MANTECH INTERNATIONAL CORP - Quarter Report: 2005 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

or

For the transition period from              to             

Commission File No. 000-49604

ManTech International Corporation

(Exact name of registrant as specified in its charter)

(703) 218-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    x  Yes    ¨  No

As of May 3, 2005, there were issued and outstanding 17,590,454 shares of our Class A Common Stock and 15,065,293 shares of our Class B Common Stock.

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MANTECH INTERNATIONAL CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2005

INDEX

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MANTECH INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

See notes to condensed consolidated financial statements.

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MANTECH INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands Except Per Share Amounts)

See notes to condensed consolidated financial statements.

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MANTECH INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

See notes to condensed consolidated financial statements.

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MANTECH INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

See notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

(Dollars in thousands, except per share amounts or where otherwise noted)

UNAUDITED

1. Introduction and Overview

ManTech International Corporation (depending on the circumstances, “ManTech” “we” “our” “ours” or “us”) is a leading provider of innovative technologies and solutions for mission-critical national security programs for the Intelligence Community and the Departments of Defense, State, Homeland Security, Justice and other federal government agencies. Our expertise includes systems engineering, systems integration, software development, enterprise security architecture, information assurance, intelligence operations support, network and critical infrastructure protection, information technology, communications integration and engineering support. With approximately 5,400 highly qualified employees, we operate in the United States and 40 countries worldwide.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to those rules and regulations. We recommend that you read these unaudited condensed consolidated financial statements in conjunction with the financial statements and related notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2004, previously filed with the SEC. We believe that the unaudited condensed consolidated financial statements in this Form 10-Q reflect all adjustments that are necessary to fairly present the financial position, results of operations and cash flows for the interim periods. We have revised the December 31, 2004 Condensed Consolidated Balance Sheet and related notes, as well as the March 31, 2004 Condensed Consolidated Statement of Income and Condensed Consolidated Statement of Cash Flow, to reflect the reclassification of MSM Security Services, Inc. (MSM) to discontinued operations. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Stock-Based Compensation—As permitted under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, we account for our stock-based compensation plan using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. For the quarter ended March 31, 2005 and 2004, we recognized pre-tax compensation expense of approximately $7 and none, respectively. No compensation cost was recognized for issuances under the plan in the quarter ended March 31, 2005, and the exercise price of all other options granted pursuant to the plan was not less than 100% of the fair market value of the shares on the date of grant. In accordance with the provisions of SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, the following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

We typically issue 10-year options that vest annually over a three-year period from the date of grant. For disclosure purposes, the fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for option grants during the three months ended March 31, 2005 and 2004, respectively: dividend yield of zero percent; expected volatility of 45.0% and 33.4%; expected average lives of three years; and risk-free interest rates of 3.93% and 2.17%.

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3. Earnings per Share

Basic earnings per share has been computed by dividing net income by the weighted average number of common shares outstanding during each period. Shares issued during the period and shares re-acquired during the period, if any, are weighted for the portion of the period for which they were outstanding. Diluted earnings per share have been computed in a manner consistent with that of basic earnings per share, while giving effect to all potentially dilutive common shares that were outstanding during each period. The weighted average number of common shares outstanding is computed as follows:

Options to purchase 0.6 million and 0.2 million shares of common stock were outstanding March 31, 2005 and 2004, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

4. Goodwill and Other Intangibles

Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. Under SFAS 142, goodwill is to be reviewed at least annually for impairment; we have elected to perform this review annually during the second quarter each calendar year. These reviews resulted in no adjustments in goodwill.

In February 2005, we classified our ManTech MSM Security Services, Inc. (MSM) subsidiary as discontinued (refer to Note 10: Discontinued Operations). As required under SFAS No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets, we have reclassified assets of MSM as Assets Held for Sale for all periods presented. Goodwill and other intangibles, net of accumulated amortization for MSM totaled $3.4 million as of March 31, 2005 and $3.3 million as of December 31, 2004. On February 11, 2005, we sold our Mantech Environmental Technology, Inc (METI) subsidiary (refer to Note 11: Gain on Disposal of an Operation). For the period ending December 31, 2004, we had $1.4 million in Goodwill associated with METI.

