MANTECH INTERNATIONAL CORP - Annual Report: 2017 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-49604
ManTech International Corporation
(Exact name of registrant as specified in its charter)
__________________________________________
Delaware | 22-1852179 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
12015 Lee Jackson Highway, Fairfax, VA | 22033 |
(Address of principal executive offices) | (Zip Code) |
(703) 218-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Class A Common Stock, Par Value $0.01 Per Share | Nasdaq Stock Market | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
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. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | o |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Emerging growth company | o | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2017 was $1.06 billion (based on the closing price of $41.38 per share on June 30, 2017, as reported by the Nasdaq Global Select Market).
There were the following numbers of shares outstanding of each of the registrant's classes of common stock as of February 21, 2018: ManTech International Corp. Class A Common Stock, $0.01 par value per share, 26,040,507 shares; ManTech International Corp. Class B Common Stock, $0.01 par value per share, 13,189,245 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement to be filed with the Securities Exchange Commission pursuant to Regulation 14A in connection with the registrant's 2018 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K. Such definitive Proxy Statement will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
TABLE OF CONTENTS
Page | |
PART I
In this document, unless the context indicates otherwise, the terms “Company” and “ManTech” as well as the words “we,” “our,” “ours” and “us” refer to both ManTech International Corporation and its consolidated subsidiaries. The term “registrant” refers only to ManTech International Corporation, a Delaware corporation.
Industry and Market Data
Industry and market data used throughout this Annual Report on Form 10-K were obtained through surveys and studies conducted by third parties, industry and general publications. We have not independently verified any of the market data obtained from these third-party sources, nor have we validated any assumptions underlying such data.
Cautionary Note Regarding Forward-Looking Statements
All statements and assumptions contained in this Annual Report on Form 10-K that do not relate to historical facts constitute "forward-looking statements." These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include the use of words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate," "plan" and words and terms of similar substance in connection with discussions of future events, situations or financial performance. While these statements represent our current expectations, no assurance can be given that the results or events described in such statements will be achieved.
Forward-looking statements may include, among other things, statements with respect to our financial condition, results of operations, prospects, business strategies, competitive position, growth opportunities, and plans and objectives of management. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of our control, and include, without limitations, the risks and uncertainties discussed in Item 1A "Risk Factors" in Part I of this Annual Report on Form 10-K.
Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to, the following:
• | Failure to maintain our relationship with the U.S. government, or the failure to compete effectively for new contract awards or to retain existing U.S. government contracts; |
• | Inability to recruit and retain a sufficient number of employees with specialized skill sets or necessary security clearances who are in great demand and limited supply; |
• | Adverse changes in U.S. government spending for programs we support, whether due to changing mission priorities, socio-economic policies that reduce contracts that we may bid on, cost reduction and efficiency initiatives by our customers, or federal budget constraints generally; |
• | Issues relating to competing effectively for awards procured through the competitive bidding process, including the adverse impact of delays caused by competitors' protests of contract awards received by us; |
• | Failure to obtain option awards, task orders or funding under contracts; |
• | Failure to realize the full amount of our backlog, or adverse changes in the timing of receipt of revenues under contracts included in backlog; |
• | Renegotiation, modification or termination of our contracts, or failure to perform in conformity with contract terms or our expectations; |
• | 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; |
• | Failure to successfully integrate acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions; |
• | Increased exposure to risks associated with conducting business internationally; |
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• | 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 laws, procurement regulations or processes; and |
• | Adverse results of U.S. government audits or other investigations of our government contracts. |
We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to update any forward-looking statement made herein following the date of this Annual Report, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
Item 1. | Business |
Corporate Overview and Background
We provide mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. Now in our 50th year, we excel in full-spectrum cyber, data collection & analytics, enterprise IT, systems engineering and software application development solutions that support national and homeland security. We are able to leverage our technical capabilities, our intimate knowledge of our customers' missions, and our experience providing a wide array of solutions and services to help our customers meet some of their greatest challenges and succeed in their most important endeavors. We provide services that support missions of national significance, such as military operations readiness and wellness, terrorist threat detection, information security and border protection.
We were co-founded by George J. Pedersen in 1968 as a New Jersey corporation, starting with a single U.S. Navy contract. We reincorporated as a Delaware corporation shortly before our initial public offering in February 2002. Since then we have grown substantially. Our annual revenues have increased from approximately $400 million at the end of 2001 to $1.72 billion in 2017. Additional financial information is provided in this Annual Report under Item 8 “Financial Statements and Supplemental Data.”
Our Solutions and Services
We combine deep domain understanding and technical capability to deliver comprehensive information technology (IT), systems engineering and other services and solutions, primarily in support of mission-critical programs for the intelligence community, the Department of Defense (DoD) and federal civilian agencies including the diplomatic, homeland security, healthcare and space communities. We integrate our broad capabilities into tailored solutions to meet the evolving requirements of our customers' long-term programs. The following solution sets are aligned with the long-term needs of our customers:
•Cyber;
•Enterprise IT;
•Software, Application and Systems Development;
•Multi-Disciplined Intelligence;
• | Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance and Reconnaissance (C5ISR); |
•Program Protection and Mission Assurance;
•Systems Engineering;
•Training; and
•Supply Chain Management and Logistics.
Cyber
We provide full-spectrum cyber, encompassing defense, resilience, offense, analytics and compliance. Our cyber solutions and services includes security operations, threat intelligence, incident response and forensics, boundary defense, security systems engineering, infrastructure security, and computer forensics and exploitation. Our professionals tackle the most challenging problems facing the nation, preventing, identifying and neutralizing external cyber attacks, engineering tailored defensive security solutions and controls, developing robust insider threat detection programs, creating enterprise vulnerability management programs and supporting offensive and exploitation efforts. Our forensics and incident response capabilities can provide our customers with additional insight and evidence for post-attack assessments, assisting our customers with efforts to strengthen their security posture. We offer customers insight into their infrastructure and the opportunity to deny, disrupt and degrade attempts to compromise our
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customers' business operations and reputation.
Enterprise IT
We develop, implement and sustain solutions that leverage technology across an enterprise delivering services that improve mission performance and reduce costs for our customers. Solutions typically involve hardware and software to support the core technology infrastructure, such as data centers, cloud services, e-mail or desktop computing and managed services. Specific applications include IT service management, help desk, data center consolidation, enterprise architecture, mobile computing and device management, network operations and infrastructure, virtualization/cloud computing and migration, network and database administration, enterprise systems development and management, infrastructure as a managed service, data collection and analytics including predictive and other types of analytics. We evaluate our customers' enterprise infrastructure with the goal of enhancing security, increasing efficiency, reducing system footprint and lowering total cost of ownership. We are at the forefront of helping our customers migrate to new, innovative enterprise IT management methodologies, including fully-outsourced, managed services models.
Software, Application and Systems Development
We develop, modify and maintain software solutions and complex systems that link different computing systems and software applications to act as a coordinated whole. This solution set includes a broad array of full lifecycle services, including requirements analysis; planning, design, implementation, integration and enhancement; testing, deployment, maintenance and quality assurance; and documentation and configuration management. Our software and systems development activities support all major software development lifecycle methodologies including Agile, DevOps, DevSecOps and hybrid methodologies. We develop software solutions and systems across many domains and mission-specific applications. Our experienced software engineers and developers design, develop, integrate, operate and sustain mission-critical software applications and systems across defense, intelligence and federal civilian customers worldwide.
Multi-Disciplined Intelligence
We provide specialized professional and technical solutions and mission support services in the interest of national security. Specific solutions include support to strategic and tactical intelligence systems, networks and facilities; development and integration of collection and analysis systems and techniques; and support to the development and application of analytical techniques to counterintelligence, homeland security operations, human intelligence operations/training and counterterrorist operations. We provide signals intelligence collection, analysis and dissemination, intelligence analysis and linguistics support, as well as cyber threat intelligence and insider threat support. We develop, integrate and maintain advanced signal processing systems to support classified programs and facilities that collect and process intelligence. We provide counterterrorism operations support and counterintelligence analytical expertise.
Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance and Reconnaissance
We are a proven leader in the design, development, analysis, implementation and support of all aspects of C5ISR systems and technology. Our experience includes land, sea, air, space and cyber domains, to include command-and-control infrastructure, intelligence, surveillance and reconnaissance platforms and sensors (manned and unmanned), and the communication, dissemination and analysis of data. Our C5ISR solutions and capabilities span the entire lifecycle continuum to include modeling and simulation; test and evaluation; supporting telecommunications systems and terrestrial sensors; developing, testing and incorporating new technology; and providing training for solutions needed by our customers. We have developed, tested, fielded and supported systems for the U.S. government across the globe, and have provided C4ISR and subsequent C5ISR operations and maintenance support for every major military deployment since Operation Desert Storm.
Program Protection and Mission Assurance
We support highly-classified programs with secrecy management and security infrastructure services. Our services include vulnerability assessment, insider threat protection, exposure analysis, secrecy architecture design, security policy development and implementation, lifecycle acquisition program security, (OPSEC, INFOSEC, COMSEC and PERSEC), anti-tamper, export compliance support, foreign disclosure, system security engineering, security awareness and training, comprehensive security support services and technical certification and accreditation services. Additionally, as part of our program protection support, we provide network architecture planning and implementation services and systems engineering services within secure environments requiring the application of multi-level security policies across the enterprise. We provide comprehensive mission assurance in the development, acquisition, manufacturing, testing, integration and site support for launch support and systems safety for mission-critical systems.
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Systems Engineering
With five decades of experience, we are recognized across markets for our operational, engineering and technical expertise across major domains, including land, sea, air, space and cyberspace. We apply systems engineering across a wide array of large-scale system development and acquisition programs used by government and industry. We provide world-class talent, proven management and technical processes to manage some of the most complex projects throughout their lifecycle, from concept through deployment. The systems engineering services we provide include requirement analysis, development and management; systems development and integration; enterprise architecture and concept of operations; and systems engineering and technical assistance. Our test and evaluation services are closely linked with our systems engineering capabilities, and include specific competencies in test engineering, preparation and planning; modeling and simulation; test range operations and management; systems and cyber vulnerability; and independent validation and verification.
Training
We deliver advanced training solutions using a range of environments including live, virtual, constructive, immersive and gaming scenarios. We leverage dedicated subject matter experts, a virtual cyber training range, and our longstanding, acclaimed learning center, ManTech University, in developing customized training solutions for our customers. We have also developed an online interactive multimedia instruction authoring environment that allows us to create optimal environments for "sharable content object reference" models to enhance e-learning. Specific offerings include mobile training teams; instructional systems design; web-based and instructor-led training; live, virtual, constructive training; and interactive courseware and simulations. We meet the global mission support demands of our customers by providing training and education tools in the most effective manner for our customers, whether in the classroom, in virtualized environments, or at customer locations in the U.S. and around the world.
Supply Chain Management and Logistics
We provide supply chain management and logistics services involving the use of sophisticated systems that secure the entire supply chain, from supplies to data. Our comprehensive set of integrated logistics and supply chain management services include supply chain management support (such as warehousing, logistics management, shipping/receiving and global property management), maintenance and reset of ground vehicles and electronics, business process outsourcing, transportation using contracted and government provided services and other field services support (including fielding, training and operations support). Our tools and systems can predict requirements and provide secure, real-time tracking analysis and reporting data to meet our customers' needs. We have overseen some of the most important mission-critical logistics and supply chain management efforts for the U.S. government and have provided a full range of logistics and maintenance support across the globe.
Our Employees
Our customer's success is the end result of the hard work of our talented and dedicated employees. At year end, our workforce consisted of approximately 7,600 employees, 67% of whom hold security clearances and over 47% of whom are veterans. In 2017, we continued to successfully attract, train, develop and retain highly skilled people across our organization by providing our employees with rewarding and challenging opportunities that meaningfully impact our customers’ missions.
Our Customers
We derive the vast majority of our revenues from U.S. government customers. We have successful, long-standing relationships with these customers, having supported many of them for almost half a century. For each of the last three years we have derived approximately 98% of our annual revenues from our U.S. government customers, with at least 79% of our revenues each such year from intelligence and defense customers.
Foreign Operations
We treat sales to U.S. government customers as sales within the U.S., regardless of where the services are performed. U.S. revenues were approximately 98%, 98% and 100% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. International revenues were approximately 2%, 2% and 0% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively.
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Backlog
At December 31, 2017, our backlog was $7.1 billion, of which $1.4 billion was funded backlog. At December 31, 2016, our backlog was $4.9 billion, of which $1.0 billion was funded backlog. We expect that approximately 23% of our total backlog will be recognized as revenue prior to December 31, 2018.
We define backlog as our estimate of the remaining future revenue from existing signed contracts, assuming the exercise of all options relating to such contracts and including executed task orders issued under Indefinite Quantity/Indefinite Delivery (ID/IQ) contracts. We also include an estimate of revenue for solutions that we believe we will be asked to provide in the future under the terms of ID/IQ contracts for which there are established patterns of revenues.
We define funded backlog to be the portion of backlog for which funding currently is appropriated and allocated to the contract by the purchasing agency or otherwise authorized for payment by the customer upon completion of a specified portion of work. Our funded backlog does not include the full value of our contracts because Congress often appropriates funds for a particular program or contract on a yearly or quarterly basis, even though the contract may call for performance over a much longer period of time.
A variety of circumstances or events may cause changes in the amount of our backlog and funded backlog, including the execution of new contracts, the extension of existing contracts, the non-renewal or completion of current contracts, the early termination of contracts, and adjustments to estimates for previously included contracts. Changes in the amount of our funded backlog also are affected by the funding cycles of the government.
Patents, Trademarks, Trade Secrets and Licenses
We own a limited number of patents. We also maintain a number of trademarks and service marks to identify and distinguish the goods and services we offer. While we protect our patents, marks, trade secrets and vital confidential information, our business does not depend on the existence or protection of such intellectual property.
Seasonality
Our business is not seasonal. However, in order to avoid the loss of unexpended fiscal year funds it is not uncommon for U.S. government agencies to award extra tasks or complete other contract actions in the weeks before the end of the U.S. government's fiscal year (GFY), which begins on October 1 and ends on September 30. Additionally, our quarterly results are impacted by the number of working days in a given quarter. There are generally fewer working days for our employees to generate revenues in the first and fourth quarters of our fiscal year.
Business Environment and Competitive Landscape
Our primary customer is the U.S. government, the largest consumer of services and solutions in the U.S. In U.S. GFY 2017, the U.S. government obligated approximately $306 billion on contracted services. Our principal focus is on the national security and defense of the U.S. homeland. The DoD is the largest purchaser of services and solutions in the U.S. government. With the U.S. GFY 2019 budget request of $686 billion, the DoD accounts for approximately 57% of the total discretionary budget.
We compete in a market that is shaped by customer requirements and federal budget priorities and constraints. Our key competitors currently include divisions of large defense contractors, as well as a number of mid-size U.S. government contractors with specialized capabilities. Because of the diverse requirements of U.S. government customers and the highly competitive nature of large procurements, we frequently collaborate with these and other companies to compete for large contracts and we bid against these companies in other situations.
The budget environment continued to improve in 2017. Federal spending grew in U.S. GFY 2017 for a second consecutive year following several years of budget constraints and uncertain funding levels. Congressional actions have alleviated much of the potential impact of sequestration historically but Budget Control Act (BCA) caps remain longer term. We are currently operating under a Continuing Resolution as Congress works to finalize the details of a bipartisan budget comprise, which would provide visibility into funding and spending levels for the GFY 2018 and GFY 2019 substantially above the BCA caps. The improved budget clarity resulted in our customers making more award decisions and procuring services to meet mission needs on a more regular and predictable basis. We also believe that our customers' use of lowest price/technically acceptable (LPTA) procurements, which contributed to pricing pressures and lower margins in prior years, has leveled off. Under the current Administration, we believe the defense budget outlook has improved meaningfully and we expect defense spending increases relative to prior years.
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The Administration has cited significant global threats, readiness and force structure needs within the military, diplomatic, homeland and border security, and cyber aggressions by both state and non-state actors, as priorities in establishing federal policy and budgets. Although the Administration's priorities will be subject to Congressional debate, we believe that the U.S. government's spending will remain robust in key areas that we are well positioned to serve, including national and homeland security programs, cyber security, sophisticated intelligence gathering and information sharing activities.
Company Information Available on the Internet
Our Internet address is www.mantech.com. Through links on the Investor Relations section of our website, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).
Item 1A. | Risk Factors |
Set forth below are the risks that we believe are material to our investors. You should carefully consider the following risks, together with the other information contained in or incorporated by reference into this Annual Report on Form 10-K, including our consolidated financial statements and notes thereto. Any of the following risks could materially and adversely affect our business, financial condition, results of operations and prospects, as well as the actual outcome of matters as to which forward-looking statements are made in this Annual Report.
The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us, or those we currently deem to be immaterial, may also materially and adversely affect our business, financial condition or results of operations. This section contains forward-looking statements. You should refer to the explanation of the qualification and limitations of forward-looking statements set forth at the beginning of this Annual Report.
Risks Related to Our Business
We depend on contracts with the U.S. government for substantially all of our revenues. If our relationships with the U.S. government are harmed, our business, future revenues and growth prospects could be adversely affected.
We derive the vast majority of our revenues from our U.S. government customers. We expect that U.S. government contracts will continue to be the primary source of our revenues for the foreseeable future. For this reason, any issue that compromises our relationship with the U.S. government generally or any U.S. government agency that we serve could adversely and materially harm our business, prospects, financial condition or operating results. Among the key factors in maintaining our relationships with U.S. government agencies are our performance on our contracts and task orders, the strength of our professional reputation, compliance with applicable laws and regulations, and the strength of our relationships with our customers and client personnel. To the extent our reputation or relationships with U.S. government agencies is impaired, our revenue and operating profits could materially decline.
We derive most of our revenues from contracts awarded through competitive bidding processes, and our revenue and profitability may be adversely impacted if we fail to compete effectively in such processes, or if there are delays as a result of our competitors' protests of contract awards that we receive.
We derive a significant portion of revenues from U.S. government contracts awarded through a competitive bidding process. We do not anticipate that this will change in the foreseeable future. Our failure to compete effectively in this procurement environment would have a material adverse impact on our revenue and profitability. The competitive bidding process involves risk and significant costs to businesses operating in this environment including:
• | the substantial cost and managerial time and effort spent to prepare bids and proposals for contracts that may not be awarded to us; |
• | the need to expend resources and make financial commitments (such as procuring leased premises) and bid on programs in advance of the completion of their design, which may result in unforeseen difficulties in execution, cost overruns, or, in the case of unsuccessful competitions, the loss of committed costs; |
• | the expense and delays that may arise if our competitors protest or challenge contract awards made to us, and the risk that any such protest could result in the resubmission of bids on modified specifications, or in the termination, reduction or modification of the awarded contract; and |
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• | the ability to accurately estimate the resources and costs structure required to service any contract we are awarded. |
The current competitive environment has resulted in an increase in the number of bid protests from unsuccessful bidders on new program awards. It can take months to resolve protests by one or more of our competitors of contract awards we receive. Even where the protest does not result in us losing the awarded contract, the resulting delay in startup and funding of the work under such contracts may cause our actual results to differ materially and adversely from anticipated results.
If we are unable to win particular contracts that are awarded through the competitive bidding process, we may not be able to operate in the market for services that are provided under those contracts for the duration of those contracts, to the extent that there is no additional demand for such services. Our inability to win new contract awards over an extended period of time would have a material adverse effect on our business and results of operations.
We face aggressive competition from many competitors, which may adversely impact our profitability and growth prospects.
