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MANT > SEC Filings for MANT > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for MANTECH INTERNATIONAL CORP

Form 10-Q for MANTECH INTERNATIONAL CORP


1-Nov-2013

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 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 and appropriations process, continue federal government operations 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 or other factors;

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

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

adverse changes in our mix of contract types;

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;

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

failure to successfully identify and execute future acquisitions;

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

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

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.

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; the 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 over 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 been reduced, and may be further reduced, given the effects of sequestration, mounting levels of debt, and the current political environment.
Additionally, the funding of U.S. government programs is subject to an annual congressional budget authorization and appropriation process. The U.S. government did not complete its budget process before the end of its fiscal year on September 30, 2013 and did not provide for a continuing resolution, which resulted in a federal government shutdown that lasted for sixteen days. During the shutdown, certain of our programs were negatively impacted. While a short term resolution is now in place to fund government operations through January 15, 2014, it remains uncertain that a longer-term agreement on budget authorization and appropriations will be reached.
Pressure on government funding levels, combined with continuing uncertainty about the budget dispute, has led certain of our customers to delay awards and spending. In this environment, we expect that our customers will continue to be motivated by minimizing costs, which we expect to lower margins across the industry, and to reexamine program priorities in light of sequestration. Furthermore, if a budget agreement for government fiscal year 2014 is not reached before the current authorization expires, the federal government may be forced to shutdown again, and our results of operations may be negatively impacted.
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 September 30, 2013 Compared to the Three Months Ended
September 30, 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
September 30, 2012 to September 30, 2013.

                                     Three months ended
                                       September 30,                           Period-to-Period Change
                       2013           2012          2013          2012               2012 to 2013
                             Dollars                    Percentage              Dollars        Percentage
                                                   (dollars in thousands)
REVENUES           $  567,399     $  645,028        100.0  %      100.0 %   $    (77,629 )        (12.0 )%
Cost of services      493,604        551,493         87.0  %       85.5 %        (57,889 )        (10.5 )%
General and
administrative
expenses               41,756         50,776          7.4  %        7.9 %         (9,020 )        (17.8 )%
OPERATING INCOME       32,039         42,759          5.6  %        6.6 %        (10,720 )        (25.1 )%
Interest expense       (4,104 )       (4,110 )        0.7  %        0.6 %              6           (0.1 )%
Interest income           167            118            -  %          - %             49           41.5  %
Other income
(expense), net            (20 )           10            -  %          - %            (30 )       (300.0 )%
INCOME FROM
OPERATIONS BEFORE
INCOME TAXES           28,082         38,777          4.9  %        6.0 %        (10,695 )        (27.6 )%
Provision for
income taxes           (9,614 )      (14,350 )        1.7  %        2.2 %          4,736          (33.0 )%
Equity in losses
of unconsolidated
subsidiaries             (750 )            -          0.1  %          - %           (750 )       (100.0 )%
NET INCOME         $   17,718     $   24,427          3.1  %        3.8 %   $     (6,709 )        (27.5 )%

Revenues
The primary driver of our decrease in revenues was due to reductions on contracts that support Overseas Contingency Operations (OCO) in Afghanistan, including some of our C4ISR support contracts, due to the continuing withdrawal from Afghanistan, as well as contracts that have ended. These reductions were partially offset by the revenues provided from contracts in the intelligence area including contracts for IT infrastructure modernization. Cost of services
The decrease in cost of services was primarily due to lower revenues. As a percentage of revenues, direct labor costs was 38.3% for the three months ended September 30, 2013, compared to 35.6% for the same period in 2012. The increase in direct labor costs as a percentage of revenues was due to a change in our direct cost mix. 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 48.7% for the three months ended September 30, 2013, compared to 49.9% for the same period in 2012. The decrease in other direct costs was due to a reduction in material used in the performance of the contracts.
General and administrative expenses
The decrease in general and administrative expense was due to cost reduction initiatives, including reductions in indirect support staff and lower stock based compensation expense. As a percentage of revenues, general and administrative expense decreased for the three months ended September 30, 2013 when compared to the same period in 2012 due to these initiatives. 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 various taxing 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 35.2% and 37.0% for the three months ended September 30, 2013 and 2012, respectively. The decrease in the effective tax rate is attributable to a tax basis deduction of an investment, the impact of deductible gains related to our Employee Supplemental Savings Plan and provisions in the American Taxpayer Relief Act of 2012 (the Act) that took effect on January 2, 2013. The Act retroactively restored certain tax positions on our 2012 tax return.


Equity in losses of unconsolidated subsidiaries We account for our investment in the Fluor-ManTech Logistics Solutions, LLC under the equity method of accounting. We recorded $0.8 million and $0 in equity method losses for the three months ended September 30, 2013 and 2012, respectively.
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.
Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 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 September 30, 2012 to September 30, 2013.