The components of goodwill and other intangibles are as follows:

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As of March 31, 2005:

Aggregated amortization expense for the three months ended March 31, 2005 and 2004 was $1,110 and $1,130, respectively. We estimate that we will have the following amortization expense for the future periods indicated below:

5. Business Segment and Geographic Area Information

We operate as one segment, delivering a broad array of information technology and technical services solutions under contracts with the U.S. government, state and local governments, and commercial customers. Our federal government customers typically exercise independent contracting authority, and even offices or divisions within an agency or department may directly, or through a prime contractor, use our services as a separate customer so long as that customer has independent decision-making and contracting authority within its organization. Our customer, the U.S. Army Communications-Electronic Command Headquarters (CECOM-HQ) accounted for 16.5% and 13.7% of our revenues for the three months ended March 31, 2005 and 2004, respectively. At March 31, 2005 and December 31, 2004, one customer, CECOM-HQ, accounted for 17.6% and 17.0% of our accounts receivable, respectively. In addition, there were no sales to any customers within a single country (except for the United States) where the sales accounted for 10% or more of total revenue. We treat sales to U.S. government customers as sales within the United States regardless of where the services are performed. Substantially all assets of continuing operations were held in the United States for the period ended March 31, 2005 and 2004. Revenues by geographic customer and the related percentages of total revenues for the period ended March 31, 2005 and 2004 were as follows:

In February 2005, we reached a final corporate determination that we would exit the personnel security investigation (PSI) services business and discontinue operations at the MSM subsidiary. Please refer to Note 10: Discontinued Operations for more details related to this determination.

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6. Revenues and Receivables

We deliver a broad array of information technology and technical services solutions under contracts with the U.S. government, state and local governments, and commercial customers. Revenues from the U.S. government under prime contracts and subcontracts, as compared to total contract revenues, were approximately 83.1% and 86.2% for the periods ended March 31, 2005 and 2004, respectively. The components of contract receivables are as follows:

Amounts currently billable consist principally of amounts to be billed within the next month. Revenues recorded in excess of milestone billings on fixed-price contracts consist of amounts not expected to be billed within the next month. Indirect costs incurred in excess of provisional billing rates on U.S. government contracts are generally billable at actual rates less a reduction of 0.5% of the actual general and administrative rate base before a Defense Contract Audit Agency (DCAA) audit is completed. The balance remaining, as well as any retainage, is billable upon completion of the DCAA audit. Revenues recorded in excess of estimated contract value or funding are billable upon receipt of contractual amendments or other modifications. At March 31, 2005, the amount of receivables that we expect to collect after one year is $8.5 million.

7. Commitments and Contingencies

Payments to us on cost-reimbursable contracts with the U.S. government are provisional payments subject to adjustment upon audit by the DCAA. The majority of audits through 2002 have been completed and resulted in no material adjustments. The audits for 2004 and 2003 and the remaining audits for 2002 are not expected to have a material effect on the results of future operations.

In the ordinary course of business, we are involved in certain government and legal proceedings, claims and disputes, and have litigation pending under several suits. We believe that the ultimate resolution of these matters will not have a material effect on our financial position or results of operations.

8. Acquisitions

Acquisition of Certain Assets from Affiliated Computer Services, Inc. — On February 8, 2004, ManTech acquired certain operations from ACS, a provider of systems engineering, network administration, program management, and communications systems support to Department of Defense customers for $6.5 million. The assets acquired from ACS include contracts for providing support to the U.S. Air Force Electronic Systems Center’s Information Technology Services Program. Services provided through these contracts include information technology services, such as program management, systems engineering, network engineering and administration, test and evaluation, and data management.

