's advanced technology to meet our customers' increasing needs in the rapidly growing enterprise IT arena. The preliminary purchase price was $178.7 million, which is subject to a final working capital adjustment and contingent consideration of $6.0 million.
| |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Cautionary Note Regarding Forward-Looking Statements
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, 2016.2018.
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:
Inability to recruit and retain a sufficient number of employees with specialized skill sets or necessary security clearances who are in great demand and limited supply;
Failure to maintain our relationship with the U.S. government, or the failure to compete effectively for new contract awards or to retain existing U.S. government contracts;
Issues relatingDisruption of our business or damage to competing effectively for awards procured through the competitive bidding process, including the adverse impactour reputation resulting from security breaches in customer systems, internal systems or service failures (including as a result of delays caused by competitors' protests of contract awards received by us;cyber or other security threats), or employee or subcontractor misconduct;
Inability to recruit and retain a sufficient number of employees with specialized skill sets who are in great demand and limited supply;
Adverse changes in U.S. government spending for programs we support, whether due to changing mission priorities, socio-economic policies that reduce contracts that we may bid on, cost reduction and efficiency initiatives by our customers or federal budget constraints generally;
Failure to obtain option awards, task orders or funding under contracts;
Increased exposure to risks associated with conducting business internationally;
Failure to realize the full amount of our backlog, or adverse changes in the timing of receipt of revenuesrevenue under contracts included in backlog;
Adverse results of U.S. government audits or other investigations of our government contracts;
Issues relating to competing effectively for awards procured through the competitive bidding process, including the adverse impact of delays caused by competitors' protests of contract awards received by us;
Failure to obtain option awards, task orders or funding under contracts;
Renegotiation, modification or termination of our contracts, or failure to perform in conformity with contract terms or our expectations;
Disruption of our business or damage to our reputation resulting from security breaches in customer systems, internal systems or service failures (including as a result of cyber or other security threats), or employee or subcontractor misconduct;
Failure to successfully integrate acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions;
Adverse changes in business conditions that may cause our investments in recorded goodwill to become impaired;
Non-compliance with, or adverse changes in, complex U.S. government laws, procurement regulations or processes;
Adverse change in business conditions that may cause our investments in recorded goodwill to become impaired; and
Adverse results of U.S. government audits or other investigations of our government contracts.Increased exposure to risks associated with conducting business internationally.
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.
Overview
We provide innovative technologiesmission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. We excel in full-spectrum cyber, data collection & analytics, enterprise information technology (IT), systems and software engineering solutions for mission-criticalthat support national security programs for the intelligence community; the departments of Defense, State, Homeland Security, Health and Human Services, Veterans Affairs and Justice, including the FBI; the space community; and other U.S. government customers. We derive revenues primarily from contracts with U.S. government agencies that are focused on national security and consequently our operational results are affected by U.S. government spending levels in the areas of defense, federal health IT, intelligence and homeland security.
OverApproximately 98% of our revenues are generated through contracts with the last few years, financial performance inU.S. federal government. As such, our industry was adverselybusiness is impacted by public and political pressure regardingthe overall U.S. government funding levels, uncertainty about the appropriations process and delays in contract awards and spending. With the passing of budget and appropriation acts lateour ability to match our capabilities and offerings to the U.S. government's spending priorities. Through legislation passed in 2015September 2018 and early 2016, industry conditions began to improve. The President'sFebruary 2019, all agencies of the U.S. federal government were funded through Government fiscal year 2018(GFY) 2019. In August 2019, Congress passed and the president signed a new two-year budget proposal includesdeal, the near term expansionBipartisan Budget Act of 2019. The Act effectively ended the threat of sequestration by increasing spending for GFY 2020 and 2021 above caps previously in place under the Budget Control Act. The GFY 2020 and 2021 budgets include increases for areas supporting national security. Despite the Departmentpassage of Defense related to readiness, anti-ISISa two year budget, Congress has not yet passed full year appropriations and force structure readiness, which are generally viewed favorable to our industry. While Congress debates the Administration's funding priorities contained in the President's budget proposal, the U.S. Government isas of October 1st, began operating under a Continuing Resolution which funds(CR). If Congress is unable to approve appropriations by November 21st, the U.S. Government and its agencies may be subjected to funding restrictions through a CR or, if there is a failure to pass interim funding, a government through December 8, 2017. Congressional funding appropriations have been,shutdown.
We classify indirect costs incurred as cost of services and continuegeneral and administrative expenses in the same manner as such costs are defined in our disclosure statements under U.S. Government Cost Accounting Standards. Effective January 1, 2019, we updated our disclosure statements with the Defense Contract Management Agency, resulting in certain costs being classified differently either as cost of services or as general and administrative expenses on a prospective basis. This change has caused a net increase in the reported cost of services and a net decrease in reported general and administrative expenses in 2019 as compared to be, debated in relation to national budget deficits, debt ceilings and the Budget Control Act. We believe our strong position as a prime contractor and our broad array of service offerings are a competitive advantage, and that we are well positioned to support the challenges our customers face.2018; however, total operating costs were not affected by this change.
