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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 September 30, 2019
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
Virginia
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 and posted on its corporate Website, 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      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 October 30, 2019 there were 26,913,779 shares outstanding of our Class A common stock and 13,188,045 shares outstanding of our Class B common stock.





MANTECH INTERNATIONAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED September 30, 2019
INDEX
 
 
Page No.
 
Item 1.
 
 
Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
 
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 1A.
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)
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Cash and cash equivalents
$
33,313

 
$
5,294

Receivables—net
367,042

 
405,378

Prepaid expenses
26,069

 
23,398

Other current assets
7,152

 
5,915

Total Current Assets
433,576

 
439,985

Goodwill
1,191,213

 
1,085,806

Other intangible assets—net
203,247

 
171,962

Operating lease right of use assets
116,236

 

Property and equipment—net
72,993

 
51,427

Employee supplemental savings plan assets
34,897

 
30,501

Investments
11,550

 
11,830

Other assets
14,127

 
12,360

TOTAL ASSETS
$
2,077,839

 
$
1,803,871

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
LIABILITIES
 
 
 
Accounts payable and accrued expenses
$
161,404

 
$
126,066

Accrued salaries and related expenses
104,309

 
89,058

Contract liabilities
43,891

 
28,209

Operating lease liabilities—current
28,170

 

Total Current Liabilities
337,774

 
243,333

Long term debt
25,000

 
7,500

Deferred income taxes
126,048

 
108,956

Operating lease liabilities—long term
98,979

 

Accrued retirement
33,654

 
30,999

Other long-term liabilities
1,428

 
11,889

TOTAL LIABILITIES
622,883

 
402,677

COMMITMENTS AND CONTINGENCIES


 


STOCKHOLDERS' EQUITY
 
 
 
Common stock, Class A—$0.01 par value; 150,000,000 shares authorized; 27,149,693 and 26,817,513 shares issued at September 30, 2019 and December 31, 2018; 26,905,580 and 26,573,400 shares outstanding at September 30, 2019 and December 31, 2018
271

 
268

Common stock, Class B—$0.01 par value; 50,000,000 shares authorized; 13,188,045 and 13,188,045 shares issued and outstanding at September 30, 2019 and December 31, 2018
132

 
132

Additional paid-in capital
519,835

 
506,970

Treasury stock, 244,113 and 244,113 shares at cost at September 30, 2019 and December 31, 2018
(9,158
)
 
(9,158
)
Retained earnings
943,969

 
903,084

Accumulated other comprehensive loss
(93
)
 
(102
)
TOTAL STOCKHOLDERS’ EQUITY
1,454,956

 
1,401,194

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,077,839

 
$
1,803,871

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
September 30,
 
(unaudited)
Nine months ended
September 30,
 
2019
 
2018
 
2019
 
2018
REVENUE
$
579,179

 
$
497,205

 
$
1,618,146

 
$
1,461,485

Cost of services
487,914

 
425,560

 
1,378,263

 
1,250,505

General and administrative expenses
52,863

 
42,246

 
139,652

 
126,831

OPERATING INCOME
38,402

 
29,399

 
100,231

 
84,149

Interest expense
(659
)
 
(616
)
 
(2,088
)
 
(2,007
)
Interest income
90

 
43

 
401

 
85

Other income (expense), net
(39
)
 
1

 
(50
)
 
63

INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS
37,794

 
28,827

 
98,494

 
82,290

Provision for income taxes
(9,873
)
 
(6,912
)
 
(25,229
)
 
(20,412
)
Equity in earnings of unconsolidated subsidiaries
16

 
8

 
4

 
27

NET INCOME
$
27,937

 
$
21,923

 
$
73,269

 
$
61,905

BASIC EARNINGS PER SHARE:
 
 
 
 
 
 
 
Class A common stock
$
0.70

 
$
0.55

 
$
1.84

 
$
1.57

Class B common stock
$
0.70

 
$
0.55

 
$
1.84

 
$
1.57

DILUTED EARNINGS PER SHARE:
 
 
 
 
 
 
 
Class A common stock
$
0.69

 
$
0.55

 
$
1.82

 
$
1.55

Class B common stock
$
0.69

 
$
0.55

 
$
1.82

 
$
1.55


See notes to condensed consolidated financial statements.

