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MANT > SEC Filings for MANT > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for MANTECH INTERNATIONAL CORP

Form 10-Q for MANTECH INTERNATIONAL CORP


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties, many of which are outside of our control. ManTech International Corporation (depending on the circumstances, "ManTech," "Company," "we," "our," "ours" or "us") believes these statements to be within the definition of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate" and other similar words. You should read statements that contain these words carefully because they discuss our future expectations, make projections of our future results of operations or financial condition or state other "forward-looking" information.
Although forward-looking statements in this Quarterly Report reflect our good faith judgment, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to predict accurately or control. Factors that could cause actual results to differ materially from the results we anticipate include, but are not limited to, the following:
adverse changes in U.S. government spending levels for programs we support due to budgetary constraints affecting federal government spending, changing mission priorities or other factors;

adverse changes in our mix of contract types;

failure to retain existing U.S. government contracts, win new contracts or win recompetes;

failure to obtain option awards, task orders or funding under contracts;

risk of contract renegotiation, performance, modification or termination;

competition;

failure to maintain strong relationship with other contractors;

failure to successfully integrate recently acquired companies or businesses into our operations or realize any accretive or synergistic effects from such acquisitions;

risks associated with complex U.S. government procurement laws and regulations;

adverse results of U.S. government audits of our government contracts;

risks of financing, such as increases in interest rates and restrictions imposed by our outstanding indebtedness, including the ability to meet financial covenants, and risks related to an ability to obtain new or additional financing; and

failure to identify, execute or effectively integrate future acquisitions.

We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. These and other risk factors are more fully described and discussed in the section titled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and under Item 1A. of Part II of our Quarterly Reports on Form 10-Q, and from time to time, in our other filings with the Securities and Exchange Commission (SEC). We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. We also suggest that you carefully review and consider the various disclosures made in this Quarterly Report that attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Introduction and Overview
ManTech is a leading provider of innovative technologies and solutions for mission-critical national security programs for the intelligence community; the Department of Defense, including its health organizations; the departments of State, Homeland Security, Energy and Justice, including the Federal Bureau of Investigations (FBI); the space community; and other U.S. federal government customers. We combine deep domain understanding and technical capability to deliver comprehensive information technology, systems engineering, technical and other services and solutions primarily in support of mission critical national security programs for the intelligence community and Department of Defense. We provide support to critical national security programs for approximately 60 federal agencies through approximately 1,000 current contracts. Our broad set of services is generally deployed in custom combinations to best address the requirements of our customers' long-term programs. Our services generally include the following solution sets that are aligned with the long-term needs of our national security clients: command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) lifecycle support; cyber security; global


logistics support; intelligence/counter-intelligence support; information technology modernization and sustainment; systems engineering; test and evaluation; and health IT. ManTech supports major national missions, such as military readiness, terrorist threat detection, information security and border protection.
We derive revenues primarily from contracts with U.S. government agencies that are focused on national security, and as a result, funding for our programs is generally linked to trends in U.S. government spending in areas such as defense, intelligence and homeland security. While we believe that national security spending will continue to be a priority, the U.S. government deficit and budget situation has created increasing pressure to examine and reduce spending across all areas. Additionally, in the absence of Congressional action to the contrary, automatic reductions in federal budgets will commence in January 2013 as a result of sequestration. We continue to evaluate the potential impact of this environment on our business.
While the uncertain size of future budget reductions has created a challenging environment for companies in our industry, we believe that opportunities for expanding services in this constrained environment continue to exist. For example, changing mission priorities following the end of the Iraq war and the planned withdrawal from Afghanistan have and will continue to result in reduced spending in support of overseas contingency operations generally. This change will impact the outlook for our industry overall, however we believe that ManTech is well positioned to continue benefiting in the near term from our delivery of C4ISR and logistics services around the world, as evidenced by recent significant contract awards in these areas.
We recommend that you read this discussion and analysis in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, previously filed with the SEC.
Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011
The following table sets forth certain items from our condensed consolidated statement of income and the relative percentage that certain items of expenses and earnings bear to revenues, as well as the period-to-period change from September 30, 2011 to September 30, 2012.

