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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 June 30, 2020
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 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 July 29, 2020 there were 27,145,551 shares outstanding of our Class A common stock and 13,187,195 shares outstanding of our Class B common stock.





TABLE OF CONTENTS
 
 
Page No.
 
Item 1.
 
 
Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019
 
Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Six Months Ended June 30, 2020 and 2019
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019
 
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)
 
June 30,
2020
 
December 31,
2019
ASSETS
 
 
 
Cash and cash equivalents
$
29,668

 
$
8,854

Receivables—net
443,018

 
398,976

Prepaid expenses
38,172

 
20,030

Taxes receivable—current
6,586

 
21,996

Other current assets
6,089

 
4,878

Total Current Assets
523,533

 
454,734

Goodwill
1,191,270

 
1,191,259

Other intangible assets—net
188,651

 
196,778

Property and equipment—net
111,381

 
85,631

Operating lease right of use assets
102,187

 
117,728

Employee supplemental savings plan assets
32,740

 
36,777

Investments
11,549

 
11,550

Other assets
13,458

 
13,457

TOTAL ASSETS
$
2,174,769

 
$
2,107,914

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
LIABILITIES
 
 
 
Accounts payable and accrued expenses
$
146,936

 
$
146,016

Accrued salaries and related expenses
114,911

 
97,298

Contract liabilities
47,766

 
27,620

Operating lease obligations—current
29,063

 
29,047

Total Current Liabilities
338,676

 
299,981

Deferred income taxes
134,352

 
131,782

Operating lease obligations—long term
89,149

 
103,148

Accrued retirement
31,525

 
35,552

Long term debt
20,000

 
36,500

Other long-term liabilities
27,978

 
10,309

TOTAL LIABILITIES
641,680

 
617,272

COMMITMENTS AND CONTINGENCIES


 


STOCKHOLDERS' EQUITY
 
 
 
Common stock, Class A—$0.01 par value; 150,000,000 shares authorized; 27,388,381 and 27,235,860 shares issued at June 30, 2020 and December 31, 2019; 27,144,268 and 26,991,747 shares outstanding at June 30, 2020 and December 31, 2019
274

 
272

Common stock, Class B—$0.01 par value; 50,000,000 shares authorized; 13,187,195 and 13,187,195 shares issued and outstanding at June 30, 2020 and December 31, 2019
132

 
132

Additional paid-in capital
535,464

 
525,851

Treasury stock, 244,113 and 244,113 shares at cost at June 30, 2020 and December 31, 2019
(9,158
)
 
(9,158
)
Retained earnings
1,006,624

 
973,767

Accumulated other comprehensive loss
(247
)
 
(222
)
TOTAL STOCKHOLDERS' EQUITY
1,533,089

 
1,490,642

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
2,174,769

 
$
2,107,914

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
June 30,
 
(unaudited)
Six months ended
June 30,
 
2020
 
2019
 
2020
 
2019
REVENUE
$
632,492

 
$
537,037

 
$
1,243,404

 
$
1,038,967

Cost of services
539,473

 
459,266

 
1,059,764

 
890,349

General and administrative expenses
53,433

 
44,474

 
105,156

 
86,789

OPERATING INCOME
39,586

 
33,297

 
78,484

 
61,829

Interest expense
(632
)
 
(945
)
 
(1,287
)
 
(1,429
)
Interest income
137

 
121

 
187

 
311

Other income (expense), net

 
31

 
(22
)
 
(11
)
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS
39,091

 
32,504

 
77,362

 
60,700

Provision for income taxes
(9,143
)
 
(8,290
)
 
(18,734
)
 
(15,356
)
Equity in (losses) of unconsolidated subsidiaries

 

 
(1
)
 
(12
)
NET INCOME
$
29,948

 
$
24,214

 
$
58,627

 
$
45,332

BASIC EARNINGS PER SHARE:
 
 
 
 
 
 
 
Class A common stock
$
0.74

 
$
0.61

 
$
1.46

 
$
1.14

Class B common stock
$
0.74

 
$
0.61

 
$
1.46

 
$
1.14

DILUTED EARNINGS PER SHARE:
 
 
 
 
 
 
 
Class A common stock
$
0.74

 
$
0.60

 
$
1.44

 
$
1.13

Class B common stock
$
0.74

 
$
0.60

 
$
1.44

 
$
1.13


See notes to condensed consolidated financial statements.

4



MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
 
(unaudited)
Three months ended
June 30,
 
(unaudited)
Six months ended
June 30,
 
2020
 
2019
 
2020
 
2019
NET INCOME
$
29,948

 
$
24,214

 
$
58,627

 
$
45,332

OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Translation adjustments, net of tax
(8
)
 
(7
)
 
(25
)
 
5

Cumulative-effect adjustment for adoption of Accounting Standards Update 2018-02

 

 

 
(24
)
Total other comprehensive (loss)
(8
)
 
(7
)
 
(25
)
 
(19
)
COMPREHENSIVE INCOME
$
29,940

 
$
24,207

 
$
58,602

 
$
45,313


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
June 30,
 
(unaudited)
Six months ended
June 30,
 
2020
 
2019
 
2020
 
2019
Common Stock, Class A
 
 
 
 
 
 
 
At beginning of period
$
273

 
$
269

 
$
272

 
$
268

Stock-based compensation expense
1

 
1

 
1

 
1

Stock option exercises

 