4



MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
 
(unaudited)
Three months ended
September 30,
 
(unaudited)
Nine months ended
September 30,
 
2019
 
2018
 
2019
 
2018
NET INCOME
$
27,937

 
$
21,923

 
$
73,269

 
$
61,905

OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Cumulative-effect adjustment for adoption of Accounting Standards Update 2018-02

 

 
(24
)
 

Translation adjustments, net of tax
4

 
(27
)
 
9

 
(54
)
Total other comprehensive income (loss)
4

 
(27
)
 
(15
)
 
(54
)
COMPREHENSIVE INCOME
$
27,941

 
$
21,896

 
$
73,254

 
$
61,851


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
September 30,
 
(unaudited)
Nine months ended
September 30,
 
2019
 
2018
 
2019
 
2018
Common Stock, Class A
 
 
 
 
 
 
 
At beginning of period
$
270

 
$
266

 
$
268

 
$
263

Stock option exercises
1

 
2

 
2

 
4

Stock-based compensation expense

 

 
1

 
1

At end of period
271

 
268

 
271

 
268

Common Stock, Class B
 
 
 
 
 
 
 
At beginning of period
132

 
132

 
132

 
132

At end of period
132

 
132

 
132

 
132

Additional Paid-In Capital
 
 
 
 
 
 
 
At beginning of period
513,840

 
498,370

 
506,970

 
492,030

Stock option exercises
4,176

 
4,667

 
9,154

 
11,489

Stock-based compensation expense
1,938

 
1,341

 
5,187

 
3,582

Payment consideration to tax authority on employees' behalf
(119
)
 

 
(1,476
)
 
(2,723
)
At end of period
519,835

 
504,378

 
519,835

 
504,378

Treasury Stock, at cost
 
 
 
 
 
 
 
At beginning of period
(9,158
)
 
(9,158
)
 
(9,158
)
 
(9,158
)
At end of period
(9,158
)
 
(9,158
)
 
(9,158
)
 
(9,158
)
Retained Earnings
 
 
 
 
 
 
 
At beginning of period
926,855

 
880,837

 
903,084

 
860,027

Net income
27,937

 
21,923

 
73,269

 
61,905

Dividends
(10,823
)
 
(9,928
)
 
(32,360
)
 
(29,687
)
Cumulative-effect adjustment for adoption of Accounting Standards Update 2018-02

 

 
(24
)
 

Cumulative-effect adjustment for adoption of Accounting Standards Update 2014-09

 

 

 
587

At end of period
943,969

 
892,832

 
943,969

 
892,832

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
At beginning of period
(97
)
 
(347
)
 
(102
)
 
(320
)
Translation adjustments, net of tax
4

 
(27
)
 
9

 
(54
)
At end of period
(93
)
 
(374
)
 
(93
)
 
(374
)
Total Stockholders' Equity
$
1,454,956

 
$
1,388,078

 
$
1,454,956

 
$
1,388,078


See notes to condensed consolidated financial statements.


6



MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
(unaudited)
Nine months ended
September 30,
 
2019
 
2018
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
 
 
 
Net income
$
73,269

 
$
61,905

Adjustments to reconcile net income to net cash flow from (used in) operating activities:
 
 
 
Depreciation and amortization
39,470

 
40,028

Noncash lease expense
20,949

 

Deferred income taxes
9,773

 
13,274

Stock-based compensation expense
5,188

 
3,583

Contract loss reserve
(881
)
 

Equity in (earnings) of unconsolidated subsidiaries
(4
)
 
(27
)
Change in assets and liabilities—net of effects from acquired businesses:
 
 
 
Receivables—net
60,182

 
(49,289
)
Prepaid expenses
(5,609
)
 
(8,448
)
Other current assets
(1,067
)
 