We recommend that you read this discussion and analysis in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, previously filed with the SEC.Securities and Exchange Commission.
Three Months Ended September 30, 20172019 Compared to the Three Months Ended September 30, 20162018
The following table sets forth certain items from our condensed consolidated statements of income and the relative percentage that certain items of expenses and earnings bear to revenues,revenue, as well as the period-to-period change from September 30, 20162018 to September 30, 20172019.
| | | | Three months ended
September 30, | | Period-to-Period Change | Three months ended
September 30, | | Period-to-Period Change |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2016 to 2017 | 2019 | | 2018 | | 2019 | | 2018 | | 2018 to 2019 |
| | Dollars | | Percentage | | Dollars | | Percentage | Dollars | | Percentage | | Dollars | | Percentage |
| | (dollars in thousands) | (dollars in thousands) |
| REVENUES | $ | 422,665 |
| | $ | 415,402 |
| | 100.0 | % | | 100.0 | % | | $ | 7,263 |
| | 1.7 | % | |
| REVENUE | | $ | 579,179 |
| | $ | 497,205 |
| | 100.0 | % | | 100.0 | % | | $ | 81,974 |
| | 16.5 | % |
| Cost of services | 361,286 |
| | 356,294 |
| | 85.5 | % | | 85.8 | % | | 4,992 |
| | 1.4 | % | 487,914 |
| | 425,560 |
| | 84.3 | % | | 85.6 | % | | 62,354 |
| | 14.7 | % |
| General and administrative expenses | 38,239 |
| | 35,608 |
| | 9.0 | % | | 8.5 | % | | 2,631 |
| | 7.4 | % | 52,863 |
| | 42,246 |
| | 9.1 | % | | 8.5 | % | | 10,617 |
| | 25.1 | % |
| OPERATING INCOME | 23,140 |
| | 23,500 |
| | 5.5 | % | | 5.7 | % | | (360 | ) | | (1.5 | )% | 38,402 |
| | 29,399 |
| | 6.6 | % | | 5.9 | % | | 9,003 |
| | 30.6 | % |
| Interest expense | (254 | ) | | (263 | ) | | — | % | | 0.1 | % | | (9 | ) | | (3.4 | )% | (659 | ) | | (616 | ) | | 0.1 | % | | 0.1 | % | | 43 |
| | 7.0 | % |
| Interest income | 37 |
| | 36 |
| | — | % | | — | % | | 1 |
| | 2.8 | % | 90 |
| | 43 |
| | — | % | | — | % | | 47 |
| | 109.3 | % |
| Other income, net | 191 |
| | 92 |
| | — | % | | — | % | | 99 |
| | 107.6 | % | |
| Other income (expense), net | | (39 | ) | | 1 |
| | — | % | | — | % | | (40 | ) | | (4,000.0 | )% |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS | 23,114 |
| | 23,365 |
| | 5.5 | % | | 5.6 | % | | (251 | ) | | (1.1 | )% | 37,794 |
| | 28,827 |
| | 6.5 | % | | 5.8 | % | | 8,967 |
| | 31.1 | % |
| Provision for income taxes | (8,004 | ) | | (8,630 | ) | | 1.9 | % | | 2.1 | % | | (626 | ) | | (7.3 | )% | (9,873 | ) | | (6,912 | ) | | 1.7 | % | | 1.4 | % | | 2,961 |
| | 42.8 | % |
| Equity in gains (losses) of unconsolidated subsidiaries | 72 |
| | (71 | ) | | — | % | | — | % | | 143 |
| | 201.4 | % | |
| Equity in earnings of unconsolidated subsidiaries | | 16 |
| | 8 |
| | — | % | | — | % | | 8 |
| | 100.0 | % |
| NET INCOME | $ | 15,182 |
| | $ | 14,664 |
| | 3.6 | % | | 3.5 | % | | $ | 518 |
| | 3.5 | % | $ | 27,937 |
| | $ | 21,923 |
| | 4.8 | % | | 4.4 | % | | $ | 6,014 |
| | 27.4 | % |
RevenuesRevenue
The primary driver of our increase in revenues relates to revenuesrevenue from new contract awards, growth on certain existing contracts and acquisitions. These increasesour recent acquisitions, which were offset by contracts and tasks that ended and reduced scope of work or lower material purchases on some contracts.
Cost of services
The increase in cost of services was primarily due to increases in revenues.revenue. As a percentage of revenues,revenue, direct labor costs increased to 48%were 46% for both the three months ended September 30, 2017, compared to 46% for the same period in 2016.2019 and 2018. As a percentage of revenues, other direct costs, which include subcontractors as well asand third party equipment and materials used in the performance of our contracts, decreased towere 38% for the three months ended September 30, 2017,2019, compared to 40%39% 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 contracts and increases in direct labor.2018.