We operate in highly competitive markets and generally encounter intense competition to win contracts, which are usually subject to competitive bidding processes. We may not be able to continue to win competitively awarded contracts at historic levels. We compete with larger companies who may have greater financial resources than we have. We also compete with smaller, more specialized companies that may be able to concentrate their resources into highly-skilled niche markets. Our competitors may be able to provide our customers with different or greater capabilities or better contract terms than we can provide, including price, technical qualifications, past contract experience, geographic presence and the availability of qualified professional personnel. In particular, increased efforts by our competitors to meet U.S. government requirements for efficiency and cost reduction may require that we charge lower prices to pass along cost savings as a result of the 2017 Tax Act to the U.S. Government to win or retain contracts. If we lose business to our competitors or are forced to reduce our prices, our revenue and operating profits could decline.
We may fail to attract and retain skilled and qualified employees with requisite specialized skill sets or security clearances, which could impair our ability to effectively serve our clients, require more subcontracting work than is optimal, and limit our growth prospects.
Our business depends in large part upon our ability to attract and retain sufficient numbers of employees who have advanced IT and technical services skills. Often, these employees must also have some of the highest security clearances in the United States. Security clearances may take 12-24 months to complete depending upon the level of clearance and demand levels for cleared professionals. These employees are in great demand, and we compete intensely for such qualified personnel with other U.S. government contractors, the U.S. government, and private industry. Such personnel may remain a limited resource for the foreseeable future. If we are unable to recruit and retain a sufficient number of qualified employees or fail to obtain their appropriate security clearances in a timely manner, our ability to maintain and grow our business and effectively serve our clients could be limited and our future revenues and results of operations could be materially and adversely impacted. Furthermore, to the extent that we are unable to hire sufficient qualified employees to staff our contracts, we may be required to engage larger numbers of contracted personnel, which could reduce our profit margins. Even if we are able to attract the requisite skilled employees, the intense competition for such employees may result in attrition in our employee ranks, requiring us to expend additional resources to hire and train replacement personnel. The loss of services of key personnel could impair our ability to perform required services under some of our contracts, which could result in the termination of such contracts and limit our ability to win new business.
U.S. government spending and mission priorities could change in a manner that adversely affects our future revenues and limits our growth prospects.
Our business depends upon continued U.S. government expenditures on intelligence, defense, homeland security, federal health IT and other programs that we support. These expenditures have not remained constant over time, have been reduced in certain periods and, recently, have been affected by the U.S. government's efficiency and cost reduction efforts. Additionally, in recent years, in the face of growing national debt and long-term fiscal challenges facing the nation, spending levels for U.S. government programs generally, and in particular the U.S. defense budget, have come under pressure. During this period, Congress failed to approve budgets on a timely basis, eventually resulting in a government shutdown. Notwithstanding the recent stabilization of base budgets and improved budget clarity, discretionary spending may remain constrained, affect future levels of expenditures (or timing of expenditures), place pressure on operating margins, or result in a shift of expenditures to programs that we do not currently support. Each of these changes in U.S. government spending could adversely impact our business and future results of operations.
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The U.S. government may prefer minority-owned, small and small disadvantaged businesses; therefore, we may have fewer opportunities to bid for.
As a result of the Small Business Administration set-aside program, the U.S. government may decide to restrict certain procurements only to bidders that qualify as minority-owned, small, or small disadvantaged businesses. As a result, we would not be eligible to perform as a prime contractor on those programs and would be restricted to a maximum of 49% of the work as a subcontractor on those programs. An increase in the amount of procurements under the Small Business Administration set-aside program may impact our ability to bid on new procurements as a prime contractor or restrict our ability to recompete on incumbent work that is placed in the set-aside program. An increase in set-aside work, even where we are successful in teaming with a small business, could result in less revenue and profit for us.
We may not realize the full value of our backlog, which may result is lower revenues than anticipated.
As of December 31, 2017, our backlog was $7.1 billion, of which $1.4 billion was funded. Backlog is our estimate of the remaining future revenues from existing signed contracts, assuming the exercise of all options relating to such contracts and including executed task orders issued under ID/IQ contracts. Backlog also includes estimates of revenues for solutions that we believe we will be asked to provide in the future under the terms of ID/IQ contracts for which we have an established pattern of revenues. Our estimates are based on our experience using such vehicles and similar contracts. However, our estimates of future revenues are inexact and the receipt of these revenues are subject to various contingencies, many of which are beyond our control.
Historically, we have not realized all of the revenue included in our total backlog, and we may not realize all of the revenue included in our total backlog in the future. The actual accrual and recognition of revenues on programs that are included in backlog may never occur or may change for a number of reasons, including if a program is changed, delayed or cancelled; if the funding or scope of a contract is reduced, modified, delayed or terminated early (including as a result of a lack of appropriated funds or as a result of cost cutting initiatives); if an option that we have assumed would be exercised is not exercised; or if our estimates regarding the amount of services that we will provide under contracts prove to be inaccurate. Our unfunded backlog, in particular, contains management's estimate of amounts expected to be realized on unfunded contract work, and this work may never be realized as revenues. In addition, there can be no assurance that our backlog will result in actual revenue during any particular fiscal period, as the timing of the receipt of revenue under contracts included in backlog is subject to various contingencies, many of which are beyond our control.
If we fail to realize as revenues amounts included in our backlog, our future revenues and growth prospects may be adversely affected.
Our earnings and profitability may be adversely affected if we do not accurately estimate the expenses, time and resources necessary to satisfy some of our contractual obligations.
We enter into three types of U.S. government contracts for our services: cost-reimbursable, time-and-materials and fixed-price. Our customers have increasingly procured our services under cost-reimbursable contracts, which tend to offer lower margin opportunities than other contract types.
For our last three fiscal years, we derived revenues from such contracts as follows:
Year Ended December 31, | ||||||||
2017 | 2016 | 2015 | ||||||
Cost-reimbursable | 66 | % | 68 | % | 68 | % | ||
Fixed-price | 21 | % | 19 | % | 21 | % | ||
Time-and-materials | 13 | % | 13 | % | 11 | % | ||
Total | 100 | % | 100 | % | 100 | % | ||
Each of these types of contracts, to varying degrees, involves some risk that we could underestimate our cost of fulfilling the contract, which may reduce the profit we earn or lead to a financial loss on the contract.
• | Under cost-reimbursable contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based. To the extent that the actual costs incurred in performing a cost-reimbursable contract are within the contract ceiling and allowable under the terms of the contract and applicable regulations, we are entitled to |
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reimbursement of our costs, plus a profit. However, if our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs. In particular, there is increasing focus by the U.S. government on the extent to which contractors are able to receive reimbursement for employee compensation.
• | Under fixed-price contracts, we perform specific tasks for a fixed price. Compared to cost-plus contracts, fixed-price contracts generally offer higher margin opportunities, but involve greater financial risk because we bear the impact of cost overruns, which could result in increased costs and expenses. Because we assume such risk, an increase in the percentage of fixed-price contracts in our contract mix, whether caused by a shift by the U.S. government toward a preference for fixed-price contracts or otherwise, could increase the risk that we suffer losses if we underestimate the level of effort required to perform the contractual obligations. As we expand our fixed price managed services business, we expect our mix of fixed price work will be increasing over time. |
• | Under time-and-materials contracts, we are reimbursed for labor at negotiated hourly billing rates and for certain expenses. We assume financial risk on time-and-materials contracts because we assume the risk of performing those contracts at negotiated hourly rates. |
Our profits could be adversely affected if our costs under any of these contracts exceed the assumptions we used in bidding for the contract.
U.S. government contracts contain provisions giving government customers a variety of rights that are unfavorable to us, including the ability to terminate a contract at any time for convenience.
U.S. government contracts contain provisions and are subject to laws and regulations that give the government rights and remedies not typically found in commercial contracts. These provisions may allow the government to:
• | Terminate existing contracts for convenience, as well as for default; |
• | Reduce orders under, or otherwise modify, contracts or subcontracts; |
• | Cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; |
• | Decline to exercise an option to renew multi-year contracts or issue task orders in connection with multiple award contracts; |
• | Suspend or debar us from doing business with the U.S. government or with a government agency; |
• | Prohibit future procurement awards with a particular agency as a result of a finding of an organizational conflict of interest based upon prior related work performed for the agency that is deemed to give a contractor an unfair advantage over competing contractors; |
• | Subject the award of contracts to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit offers for the contract or in the termination, reduction or modification of the awarded contract; |
• | Terminate our facility security clearances and thereby prevent us from receiving classified contracts; |
• | Claim rights in products and systems produced by us; and |
• | Control or prohibit the export of our products and services. |
If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may not even recover those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. If one of our government customers were to unexpectedly terminate, cancel or decline to exercise an option to renew one or more of our significant contracts or programs, our revenues and operating results would be materially harmed.
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Internal system or service failures, including those resulting from cyber or other security threats, could disrupt our business and impair our ability to effectively provide services to our customers, which could damage our reputation and have a material adverse effect on our business and results of operations.
We create, implement and maintain IT and engineering systems, and provide services that are often critical to our customers' operations, some of which involve classified or other sensitive information in intelligence, national security and other classified or sensitive customer functions. We are subject to systems or service failures (both our own failures and the failures of third-party service providers), which may be caused by natural disasters, power shortages or terrorist attacks, as well as from continuous exposure to cyber and other security threats, including computer viruses, attacks by computer hackers and physical break-ins. We also face a heightened risk of a security breach or disruption due to our custody of classified and other sensitive information. Many government contractors have already been targeted and these types of attacks are likely to occur in the future. Attacks on our network or other systems could result in the loss of customer or proprietary data, interruptions or delays in our customers' business, and damage to our reputation, which could have a material adverse effect on our business and results of operations. In addition, the failure or disruption of our systems, communications or utilities could result in the interruption or suspension of our operations, which could have a material adverse effect on our business and results of operations.
If our systems, services or other applications have significant defects or errors, if we are successfully attacked by cyber or other security threats, or if we suffer delivery delays or otherwise fail to meet our customers' expectations, we may:
• | lose revenue due to adverse customer reaction; |
• | be required to provide additional services to a customer at no charge; |
• | incur additional costs related to monitoring and increasing our cyber security; |
• | lose revenue due to the deployment of internal staff for remediation efforts instead of customer assignments; |
• | receive negative publicity, which could damage our reputation and adversely affect our ability to attract or retain customers; |
• | be unable to successfully market services that rely on the creation and maintenance of secure IT systems; |
• | suffer claims for substantial damages, particularly as a result of any successful network or systems breach and exfiltration of customer information; or |
• | incur significant costs complying with applicable federal or state laws, including laws governing protection of personal information. |
In addition to costs related to contract performance or required corrective action, these failures may result in increased costs or loss of revenues if our customers terminate or reduce the scope of our contracts, or do not renew our contracts as a result of such failures.
Our errors and omissions insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to some types of future claims. A successful large claim against us could seriously harm our business, and any claim, whether successful or not, may result in significant legal and other costs, may be a distraction to our management and may harm our customer relationships.
Security breaches in customer systems could adversely affect our business.
Many of the programs we support and the systems we develop, install and maintain involve managing and protecting information involved in intelligence, national security and other classified or sensitive customer functions. Losses from a security breach in one of these systems could cause serious harm to our business, damage our reputation, and impact our eligibility for further work on critical systems for our current customers or for other U.S. government customers generally. Losses could also exceed the policy limits that we have for errors and omissions and product liability insurance coverage. Damage to our reputation or limitations on our eligibility for additional work could materially reduce our revenues.
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We face risks associated with our international business.
Our business operations are subject to a variety of risks associated with conducting business internationally, including:
• | Changes in or interpretations of foreign laws or policies that may adversely affect the performance of our services; |
• | Political instability in foreign countries; |
• | Conducting business in places where laws, business practices and customs are unfamiliar, unknown or inconsistent with U.S. requirements; |
• | Customary business practices and other factors in foreign countries, including requirements to provide up-front performance bonds (guaranteed by a letter of credit from our lender), may involve uncertainties not associated with the business of contracting with the U.S. government, including potential difficulties in collecting receivables and fewer available remedies to the contractor in the event of contract disputes or contract terminations; |
• | Imposition of limitations on or increase of withholding and other taxes on payments by foreign subsidiaries or joint ventures; |
• | Currency fluctuations and devaluations and limitations on the conversion of foreign currencies into U.S. dollars; and |
• | Compliance with a variety of international and U.S. laws, including the Foreign Corrupt Practices Act and U.S. export control regulations. |
These regulatory, geopolitical and other risks could have an adverse effect on our business in the future, particularly if we increase the amount of work that we plan to perform internationally.
Acquisitions could result in operating difficulties, dilution or other adverse consequences to our business.
One of our key operating strategies is to selectively pursue acquisitions. Our acquisitions strategy poses many risks, including:
• | As a result of an acquisition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings; |
• | We may have difficulty retaining an acquired company's key employees, customers or contracts (particularly with respect to awards not made on a full and open basis); |
• | We may have difficulty integrating acquired businesses, resulting in unforeseen difficulties, such as incompatible accounting, information management or other control systems; and |
• | Acquisitions may disrupt our business or distract management from other responsibilities. |
In connection with any acquisition that we make, there may be liabilities that we fail to discover or that we inadequately assess. Acquired entities may not operate profitably or result in improved operating performance. Additionally, we may not realize anticipated synergies. If our acquisitions perform poorly, our business and financial results could be adversely affected.
If we fail to comply with complex laws and procurement regulations, we could lose business and be liable for various penalties or sanctions.
We must comply with laws and regulations relating to the formation, administration and performance of U.S. government contracts. These laws and regulations affect how we conduct business with our U.S. government customers. In complying with these laws and regulations, we may incur additional costs. Non-compliance could result in the imposition of fines and penalties, including contractual damages.
Among the more significant laws and regulations affecting our business are the following:
• | The Federal Acquisition Regulation and the Defense Federal Acquisitions Regulation, which comprehensively regulates the formation, administration and performance of U.S. government contracts; |
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• | Truthful Cost or Pricing Data, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations; |
• | The Cost Accounting Standards and Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. government contracts; |
• | Laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the export of certain products, services and technical data; |
• | U.S. export controls, which apply when we engage in international work; and |
• | The Foreign Corrupt Practices Act. |
Failure to comply with these laws and regulations can lead to severe penalties, both civil and criminal, and can include suspension or debarment from contracting with the U.S. government.
Our contracting agency customers periodically review our compliance with laws and procurement regulations, as well as our performance under the terms of our U.S. government contracts. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties or administrative sanctions, including the termination of contracts, forfeiture of profits, the triggering of price reduction clauses, suspension of payments, fines and the suspension or debarment from doing business with federal government agencies.
Additionally, the False Claims Act provides for substantial damages and penalties where, for example, a contractor presents a false or fraudulent claim to the government for payment or approval. Actions under the False Claims Act may be brought by the government or by individuals on behalf of the government (who may then share a portion of any recovery).
If we fail to comply with these laws and regulations, we may also suffer harm to our reputation, which could impair our ability to win awards of contracts in the future or receive renewals of existing contracts. If we are subject to civil and criminal penalties and administrative sanctions or suffer harm to our reputation, our current business, future prospects, financial condition or operating results could be materially harmed.
Unfavorable U.S. government audits or results of other investigations could subject us to penalties or sanctions, adversely affect our profitability, harm our reputation and relationships with our customers or impair our ability to win new contracts.
The Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA) and other government agencies routinely audit and investigate government contracts and contractor systems. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The DCAA and DCMA also review the adequacy of, and compliance with, internal control systems and policies, including accounting, purchasing, estimating, compensation and management information systems. Allegations of impropriety or deficient controls could harm our reputation or influence the award of new contracts. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If any of our internal control systems or policies is found to be non-compliant or inadequate, payments may be withheld or suspended under our contracts, or we may be subject to increased government scrutiny and approval requirements that could delay or adversely affect our ability to invoice and receive timely payment for services we perform on our contracts. Adverse findings by DCAA or DCMA may also impair our ability to compete for and win new contracts with the U.S. government. As a result, a DCAA or DCMA audit could materially affect our competitive position and result in a substantial adjustment to our revenues and adversely affect our profitability.
Goodwill represents a significant asset on our balance sheet, and changes in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income.
As of December 31, 2017, our goodwill was $1.1 billion. The amount of our recorded goodwill may substantially increase in the future as a result of any acquisitions that we make. We evaluate the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists. Impairment analysis is based on several factors requiring judgment and the use of estimates, which are inherently uncertain and based on assumptions that may prove to be inaccurate. Additionally, material changes in our financial outlook, as well as events outside of our control, such as deteriorating market conditions for companies in our industry, may indicate a potential impairment. When there is an impairment, we are required to write down the recorded amount of goodwill, which is reflected as a charge against operating income.
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Our failure to maintain strong relationships with other contractors, or the failure of other contractors with whom we have entered into a subcontract or prime contract relationship to meet their contractual obligations to us or our clients, could have a material adverse effect on our business and results of operations.
As a prime contractor, we often rely on other companies to perform some of the work under a contract, and we expect to continue to depend on relationships with other contractors for portions of our delivery of services and revenue for the foreseeable future. There is a risk that we may have disputes with our subcontractors regarding a variety of issues, including the quality and timeliness of work performed by the subcontractor, client concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract, or our hiring of the subcontractor’s personnel. In addition, if any of our subcontractors fail to deliver supplies or perform services on a timely basis, our ability to fulfill our obligations as a prime contractor may be jeopardized and could result in our customer terminating our prime contract for default. A termination for default could expose us to liability and have an adverse effect on our ability to compete for future contracts and orders.
We derive a portion of our revenues from contracts where we are a subcontractor to other companies that have contracted directly with the end customer. As a subcontractor, we often lack control over whether the terms of the prime contract are being satisfied. Poor performance on such contracts could impact our reputation, even if we perform as required. In addition, as a subcontractor, we may be unable to collect payments owed to us by the prime contractor, even if we have performed our obligations, if the prime contractor has failed to satisfy the terms of the prime contract.
We occasionally enter into joint ventures with other companies to jointly bid on and perform a particular project. The success of our joint ventures typically depends on the satisfactory performance of contractual obligations by our joint venture partners. If our partners do not meet their obligations, our joint ventures may be unable to adequately perform and deliver the contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture, and could also adversely affect our reputation.
Our business operations in foreign countries involve considerable risks and hazards. An accident or incident involving our employees or third parties could harm our reputation, affect our ability to compete for business, and if not adequately insured or indemnified, adversely affect our results of operations and financial condition.
We provide services in foreign countries that may be experiencing political unrest, war or terrorism. In these deployments, we are exposed to the risk of liabilities arising from accidents or incidents involving our employees or third parties. Accidents or incidents could involve significant injury or other claims by employees or third parties. We may encounter unexpected costs in connection with additional risks inherent to such deployments, such as increased insurance costs, as well as the repatriation of our employees or executives for reasons beyond our control.
We maintain insurance policies that mitigate risk and potential liabilities related to our foreign operations. Substantial claims in excess of our insurance coverage could adversely affect our operating performance and may result in additional expenses and possible loss of revenues. Even fully insured claims may result in negative publicity that could adversely affect our reputation among our customers and the public, which could cause us to lose existing and future contracts, make it more difficult to compete effectively for future contracts, and result in additional expenses and possible loss of revenues.
Covenants in the instruments governing our revolving credit facility may restrict our financial and operating flexibility.
