MANTECH INTERNATIONAL CORP - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
FORM 10-Q
__________________________________________
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
or
| ☐ | 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. | ||||||||||
| 2251 Corporate Park Drive | Herndon | VA | 20171 | ||||||||
| 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 | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Class A Common Stock | MANT | Nasdaq | ||||||
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 ☐ No
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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 | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of May 3, 2021 there were 27,424,689 shares outstanding of our Class A common stock and 13,176,695 shares outstanding of our Class B common stock.
TABLE OF CONTENTS
| Page No. | ||||||||
| Item 1. | ||||||||
| Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 | ||||||||
| Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020 | ||||||||
| Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 | ||||||||
| Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 2021 and 2020 | ||||||||
| Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 | ||||||||
| Notes to Condensed Consolidated Financial Statements | ||||||||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 6. | ||||||||
2
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share and Per Share Amounts)
| (unaudited) | |||||||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 6,924 | $ | 41,193 | |||||||
| Receivables—net | 428,755 | 400,621 | |||||||||
| Prepaid expenses | 30,206 | 26,243 | |||||||||
| Taxes receivable—current | 14,339 | 21,968 | |||||||||
| Other current assets | 6,921 | 6,354 | |||||||||
| Total Current Assets | 487,145 | 496,379 | |||||||||
| Goodwill | 1,237,733 | 1,237,894 | |||||||||
| Other intangible assets—net | 195,352 | 202,231 | |||||||||
| Property and equipment—net | 128,242 | 121,296 | |||||||||
| Operating lease right of use assets | 89,108 | 94,825 | |||||||||
| Employee supplemental savings plan assets | 38,206 | 37,848 | |||||||||
| Investments | 11,548 | 11,549 | |||||||||
| Other assets | 13,065 | 11,642 | |||||||||
| TOTAL ASSETS | $ | 2,200,399 | $ | 2,213,664 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| LIABILITIES | |||||||||||
| Accounts payable | $ | 122,549 | $ | 142,360 | |||||||
| Accrued salaries and related expenses | 120,875 | 123,953 | |||||||||
| Contract liabilities | 30,383 | 37,218 | |||||||||
| Operating lease obligations—current | 30,374 | 30,105 | |||||||||
| Accrued expenses and other current liabilities | 9,990 | 15,177 | |||||||||
| Total Current Liabilities | 314,171 | 348,813 | |||||||||
| Deferred income taxes | 143,100 | 141,638 | |||||||||
| Operating lease obligations—long term | 76,463 | 80,242 | |||||||||
| Accrued retirement | 32,560 | 36,310 | |||||||||
| Long-term debt | 21,500 | 15,000 | |||||||||
| Other long-term liabilities | 12,177 | 12,249 | |||||||||
| TOTAL LIABILITIES | 599,971 | 634,252 | |||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||
| STOCKHOLDERS' EQUITY | |||||||||||
Common stock, Class A—$0.01 par value; 150,000,000 shares authorized; 27,664,279 and 27,538,474 shares issued at March 31, 2021 and December 31, 2020; 27,420,166 and 27,294,361 shares outstanding at March 31, 2021 and December 31, 2020 | 277 | 275 | |||||||||
Common stock, Class B—$0.01 par value; 50,000,000 shares authorized; 13,176,695 and 13,176,695 shares issued and outstanding at March 31, 2021 and December 31, 2020 | 132 | 132 | |||||||||
| Additional paid-in capital | 549,811 | 545,717 | |||||||||
Treasury stock, 244,113 and 244,113 shares at cost at March 31, 2021 and December 31, 2020 | (9,158) | (9,158) | |||||||||
| Retained earnings | 1,059,608 | 1,042,676 | |||||||||
| Accumulated other comprehensive loss | (242) | (230) | |||||||||
| TOTAL STOCKHOLDERS' EQUITY | 1,600,428 | 1,579,412 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,200,399 | $ | 2,213,664 | |||||||
See notes to condensed consolidated financial statements.
3
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
| (unaudited) Three months ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| REVENUE | $ | 633,224 | $ | 610,912 | |||||||
| Cost of services | 542,717 | 520,291 | |||||||||
| General and administrative expenses | 48,086 | 51,723 | |||||||||
| OPERATING INCOME | 42,421 | 38,898 | |||||||||
| Interest expense | (354) | (655) | |||||||||
| Interest income | 40 | 50 | |||||||||
| Other (expense), net | (121) | (22) | |||||||||
| INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS | 41,986 | 38,271 | |||||||||
| Provision for income taxes | (9,657) | (9,591) | |||||||||
| Equity in (losses) of unconsolidated subsidiaries | (1) | (1) | |||||||||
| NET INCOME | $ | 32,328 | $ | 28,679 | |||||||
| BASIC EARNINGS PER SHARE: | |||||||||||
| Class A common stock | $ | 0.80 | $ | 0.71 | |||||||
| Class B common stock | $ | 0.80 | $ | 0.71 | |||||||
| DILUTED EARNINGS PER SHARE: | |||||||||||
| Class A common stock | $ | 0.79 | $ | 0.71 | |||||||
| Class B common stock | $ | 0.79 | $ | 0.71 | |||||||
See notes to condensed consolidated financial statements.
4
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
| (unaudited) Three months ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| NET INCOME | $ | 32,328 | $ | 28,679 | |||||||
| OTHER COMPREHENSIVE INCOME (LOSS): | |||||||||||
| Translation adjustments, net of tax | (12) | (17) | |||||||||
| Total other comprehensive income (loss) | (12) | (17) | |||||||||
| COMPREHENSIVE INCOME | $ | 32,316 | $ | 28,662 | |||||||
See notes to condensed consolidated financial statements.