                                     Three months ended
                                       September 30,                           Period-to-Period Change
                       2012           2011          2012         2011                2011 to 2012
                             Dollars                    Percentage              Dollars        Percentage
                                                   (dollars in thousands)
REVENUES           $  645,028     $  734,607        100.0 %      100.0  %   $    (89,579 )        (12.2 )%
Cost of services      551,493        629,181         85.5 %       85.6  %        (77,688 )        (12.3 )%
General and
administrative
expenses               50,776         46,918          7.9 %        6.4  %          3,858            8.2  %
OPERATING INCOME       42,759         58,508          6.6 %        8.0  %        (15,749 )        (26.9 )%
Interest expense       (4,110 )       (3,857 )        0.6 %        0.5  %           (253 )          6.6  %
Interest income           118            107            - %          -  %             11           10.3  %
Other income
(expense), net             10            (20 )          - %          -  %             30         (150.0 )%
INCOME FROM
OPERATIONS BEFORE
INCOME TAXES           38,777         54,738          6.0 %        7.5  %        (15,961 )        (29.2 )%
Provision for
income taxes          (14,350 )      (20,252 )        2.2 %        2.8  %          5,902          (29.1 )%
NET INCOME         $   24,427     $   34,486          3.8 %        4.7  %   $    (10,059 )        (29.2 )%

Revenues
Revenues decreased 12.2% to $645.0 million for the three months ended September 30, 2012, compared to $734.6 million for the same period in 2011. The primary driver of our decrease in revenues relates to reductions on our C4ISR support contracts and a contract to provide mobile telecommunication services in Afghanistan which ended in the second quarter of 2012. These reductions were partially offset by the revenues provided from our recent acquisitions. The reduction in C4ISR work is primarily due to reduced demand for field service support and delays in enhancements to existing ISR systems. Cost of services
Cost of services decreased 12.3% to $551.5 million for the three months ended September 30, 2012, compared to $629.2 million for the same period in 2011. The decrease in cost of services is primarily due to the reduction in revenues, as cost of services remained stable as a percentage of revenues for the three months ended September 30, 2012 as compared to the same


period in 2011. As a percentage of revenues, direct labor costs, which include applicable fringe benefits and overhead, increased to 35.6% for the three months ended September 30, 2012, compared to 32.8% for the same period in 2011 as a result of an increase in our percentage of work performed as a prime contractor. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, decreased from 52.8% for the three months ended September 30, 2011 to 49.9% for the same period in 2012 due to a reduction in other direct costs on our C4ISR support contracts.
General and administrative expenses
General and administrative expenses increased to $50.8 million for the three months ended September 30, 2012, compared to $46.9 million for the same period in 2011. The increase was primarily due to the general and administrative expenses associated with our recent acquisitions. Net income
Net income decreased 29.2% to $24.4 million for the three months ended September 30, 2012, compared to $34.5 million for the same period in 2011. The decrease in net income was primarily due to lower revenues and increased general and administrative expenses.
Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011
The following table sets forth certain items from our condensed consolidated statement of income and the relative percentage that certain items of expenses and earnings bear to revenues, as well as the period-to-period change from September 30, 2011 to September 30, 2012.

                                         Nine months ended
                                           September 30,                          Period-to-Period Change
                           2012            2011          2012        2011               2011 to 2012
                                  Dollars                   Percentage             Dollars        Percentage
                                                       (dollars in thousands)
REVENUES               $ 1,960,474     $ 2,188,144      100.0  %     100.0 %   $    (227,670 )       (10.4 )%
Cost of services         1,678,470       1,873,595       85.6  %      85.6 %        (195,125 )       (10.4 )%
General and
administrative
expenses                   148,670         141,018        7.6  %       6.4 %           7,652           5.4  %
OPERATING INCOME           133,334         173,531        6.8  %       8.0 %         (40,197 )       (23.2 )%
Interest expense           (12,267 )       (11,806 )      0.6  %       0.5 %            (461 )         3.9  %
Interest income                257             230          -  %         - %              27          11.7  %
Other income
(expense), net                 (78 )         3,896          -  %       0.1 %          (3,974 )      (102.0 )%
INCOME FROM OPERATIONS
BEFORE INCOME TAXES        121,246         165,851        6.2  %       7.6 %         (44,605 )       (26.9 )%
Provision for income
taxes                      (46,432 )       (63,020 )      2.4  %       2.9 %          16,588         (26.3 )%
NET INCOME             $    74,814     $   102,831        3.8  %       4.7 %   $     (28,017 )       (27.2 )%

