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MANT > SEC Filings for MANT > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for MANTECH INTERNATIONAL CORP

Form 10-K for MANTECH INTERNATIONAL CORP


21-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the notes to those statements included in Item 8 "Financial Statements and Supplemental Data." This discussion contains forward-looking statements that involve risks and uncertainties. For a description of these forward-looking statements, refer to Part I "Forward-Looking Statements." A description of factors that could cause actual results to differ materially from the results we anticipate include, but are not limited to, those discussed in Item 1A "Risk Factors," as well as discussed elsewhere in this Annual Report.

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 Investigation (FBI); the healthcare and space communities; and other U.S. federal government customers.

We derive revenues primarily from contracts with U.S. government agencies that are focused on national security and consequently our operational results are affected by U.S. government spending levels in the areas of defense, intelligence and homeland security. During 2013, our financial performance was adversely impacted by the same factors affecting government services providers generally; public and political pressure regarding government funding levels, combined with uncertainty about the appropriations process, caused delays in awards and spending. 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 lasting 16 days, further impacting certain of our programs. Our customers now have approved budgets through September 30, 2014 and a solid framework for a year longer. Although the delays in procurements and cautious spending in 2013 will continue to impact our business in the short term, we believe that the recent budget clarity will allow our customers to accelerate the procurement of services. We are well positioned to meet our customers' needs and grow our business as we move through 2014 and beyond.

Revenues

Substantially all of our revenues are derived from services and solutions provided to the federal government or to prime contractors supporting the federal government, including services provided by our employees, our subcontractors and through solutions that include third-party hardware and software that we purchase and integrate as a part of our overall solutions. These requirements may vary from period-to-period depending on specific contract and customer requirements. The following table shows revenues from each type of customer as a percentage of total revenues for the periods presented.

                                                              Year Ended
                                                             December 31,
                                                   2013          2012          2011
Department of Defense and intelligence agencies      95.6 %        95.4 %        96.6 %
Federal civilian agencies                             3.4 %         3.8 %         2.6 %
State agencies, international agencies and
commercial entities                                   1.0 %         0.8 %         0.8 %
Total                                               100.0 %       100.0 %       100.0 %

Several years ago, management decided to pursue a prime position on contracts by bidding as a prime and through the acquisition of companies holding a prime position on desired contract vehicles. As a result, our prime contract revenues as a percentage of our total revenues have increased each year since 2008. The following table shows our revenues as prime contractor and as subcontractor as a percentage of our total revenues for the following periods:

                         Year Ended
                        December 31,
                  2013      2012      2011
Prime contractor  91.2 %    89.9 %    85.6 %
Subcontractor      8.8 %    10.1 %    14.4 %
Total            100.0 %   100.0 %   100.0 %

We provide our services and solutions under three types of contracts:
cost-reimbursable; time-and-materials; and fixed-price.

Cost-reimbursable contracts-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 cost-reimbursable contracts we recognize revenues and an estimate of applicable fees earned as costs are incurred. We consider fixed fees under cost-reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the contract. For performance based fees under cost-reimbursable contracts, we recognize the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as our prior award experience and communications with the customer regarding performance, or upon customer approval.

Fixed-price contracts-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. Revenues on fixed-price contracts that provide for the Company to render services throughout a period is recognized as earned according to contract terms as the service is provided on a proportionate performance basis. For fixed-price contracts that provide for the delivery of a specific product with related customer acceptance provisions, revenues are recognized as those products are delivered and accepted.

Time-and-materials contracts-Under time-and-materials contracts, we are reimbursed for labor at fixed hourly rates and generally reimbursed separately for allowable materials, costs and expenses at cost. We recognize revenues under time-and-


materials contracts by multiplying the number of direct labor hours expended by the contract billing rates and adding the effect of other billable direct costs.

Our contract mix varies from year-to-year due to numerous factors, including our business strategies and federal government procurement objectives. Over the last few years, our customers have increasingly procured our services using cost-reimbursable contracts. The following table shows revenues from each of these types of contracts as a percentage of total revenues for the periods presented.

                           Year Ended
                          December 31,
                    2013      2012      2011
Cost-reimbursable   72.3 %    51.0 %    33.6 %
Fixed-price         16.8 %    16.2 %    15.9 %
Time-and-materials  10.9 %    32.8 %    50.5 %
Total              100.0 %   100.0 %   100.0 %

Under cost-reimbursable contracts, there is limited financial risk, because we are reimbursed for all allowable direct and indirect costs. However, profit margins on this type of contract tend to be lower than on time-and-materials and fixed-price contracts, and as a result of the shift in our contract mix, our profits have been impacted.

