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MANT > SEC Filings for MANT > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for MANTECH INTERNATIONAL CORP

Form 10-Q for MANTECH INTERNATIONAL CORP


1-Aug-2014

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 or other federal budget constraints generally;

uncertainty regarding the timing and nature of government action to complete the budget and appropriations process, continue federal government operations or address other budgetary constraints 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;

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

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

failure to successfully integrate 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;

adverse changes in business conditions that may cause our investments in recorded goodwill to become impaired;

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

failure to maintain strong relationships with other contractors;

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

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.

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, 2013 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 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. Over the past two years, financial performance in our industry has been adversely impacted by public and political pressure regarding government funding levels, uncertainty about the appropriations process, and delays in awards and spending. In addition, as U.S. forces have withdrawn from Afghanistan, revenues from our contracts in support of Overseas Contingency Operations (OCO) have substantially declined. The delays in awards from 2013 and the first half of 2014 have had continued impacts in 2014. Despite uncertainties over the past two years, we believe we are well positioned to meet our customers' needs and grow our business as we move through 2014 and beyond.

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, 2013, previously filed with the SEC.

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

The following table sets forth certain items from our 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 June 30, 2013 to June 30, 2014.

                                     Three months ended
                                          June 30,                             Period-to-Period Change
                       2014           2013          2014         2013                2013 to 2014
                             Dollars                    Percentage              Dollars        Percentage
                                                   (dollars in thousands)
REVENUES           $  463,381     $  605,129        100.0 %      100.0  %   $    (141,748 )       (23.4 )%
Cost of services      399,789        523,039         86.3 %       86.4  %        (123,250 )       (23.6 )%
General and
administrative
expenses               39,522         43,419          8.5 %        7.2  %          (3,897 )        (9.0 )%
OPERATING INCOME       24,070         38,671          5.2 %        6.4  %         (14,601 )       (37.8 )%
Loss on
extinguishment of
debt                  (10,074 )            -          2.2 %          -  %         (10,074 )      (100.0 )%
Interest expense       (1,106 )       (4,062 )        0.2 %        0.7  %           2,956         (72.8 )%
Interest income            31            113            - %          -  %             (82 )       (72.6 )%
Other income
(expense), net              8            (90 )          - %          -  %              98        (108.9 )%
INCOME FROM
OPERATIONS BEFORE
INCOME TAXES AND
EQUITY METHOD
INVESTMENTS            12,929         34,632          2.8 %        5.7  %         (21,703 )       (62.7 )%
Provision for
income taxes           (5,156 )      (13,081 )        1.1 %        2.1  %           7,925         (60.6 )%
Equity in losses
of unconsolidated
subsidiaries              (65 )            -            - %          -  %             (65 )      (100.0 )%
NET INCOME         $    7,708     $   21,551          1.7 %        3.6  %   $     (13,843 )       (64.2 )%

Revenues

The primary driver of our decrease in revenues relates to reduced demand for services supporting Overseas Contingency Operations (OCO) as a result of the withdrawal of U.S. forces and reduction in military operations in Afghanistan. The reduction in our OCO related work in 2014 as compared to the same period in 2013 was primarily due to reduced demand on a sustainment contract for Mine-Resistance Ambush-Protected (MRAP) vehicles and reduced demand for field service support on C4ISR systems.


Cost of services

The decrease in cost of services was primarily due to reductions in revenues. As a percentage of revenues, direct labor costs were 42.8% for the three months ended June 30, 2014, compared to 38.2% for the same period in 2013. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, were 43.5% for the three months ended June 30, 2014, compared to 48.2% for the same period in 2013.

General and administrative expenses

The decrease in general and administrative expenses was due to cost reduction measures as well as certain cost being classified as cost of services instead of general and administrative expenses in 2014. We classify indirect costs in a manner consistent with disclosure statements filed with and approved by the Defense Contract Management Agency. Effective January 1, 2014, updates to our disclosure statements resulted in changes to the presentation of certain costs. Changes such as these do not impact the overall expense incurred or operating income and are presented prospectively. While overall general and administrative expenses decreased, general and administrative expenses as a percentage of revenues increased for the three months ended June 30, 2014 when compared to the same period in 2013, largely due to the decline in revenues relative to levels of indirect spending.