On June 1, 2004, we acquired additional assets from ACS for $1.5 million. The assets acquired from ACS include contracts for providing support to NATO.

The following table summarizes the estimated fair value of the assets acquired at the date of acquisition, based on an independent appraisal. No liabilities were assumed.

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9. Debt

On February 25, 2004, we executed the Amended and Restated Credit and Security Agreement with Citizens Bank of Pennsylvania, KeyBank National Association, Branch Banking and Trust Company of Virginia, Chevy Chase Bank, F.S.B., and Riggs Bank, N.A. in order to increase the capacity available under our prior loan agreement. The agreement initially provides for a $125 million revolving credit facility that can be increased to $200 million. The maturity date of the agreement is February 25, 2009. Under the agreement, we are required to maintain specified financial covenants relating to asset coverage, fixed charge coverage, and debt coverage. The agreement also places limitations on additional borrowings, mergers, and related-party transactions, payment of dividends, and contains limitations with respect to capital expenditures. Borrowings under agreement are collateralized by our assets and bear interest at the London Inter-Bank Offer Rate (LIBOR), or the lender’s base rate, plus market-rate spreads that are determined based on a company leverage ratio calculation. As of March 31, 2005, we were in compliance with all covenants under the Credit Agreement.

The maximum available borrowing under the Agreement’s revolving credit facility at March 31, 2005 was $93.5 million. As of March 31, 2005, the Company was contingently liable under letters of credit totaling $6.5 million, which reduces the availability to borrow under the revolving portion of the Agreement.

10. Discontinued Operations

The Condensed Consolidated Financial Statements and related footnote disclosures reflect the ManTech MSM Security Services, Inc. subsidiary as discontinued operations, net of applicable income taxes, for all periods presented in accordance with Statement of Financial Accounting Standards No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets.

In February 2005, we reached the final corporate determination that we would exit the personnel security investigation (PSI) services business and discontinue operations at our ManTech MSM Security Services, Inc. subsidiary (MSM). We reached the determination to sell our MSM subsidiary after we concluded that the MSM business no longer furthered our long-term strategic objectives. Currently, we intend to sell MSM as a going-concern, and are in the process of identifying potential buyers. We expect to complete the sale or other disposition of the MSM operations by the end of 2005. We do not expect to sell MSM at a loss; therefore, no loss accrual was recorded at March 31, 2005.

The following discloses the results of the discontinued operations of MSM for the three months ended March 31, 2005 and 2004:

The following is a summary of the assets and liabilities of the held for sale operations related to MSM at March 31, 2005 and December 31, 2004:

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11. Gain on Disposal of an Operation

On February 11, 2005, ManTech Environmental Technology, Inc. (METI), one of our subsidiaries, was sold to another company, Alion Science and Technology Corporation. METI performs professional services including research and development in the fields of environmental and life sciences for the Environmental Protection Agency, the National Cancer Institute, the U.S. Air Force, and other federal government agencies. The financial terms of the arrangement included an all cash payment of $7 million, which resulted in a pre-tax gain of approximately $3.9 million net of selling costs in the first quarter of 2005. After the sale, we continue to provide professional services in the environmental area for various federal government agencies.

The following discloses the results of the disposal of METI for the three months ended March 31, 2005 and 2004 (METI’s results for 2005 are through February 11^th):

Total assets and liabilities were $3.9 million and $1.0 million, respectively, for METI at December 31, 2004.

12. Subsequent Event

Acquisition of Gray Hawk Systems, Inc.—On May 3, 2005, the Company entered into a definitive agreement to acquire all of the outstanding shares of Gray Hawk Systems, Inc., a provider of critical infrastructure protection, counter-intelligence/counter-terrorism mission support, information processing and warfare systems engineering to the federal government and commercial clients for $100 million in cash. Gray Hawk Systems, Inc., was founded in 1995 and has over 500 employees. For the year ending December 31, 2004, Gray Hawk Systems had revenue of approximately $70 million and total assets of $25 million. The acquisition is subject to various closing conditions and approvals, including approval under the Hart-Scott-Rodino Act, and we expect to complete it in May 2005.

