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MANT > SEC Filings for MANT > Form 10-Q on 3-May-2013All Recent SEC Filings

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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 or delays in U.S. government spending for programs we support due to cost cutting and efficiency initiatives, changing mission priorities (including the expected withdrawal from Afghanistan) and other efforts to reduce federal government spending generally;

uncertainty regarding the timing and nature of government action to complete the budget process and otherwise address budgetary constraints, sequestration or other factors;

failure to compete effectively for new contract awards or to retain existing U.S. government contracts;

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

delays in the competitive bidding process caused by competitors' protests of contract awards received by us;

failure to realize the full amount of our backlog or adverse changes in the timing of receipt of revenues under contracts included in backlog;

adverse changes in our mix of contract types;

renegotiation, modification or termination of our contracts, or failure to perform in conformity with contract terms or our expectations;

failure to successfully integrate recently 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;

failure to maintain strong relationship with other contractors;

failure to successfully identify and execute future acquisitions;

non-compliance with, or adverse changes in, complex U.S. government procurement laws and regulations;

adverse results of U.S. government audits or other investigations of our government contracts;

adverse changes in our financing arrangements, such as increases in interest rates and restrictions imposed by our outstanding indebtedness, including the ability to meet financial covenants, or inability to obtain new or additional financing; and

disruption of our business resulting from internal systems or service failures or breaches in customer systems, including as a result of cyber or other security threats.

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, 2012 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; departments of Defense, State, Homeland Security, Energy and Justice, including the Federal Bureau of Investigations (FBI); the healthcare and space communities; and other U.S. federal government customers. We provide support to critical national security programs for approximately 50 federal agencies through approximately 1,000 current contracts. Our services include the following solution sets that are aligned with the long-term needs of our customers: command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) solutions and services; cyber security; global logistics support; IT modernization and sustainment; intelligence/counter-intelligence solutions and support; systems engineering; test and evaluation; environmental, range and sustainability services; healthcare analytics and IT. We support major national missions, such as military readiness and wellness, terrorist threat detection, information security and border protection. Our employees operate primarily in the United States, as well as numerous locations internationally.
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 of defense, intelligence and homeland security. While we believe that spending for our national security and other programs we support will continue to be a priority, federal spending levels generally have come under pressure given the effects of sequestration, mounting levels of debt, and planned withdraw from Southwest Asia. The uncertainty about funding levels has led certain of our customers to delay awards and spending and led the government to adopt policies adverse to our industry. We expect that our customers will continue to be motivated by minimizing costs, which we expect to lower margins across the industry. In addition, a significant portion of our business supports Overseas Contingency Operations (OCO), which will be negatively affected by the draw down of military forces over the next two years.
While budgetary pressures and limitations have created a challenging environment for companies in our industry, we believe that this situation may provide opportunities for price competitive providers such as ManTech. Moreover, we believe that the federal government's spending will remain robust in key areas for which ManTech is well positioned, including national and homeland security programs, sophisticated intelligence gathering and information sharing activities and implementation of new healthcare systems and policies. The U.S. is committed to maintaining its superiority in capabilities that we support, such as intelligence, surveillance and reconnaissance (ISR), cyber security and intelligence analysis and operations. With an increasing veteran population and an aging national population, investments in healthcare will continue. The government is actively looking for cloud-based solutions and data center consolidation to save money as well as systems integration and interoperability to enable better coordination and communication within and among agencies and departments.
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, 2012, previously filed with the SEC.

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012
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 March 31, 2012 to March 31, 2013.

                                    Three months ended
                                         March 31,                             Period-to-Period Change
                       2013           2012          2013         2012               2012 to 2013
                             Dollars                   Percentage              Dollars         Percentage
                                                   (dollars in thousands)
REVENUES           $  646,008     $  676,509        100.0 %      100.0 %   $     (30,501 )         (4.5 )%
Cost of services      562,297        582,867         87.0 %       86.1 %         (20,570 )         (3.5 )%
General and
expenses               47,340         47,947          7.4 %        7.1 %            (607 )         (1.3 )%
OPERATING INCOME       36,371         45,695          5.6 %        6.8 %          (9,324 )        (20.4 )%
Interest expense       (4,051 )       (4,148 )        0.6 %        0.6 %              97           (2.3 )%
Interest income           113             72            - %          - %              41           56.9  %
Other income
(expense), net             46             15            - %          - %              31          206.7  %
INCOME TAXES           32,479         41,634          5.0 %        6.2 %          (9,155 )        (22.0 )%
Provision for
income taxes          (12,299 )      (15,992 )        1.9 %        2.4 %           3,693          (23.1 )%
NET INCOME         $   20,180     $   25,642          3.1 %        3.8 %   $      (5,462 )        (21.3 )%