General and administrative expenses
The increase in general and administrative expenses was primarily due to an increase inadditional infrastructure spending to support the growth of our business, bid and proposal spending, incentive compensationexpenditures and additional expenses related to legal matters. These increases were partially offset by the reclassification of certain allocable expenses from general and administrative expenses to cost of services.
Interest expense and expenditures
The increase in interest expense was due to support infrastructure.increased borrowings on our revolving line of credit to fund our acquisitions.
Provision for income taxes
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%26% and 37%24% for the three months ended September 30, 20172019 and 2016,2018, respectively. The decreaseprimary driver of the increase in our effective tax rate primarily is related towas the impact of discrete items recognized in the third quarter of 2018, which were more favorable performancethan discrete items recognized in our executive supplemental saving plan assets and the tax benefit from the exercisethird quarter of stock options during the period ended September 30, 2017.2019.
Nine Months Ended September 30, 20172019 Compared to the Nine Months Ended September 30, 20162018
The following table sets forth certain items from our condensed consolidated statements of income and the relative percentage that certain items of expenses and earnings bear to revenues,revenue, as well as the period-to-period change from September 30, 20162018 to September 30, 2017.2019.
| | | | Nine months ended
September 30, | | Period-to-Period Change | Nine months ended
September 30, | | Period-to-Period Change |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2016 to 2017 | 2019 | | 2018 | | 2019 | | 2018 | | 2018 to 2019 |
| | Dollars | | Percentage | | Dollars | | Percentage | Dollars | | Percentage | | Dollars | | Percentage |
| | (dollars in thousands) | (dollars in thousands) |
| REVENUES | $ | 1,254,733 |
| | $ | 1,207,418 |
| | 100.0 | % | | 100.0 | % | | $ | 47,315 |
| | 3.9 | % | |
| REVENUE | | $ | 1,618,146 |
| | $ | 1,461,485 |
| | 100.0 | % | | 100.0 | % | | $ | 156,661 |
| | 10.7 | % |
| Cost of services | 1,069,007 |
| | 1,031,319 |
| | 85.2 | % | | 85.4 | % | | 37,688 |
| | 3.7 | % | 1,378,263 |
| | 1,250,505 |
| | 85.2 | % | | 85.6 | % | | 127,758 |
| | 10.2 | % |
| General and administrative expenses | 113,261 |
| | 106,440 |
| | 9.0 | % | | 8.8 | % | | 6,821 |
| | 6.4 | % | 139,652 |
| | 126,831 |
| | 8.6 | % | | 8.7 | % | | 12,821 |
| | 10.1 | % |
| OPERATING INCOME | 72,465 |
| | 69,659 |
| | 5.8 | % | | 5.8 | % | | 2,806 |
| | 4.0 | % | 100,231 |
| | 84,149 |
| | 6.2 | % | | 5.7 | % | | 16,082 |
| | 19.1 | % |
| Interest expense | (865 | ) | | (858 | ) | | 0.1 | % | | 0.1 | % | | 7 |
| | 0.8 | % | (2,088 | ) | | (2,007 | ) | | 0.1 | % | | 0.1 | % | | 81 |
| | 4.0 | % |
| Interest income | 89 |
| | 99 |
| | — | % | | — | % | | (10 | ) | | (10.1 | )% | 401 |
| | 85 |
| | — | % | | — | % | | 316 |
| | 371.8 | % |
| Other income, net | 235 |
| | 145 |
| | — | % | | — | % | | 90 |
| | 62.1 | % | |
| Other income (expense), net | | (50 | ) | | 63 |
| | — | % | | — | % | | (113 | ) | | (179.4 | )% |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS | 71,924 |
| | 69,045 |
| | 5.7 | % | | 5.7 | % | | 2,879 |
| | 4.2 | % | 98,494 |
| | 82,290 |
| | 6.1 | % | | 5.6 | % | | 16,204 |
| | 19.7 | % |
| Provision for income taxes | (26,230 | ) | | (26,440 | ) | | 2.1 | % | | 2.2 | % | | (210 | ) | | (0.8 | )% | (25,229 | ) | | (20,412 | ) | | 1.6 | % | | 1.4 | % | | 4,817 |
| | 23.6 | % |
| Equity in gains of unconsolidated subsidiaries | 77 |
| | 57 |
| | — | % | | — | % | | 20 |
| | 35.1 | % | |
| Equity in earnings of unconsolidated subsidiaries | | 4 |
| | 27 |
| | — | % | | — | % | | (23 | ) | | (85.2 | )% |
| NET INCOME | $ | 45,771 |
| | $ | 42,662 |
| | 3.6 | % | | 3.5 | % | | $ | 3,109 |
| | 7.3 | % | $ | 73,269 |
| | $ | 61,905 |
| | 4.5 | % | | 4.2 | % | | $ | 11,364 |
| | 18.4 | % |
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 36%26% and 38%25% for the nine months ended September 30, 20172019 and 2016,2018, respectively. The decreaseWe have been engaged in a project to review and improve the method by which we identify expenditures that qualify for the research and development tax credit. This project is ongoing, however, we expect to complete the review and implement changes in our methodology in the fourth quarter of 2019. After completion, we expect to amend our prior year tax returns and record a tax benefit in our tax provision, which could potentially have a material impact on our condensed consolidated financial statements. Assuming adequate levels of taxable income, our improved methodology for identifying expenditures that qualify for the research and development tax credit could provide tax benefits in future years that are expected to lower our future effective tax rate is primarily related to favorable performance in our executive supplemental savings plan and the tax benefit from stock option exercises during the period ended September 30, 2017. Assuming no changes in federal tax legislation, we expect our effective tax rate to increase slightly for the remainder of 2017.rate.