5
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
| (unaudited) Three months ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Common Stock, Class A | |||||||||||
| At beginning of period | $ | 275 | $ | 272 | |||||||
| Stock option exercises | 1 | 1 | |||||||||
| Stock-based compensation expense | 1 | — | |||||||||
| At end of period | 277 | 273 | |||||||||
| Common Stock, Class B | |||||||||||
| At beginning of period | 132 | 132 | |||||||||
| At end of period | 132 | 132 | |||||||||
| Additional Paid-In Capital | |||||||||||
| At beginning of period | 545,717 | 525,851 | |||||||||
| Stock-based compensation expense | 3,442 | 2,635 | |||||||||
| Stock option exercises | 3,141 | 2,054 | |||||||||
| Payment consideration to tax authority on employees' behalf | (2,489) | (777) | |||||||||
| At end of period | 549,811 | 529,763 | |||||||||
| Treasury Stock, at cost | |||||||||||
| At beginning of period | (9,158) | (9,158) | |||||||||
| At end of period | (9,158) | (9,158) | |||||||||
| Retained Earnings | |||||||||||
| At beginning of period | 1,042,676 | 973,767 | |||||||||
| Net income | 32,328 | 28,679 | |||||||||
| Dividends | (15,396) | (12,868) | |||||||||
| At end of period | 1,059,608 | 989,578 | |||||||||
| Accumulated Other Comprehensive Loss | |||||||||||
| At beginning of period | (230) | (222) | |||||||||
| Translation adjustments, net of tax | (12) | (17) | |||||||||
| At end of period | (242) | (239) | |||||||||
| Total Stockholders' Equity | $ | 1,600,428 | $ | 1,510,349 | |||||||
See notes to condensed consolidated financial statements.
6
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| (unaudited) Three months ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 32,328 | $ | 28,679 | |||||||
| Adjustments to reconcile net income to net cash flow from (used in) operating activities: | |||||||||||
| Depreciation and amortization | 19,152 | 16,138 | |||||||||
| Noncash lease expense | 8,023 | 5,995 | |||||||||
| Stock-based compensation expense | 3,443 | 2,635 | |||||||||
| Deferred income taxes | 1,462 | 4,148 | |||||||||
| Change in allowance for bad debts | (999) | — | |||||||||
| Loss on sale and retirement of property and equipment | 15 | 22 | |||||||||
| Equity in losses of unconsolidated subsidiaries | 1 | 1 | |||||||||
| Contract loss reserve | — | (372) | |||||||||
| Change in assets and liabilities—net of effects from acquired businesses: | |||||||||||
| Receivables—net | (26,823) | (34,686) | |||||||||
| Prepaid expenses | (3,960) | (7,620) | |||||||||
| Taxes receivable—current | 7,629 | 5,403 | |||||||||
| Other current assets | 1,295 | (102) | |||||||||
| Employee supplemental savings plan asset | (358) | 4,822 | |||||||||
| Other long-term assets | (2,051) | (997) | |||||||||
| Accounts payable | (19,862) | 27,450 | |||||||||
| Accrued salaries and related expenses | (3,015) | 968 | |||||||||
| Operating lease obligations | (8,941) | (6,640) | |||||||||
| Contract liabilities | (6,386) | 8,926 | |||||||||
| Accrued expenses and other current liabilities | (4,963) | (4,014) | |||||||||
| Accrued retirement | (3,750) | (8,089) | |||||||||
| Other long-term liabilities | (66) | — | |||||||||
| Other | (307) | (27) | |||||||||
| Net cash flow from (used in) operating activities | (8,133) | 42,640 | |||||||||
| CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | (17,854) | (25,370) | |||||||||
| Investment in capitalized software | — | (4,402) | |||||||||
| Net cash used in investing activities | (17,854) | (29,772) | |||||||||
| CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: | |||||||||||
| Borrowing under revolving credit facility | 131,000 | 231,500 | |||||||||
| Repayments under revolving credit facility | (124,500) | (153,000) | |||||||||
| Dividends paid | (15,388) | (12,861) | |||||||||
| Proceeds from exercise of stock options | 3,142 | 2,055 | |||||||||
| Payment consideration to tax authority on employees' behalf | (2,489) | (777) | |||||||||
| Principal paid on financing leases | (47) | (35) | |||||||||
| Net cash flow from (used in) financing activities | (8,282) | 66,882 | |||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | (34,269) | 79,750 | |||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 41,193 | 8,854 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 6,924 | $ | 88,604 | |||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | |||||||||||
| Cash paid for interest | $ | 327 | $ | 639 | |||||||
| Cash paid for income taxes, net of refunds | $ | 10 | $ | 35 | |||||||
| Noncash investing and financing activities: | |||||||||||
| Operating lease obligations arising from obtaining right of use assets | $ | 5,401 | $ | 1,443 | |||||||
| Finance lease obligations arising from obtaining right of use assets | $ | 62 | $ | — | |||||||
| Noncash investing activities | $ | 479 | $ | 935 | |||||||
See notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
UNAUDITED
1.Description of the Business
ManTech International Corporation (depending on the circumstances, “ManTech” “Company” “we” “our” “ours” or “us”) provides mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. We excel in full-spectrum cyber, data collection & analytics, enterprise information technology (IT) and systems engineering and software application development solutions that support national and homeland security.