We maintain a credit agreement with a syndicate of lenders led by Bank of America, N.A., as administrative agent. The credit agreement provides for a $500 million revolving credit facility. The maturity date for the credit agreement is August 17, 2022. The credit agreement requires us to comply with specified financial covenants, including the maintenance of certain consolidated total leverage ratios and a certain fixed charge coverage ratio, and contains negative covenants that, among other things, may limit or impose restrictions on the ability of us to incur additional indebtedness, make investments, make acquisitions and undertake certain other actions. Additionally, an event of default under the credit agreement could result in our creditors exercising rights that could have a material adverse effect on our business.
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Risks Related to Our Stock
Our quarterly operating results may fluctuate.
Our quarterly revenues and operating results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our operating results on a period-to-period basis may be of limited significance in some cases, and as such, you should not rely on our past results as an indication of our future performance. In addition to the risk factors already identified in this section of our Form 10-K, a number of additional factors could cause our revenues, cash flows and operating results to vary from quarter-to-quarter, including:
• | Fluctuations in revenues earned on fixed-price contracts and contracts with a performance-based fee structure; |
• | Commencement, completion or termination of contracts during any particular quarter; |
• | Timing of significant bid and proposal costs; |
• | Variable purchasing patterns under government contracts, blanket purchase agreements and ID/IQ contracts; |
• | Seasonal or quarterly fluctuations in our workdays and staff utilization rates; |
• | Strategic decisions, such as acquisitions, divestitures, spin-offs and joint ventures; and |
• | Changes in the volume of purchase requests from customers for equipment and materials. |
Because a relatively large amount of our expenses are fixed, cash flows from our operations may vary significantly as a result of changes in the level of services we provide under existing contracts and the number of contracts that are commenced, completed or terminated during any quarter. Depending on the nature of the contract, we may incur significant operating expenses during the start-up and early stages of large contracts, and in such cases we typically do not receive corresponding payments from the customer in that same quarter. We may also incur significant or unanticipated expenses when a contract expires, terminates or is not renewed.
We may change our dividend policy in the future.
We have maintained a regular cash dividend program since 2011. We anticipate continuing to pay quarterly dividends during 2018. However, any future payment of dividends, including the timing and amount of any such dividends, is at the discretion of our Board of Directors and may depend upon our earnings, liquidity, financial condition, alternate capital deployment opportunities, or any other factors that our Board of Directors considers relevant. A change in our regular cash dividend program could have an adverse effect on the market price of our common stock.
Mr. Pedersen, our Executive Chairman and Chairman of the Board, effectively controls us, and his interests may not be aligned with those of other stockholders.
As of December 31, 2017, Mr. Pedersen owned approximately 34% of our total outstanding shares of common stock. Holders of our Class B common stock are entitled to ten votes per share, while holders of our Class A common stock are entitled to only one vote per share. Mr. Pedersen beneficially owned 13,189,245 shares of Class B common stock as of December 31, 2017; thus he controlled approximately 84% of the combined voting power of our stock as of December 31, 2017. Accordingly, Mr. Pedersen controls the vote on substantially all matters submitted to a vote of our stockholders. As long as Mr. Pedersen beneficially owns a majority of the combined voting power of our common stock, he will have the ability, without the consent of our public stockholders, to elect all members of our Board of Directors and to control our management and affairs.
Mr. Pedersen's voting control may have the effect of preventing or discouraging transactions involving an actual or a potential change of control of us, regardless of whether a premium is offered over then-current market prices. Mr. Pedersen will be able to cause a change of control of us. Mr. Pedersen's voting control could adversely affect the trading price of our common stock if investors perceive disadvantages in owning stock in a company with such concentrated ownership.
Mr. Pedersen could also cause a registration statement to be filed and to become effective under the Securities Act of 1933, thereby permitting him to freely sell or transfer the shares of common stock that he owns, which could adversely affect the trading price of our stock.
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Provisions in our charter documents and Delaware law may inhibit potential acquisition bids that you and other stockholders may consider favorable, and the market price of our Class A common stock may be lower as a result.
There are provisions in our certificate of incorporation and bylaws that make it more difficult for a third party to acquire, or attempt to acquire, control of us, even if a change of control were considered favorable by you and other stockholders. Among the provisions that could have an anti-takeover effect, are provisions relating to the following:
• | The high vote nature of our Class B common stock; |
• | The ability of the Board of Directors to issue preferred stock; |
• | The inability of stockholders to take action by written consent; and |
• | The advance notice requirements for director nominations or other proposals submitted by our stockholders. |
Item 1B. | Unresolved Securities and Exchange Commission Staff Comments |
We have not received any written comments from the SEC staff regarding our periodic or current reports under the Exchange Act that remain unresolved.
Item 2. | Properties |
We lease our facilities, including offices, warehouses and labs, and we do not own any facilities or real estate that are material to our operations. Our facilities are leased in close proximity to our customers. As of December 31, 2017, we leased 18 facilities throughout the metropolitan Washington, D.C. area and 37 facilities in other parts of the U.S., for approximately 1.8 million square feet. We also have employees working at customer sites throughout the U.S. and in other countries. Our leases expire between 2018 and 2025.
We believe our current facilities are adequate to meet our current needs. We do not anticipate any significant difficulty in renewing our leases or finding alternative space to lease upon the expiration of our leases and to support our future growth.
Item 3. | 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 DCAA. In addition to these routine audits, we are subject from time-to-time to audits and investigations by other agencies of the U.S. 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 are 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 U.S. government or a particular agency or civil or criminal proceedings seeking penalties and/or fines. Audits and investigations conducted by the U.S. 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 4. | Mine Safety Disclosures |
Not applicable.
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PART II
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our Class A common stock has been quoted on the Nasdaq Stock Market under the symbol “MANT” since our initial public offering on February 7, 2002. The following table sets forth, for the periods indicated, the high and low prices of our shares of common stock, as reported on the Nasdaq Stock Market.
2017 | High | Low | |
First Quarter | $42.64 | $34.01 | |
Second Quarter | $41.49 | $33.50 | |
Third Quarter | $44.20 | $37.02 | |
Fourth Quarter | $53.29 | $44.00 | |
2016 | High | Low | |
First Quarter | $33.10 | $25.76 | |
Second Quarter | $39.15 | $30.80 | |
Third Quarter | $41.69 | $36.78 | |
Fourth Quarter | $45.52 | $36.68 | |
There is no established public market for our Class B common stock.
As of February 21, 2018, there were 63 holders of record of our Class A common stock and 3 holders of record of our Class B common stock. The number of holders of record of our Class A common stock is not representative of the number of beneficial holders because many of the shares are held by depositories, brokers or nominees.
Dividend Policy
During fiscal years 2017 and 2016, we declared and paid quarterly dividends, each in the amount of $0.21 per share, on all issued and outstanding shares of common stock. For 2018, we anticipate we will continue paying quarterly dividends, and on February 21, 2018, the Board of Directors declared a quarterly cash dividend in the amount of $0.25 per share; however any future dividends declared will be at the discretion of our Board of Directors and will depend, among other factors, upon our earnings, liquidity, financial condition, alternate capital allocation opportunities, or any other factors our Board of Directors deems relevant.
Recent Sales of Unregistered Securities
We did not issue or sell any securities in fiscal year 2017 that were not registered under the Securities Act of 1933.
Equity Compensation Plan Information
Information regarding our equity compensation plans and the securities authorized for issuance thereunder is incorporated by reference in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Purchase of Equity Securities
We did not purchase equity securities during the year ended December 31, 2017.
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Performance Graph
The stock performance graph compares the cumulative total shareholder return of our common stock to the NASDAQ Composite-Total Returns Index, Standard & Poor's MidCap 400 Index, Russell 2000 Index and Standard & Poor's 1500 IT Consulting & Services Index. The period measured is December 31, 2012 to December 31, 2017. The graph assumes an investment of $100 in our common stock and each of the indices with reinvestment of all dividends.
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Item 6. | Selected Financial Data |
The selected financial data presented for each of the five years ended December 31, 2017 is derived from our audited consolidated financial statements. The selected financial data presented should be read in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Year Ended December 31, | |||||||||||||||||||
2017 (1) | 2016 | 2015 | 2014 (2) | 2013 (3) | |||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||
Statement of Income and Loss Data: | |||||||||||||||||||
Revenues | $ | 1,717,018 | $ | 1,601,596 | $ | 1,550,117 | $ | 1,773,981 | $ | 2,310,072 | |||||||||
Operating income | $ | 98,194 | $ | 90,963 | $ | 84,886 | $ | 94,816 | $ | 22,243 | |||||||||
Net income (loss) | $ | 114,141 | $ | 56,391 | $ | 51,127 | $ | 47,294 | $ | (6,149 | ) | ||||||||
Basic earnings (loss) per share (Class A and B) | $ | 2.94 | $ | 1.48 | $ | 1.36 | $ | 1.27 | $ | (0.17 | ) | ||||||||
Diluted earnings (loss) per share (Class A and B) | $ | 2.91 | $ | 1.47 | $ | 1.36 | $ | 1.27 | $ | (0.17 | ) | ||||||||
Dividend per share | $ | 0.84 | $ | 0.84 | $ | 0.84 | $ | 0.84 | $ | 0.84 | |||||||||
Balance Sheet Data: | |||||||||||||||||||
Working capital | $ | 138,879 | $ | 229,659 | $ | 189,276 | $ | 195,491 | $ | 453,560 | |||||||||
Goodwill (4) | $ | 1,084,560 | $ | 955,874 | $ | 919,591 | $ | 851,640 | $ | 752,867 | |||||||||
Total assets | $ | 1,744,475 | $ | 1,598,464 | $ | 1,506,424 | $ | 1,487,402 | $ | 1,723,402 | |||||||||
Long-term debt | $ | 31,000 | $ | — | $ | — | $ | — | $ | 200,000 | |||||||||
(1) The Tax Cuts and Jobs Act, enacted on December 22, 2017, reduces the U.S. corporate tax rate from 35% to 21% beginning in 2018. Due to the enactment of the Tax Cuts and Jobs Act, our income tax expense was reduced by $50.6 million for the year ended December 31, 2017 from the re-measurement of our existing deferred tax assets and liabilities. | |||||||||||||||||||
(2) On April 15, 2014, we paid the redemption price plus accrued and unpaid interest on our 7.25% senior unsecured notes issued on April 13, 2010 for $200.0 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 as non-operating income. | |||||||||||||||||||
(3) We recorded a non-cash goodwill impairment charge of $118.4 million. | |||||||||||||||||||
(4) Over the past five years, we completed 9 acquisitions. In aggregate, these acquisitions have added $345.1 million in goodwill. For additional information on our recent acquisitions, see Note 3 "Acquisitions" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data." | |||||||||||||||||||
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 Supplementary Data." This discussion contains forward-looking statements that involve risks and uncertainties. For a description of these forward-looking statements, refer to Part I “Cautionary Statement Concerning 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 those discussed elsewhere in this Annual Report.
Overview
We provide mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. Now in our 50th year, we excel in full-spectrum cyber, data collection & analytics, enterprise IT, systems engineering and software application development solutions that support national and homeland security.
Federal spending grew in U.S. GFY 2017 for a second consecutive year following several years of budget constraints and uncertain funding levels. The U.S. GFY 2018 and GFY 2019 budget includes near term expansion of budgets for the Department of Defense related to readiness and force structure needs, which are generally viewed as favorable to our industry. However,
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Congressional funding appropriations continue to be debated in relation to policy priorities, national budget deficits, debt ceilings and the Budget Control Act (BCA). Entering 2018, we continue to operate under a Continuing Resolution while Congress details the funding priorities contained in the recently passed two year spending bill. This two year bill provides a framework for substantial increases in defense spending above BCA caps in GFY 2018 and GFY 2019. While the government operates under a Continuing Resolution, there is a potential risk of additional shutdowns which could adversely impact our business. Based on the Administration's stated priorities in dealing with significant global threats, readiness and force structure needs within the military, diplomatic, homeland and border security, and cyber aggressions by both state and non-state actors, we expect increases to defense spending relative to prior years.
Despite an improved outlook for defense spending, our industry remains competitive on price. To ensure our cost structure remains competitive, we will continually evaluate and adjust our levels of indirect spending to stay in line with the expected business opportunities. Our industry also remains competitive in attracting and retaining employees with the necessary skills and security clearances to perform the services we have promised in our contracts. Additionally, we will continue to pursue acquisitions that broaden our domain expertise and service offerings and/or establish relationships with new customers. Since going public in 2002, we have acquired and integrated 28 businesses into our operations. During 2017, we acquired InfoZen, LLC, a leading IT solution provider, with domain expertise in modernization, agile/DevOps software development, cloud migration and threat monitoring and assessment capabilities in support of critical national and homeland security missions.
Revenues
Substantially all of our revenues are derived from services and solutions provided to the U.S. government or to prime contractors supporting the U.S. government, including services provided by our employees and our subcontractors, and solutions that include third-party hardware and software that we purchase and integrate as a part of our overall solutions. Customer 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, | ||||||||
2017 | 2016 | 2015 | ||||||
DoD and intelligence agencies | 79 | % | 83 | % | 84 | % | ||
Federal civilian agencies | 18 | % | 14 | % | 15 | % | ||
State agencies, international agencies and commercial entities | 3 | % | 3 | % | 1 | % | ||
Total | 100 | % | 100 | % | 100 | % | ||
Our prime contractor revenues as a percentage of our total revenues were 88% for the three years ended December 31, 2017, 2016 and 2015.
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 us to render services throughout a period are 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
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of other billable direct costs.
Our contract mix varies from year-to-year due to numerous factors, including our business strategies and U.S. government procurement objectives. 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, | ||||||||
2017 | 2016 | 2015 | ||||||
Cost-reimbursable | 66 | % | 68 | % | 68 | % | ||
Fixed-price | 21 | % | 19 | % | 21 | % | ||
Time-and-materials | 13 | % | 13 | % | 11 | % | ||
Total | 100 | % | 100 | % | 100 | % | ||
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.
Cost of Services
Cost of services primarily includes direct costs incurred to provide services and solutions to our 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. As we earn higher profits on our own labor services, we expect the ratio of cost of services as a percentage 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 increases relative to our own labor services, we expect the ratio of cost of services as a percentage of revenues to increase.
The proportion that cost 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-and-materials contracts than cost-reimbursable contracts. Fixed-price contracts generally offer higher profit margin opportunities but can involve greater financial risk because we bear the 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 expenses 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 debt and deferred financing charges.
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Interest Income
Interest income is primarily from cash on hand and late invoice payments by the government.
Results of Operations
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
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, 2016 to December 31, 2017.
Year Ended December 31, | Year-to-Year Change | |||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2016 to 2017 | ||||||||||||||||
Dollars | Percentages | Dollars | Percent | |||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
REVENUES | $ | 1,717,018 | $ | 1,601,596 | 100.0 | % | 100.0 | % | $ | 115,422 | 7.2 | % | ||||||||
Cost of services | 1,463,599 | 1,369,775 | 85.3 | % | 85.5 | % | 93,824 | 6.8 | % | |||||||||||
General and administrative expenses | 155,225 | 140,858 | 9.0 | % | 8.8 | % | 14,367 | 10.2 | % | |||||||||||
OPERATING INCOME | 98,194 | 90,963 | 5.7 | % | 5.7 | % | 7,231 | 7.9 | % | |||||||||||
Interest expense | (1,375 | ) | (1,097 | ) | — | % | 0.1 | % | 278 | 25.3 | % | |||||||||
Interest income | 104 | 121 | — | % | — | % | (17 | ) | (14.0 | )% | ||||||||||
Other income (expense), net | 319 | 83 | — | % | — | % | 236 | 284.3 | % | |||||||||||
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS | 97,242 | 90,070 | 5.7 | % | 5.6 | % | 7,172 | 8.0 | % | |||||||||||
Benefit (provision) for income taxes | 16,859 | (33,786 | ) | 1.0 | % | 2.1 | % | (50,645 | ) | (149.9 | )% | |||||||||
Equity in gains of unconsolidated subsidiaries | 40 | 107 | — | % | — | % | (67 | ) | (62.6 | )% | ||||||||||
NET INCOME | $ | 114,141 | $ | 56,391 | 6.7 | % | 3.5 | % | $ | 57,750 | 102.4 | % | ||||||||
Revenues
The primary driver of our increase in revenues relates to revenues from new contract awards, growth on existing contracts and our acquisitions, which were offset by contracts and tasks that ended and reduced scope of work on some contracts. We expect revenues to increase in 2018 due to new contract awards and our recent acquisition.
Cost of services
The increase in cost of services was primarily due to increases in revenues. As a percentage of revenues, direct labor costs remained stable at 48% for both the years ended December 31, 2017 and 2016. 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 to 37% for the year ended December 31, 2017, compared to 38% for the same period in 2016. In 2018, we expect cost of services as a percentage of revenues to remain relatively stable as compared to 2017.
General and administrative expenses
The increase in general and administrative expenses was primarily due to an increase in incentive compensation from performance based plans, staffing increases to support the growth of our business, amortization of acquisition intangibles and bid and proposal spending. As a percentage of revenues, general and administrative expenses increased for the year ended December 31, 2017 as compared to the same period in 2016, due to the above mentioned spending increases. In 2018, we expect general and
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administrative expenses as a percentage of revenues to decrease slightly as compared to 2017.
Interest expense
The increase in interest expense was primarily due to increased borrowings on our revolving credit facility to fund the acquisition of InfoZen LLC (InfoZen). For additional information on the acquisition of InfoZen see Note 3 "Acquisitions" to our consolidated financial statements in Item 8.
Benefit (provision) for income taxes
Our effective tax rate is affected by recurring items, such as the relative amount of income we earn in various taxing jurisdictions and their tax rates. 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 rate was (17)% and 37% for the years ended December 31, 2017 and 2016, respectively. The Tax Cuts and Jobs Act, enacted on December 22, 2017, reduces the U.S. corporate tax rate from 35% to 21% beginning in 2018. Due to the enactment of the Tax Cuts and Jobs Act, our income tax expense was reduced by $50.6 million for the year ended December 31, 2017 from a re-measurement of our existing deferred tax assets and liabilities. For additional information concerning the re-measurement adjustment see Note 12 "Income Taxes" to our consolidated financial statements in Item 8. Our effective tax rate was also favorably impacted by tax benefits from the stock based compensation and deferred compensation plans. We expect our effective income tax rate for the year ended December 31, 2018 to be 26%.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
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, 2015 to December 31, 2016.
Year Ended December 31, | Year-to-Year Change | |||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2015 to 2016 | ||||||||||||||||
Dollars | Percentages | Dollars | Percent | |||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
REVENUES | $ | 1,601,596 | $ | 1,550,117 | 100.0 | % | 100.0 | % | $ | 51,479 | 3.3 | % | ||||||||
Cost of services | 1,369,775 | 1,320,697 | 85.5 | % | 85.2 | % | 49,078 | 3.7 | % | |||||||||||
General and administrative expenses | 140,858 | 144,534 | 8.8 | % | 9.3 | % | (3,676 | ) | (2.5 | )% | ||||||||||
OPERATING INCOME | 90,963 | 84,886 | 5.7 | % | 5.5 | % | 6,077 | 7.2 | % | |||||||||||
Interest expense | (1,097 | ) | (1,193 | ) | 0.1 | % | 0.1 | % | (96 | ) | (8.0 | )% | ||||||||
Interest income | 121 | 160 | — | % | — | % | (39 | ) | (24.4 | )% | ||||||||||
Other income (expense), net | 83 | 1,501 | — | % | 0.1 | % | (1,418 | ) | 94.5 | % | ||||||||||
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS | 90,070 | 85,354 | 5.6 | % | 5.5 | % | 4,716 | 5.5 | % | |||||||||||
Provision for income taxes | (33,786 | ) | (34,366 | ) | 2.1 | % | 2.2 | % | (580 | ) | (1.7 | )% | ||||||||
Equity in gains of unconsolidated subsidiaries | 107 | 139 | — | % | — | % | (32 | ) | 23.0 | % | ||||||||||
NET INCOME | $ | 56,391 | $ | 51,127 | 3.5 | % | 3.3 | % | $ | 5,264 | 10.3 | % | ||||||||
Revenues
The primary driver of our increase in revenues relates to revenues from new contract awards, growth on existing contracts, including higher levels of material procurements and our acquisitions. These increases were offset by contracts and tasks that ended during 2016 and reduced scope of work on some contracts.