Backlog
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 Delivery/Indefinite Quantity 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 U.S. government.
At September 30, 2019 and December 31, 2016, previously filed with the SEC.2018, our backlog was $9.5 billion and $8.4 billion, respectively. Our funded backlog was $1.5 billion and $1.3 billion as of September 30, 2019 and December 31, 2018, respectively.
The following table reconciles our backlog to our remaining performance obligations as disclosed in Note 3 to our condensed consolidated financial statements in Item 1 (in billions):
|
| | | |
| | September 30, 2019 |
| Backlog | $ | 9.5 |
|
| Unexercised contract options | 6.4 |
|
| Remaining performance obligation | $ | 3.1 |
|
Liquidity and Capital Resources
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, 2017,2019, our cash and cash equivalents balance was $148.7$33.3 million. There were no outstanding borrowings of $25.0 million under our revolving credit facility at September 30, 2017.2019. The maximum available borrowings under our revolving credit facility at September 30, 20172019 were $484.7$467.3 million. As of September 30, 2017,2019, we were contingently liable under letters of credit totaling $15.3$7.7 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.
Cash Flows fromFrom (Used In) Operating Activities
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 6857 and 6367 for the threenine months ended September 30, 20172019 and 2016,2018, respectively. For the nine months ended September 30, 20172019 and 2016,2018, our net cash flows from operating activities were $115.2 was $233.0
million and $83.2$94.2 million, respectively. The increase in net cash flows from operating activities during the nine months ended September 30, 20172019 when compared to the same period in 20162018 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 collection.
Cash Flows fromFrom (Used In) Investing Activities
For the nine months ended September 30, 2017,2019 our net cash outflows fromused in investing activities were $11.6was $197.7 million, which werewas primarily due to capital expenditures.the acquisitions of KGS and H2M and the purchase of equipment to support managed IT service contracts, infrastructure investments and capitalized software for internal use. For the nine months ended September 30, 2016,2018 our net cash outflows fromused in investing activities were $55.2was $36.8 million, which werewas primarily used for the purchase of equipment to support a managed IT service contract, infrastructure investments, closing working payments related to the acquisitionpurchase of Oceans Edge, Inc, Cyber Division.InfoZen and capitalized software for internal use.
Cash Flows fromFrom (Used in) Financing Activities
For the nine months ended September 30, 2017,2019, our net cash outflowsused in financing activities was $7.3 million, which was primarily due to dividends paid, offset by net borrowings under our revolving credit facility and proceeds from the exercise of stock options. For the nine months ended September 30, 2018, our net cash used in financing activities were $19.9$51.9 million, which werewas 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.
Revolving Credit Facility
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 theof our 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) basedbase 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 nowere outstanding balanceborrowings of $25.0 million on our revolving credit facility at September 30, 2017.2019. As of and during the nine months ended September 30, 2017,2019, we were in compliance with the financial covenants under the credit agreement.
Capital Resources
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.
Cash Management
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.
Dividend
During each of the nine months ended September 30, 20172019 and 2016,2018, we declared and paid quarterly dividends in the amount of $0.21$0.27 per share and $0.25 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.
Off-Balance Sheet Arrangements
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, $15.32019, $7.7 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$7.6 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, previously filed with the SEC.
Critical Accounting Estimates and Policies
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 2018 are described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, previously filed with the SEC. There have been no material changes to our critical accounting estimates and policies from those discussed in our 2018 Annual Report on Form 10-K, other than lease accounting associated with the implementation of ASC 842, which is described below.