2.Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the U.S., have been condensed or omitted pursuant to those rules and regulations. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We recommend that you read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC. We believe that the condensed consolidated financial statements in this Form 10-Q reflect all adjustments that are necessary to fairly present the financial position, results of operations and cash flows for the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results that can be expected for the full year.
3.Revenue from Contracts with Customers
We derive revenue from contracts with customers primarily from contracts with the U.S. government in the areas of defense, intelligence, homeland security and other federal civilian agencies. Substantially all of our revenue is derived from services and solutions provided to the U.S. government or to prime contractors supporting the U.S. government, including services 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. We provide our services and solutions under three types of contracts: cost-reimbursable, fixed-price and time-and-materials. 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 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. Under time-and-materials contracts, we are reimbursed for labor at fixed hourly rates and are generally reimbursed separately for allowable materials and expenses at cost.
For contracts that do not meet the criteria to measure performance as a right to invoice under the series guidance, we utilize an Estimate at Completion process to measure progress toward completion. We typically estimate progress towards completion based on cost incurred or direct labor incurred. As part of this process, we review information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenue and costs. The risks and opportunities include judgments about the ability and cost to achieve the contract milestones and other technical contract requirements. We make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the timing in which we recognize revenue on our contracts. For the three months ended March 31, 2021 and 2020, the aggregate impact of adjustments in contract estimates increased our revenue by $2.5 million and $3.3 million, respectively.
We have one reportable segment. Our U.S. government customers typically exercise independent decision-making and contracting authority. Offices or divisions within an agency or department of the U.S. government may directly, or through a prime contractor, use our services as a separate customer as long as the customer has independent decision-making and contracting authority within its organization. We treat sales to U.S. government customers as sales within the U.S. regardless of where the services are performed. We generated approximately 100% and 99% of our revenue from sales in the U.S. for each of the three months ended March 31, 2021 and 2020, respectively.
8
The following tables disclose revenue (in thousands) by contract type, customer and contractor type for the periods presented.
| Three months ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cost-reimbursable | $ | 419,775 | $ | 418,655 | |||||||
| Fixed-price | 132,208 | 121,555 | |||||||||
| Time-and-materials | 81,241 | 70,702 | |||||||||
| Revenue | $ | 633,224 | $ | 610,912 | |||||||
| Three months ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| U.S. Government | $ | 628,498 | $ | 600,528 | |||||||
| State agencies, international agencies and commercial entities | 4,726 | 10,384 | |||||||||
| Revenue | $ | 633,224 | $ | 610,912 | |||||||
| Three months ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Prime contractor | $ | 589,074 | $ | 555,168 | |||||||
| Subcontractor | 44,150 | 55,744 | |||||||||
| Revenue | $ | 633,224 | $ | 610,912 | |||||||
The components of our receivables are as follows (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Billed receivables | $ | 318,417 | $ | 312,991 | |||||||
| Unbilled receivables | 128,099 | 106,007 | |||||||||
| Allowance for doubtful accounts | (17,761) | (18,377) | |||||||||
| Receivables—net | $ | 428,755 | $ | 400,621 | |||||||
Receivables at March 31, 2021 are expected to be substantially collected within one year except for approximately $2.1 million, of which a majority is related to U.S. government receivables. We do not believe that we have significant exposure to credit risk as billed receivables and unbilled receivables are primarily due from the U.S. government. The allowance for doubtful accounts represents our estimate for exposure due to compliance, contractual issues and bad debts related to prime contractors.
At March 31, 2021 and December 31, 2020, our contract liabilities are $30.4 million and $37.2 million, respectively. Changes in the balance of contract liabilities are primarily due to the timing difference between our performance and our customers' payments. For the three months ended March 31, 2021, the amount of revenue that was included in the opening contract liabilities balance were $25.5 million.
The remaining performance obligation as of March 31, 2021 is $2.6 billion. The following table discloses when we expect to recognize the remaining performance obligation as revenue (in billions):
| For the remaining nine months ending December 31, 2021 | For the year ending | |||||||||||||||||||
| December 31, 2022 | December 31, 2023 | Thereafter | ||||||||||||||||||
| $ | 1.5 | $ | 0.4 | $ | 0.2 | $ | 0.5 | |||||||||||||
9
4.Acquisitions
Tapestry Technologies (Tapestry)—On December 11, 2020, we completed the acquisition of Tapestry through a share purchase agreement by and among ManTech International Corporation, Tapestry Technologies, Inc., Project Tribune Holdings, Inc. (Holdco), and all of the shareholders of the Holdco. Tapestry provides unique insight and cybersecurity solutions to the U.S. Defense Information Systems Agency (DISA) and the Department of Defense (DoD). This acquisition broadens our footprint with DISA, serves as a springboard into the broader Defense Department IT marketspace, and provides us access to well-funded DISA and DoD programs.
The acquisition was accounted for as a business combination. The results of Tapestry's operations have been included in our condensed consolidated financial statements since that date. We funded the acquisition with cash on hand and borrowing under our revolving credit facility.
The preliminary purchase price of $46.3 million and it includes an estimated working capital adjustment. The preliminary purchase price was preliminarily allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. As we are still in the process of reviewing the fair value of the assets acquired and liabilities assumed, the purchase price allocation for Tapestry is not complete as of March 31, 2021. In accordance with ASC 805, Business Combinations, we expect to finalize our purchase price allocation within one year of the acquisition date.