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Cost of services
The increase in cost of services was primarily due to increases in revenues. As a percentage of revenues, direct labor costs decreased slightly to 48% for the year ended December 31, 2016, as compared to 49% for the same period in 2015. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, increased to 38% for the year ended December 31, 2016, compared to 37% for the same period in 2015.
General and administrative expenses
The decrease in general and administrative expenses was primarily due to the sale of ManTech Cyber Solutions International (MCSI) and cost reduction measures. As a percentage of revenues, general and administrative expenses decreased for the year ended December 31, 2016 as compared to the same period in 2015, due to the increase in revenues and reduced spending.
Other income (expense), net
The decrease in other income (expense), net was due to the gain on the sale of MCSI during 2015.
Provision for income taxes
Our effective tax rate is impacted by recurring items, such as tax rates and the relative amount of income we earn in various taxing jurisdictions and their tax rates. 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 rate was 37% and 40% for each of the years ended December 31, 2016 and 2015, respectively. The decrease in our effective tax rate is primarily due to favorable performance in our executive deferred compensation plan and changes in our state tax apportionments, as well as one-time items.
Backlog
For the years ended December 31, 2017, 2016 and 2015 our backlog was $7.1 billion, $4.9 billion and $4.1 billion, respectively, of which $1.4 billion, $1.0 billion and $1.0 billion, respectively, was funded backlog. The increase in our backlog is due to our receipt of new awards and the acquisition of InfoZen. The current trend is that contracts are awarded for a longer term, which increases the time over which backlog will be recognized as revenue. 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, 2017, our cash and cash equivalents balance was $9.5 million. There were $31.0 million in outstanding borrowings under our revolving credit facility at December 31, 2017. At December 31, 2017, we were contingently liable under letters of credit totaling $15.3 million, which reduced our ability to borrow under our revolving credit facility by that amount. The maximum available borrowings under our revolving credit facility at December 31, 2017 were $453.7 million.
Generally, cash provided by operating activities is adequate to fund our operations, including payments under our regular cash dividend program. Due to short-term 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) were 61 and 73 for the quarters ended December 31, 2017 and 2016, respectively. For the years ended December 31, 2017, 2016 and 2015, our net cash flows from operating activities were $153.0 million, $95.8 million and $153.9 million, respectively. The increase in net cash flows from operating activities during the year ended December 31, 2017 when compared to the same period in 2016 was primarily due to an increase in net income, timing of receivables, accounts payable and accrued salaries and other related expenses, offset by an increase in income tax payments. The decrease in net cash flows from operating activities during the year ended December 31, 2016 compared to the same period in 2015 was primarily due to significant improvements in our DSO, our ability to manage vendor payments and
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higher net income.
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 years ended December 31, 2017, 2016 and 2015, our net cash outflows from investing activities were $219.0 million, $72.1 million and $112.7 million, respectively. For the year ended December 31, 2017, our net cash outflows from investing activities were primarily due to the acquisition of InfoZen and capital expenditures. The increase in capital expenditures was primarily due to the purchase of assets in support of a new managed IT services contract. Managed IT contracts typically require upfront purchases of equipment and infrastructure to support the promised services in the contract. Managed IT contracts also require asset replenishments throughout the contract's life which will increase our capital expenditures above historical amounts. For the year ended December 31, 2016, our net cash outflows from investing activities were primarily due to the acquisition of Oceans Edge, Inc., Cyber Division and Edaptive Systems LLC as well as capital expenditures. For the year ended December 31, 2015, our net cash outflows from investing activities were primarily due to the acquisitions of Knowledge Consulting Group, Inc. and Welkin Associates, Ltd., our investment in CounterTack Inc. and capital expenditures.
Cash Flows from Financing Activities
For the years ended December 31, 2017, 2016 and 2015, our net cash inflows (outflows) from financing activities were $10.6 million, $(10) thousand and $(23.6) million, respectively. For the year ended December 31, 2017, our net cash inflows from financing activities were primarily due to net borrowings under our revolving credit facility to fund the acquisition of InfoZen and proceeds from the exercise of stock options which were partially offset by dividend payments and debt issuance costs related the amendment of our credit facility. For the year ended December 31, 2016, our net cash outflows from financing activities were primarily due to dividends paid offset by the proceeds from the exercise of stock options and the excess tax benefits from the exercise of stock options. For the year ended December 31, 2015, our net cash outflows from financing activities were primarily due to our dividend payments.
Revolving Credit Facility
We maintain a credit agreement with a syndicate of lenders led by Bank of America, N.A., as sole administrative agent. The credit agreement provides for a $500 million revolving credit facility, with a $75 million letter of credit sublimit and a $30 million swing line loan sublimit. The credit agreement also includes an accordion feature that permits us to arrange with the lenders for the provision of additional commitments. The maturity date is August 17, 2022. On August 17, 2017, we amended the credit agreement, which among other things increased the letter of credit sublimit to $75 million. We deferred $2.2 million in debt issuance costs, cumulatively over the agreement, which are amortized over the term of the credit agreement.
Borrowings under our credit agreement are collateralized by substantially all the assets of us and our Material Subsidiaries (as defined in the credit agreement) and bear interest at one of the following variable rates as selected by us at the time of borrowing: a London Interbank Offer Rate (LIBOR) based rate plus market spreads (1.25% to 2.25% based on our consolidated total leverage ratio) or Bank of America's base rate plus market spreads (0.25% to 1.25% based on our consolidated total leverage ratio).
The terms of the credit agreement permit prepayment and termination of the loan commitments at any time, subject to certain conditions. The credit agreement requires us to comply with specified financial covenants, including the maintenance of certain consolidated leverage ratios and a certain consolidated coverage ratio. The credit agreement also contains various covenants, including affirmative covenants with respect to certain reporting requirements and maintaining certain business activities, and negative covenants that, among other things, may limit or impose restrictions on our ability to incur liens, incur additional indebtedness, make investments, make acquisitions and undertake certain other actions. As of, and during the fiscal years ending December 31, 2017 and 2016, we were in compliance with our financial covenants under the credit agreement.
There was $31.0 million and $0 outstanding on our revolving credit facility at December 31, 2017 and 2016, respectively.
Capital Resources
We believe the capital resources available to us from cash on hand, our remaining capacity under our revolving credit facility, and cash from our operations are adequate to fund our anticipated cash requirements for at least the next year. We anticipate financing our external growth from acquisitions and our longer-term internal growth through one or more of the following sources: cash from operations; use of our revolving credit facility; and additional borrowings of debt or issuance of equity.
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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 the years ended December 31, 2017 and 2016, we declared and paid quarterly dividends in the amount of $0.21 per share on both classes of common stock. On February 21, 2018, we declared a quarterly cash dividend in the amount of $0.25 per share, to be paid in March 2018. 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 our Board of Directors deems relevant.
Off-Balance Sheet Arrangements
In the ordinary course of business, we use letters of credit to satisfy certain contractual terms with our customers. As of December 31, 2017, $15.3 million in letters of credit were issued but undrawn. We have an outstanding performance bond in connection with a contract between ManTech MENA, LLC and Jadwalean International Operations and Management Company to fulfill technical support requirements for the Royal Saudi Air Force. This performance bond is guaranteed by a letter of credit in the amount of $15.2 million. We have off-balance sheet arrangements related to operating leases. For a description of our operating leases, see Note 9 "Commitments and Contingencies" to our consolidated financial statements in Item 8 "Financial Statement and Supplementary Data."
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 U.S. generally accepted accounting principles (GAAP). 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 more fully described in the notes to our consolidated financial statements included in this report.
Revenue Recognition and Cost Estimation
We recognize revenues when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable and collectability is reasonably assured. We have a standard internal process that we use to determine whether all required criteria for revenue recognition have been met.
Our revenues consist primarily of services provided by our employees and the pass through of costs for materials and subcontract efforts under contracts with our customers. Cost of services consists primarily of compensation expenses for program personnel, the fringe benefits associated with this compensation and other direct expenses incurred to complete programs, including cost of materials and subcontract efforts.
We derive the majority of our revenues from cost-plus-fixed-fee, cost-plus-award-fee, fixed-price or time-and-materials contracts. Revenues for cost-reimbursable contracts are recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For performance-based fees under cost-reimbursable contracts, 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 approval by the customer. For time-and-materials contracts, revenues are recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. For long-term fixed-price production contracts, revenues are recognized at a rate per unit as the units are delivered or by other methods to measure services provided. Revenues from other long-term fixed-price contracts are 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.
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For long-term contracts, specifically described in the scope section of Accounting Standards Codification (ASC) 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts, we apply the percentage of completion method. Under the percentage of completion method, income is recognized at a consistent profit margin over the period of performance based on estimated profit margins at completion of the contract. This method of accounting requires estimating the total revenues and total contract cost at completion of the contract. During the performance of long-term contracts, these estimates are periodically reviewed and revisions are made as required using the cumulative catch-up method of accounting. The impact on revenues 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.
Accounting for Business Combinations, Goodwill and Other Intangible Assets
The purchase price of an acquired business is allocated to the tangible assets, financial assets and separately recognized intangible assets acquired less liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. Such fair value assessments require judgments and estimates that can be affected by contract performance and other factors over time, which may cause final amounts to differ materially from original estimates.
We review goodwill at least annually for impairment, or whenever events or circumstances indicate that the carrying value of long-lived assets may not be fully recoverable. We perform this review at the reporting unit level, which is one level below our one reportable segment.
In reviewing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test (described below), otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.
The goodwill impairment test is a two-step process performed at the reporting unit level. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying value (including goodwill). If the reporting unit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit's fair value is less than its carrying value, an impairment of goodwill may exist, requiring a second step to be performed. Step two of this test measures the amount of the impairment loss, if any. Step two of this test requires the allocation of the reporting unit's fair value to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as a goodwill impairment charge in operations.
The fair values of the reporting units are determined based on a weighting of the income approach, market approach and market transaction approach. The income approach is a valuation technique in which fair value is based from forecasted future cash flow discounted at the appropriate rate of return commensurate with the risk as well as current rates of return for equity and debt capital as of the valuation date. The forecast used in our estimation of fair value was developed by management based on a contract basis, incorporating adjustments to reflect known contract and market considerations (such as reductions and uncertainty in government spending, pricing pressure and opportunities). The discount rate utilizes a risk adjusted weighted average cost of capital. The market approach is a valuation technique in which the fair value is calculated based on market prices realized in an actual arm's length transaction. The technique consists of undertaking a detailed market analysis of publicly traded companies that provides a reasonable basis for comparison to us. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. The market transaction approach is a valuation technique in which the fair value is calculated based on market prices realized in actual arm's length transactions. The technique consists of undertaking a detailed market analysis of merged and acquired companies that provides a reasonable basis for comparison to us. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. To assess the reasonableness of the calculated reporting unit fair values, we compare the sum of the reporting units' fair values to our market capitalization (per share stock price times the number of shares outstanding) and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization), and then assess the reasonableness of our implied control premium.
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We have elected to perform our annual review as of October 31st of each calendar year. The results of our annual goodwill impairment test as of October 31, 2017 indicated that the estimated fair value of each reporting unit substantially exceeded its respective carrying value. In addition, management monitors events and circumstances that could result in an impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred between annual testing dates. Events that could cause the fair value of our long-lived assets to decrease include: changes in our business environment or market conditions; a material change in our financial outlook, including declines in expected revenue growth rates and operating margins; or a material decline in the market price for our stock. If any impairment were indicated as a result of a review, we would recognize a loss based on the amount by which the carrying amount exceeds the estimated fair value.
Due to the many variables inherent in the estimation of a reporting unit's fair value and the relative size of our recorded goodwill, differences in assumptions may have a material effect on the results of our goodwill impairment analysis.
Recently Issued But Not Yet Adopted Accounting Standards Updates
For information on the recently issued but not yet adopted Accounting Standards Updates, see Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data."
Contractual Obligations
Our contractual obligations as of December 31, 2017 are as follows (in thousands):
Payments Due By Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Debt obligations (1) | $ | 31,000 | $ | — | $ | — | $ | 31,000 | $ | — | ||||||||||
Operating lease obligations (2) | 131,276 | 32,737 | 49,190 | 33,356 | 15,993 | |||||||||||||||
Other long-term liabilities (3) | 13,048 | 2,435 | 4,406 | 3,492 | 2,715 | |||||||||||||||
Accrued defined benefit obligations (4) | 1,150 | 124 | 238 | 221 | 567 | |||||||||||||||
Total | $ | 176,474 | $ | 35,296 | $ | 53,834 | $ | 68,069 | $ | 19,275 | ||||||||||
(1) We may elect to pay all of or a portion of this obligation earlier than contractually required. See Note 8 "Debt" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding debt and related matters. | ||||||||||||||||||||
(2) See Note 9 "Commitments and Contingencies" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding operating leases. | ||||||||||||||||||||
(3) Includes approximately $10.6 million of deferred rent liabilities and $0.2 million of gross unrecognized tax benefits. See Note 9 "Commitments and Contingencies" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding deferred rent liabilities. See Note 12 "Income Taxes" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding gross unrecognized tax benefits. | ||||||||||||||||||||
(4) Includes unfunded pension obligations related to nonqualified supplemental defined benefit pension plans for certain retired employees of an acquired company, which is included in the accrued retirement amount on our consolidated balance sheets. See Note 11 "Retirement Plans" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding retirement plans. | ||||||||||||||||||||
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Our exposure to market risk relates to changes in interest rates for borrowings under our revolving credit facility. At December 31, 2017, we had $31.0 million outstanding on our revolving credit facility. Borrowings under our revolving credit facility bear interest at variable rates. A hypothetical 10% increase in interest rates would have a $22 thousand dollar effect on our interest expense for the year ended December 31, 2017.
We do not use derivative financial instruments for speculative or trading purposes. When we have excess cash, we invest in short-term, investment grade, interest-bearing securities. Our investments are made in accordance with an investment policy. Under this policy, no investment security can have a maturity exceeding six months and the weighted average maturity of the portfolio cannot exceed 60 days.
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Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements | Page |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of December 31, 2017 and 2016 | |
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 | |
Notes to Consolidated Financial Statements | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of ManTech International Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ManTech International Corporation and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Mclean, Virginia
February 23, 2018
We have served as the Company's auditor since 1999.
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MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share and Per Share Amounts)
December 31, | |||||||
2017 | 2016 | ||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 9,451 | $ | 64,936 | |||
Receivables—net | 311,410 | 320,677 | |||||
Prepaid expenses and other | 46,207 | 34,423 | |||||
Contractual inventory | 96 | 1,277 | |||||
Total Current Assets | 367,164 | 421,313 | |||||
Goodwill | 1,084,560 | 955,874 | |||||
Other intangible assets—net | 194,348 | 154,931 | |||||
Property and equipment—net | 46,082 | 23,121 | |||||
Employee supplemental savings plan assets | 33,555 | 29,383 | |||||
Investments | 11,843 | 11,691 | |||||
Other assets | 6,923 | 2,151 | |||||
TOTAL ASSETS | $ | 1,744,475 | $ | 1,598,464 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
LIABILITIES | |||||||
Accounts payable and accrued expenses | $ | 122,405 | $ | 108,888 | |||
Accrued salaries and related expenses | 87,064 | 70,768 | |||||
Billings in excess of revenue earned | 18,816 | 11,998 | |||||
Total Current Liabilities | 228,285 | 191,654 | |||||
Long term debt, net of current portion | 31,000 | — | |||||
Deferred income taxes—non-current | 97,194 | 122,081 | |||||
Accrued retirement | 34,517 | 30,581 | |||||
Other long-term liabilities | 10,505 | 12,481 | |||||
TOTAL LIABILITIES | 401,501 | 356,797 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
STOCKHOLDERS' EQUITY | |||||||
Common stock, Class A—$0.01 par value; 150,000,000 shares authorized; 26,285,773 and 25,795,973 shares issued at December 31, 2017 and 2016; 26,041,660 and 25,551,860 shares outstanding at December 31, 2017 and 2016 | 263 | 258 | |||||
Common stock, Class B—$0.01 par value; 50,000,000 shares authorized; 13,189,245 and 13,190,745 shares issued and outstanding at December 31, 2017 and 2016 | 132 | 132 | |||||
Additional paid-in capital | 492,030 | 471,906 | |||||
Treasury stock, 244,113 and 244,113 shares at cost at December 31, 2017 and 2016 | (9,158 | ) | (9,158 | ) | |||
Retained earnings | 860,027 | 778,710 | |||||
Accumulated other comprehensive loss | (320 | ) | (181 | ) | |||
TOTAL STOCKHOLDERS' EQUITY | 1,342,974 | 1,241,667 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,744,475 | $ | 1,598,464 | |||
See notes to consolidated financial statements.
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MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
REVENUES | $ | 1,717,018 | $ | 1,601,596 | $ | 1,550,117 | |||||
Cost of services | 1,463,599 | 1,369,775 | 1,320,697 | ||||||||
General and administrative expenses | 155,225 | 140,858 | 144,534 | ||||||||
OPERATING INCOME | 98,194 | 90,963 | 84,886 | ||||||||
Interest expense | (1,375 | ) | (1,097 | ) | (1,193 | ) | |||||
Interest income | 104 | 121 | 160 | ||||||||
Other income (expense), net | 319 | 83 | 1,501 | ||||||||
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS | 97,242 | 90,070 | 85,354 | ||||||||
Benefit (provision) for income taxes | 16,859 | (33,786 | ) | (34,366 | ) | ||||||
Equity in gains of unconsolidated subsidiaries | 40 | 107 | 139 | ||||||||
NET INCOME | $ | 114,141 | $ | 56,391 | $ | 51,127 | |||||
BASIC EARNINGS PER SHARE: | |||||||||||
Class A common stock | $ | 2.94 | $ | 1.48 | $ | 1.36 | |||||
Class B common stock | $ | 2.94 | $ | 1.48 | $ | 1.36 | |||||
DILUTED EARNINGS PER SHARE: | |||||||||||
Class A common stock | $ | 2.91 | $ | 1.47 | $ | 1.36 | |||||
Class B common stock | $ | 2.91 | $ | 1.47 | $ | 1.36 | |||||
See notes to consolidated financial statements.
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MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
NET INCOME | $ | 114,141 | $ | 56,391 | $ | 51,127 | |||||
OTHER COMPREHENSIVE INCOME (LOSS): | |||||||||||
Actuarial gain (loss) on defined benefit pension plans, net of tax | (84 | ) | (29 | ) | 84 | ||||||
Translation adjustments, net of tax | (55 | ) | (43 | ) | 14 | ||||||
Total other comprehensive income (loss) | (139 | ) | (72 | ) | 98 | ||||||
COMPREHENSIVE INCOME | $ | 114,002 | $ | 56,319 | $ | 51,225 | |||||
See notes to consolidated financial statements.