Cost of Services

Cost of services primarily includes direct costs incurred to provide our services and solutions to customers. The most significant portion of these costs are direct labor costs, including salaries and wages, plus associated fringe benefits of our employees directly serving customers, in addition to the related management, facilities and infrastructure costs. Cost of services also includes other direct costs, such as the costs of subcontractors and outside consultants and third-party materials, including hardware or software that we purchase and provide to the customer as part of an integrated solution.

Changes in the mix of services and equipment provided under our contracts can result in variability in our contract margins. Since we earn higher profits on our own labor services, we expect the ratio of cost of services as a percent of revenues to decline when our labor services mix increases relative to subcontracted labor or third-party materials. Conversely, as subcontracted labor or third-party material purchases for customers increase relative to our own labor services, we expect the ratio of cost of services as a percent of revenues to increase.

The proportion that costs of services bears to revenues varies in part based on our mix of revenues by contract type. In general, cost-reimbursable contracts are the least profitable of our government contracts but offer the lowest risk of loss. Under time-and-materials contracts, to the extent that our actual labor costs are higher or lower than the billing rates under the contract, our profit under the contract may either be greater or less than we anticipated or we may suffer a loss under the contract. In general, we realize a higher profit margin on work performed under time-material contracts than cost-reimbursable contracts. Fixed-price contracts generally offer higher profit margins opportunities but involve great financial risk because we bear impact of cost overruns in return for the full benefit of any cost savings.

General and Administrative Expenses

General and administrative expenses include the salaries and wages, plus associated fringe benefits of our employees not performing work directly for customers, and associated facilities costs. Among the functions covered by these costs are corporate business development, bid and proposal, contracts administration, finance and accounting, legal, corporate governance and executive and senior management. In addition, we included stock-based compensation, as well as depreciation and amortization expense related to the general and administrative function. Depreciation and amortization expenses include the depreciation of computers, furniture and other equipment, the amortization of third party software we use internally, leasehold improvements and intangible assets. Intangible assets include customer relationships and contract backlogs acquired in business combinations, and are amortized over their estimated useful lives.

Interest Expense

Interest expense is primarily related to interest expense incurred or accrued under our outstanding borrowings on our 7.25% senior secured notes and deferred financing charges.


Interest Income

Interest income is primarily from cash on hand and notes receivable.

Results of Operations

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Consolidated Statements of Income and Loss

The following table sets forth certain items from our consolidated statements of income and loss and the relative percentages that certain items of expense and earnings bear to revenues as well as the year-over-year change from December 31, 2012 to December 31, 2013.

                                             Year Ended
                                            December 31,                            Year-to-Year Change
                           2013            2012           2013         2012             2012 to 2013
                                  Dollars                    Percentages           Dollars        Percent
                                                      (dollars in thousands)
REVENUES               $ 2,310,072     $ 2,582,295        100.0 %      100.0 %   $ (272,223 )      (10.5 )%
Cost of services         1,995,630       2,213,894         86.4 %       85.7 %     (218,264 )       (9.9 )%
General and
administrative
expenses                   173,772         197,413          7.5 %        7.7 %      (23,641 )      (12.0 )%
Goodwill impairment        118,427               -          5.1 %          - %      118,427        100.0  %
OPERATING INCOME            22,243         170,988          1.0 %        6.6 %     (148,745 )      (87.0 )%
Interest expense           (16,266 )       (16,304 )        0.7 %        0.6 %           38         (0.2 )%
Interest income                608             344            - %          - %          264         76.7  %
Other income
(expense), net                 (32 )           (74 )          - %          - %           42        (56.8 )%
INCOME FROM OPERATIONS
BEFORE INCOME TAXES
AND EQUITY METHOD
INVESTMENTS                  6,553         154,954          0.3 %        6.0 %     (148,401 )      (95.8 )%
Provision for income
taxes                      (11,842 )       (59,935 )        0.5 %        2.3 %       48,093        (80.2 )%
Equity in losses of
unconsolidated
subsidiaries                  (860 )             -            - %          - %         (860 )     (100.0 )%
NET INCOME (LOSS)      $    (6,149 )   $    95,019          0.2 %        3.7 %   $ (101,168 )     (106.5 )%

Revenues

The primary driver of our decrease in revenue relates to reduced demand for services supporting Overseas Contingency Operations (OCO) as a result of the accelerated withdrawal of U.S. forces and reduction in military operations in Afghanistan. The reduction in our OCO related work in 2013 was primarily due to reduced demand on a sustainment contract for Mine-Resistant Ambush-Protected (MRAP) vehicles and reduced demand for field service support on C4ISR systems. These reductions were partially offset by revenue provided from contracts in the intelligence area, including contracts for IT infrastructure modernization and from growth from healthcare IT programs. We expect the continued withdrawal from Afghanistan to impact revenues from our contracts providing OCO support throughout 2014.