Recognition of goodwill is largely attributed to the value paid for Tapestry's capabilities, which will broaden our footprint within DISA and the Defense Department IT marketplace. The goodwill recorded for this transaction will be deductible for tax purposes over 15 years. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $15.1 million and $1.4 million, respectively. The fair values of the customer relationships and backlog were determined using the excess earnings method (income approach) in which the value is derived from an estimation of the after-tax cash flows specifically attributable to backlog and customer relationships. Assumptions used in the analysis included revenue and expense forecasts, contributory asset charges, tax amortization benefit and discount rates. Customer contracts and related relationships represent the underlying relationships and agreements with Tapestry'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 using the pattern of benefits method over its estimated useful life of 2 years. The weighted-average amortization period of other intangibles is 18 years.
10
The following table represents the preliminary purchase price allocation for Tapestry (in thousands):
| Cash and cash equivalents | $ | 36 | |||
| Receivables | 3,926 | ||||
| Prepaid expenses | 225 | ||||
| Goodwill | 27,013 | ||||
| Other intangible assets | 16,500 | ||||
| Property and equipment | 269 | ||||
| Operating lease right of use assets | 934 | ||||
| Other assets | 10 | ||||
| Accounts payable | (522) | ||||
| Accrued salaries and related expenses | (1,142) | ||||
| Operating lease obligations—current | (487) | ||||
| Accrued expenses and other current liabilities | (59) | ||||
| Operating lease obligations—long term | (453) | ||||
| Net assets acquired and liabilities assumed | $ | 46,250 | |||
Minerva Engineering (Minerva)—On November 9, 2020, we completed the acquisition of Minerva through a membership interest purchase agreement by and among ManTech International Corporation, Minerva Engineering, LLC and NH Holdco LLC. Minerva is a leading provider of advanced cyber services that support the intelligence community, including risk and vulnerability assessment, incident response and cyber intrusion detection, and wireless signal discovery. This acquisition enhances and expands our cyber defense capabilities within the intelligence community, adding new customers, new past performance qualifications, mission-critical contracts, and highly skilled, cleared professionals that increase our deep cyber security talent base.
The acquisition was accounted for as a business combination. The results of Minerva's operations have been included in our condensed consolidated financial statements since that date. We paid for the acquisition with cash on November 9, 2020 and a short-term promissory note that was paid on November 12, 2020.
The preliminary purchase price was $32.7 million and it includes an estimated working capital adjustment. The preliminary purchase price was preliminarily allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. As we are still in the process of reviewing the fair value of the assets acquired and liabilities assumed, the purchase price allocation for Minerva is not complete as of March 31, 2021. In accordance with ASC 805, Business Combinations, we expect to finalize our purchase price allocation within one year of the acquisition date.
Recognition of goodwill is largely attributed to the value paid for Minerva's capabilities, which will broaden our footprint within the intelligence community through the addition of differentiated capabilities and access to new customers and contracts. The goodwill recorded for this transaction will be deductible for tax purposes over 15 years. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $10.5 million and $1.1 million, respectively. The fair values of the customer relationships and backlog were determined using the excess earnings method (income approach) in which the value is derived from an estimation of the after-tax cash flows specifically attributable to backlog and customer relationships. Assumptions used in the analysis included revenue and expense forecasts, contributory asset charges, tax amortization benefit and discount rates. Customer contracts and related relationships represent the underlying relationships and agreements with Minerva'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 using the pattern of benefits method over its estimated useful life of 2 years. The weighted-average amortization period for other intangible assets is 18 years.
11
The following table represents the preliminary purchase price allocation for Minerva (in thousands):
| Cash and cash equivalents | $ | 56 | |||
| Receivables | 4,573 | ||||
| Prepaid expenses | 28 | ||||
| Goodwill | 19,450 | ||||
| Other intangible assets | 11,600 | ||||
| Property and equipment | 149 | ||||
| Operating lease right of use assets | 968 | ||||
| Other assets | 29 | ||||
| Accounts payable | (1,874) | ||||
| Accrued salaries and related expenses | (784) | ||||
| Operating lease obligations—current | (384) | ||||
| Accrued expenses and other current liabilities | (591) | ||||
| Operating lease obligations—long term | (562) | ||||
| Net assets acquired and liabilities assumed | $ | 32,658 | |||
5.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 three months ended March 31, 2021 and 2020, we declared and paid a quarterly dividend in the amount of $0.38 per share and $0.32 per share, respectively, 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):
| Three months ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Distributed earnings | $ | 15,396 | $ | 12,868 | |||||||
| Undistributed earnings | 16,932 | 15,811 | |||||||||
| Net income | $ | 32,328 | $ | 28,679 | |||||||
| Class A common stock: | |||||||||||
| Basic net income available to common stockholders | $ | 21,809 | $ | 19,266 | |||||||
| Basic weighted average common shares outstanding | 27,317 | 26,992 | |||||||||
| Basic earnings per share | $ | 0.80 | $ | 0.71 | |||||||
| Diluted net income available to common stockholders | $ | 21,912 | $ | 19,353 | |||||||
| Effect of potential exercise of stock options | 401 | 375 | |||||||||
| Diluted weighted average common shares outstanding | 27,718 | 27,367 | |||||||||
| Diluted earnings per share | $ | 0.79 | $ | 0.71 | |||||||
| Class B common stock: | |||||||||||
| Basic net income available to common stockholders | $ | 10,519 | $ | 9,413 | |||||||
| Basic weighted average common shares outstanding | 13,177 | 13,187 | |||||||||
| Basic earnings per share | $ | 0.80 | $ | 0.71 | |||||||
| Diluted net income available to common stockholders | $ | 10,416 | $ | 9,326 | |||||||
| Diluted weighted average common shares outstanding | 13,177 | 13,187 | |||||||||
| Diluted earnings per share | $ | 0.79 | $ | 0.71 | |||||||
For the three months ended March 31, 2021 and 2020, options to purchase 394 shares and 235,059 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 three months ended March 31, 2021 and 2020, there were 61,804 shares and 47,224 shares, respectively, issued from the exercise of stock options. For the three months ended March 31, 2021 and 2020 there were 92,295 shares and 35,882 shares, respectively, issued from the vesting of restricted stock units.