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MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Common Stock, Class A | |||||||||||
At beginning of year | $ | 258 | $ | 247 | $ | 244 | |||||
Stock option exercises | 5 | 11 | 3 | ||||||||
At end of year | 263 | 258 | 247 | ||||||||
Common Stock, Class B | |||||||||||
At beginning of year | 132 | 132 | 132 | ||||||||
At end of year | 132 | 132 | 132 | ||||||||
Additional Paid-In Capital | |||||||||||
At beginning of year | 471,906 | 438,168 | 428,895 | ||||||||
Stock option exercises | 13,619 | 30,551 | 7,865 | ||||||||
Stock compensation expense | 6,319 | 3,323 | 4,379 | ||||||||
Tax deficiency from the exercise of stock options | — | (136 | ) | (2,971 | ) | ||||||
Cumulative-effect adjustment for adoption of Accounting Standards Update 2016-09 | 186 | — | — | ||||||||
At end of year | 492,030 | 471,906 | 438,168 | ||||||||
Treasury Stock, at cost | |||||||||||
At beginning of year | (9,158 | ) | (9,158 | ) | (9,158 | ) | |||||
At end of year | (9,158 | ) | (9,158 | ) | (9,158 | ) | |||||
Retained Earnings | |||||||||||
At beginning of year | 778,710 | 754,457 | 734,873 | ||||||||
Net income | 114,141 | 56,391 | 51,127 | ||||||||
Dividends | (32,709 | ) | (32,138 | ) | (31,543 | ) | |||||
Cumulative-effect adjustment for adoption of Accounting Standards Update 2016-09 | (115 | ) | — | — | |||||||
At end of year | 860,027 | 778,710 | 754,457 | ||||||||
Accumulated Other Comprehensive Loss | |||||||||||
At beginning of year | (181 | ) | (109 | ) | (207 | ) | |||||
Actuarial gain (loss) on defined benefit pension plans, net of tax | (84 | ) | (29 | ) | 84 | ||||||
Translation adjustments, net of tax | (55 | ) | (43 | ) | 14 | ||||||
At end of year | (320 | ) | (181 | ) | (109 | ) | |||||
Total Stockholders' Equity | $ | 1,342,974 | $ | 1,241,667 | $ | 1,183,737 | |||||
See notes to consolidated financial statements
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MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: | |||||||||||
Net income | $ | 114,141 | $ | 56,391 | $ | 51,127 | |||||
Adjustments to reconcile net income to net cash flows from operating activities: | |||||||||||
Depreciation and amortization | 33,792 | 30,191 | 30,276 | ||||||||
Deferred income taxes | (24,815 | ) | 18,254 | 30,553 | |||||||
Stock-based compensation | 6,319 | 3,323 | 4,379 | ||||||||
(Gain) loss on sale and retirement of property and equipment | 76 | (12 | ) | (656 | ) | ||||||
Equity in gains of unconsolidated subsidiaries | (40 | ) | (107 | ) | (139 | ) | |||||
Excess tax benefits from the exercise of stock options | — | (1,656 | ) | (73 | ) | ||||||
Gain on disposition of business | — | — | (1,692 | ) | |||||||
Change in assets and liabilities—net of effects from acquired businesses: | |||||||||||
Receivables-net | 18,643 | (5,611 | ) | 82,727 | |||||||
Prepaid expenses and other | (7,422 | ) | (10,641 | ) | (4,990 | ) | |||||
Contractual inventory | 1,181 | (1,277 | ) | — | |||||||
Employee supplemental savings plan asset | (4,172 | ) | (1,826 | ) | 4,184 | ||||||
Accounts payable and accrued expenses | (541 | ) | (162 | ) | (44,103 | ) | |||||
Accrued salaries and related expenses | 13,095 | 6,926 | 2,703 | ||||||||
Billings in excess of revenue earned | 1,177 | (687 | ) | 913 | |||||||
Accrued retirement | 3,936 | 704 | (2,927 | ) | |||||||
Other | (2,412 | ) | 1,954 | 1,601 | |||||||
Net cash flow from operating activities | 152,958 | 95,764 | 153,883 | ||||||||
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: | |||||||||||
Acquisition of businesses-net of cash acquired | (177,193 | ) | (60,556 | ) | (101,556 | ) | |||||
Purchases of property and equipment | (31,118 | ) | (7,662 | ) | (5,202 | ) | |||||
Investment in capitalized software for internal use | (7,744 | ) | (2,748 | ) | (1,025 | ) | |||||
Deferred contract costs | (2,877 | ) | — | — | |||||||
Payments to acquire investments | (110 | ) | (1,183 | ) | (4,500 | ) | |||||
Proceeds from sale of property and equipment | 3 | 17 | 696 | ||||||||
Transaction costs for disposition of business | — | — | (1,174 | ) | |||||||
Proceeds from sale of investment | — | — | 13 | ||||||||
Net cash flow from (used in) investing activities | (219,039 | ) | (72,132 | ) | (112,748 | ) | |||||
36
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: | |||||||||||
Borrowings under revolving credit facility | 136,500 | — | 163,200 | ||||||||
Repayments under revolving credit facility | (105,500 | ) | — | (163,200 | ) | ||||||
Dividends paid | (32,705 | ) | (32,139 | ) | (31,543 | ) | |||||
Proceeds from exercise of stock options | 13,624 | 30,562 | 7,868 | ||||||||
Debt issuance costs | (1,323 | ) | (89 | ) | — | ||||||
Excess tax benefits from the exercise of stock options | — | 1,656 | 73 | ||||||||
Net cash flow from (used in) financing activities | 10,596 | (10 | ) | (23,602 | ) | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (55,485 | ) | 23,622 | 17,533 | |||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 64,936 | 41,314 | 23,781 | ||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 9,451 | $ | 64,936 | $ | 41,314 | |||||
SUPPLEMENTAL CASH FLOW INFORMATION | |||||||||||
Cash paid for interest | $ | 1,166 | $ | 983 | $ | 1,203 | |||||
Noncash investing and financing activities: | |||||||||||
Capital expenditures incurred but not yet paid | $ | 1,345 | $ | 325 | $ | — | |||||
Deferred contract costs incurred but not yet paid | $ | 872 | $ | — | $ | — | |||||
See notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2017, 2016 and 2015
1. | Description of the Business |
ManTech International Corporation (depending on the circumstances, “ManTech” “Company” “we” “our” “ours” or “us”) provide mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. Now in our 50th year, we excel in full-spectrum cyber, data collection & analytics, enterprise IT, systems engineering and software application development solutions that support national and homeland security.
2. | Summary of Significant Accounting Policies |
Principles of Consolidation-Our consolidated financial statements include the accounts of ManTech International Corporation, subsidiaries we control and variable interest entities that are required to be consolidated. All intercompany accounts and transactions have been eliminated.
Use of Accounting Estimates-We prepare our consolidated financial statements in conformity with U.S. GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates involve judgments with respect to, among other things, various future economic factors that are difficult to predict and are beyond the control of us. Therefore, actual amounts could differ from these estimates.
Revenue Recognition-We derive the majority of our revenues from cost-plus-fixed-fee, cost-plus-award-fee, fixed-price and time-and-materials contracts. Revenues for cost-reimbursable contracts are recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For performance-based fees under cost-reimbursable contracts, 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 approval by the customer. For time-and-materials contracts, revenues are recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. For long-term fixed-price contracts, revenues are recognized at a rate per unit as the units are delivered or by other methods to measure services provided. Revenues from other long-term fixed-price contracts are recognized ratably over the contract period or by other appropriate methods to measure services provided. Contract costs are expensed as incurred except for certain limited long-term contracts noted below.
For long-term contracts, specifically described in the scope section of ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts, we apply the percentage of completion method. Under the percentage of completion method, income is recognized at a consistent profit margin over the period of performance based on estimated profit margins at completion of the contract. This method of accounting requires estimating the total revenues and total contract cost at completion of the contract. During the performance of long-term contracts, these estimates are periodically reviewed and revisions are made as required using the cumulative catch-up method of accounting. The impact on revenues 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.
Cost of Services-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 subcontractor efforts.
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 include stock-based compensation, as well as depreciation and amortization expenses related to the general and administrative function. We recognize interest related to unrecognized tax benefits within interest expense and penalties related to unrecognized tax benefits in general and administrative expenses.
We classify indirect costs incurred as cost of services and general and administrative expenses in the same manner as such
38
costs are defined in our disclosure statements under U.S. Government Cost Accounting Standards.
Cash and Cash Equivalents-For the purpose of reporting cash flows, 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.
Property and Equipment-Property and equipment are recorded at original cost to us. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gain or loss is included in income. Maintenance and repairs are charged to expense as incurred.
Depreciation and Amortization Method-Furniture and office equipment are depreciated using the straight-line method with estimated useful lives ranging from one to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the asset's useful life or the term of the lease.
Goodwill-The purchase price of an acquired business is allocated to the tangible assets, financial assets and separately recognized intangible assets acquired less liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. We review goodwill at least annually for impairment, or whenever events or circumstances indicate that the carrying value of long-lived assets may not be fully recoverable.
Other Intangible Assets-Contract rights and other intangible assets are amortized primarily using the pattern of benefits method over periods ranging from one to twenty-five years.
We account for the cost of computer software developed or obtained for internal use in accordance with ASC 350-985, Intangibles - Goodwill and Other - Software. These capitalized software costs are included in other intangible assets, net.
We account for software development costs related to software products for sale, lease or otherwise marketed in accordance with ASC 985-20, Software - Costs of Software to Be Sold, Leased, or Marketed. For projects fully funded by us, development costs are capitalized from the point of demonstrated technological feasibility until the point in time that the product is available for general release to customers. Once the product is available for general release, capitalized costs are amortized based on units sold or on a straight-line basis over a five-year period or other such shorter period as may be required.
Impairment of Long-Lived Assets-Whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be fully recoverable, we evaluate the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. If any impairment were indicated as a result of this review, we would recognize a loss based on the amount by which the carrying amount exceeds the estimated fair value.
Employee Supplemental Savings Plan (ESSP) Assets-We maintain several non-qualified defined contribution supplemental retirement plans for certain key employees that are accounted for in accordance with ASC 710-10-05, Compensation - General - Deferred Compensation - Rabbi Trust, as the underlying assets are held in rabbi trusts with investments directed by the respective employee. A rabbi trust is a grantor trust generally set up to fund compensation for a select group of management and the assets of this trust are available to satisfy the claims of general creditors in the event of bankruptcy of us. The assets held by the rabbi trusts are recorded at cash surrender value in our consolidated financial statements as ESSP assets with a related liability to employees recorded as a deferred compensation liability in accrued retirement.
Billings In Excess of Revenue Earned-We receive advances and milestone payments from customers that exceed the revenues earned to date. We classify such items as current liabilities.
Stock-based Compensation-We account for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation, which requires the use of a valuation model to calculate the fair value of stock-based awards. We have elected to use the Black-Scholes-Merton pricing model to determine fair value of stock options on the dates of grant for our stock options. The fair value is included in operating expenses or capitalized, as appropriate, straight-line over the period in which service is provided in exchange for the award. The grant date fair value of the restricted stock is equal to the closing market price of our common stock on the date of grant. The compensation expense for restricted stock is recognized over the service period and is based on the grant date fair value of the shares. The grant date fair value of the restricted stock unit (RSU) is equal to the closing market price of our common stock on the grant date less the present value of dividends expected to be awarded during the service period. We recognize the grant date fair value of RSUs of shares we expect to issue as compensation expense ratably over the requisite service period. We account for forfeitures as they occur.
Income Taxes-We account for income taxes in accordance with ASC 740, Income Taxes. Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets
39
and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year-to-year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would “more likely than not” sustain the position following an audit. For tax positions meeting the “more likely than not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Foreign-Currency Translation-All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at fiscal year-end exchange rates. Income and expense items are translated at average monthly exchange rates prevailing during the fiscal year. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss).
Comprehensive Income (Loss)-Comprehensive income (loss) consists of net income; translation adjustments, net of tax; and actuarial gain (loss) on defined benefit pension plan, net of tax.
Fair Value of Financial Instruments-The carrying value of our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value because of the short-term nature of these amounts.
Variable Interest Entities (VIEs)-We determine whether we have a controlling financial interest in a VIE. The reporting entity with a variable interest or interest that provides the reporting entity with a controlling financial interest in a VIE will have both (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. We have one entity that has been consolidated as a VIE. The purpose of the entity is to perform on certain U.S. Navy contracts. The maximum amount of loss we are exposed to as of December 31, 2017 was not material to our consolidated financial statements.
Investments-Investments where we have the ability to exercise significant influence, but we do not control, are accounted for under the equity method of accounting and are included in other assets on our consolidated balance sheets. Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method of accounting, our share of the net earnings or losses of the investee is included in equity in earnings or losses of unconsolidated subsidiaries on our consolidated statement of income.
Investments where we have less than 20% ownership interest in the investee and lack the ability to exercise significant influence are accounted for under the cost method. Under the cost method, we recognize our investment in the stock of an investee as an asset. The investment is measured initially at cost. We recognize as income dividends received that are distributed from net accumulated earnings. Dividends received in excess of earnings are considered a return of investment and are recorded as reductions of costs of the investment. Impairment is assessed at the individual investment level. An investment is impaired if the fair value of the investment is less than its costs. If it is determined that the impairment is other than temporary, then an impairment loss is recognized in earnings. The fair value of the investment would become the new cost basis of the investment and will not be adjusted for subsequent recoveries in fair value.
Business Combinations-The accounting for our business combinations consists of allocating the purchase price to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values, with the excess recorded as goodwill. We have up to one year from the acquisition date to use information as of each acquisition date to adjust the fair value of the acquired assets and liabilities, which may result in material changes to their recorded values with an offsetting adjustment to goodwill.
Recently Adopted ASUs
On January 1, 2017, we adopted Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718). The changes in the ASU were adopted prospectively. The ASU requires all excess tax benefits or deficiencies to be recognized as income tax expense or benefit in the consolidated statement of income. Previously, excess tax benefits and deficiencies were recorded as a component of paid-in capital. For the years ended December 31, 2016 and 2015, we recorded $0.1 million and $3.0 million to paid-in capital for the net tax deficiencies related to the exercise of stock options, vested cancellations and the vesting of restricted stock. For the year ended December 31, 2017, we recorded a net tax benefit of $2.7 million to income tax expense related to the exercise of stock options, vested cancellations and the vesting of restricted stock. The ASU allows a policy election to account for forfeitures as they occur verses requiring a forfeiture estimate. We have elected to account for forfeitures when
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they occur. Upon transition we recognized a cumulative-effect adjustment to retained earnings of $0.2 million related to previously estimated forfeitures. Under the ASU, excess tax benefits are no longer presented as financing activities in the statement of cash flows. The change in the presentation in the statement of cash flows was applied prospectively beginning January 1, 2017.
Recently Issued But Not Yet Adopted ASUs
On May 10, 2017, Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which seeks to provide clarity, reduce diversity in practice and reduce cost and complexity when applying the guidance in ASC 718, Compensation—Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. ASU 2017-09 provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in ASC 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in ASU 2017-09. The amendments are effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.
On January 26, 2017, the FASB has issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. Finally, this ASU amends the Overview and Background sections of the ASC as part of the FASB’s initiative to unify and improve such sections across Topics and Subtopics. Public entities that are SEC filers should adopt the amendments in this ASU prospectively for their annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. Note that early adoption is permitted for all entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will continue to evaluate the effects of this ASU in conjunction with our goodwill impairment tests.
On January 5, 2017, the FASB has issued ASU 2017-01, Business Combinations (Topic 805)—Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes and outputs. While an integrated set of assets and activities (collectively, a “set”) that is a business usually has outputs, outputs are not required to be present. Additionally, all of the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in ASU 2017-01 provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If, however, the screen is not met, then the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. Finally, the amendments in this ASU narrow the definition of the term “output” so that the term is consistent with the manner in which outputs are described in Topic 606. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permissible. We do not expect this ASU to have a material effect on our consolidated financial statements.
On August 26, 2016, the FASB issued ASU 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the following eight specific cash flow issues: debt prepayment or debt
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extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in ASU 2016-15 become effective for fiscal years that start after December 15, 2017. We plan to apply it retrospectively to all periods presented in our quarterly and annual reports on Form 10-Q and Form 10-K. We plan to apply the equity method of accounting for applicable investments. Therefore, we will make an accounting policy election to classify distributions received from equity method investees using the cumulative earnings approach. Distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the investor (as adjusted for amortization of basis differences). When such an excess occurs, the current-period distribution up to this excess is considered a return of investment and should be classified as cash inflows from investing. We do not expect this ASU to have a material effect on our consolidated financial statements.
On February 25, 2016, the FASB issued ASU 2016-02—Leases (Topic 842). The amendments in this ASU create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors should apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. This ASU is effective for public entities for annual periods after December 15, 2018, and interim periods therein. Early adoption is permitted for all entities. We are currently evaluating methods of adoption as well as the effect on our consolidated financial statements. However, it is expected to increase total assets and total liabilities for current operating leases that are currently recorded off balance sheet.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition guidance, including ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certain of our contracts. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 deferred the effective date of ASU 2014-09 for all entities by one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Several related ASUs have been issued since the issuance of ASU 2014-09. These ASUs, which modify certain sections of ASU 2014-09, are intended to promote a more consistent interpretation and application of the principles outlined in the standard.
The adoption of ASU 2014-09 will impact our policies, controls, business processes and information systems. To prepare for the changes in this guidance, we developed a plan for adoption. Based on our plan, we commenced an assessment in 2016 on the impacts of this guidance on a representative sample of our existing contract population. The sample contracts selected covered more than 20% of our existing revenue base and included contracts from all of our various contract types. A majority of the contracts we tested were not impacted by the new guidance. For contracts that were impacted, we identified two primary differences. First, the determination of performance obligations under this ASU has led to a different unit of accounting then we are currently applying. Second, we reassessed whether a contract, or performance obligation, met the definition of a "stand ready to perform" or "series" obligation. Those contracts that do not meet the "stand ready to perform" or "series" definition will be transitioned to revenue recognition model where revenue is recognized over time as the performance obligation is satisfied, primarily based on cost incurred. We expect the impact of these changes to produce a more consistent gross margin period-to-period as the obligations are satisfied.
We developed and substantially completed a detailed implementation plan during 2017, which includes, among other things, an update to our policies, development of disclosures, updates to our controls and application of the guidance across our contract population. We will adopt ASU 2014-09 under the modified retrospective method to contracts not substantially complete at January 1, 2018. Under the modified retrospective transition method, we will record a transition adjustment to retained earnings. We estimate the cumulative-effect adjustment to retained earnings to be less than $1 million. Based on the results of our detailed implementation plan, we do not expect the adoption of ASU 2014-09 to have a material effect on our consolidated statement of income or our consolidated statement of cash flows. We do expect a more significant impact from the additional disclosures required under the ASU as well as a change in the presentation of contract assets and liabilities on our consolidated balance sheet.
Other ASUs effective after December 31, 2017 are not expected to have a material effect on our consolidated financial
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statements.
3. | Acquisitions |
InfoZen LLC (InfoZen)—On October 2, 2017, we completed the acquisition of InfoZen. The results of InfoZen's operations have been included in our consolidated financial statements since that date. The acquisition was completed through an equity purchase agreement dated September 15, 2017, by and among InfoZen LLC., IZ Holdings, LLC and other beneficiaries and ManTech Advanced Systems International, Inc. We funded the acquisition with cash on hand and borrowings on our revolving credit facility. InfoZen is a leading IT solution provider, with domain expertise in modernization, agile/DevOps software development, cloud migration and threat monitoring and assessment capabilities in support of critical national and homeland security missions. The purchase agreement did not contain provisions for contingent consideration.