The primary driver of our decrease in revenues relates to reductions on our C4ISR support contracts and contracts that have ended, including a contract to provide mobile telecommunication services in Afghanistan. These reductions were partially offset by the revenues provided from contracts in the intelligence area including contracts for IT infrastructure modernization. The reduction in C4ISR work is primarily due to reduced demand for field service support to existing ISR systems. We expect these reductions in field service support to continue along with the eventual withdraw from Afghanistan. Cost of services
The decrease in cost of services was primarily due to lower revenues. As a percentage of revenues, direct labor costs remained stable at 35.7% for the three months ended March 31, 2013, compared to 35.5% for the same period in 2012. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, was 51.3% for the three months ended March 31, 2013, compared to 50.6% for the same period in 2012. We expect cost of services as a percentage of revenues to remain the same or slightly decrease for the remainder of the year.
Provision for income taxes
Our effective tax rate is affected by recurring items, such as tax rates and the relative amount of income we earn in jurisdictions. 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 37.9% and 38.4% for the three months ended March 31, 2013 and 2012, respectively. The decrease in the effective tax rate is attributed to provisions in the American Taxpayer Relief Act of 2012 (the Act) that took effect on January 2, 2013. The Act retroactively restored tax positions on the 2012 tax return, including the research and experimentation credit and the D.C. federal empowerment zone credit. We expect the effective tax rate to be in line with the first quarter 2012 rate for the remainder of the year. Net income
The decrease in net income was due to the reduction in revenues and margin pressure due to a shift to cost-reimbursable contracts awards as well as the competitive market place. Given the competitive market place and budgetary constraints of our customer, we expect continued pressure on net income. Backlog
At March 31, 2013 and December 31, 2012, our backlog was $6.1 billion and $6.5 billion, respectively, of which $1.4 billion and $1.8 billion, respectively, was funded backlog. 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, 2012, previously filed with the SEC.

Liquidity and Capital Resources
Historically, our primary liquidity needs have been the financing of acquisitions, working capital, payment under our cash dividend program and capital expenditures. Our primary sources of liquidity are cash provided by operations and our revolving credit facility.
On March 31, 2013, the Company's cash and cash equivalents balance was $172.3 million. At March 31, 2013, there were no outstanding borrowings under our revolving credit facility. At March 31, 2013, we were contingently liable under letters of credit totaling $0.2 million, which reduced our ability to borrow under our revolving credit facility by that amount. The maximum available borrowing under our revolving credit facility at March 31, 2013 was $499.8 million. At March 31, 2013, we had $200.0 million outstanding of our 7.25% senior unsecured notes. For additional information concerning our revolving credit facility and 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 revolving credit facility to meet cash demands.
Cash Flows from Operating Activities
Our operating cash flows are primarily affected by our ability to invoice and collect from our clients in a timely manner, our ability to manage our vendor payments and the overall profitability of our contracts. We bill most of our customers monthly after services are rendered. For the three months ended March 31, 2013 and 2012, our net cash flows from operating activities were $57.6 million and $52.2 million, respectively. Increased cash flows from operations during the three months ended March 31, 2013 compared to the same period in 2012 were due to the sale of contractual inventory, the timing of the collection of our receivables and payment of salaries to our employees; offset by the timing of vendor payments and decreases in depreciation expense and net income. Our accounts receivable days sales outstanding (DSO) was 76 for both the three months ended March 31, 2013 and 2012.
Cash Flows from Investing Activities
Our cash flows from investing activities consist primarily of business acquisitions, purchases of property and equipment and investments in capitalized software for internal use. For the three months ended March 31, 2013 and 2012, our net cash outflows from investing activities were $13.0 million and $40.9 million, respectively. During the three months ended March 31, 2013, our net cash outflows from investing activities were due to the acquisition of ALTA Systems, Inc. and purchases of property and equipment. During the three months ended March 31, 2012, our net cash outflows from investing activities were primarily due to the acquisition of Evolvent Technologies, Inc. Cash Flows from Financing Activities
For the three months ended March 31, 2013 and 2012, our net cash outflows from financing activities were $7.2 million and $6.6 million, respectively. During the three months ended March 31, 2013, our net cash outflows from financing activities resulted primarily from dividends paid. During the three months ended March 31, 2012, our net cash outflows from financing were due to dividends paid, partially offset by the proceeds from the exercise of stock options. Capital Resources
We believe the capital resources available to us from our cash on hand of $172.3 million at March 31, 2013, our $500.0 million 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, including payments under our regular cash dividend program. We anticipate financing our external growth from acquisitions and our longer-term internal growth through one or more of the following sources: cash from operations, use of our revolving credit facility, additional senior unsecured notes, additional borrowings or issuances of equity.