Revenue Recognition and Cost EstimationLease Accounting
We recognize revenues when persuasive evidence of an arrangement exists, services have been rendered,determine if a contract is or contains a lease at inception. A contract is or contains a lease if the contract price is fixedconveys the right to control the use of identified property or determinable and collectability is reasonably assured.equipment (an identified asset) for a period of time in exchange for consideration. We have the right to control the use of the identified asset when we have both of the following: the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset. In making this determination, we consider all relevant facts and circumstances. We reassess whether a standard internal process thatcontract is or contains a lease only if the terms and conditions of the contract are changed. We account for lease components and nonlease components associated with a lease as a single lease component. Operating leases are included in Operating lease ROU assets, Operating lease liabilities—current and Operating lease liabilities—long term on our condensed consolidated balance sheets. Finance leases are included in Property and equipment—net, Accounts payable and other accrued expenses and Other long-term liabilities on our condensed consolidated balance sheets.
Our ROU asset is recognized as the lease liability, any initial indirect costs and any prepaid lease payments, less any lease incentives. Our lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Our lease payments consist of amounts relating to the use of the underlying asset during the lease term, specifically fixed payments, payments to be made in optional periods when we are reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease and the amounts probable of being owed by us under residual guarantees. Our variable lease payments are excluded in measuring ROU assets and lease liabilities because they do not depend on an index or a rate or are not in substance fixed payments. We exclude lease incentives and initial direct costs incurred from our lease payments. Our leases typically do not provide an implicit rate, we use to determine whether all required criteriaour incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.
For operating leases, after lease commencement, we measure our lease liability for revenue recognition have been met.
Our revenues consist primarilyeach period at the present value of services providedany remaining lease payments, discounted by using the rate determined at lease commencement. In our employees andcondensed consolidated statement of income, we recognize a single operating lease expense calculated on a straight-line basis over the pass through of costs for materials and subcontract efforts under contracts with our customers. Cost of services consists primarily of compensation expenses for program personnel, the fringe benefits associated with this compensation and other direct expenses incurred to complete programs, including cost of materials and subcontract efforts.
We derive the majority 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 shareremaining lease term. The depreciation of the applicable contractual fees earned. For performance-based fees under cost-reimbursable contracts, we recognize the relevant
portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as our prior award experience and communications with the customer regarding performance, or upon approval by the customer. For time-and-materials contracts, revenues are recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. For long-term fixed-price production contracts, revenues are recognized at a rate per unit as the units are delivered or by other methods to measure services provided. Revenues from other long-term fixed-price contracts are recognized ratably over the contract period or by other appropriate methods to measure services provided. Contract costs are expensed as incurred except for certain limited long-term contracts noted below. For long-term contracts specifically described in the scope section of ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts, we apply the percentage of completion method. Under the percentage of completion method, income is recognized at a consistent profit margin over the period of performance based on estimated profit margins at completion of the contract. This method of accounting requires estimating the total revenues and total contract cost at completion of the contract. During the performance of long-term contracts, these estimates are periodically reviewed and revisions are made as required using the cumulative catch-up method of accounting. The impact on revenues and contract profitROU asset increases each year as a result of these revisions is includedthe declining lease liability balance. Variable lease payments are not recognized in the periodsmeasurement of the lease liability; they are recognized in the period in which the revisions are made. This method canrelated obligation has been incurred.
For finance leases, after lease commencement, we measure our lease liability by using the effective interest rate method. In each period, the lease liability will be increased to reflect the interest that is accrued on the related lease liability by using the appropriate discount rate, offset by a decrease in the lease liability resulting from the periodic lease payments. We recognize the ROU asset at cost, reduced by any accumulated depreciation. The ROU asset is depreciated on a straight-line basis. Together, the interest expense and depreciation expense result in a front-loaded expense profile. We will present interest expense and depreciation expense separately on our condensed consolidated statement of income.
Recently Adopted Accounting Standards Updates
The FASB has issued ASU 2019-07, Codification Updates to SEC Sections—Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates, to align SEC paragraphs in the deferralCodification with changes made in the above-referenced SEC rules (primarily to Regulation S-X, which sets forth the form and content of costsfinancial statements). By way of background, in August 2018, the SEC issued Final Rulemaking Release No. 33-10532, Disclosure Update and Simplification, amending certain of its disclosure requirements that were duplicative, overlapping or the deferral of profit on these contracts. Because we assume the risk of performing a fixed-price contract at a set price, the failure to accurately estimate ultimate costs or to control costs during performanceoutdated in light of the work could result,SEC’s other disclosure requirements, U.S. GAAP or International Financial Reporting Standards (IFRS). We adopted the requirements of ASU 2019-17, which had no effect on our condensed consolidated financial statements.
ASU 2016-02, Leases (Topic 842) supersedes the leases requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors should apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. We elected to adopt using the modified retrospective method at the beginning of the period of adoption, January 1, 2019, through the recognition of a lease liability and corresponding right of use asset. We elected the following transition related practical expedients: not to reassess whether any expired or existing contracts are or contain leases, not to reassess lease classification as determined under ASC 840 and, not to reassess initial direct costs for any existing lease. We have also elected not to apply the recognition and measurement requirements to short-term leases (less than 1 year). Additional details are included in some instances has resulted,Note 4 in reduced profits or losses for such contracts. Estimated lossesour condensed consolidated financial statements in Item 1.
ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, whichhelps organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (TCJA), enacted on contractsDecember 22, 2017. We elected to adopt this ASU at completion are recognized when identified. In certain circumstances, revenues are recognized when contract amendments have not been finalized.
Accounting for Business Combinations and Goodwill and Other Intangible Assets
The purchase pricethe beginning of the period of adoption, January 1, 2019. We recorded an acquired business is allocatedadjustment to the tangible assets, financial assets and separately recognized intangible assets acquired less liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. Such fair value assessments require judgments and estimates that can be affected by contract performance and other factors over time, which may cause final amounts to differ materially from original estimates.
We review goodwill at least annually for impairment, or whenever events or circumstances indicate that the carrying value of long-lived assets may not be fully recoverable. We perform this review at the reporting unit level, which is one level below our reportable segment.
In reviewing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test (described below), otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.
The goodwill impairment test is a two-step process performed at the reporting unit level. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying value (including goodwill). If the reporting unit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit's fair value is less than its carrying value, an impairment of goodwill may exist, requiring a second step to be performed. Step two of this test measures2019 opening retained earnings in the amount of the impairment loss, if any. Step two of this test requires the allocation of the reporting unit's value$24 thousand related to its assets and liabilities, including any unrecognized intangible assets in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as a goodwill impairment charge in operations.
The fair values of the reporting units are determined based on a weighting of the income approach, market approach and market transaction approach. The income approach is a valuation technique in which fair value is calculated based on forecasted future cash flow discounted at the appropriate rate of return commensurate with the risk as well as current rates of return for equity and debt capital as of the valuation date. The forecast used in our estimation of fair value was developed by management based on a contract basis, incorporating adjustments to reflect known contract and market considerations (such as reductions and uncertainty in government spending, pricing pressure and opportunities). The discount rate utilizes a risk adjusted weighted average cost of capital. The market approach is a valuation technique in which the fair value is calculated based on market prices realized in an actual arm's length transaction. The technique consists of undertaking a detailed market analysis of publicly traded companies that provides a reasonable basis for comparison to us. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. The market transaction approach is a valuation technique in which the fair value is calculated based on market prices realized in actual arm's length transactions. The technique consists of undertaking a detailed market analysis of merged and acquired companies that provides a reasonable basis for comparison to us. Valuation
ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. To assess the reasonableness of the calculated reporting unit fair values, we compare the sum of the reporting units' fair values to our market capitalization (per share stock price times the number of shares outstanding) and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization), and then assess the reasonableness of our implied control premium.
We have elected to perform our annual review as of October 31st of each calendar year. In addition, management monitors events and circumstances that could result in an impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred between annual testing dates. Events that could cause the fair value of our long-lived assets to decrease include: changes in our business environment or market conditions, a material change in our financial outlook, including declines in expected revenue growth rates and operating margins, or a material decline in the market price for our stock. If any impairment were indicated as a result of a review, we would recognize a loss based on the amount by which the carrying amount exceeds the estimated fair value.U.S. federal corporate tax rate.
Due to the many variables inherent in the estimation of a reporting unit's fair value and the relative size of our recorded goodwill, differences in assumptions may have a material effect on the results of our goodwill impairment analysis.
Recently Issued But Not Yet Adopted ASUs
On May 10, 2017, Financial Accounting Standards Board (FASB)
The FASB has issued ASU 2017-09, Compensation—Stock Compensation2018-18, Collaborative Arrangements (Topic 718)808): Scope of Modification AccountingClarifying the Interaction between Topic 808 and Topic 606, whichseeks to provide clarity, reduce resolves the diversity in practice and reduce cost and complexity when applyingconcerning the manner in which entities account for transactions on the basis of their view of the economics of the collaborative arrangement. A collaborative arrangement, as defined by the guidance in ASC 718, Compensation—Stock Compensation, regardingTopic 808, is a changecontractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the terms or conditions of a share-based payment award. ASU 2017-09 provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in ASC 718 apply regardless of whether an entity is required to apply modification accounting underactivity’s commercial success. In particular, the amendments in ASU 2017-09.2018-18 (1) clarify that certain transactions between collaborative participants should be accounted for as revenue under Topic 606 when the collaborative participant is a customer in the context of the unit of account, and that, in those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation and disclosure requirements; (2) add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (i.e., a distinct good or service), limited to when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606; and (3) clarify that in a transaction that is not directly related to sales to third parties, presenting the transaction as revenue would be precluded if the collaborative participant counterparty was not a customer. The amendments are effective for annual periods,fiscal years beginning after December 15, 2019, and for interim periods within those annualfiscal years. Note that early adoption is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. We are currently evaluating the effect on our condensed consolidated financial statements.