For the year ended December 31, 2017, we incurred approximately $0.8 million of acquisition costs related to the InfoZen transaction, which are included in the general and administrative expenses in our consolidated statement of income.
The preliminary purchase price of $182.6 million, which includes an estimated working capital adjustment, was preliminarily allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. As we are still in the process of reviewing the fair value of the assets acquired and liabilities assumed and in finalizing the closing working capital adjustment, the purchase price allocation for InfoZen is not complete as of December 31, 2017. The goodwill recorded related to this transaction will be deductible for tax purposes over 15 years. Recognition of goodwill is largely attributed to the value paid for InfoZen's capabilities to support the DHS and NASA customers and specifically in modernization, agile software development, cloud migration and threat monitoring and assessment capabilities.
In preliminarily allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of InfoZen's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $49.2 million and $5.7 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with InfoZen's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 20 years. Backlog is amortized straight-line over its estimated useful life of 1 year. The weighted-average amortization period for the intangible assets is 18 years.
The following table represents the preliminary purchase price allocation for InfoZen (in thousands):
Cash and cash equivalents | $ | 1,406 | |
Receivables | 9,434 | ||
Prepaid expenses and other | 4,245 | ||
Goodwill | 128,686 | ||
Other intangible assets | 54,850 | ||
Property and equipment | 485 | ||
Other assets | 112 | ||
Accounts payable and accrued expenses | (8,390 | ) | |
Accrued salaries and related expenses | (2,893 | ) | |
Unearned revenue | (4,297 | ) | |
Billings in excess of revenue earned | (1,018 | ) | |
Net assets acquired and liabilities assumed | $ | 182,620 | |
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The following unaudited pro forma financial information below represents our results of operations for years ended December 31, 2017 had the InfoZen acquisition occurred on January 1, 2017 (in thousands). The unaudited proforma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the acquisition at January 1, 2017. This information should not be taken as representative of our future consolidated results of operations. Revenues and earnings were immaterial for the prior comparative year.
Year Ended December 31, 2017 | |||
Revenues | $ | 1,793,752 | |
Net income | $ | 118,564 | |
Basic earnings per share | $ | 3.05 | |
Diluted earnings per share | $ | 3.03 | |
Edaptive Systems LLC (Edaptive)—On December 15, 2016, we completed the acquisition of Edaptive. The results of Edaptive's operations have been included in our consolidated financial statements since that date. The acquisition was completed through a membership interest purchase agreement dated December 15, 2016, by and among Edaptive, Everest Holdco, Inc., and certain members of Edaptive and ManTech Advanced Systems International, Inc. Edaptive provides innovative IT solutions primarily to federal health agencies, with a significant focus on the Centers for Medicare & Medicaid Services. The acquisition strategically expands our reach within the federal health community. We funded the acquisition with cash on hand. The membership interest purchase agreement did not contain provisions for contingent consideration.
For the year ended December 31, 2016, we incurred approximately $0.3 million of acquisition costs related to the Edaptive transaction, which are included in the general and administrative expenses in our consolidated statement of income.
The purchase price of $13.2 million was allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. The goodwill recorded related to this transaction will be deductible for tax purposes over 15 years. Recognition of goodwill is largely attributed to the value paid for Edaptive's capabilities to support Department of Health and Human Services customers and, specifically, in agile software development, testing and automation and business intelligence.
In allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of Edaptive's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $1.1 million and $0.3 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with Edaptive's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 10 years. Backlog is amortized straight-line over its estimated useful life of 1 year. The weighted-average amortization period for the intangible assets is 8 years.
The following table represents the purchase price allocation for Edaptive (in thousands):
Cash and cash equivalents | $ | 1,955 | |
Receivables | 10,892 | ||
Prepaid expenses and other | 261 | ||
Goodwill | 6,193 | ||
Other intangible assets | 1,689 | ||
Property and equipment | 502 | ||
Other assets | 116 | ||
Accounts payable and accrued expenses | (5,777 | ) | |
Accrued salaries and related expenses | (2,324 | ) | |
Billings in excess of revenue earned | (326 | ) | |
Net assets acquired and liabilities assumed | $ | 13,181 | |
We have not disclosed current period, nor pro forma, revenues and earnings attributable to Edaptive as our integration of these operations post-acquisition and the entity's accounting methods pre-acquisition make it impracticable.
Oceans Edge, Inc, Cyber Division (OEC)—On June 10, 2016, we completed the acquisition of certain assets of OEC which constituted a business. The results of OEC's operations have been included in our consolidated financial statements since that date. The acquisition was completed through an asset purchase agreement dated June 10, 2016, by and among Oceans Edge, Inc.,
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Oceans Edge Cyber, LLC, certain owners of Ocean's Edge, Inc. and ManTech Advanced Systems International, Inc. OEC provides technical and professional services under government contracts in the defense and intelligence industries, including turnkey system solutions in cyber offense and defense, mission operations support and operations assessment and analysis. The OEC team of computer network operations (CNO) professionals will enhance our advanced CNO tools and research and development offerings with new business across the DoD landscape, including United States Cyber Command. The acquisition strategically strengthens our capabilities to support our federal agency customers and, specifically, to engineer and develop new, advanced solutions for wireless devices, networks, and infrastructures. We funded the acquisition with cash on hand. The asset purchase agreement did not contain provisions for contingent consideration.
For the year ended December 31, 2016, we incurred approximately $1.2 million of acquisition costs related to the OEC transaction, which are included in the general and administrative expenses in our consolidated statement of income.
The purchase price of $47.7 million was allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. The goodwill recorded related to this transaction will be deductible for tax purposes over 15 years. Recognition of goodwill is largely attributed to the value paid for OEC's capabilities in adding additional vulnerability research, development and analysis capabilities to our existing cyber intelligence business.
In allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of OEC's contracts. The components of other intangible assets associated with the acquisition were technology, customer relationships and backlog valued at $3.0 million, $14.0 million and $1.0 million, respectively. Technology represents a suite of mobile analysis and exploitation offerings, which is used by customers in support of their missions. Technology is amortized straight-line over its estimated useful life of 5 years. Customer contracts and related relationships represent the underlying relationships and agreements with OEC's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 20 years. Backlog is amortized straight-line over its estimated useful life of 1 year. The weighted-average amortization period for the intangible assets is 16 years.
The following table represents the purchase price allocation for OEC (in thousands):
Receivables | $ | 138 | |
Goodwill | 30,090 | ||
Other intangible assets | 18,000 | ||
Property and equipment | 69 | ||
Accounts payable and accrued expenses | (29 | ) | |
Accrued salaries and related expenses | (586 | ) | |
Net assets acquired and liabilities assumed | $ | 47,682 | |
We have not disclosed current period, nor pro forma, revenues and earnings attributable to OEC as our integration of these operations post-acquisition and the entity's accounting methods pre-acquisition make it impracticable.
Knowledge Consulting Group, Inc. (KCG)—On June 15, 2015, we completed the acquisition of KCG. The results of KCG's operations have been included in our consolidated financial statements since that date. The acquisition was completed through an agreement and plan of merger dated June 15, 2015, by and among ManTech Advanced Systems International, Inc., Knight Acquisitions Corporation and KCG. KCG provides comprehensive cyber security services including cloud security, certification and accreditation and various cyber defense solutions across federal and commercial markets. The acquisition strategically positions us to pursue additional cyber work in the Department of Homeland Security, FBI and the intelligence community by leveraging our enhanced cloud security expertise. We funded the acquisition through a combination of cash on hand and borrowings under our revolving credit facility. The agreement did not contain provisions for contingent consideration.
For the year ended December 31, 2015, we incurred approximately $0.3 million of acquisition costs related to the KCG transaction, which are included in the general and administrative expenses in our consolidated statement of income.
The purchase price of $68.2 million was allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. The goodwill recorded related to this transaction will be deductible for tax purposes over 15 years. Recognition of goodwill is largely attributed to the value paid for KCG's capabilities in providing comprehensive cyber security services throughout the DoD and intelligence community.
In allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates
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of future performance of KCG's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $12.4 million and $0.8 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with KCG's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 15 years. Backlog is amortized straight-line over its estimated useful life of 1 year. The weighted-average amortization period for the intangible assets is 14 years.
The following table represents the purchase price allocation for KCG (in thousands):
Cash and cash equivalents | $ | 658 | |
Receivables | 6,532 | ||
Prepaid expenses and other | 460 | ||
Goodwill | 47,487 | ||
Other intangible assets | 13,219 | ||
Property and equipment | 1,419 | ||
Investments | 15 | ||
Other assets | 31 | ||
Accounts payable and accrued expenses | (1,269 | ) | |
Accrued salaries and related expenses | (336 | ) | |
Billings in excess of revenue earned | (2 | ) | |
Net assets acquired and liabilities assumed | $ | 68,214 | |
We have not disclosed current period, nor pro forma, revenues and earnings attributable to KCG as our integration of these operations post-acquisition and the entity's accounting methods pre-acquisition make it impracticable.
Welkin Associates, Ltd. (Welkin)—On April 27, 2015, we completed the acquisition of Welkin, formerly a wholly-owned subsidiary of Computer Sciences Corporation (CSC). The results of Welkin's operations have been included in our consolidated financial statements since that date. The acquisition was completed through a stock purchase agreement dated April 27, 2015, by and among ManTech International Corporation, CSC and Welkin. Welkin delivers mission-centric services in high-end systems engineering and advanced national security technology and business services. The acquisition strategically positions us to pursue large engineering and support opportunities throughout the intelligence community and DoD. We funded the acquisition with cash on hand. The stock purchase agreement did not contain provisions for contingent consideration.
For the year ended December 31, 2015, we incurred approximately $0.7 million of acquisition costs related to the Welkin transaction, which are included in the general and administrative expenses in our consolidated statement of income.
The purchase price of $34.0 million was allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. The goodwill recorded related to this transaction will be deductible for tax purposes over 15 years. Recognition of goodwill is largely attributed to the value paid for Welkin's capabilities in providing high-end systems engineering and support services throughout the intelligence community and DoD.
In allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of Welkin's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $6.0 million and $0.4 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with Welkin's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 15 years. Backlog is amortized straight-line over its estimated useful life of 1 year. The weighted-average amortization period for the intangible assets is 14 years.
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The following table represents the purchase price allocation for Welkin (in thousands):
Receivables | $ | 3,901 | |
Prepaid expenses and other | 141 | ||
Goodwill | 24,436 | ||
Other intangible assets | 6,350 | ||
Property and equipment | 100 | ||
Accounts payable and accrued expenses | (436 | ) | |
Accrued salaries and related expenses | (492 | ) | |
Net assets acquired and liabilities assumed | $ | 34,000 | |
We have not disclosed current period, nor pro forma, revenues and earnings attributable to Welkin as our integration of these operations post-acquisition and the entity's accounting methods pre-acquisition make it impracticable.
4. | Earnings per Share |
Under ASC 260, Earnings per Share, the two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under that method, basic and diluted earnings per share data are presented for each class of common stock.
In applying the two-class method, we determined that undistributed earnings should be allocated equally on a per share basis between Class A and Class B common stock. Under our Certificate of Incorporation, the holders of the common stock are entitled to participate ratably, on a share-for-share basis as if all shares of common stock were of a single class, in such dividends, as may be declared by the Board of Directors. During the years ended December 31, 2017, 2016 and 2015, we declared and paid quarterly dividends, each in the amount of $0.21 per share on both classes of common stock.
Basic earnings per share has been computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period in which the shares 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.
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The net income available to common stockholders and weighted average number of common shares outstanding used to compute basic and diluted earnings per share for each class of common stock are as follows (in thousands, except per share amounts):
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Distributed earnings | $ | 32,709 | $ | 32,138 | $ | 31,543 | |||||
Undistributed earnings | 81,432 | 24,253 | 19,584 | ||||||||
Net income | $ | 114,141 | $ | 56,391 | $ | 51,127 | |||||
Class A common stock: | |||||||||||
Basic net income available to common stockholders | $ | 75,413 | $ | 36,885 | $ | 33,145 | |||||
Basic weighted average common shares outstanding | 25,685 | 24,944 | 24,317 | ||||||||
Basic earnings per share | $ | 2.94 | $ | 1.48 | $ | 1.36 | |||||
Diluted net income available to common stockholders | $ | 75,698 | $ | 36,988 | $ | 33,197 | |||||
Effect of potential exercise of stock options | 288 | 202 | 109 | ||||||||
Diluted weighted average common shares outstanding | 25,973 | 25,146 | 24,426 | ||||||||
Diluted earnings per share | $ | 2.91 | $ | 1.47 | $ | 1.36 | |||||
Class B common stock: | |||||||||||
Basic net income available to common stockholders | $ | 38,728 | $ | 19,506 | $ | 17,982 | |||||
Basic weighted average common shares outstanding | 13,190 | 13,192 | 13,193 | ||||||||
Basic earnings per share | $ | 2.94 | $ | 1.48 | $ | 1.36 | |||||
Diluted net income available to common stockholders | $ | 38,443 | $ | 19,403 | $ | 17,930 | |||||
Effect of potential exercise of stock options | — | — | — | ||||||||
Diluted weighted average common shares outstanding | 13,190 | 13,192 | 13,193 | ||||||||
Diluted earnings per share | $ | 2.91 | $ | 1.47 | $ | 1.36 | |||||
For the years ended December 31, 2017, 2016 and 2015, options to purchase 265,866, 369,300 and 1,780,222 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because the options' effect would have been anti-dilutive. For the years ended December 31, 2017, 2016 and 2015, there were 463,800 shares, 1,045,789 shares, and 284,320 shares, respectively, issued from the exercise of stock options.
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5. | Receivables |
We deliver a broad array of IT and technical services solutions under contracts with the U.S. government, state and local governments and commercial customers. The components of contract receivables are as follows (in thousands):
December 31, | |||||||
2017 | 2016 | ||||||
Billed receivables | $ | 236,113 | $ | 247,114 | |||
Unbilled receivables: | |||||||
Amounts billable | 52,745 | 52,640 | |||||
Revenues recorded in excess of funding | 12,397 | 20,078 | |||||
Retainage | 16,312 | 8,353 | |||||
Allowance for doubtful accounts | (6,157 | ) | (7,508 | ) | |||
Receivables-net | $ | 311,410 | $ | 320,677 | |||
Amounts billable consist principally of amounts to be billed within the next month. Revenues recorded in excess of funding are billable upon receipt of contractual amendments or other modifications. The retainage is billable upon completion of the contract performance and approval of final indirect expense rates by the government. Accounts receivable at December 31, 2017 are expected to be substantially collected within one year except for approximately $1.3 million, of which 97.7% is related to receivables from sales to the U.S. government. The remainder is related to receivables from contracts in which we acted as a subcontractor to other contractors.
We do not believe that we have significant exposure to credit risk as accounts receivable and the related unbilled amounts are primarily due from the U.S. government. The allowance for doubtful accounts represents our estimate for exposure to compliance, contractual issues and bad debts related to prime contractors.
6. | Property and Equipment |
Major classes of property and equipment are summarized as follows (in thousands):
December 31, | |||||||
2017 | 2016 | ||||||
Furniture and equipment | $ | 79,218 | $ | 51,806 | |||
Leasehold improvements | 39,022 | 36,439 | |||||
Property and equipment-gross | 118,240 | 88,245 | |||||
Accumulated depreciation and amortization | (72,158 | ) | (65,124 | ) | |||
Property and equipment-net | $ | 46,082 | $ | 23,121 | |||
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2017, 2016 and 2015 was $9.5 million, $7.8 million and $8.5 million, respectively.
7. | Goodwill and Other Intangible Assets |
Under ASC 350, Intangibles - Goodwill and Other, goodwill is to be reviewed at least annually for impairment and whenever events or circumstances indicate that the carrying value of goodwill may not be fully recoverable. We have elected to perform this annual review as of October 31st of each calendar year.
In reviewing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test (described below), otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.
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The goodwill impairment test is a two-step process performed at the reporting unit level. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount (including goodwill). If the reporting unit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit's fair value is less than its carrying value, an impairment of goodwill may exist, requiring a second step to be performed. Step two of this test measures the amount of the impairment loss, if any. Step two of this test requires the allocation of the reporting unit's fair value to its assets and liabilities, including any unrecognized intangible assets in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as a goodwill impairment charge in operations.
The fair values of the reporting units are determined based on a weighting of the income approach, market approach and market transaction approach. The income approach is a valuation technique in which fair value is based from forecasted future cash flow discounted at the appropriate rate of return commensurate with the risk as well as current rates of return for equity and debt capital as of the valuation date. The forecast used in our estimation of fair value was developed by management based on a contract basis, incorporating adjustments to reflect known contract and market considerations (such as reductions and uncertainty in government spending, pricing pressure and opportunities). The discount rate utilizes a risk adjusted weighted average cost of capital. The market approach is a valuation technique in which the fair value is calculated based on market prices realized in an actual arm's length transaction. The technique consists of undertaking a detailed market analysis of publicly traded companies that provides a reasonable basis for comparison to us. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. The market transaction approach is a valuation technique in which the fair value is calculated based on market prices realized in actual arm's length transactions. The technique consists of undertaking a detailed market analysis of merged and acquired companies that provides a reasonable basis for comparison to us. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. To assess the reasonableness of the calculated reporting unit fair values, we compare the sum of the reporting units' fair values to our market capitalization (per share stock price times the number of shares outstanding) and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization) and then assess the reasonableness of our implied control premium.
The changes in the carrying amounts of goodwill during fiscal years 2017 and 2016 were as follows (in thousands):
Goodwill Balance | |||
Goodwill at December 31, 2015 | $ | 919,591 | |
Acquisitions | 36,283 | ||
Goodwill at December 31, 2016 | 955,874 | ||
Acquisitions | 128,686 | ||
Goodwill at December 31, 2017 | $ | 1,084,560 | |
Other intangible assets consisted of the following (in thousands):
December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Other intangible assets: | |||||||||||||||||||||||
Contract and program intangible assets | $ | 355,932 | $ | 179,049 | $ | 176,883 | $ | 301,082 | $ | 158,671 | $ | 142,411 | |||||||||||
Capitalized software cost for internal use | 46,937 | 29,472 | 17,465 | 39,332 | 26,815 | 12,517 | |||||||||||||||||
Other | 58 | 58 | — | 58 | 55 | 3 | |||||||||||||||||
Total other intangible assets-net | $ | 402,927 | $ | 208,579 | $ | 194,348 | $ | 340,472 | $ | 185,541 | $ | 154,931 | |||||||||||
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Amortization expense relating to intangible assets for the years ended December 31, 2017, 2016 and 2015 was $23.5 million, $21.8 million and $21.2 million, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):
Year ending: | |||
December 31, 2018 | $ | 25,472 | |
December 31, 2019 | $ | 21,013 | |
December 31, 2020 | $ | 20,172 | |
December 31, 2021 | $ | 17,443 | |
December 31, 2022 | $ | 14,843 | |
8. | Debt |
Revolving Credit Facility-We maintain a credit agreement with a syndicate of lenders led by Bank of America, N.A., as sole administrative agent. The credit agreement provides for a $500 million revolving credit facility, with a $75 million letter of credit sublimit and a $30 million swing line loan sublimit. The credit agreement also includes an accordion feature that permits us to arrange with the lenders for the provision of additional commitments. The maturity date is August 17, 2022. On August 17, 2017, we amended the credit agreement, which among other things increased the letter of credit sublimit to $75 million. We deferred $2.2 million in debt issuance costs, cumulatively over the agreement, which are amortized over the term of the credit agreement.
