ManTech International Corporation (depending on the circumstances, “ManTech” “Company” “we” “our” “ours” or “us”) provideprovides mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. In business for more than 50 years, we excel in full-spectrum cyber, data collection & analytics, enterprise information technology (IT), and systems and software engineering solutions that support national and 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, revenue 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, 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.

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 costs 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 or 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 March 31,September 30, 2019 and 2018, the aggregate impact of adjustments in contract estimates increased our revenue by $3.2 million.$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 one1 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.

The following table discloses contract receivables (in thousands):

Receivables at March 31,September 30, 2019 are expected to be substantially collected within one year except for approximately $0.9$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 have one contract which accounts for 11.4% of our accounts receivable balance. We do not believe that we have significant exposure to credit

The following table discloses contract liabilities (in thousands):

For the three months ended March 31,and nine months ended September 30, 2019, the amount of revenue that was included in the opening contract liabilities balance was $18.0 million.were $0.9 million and $23.4 million, respectively.

The remaining performance obligation as of March 31,September 30, 2019 is $2.7$3.1 billion. The following table discloses when we expect to recognize the remaining performance obligation as revenue (in billions):

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. 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, 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

ForOur operating leases after lease commencement, we measure our lease liability for each period at the present valueare primarily made up of any remaining lease payments, discounted by using the rate determined at lease commencement. In our condensed consolidated statement of income, we recognize a single operating lease expense calculated on a straight-line basis over the remaining lease term. The amortization of the ROU asset increases each year as a result of the declining lease liability balance. Variable lease payments are not recognized in the measurement of the lease liability - they are recognized in the period in which the related obligation has been incurred.

The balance sheet information related to our leases was as follows (dollars in thousands):

The components of lease expense were as follows (in thousands):

The weighted average information related to leases was aas follows:

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 the threenine months ended March 31,September 30, 2019 and 2018, we declared and paid quarterly dividends in the amount of $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.

For the three months ended March 31,September 30, 2019 and 2018, options to purchase 514,2247,641 shares and 310,745242,789 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 threenine months ended March 31,September 30, 2019 and 2018, options to purchase 331,994 shares and 268,013 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, 2019 and 2018, there were 51,089255,376 shares and 203,854387,926 shares, respectively, issued from the exercise of stock options. For the threenine months ended March 31,September 30, 2019 and 2018 there were 72,18876,346 shares and 86,233 shares, respectively, issued from the vesting of restricted stock units.

Depreciation and amortization expense related to property and equipment for the three months ended March 31,September 30, 2019 and 2018 was $6.3$6.9 million and $5.9$6.4 million, respectively. Depreciation and amortization expense related to property and equipment for the nine months ended September 30, 2019 and 2018 was $19.4 million and $19.1 million, respectively.

Amortization expense relating to intangible assets for the three months ended March 31,September 30, 2019 and 2018 was $5.8$6.1 million and $7.1 million.$6.8 million, respectively. Amortization expense relating to intangible assets for the nine months ended September 30, 2019 and 2018 was $18.0 million and $20.3 million, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):

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 threenine months ended March 31,September 30, 2019 and 2018, we were in compliance with the financial covenants under the credit agreement.

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 2016 with no material adjustments. The remaining audits for 2017 through 2018 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.

An officer of our Company is awas party to a pendingan arbitration proceeding with a former employer that relatesrelating to certaina breach of a contract claims.claim.  Pursuant to indemnification arrangements we have with this officer, we may bewere exposed to a potential loss related to this claim.  PursuantIn the period ending September 30, 2019, we settled the claim. The settlement amount was not material to applicable accounting standards, we have determined that it is reasonably possible that an unfavorable outcome could cause us to incur a liability/loss under these indemnification arrangements. However, given the nature of the claim, the early stage of the process, the limitations on information and other factual details relating to the claims that are available to us at this time, and management’s intent to contest the matter vigorously, we are unable to make a reasonable estimate of loss at this time.  As such, we have not disclosed an amount of potential loss as of March 31, 2019.our condensed consolidated financial statements.

We have $7.7 million outstanding on our letter of credit, of which $14 thousand$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.

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.