6.Property and Equipment
Major classes of property and equipment are summarized as follows (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Furniture and equipment | $ | 209,213 | $ | 194,470 | |||||||
| Leasehold improvements | 64,756 | 62,293 | |||||||||
| Finance leases | 767 | 705 | |||||||||
| Property and equipment—gross | 274,736 | 257,468 | |||||||||
| Accumulated depreciation and amortization | (146,494) | (136,172) | |||||||||
| Property and equipment—net | $ | 128,242 | $ | 121,296 | |||||||
Depreciation and amortization expense related to property and equipment for the three months ended March 31, 2021 and 2020 was $11.5 million and $8.8 million, respectively.
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7.Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill during the year ended December 31, 2020 and three months ended March 31, 2021 are as follows (in thousands):
| Goodwill Balance | |||||
| Goodwill at December 31, 2019 | $ | 1,191,259 | |||
| Acquisitions | 46,624 | ||||
| Acquisition fair value adjustment | 11 | ||||
| Goodwill at December 31, 2020 | 1,237,894 | ||||
| Acquisition fair value adjustment | (161) | ||||
| Goodwill at March 31, 2021 | $ | 1,237,733 | |||
Other intangible assets consisted of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Other intangible assets: | |||||||||||||||||||||||||||||||||||
| Contract and program intangible assets | $ | 430,632 | $ | 247,188 | $ | 183,444 | $ | 430,632 | $ | 242,194 | $ | 188,438 | |||||||||||||||||||||||
| Capitalized software | 53,943 | 42,035 | 11,908 | 54,605 | 40,812 | 13,793 | |||||||||||||||||||||||||||||
| Total other intangible assets—net | $ | 484,575 | $ | 289,223 | $ | 195,352 | $ | 485,237 | $ | 283,006 | $ | 202,231 | |||||||||||||||||||||||
Amortization expense relating to intangible assets for the three months ended March 31, 2021 and 2020 was $6.8 million and $6.5 million, respectively. Amortization expense for the three months ended March 31, 2021 includes an impairment of $0.3 million for capitalized software. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):
| For the remaining nine months ending December 31, 2021 | $ | 18,061 | |||
| For the year ending: | |||||
| December 31, 2022 | $ | 23,973 | |||
| December 31, 2023 | $ | 19,546 | |||
| December 31, 2024 | $ | 17,486 | |||
| December 31, 2025 | $ | 15,423 | |||
| December 31, 2026 | $ | 14,331 | |||
8.Debt
Revolving Credit Facility—We maintain a credit facility 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.
Borrowings under our credit agreement are collateralized by substantially all of our assets and those of 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 base rate plus market-rate 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).
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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 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 three months ended March 31, 2021 and 2020, we were in compliance with the financial covenants under the credit agreement.
There was $21.5 million and $15.0 million outstanding on our revolving credit facility at March 31, 2021 and December 31, 2020, respectively. The maximum available borrowing under the revolving credit facility at March 31, 2021 was $476.4 million. As of March 31, 2021, we were contingently liable under letters of credit totaling $2.1 million, 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 2016 with no material adjustments. The remaining audits for 2017 through 2020 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.
We have $2.1 million outstanding on our letter of credit, of which $1.6 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.
10.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, among others, stock options, restricted stock and restricted stock units (RSUs), among others. 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, 2021, there were 607,066 additional shares made available for issuance under the Plan. Through March 31, 2021, the Board of Directors has authorized the issuance of up to 16,358,071 shares under this Plan. Through March 31, 2021, the remaining aggregate number of shares of our common stock available for future grants under the Plan was 7,711,136. 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 three months ended March 31, 2021 and 2020, we recorded $3.4 million and $2.6 million, respectively, of stock-based compensation expense. No compensation expense of employees with stock awards, including stock-based compensation expense, was capitalized during the periods. For the three months ended March 31, 2021 and 2020, we recorded $1.0 million and $0.5 million, respectively, to income tax benefit related to the exercise of stock options, vested cancellations and the vesting of restricted stock and restricted stock units.
Stock Options—Under the Plan, we have issued stock options in the past. A stock option 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 did not grant any options during the three months ended March 31, 2021 and year ended December 31, 2020.
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We have used the Black-Scholes-Merton option pricing model to determine the fair value of our 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. Option grants that vested during the three months ended March 31, 2021 and 2020 had a combined fair value of $1.1 million and $1.7 million, respectively.