Cost of services

The decrease in cost of services was primarily due to reductions in revenue. As a percentage of revenues, direct labor costs increased to 37.9% for the year ended December 31, 2013, as compared to 36.1% 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 48.5% for the year ended December 31, 2013, compared to 49.6% for the same period in 2012. We expect cost of services as a percentage of revenues to remain the same or slightly increase in 2014.


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 was slightly lower for the year ended December 31, 2013 when compared to the same period in 2012. We expect general and administrative expenses as a percentage of revenues to remain relatively stable in 2014.

Goodwill impairment

During the fourth quarter of 2013, multiple events and circumstances indicated a significant reduction in the operating performance outlook of one of our reporting units. These events included being awarded fewer contracts than anticipated on several competitive opportunities, changing mission priorities of the U.S. government in relation to certain of our C4ISR contracts and OCO-related work (primarily on maintenance and sustainment of MRAP vehicles), continued delays in our customers' procurement cycle due, in part, to the U.S. government shutdown, and continued margin pressure on some of our contracts. The culmination of these events led us to conduct an interim impairment analysis on the impacted reporting unit. As a result of this analysis, we recorded a non-cash impairment charge of $118.4 million for the period ending December 31, 2013. For additional information, see "Critical Accounting Estimates and Policies - Accounting for Business Combinations, Goodwill and Other Intangible Assets" and Note 7 to our consolidated financial statements in Item 8.

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 208.0% and 38.7% for the years ended December 31, 2013 and 2012, respectively. The increase in the effective tax rate is due to the non-deductible portion of the non-cash goodwill impairment charge. We expect the effective tax rate to be more in line with our historical rates in 2014.

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 $(0.9) million and $0 in equity method losses for the years ended December 31, 2013 and 2012, respectively.

Net income (loss)

The decrease in net income (loss) was due to a non-cash goodwill impairment charge, a reduction in revenues and margin pressure due to a shift to cost-reimbursable contract awards as well as the competitive market place. To see net income exclusive of the non-cash goodwill impairment charge, see "Non-GAAP Financial Measures" below.


Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Consolidated Statements of Income

The following table sets forth certain items from our consolidated statements of
income and the relative percentages that certain items of expense and earnings
bear to revenues as well as the year-over-year change from December 31, 2011 to
December 31, 2012.

                                            Year Ended
                                           December 31,                           Year-to-Year Change
                           2012            2011          2012        2011            2011 to 2012
                                  Dollars                   Percentages          Dollars       Percent
                                                    (dollars in thousands)
REVENUES               $ 2,582,295     $ 2,869,982       100.0 %     100.0 %   $ (287,687 )     (10.0 )%
Cost of services         2,213,894       2,453,679        85.7 %      85.5 %     (239,785 )      (9.8 )%
General and
administrative
expenses                   197,413         188,949         7.7 %       6.6 %        8,464         4.5  %
OPERATING INCOME           170,988         227,354         6.6 %       7.9 %      (56,366 )     (24.8 )%
Interest expense           (16,304 )       (15,791 )       0.6 %       0.5 %         (513 )       3.2  %
Interest income                344             332           - %         - %           12         3.6  %
Other income
(expense), net                 (74 )         3,607           - %       0.1 %       (3,681 )    (102.1 )%
INCOME FROM OPERATIONS
BEFORE INCOME TAXES        154,954         215,502         6.0 %       7.5 %      (60,548 )     (28.1 )%
Provision for income
taxes                      (59,935 )       (82,196 )       2.3 %       2.9 %       22,261       (27.1 )%
NET INCOME             $    95,019     $   133,306         3.7 %       4.6 %   $  (38,287 )     (28.7 )%

Revenues

The primary driver of our decrease in revenues relates to reductions on our C4ISR support contracts and contracts that have ended. These reductions were partially offset by revenues provided from new contract awards in the intelligence area. 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

The decrease in cost of services was primarily due to the decrease in revenues. As a percentage of revenues, direct labor costs increased to 36.1% for the year ended December 31, 2012, as compared to 34.2% 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 51.3% for the year ended December 31, 2011 to 49.6% for the same period in 2012 due to a reduction in other direct costs on the C4ISR support contracts.