The agreed upon purchase price of $100 million will be financed through available cash and borrowings under our senior credit facility.

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

Introduction and Overview

We are a leading provider of innovative technologies and solutions for mission-critical national security programs for the Intelligence Community and the Departments of Defense, State, Homeland Security, Justice and other federal government customers. Our expertise includes systems engineering, systems integration, software development, enterprise security architecture, information assurance, intelligence operations support, network and critical infrastructure protection, information technology, communications integration and engineering support. With approximately 5,400 highly-qualified employees, we operate in the United States and 40 countries worldwide.

We derive revenue primarily from contracts with U.S. government agencies that are focused on national security. As a result, funding for our programs and services are generally linked to trends in U.S. government spending in the areas of defense, intelligence and homeland security. Leading up to and following the terrorist events of September 11, 2001, the U.S. government substantially increased its overall defense, intelligence and homeland security budgets. Hence, our focus on national security corresponds with our customers’ objective to safeguard the nation. Our business has also benefited from the U.S. government’s increased need for specialized support of ongoing and mission-critical operations, due in part to the growing complexity of technology.

Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31, 2004

We experienced an increase in revenue in the first quarter of 2005, compared to the first quarter of 2004, due to an increase in our defense system support for activities in Iraq, Europe and the United States and the overall increased spending for national and homeland security, as well as our prior acquisitions.

Revenues

Revenues increased 14.7% to $217.5 million for the three months ended March 31, 2005, compared to $189.6 million for the same period in 2004. This increase is partially attributable to forward deployment support in Iraq and Afghanistan and increased

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work in the Intelligence Community contributed to our increase in revenue for the first quarter of 2005. Also contributing to the increase was a full quarter of revenues from our acquisitions of certain operations from Affiliated Computer Services, Inc. (ACS) on February 27, 2004 and June 1, 2004. We anticipate that quarterly revenues will continue at this level, or slightly higher levels, largely because of the United States continuing focus on national security and its efforts in the war on terrorism.

Cost of services

Cost of services increased 16.7% to $179.2 million for the three months ended March 31, 2005, compared to $153.6 million for the same period in 2004. As a percentage of revenues, cost of services increased 1.4%, to 82.4% for the three months ended March 31, 2005, compared to 81.0% for the same period in 2004. Direct labor costs increased by 16.4% primarily due to an increase in personnel, a higher direct labor utilization rate, and increased benefit costs. For the three months ended March 31, 2005, other direct costs increased by 18.6% over first quarter 2004, from $59.4 million to $70.4 million. As a percentage of revenues, other direct costs increased from 31.3% for the three months ended March 31, 2004 to 32.4% for the same period in 2005, due to increased subcontractor usage. For the three months ended March 31, 2005, overhead personnel and facilities costs decreased 0.3% as a percentage of revenue, compared to the same period in 2004.

Gross profit

Gross profit increased 6.1% to $38.3 million for the three months ended March 31, 2005, compared to $36.1 million for the same period in 2004. Gross profit margin was 17.6% for the three months ended March 31, 2005, compared to 19.0% for the same period in 2004. The decrease in gross profit margin is due to higher labor costs including employee benefits, and higher other direct costs including subcontractors as a percentage of sales. These increases were partly offset by lower growth in overhead expenses.

General and administrative

General and administrative expenses increased 14.4% to $19.3 million for the three months ended March 31, 2005, compared to $16.9 million for the same period in 2004. The increased expense primarily relates to an increase in bid and proposal spending as well as an effort to increase our management strength and infrastructure. As a percentage of revenues, general and administrative expenses remained consistent at 8.9% for the three months ended March 31, 2005 and 2004.