14,356

Employee supplemental savings plan asset
(4,396
)
 
(1,899
)
Accounts payable and accrued expenses
28,888

 
4,946

Accrued salaries and related expenses
9,830

 
5,907

Contract liabilities
15,682

 
10,256

Operating lease liabilities
(21,077
)
 

Accrued retirement
2,655

 
965

Other
107

 
(1,343
)
Net cash flow from operating activities
232,959

 
94,214

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Acquisition of a business-net of cash acquired
(153,180
)
 
(5,279
)
Purchases of property and equipment
(38,455
)
 
(25,029
)
Deferred contract costs
(3,520
)
 
(3,586
)
Investment in capitalized software for internal use
(2,784
)
 
(4,199
)
Proceeds from equity method investment
283

 

Proceeds from corporate owned life insurance

 
1,300

Net cash used in investing activities
(197,656
)
 
(36,793
)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
Borrowing under revolving credit facility
465,500

 
501,000

Repayments under revolving credit facility
(448,000
)
 
(532,000
)
Dividends paid
(32,365
)
 
(29,691
)
Proceeds from exercise of stock options
9,156

 
11,493

Payment consideration to tax authority on employees' behalf
(1,476
)
 
(2,723
)
Principal paid on financing leases
(99
)
 

Net cash used in financing activities
(7,284
)
 
(51,921
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
28,019

 
5,500

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
5,294

 
9,451

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
33,313

 
$
14,951

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
1,938

 
$
1,961

Cash paid for income taxes, net of refunds
$
16,117

 
$
(6,750
)
Noncash investing and financing activities:
 
 
 
Operating lease liabilities arising from obtaining right of use assets
$
18,527

 
$

Finance lease liabilities arising from obtaining right of use assets
$
368

 
$

Capital expenditures incurred but not yet paid
$
1,333

 
$
112

See notes to condensed consolidated financial statements.

7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
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. In business for more than 50 years, we excel in full-spectrum cyber, data collection & analytics, enterprise information technology (IT) and systems and software engineering 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, 2018, 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

On January 1, 2018, we adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts that were not substantially complete as of January 1, 2018. ASC 606 outlines a five-step model whereby revenue is recognized as performance obligations within the contract are satisfied. ASC 606 also requires new, expanded disclosures regarding revenue recognition. We recognized the cumulative effect of adopting ASC 606 as an increase to the 2018 opening balance of retained earnings in the amount of $0.8 million, with the impact primarily related to fixed-price contracts.

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. We typically recognize revenue for time and material contracts under the "right to invoice" model.

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 September 30, 2019 and 2018, the aggregate impact of adjustments in contract estimates increased our revenue by $5.9 million and $4.5 million, respectively. For the nine months ended September 30, 2019 and 2018, the aggregate impact of adjustments in contract estimates increased our revenue by $9.0 million and $8.8 million, respectively.

8




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.

The following tables disclose revenue (in thousands) by contract type, customer, prime or subcontractor and geography for the periods presented.
 