Loss on extinguishment of debt

On April 15, 2014, we paid the redemption price plus accrued and unpaid interest on our 7.25% senior unsecured notes. The 7.25% senior unsecured notes were redeemed, at a redemption price of 103.625% of the principal amount of the outstanding 7.25% senior unsecured notes, or $207.3 million. As a result of the redemption of our 7.25% senior unsecured notes, we recorded a loss on the extinguishment of debt for $10.1 million for the three months ended June 30, 2014.

Interest expense

The decrease in interest expense was primarily due to the redemption of the 7.25% senior unsecured notes on April 15, 2014, which resulted in 15 days of interest expense during the three months ended June 30, 2014, compared to 90 days during the three months ended June 30, 2013.

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 40.1% and 37.8% for the three months ended June 30, 2014 and 2013, respectively. The increase in the effective tax rate is attributable to 2013 tax credits that are no longer available in 2014 and a tax basis deduction on an investment taken in 2013.

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 $0.1 million and $0 in equity method losses for the three months ended June 30, 2014 and 2013, respectively.

Net income

The decrease in net income was due to the reduction in revenues and margin pressure due to the competitive marketplace, loss on the extinguishment of debt, and investments the company is making in strategic initiatives.


Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

The following table sets forth certain items from our 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 June 30, 2013 to
June 30, 2014.

                                       Six months ended
                                           June 30,                              Period-to-Period Change
                       2014           2013           2014          2013                2013 to 2014
                             Dollars                     Percentage               Dollars        Percentage
                                                    (dollars in thousands)
REVENUES           $  915,414     $ 1,251,137        100.0  %      100.0  %   $    (335,723 )       (26.8 )%
Cost of services      792,798       1,085,336         86.6  %       86.7  %        (292,538 )       (27.0 )%
General and
administrative
expenses               78,504          90,759          8.6  %        7.3  %         (12,255 )       (13.5 )%
OPERATING INCOME       44,112          75,042          4.8  %        6.0  %         (30,930 )       (41.2 )%
Loss on
extinguishment of
debt                  (10,074 )             -          1.1  %          -  %         (10,074 )      (100.0 )%
Interest expense       (5,225 )        (8,113 )        0.5  %        0.6  %           2,888         (35.6 )%
Interest income           208             226            -  %          -  %             (18 )        (8.0 )%
Other income
(expense), net            (33 )           (44 )          -  %          -  %              11         (25.0 )%
INCOME FROM
OPERATIONS BEFORE
INCOME TAXES AND
EQUITY METHOD
INVESTMENTS            28,988          67,111          3.2  %        5.4  %         (38,123 )       (56.8 )%
Provision for
income taxes          (11,524 )       (25,380 )        1.3  %        2.1  %          13,856         (54.6 )%
Equity in losses
of unconsolidated
subsidiaries             (122 )             -            -  %          -  %            (122 )      (100.0 )%
NET INCOME         $   17,342     $    41,731          1.9  %        3.3  %   $     (24,389 )       (58.4 )%

Revenues
The primary driver of our decrease in revenues relates to reduced demand for services supporting Overseas Contingency Operations (OCO) as a result of the withdrawal of U.S. forces and reduction in military operations in Afghanistan. The reduction in our OCO related work in 2014 as compared to the same period in 2013 was primarily due to reduced demand on a sustainment contract for Mine-Resistance Ambush-Protected (MRAP) vehicles and reduced demand for field service support on C4ISR systems. In addition, we had a surge in equipment deliveries in the first quarter of 2013 on a contract for IT infrastructure modernization in the intelligence area. We expect the withdrawal from Afghanistan to continue to negatively impact revenues related to our contracts that support OCO during the remainder of 2014.

Cost of services

The decrease in cost of services was primarily due to lower revenues. As a percentage of revenues, direct labor costs were 43.3% for the six months ended June 30, 2014, compared to 36.9% for the same period in 2013, which was primarily due to the decrease in other direct costs on OCO related contracts and fewer deliveries of equipment on an intelligence contract. 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 43.3% for the six months ended June 30, 2014, compared to 49.8% for the same period in 2013 due to a reduction in other direct costs on our OCO related contracts. We expect cost of services as a percentage of revenues to remain relatively stable for the remainder of the year.