Borrowings under our credit agreement are collateralized by substantially all of our assets and our Material Subsidiaries (as defined in the credit agreement) and bear interest at one of the following variable rates as selected by us at the time of borrowing: a LIBOR based rate plus market spreads (1.25% to 2.25% based on our consolidated total leverage ratio) or Bank of America's base rate plus market spreads (0.25% to 1.25% based on our consolidated total leverage ratio). The aggregate annual weighted average interest rates were 2.99% and 3.75% for the years ended December 31, 2017 and 2016, respectively.
The terms of the credit agreement permit prepayment and termination of the loan commitments at any time, subject to certain conditions. The credit agreement requires us to comply with specified financial covenants, including the maintenance of certain leverage ratios and a certain consolidated coverage ratio. The credit agreement also contains various covenants, including affirmative covenants with respect to certain reporting requirements and maintaining certain business activities, and negative covenants that, among other things, may limit or impose restrictions on our ability to incur liens, incur additional indebtedness, make investments, make acquisitions and undertake certain other actions. As of, and during the fiscal years ending, December 31, 2017 and 2016, we were in compliance with our financial covenants under the credit agreement.
There was $31.0 million and $0 outstanding on our revolving credit facility at December 31, 2017 and 2016, respectively. The weighted average borrowings under the revolving portion of the facility during the years ended December 31, 2017 and 2016 were $2.7 million and $0, respectively. The maximum available borrowing under the revolving credit facility at December 31, 2017 was $453.7 million. At December 31, 2017 and 2016, we were contingently liable under letters of credit totaling $15.3 million and $23.1 million, respectively, which reduces our availability to borrow under our revolving credit facility.
9. | Commitments and Contingencies |
Contracts with the U.S. government, including subcontracts, are subject to extensive legal and regulatory requirements and, from time-to-time, agencies of the U.S. government, in the ordinary course of business, investigate whether our operations are conducted in accordance with these requirements and the terms of the relevant contracts. U.S. government investigations of us, whether related to our U.S. government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting activities. Management believes it has adequately reserved for any losses that may be experienced from any investigation of which it is aware. The Defense Contract Audit Agency has substantially completed our incurred cost audits through 2012 with no material adjustments. The remaining audits for 2013 through 2016 are not expected to have a material effect on our financial position, results of operations or cash flow and management believes it has adequately reserved for any losses.
In the normal course of business, we are involved in certain governmental 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, results of operations or cash flows, except for the matter noted below.
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We are a defendant in a lawsuit filed by two former employees alleging retaliation under both the False Claims Act (FCA) and the Defense Contractor Whistleblower Protection Act (DCWPA). In November 2016, we went to trial and the jury returned a verdict in favor of both plaintiffs, finding us liable for retaliation under both the FCA and the DCWPA, and awarded $0.8 million in compensatory damages for emotional distress. As a result of the jury's verdict, these plaintiffs are also entitled to awards of (i) back pay, (ii) front pay and (iii) attorneys' fees and costs. We challenged the jury’s verdict at the trial court level - both in terms of liability and in terms of the amount of the compensatory damages awarded. Specifically, we have asked the trial judge to: (i) grant us judgment as a matter of law and dismiss the retaliation claims under both the FCA and the DCWPA, and (ii) vacate the jury’s awards of compensatory damages. On May 19, 2017, the court, by a Memorandum Opinion and Order, vacated the jury's verdict with respect to the awards of $0.8 million in compensatory damages for emotional distress and awarded damages in the total amount of $1.8 million for back pay and front pay. On August 30, 2017, the judge awarded attorneys' fees and costs and the judgment entered on May 19, 2017 in favor of both plaintiffs was amended as follows: (i) to plaintiff #1, $0.3 million in attorneys' fees and costs; $0.9 million in back pay with interest at the rate of $16.92 per diem from November 18, 2016 through the date of the amended judgment, and $0.3 million in front pay; and (ii) to plaintiff #2, $0.3 million in attorneys’ fees and costs; $0.5 million in back pay with interest at the rate of $9.79 per diem from November 18, 2016 through the date of the amended judgment, and $0.2 million in front pay. We have filed an appeal in the Fourth Circuit Court of Appeals. As of December 31, 2017, we accrued a liability for $2.3 million and recorded a receivable for $2.8 million. Through the appeals process, our liability could be further reduced or, if the plaintiffs are successful, increased an additional $0.8 million. We have an insurance policy that covers the amount of the liability, therefore, no loss was recognized as of the year ended December 31, 2017. The impact of future events in connection with this matter are not expected to have a material effect on our financial position, results of operations or cash flow.
We have $15.3 million outstanding on our letter of credit, of which $15.2 million is related to an outstanding performance bond in connection with a contract between ManTech MENA, LLC and Jadwalean International Operations and Management Company to fulfill technical support requirements for the Royal Saudi Air Force.
We lease office space and equipment under long-term operating leases. A number of the leases contain renewal options and escalation clauses. Office space and equipment rent expense totaled approximately $36.9 million, $37.4 million and $37.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. We had $10.6 million and $11.1 million of deferred rent liabilities resulting from recording rent expense on a straight-line basis over the life of the respective lease for the years ended December 31, 2017 and 2016, respectively. At December 31, 2017, aggregate future minimum rental commitments under these leases are as follows (in thousands):
Total | ||||
Year ending: | ||||
December 31, 2018 | $ | 32,353 | ||
December 31, 2019 | 29,252 | |||
December 31, 2020 | 23,048 | |||
December 31, 2021 | 19,964 | |||
December 31, 2022 | 16,793 | |||
Thereafter | 18,692 | |||
Total | $ | 140,102 | ||
10. | Stockholders' Equity and Stock-Based Compensation |
Common Stock-We have 150,000,000 shares of authorized Class A common stock, par value $0.01 per share. We have 50,000,000 shares of authorized Class B common stock, par value $0.01 per share. On December 31, 2017, there were 26,041,660 shares of Class A common stock outstanding, 244,113 shares of Class A common stock recorded as treasury stock and 13,189,245 shares of Class B common stock outstanding.
Holders of Class A common stock are entitled to one vote for each share held of record and holders of Class B common stock are entitled to ten votes for each share held of record, except with respect to any “going private transaction” (generally, a transaction in which George J. Pedersen (our Executive Chairman and Chairman of the Board), his affiliates, his direct and indirect permitted transferees or a group, generally including Mr. Pedersen, such affiliates and permitted transferees, seek to buy all outstanding shares), as to which each share of Class A common stock and Class B common stock are entitled to one vote per share. The Class A common stock and the Class B common stock vote together as a single class on all matters submitted to a vote of stockholders, including the election of directors, except as required by law. Holders of common stock do not have cumulative voting rights in the election of directors.
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Stockholders are entitled to receive, when and if declared by the Board of Directors from time-to-time, such dividends and other distributions in cash, stock or property from our assets or funds legally and contractually available for such purposes subject to any dividend preferences that may be attributable to preferred stock that may be authorized. Each share of Class A common stock and Class B common stock is equal in respect to dividends and other distributions in cash, stock or property, except that in the case of stock dividends, only shares of Class A common stock will be distributed with respect to the Class A common stock and only shares of Class B common stock will be distributed with respect to Class B common stock. In no event will either Class A common stock or Class B common stock be split, divided or combined unless the other class is proportionately split, divided or combined.
The shares of Class A common stock are not convertible into any other series or class of securities. Each share of Class B common stock, however, is freely convertible into one share of Class A common stock at the option of the Class B stockholder. Upon the death of Mr. Pedersen, all outstanding shares of Class B common stock automatically convert to Class A common stock.
Preferred Stock-We are authorized to issue an aggregate of 20,000,000 shares of preferred stock, $0.01 par value per share, the terms and conditions of which are determined by our Board of Directors upon issuance. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of holders of any shares of preferred stock that we may designate and issue in the future. At December 31, 2017 and 2016, no shares of preferred stock were outstanding and the Board of Directors currently has no plans to issue a series of preferred stock.
Accounting for Stock-Based Compensation:
Our 2016 Management Incentive Plan (the Plan) was designed to attract, retain and motivate key employees. The types of awards available under the Plan include stock options, restricted stock and RSUs. Equity awards granted under the Plan are settled in shares of Class A common stock. At the beginning of each year, the Plan provides that the number of shares available for issuance automatically increases by an amount equal to 1.5% of the total number of shares of Class A and Class B common stock outstanding on December 31st of the previous year. On January 2, 2018, there were 588,464 additional shares made available for issuance under the Plan. Through December 31, 2017, the Board of Directors has authorized the issuance of up to 13,963,435 shares under this Plan. Through December 31, 2017, the remaining aggregate number of shares of our common stock available for future grants under the Plan was 5,980,594. The Plan expires in March 2026.
The Plan is administered by the compensation committee of our Board of Directors, along with its delegates. Subject to the express provisions of the Plan, the committee has the Board of Directors' authority to administer and interpret the Plan, including the discretion to determine the exercise price, vesting schedule, contractual life and the number of shares to be issued.
Stock Compensation Expense-For the years ended December 31, 2017, 2016 and 2015, we recorded $6.3 million, $3.3 million and $4.4 million of stock-based compensation expense, respectively. No compensation expense of employees with stock awards, including stock-based compensation expense, was capitalized during the periods. For the year ended December 31, 2017, we recorded $2.7 million to income tax expense for tax benefits related to the exercise of stock options, vested cancellations and the vesting of restricted stock. For the year ended December 31, 2016 and 2015, we recorded $0.1 million and $3.0 million, respectively, to paid in capital related to tax deficiencies from the exercise of stock options, vested cancellations and the vesting of restricted stock.
Stock Options-Under the Plan, we have issued stock options. A stock option granted gives the holder the right, but not the obligation to purchase a certain number of shares at a predetermined price for a specific period of time. We typically issue options that vest over three years in equal installments beginning on the first anniversary of the date of grant. Under the terms of the Plan, the contractual life of the option grants may not exceed eight years. During the years ended December 31, 2017, 2016 and 2015, we issued options that expire five years from the date of grant.
Fair Value Determination-We have used the Black-Scholes-Merton option pricing model to determine fair value of our stock option awards on the date of grant. We will reconsider the use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that cannot be reasonably estimated under this model.
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The following weighted-average assumptions were used for option grants during the years ended December 31, 2017, 2016 and 2015:
• | Volatility-The expected volatility of the options granted was estimated based upon historical volatility of our share price through weekly observations of our trading history. |
• | Expected life of options-The expected life of options granted to employees was determined from historical exercises of the grantee population. The options had graded vesting over three years in equal installments beginning on the first anniversary of the date of the grant and a contractual term of five years. |
• | Risk-free interest rate-The yield on zero-coupon U.S. Treasury strips was used to extrapolate a forward-yield curve. This “term structure” of future interest rates was then input into a numeric model to provide the equivalent risk-free rate to be used in the Black-Scholes-Merton model based on the expected term of the underlying grants. |
• | Dividend yield-The Black-Scholes-Merton valuation model requires an expected dividend yield as an input. We have calculated our expected dividend yield based on an expected annual cash dividend of $0.84 per share. |
The following table summarizes weighted-average assumptions used in our calculations of fair value for the years ended December 31, 2017, 2016 and 2015:
Year Ended December 31, | ||||||||
2017 | 2016 | 2015 | ||||||
Volatility | 25.59 | % | 23.70 | % | 26.16 | % | ||
Expected life of options | 3 years | 3 years | 3 years | |||||
Risk-free interest rate | 1.72 | % | 1.10 | % | 1.15 | % | ||
Dividend yield | 2.75 | % | 2.88 | % | 3.00 | % | ||
Stock Option Activity-The weighted-average fair value of options granted during the years ended December 31, 2017, 2016 and 2015, as determined under the Black-Scholes-Merton valuation model, was $6.75, $4.60 and $4.59, respectively. Option grants that vested during the years ended December 31, 2017, 2016 and 2015 had a combined fair value of $1.7 million, $2.6 million and $3.6 million, respectively.
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The following table summarizes stock option activity for the years ended December 31, 2017, 2016 and 2015:
Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value (in thousands) | Weighted Average Remaining Contractual Life | |||||||||
Stock options outstanding at December 31, 2014 | 3,391,032 | $ | 32.76 | $ | 4,722 | |||||||
Granted | 237,853 | $ | 30.87 | |||||||||
Exercised | (284,320 | ) | $ | 27.51 | $ | 1,348 | ||||||
Cancelled and expired | (849,255 | ) | $ | 39.56 | ||||||||
Stock options outstanding at December 31, 2015 | 2,495,310 | $ | 30.86 | $ | 3,583 | |||||||
Granted | 199,938 | $ | 34.22 | |||||||||
Exercised | (1,045,789 | ) | $ | 29.24 | $ | 8,858 | ||||||
Cancelled and expired | (489,040 | ) | $ | 37.91 | ||||||||
Stock options outstanding at December 31, 2016 | 1,160,419 | $ | 29.93 | $ | 14,299 | |||||||
Granted | 534,030 | $ | 42.90 | |||||||||
Exercised | (463,800 | ) | $ | 29.34 | $ | 7,203 | ||||||
Cancelled and expired | (61,241 | ) | $ | 33.80 | ||||||||
Stock options outstanding at December 31, 2017 | 1,169,408 | $ | 35.88 | $ | 16,731 | 3 years | ||||||
Stock options exercisable at December 31, 2017 | 484,429 | $ | 29.22 | $ | 10,156 | 2 years | ||||||
The following table summarizes non-vested stock options for the year ended December 31, 2017:
Number of Shares | Weighted Average Fair Value | |||||
Non-vested stock options at December 31, 2016 | 562,927 | $ | 4.66 | |||
Granted | 534,030 | $ | 6.75 | |||
Vested | (367,729 | ) | $ | 4.71 | ||
Cancelled | (44,249 | ) | $ | 5.11 | ||
Non-vested stock options at December 31, 2017 | 684,979 | $ | 6.23 | |||
Unrecognized compensation expense related to outstanding stock options was $3.6 million as of December 31, 2017, which is expected to be recognized over a weighted-average period of 3 years and will be adjusted for forfeitures as they occur.
Restricted Stock-Under the Plan, we have issued restricted stock. A restricted stock award is an issuance of shares that cannot be sold or transferred by the recipient until the vesting period lapses. Restricted stock issued to members of our Board of Directors vest in one year. The related compensation expense is recognized over the service period and is based on the grant date fair value of the stock and the number of shares expected to vest. The grant date fair value of the restricted stock is equal to the closing market price of our common stock on the date of grant.
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Restricted Stock Activity-The following table summarizes the restricted stock activity during the years ended December 31, 2017 and 2016:
Number of Shares | Weighted Average Fair Value | |||||
Non-vested restricted stock at December 31, 2015 | 21,000 | $ | 28.98 | |||
Granted | 18,000 | $ | 33.84 | |||
Vested | (21,000 | ) | $ | 28.98 | ||
Non-vested restricted stock at December 31, 2016 | 18,000 | $ | 33.84 | |||
Granted | 24,000 | $ | 37.90 | |||
Vested | (18,000 | ) | $ | 33.84 | ||
Non-vested restricted stock at December 31, 2017 | 24,000 | $ | 37.90 | |||
RSUs-Under the Plan, we issued RSUs. RSUs are not actual shares, but rather a right to receive shares in the future. The shares are not issued and the employee cannot sell or transfer shares prior to vesting and has no voting rights until the RSUs vest. Employees who are granted RSUs do not receive dividend payments during the vesting period. The employees' RSUs will result in the delivery of shares if (a) performance criteria is met and (b) the employee remains employed, in good standing, through the date of the performance period or death. The performance period is 2 years. During the year ended December 31, 2016, we granted 26,788 time-based RSUs to an officer which did not contain additional performance criteria (half will vest four years after the date of grant and the other half will vest five years after the date of grant). The grant date fair value of the RSUs is equal to the closing market price of our common stock on the grant date less the present value of dividends expected to be awarded during the service period. We recognize the grant date fair value of RSUs of shares we expect to issue as compensation expense ratably over the requisite service period.
RSU Activity-The following table summarizes the RSU activity during the years ended December 31, 2017 and 2016:
Number of Units | Weighted Average Fair Value | |||||
RSUs at December 31, 2015 | 93,450 | $ | 30.84 | |||
Granted | 132,988 | $ | 29.50 | |||
Forfeited | (20,100 | ) | $ | 29.56 | ||
RSUs at December 31, 2016 | 206,338 | $ | 30.10 | |||
Granted | 55,830 | $ | 35.34 | |||
Vested | (3,300 | ) | $ | 30.60 | ||
Forfeited | (97,525 | ) | $ | 31.00 | ||
RSUs at December 31, 2017 | 161,343 | $ | 31.36 | |||
11. | Retirement Plans |
As of December 31, 2017, we maintained a qualified defined contribution plan. Our qualified defined contribution plan covers substantially all employees and complies with Section 401 of the Internal Revenue Code. Under this plan, we stipulated a basic matching contribution that matches a portion of the participants' contribution based upon a defined schedule. Additionally, this plan contains a discretionary contribution component where we may contribute additional amounts based on a percentage of eligible employees' compensation. Contributions are invested by an independent investment company. The choice of investment alternatives is at the election of each participating employee. Our contributions to the plan were approximately $20.6 million, $19.8 million and $18.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, we also maintained an Employee Supplemental Savings Plan (ESSP), which is a nonqualified deferred compensation plan for certain key employees. Under this plan, eligible employees may defer up to 75% of qualified annual base compensation and 100% of bonus. In the ESSP, participant deferral accounts are credited with a rate of return based on investment elections as selected by the participant. The assets related to the ESSP are held in a rabbi trust owned by us for benefit of the participating employees. The trust investments are in the form of variable universal life insurance products, which are owned by us. These investments seek to replicate the return of the participant investment elections. Employee contributions
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to this plan were approximately $3.0 million, $2.6 million and $2.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
We maintained a nonqualified supplemental defined benefit pension plan for certain retired employees of an acquired company as of December 31, 2017. These plans were informally and partially funded beginning in 1999 through a rabbi trust. Assets held in a rabbi trust are not eligible to be included in the calculation of plan status. At both December 31, 2017 and 2016, 100% of the rabbi trust assets were invested in a money market account with a commercial bank. All covered employees retired prior to 1998. Our benefit obligation was $1.2 million and $1.1 million at December 31, 2017 and 2016, respectively.
12. | Income Taxes |
The domestic and foreign components of income operations before income taxes and equity method investments were as follows (in thousands):
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Domestic | $ | 97,718 | $ | 89,988 | $ | 85,665 | |||||
Foreign | (476 | ) | 82 | (311 | ) | ||||||
Income from operations before income taxes and equity method investments | $ | 97,242 | $ | 90,070 | $ | 85,354 | |||||
The provision for income taxes was comprised of the following components (in thousands):
Year Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Current provision: | |||||||||||
Federal | $ | 5,340 | $ | 13,454 | $ | 2,714 | |||||
State | 2,523 | 2,394 | 1,247 | ||||||||
Foreign | 38 | (45 | ) | 77 | |||||||
7,901 | 15,803 | 4,038 | |||||||||
Deferred (benefit) provision: | |||||||||||
Federal | (28,013 | ) | 17,170 | 27,817 | |||||||
State | 3,313 | 2,831 | 5,825 | ||||||||
(24,700 | ) | 20,001 | 33,642 | ||||||||
Non-current (benefit) resulting from allocating tax benefits directly to additional paid in capital and changes in liabilities: | |||||||||||
Federal | (60 | ) | (1,573 | ) | (2,568 | ) | |||||
State | — | (445 | ) | (746 | ) | ||||||
(60 | ) | (2,018 | ) | (3,314 | ) | ||||||
(Benefit) provision for income taxes | $ | (16,859 | ) | $ | 33,786 | $ | 34,366 | ||||
For the years ended December 31, 2017, 2016 and 2015 the non-current benefits related to liabilities for uncertain tax positions was $0.1 million, $0.2 million and $0.3 million, respectively.