Short-term Borrowings
From time to time, we borrow funds against our revolving credit facility for working capital requirements and funding of operations, as well as acquisitions. Borrowings under our revolving credit facility bear interest at one of the following variable rate as selected by the Company at the time of the borrowing:
a LIBOR based rate plus market spreads (1.25% to 2.25% based on the Company's consolidated total leverage ratio) or Bank of America's base rate plus market spreads (0.25% to 1.25% based on the Company's consolidated total leverage ratio). In the next year we may use, as needed, our revolving credit facility or additional sources of borrowings in order to fund our anticipated cash requirements.
The following table summarizes the activity under our revolving credit facility for the three months ended March 31, 2013 and 2012 (in thousands):

                                                            Three months ended
                                                                March 31,
                                                            2013           2012
Borrowing under revolving credit facility               $   -           $  8,000
Repayment of borrowings under revolving credit facility $   -           $ (8,000 )

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 periods ended March 31, 2013 and 2012, we declared and paid a dividend in the amount of $0.21 per share on all issued and outstanding shares of common stock. While we expect to continue the regular 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.

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 consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies, including the critical accounting policies and practices listed below, are more fully described and discussed in the notes to the consolidated financial statements for the fiscal year 2012 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on February 22, 2013.

Revenue Recognition and Cost Estimation

We recognize revenues when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable and collectability is reasonably assured. We have a standard internal process that we use to determine whether all required criteria for revenue recognition have been met.
Our revenues consist primarily of services provided by our employees and 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, firm-fixed-price or time-and-materials contracts. Revenues for cost reimbursement contracts are recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For performance-based fees under cost reimbursable contracts that are subject to the

provisions of Accounting Standards Codification (ASC) 605-35, Construction-Type and Certain Production-Type 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. For cost reimbursable contracts with performance-based fee incentives that are subject to the provisions of SEC Topic 13, Revenue Recognition, we recognize the relevant portion of the fee upon customer approval. For time-and-material contracts, revenues are recognized to the extent of billable rates times hours delivered plus material 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 is 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 ASC 605-35, 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 revenue and contract profit as a result of these revisions is included in the periods in which the revisions are made. This method can result in the deferral of costs 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 performance of the work could result, and in some instances has resulted, in reduced profits or losses for such contracts. Both the individual changes in contract estimates and aggregate net changes in the contract estimates recognized using the cumulative catch-up method of accounting were not material to the consolidated statement of operations for all periods presented. Estimated losses on contracts 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 price of an acquired business is allocated 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 one reportable segment. 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 amount (including goodwill). If the first step of the impairment test does not indicate an impairment, performance of the second step is not required. The fair values of the reporting units are determined based on a weighting of the income approach, market approach and the market transaction approach. The income approach is a valuation technique in which fair value is derived from 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 is 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 the company. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to the company 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 provided a reasonable basis for comparison to the company. Valuation ratios, which relate market prices to selected financial statistics derived from . . .

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