The following table summarizes stock option activity for the year ended December 31, 2020 and the three months ended March 31, 2021:
| Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value (in thousands) | Weighted Average Remaining Contractual Life | ||||||||||||||||||||
| Stock options outstanding at December 31, 2019 | 1,136,095 | $ | 54.98 | $ | 28,291 | ||||||||||||||||||
| Exercised | (223,405) | $ | 46.72 | $ | 6,897 | ||||||||||||||||||
| Cancelled and expired | (126,863) | $ | 61.17 | ||||||||||||||||||||
| Stock options outstanding at December 31, 2020 | 785,827 | $ | 56.33 | $ | 25,629 | ||||||||||||||||||
| Exercised | (61,804) | $ | 48.83 | $ | 2,464 | ||||||||||||||||||
| Cancelled and expired | (5,016) | $ | 62.88 | ||||||||||||||||||||
| Stock options outstanding at March 31, 2021 | 719,007 | $ | 56.92 | $ | 21,588 | 3 years | |||||||||||||||||
| Stock options exercisable at March 31, 2021 | 482,337 | $ | 52.87 | $ | 16,437 | 2 years | |||||||||||||||||
The following table summarizes non-vested stock options for the three months ended March 31, 2021:
| Number of Shares | Weighted Average Fair Value | ||||||||||
| Non-vested stock options at December 31, 2020 | 353,643 | $ | 11.66 | ||||||||
| Vested | (112,591) | $ | 10.04 | ||||||||
| Cancelled | (4,382) | $ | 12.05 | ||||||||
| Non-vested stock options at March 31, 2021 | 236,670 | $ | 12.42 | ||||||||
Unrecognized compensation expense related to non-vested awards was $2.3 million as of March 31, 2021, which is expected to be recognized over a weighted-average period of 1 year.
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 on the one year anniversary of the grant date. The related compensation expense is recognized over the service period and is based on the grant date fair value of the stock. 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.
There was no activity for the three months ended March 31, 2021. The following table summarizes the restricted stock activity during the year ended December 31, 2020.
| Number of Shares | Weighted Average Fair Value | ||||||||||
| Non-vested restricted stock at December 31, 2019 | 24,000 | $ | 62.66 | ||||||||
| Granted | 24,000 | $ | 71.11 | ||||||||
| Vested | (24,000) | $ | 62.66 | ||||||||
| Non-vested restricted stock at December 31, 2020 | 24,000 | $ | 71.11 | ||||||||
RSUs—Under the Plan, we have issued restricted stock units (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 have
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no voting rights until the RSUs vest. Employees who are granted RSUs do not receive dividend payments during the vesting period. Our employees' time-based RSUs provide for the delivery of shares in one-third increments on the first, second and third anniversaries of 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.
The following table summarizes the non-vested RSU activity during the year ended December 31, 2020 and the three months ended March 31, 2021:
| Number of Units | Weighted Average Fair Value | ||||||||||
| Non-vested RSUs at December 31, 2019 | 210,827 | $ | 55.31 | ||||||||
| Granted | 266,880 | $ | 68.83 | ||||||||
| Vested | (73,047) | $ | 53.85 | ||||||||
| Forfeited | (57,861) | $ | 64.52 | ||||||||
| Non-vested RSUs at December 31, 2020 | 346,799 | $ | 64.48 | ||||||||
| Granted | 196,310 | $ | 78.60 | ||||||||
| Vested | (93,062) | $ | 61.10 | ||||||||
| Forfeited | (9,766) | $ | 56.57 | ||||||||
| Non-vested RSUs at March 31, 2021 | 440,281 | $ | 71.67 | ||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
All statements and assumptions contained in this Quarterly Report on Form 10-Q 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 the Item 1A "Risk Factors" in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
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;
•adverse changes in U.S. government spending for programs we support, whether due to changing mission priorities, socio-economic policies or federal budget constraints generally;
•disruptions to our business or damage to our reputation resulting from cyber attacks and other security threats;
•disruptions to our business resulting from the COVID-19 pandemic or other similar global health epidemics, pandemics and/or other disease outbreaks;
•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;
•failure to compete effectively for awards procured through the competitive bidding process, and the adverse impact of delays resulting from our competitors' protests of new contracts that are awarded to us;
•failure to obtain option awards, task orders or funding under our contracts;
•the government renegotiating, modifying or terminating our contracts;
•failure to comply with, or adverse changes in, complex U.S. government laws and procurement regulations;
•adverse results of U.S. government audits or other investigations of our government contracts;
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•failure to successfully integrate acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions;
•failure to mitigate risks associated with conducting business internationally; and
•adverse changes in business conditions that may cause our investments in recorded goodwill to become impaired.
We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to update any forward-looking statement made herein following the date of this Quarterly Report, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
Overview
We provide mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. We excel in full-spectrum cyber, secure mission & enterprise IT, advanced data analytics, software and systems development, intelligent systems engineering, intelligence mission support and mission operations.
Approximately 99% of our revenues are generated through contracts with the U.S. federal government, or through prime contractors supporting the U.S. government. The U.S. government is the largest consumer of services and solutions in the U.S. As such, our business is impacted by the overall U.S. government budget and our ability to match our capabilities and offerings to the U.S. government's spending priorities. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. On December 27, 2020, Congress passed, and the President signed into law the Consolidated Appropriations Act of 2020. The Consolidated Appropriations Act funds the federal government through GFY 2021 and contains $696 billion of funding for defense. On March 11, 2021, the President signed into law the American Rescue Plan (ARP) Act of 2021. The ARP Act is a $1.9 trillion stimulus package aimed at further combating the economic impacts of the COVID-19 pandemic.