Three months ended
September 30,
 
Nine months ended
September 30,
2019
 
2018
 
2019
 
2018
Cost-reimbursable
$
397,921

 
$
337,105

 
$
1,129,538

 
$
970,647

Fixed-price
120,632

 
108,921

 
323,723

 
341,854

Time-and-materials
60,626

 
51,179

 
164,885

 
148,984

Revenue
$
579,179

 
$
497,205

 
$
1,618,146

 
$
1,461,485



 
Three months ended
September 30,
 
Nine months ended
September 30,
2019
 
2018
 
2019
 
2018
Department of Defense and intelligence agencies
$
443,253

 
$
365,044

 
$
1,241,609

 
$
1,055,911

Federal civilian agencies
124,243

 
121,543

 
341,880

 
371,767

State agencies, international agencies and commercial entities
11,683

 
10,618

 
34,657

 
33,807

Revenue
$
579,179

 
$
497,205

 
$
1,618,146

 
$
1,461,485



 
Three months ended
September 30,
 
Nine months ended
September 30,
2019
 
2018
 
2019
 
2018
Prime contractor
$
524,370

 
$
442,413

 
$
1,448,875

 
$
1,298,437

Subcontractor
54,809

 
54,792

 
169,271

 
163,048

Revenue
$
579,179

 
$
497,205

 
$
1,618,146

 
$
1,461,485



 
Three months ended
September 30,
 
Nine months ended
September 30,
2019
 
2018
 
2019
 
2018
U.S.
$
571,923

 
$
490,098

 
$
1,596,365

 
$
1,439,293

International
7,257

 
7,107

 
21,781

 
22,192

Revenue
$
579,179

 
$
497,205

 
$
1,618,146

 
$
1,461,485



The following table discloses contract receivables (in thousands):
 
September 30, 2019
 
December 31, 2018
Billed receivables
$
292,323

 
$
301,716

Unbilled receivables
82,054

 
109,895

Allowance for doubtful accounts
(7,335
)
 
(6,233
)
Receivables—net
$
367,042

 
$
405,378



Receivables at September 30, 2019 are expected to be substantially collected within one year except for approximately $1.1 million, of which 100% is related to receivables from sales to the U.S. government or from contracts in which we acted as a subcontractor to other contractors selling to the U.S. government. We do not believe that we have significant exposure to credit

9



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.

The following table discloses contract liabilities (in thousands):
 
September 30, 2019
 
December 31, 2018
Contract liabilities
$
43,891

 
$
28,209



For the three months ended and nine months ended September 30, 2019, the amount of revenue that was included in the opening contract liabilities balance were $0.9 million and $23.4 million, respectively.

The remaining performance obligation as of September 30, 2019 is $3.1 billion. The following table discloses when we expect to recognize the remaining performance obligation as revenue (in billions):
For the remaining three months ending December 31, 2019
 
For the year ending
 
 
 
December 31, 2020
 
December 31, 2021
 
Thereafter
$
0.6

 
$
1.5

 
$
0.5

 
$
0.5



4.
Leases

We adopted ASC 842, Leases, on January 1, 2019. We elected to apply the provisions of the standard as of the date of adoption, and, therefore, have not restated prior comparative periods. Upon adoption, we recorded operating lease liabilities of $129.6 million and operating lease right of use (ROU) assets of $118.7 million. We elected the practical expedient to recognize the lease payments related to short-term leases as profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments are incurred. We also elected the following transition related practical expedients: not to reassess whether expired or existing contracts are or contain leases, not to reassess lease classification as determined under ASC 840 and not to reassess initial direct costs from any existing lease. We elected the practical expedient as an accounting election not to separate nonlease components from lease components on all classes of underlying assets. Our leases include nonlease components such as common area maintenance (CAM), utilities and operating expenses. Additionally, we implemented internal controls and key system functionality to enable the preparation of financial information upon adoption. ASC 842 had a material impact on our condensed consolidated balance sheet, but did not have an impact on our condensed consolidated income statement. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged.

We determine if a contract is or contains a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of identified property or equipment (an identified asset) for a period of time in exchange for consideration. We have the right to control the use of the identified asset when we have both of the following: the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset. In making this determination, we consider all relevant facts and circumstances. We reassess whether a contract is or contains a lease only if the terms and conditions of the contract are changed. We account for lease components and nonlease components associated with a lease as a single lease component.

Our ROU asset is recognized as the lease liability, any initial indirect costs and any prepaid lease payments, less any lease incentives. Our lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Our lease payments consist of amounts relating to the use of the underlying asset during the lease term, specifically fixed payments, payment to be made in optional periods when we are reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease and the amounts probable of being owned by us under residual guarantees. Our variable lease payments are excluded in measuring ROU assets and lease liabilities because they do not depend on an index or a rate or are not in substance fixed payments. We exclude lease incentives and initial direct costs incurred from our lease payments. Our leases typically do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.