The FASB has issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which focuses on improving the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of each entity’s financial statements. The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. Specifically, the amendments in this ASU remove disclosure requirements in Topic 820 related to (1) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation processes for Level 3 fair value measurements; and (4) for non-public entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU also modifies disclosure requirements such that (1) in place of a rollforward for Level 3 fair value measurements, a non-public entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; (2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date that restrictions from redemption might lapse, only if the investee has communicated the timing to the entity or announced the timing publicly; and (3) it is clear that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Additionally, the ASU adds disclosure requirements for public entities about (1) the changes in unrealized gains and losses for the
period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017.2019. The amendments regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Note that early application is permitted for all entities; moreover, an entity is allowed to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. We are currently evaluating when we will adopt this standard as well as its effect on our condensed consolidated financial statements.
As part of its disclosure framework project, the FASB has issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Specifically, certain disclosure requirements are removed from Subtopic 715-20, Compensation—Retirement Benefits—Defined Benefit Plans—General, including, among others, (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; (2) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; and (3) related party disclosures concerning the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan. Certain other disclosure requirements are added to Subtopic 715-20, including (1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. Finally, the amendments in this ASU clarify disclosure requirements in Paragraph 715-20-50-3. The amendments are effective for fiscal years ending after December 15, 2020. We are currently evaluating the effect on our condensed consolidated financial statements.
The FASB has issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which aims to reduce complexity in the accounting for costs of implementing a cloud computing service arrangement. In fact, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments in this ASU require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software, in order to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal-use software that cannot be capitalized under Subtopic 350-40 (e.g., training costs and certain data conversion costs) also cannot be capitalized for a hosting arrangement that is a service contract. Additionally, the amendments in this ASU require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (i.e., the noncancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor). The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement, and to classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. Note that the accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. We are currently evaluating methods of adoption as well as the effect on our condensed consolidated financial statements.
The FASB has issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which reduces the cost and complexity of financial reporting associated with consolidation of variable interest entities (VIEs). Specially, the indirect interests held through related parties in common control arrangements should be considered on a proportional basis (as opposed to a direct interest in its entirety) for determining whether fees paid to decision makers and service providers are variable interests. This is consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a VIE. The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. We do not expect the adoption of this ASU to have a material effect on our condensed consolidated financial statements.
The FASB has issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting which supersedes the guidance in Subtopic 505-50, Equity—Equity-Based Payments to Non-
Employees. In particular, ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation (which previously only included payments to employees), to include share-based payment transactions for acquiring goods and services from nonemployees. In fact, an entity should now apply the requirements of Topic 718 to non-employee awards, except for specific guidance on inputs to an option pricing model and the attribution of cost (i.e., the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). Additionally, the amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations by issuing share-based payment awards, and clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods with fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. We do not expect the adoption of this ASU to have a material effect on our condensed consolidated financial statements.
On January 26, 2017, the
The FASB has issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the manner in which an entity determines the amount of a goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Public entities should adopt the amendments in this ASU prospectively for their annual, or any interim periods, in fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will evaluate adopting when we perform our goodwill impairment test in 2017.2019. We do not expect the adoption of this ASU to have a material effect on our condensed consolidated financial statements.
On January 5, 2017, theThe FASB has issued ASU 2017-01, Business Combinations2019-13, Financial Instruments—Credit Losses (Topic 805)—Clarifying326): Measurement of Credit Losses on Financial Instruments, to provide financial statement users with more decision-useful information about the Definitionexpected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a Business, which clarifiesbroader range of reasonable and supportable information to inform credit loss estimates. Prior GAAP included multiple credit impairment objectives that generally delayed recognition of the definitionfull amount of a businesscredit losses until it was probable that the loss would occur. The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. The accounting for purchased credit impaired financial assets under the amendments will make the allowance for credit losses more comparable between originated assets and purchased financial assets, as well as reduce complexity with the objective of adding guidance to assist entities with evaluating whether transactions should be accountedaccounting for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes and outputs. While an integrated set of assets and activities (collectively, a “set”) that is a business usually has outputs, outputs are not requiredinterest income. Additionally, credit losses on available-for-sale debt securities will now have to be present. Additionally, allpresented as an allowance rather than as a write-down. This approach is an improvement to current GAAP, because unlike current GAAP, which prohibits reflecting reversals of credit losses, an entity will be able to record reversals of credit losses in current-period net income in situations in which the inputs and processes that a seller uses in operating a set are not required if market participants can acquireestimate of credit losses declines, thereby aligning the set and continue to produce outputs. The amendments in ASU 2017-01 provide a screen to determine when a set is not a business. The screen
requires that when substantially allincome statement recognition of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If, however, the screen is not met, then the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and (2) remove the evaluation of whether a market participant could replace missing elements. Finally, the amendments in this ASU narrow the definition of the term “output” so that the term is consistentcredit losses with the mannerreporting period in which outputsthe changes occur. For public business entities that are described in Topic 606. TheSEC filers, the amendments are effective for annual periodsfiscal years beginning after December 15, 2017,2019, including interim periods within those periods, with early adoption permissible. We are currently evaluating the effect of adoption on our condensed consolidated financial statements.