COVID-19 Pandemic
The global outbreak of the COVID-19 pandemic, along with various measures that local, state and federal governments have adopted to mitigate its impact, have required us to make changes to our operations to enable our employees to continue supporting our customers' mission-critical needs in this period of disruption. As a result of travel restrictions, social distancing guidelines and other efforts that have been adopted by public health officials to mitigate the impact of the COVID-19 pandemic, we have made changes to our operating schedules and staffing plans to accommodate these restrictions while maintaining the ability of our employees to continue to support and work with our customers to the maximum extent possible. The changes include the implementation of telework or other means of remote work for our employees, who support both mission-critical programs and our internal support organization. With respect to our impacted programs that, by their nature, cannot be supported remotely, we have accommodated those customers who have implemented shiftwork or other mitigation protocols by maintaining our workforce in a “mission ready” state. With the rollout of vaccines, we are seeing some mitigation protocols being removed or reduced which is enabling some of our impacted programs to return a normal or closer to normal state.
The CARES Act included a provision (Section 3610) under which government contractors can seek reimbursement for employee's salaries when they are prevented from accessing worksites or are subject to reduced work schedules and cannot telecommute. The reimbursements available to us under the CARES Act have been extended in the ARP Act through September 30, 2021. The precise application of this provision, including what type of costs will be reimbursed, the earliest date cost-reimbursement will be applicable, and whether fee recovery will be included in the reimbursement, are determinations being made at the individual government agency or contract level. Currently, our customers are reimbursing costs incurred without fee. We are continuing to monitor the impacts of the pandemic and the rollout of the vaccine to the population. We cannot predict the duration of the pandemic nor the timing of the vaccine, however, an extended duration of the pandemic may have an adverse impact on our results of operations.
We classify indirect expenses either as cost of services or general and administrative in manner consistent with disclosure statements submitted and approved by the Defense Contract Management Agency (DCMA). Effective for 2021, we have reclassified certain expenses from general and administrative to cost of sales (overhead). While this does not impact indirect expenses in total, it does reduce general and administrative as compared to prior periods.
We recommend that you read this discussion and analysis in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the Securities and Exchange Commission.
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Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
The following table sets forth certain items from our condensed consolidated statements of income and the relative percentage that certain items of expenses and earnings bear to revenue, as well as the period-to-period change from March 31, 2020 to March 31, 2021.
| Three months ended March 31, | Period-to-Period Change | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2020 to 2021 | |||||||||||||||||||||||||||||||
| Dollars | Percentage | Dollars | Percentage | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| REVENUE | $ | 633,224 | $ | 610,912 | 100.0 | % | 100.0 | % | $ | 22,312 | 3.7 | % | |||||||||||||||||||||||
| Cost of services | 542,717 | 520,291 | 85.7 | % | 85.1 | % | 22,426 | 4.3 | % | ||||||||||||||||||||||||||
| General and administrative expenses | 48,086 | 51,723 | 7.6 | % | 8.5 | % | (3,637) | (7.0) | % | ||||||||||||||||||||||||||
| OPERATING INCOME | 42,421 | 38,898 | 6.7 | % | 6.4 | % | 3,523 | 9.1 | % | ||||||||||||||||||||||||||
| Interest expense | (354) | (655) | 0.1 | % | 0.1 | % | (301) | (46.0) | % | ||||||||||||||||||||||||||
| Interest income | 40 | 50 | — | % | — | % | (10) | (20.0) | % | ||||||||||||||||||||||||||
| Other (expense), net | (121) | (22) | — | % | — | % | 99 | 450.0 | % | ||||||||||||||||||||||||||
| INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS | 41,986 | 38,271 | 6.6 | % | 6.3 | % | 3,715 | 9.7 | % | ||||||||||||||||||||||||||
| Provision for income taxes | (9,657) | (9,591) | 1.5 | % | 1.6 | % | 66 | 0.7 | % | ||||||||||||||||||||||||||
| Equity in (losses) of unconsolidated subsidiaries | (1) | (1) | — | % | — | % | — | — | % | ||||||||||||||||||||||||||
| NET INCOME | $ | 32,328 | $ | 28,679 | 5.1 | % | 4.7 | % | $ | 3,649 | 12.7 | % | |||||||||||||||||||||||
Revenue
The primary driver of our increase in revenues relates to revenue from recent acquisitions, new contract awards and growth on certain existing contracts. These increases were offset by lower material purchases as compared to the same period in 2020 as well as contracts and tasks that ended and reduced scope of work on some contracts. We expect revenues to increase in 2021 due to recent and future new contracts and growth on existing programs.
Cost of services
The increase in cost of services was primarily due to increases in revenue. As a percentage of revenue, direct labor costs were 52% and 49% for the three months ended March 31, 2021 and 2020, respectively. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, were 34% and 37% for the three months ended March 31, 2021 and 2020, respectively. The shift in our mix between direct labor and other direct costs was primarily due an increase in direct labor, which includes increased overhead due to cost allocation reclassifications, and lower material purchases on several contracts due to timing of customer requirements as well as reduced other direct costs. We expect cost of services as a percentage of revenue to increase in 2021.
General and administrative expenses
The decrease in general and administrative expenses was primarily due to changes in the classification of certain indirect expenses, reduced travel and other indirect expenses due to the impacts of COVID. These reductions were partially offset by increased expenditures for infrastructure support. As a percentage of revenues, general and administrative expenses decreased for three months ended March 31, 2021 compared to the same period in 2020. For the balance of 2021, we expect general and administrative expenses to increase slightly as a percentage of revenue.
Interest expense
The decrease in interest expense was related to the outstanding balance on our revolving credit facility. There was $115.0 million as of March 31, 2020, which decreased to $21.5 million as of March 31, 2021.