Our operating leases are primarily made up of real estate. Our variable lease payments do not depend on an index or a rate or are not in substance fixed payments. Our leases have remaining lease terms of 1 day to 11 years, some of which include options to extend the leases for up to 14 years, and some of which include options to terminate the leases within 1 year. Our transportation vehicles and equipment leases include a residual value guarantee, which is a guarantee made to the lessor that the value of the underlying asset returned to the lessor at the end of the lease will be at least a specific amount. We sublease some of our real estate

10



space. Sublease income is immaterial and is presented net with the corresponding lease expense. We do not have any leases that have not yet commenced due to construction or design of the underlying asset. We recognize payments related to short-term leases (less than one year) as expense on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments were incurred. As such, our short-term lease expense for the three and nine months ended September 30, 2019 was $1.4 million and $4.2 million, respectively. For the three and nine months ended September 30, 2019, we incurred variable lease costs of $0.5 million and $1.9 million, respectively.

In our condensed consolidated statement of income, we recognize lease expense within general and administrative expense or cost of goods sold depending on the use of the underlying lease. For leases classified as financing, the interest on lease liabilities is classified within interest expense.

The balance sheet information related to our leases was as follows (dollars in thousands):
 
September 30, 2019
Operating Leases
 
Operating lease right of use assets
$
116,236

 
 
Operating lease liabilities—current
$
28,170

Operating lease liabilities—long term
98,979

        Total operating lease liabilities
$
127,149

Finance Leases
 
Property and equipment—gross
$
669

Accumulated depreciation
(194
)
        Property and equipment—net
$
475

 
 
Accounts payable and other accrued expenses
$
143

Other long-term liabilities
332

       Total finance lease liabilities
$
475



The components of lease expense were as follows (in thousands):
 
Three months ended
September 30, 2019
 
Nine months ended
September 30, 2019
Operating lease expenses
$
8,412

 
$
24,727

 
 
 
 
Depreciation of right of use assets
$
45

 
$
194

Interest on lease liabilities
19

 
33

Finance lease expenses
$
64

 
$
227



The weighted average information related to leases was as follows:
 
September 30, 2019
Weighted Average Remaining Lease Term
 
    Operating leases
5 years

    Finance leases
3 years

Weighted Average Discount Rate
 
    Operating leases
3
%
    Finance leases
5
%



11



Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows (in thousands):
 
Operating Leases
 
Financing Leases
For the three months ended December 31, 2019
$
6,437

 
$
31

2020
33,859

 
176

2021
31,033

 
156

2022
27,272

 
150

2023
22,666

 
41

Thereafter
16,759

 

    Total future minimum lease payments
138,026

 
554

Less imputed interest
(10,877
)
 
(79
)
    Total
$
127,149

 
$
475



5.
Acquisitions

H2M Group (H2M)—On August 8, 2019, we completed the acquisition of H2M through a membership interest purchase agreement by and among H2M Group, HHM Holding LLC, and the Members and ManTech International Corporation. The results of H2M's operations have been included in our condensed consolidated financial statements since that date. We funded the acquisition with cash on hand and borrowings on our revolving credit facility. H2M is a provider of intelligence and analysis services and solutions primarily to the National Geospatial-Intelligence Agency (NGA). This acquisition strengthens our ability to help key government agencies implement new automation techniques that enable intelligence analysts to more effectively navigate large amounts of data and to distill the critical information that informs actionable intelligence necessary to make mission-critical decisions.

For the nine months ended September 30, 2019, we incurred approximately $0.3 million of acquisition costs related to the H2M transaction, which are included in general and administrative expenses in our condensed consolidated statement of income.

The preliminary purchase price of $38.8 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 H2M is not complete as of September 30, 2019. Recognition of goodwill is largely attributed to the value paid for H2M's capabilities to support government agencies in the implementation of high-quality geospatial and professional services. The goodwill recorded for this transaction will be deductible for tax purposes over 15 years.

In preliminarily allocating the purchase price, we considered, among other factors, analysis of historical performance and estimates of future performance of H2M's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $9.6 million and $2.3 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with H2M'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 the intangible assets is 17 years.