Depreciation and amortization

Depreciation and amortization expense increased 16.0% to $1.4 million for the three months ended March 31, 2005, compared to $1.2 million for the same period in 2004. This increase resulted from an additional $0.2 million of depreciation expense related to the acquisition of additional property, plant and equipment.

Income from operations

Income from operations decreased 2.5% to $17.5 million for the three months ended March 31, 2005, compared with $17.9 million for the same period in 2004. This decrease was primarily a result of the increased pass-through sales and costs of direct labor.

Interest Expense, net

Interest expense decreased 37.1% to $0.3 million for the three months ended March 31, 2005, compared with $0.5 million for the same period in 2004. The decrease in interest expense is a result of decreased borrowing under lines of credit during the quarter. The average levels of indebtedness were approximately $25.3 million and $29.5 million, in the three months ended March 31, 2005 and 2004, respectively. In addition, strong collections of receivables and proceeds from the disposal of an operation, $7 million, have led to an improved cash balance of $64.6 million as of March 31, 2005 compared to $4.5 million at March 31, 2004. Interest income increased due to investing the additional cash during the quarter.

Gain on Disposal of an Operation

On February 11, 2005, one of our subsidiaries, Mantech Environmental Technology, Inc (METI), was sold to Alion Science and Technology Corporation. The sale generated a pre-tax gain of $3.9 million in the first quarter of 2005. For additional information see “Gain on Disposal of an Operation,” below.

Other Income (Expense)

Other income for the first quarter of 2005 consisted primarily of income from an investment in a joint venture accounted for under the equity method, partially offset by foreign currency conversion loss for the period. Other income in the first quarter of 2004 consisted of comparable investment income from a joint venture and foreign currency conversion gains.

Net income

Net income increased 5.2% to $11.9 million for the three months ended March 31, 2005, compared to $11.3 million for the same period in 2004. The increase resulted from a $2.3 million after-tax gain on the sale of METI, partially offset by a $1.7 million reduction in net income from discontinued operations; which declined from $0.8 million of net income in the first quarter

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of 2004 to a net loss of $0.9 million in 2005. The results from discontinued operations are due to our MSM subsidiary that was categorized as discontinued during the first quarter of 2005, see comments below. Our effective tax rate for the three months ended March 31, 2005 and 2004 was 40.0% and 40.7%, respectively.

Backlog

At March 31, 2005 and December 31, 2004, our backlog was $1.7 billion and $1.6 billion, respectively, of which $390 million and $444 million, respectively, was funded backlog. At March 31, 2004, our backlog was $1.4 billion, of which $342 million was funded backlog. Backlog and funded backlog represent estimates that we calculate on a consistent basis.

Liquidity and Capital Resources

The Company’s primary source of liquidity is cash provided by operations and our revolving credit facility. Generally, cash provided by operating activities is adequate to fund our operations.

Net cash flows from operating activities

Cash provided by operating activities for the three months ended March 31, 2005 was $33.5 million, compared to $1.8 million of cash provided in operating activities for the three months ended March 31, 2004. In the quarter ended March 31, 2005, increased cash provided by continuing operating activities was primarily the result of an increase in net income of $0.6 million, an increase in current and deferred taxes of $3.3 million, and an increase in accounts payable of $9.0 million which is partly offset by a decrease in accrued salaries and related expenses of $3.3 million. The net cash inflow of $16.1 million from our discontinued operations was due primarily to collections on our Defense Security Services contract and was a significant increase over first quarter 2004, which used cash of $5.8 million.

Net cash flows from investing activities

Cash provided from investing activities was $5.8 million for the three months ended March 31, 2005, compared to cash used of $7.2 million for the same period in 2004. Cash provided from investing activities in 2005 was primarily the result of $7 million in proceeds from the sale of Mantech Environmental Technology, Inc offset by $1.1 million in property, plant, and equipment purchases. Investing activities in the first quarter of 2004 included the acquisition of certain assets from Affiliated Computer Services, Inc. for $6.5 million, and purchases of property of $0.4 million.