Revenues
Revenues decreased 10.4% to $1,960.5 million for the nine months ended September 30, 2012, compared to $2,188.1 million for the same period in 2011. The primary driver of our decrease in revenues relates to reductions on our C4ISR support contracts. These reductions were partially offset by the revenues provided from our recent acquisitions, a contract to provide mobile telecommunication services in Afghanistan and organic growth on our cyber related contracts. The reduction in C4ISR work is primarily due to reduced demand for field service support and delays in enhancements to existing ISR systems.
Cost of services
Cost of services decreased 10.4% to $1,678.5 million for the nine months ended September 30, 2012, compared to $1,873.6 million for the same period in 2011. The decrease in cost of services is primarily due to the decrease in revenues, as cost of services remained stable as a percentage of revenues for the nine months ended September 30, 2012 compared to the same period in 2011. As a percentage of revenues, direct labor costs, which include applicable fringe benefits and overhead, increased to 36.3% for the nine months ended September 30, 2012, compared to 34.5% for the same period in 2011 as a result of an increase in our percentage of work as a prime contractor. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, decreased from 51.1% for the nine months ended September 30,


2011 to 49.3% for the same period in 2012 due to a reduction in other direct costs on our C4ISR support contracts.
General and administrative expenses
General and administrative expenses increased to $148.7 million for the nine months ended September 30, 2012, compared to $141.0 million for the same period in 2011. The increase was primarily due to general and administrative expenses associated with our recent acquisitions. Over time, we expect general and administrative expenses as a percentage of revenues to decrease. Other income (expense), net
Other income (expenses), net was $(0.1) million for the nine months ended September 30, 2012, compared to $3.9 million for the same period in 2011. During the nine months ended September 30, 2011, the sale of our investment in NetWitness resulted in a gain of $3.7 million. Net income
Net income decreased 27.2% to $74.8 million for the nine months ended September 30, 2012, compared to $102.8 million for the same period in 2011. The decrease in net income was primarily due to lower revenues and increased general and administrative expenses. We expect additional pressure on future levels of net income as a percentage of revenues as the trend towards more cost-reimbursable contract awards, increased competition and pricing pressures impact our operating margins.
Backlog
At September 30, 2012 and December 31, 2011, our backlog was $7.0 billion and $4.7 billion, respectively, of which $1.6 billion and $1.3 billion, respectively, was funded backlog. After experiencing industry-wide delays in contract awards and funding, customers are beginning to release funds and are moving forward with procurements. The significant increase in our backlog is primarily due to the award of the Contractor Logistics Sustainment and Support Services contract for $2.85 billion. Backlog represents estimates that we calculate on a consistent basis. For additional information on how we compute backlog, see our annual report on Form 10-K for the fiscal year ended December 31, 2011, previously filed with the SEC. Effects of Inflation
Inflation and uncertainties in the macroeconomic environment, such as conditions in the financial markets, could impact our labor rates beyond the predetermined escalation factors. However, we generally have been able to price our contracts in a manner to accommodate the rates of inflation experienced in recent years. Under our time and materials contracts, labor rates are usually adjusted annually by predetermined escalation factors. Our cost reimbursable contracts automatically adjust for changes in cost. Under our fixed-price contracts, we include a predetermined escalation factor, and generally, we have not been adversely affected by near-term inflation. Purchases of equipment and materials directly for contracts are usually cost reimbursable.

Liquidity and Capital Resources
Historically, our primary liquidity needs have been the financing of acquisitions, working capital and capital expenditures. Our primary sources of liquidity are cash provided by operations and our revolving credit facility. On September 30, 2012, the Company's cash and cash equivalents balance was $208.9 million. At September 30, 2012, we had no outstanding borrowings under our revolving credit facility. At September 30, 2012, we were contingently liable under letters of credit totaling $0.2 million, which reduced our ability to borrow under our credit facility. The maximum available borrowing under our credit facility at September 30, 2012 was $499.8 million. At September 30, 2012, we had $200.0 million outstanding of our 7.25% senior unsecured notes due April 2018. For additional information concerning our 7.25% senior unsecured notes, see Note 8 to our consolidated financial statements in Item 1. Generally, cash provided by operating activities is adequate to fund our operations, including payments under our regular cash dividend program. Due to fluctuations in our cash flows and level of operations, it is necessary from time to time to increase borrowings under our credit facility to meet cash demands.

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