12




The following table represents the preliminary purchase price allocation for H2M (in thousands):
Cash and cash equivalents
$
15

Receivables
4,011

Prepaid expenses
199

Other current assets
2

Goodwill
25,382

Other intangible assets
11,900

Operating lease ROU asset
145

Property and equipment
57

Other assets
7

Accounts payable and accrued expenses
(1,775
)
Accrued salaries and related expenses
(1,000
)
Operating lease liabilities - current
(86
)
Operating lease liabilities - non current
(60
)
Net assets acquired and liabilities assumed
$
38,797



Kforce Government Solutions (KGS)—On April 1, 2019, we completed the acquisition of KGS. KGS was a wholly owned subsidiary of the publicly traded commercial technology and staffing company KForce, Inc. The results of KGS's operations have been included in our condensed consolidated financial statements since that date. The acquisition was completed through an equity purchase agreement dated February 28, 2019, by and among Kforce Government Solutions, Inc and other beneficiaries and ManTech International Corporation. We funded the acquisition with cash on hand and borrowings on our revolving credit facility. KGS provides services, IT solutions, transformation and management consulting and data analytics - most notably in the healthcare IT market. This acquisition will expand our presence with important customers such as the Department of Veteran Affairs (VA).

For the nine months ended September 30, 2019, we incurred approximately $1.0 million of acquisition costs related to the KGS transaction, which are included in general and administrative expenses in our condensed consolidated statement of income.

The purchase price of $114.6 million, which includes the finalized 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, the purchase price allocation for KGS is not complete as of September 30, 2019. Recognition of goodwill is largely attributed to the value paid for KGS's capabilities to support customers in IT solutions, transformation and management consulting and data analytics. A majority of the goodwill recorded will not be deductible for tax purposes.

In preliminarily allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of KGS's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $33.1 million and $1.6 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with KGS'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 19 years.

13




The following table represents the preliminary purchase price allocation for KGS (in thousands):
Cash and cash equivalents
$
154

Receivables
17,835

Prepaid expenses
368

Other current assets
168

Goodwill
80,025

Other intangible assets
34,839

Property and equipment
361

Accounts payable and accrued expenses
(6,887
)
Accrued salaries and related expenses
(4,421
)
Deferred income taxes
(7,319
)
Other long-term liabilities
(571
)
Net assets acquired and liabilities assumed
$
114,552



6.
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 nine months ended September 30, 2019 and 2018, we declared and paid quarterly dividends in the amount of $0.27 per share and $0.25 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.


14



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
September 30,
 
Nine months ended
September 30,
 
2019
 
2018
 
2019
 
2018
Distributed earnings
$
10,823

 
$
9,928

 
$
32,360

 
$
29,687

Undistributed earnings
17,114

 
11,995

 
40,909

 
32,218

Net income
$
27,937

 
$
21,923

 
$
73,269

 
$
61,905

 
 
 
 
 
 
 
 
Class A common stock:
 
 
 
 
 
 
 
Basic net income available to common stockholders
$
18,729

 
$
14,623

 
$
49,048

 
$
41,226

Basic weighted average common shares outstanding
26,822

 
26,421

 
26,706

 
26,293

Basic earnings per share
$
0.70

 
$
0.55

 
$
1.84

 
$
1.57

 
 
 
 
 
 
 
 
Diluted net income available to common stockholders
$
18,798

 
$
14,682

 
$
49,203

 
$
41,402

Effect of potential exercise of stock options
306

 
322

 
257

 
340

Diluted weighted average common shares outstanding
27,128

 
26,743

 
26,963

 
26,633

Diluted earnings per share
$
0.69

 
$
0.55

 
$
1.82

 
$
1.55

 
 
 
 
 
 
 
 
Class B common stock:
 
 
 
 
 
 
 
Basic net income available to common stockholders
$
9,208

 
$
7,300

 
$
24,221

 
$
20,679

Basic weighted average common shares outstanding
13,188

 
13,189

 
13,188

 
13,189

Basic earnings per share
$
0.70

 
$
0.55

 
$
1.84

 
$
1.57

 
 