Net cash flows from financing activities

Cash provided by financing activities was $2.4 million for the three months ended March 31, 2005, compared to cash provided by financing activities of $0.8 million for the three months ended March 31, 2004. The net cash provided in the first quarter of 2005 resulted primarily from the exercise of stock options. For the same period in 2004, $0.5 million was from an increase in the use of our credit facility along with $0.3 million in proceeds from the exercise of stock options.

Credit Agreement

On February 25, 2004, we executed the Amended and Restated Credit and Security Agreement with Citizens Bank of Pennsylvania, KeyBank National Association, Branch Banking and Trust Company of Virginia, Chevy Chase Bank, F.S.B., and Riggs Bank, N.A., in order to increase the capacity available under our prior loan agreement. The agreement initially provides for a $125.0 million revolving credit facility that can be increased to $200.0 million. The maturity date of the agreement is February 25, 2009. Under the agreement, we are required to maintain specified financial covenants relating to asset coverage, fixed charge coverage, and debt coverage. The agreement also places limitations on additional borrowings, mergers, and related-party transactions, payment of dividends, and contains limitations with respect to capital expenditures. Borrowings under the agreement are collateralized by our assets and bear interest at the London Interbank Offered Rate (LIBOR), or the lender’s base rate, plus market-rate spreads that are determined based on a company leverage ratio calculation. To manage our exposure to the fluctuations in these variable interest rates, we executed an interest swap in December 2001. The swap agreement has a notional principal amount of $25.0 million and currently has a fixed LIBOR rate of 6.83%. As of March 31, 2005, we were in compliance with all material covenants under the Credit Agreement.

We believe the capital resources available to us under our credit agreements and cash from our operations are adequate to fund our ongoing operations and to support the internal growth we expect to achieve for at least the next 12 months. 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; additional borrowing; issuance of equity; use of the existing revolving facility; or a refinancing of our credit facilities.

Gain on Disposal of an Operation

On February 11, 2005, ManTech Environmental Technology, Inc. (METI), one of our subsidiaries, was sold to another company, Alion Science and Technology Corporation. METI performs research and development in the fields of environmental and life sciences for the Environmental Protection Agency, the National Cancer Institute, the U.S. Air Force, and other federal

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government agencies. The financial terms of the arrangement included an all cash payment of $7 million, which resulted in a pre-tax gain of approximately $3.9 million net of selling cost in the first quarter of 2005. After the sale, we continue to provide professional services in the environmental area for various federal government agencies.

Discontinued Operations

In February 2005, we reached the final corporate determination that we would exit the personnel security investigation (PSI) services business and discontinue operations at our ManTech MSM Security Services, Inc. subsidiary (MSM). We reached the determination to sell our MSM subsidiary after we concluded that the MSM business no longer furthered our long-term strategic objectives. Currently, we intend to sell MSM as a going-concern, and are in the process of identifying potential buyers. We expect to complete the sale or other disposition of the MSM operations by the end of 2005. We do not expect to sell MSM at a loss; therefore, no loss accrual is deemed necessary.

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. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amount 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 policies listed below, are described in the notes to the consolidated financial statements included in this report.

Revenue Recognition and Cost Estimation

We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable, and the ability to collect 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 payments for the work of our employees, and to a lesser extent, 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 a pro-rata share of the contractual fees. For time-and-material contracts, revenue is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred. For long-term fixed-price production contracts, revenue is recognized at a rate per unit as the units are delivered, or by other methods to measure services provided. Revenue 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 which are specifically described in the scope section of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 81-1, “Accounting for Performance of Construction Type and Certain Production-Type Contracts,” or other appropriate accounting literature 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. 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. Estimated losses on contracts at completion are recognized when identified. In certain circumstances, revenues are recognized when contract amendments have not been finalized.