General and administrative expenses

The increase in general and administrative expense was primarily due our acquisitions and facility related costs from newly leased office space.

Other income (expense), net

The decrease in other income (expense), net was due to the sale of our investment in NetWitness in April 2011, which resulted in a gain of $3.7 million for the year ended December 31, 2011.


Provision for income taxes

Our effective income tax rates were 38.7% and 38.1% for the years ended December 31, 2012 and 2011, respectively. Our tax rate is affected by recurring items, such as tax rates and the relative amount of income we earn in jurisdictions, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The difference between our statutory U.S. federal income tax rate of 35.0% and our effective tax rate is state income taxes and non-deductible compensation.

Net income

The decrease was due to lower revenues, increased general and administrative expense and margin pressure on our contracts, both from the shift in contract type to cost-reimbursable and increased competitive market place.

Non-GAAP Financial Measures
Item 10(e) of Regulation S-K and other provisions of the securities laws
regulate the use of financial measures that are not prepared in accordance with generally accepted accounting principles in the United States (GAAP). We are providing certain non-GAAP financial measures in this Annual Report on Form 10-K because we believe these non-GAAP measures provide important supplemental information to the GAAP financial measures contained in our consolidated financial statements. We believe these non-GAAP measures, which exclude the impact of the non-cash goodwill impairment charge taken in the fourth quarter of fiscal year 2013, provide useful information to our investors to better evaluate period-to-period comparisons of our operating results. Similarly, management uses these non-GAAP measures to gain a better understanding of our comparative operating performance from period-to-period and as a basis for forecasting future periods.
The following table is a reconciliation of our unaudited non-GAAP financial measures (in thousands, except per share data):

                                                           Year Ended
                                                          December 31,
                                           2013               2012               2011
Net income (loss)                    $       (6,149 )   $       95,019     $      133,306
Non-GAAP adjustments:
Goodwill impairment                         118,427                  -                  -
Tax effects                                 (32,717 )                -                  -
Adjusted non-GAAP net income         $       79,561     $       95,019     $      133,306

Basic earnings (loss) per share
(Class A and Class B)                $        (0.17 )   $         2.57     $         3.64
Non-GAAP adjustments                 $         2.31     $            -     $            -
Adjusted basic earnings per share
(Class A and Class B)                $         2.14     $         2.57     $         3.64

Diluted earnings (loss) per share
(Class A and Class B)                $        (0.17 )   $         2.57     $         3.63
Non-GAAP adjustments                 $         2.31     $            -     $            -
Adjusted diluted earnings per share
(Class A and Class B)                $         2.14     $         2.57     $         3.63

Backlog

For the years ended December 31, 2013, 2012 and 2011 our backlog was $3.9 billion, $6.5 billion and $4.7 billion, respectively, of which $1.1 billion, $1.8 billion and $1.3 billion, respectively, was funded backlog. The decrease in our backlog is primarily due to reduced demand on OCO contracts resulting from the accelerated withdrawal from Afghanistan. Backlog represents estimates that we calculate on a consistent basis. For additional information on how we compute backlog, see "Backlog" in Item 1 "Business."


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 December 31, 2013, our cash and cash equivalents balance was $269.0 million. There were no outstanding borrowings under our revolving credit facility at December 31, 2013. At December 31, 2013, we were contingently liable under letters of credit totaling $0.2 million, which reduces our ability to borrow under our revolving credit facility by that amount. The maximum available borrowings under our revolving credit facility at December 31, 2013 was $499.8 million. At December 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 8.

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 may become 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 flow is 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 84 and 79 for the years ended December 31, 2013 and 2012. For the years ended December 31, 2013, 2012 and 2011, our net cash flows from operating activities were $188.3 million, $126.3 million and $221.4 million, respectively. The increase in net cash flows from operating activities during the year ended December 31, 2013 when compared to the same period in 2012 was primarily due to the collection of accounts receivable and the timing of payments to our vendors and employees. The decrease in net cash flows from operating activities during the year ended December 31, 2012 compared to the same period in 2011 was primarily due to decreased billings in excess of revenue earned, lower net income, and the timing of payments under incentive compensation plans.

Cash Flows from Investing Activities

Our cash flow from investing activities consists primarily of business combinations, purchases of property and equipment and investments in capitalized software for internal use. For the year ended December 31, 2013, 2012 and 2011 . . .

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