 
 
 
 
 
 
Diluted net income available to common stockholders
$
9,139

 
$
7,241

 
$
24,066

 
$
20,503

Diluted weighted average common shares outstanding
13,188

 
13,189

 
13,188

 
13,189

Diluted earnings per share
$
0.69

 
$
0.55

 
$
1.82

 
$
1.55



For the three months ended September 30, 2019 and 2018, options to purchase 7,641 shares and 242,789 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 nine months ended September 30, 2019 and 2018, options to purchase 331,994 shares and 268,013 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 nine months ended September 30, 2019 and 2018, there were 255,376 shares and 387,926 shares, respectively, issued from the exercise of stock options. For the nine months ended September 30, 2019 and 2018 there were 76,346 shares and 86,233 shares, respectively, issued from the vesting of restricted stock units.

7.
Property and Equipment

Major classes of property and equipment are summarized as follows (in thousands):
 
September 30,
2019
 
December 31,
2018
Furniture and equipment
$
131,114

 
$
97,577

Leasehold improvements
48,421

 
43,065

Finance leases
669

 

Property and equipment—gross
180,204

 
140,642

Accumulated depreciation and amortization
(107,211
)
 
(89,215
)
Property and equipment—net
$
72,993

 
$
51,427




15



Depreciation and amortization expense related to property and equipment for the three months ended September 30, 2019 and 2018 was $6.9 million and $6.4 million, respectively. Depreciation and amortization expense related to property and equipment for the nine months ended September 30, 2019 and 2018 was $19.4 million and $19.1 million, respectively.

8.
Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill during the year ended December 31, 2018 and nine months ended September 30, 2019 are as follows (in thousands):
 
Goodwill Balance
Goodwill at December 31, 2017
$
1,084,560

Acquisition fair value adjustment
1,246

Goodwill at December 31, 2018
1,085,806

Acquisitions
105,407

Goodwill at September 30, 2019
$
1,191,213



Other intangible assets consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Contract and program intangible assets
$
402,532

 
$
215,942

 
$
186,590

 
$
355,932

 
$
201,298

 
$
154,634

Capitalized software cost for internal use
53,322

 
36,665

 
16,657

 
50,925

 
33,597

 
17,328

Total other intangible assets—net
$
455,854

 
$
252,607

 
$
203,247

 
$
406,857

 
$
234,895

 
$
171,962



Amortization expense relating to intangible assets for the three months ended September 30, 2019 and 2018 was $6.1 million and $6.8 million, respectively. Amortization expense relating to intangible assets for the nine months ended September 30, 2019 and 2018 was $18.0 million and $20.3 million, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):
For the remaining three months ending December 31, 2019
$
6,710

For the year ending:
 
December 31, 2020
$
25,301

December 31, 2021
$
23,072

December 31, 2022
$
20,139

December 31, 2023
$
16,858

December 31, 2024
$
15,151



9.
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).


16



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 nine months ended September 30, 2019 and 2018, we were in compliance with the financial covenants under the credit agreement.

There was $25.0 million and $7.5 million outstanding on our revolving credit facility at September 30, 2019 and December 31, 2018, respectively. The maximum available borrowing under the revolving credit facility at September 30, 2019 was $467.3 million. As of September 30, 2019, we were contingently liable under letters of credit totaling $7.7 million, which reduces our availability to borrow under our revolving credit facility.

10.
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 2018 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. Current legal matters are individually immaterial and we believe that the ultimate resolution of these items will not have a material effect on our financial position, results of operations or cash flows. Management believes it has adequately reserved for any losses that may be experienced from legal proceedings, claims and disputes and pending litigations of which it is aware.

An officer of our Company was party to an arbitration proceeding with a former employer relating to a breach of a contract claim.  Pursuant to indemnification arrangements we have with this officer, we were exposed to a loss related to this claim.  In the period ending September 30, 2019, we settled the claim. The settlement amount was not material to our condensed consolidated financial statements.

We have $7.7 million outstanding on our letter of credit, of which $7.6 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.