On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments orfiscal years. For all other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU apply to all entities, including bothpublic business entities, and not-for-profit entities thatthe amendments are required to present a statement of cash flows under Topic 230. The amendments in ASU 2016-15 become effective for fiscal years that startbeginning after December 15, 2017.2020, including interim periods within those fiscal years. We do not plan to early adopt this ASU. We plan to apply it retrospectively to all periods presented in our quarterly and annual reports on Form 10-Q and Form 10-K. We plan to applyexpect the equity methodadoption of accounting for applicable investments. We will make an accounting policy election to classify distributions received from equity method investees using the cumulative earnings approach. Distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the investor (as adjusted for amortization of basis differences). When such an excess occurs, the current-period distribution up to this excess is considered a return of investment and should be classified as cash inflows from investing. We do not expect this ASU to have a material effect on our condensed consolidated financial statements.
On February 25, 2016, the FASB issued ASU 2016-02—Leases (Topic 842). The amendments in this ASU create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors should apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. This ASU is effective for public entities for annual periods after December 15, 2018, and interim periods therein. Early adoption is permitted for all entities. We are currently evaluating methods of adoption as well as the effect on our condensed consolidated financial statements. However, it is expected to increase total assets and total liabilities for operating leases that are currently recorded off balance sheet.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition guidance, including ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certain of our contracts. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 deferred the effective date of ASU 2014-09 for all entities by one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Several related ASUs have been issued since the issuance of ASU 2014-09. These ASUs, which modify certain sections of ASU 2014-09, are intended to promote a more consistent interpretation and application of the principles outlined in the standard.
The adoption of ASU 2014-09 and related ASUs issued subsequently will impact our policies, controls, business processes and information systems. To prepare for the changes in this guidance, we developed a plan for adoption. Based on our plan, we commenced an assessment in 2016 on the impacts of this guidance on a representative sample of our existing contract population. The sample contracts selected covered more than 20% of our existing revenue base and included contracts from all of our various contract types. A majority of the contracts we tested were not impacted by the new guidance. For contracts that were impacted, we identified two primary differences. First, the determination of performance obligations under this ASU will lead to a different unit of accounting than we are currently applying. Second, for contracts where we are recognizing revenue ratably over the contract term, we will reassess whether the contract, or performance obligation, meets the definition of a "stand ready to perform" obligation. Those contracts that do not meet the "stand ready to perform" definition will be transitioned to a percentage of completion model
primarily based on cost incurred. The impact of these changes will produce a more consistent gross margin period-to-period as the obligations are satisfied.
We developed a detailed implementation plan for 2017, which includes, among other things, an update to our policies, development of disclosures, updates to our controls and application of the guidance across our contract population. We plan to adopt ASU 2014-09 under the modified retrospective method only to contracts not substantially completed at January 1, 2018. While we are still assessing the quantitative impact to our condensed consolidated financial statements, we do expect a significant impact from additional disclosures required under the ASU.
Other ASUs effective after September 30, 20172019 are not expected to have a material effect on our condensed consolidated financial statements.
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| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our exposure to market risk relates to changes in interest rates for borrowing under our revolving credit facility. At September 30, 2017,2019, we had noan outstanding balance of $25.0 million 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.2019.
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.
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| Item 4. | Controls and Procedures |
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, 2017,2019, 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 overfinancial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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.
There have been no material changes from the risk factors described in the “Risk Factors” section of our Annual Report on the Form 10-K for the year ended December 31, 2016.2018.
Exhibits required by Item 601 of Regulation S-K:
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| Exhibit | | Description of Exhibit |
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101101.INS | | The following materials fromInline XBRL Instance Document (the instance document does not appear in the ManTech International Corporation Quarterly Report on Form 10-Q forInteractive Data File because its XBRL tags are embedded within the quarter ended September 30, 2017, formattedInline XBRL document). |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016; (iv) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016; and (v) Notes to Condensed Consolidated Financial Statements.Exhibit 101). |
| ‡ Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | MANTECH INTERNATIONAL CORPORATION |
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| | | By: | /s/ GEORGE J. PEDERSENKEVIN M. PHILLIPS |
| Date: | November 2, 20171, 2019 | Name: | George J. PedersenKevin M. Phillips |
| | | Title: | Chairman of the Board of DirectorsPresident and
Chief Executive Officer |
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| | | By: | /s/ JUDITH L. BJORNAAS |
| Date: | November 2, 20171, 2019 | Name: | Judith L. Bjornaas |
| | | Title: | Chief Financial Officer |