General and administrative expenses

The decrease in general and administrative expenses was due to cost reduction measures as well as certain cost being classified as cost of services instead of general and administrative expenses in 2014. We classify indirect costs in a manner consistent with disclosure statements filed with and approved by the Defense Contract Management Agency. Effective January 1, 2014, updates to our disclosure statements resulted in changes to the presentation of certain costs. Changes such as these do not impact the


overall expense incurred or operating income and are presented prospectively. While overall general and administrative expenses decreased, general and administrative expenses as a percentage of revenues, increased for the six months ended June 30, 2014 when compared to the same period in 2013, largely due to the decline in revenues relative to levels of indirect spending. We expect general and administrative expenses as a percentage of revenues to remain relatively stable for the remainder of the year.

Loss on extinguishment of debt

On April 15, 2014, we paid the redemption price plus accrued and unpaid interest on our 7.25% senior unsecured notes. The 7.25% senior unsecured notes were redeemed, at a redemption price of 103.625% of the principal amount of the outstanding 7.25% senior unsecured notes, or $207.3 million. As a result of the redemption of our 7.25% senior unsecured notes, we recorded a loss on the extinguishment of debt for $10.1 million for the six months ended June 30, 2014.

Interest expense

The decrease in interest expense was primarily due to the redemption of the 7.25% senior unsecured notes on April 15, 2014. We expect interest expense to 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 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 39.9% and 37.8% for the six months ended June 30, 2014 and 2013, respectively. The increase in the effective tax rate is attributable to 2013 tax credits that are no longer available in 2014 and a tax basis deduction on investment taken in 2013. We expect the effective tax rate to decrease 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 $0.1 million and $0 in equity method losses for the six months ended June 30, 2014 and 2013, respectively. We expect the equity in losses of unconsolidated subsidiaries to remain stable 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 the competitive market place, loss on extinguishment of debt, and investments the company is making in strategic initiatives. While the loss on extinguishment of debt was a one-time event, we expect the competitive marketplace and budgetary constraints of our customers to continue to adversely impact net income.

Backlog

At June 30, 2014 and December 31, 2013, our backlog was $3.8 billion and $3.9 billion, respectively, of which $1.0 billion and $1.1 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, 2013, 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 June 30, 2014, the Company's cash and cash equivalents balance was $30.7 million. There were outstanding borrowings of $55.0 million under our revolving credit facility at June 30, 2014. At June 30, 2014, we were contingently liable under letters of credit totaling $0.8 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 June 30, 2014 was $444.2 million. On April 15, 2014, we paid the redemption price plus accrued and unpaid interest on our 7.25% senior unsecured notes. The 7.25% senior unsecured notes were redeemed, at a redemption price of 103.625% of the principal amount of the outstanding 7.25% senior unsecured notes, or $207.3 million. 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) were 79 and 76 as of June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, our net cash flows from operating activities were $60.0 million and $89.1 million, respectively. The decrease in net cash flows from operating activities during the six months ended June 30, 2014 when compared to the same period in 2013 was primarily due to lower net income.
Cash Flows from Investing Activities
Our cash flows from investing activities consist primarily of business combinations, purchases of property and equipment and investments in capitalized software for internal use. For the six months ended June 30, 2014 and 2013, our net cash outflows from investing activities were $130.0 million and $15.8 million, respectively. During the six months ended June 30, 2014, our net cash outflows from investing activities were primarily due to the acquisitions of 7Delta Inc. and Allied Technology Group, Inc. in addition to our investments in capitalized software for internal use. During the six months ended June 30, 2013, our net cash outflows from investing activities were primarily due to the acquisition of ALTA Systems, Inc. and capital expenditures. Cash Flows from Financing Activities
For the six months ended June 30, 2014 and 2013, our net cash outflows from financing activities were $168.3 million and $14.7 million, respectively. During the six months ended June 30, 2014, our net cash outflows from financing activities resulted primarily from repayments of our 7.25% senior unsecured notes and dividends paid, partially offset by borrowings under our revolving credit facility, net of repayments. During the six months ended June 30, 2013, our net cash outflows from financing activities resulted primarily from dividends paid.
Capital Resources
We believe the capital resources available to us from cash on hand of $30.7 million at June 30, 2014, the $500.0 million available 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 acquisitions and our longer-term internal growth through one or more of the following sources: cash from operations, use of our revolving credit facility; and additional borrowing or issuance of debt or 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.

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 six months ended June 30, 2014 and 2013, we declared and paid two 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 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 2013 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on February 21, 2014.

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 . . .

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