11.
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). 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, 2019, there were 596,422 additional shares made available for issuance under the Plan. Through September 30, 2019, the Board of Directors has authorized the issuance of up to 15,148,321 shares under this Plan. Through September 30, 2019, the remaining aggregate number of shares of our common stock available for future grants under the Plan was 6,727,002. 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 September 30, 2019 and 2018, we recorded $2.0 million and $1.3 million of stock-based compensation expense. For the nine months ended September 30, 2019 and 2018, we recorded $5.2 million and $3.6 million of stock-based compensation expense. No compensation expense of employees with stock awards,

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including stock-based compensation expense, was capitalized during the periods. For the three months ended September 30, 2019 and 2018, we recorded $(0.9) million and $(1.2) million, respectively, to income tax expense (benefit) related to the exercise of stock options, vested cancellations and the vesting of restricted stock and restricted stock units. For the nine months ended September 30, 2019 and 2018, we recorded $(1.6) million and $(2.9) million, respectively, to income tax expense (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. 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 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 nine months ended September 30, 2019 and 2018, 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 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.

The following weighted-average assumptions were used for option grants during the nine months ended September 30, 2019 and 2018:

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 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 $1.08 per share.

The following table summarizes weighted-average assumptions used in our calculations of fair value for the nine months ended September 30, 2019 and 2018:
 
Nine months ended
September 30,
 
2019
 
2018
Volatility
27.00
%
 
26.34
%
Expected life of options
3 years

 
3 years

Risk-free interest rate
2.38
%
 
2.46
%
Dividend yield
2.00
%
 
2.00
%


Stock Option Activity—The weighted-average fair value of options granted during the nine months ended September 30, 2019 and 2018, as determined under the Black-Scholes-Merton valuation model, was $10.10 and $9.98, respectively. Option grants that vested during the nine months ended September 30, 2019 and 2018 had a combined fair value of $1.2 million and $0.7 million, respectively.


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The following table summarizes stock option activity for the year ended December 31, 2018 and the nine months ended September 30, 2019:
 
Number of Shares
 
Weighted Average Exercise Price
 
Aggregate Intrinsic Value
(in thousands)
 
Weighted Average Remaining Contractual Life
Stock options outstanding at December 31, 2017
1,169,408

 
$
35.88

 
$
16,731

 
 
Granted
466,828

 
$
54.87

 
 
 
 
Exercised
(420,524
)
 
$
30.05

 
$
12,411

 
 
Cancelled and expired
(122,312
)
 
$
43.85

 
 
 
 
Stock options outstanding at December 31, 2018
1,093,400

 
$
45.34

 
$
8,776

 
 
Granted
256,006

 
$
53.81

 
 
 
 
Exercised
(255,376
)
 
$
35.82

 
$
7,038

 
 
Cancelled and expired
(97,005
)
 
$
50.89

 
 
 
 
Stock options outstanding at September 30, 2019
997,025

 
$
49.42

 
$
21,927

 
3 years
 
 
 
 
 
 
 
 
Stock options exercisable at September 30, 2019
221,597

 
$
41.09

 
$
6,719

 
2 years


The following table summarizes non-vested stock options for the nine months ended September 30, 2019:
 
Number of Shares
 
Weighted Average Fair Value
Non-vested stock options at December 31, 2018
774,402

 
$
8.77

Granted
256,006

 
$
10.10

Vested
(161,114
)
 
$
7.38

Cancelled
(93,866
)
 
$
9.23

Non-vested stock options at September 30, 2019
775,428

 
$
9.44



Unrecognized compensation expense related to non-vested awards was $5.1 million as of September 30, 2019, which is expected to be recognized over a weighted-average period of 2 years.

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.

Restricted Stock ActivityThe following table summarizes the restricted stock activity during the year ended December 31, 2018 and the nine months ended September 30, 2019.
 
Number of Shares
 
Weighted Average Fair Value
Non-vested restricted stock at December 31, 2017
24,000

 
$
37.90

Granted
24,000

 
$
52.83