The following weighted-average assumptions were used for option grants during the threenine months ended March 31,September 30, 2019 and 2018:

The following table summarizes weighted-average assumptions used in our calculations of fair value for the threenine months ended March 31,September 30, 2019 and 2018:

The following table summarizes stock option activity for the year ended December 31, 2018 and the threenine months ended March 31,September 30, 2019:

The following table summarizes non-vested stock options for the threenine months ended March 31,September 30, 2019:

Unrecognized compensation expense related to non-vested awards was $7.3$5.1 million as of March 31,September 30, 2019, which is expected to be recognized over a weighted-average period of 2 years.

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, 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:

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.

We provide mission-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 that support national and homeland security.

Approximately 98% of our revenues are generated through contracts with the U.S. federal government. As ofsuch, our business is impacted by the overall U.S. government budget and our ability to match our capabilities and offerings to the U.S. government's spending priorities. Through legislation passed in September 2018 and February 15, 2019, all agencies of the U.S. federal government have funding through appropriationswere funded through Government fiscal year (GFY) 2019. Approximately 75%In August 2019, Congress passed and the president signed a new two-year budget deal, the Bipartisan Budget Act of 2019. The Act effectively ended the U.S. government includingthreat of sequestration by increasing spending for GFY 2020 and 2021 above caps previously in place under the DepartmentBudget Control Act. The GFY 2020 and 2021 budgets include increases for areas supporting national security. Despite the passage of Defense hada two year budget, Congress has not yet passed full year appropriations to begin the fiscal year. Appropriations for the Departmentand as of Defense include near term expansions that aligned with the Administration's stated priorities in dealing with significant global threats, readiness and force structure needs within the military, diplomatic, and cyber aggressions by both state and non-state actors.  A number of federal civilian agencies, including the Departments of Homeland Security and State operatedOctober 1st, began operating under a Continuing Resolution (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 late Decembera CR or, if there is a failure to pass interim funding, a government shutdown.

We classify indirect costs incurred as cost of services and then endured a 35-day lapsegeneral and administrative expenses in funding prior to receiving appropriationsthe same manner as such costs are defined in mid-February. We expect future appropriations to be debatedour disclosure statements under U.S. Government Cost Accounting Standards. Effective January 1, 2019, we updated our disclosure statements with the considerationDefense Contract Management Agency, resulting in certain costs being classified differently either as cost of policy priorities, national budget deficits, debt ceilingsservices or as general and administrative expenses on a prospective basis. This change has caused a net increase in the Budget Control Act.reported cost of services and a net decrease in reported general and administrative expenses in 2019 as compared to 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, 2018, previously filed with the Securities and Exchange Commission.

The primary driver of our increase in revenues relates to revenue from new contract awards, and growth on certain existing contracts and our recent acquisitions, which were offset by contracts and tasks that ended and reduced scope of work or lower material purchases on some contracts.

 

The increase in cost of services was primarily due to increases in revenue. As a percentage of revenue, direct labor costs were 48%46% for both the three months ended March 31,September 30, 2019 and 2018. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, waswere 38% for the three months ended March 31,September 30, 2019, compared to 37%39% for the same period in 2018.

The decreaseincrease in general and administrative expenses was primarily due to reducedadditional infrastructure spending to support the growth of our business, bid and proposal spendingexpenditures and amortization of acquisition intangiblesadditional expenses related to legal matters. These increases were partially offset by increased spending on infrastructure. We expectthe reclassification of certain allocable expenses from general and administrative expenses as a percentto cost of revenue to increase during the remainder of 2019 due to the acquisition of Kforce Government Solutions (KGS) and increased bid and proposal spending.services.

The decreaseincrease in interest expense was due to repayment of debtincreased borrowings on our revolving line of credit. We expect interest expense to increase for the remainder of 2019 due to increased borrowings under our credit facility to fund the acquisition of KGS. For additional information, see Note 11 in our condensed consolidated financial statements in Item 1.acquisitions.

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 25%26% and 22%24% for the three months ended March 31,September 30, 2019 and 2018, respectively. The primary driver of the increase in our effective tax rate was the impact of discrete items recognized in the third quarter of 2018, which were more favorable than discrete items recognized in the third quarter of 2019.