Goodwill

Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets of acquired companies. Effective January 1, 2002, we adopted Statement of Financial Accounting Standard (SFAS) No. 142, and no longer amortize goodwill; rather, we review goodwill at least annually for impairment. We have elected to perform this review annually during second quarter of each calendar year and no adjustments were necessary. For acquisitions completed prior to the adoption of SFAS No. 141 and SFAS No. 142 on January 1, 2002, goodwill was amortized on a straight-line basis over periods ranging from two to twenty years.

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Other Matters

Our significant accounting policies, including the critical policies listed above, are described in the notes to the consolidated financial statements for the year ended December 31, 2004, included in our Annual Report on Form 10-K filed with the SEC on March 16, 2005.

Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R)—Share-Based Payment, which replaces SFAS No. 123—Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25—Accounting for Stock Issued to Employees. SFAS No.123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is measured based on the grant-date fair value of the equity or liability instruments issued. SFAS No. 123(R) requires liability awards to be re-measured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) is effective as of the beginning of the first fiscal year that begins after June 15, 2005. We plan to adopt the provisions of SFAS No. 123(R) prospectively during the first quarter of 2006.

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 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,” “continue” 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 Interim Report reflect the good faith judgment of management, 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 anticipated results include, but are not limited to, the following:

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 our Annual Report on Form 10-K, filed with the SEC on March 16, 2005, and from time to time, in our other filings with the 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.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

Our exposure to market risk relates to changes in interest rates for borrowings under our senior term loan and revolving credit facility. These borrowings bear interest at variable rates. As of March 31, 2005, we had $25.0 million in borrowings outstanding under our revolving credit facility. A hypothetical 10% increase in interest rates would have increased our interest expense for the three months ended March 31, 2005 by less than $.1 million.

In December 2001, we entered into an interest swap agreement in order to reduce our exposure associated with the market volatility of fixed London Inter-Bank Offer Rate (LIBOR) interest rates. This agreement has a notional principal amount of $25.0 million and, as of March 31, 2005, had a rate of 2.8%. This agreement is a hedge against revolving debt of $25.0 million, which bears interest at monthly floating LIBOR plus 1.00%. At stated monthly intervals the difference between the interest on the floating LIBOR-based debt and the interest calculated in the swap agreement are settled in cash. The value of the swap at March 31, 2005 was a negative $0.6 million.

We do not use derivative financial instruments for speculative or trading purposes. We invest our excess cash in short-term, investment grade, interest-bearing securities. Our investments are made in accordance with an investment policy approved by the board of directors. Under this policy, no investment securities can have maturities exceeding one year, and the average maturity of the portfolio cannot exceed 90 days.

Item 4. Controls and Procedures

As of March 31, 2005, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), management evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of March 31, 2005, such that the information relating to us that is required to be disclosed in our reports filed with the SEC (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There were no significant changes in our internal control over financial reporting during the three months ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to certain legal proceedings, government audits, investigations, claims and disputes that arise in the ordinary course of our business. Like most large government defense contractors, our contract costs are audited and reviewed on a continual basis by an in-house staff of auditors from the Defense Contract Auditing Agency. In addition to these routine audits, we are subject from time to time to audits and investigations by other agencies of the federal government. These audits and investigations are conducted to determine if our performance and administration of our government contracts are compliant with contractual requirements and applicable federal statutes and regulations. An audit or investigation may result in a finding that our performance, systems and administration is compliant or, alternatively, may result in the government initiating proceedings against us or our employees, including administrative proceedings seeking repayment of monies, suspension and/or debarment from doing business with the federal government or a particular agency, or civil or criminal proceedings seeking penalties and/or fines. Audits and investigations conducted by the federal government frequently span several years.

Although we cannot predict the outcome of these and other legal proceedings, investigations, claims and disputes, based on the information now available to us, we do not believe the ultimate resolution of these matters, either individually or in the aggregate, will have a material adverse effect on our business, prospects, financial condition or operating results.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits required by Item 601 of Regulation S-K:

(b) Reports on Form 8-K

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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