                                       Nine months ended
                                         September 30,                            Period-to-Period Change
                       2013            2012           2013          2012                2012 to 2013
                              Dollars                     Percentage               Dollars        Percentage
                                                     (dollars in thousands)
REVENUES           $ 1,818,536     $ 1,960,474        100.0  %      100.0  %   $    (141,938 )        (7.2 )%
Cost of services     1,578,940       1,678,470         86.8  %       85.6  %         (99,530 )        (5.9 )%
General and
administrative
expenses               132,515         148,670          7.3  %        7.6  %         (16,155 )       (10.9 )%
OPERATING INCOME       107,081         133,334          5.9  %        6.8  %         (26,253 )       (19.7 )%
Interest expense       (12,217 )       (12,267 )        0.7  %        0.6  %              50          (0.4 )%
Interest income            393             257            -  %          -  %             136          52.9  %
Other income
(expense), net             (64 )           (78 )          -  %          -  %              14         (17.9 )%
INCOME FROM
OPERATIONS BEFORE
INCOME TAXES            95,193         121,246          5.2  %        6.2  %         (26,053 )       (21.5 )%
Provision for
income taxes           (34,994 )       (46,432 )        1.9  %        2.4  %          11,438         (24.6 )%
Equity in losses
of unconsolidated
subsidiaries              (750 )             -            -  %          -  %            (750 )      (100.0 )%
NET INCOME         $    59,449     $    74,814          3.3  %        3.8  %   $     (15,365 )       (20.5 )%

Revenues
The primary driver of our decrease in revenues was due to reductions on our C4ISR support contracts and the impact of the withdrawal from Afghanistan on our contracts in support of OCO, as well as 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 the withdrawal from Afghanistan to impact our contracts in support of OCO.
Cost of services
The decrease in cost of services was primarily due to lower revenues. As a percentage of revenues, direct labor costs was 37.3% for the nine months ended September 30, 2013, compared to 36.3% 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 49.5% for the nine months ended September 30, 2013, compared to 49.3% 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. General and administrative expenses
The decrease in general and administrative expense was due to cost reduction initiatives, including reductions in indirect support staff and lower stock based compensation expense. As a percentage of revenues, general and administrative expense remained the same for the nine months ended September 30, 2013 when compared to the same period in 2012. We expect general and administrative expenses as a percentage of revenues to remain relatively stable 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 various taxing 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 37.1% and 38.3% for the nine months ended September 30, 2013 and 2012, respectively. The decrease in the effective tax rate is attributable to a tax basis deduction of an investment, the impact of deductible gains related to our Employee Supplemental Savings Plan and provisions in the American Taxpayer Relief Act of 2012 (the Act) that took effect on January 2, 2013. The Act retroactively restored certain tax positions on our 2012 tax return. We expect the effective tax rate to remain stable for the remainder of the year. Equity in losses of unconsolidated subsidiaries We account for our investment in the Fluor-ManTech Logistics Solutions, LLC under the equity method of accounting. We recorded $0.8 million and $0 in equity method losses for the nine months ended September 30, 2013 and 2012, respectively.
Net income
The decrease in net income was due to the reduction in revenues and margin pressure due to a shift to cost-reimbursable contract awards as well as the competitive market place. While we believe our cost-reimbursable contract mix will remain stable, given the competitive market place and budgetary constraints of our customer, we expect continued pressure on net income. Backlog
At September 30, 2013 and December 31, 2012, our backlog was $5.4 billion and $6.5 billion, respectively, of which $1.2 billion and $1.8 billion, respectively, was funded backlog. The decrease in our backlog is primarily due to reduced demand on OCO contracts during 2013 as well as lower expected demand in future periods due to the accelerated withdrawal from Afghanistan. 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 September 30, 2013, the Company's cash and cash equivalents balance was $258.7 million. There were no outstanding borrowings under our revolving credit facility at September 30, 2013. At September 30, 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 September 30, 2013 was $499.8 million. At September 30, 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 borrow 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. Our accounts receivable days sales outstanding (DSO) was 78 and 66 for the nine months ended September 30, 2013 and 2012. For the nine months ended September 30, 2013 and 2012, our net cash flows from operating activities were $166.1 million and $188.3 million, respectively. The decrease in net cash flows from operating activities during the nine months ended September 30, 2013 when compared to the same period in 2012 was primarily due to lower net income and increased DSO. 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 nine months ended September 30, 2013 and 2012, our net cash outflows from investing activities were $20.1 million and $71.7 million, respectively. During the nine months ended September 30, 2013, our net cash outflows from investing activities were primarily due to the acquisition of ALTA Systems, Inc. and capital expenditures. During the nine months ended September 30, 2012, our net cash outflows from investing activities were due to the acquisitions of HBGary, Inc. and Evolvent Technologies, Inc. as well as capital expenditures.


Cash Flows from Financing Activities
For the nine months ended September 30, 2013 and 2012, our net cash outflows from financing activities were $22.2 million and $22.1 million, respectively. During the nine months ended September 30, 2013 and 2012, our net cash outflows from financing activities resulted primarily from dividends paid. Capital Resources
We believe the capital resources available to us from our cash on hand of $258.7 million at September 30, 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 rates 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 nine months ended September 30, 2013 and 2012 (in thousands):

                                                            Nine months ended
                                                              September 30,
                                                            2013          2012
Borrowings under revolving credit facility              $   -          $  9,000
Repayment of borrowings under revolving credit facility $   -          $ (9,000 )

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 nine month periods ended September 30, 2013 and 2012, we declared and paid three dividends in the amount of $0.21 per share on both classes 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, . . .

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