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The schedule of effective income tax rate reconciliation is as follows:
Year Ended December 31, | ||||||||
2017 | 2016 | 2015 | ||||||
Statutory U.S. Federal tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
Increase (decrease) in tax rate resulting from: | ||||||||
Net deferred tax liability remeasurement | (52.0 | )% | — | % | — | % | ||
State taxes—net of Federal benefit | 3.9 | % | 3.4 | % | 4.8 | % | ||
Stock-based compensation | (2.8 | )% | — | % | — | % | ||
ESSP | (1.5 | )% | (0.7 | )% | 0.2 | % | ||
Excess executive compensation | 0.4 | % | 0.7 | % | 0.5 | % | ||
Section 199 deductions | (0.4 | )% | (0.4 | )% | (0.4 | )% | ||
Other, net | 0.1 | % | (0.5 | )% | 0.1 | % | ||
Effective tax rate | (17.3 | )% | 37.5 | % | 40.2 | % | ||
We paid income taxes, net of refunds, of $15.9 million, $18.1 million and $6.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. A summary of the tax effect of the significant components of deferred income taxes is as follows (in thousands):
December 31, | |||||||
2017 | 2016 | ||||||
Gross deferred tax liabilities: | |||||||
Goodwill and other assets | $ | 100,967 | $ | 131,367 | |||
Unbilled receivables | 11,693 | 18,608 | |||||
Property and equipment | 7,303 | 2,657 | |||||
Total | 119,963 | 152,632 | |||||
Gross deferred tax assets: | |||||||
Retirement and other liabilities | (20,636 | ) | (27,258 | ) | |||
Allowance for potential contract losses and other contract reserves | (1,598 | ) | (3,005 | ) | |||
Federal and state operating loss carryforwards | (1,252 | ) | (560 | ) | |||
Less: Valuation allowance | 717 | 272 | |||||
Total | (22,769 | ) | (30,551 | ) | |||
Net deferred tax liabilities | $ | 97,194 | $ | 122,081 | |||
In connection with our initial analysis of the impact of the Tax Cuts and Jobs Act, our income tax expense was reduced by $50.6 million for the year ended December 31, 2017 from a re-measurement of our existing deferred tax assets and liabilities. We have not completed our accounting for the income tax effects of certain elements of the Tax Cuts and Jobs Act, specifically related to the future deductibility of certain executive compensation expenses, acquisition accounting for InfoZen, and a detailed review of capitalized assets that qualify for immediate deduction. We have recorded provisional adjustments for these matters for the year ended December 31, 2017.
At December 31, 2017, we had state and foreign net operating losses of approximately $9.9 million and $3.5 million, respectively. The state net operating losses expire beginning 2019 through 2035. We recorded a valuation allowance against the foreign net operating losses as we do not believe the loss will be fully utilized in the future.
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A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):
December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Gross unrecognized tax benefits at beginning of year | $ | 293 | $ | 519 | $ | 785 | |||||
Lapse in statute of limitations | (105 | ) | (285 | ) | (266 | ) | |||||
Increases in tax positions for current year | 32 | 59 | — | ||||||||
Gross unrecognized tax benefits at end of year | $ | 220 | $ | 293 | $ | 519 | |||||
The total liability for gross unrecognized tax benefits as of December 31, 2017, 2016 and 2015 includes $0.2 million, $0.2 million and $0.4 million, respectively, of unrecognized net tax benefits which, if ultimately recognized, would reduce our annual effective tax rate in a future period.
We are subject to income taxes in the U.S., various state and foreign jurisdictions. Tax statutes and regulations within each jurisdiction are subject to interpretation and require significant judgment to apply. We are no longer subject to U.S. federal or non-U.S. income tax examinations by tax authorities for the years before 2013. We are no longer subject to U.S. state tax examinations by tax authorities for the years before 2012. We believe it is reasonably possible that $0.1 million of gross unrecognized tax benefits will be settled within the next year due to expirations of statute of limitations.
13. | Business Segment and Geographic Area Information |
We have one reportable segment. We deliver a broad array of IT and technical services solutions under contracts with the U.S. government. Our U.S. 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. Revenues from the U.S. government under prime contracts and subcontracts were approximately 98%, 98% and 99% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. We treat sales to U.S. government customers as sales within the U.S. regardless of where the services are performed. U.S. revenues were approximately 98%, 98% and 100% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. International revenues were approximately 2%, 2% and 0% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. Furthermore, substantially all assets from continuing operations were held in the U.S. for the years ended December 31, 2017, 2016 and 2015.
14. | Divestiture of ManTech Cyber Solutions International (MCSI) and Investment in CounterTack Inc. (CounterTack) |
On July 13, 2015, we divested MCSI, which was engaged in the business of providing commercial cyber products. We received consideration of preferred stock in CounterTack that has a fair value of $6.7 million. The fair value is based on the quoted price for the identical item held by another party (Level 3). We recorded a gain on the sale of $1.7 million, which is included in the other income (expense), net line item on the consolidated statement of income for the year ended December 31, 2015. We recorded transaction costs associated with the divestiture of $1.2 million. The divestiture did not qualify to be presented as discontinued operations as it did not represent a strategic shift that would have a major effect on our operations and financial results. On July 13, 2015, we purchased additional preferred stock in CounterTack for $3.8 million. We account for our investment in CounterTack preferred stock under the cost method of accounting for investments.
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15. | Quarterly Financial Information (Unaudited) |
The quarterly financial data reflects, in our opinion, all normal and recurring adjustments to present fairly the results of operations for such periods. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends. The following tables set forth selected unaudited quarterly financial data:
2017 | |||||||||||||||
March 31, | June 30, | September 30, | December 31, | ||||||||||||
(in thousands, except per share data) | |||||||||||||||
Revenues | $ | 418,374 | $ | 413,694 | $ | 422,665 | $ | 462,285 | |||||||
Operating income | $ | 24,390 | $ | 24,935 | $ | 23,140 | $ | 25,729 | |||||||
Income from operations before income taxes and equity method investments | $ | 24,159 | $ | 24,651 | $ | 23,114 | $ | 25,318 | |||||||
Net income | $ | 15,028 | $ | 15,561 | $ | 15,182 | $ | 68,370 | |||||||
Class A common stock: | |||||||||||||||
Basic weighted average common shares outstanding | 25,547 | 25,618 | 25,684 | 25,886 | |||||||||||
Basic earnings per share | $ | 0.39 | $ | 0.40 | $ | 0.39 | $ | 1.75 | |||||||
Diluted weighted average common shares outstanding | 25,778 | 25,827 | 25,929 | 26,353 | |||||||||||
Diluted earnings per share | $ | 0.39 | $ | 0.40 | $ | 0.39 | $ | 1.73 | |||||||
Class B common stock: | |||||||||||||||
Basic weighted average common shares outstanding | 13,191 | 13,191 | 13,191 | 13,189 | |||||||||||
Basic earnings per share | $ | 0.39 | $ | 0.40 | $ | 0.39 | $ | 1.75 | |||||||
Diluted weighted average common shares outstanding | 13,191 | 13,191 | 13,191 | 13,189 | |||||||||||
Diluted earnings per share | $ | 0.39 | $ | 0.40 | $ | 0.39 | $ | 1.73 | |||||||
2016 | |||||||||||||||
March 31, | June 30, | September 30, | December 31, | ||||||||||||
(in thousands, except per share data) | |||||||||||||||
Revenues | $ | 390,662 | $ | 401,354 | $ | 415,402 | $ | 394,178 | |||||||
Operating income | $ | 21,945 | $ | 24,214 | $ | 23,500 | $ | 21,304 | |||||||
Income from operations before income taxes and equity method investments | $ | 21,708 | $ | 23,972 | $ | 23,365 | $ | 21,025 | |||||||
Net income | $ | 13,216 | $ | 14,782 | $ | 14,664 | $ | 13,729 | |||||||
Class A common stock: | |||||||||||||||
Basic weighted average common shares outstanding | 24,476 | 24,707 | 25,164 | 25,423 | |||||||||||
Basic earnings per share | $ | 0.35 | $ | 0.39 | $ | 0.38 | $ | 0.36 | |||||||
Diluted weighted average common shares outstanding | 24,567 | 24,916 | 25,429 | 25,667 | |||||||||||
Diluted earnings per share | $ | 0.35 | $ | 0.39 | $ | 0.38 | $ | 0.35 | |||||||
Class B common stock: | |||||||||||||||
Basic weighted average common shares outstanding | 13,192 | 13,192 | 13,192 | 13,191 | |||||||||||
Basic earnings per share | $ | 0.35 | $ | 0.39 | $ | 0.38 | $ | 0.36 | |||||||
Diluted weighted average common shares outstanding | 13,192 | 13,192 | 13,192 | 13,191 | |||||||||||
Diluted earnings per share | $ | 0.35 | $ | 0.39 | $ | 0.38 | $ | 0.35 | |||||||
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
We have had no disagreements with our auditors on accounting principles, practices or financial statement disclosure during and through the date of the financial statements included in this Report.
Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures and Internal Control over Financial Reporting-Management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over financial reporting. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Annual Report on Form 10-K, is accurately recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal control over financial reporting is a process designed by, or under the supervision of our principal executive officer and our principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
• | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts and expenditures are being made only in accordance with authorizations of management or our Board of Directors; and |
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material adverse effect on our financial statements. |
Limitations on the Effectiveness of Controls-Management, including our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no assessment of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management's override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Scope of the Assessments-The assessment by our principal executive officer and our principal financial officer of our disclosure controls and procedures and the assessment by our management of our internal control over financial reporting included a review of procedures and documents and discussions with other employees in our organization in order to evaluate the adequacy of our internal control system design. In the course of the evaluation, we sought to identify exposure to unprevented or undetected data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. The assessment also included testing of properly designed controls to verify their effective performance. Our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in the Internal Control-Integrated Framework (2013) to assess the effectiveness of our internal control over financial reporting.
We assess our disclosure controls and procedures and our internal control over financial reporting on an ongoing basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. We consider the results of these assessment activities as we monitor our disclosure controls and procedures and our internal control over financial reporting. Our intent is to ensure that disclosure controls and procedures and internal control over financial reporting will be maintained and updated as conditions warrant. Among other matters, we sought in our assessment to determine whether there were any “material weaknesses” in our internal control over financial reporting, or whether we had
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identified any acts of fraud involving senior management, management or other personnel who have a significant role in our internal control over financial reporting. This information was important both for the assessment generally and because the Section 302 certifications require that our principal executive officer and our principal financial officer disclose that information, along with any “significant deficiencies,” to the Audit Committee of our Board of Directors, and to our independent auditors and to report on related matters in this section of the Annual Report on Form 10-K.
Assessment of Effectiveness of Disclosure Controls and Procedures-Based upon the assessments, our principal executive officer and our principal financial officer have concluded that, as of December 31, 2017, our disclosure controls and procedures were effective at the reasonable assurance level described above.
Management's Report on Internal Control over Financial Reporting-Management is responsible for establishing and maintaining adequate control over financial reporting. Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in the Internal Control-Integrated Framework (2013) to assess the effectiveness of our internal control over financial reporting. Based upon the assessments, our management has concluded that, as of December 31, 2017, our internal control over financial reporting was effective. Our independent registered public accounting firm issued an attestation report concerning our internal control over financial reporting, which appears further in this Annual Report.
Changes in Internal Control over Financial Reporting-During the three months ended December 31, 2017, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control for financial reporting.
Item 9B. | Other Information |
None.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of ManTech International Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of ManTech International Corporation and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 23, 2018 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Mclean, Virginia
February 23, 2018
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
The information concerning our directors and executive officers required by Item 401 of Regulation S-K is included under the captions “Election of Directors” and “Executive Officers,” respectively, in our definitive Proxy Statement to be filed with the Securities and Exchange Commission (SEC) in connection with our 2018 Annual Meeting of Stockholders (the “2018 Proxy Statement”), and that information is incorporated by reference in this Annual Report on Form 10-K.
The information required by Item 405 of Regulation S-K concerning compliance with Section 16(a) of the Exchange Act is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2018 Proxy Statement, and that information is incorporated by reference in this Annual Report on Form 10-K.
Our Standards of Ethics and Business Conduct, which sets forth the policies comprising our code of conduct, satisfies the SEC's requirements (including Item 406 of Regulation S-K) for a “code of ethics” applicable to our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions, as well as Nasdaq's requirements for a code of conduct applicable to all directors, officers and employees. Among other principles, our Standards of Ethics and Business Conduct includes guidelines relating to the ethical handling of actual or potential conflicts of interest, compliance with laws, accurate financial reporting and procedures for promoting compliance with (and reporting violations of) these standards. A copy of our Standards of Ethics and Business Conduct is available on the investor relations section of our website: www.mantech.com. We are required to disclose any amendment to, or waiver from, a provision of our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. We intend to use our website as a method of disseminating this disclosure as permitted by applicable SEC rules.
The information required by Item 407(d)(4) of Regulation S-K concerning the Audit Committee is included under the caption “Committees of the Board of Directors - Audit Committee” in our 2018 Proxy Statement and that information is incorporated by reference in this Annual Report on Form 10-K.
The information required by Item 407(d)(5) of Regulation S-K concerning the designation of an audit committee financial expert is included under the caption “Committees of the Board of Directors - Audit Committee” in our 2018 Proxy Statement and that information is incorporated by reference in this Annual Report on Form 10-K.
Item 11. | Executive Compensation |
The information required by this Item is included under the captions “Non-Employee Director Compensation Table,” “Certain Relationships and Related Person Transactions - Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report” and “Compensation Discussion and Analysis” and the related text and tables in our 2018 Proxy Statement and that information is incorporated by reference in this Annual Report on Form 10-K.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by Item 403 of Regulation S-K is included under the caption “Beneficial Ownership of Our Stock” in our 2018 Proxy Statement, and that information is incorporated by reference in this Annual Report on Form 10-K.
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Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2017 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.
Equity Compensation Plan Information | ||||||||||
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||
Equity compensation plans approved by security holders | 1,169,408 | $ | 35.88 | 5,980,594 | ||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||
Total | 1,169,408 | $ | 35.88 | 5,980,594 | ||||||
The plan contains a formula that automatically increases the number of securities available for issuance. The plan provides that the number of shares available for issuance under the plan automatically increases on the first trading day of January each calendar year during the term of the plan by an amount equal to 1.5% of the total number of shares outstanding (including all outstanding classes of common stock) on the last trading day in December of the immediately preceding calendar year, but provides that in no event should any such annual increase exceed 1,500,000 shares. On January 2, 2018, there were 588,464 shares added to the plan under this provision.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item is included under the captions “Certain Relationships and Related Person Transactions” and “Corporate Governance - Director Independence” in our 2018 Proxy Statement and that information is incorporated by reference in this Annual Report on Form 10-K.
Item 14. | Principal Accounting Fees and Services |
The information required by this Item is included under the caption “Ratification of Appointment of Independent Auditors” in our 2018 Proxy Statement and that information is incorporated by reference in this Annual Report on Form 10-K.
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PART IV
Item 15. | Exhibits, Financial Statement Schedule |
(a) The following documents are filed as a part of this Annual Report on Form 10-K:
(1)All financial statements:
DESCRIPTION | PAGE |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of December 31, 2017 and 2016 | |
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 | |
Notes to Consolidated Financial Statements | |
(2)Financial statement schedule:
SCHEDULE NO. | DESCRIPTION | PAGE | |
Schedule II | Valuation and Qualifying Accounts for the years ended December 31, 2017, 2016 and 2015 | ||
(3) Exhibits required by Item 601 of Regulation S-K (each management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report pursuant to Item 15(b) of this annual report is identified in the Exhibit list below):
Exhibit | Description | ||
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24.1 | Power of Attorney (included on signature page). | ||
101 | The following materials from ManTech International Corporation's Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2017 and 2016; (ii) Consolidated Statement of Income for the Years Ended December 31, 2017, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015; (iv) Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2017, 2016 and 2015; (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015; and (vi) Notes to Consolidated Financial Statements. | ||
* Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this report pursuant to Item 15(a)(3). | |||
‡ Filed herewith | |||
Item 16. | Form 10-K Summary. |
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MANTECH INTERNATIONAL CORPORATION | |
By: | /s/ KEVIN M. PHILLIPS |
Name: | Kevin M. Phillips |
Title: | President and Chief Executive Officer |
Date: | February 23, 2018 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby constitutes and appoints each of George J. Pedersen, Kevin M. Phillips or Michael Putnam as his/her attorney-in-fact and agent, with full power of substitution and resubstitution for him/her in any and all capacities, to sign any or all amendments to this Report and to file same, with exhibits thereto and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his/her substitutes may do or cause to be done by virtue hereof.
Name and Signature | Title | Date | ||
/s/ GEORGE J. PEDERSEN | Executive Chairman and Chairman of the Board of Directors | February 23, 2018 | ||
George J. Pedersen | ||||
/s/ KEVIN M. PHILLIPS | President, Chief Executive Officer and Director | February 23, 2018 | ||
Kevin M. Phillips | (Principal Executive Officer) | |||
/s/ JUDITH L. BJORNAAS | Chief Financial Officer | February 23, 2018 | ||
Judith L. Bjornaas | (Principal Financial Officer and Principal Accounting Officer) | |||
/s/ RICHARD L. ARMITAGE | Director | February 23, 2018 | ||
Richard L. Armitage | ||||
/s/ MARY K. BUSH | Director | February 23, 2018 | ||
Mary K. Bush | ||||
/s/ BARRY G. CAMPBELL | Director | February 23, 2018 | ||
Barry G. Campbell | ||||
/s/ WALTER R. FATZINGER, JR. | Director | February 23, 2018 | ||
Walter R. Fatzinger, Jr. | ||||
/s/ RICHARD J. KERR | Director | February 23, 2018 | ||
Richard J. Kerr | ||||
/s/ KENNETH A. MINIHAN | Director | February 23, 2018 | ||
Kenneth A. Minihan | ||||
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SCHEDULE II
Valuation and Qualifying Accounts
Activities in our allowance accounts for the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands):
Doubtful Accounts | ||||||||||||||||
Balance at Beginning of Period | Charged to Costs and Expenses | Deductions | Other* | Balance at End of Period | ||||||||||||
2015 | $ | 9,830 | — | (552 | ) | (805 | ) | $ | 8,473 | |||||||
2016 | $ | 8,473 | — | (215 | ) | (750 | ) | $ | 7,508 | |||||||
2017 | $ | 7,508 | — | — | (1,351 | ) | $ | 6,157 | ||||||||
* | Other represents doubtful account reserves released or recorded as part of net revenues for estimated customer disallowances. |
Deferred Tax Asset Valuation | ||||||||||||||||
Balance at Beginning of Period | Charged to Costs and Expenses | Deductions | Other | Balance at End of Period | ||||||||||||
2015 | $ | 64 | — | — | (64 | ) | $ | — | ||||||||
2016 | $ | — | 272 | — | — | $ | 272 | |||||||||
2017 | $ | 272 | 444 | — | 1 | $ | 717 | |||||||||
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