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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 23% and 25% for the three months ended March 31, 2021 and 2020, respectively. For the three months ending March 31, 2021, the effective tax rate decreased primarily due to an increase in the benefit for stock-based compensation and an increase in the estimated research and development tax credit. Under the current tax laws, we expect our effective tax rate to slightly increase in 2021. The President has signaled the administration's intent to increase the U.S. corporate income tax rate. An increase in the U.S. corporate rate could result in a significant increase in our income tax expense as we would be required to revalue our deferred tax liabilities.
Backlog
At March 31, 2021 and December 31, 2020, our backlog was $10.1 billion and $10.2 billion, respectively. Our funded backlog was $1.4 billion and $1.2 billion as of March 31, 2021 and December 31, 2020, respectively. Backlog represents estimates that we calculate on a consistent basis. For additional information on how we compute backlog, see the disclosure under the caption "Backlog," contained in "Item 1 Business" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Liquidity and Capital Resources
Historically, our primary liquidity needs have been financing acquisitions, working capital, payments under our cash dividend program and capital expenditures. Our primary sources of liquidity are cash from operating activities and borrowings under our revolving credit facility.
On March 31, 2021, our cash and cash equivalents balance was $6.9 million. There was $21.5 million outstanding under our revolving credit facility at March 31, 2021. As of March 31, 2021, we were contingently liable under letters of credit totaling $2.1 million, which reduces our availability to borrow under our revolving credit facility. The maximum available borrowings under our revolving credit facility at March 31, 2021 were $476.4 million.
Cash Flows From (Used In) Operating Activities
Our operating cash flow is primarily affected by our ability to invoice and collect from our customers in a timely manner, our management of 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 were 61 and 64 for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, our net cash used in operating activities was $8.1 million. For the three months ended March 31, 2020, our net cash flow from operating activities was $42.6 million. The decrease in net cash flows from (used in) operating activities over the comparative period was primarily due to the timing of payments to vendors.
Cash Flows From (Used In) Investing Activities
Our cash used in investing activities consists primarily of business combinations, purchases of property and equipment and investments in capital software. For the three months ended March 31, 2021 our net cash used in investing activities was $17.9 million, which was primarily due to the purchase of equipment to support managed IT service contracts. For the three months ended March 31, 2020 our net cash used in investing activities was $29.8 million, which was primarily due to the purchase of equipment to support a managed IT service contract, infrastructure investments and capitalized software for internal use.
Cash Flows From (Used in) Financing Activities
For the three months ended March 31, 2021, our net cash used in financing activities was $8.3 million, which was primarily the result of our dividend payments, offset by net borrowings under our credit facility. For the three months ended March 31, 2020, our net cash flow from financing activities was $66.9 million, which was primarily due to net borrowings under our credit facility, offset by 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.
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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.
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 London Interbank Offer Rate base 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).
There was $21.5 million outstanding on our revolving credit facility at March 31, 2021. As of and during the three months ended March 31, 2021, we were in compliance with the financial covenants under the credit agreement.
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 internal and external growth through cash from operating activities, borrowings under our revolving credit facility and issuance of equity.
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 three months ended March 31, 2021 and 2020, we declared and paid a quarterly dividend in the amount of $0.38 per share and $0.32 per share, respectively, on both classes of our common stock. While we expect to continue the cash dividend program, any future dividends declared will be at the discretion of our Board of Directors and will depend, among other factors, upon our results of operations, financial condition and cash requirements, as well as such other factors that our Board of Directors deems relevant.
Off-Balance Sheet Arrangements
In the ordinary course of business, we use letters of credit issued to satisfy certain contractual terms with our customers. As of March 31, 2021, $2.1 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 $1.6 million.
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 condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are set forth under the caption "Critical Accounting Estimates and Policies" in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC. There have been no material changes to our critical accounting estimates and policies from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
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Recently Adopted Accounting Standards Updates
Accounting Standards Updates that became effective during the three months ended March 31, 2021 did not have a material impact on our condensed consolidated financial statements.
Recently Issued But Not Yet Adopted ASUs
ASUs effective after March 31, 2021 are not expected to have a material effect on our condensed consolidated financial statements.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk relates to changes in interest rates for borrowing under our revolving credit facility. At March 31, 2021, we had $21.5 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 an immaterial effect on our interest expense for the three months ended March 31, 2021.
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 securities can have maturities exceeding six months and the weighted average maturity of the portfolio cannot exceed 60 days.
Item 4.Controls and Procedures
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 Quarterly Report on Form 10-Q, 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.
It should be noted that 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. 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. As a result, our disclosure controls and procedures are designed to provide reasonable assurance that such disclosure controls and procedures will meet their objectives.
As of March 31, 2021, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), management evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level described above.
There were no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1.Legal Proceedings
We are subject to certain legal proceedings, government audits, investigations, claims and disputes that arise in the ordinary course of our business. Like most large government defense contractors, our contract costs are audited and reviewed on a continual basis by an in-house staff of auditors from the Defense Contract Audit Agency. 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 6.Exhibits
Exhibits required by Item 601 of Regulation S-K:
| Exhibit | Description of Exhibit | |||||||
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
| * 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. | ||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MANTECH INTERNATIONAL CORPORATION | |||||||||||
| By: | /s/ KEVIN M. PHILLIPS | ||||||||||
| Date: | May 5, 2021 | Name: | Kevin M. Phillips | ||||||||
| Title: | Chairman, Chief Executive Officer and President | ||||||||||
| By: | /s/ JUDITH L. BJORNAAS | ||||||||||
| Date: | May 5, 2021 | Name: | Judith L. Bjornaas | ||||||||
| Title: | Chief Financial Officer | ||||||||||
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