 
1

 
1

At end of period
274

 
270

 
274

 
270

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
529,763

 
508,605

 
525,851

 
506,970

Stock-based compensation expense
2,874

 
1,938

 
5,509

 
3,249

Stock option exercises
2,827

 
3,297

 
4,881

 
4,978

Payment consideration to tax authority on employees' behalf

 

 
(777
)
 
(1,357
)
At end of period
535,464

 
513,840

 
535,464

 
513,840

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
989,578

 
913,453

 
973,767

 
903,084

Net income
29,948

 
24,214

 
58,627

 
45,332

Dividends
(12,902
)
 
(10,788
)
 
(25,770
)
 
(21,537
)
At end of period
1,006,624

 
926,879

 
1,006,624

 
926,879

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
At beginning of period
(239
)
 
(114
)
 
(222
)
 
(102
)
Translation adjustments, net of tax
(8
)
 
(7
)
 
(25
)
 
5

Cumulative-effect adjustment for adoption of Accounting Standards Update 2018-02

 

 

 
(24
)
At end of period
(247
)
 
(121
)
 
(247
)
 
(121
)
Total Stockholders' Equity
$
1,533,089

 
$
1,431,842

 
$
1,533,089

 
$
1,431,842


See notes to condensed consolidated financial statements.


6



MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
(unaudited)
Six months ended
June 30,
 
2020
 
2019
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
 
 
 
Net income
$
58,627

 
$
45,332

Adjustments to reconcile net income to net cash flow from (used in) operating activities:
 
 
 
Depreciation and amortization
33,154

 
25,630

Noncash lease expense
13,357

 
13,503

Deferred income taxes
2,570

 
5,468

Stock-based compensation expense
5,510

 
3,250

Bad debt expense
2,156

 

Contract loss reserve
(372
)
 
(505
)
Equity in losses of unconsolidated subsidiaries
1

 
12

Change in assets and liabilities—net of effects from acquired businesses:
 
 
 
Receivables—net
(46,198
)
 
30,151

Prepaid expenses
(18,142
)
 
(13,704
)
Taxes receivable—current
15,410

 
(1,711
)
Other current assets
1,026

 
2,896

Employee supplemental savings plan asset
(100
)
 
(4,253
)
Accounts payable and accrued expenses
2,196

 
11,522

Accrued salaries and related expenses
17,613

 
1,353

Operating lease obligations
(14,286
)
 
(13,487
)
Contract liabilities
20,146

 
15,317

Accrued retirement
(4,027
)
 
1,977

Other long-term liabilities
17,687

 
280

Other
(1,651
)
 
412

Net cash flow from operating activities
104,677

 
123,443

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(45,600
)
 
(21,946
)
Investment in capitalized software
(5,016
)
 
(1,952
)
Proceeds from corporate owned life insurance
4,137

 

Proceeds from sale of property and equipment
869

 

Acquisition of a business-net of cash acquired

 
(114,552
)
Deferred contract costs

 
(2,658
)
Proceeds from equity method investment

 
283

Net cash used in investing activities
(45,610
)
 
(140,825
)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
Borrowing under revolving credit facility
261,500

 
333,000

Repayments under revolving credit facility
(278,000
)
 
(297,000
)
Dividends paid
(25,782
)
 
(21,548
)
Proceeds from exercise of stock options
4,882

 
4,979

Payment consideration to tax authority on employees' behalf
(777
)
 
(1,357
)
Principal paid on financing leases
(76
)
 
(62
)
Net cash from (used in) financing activities
(38,253
)
 
18,012

NET CHANGE IN CASH AND CASH EQUIVALENTS
20,814

 
630

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
8,854

 
5,294

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
29,668

 
$
5,924

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
1,256

 
$
1,248

Cash paid for income taxes, net of refunds
$
(1,493
)
 
$
10,323

Noncash investing and financing activities:
 
 
 
Operating lease obligations arising from obtaining right of use assets
$
303

 
$
12,142

Finance lease obligations arising from obtaining right of use assets
$
63

 
$
352

Noncash investing activities
$
2,528

 
$
376

See notes to condensed consolidated financial statements.

7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
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, 2019, 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 June 30, 2020 and 2019, the aggregate impact of adjustments in contract estimates increased our revenue by $5.8 million and $3.5 million, respectively. For the six months ended June 30, 2020 and 2019, the aggregate impact of adjustments in contract estimates increased our revenue by $7.2 million and $5.6 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 99% of our revenue from sales in the U.S. for both the three months ended June 30, 2020 and 2019. We generated 99% of our revenue from sales in the U.S. for both the six months ended June 30, 2020 and 2019.

8



  
The following tables disclose revenue (in thousands) by contract type, customer and contractor type for the periods presented.
 
Three months ended
June 30,
 
Six months ended
June 30,
2020
 
2019
 
2020
 
2019
Cost-reimbursable
$
432,876

 
$
371,852

 
$
851,531

 
$
731,617

Fixed-price
120,359

 
108,028

 
241,914

 
203,091

Time-and-materials
79,257

 
57,157

 
149,959

 
104,259

Revenue
$
632,492

 
$
537,037

 
$
1,243,404

 
$
1,038,967



 
Three months ended
June 30,
 
Six months ended
June 30,
2020
 
2019
 
2020
 
2019
U.S. Government
$
622,627

 
$
524,976

 
$
1,223,155

 
$
1,015,993

State agencies, international agencies and commercial entities
9,865

 
12,061

 
20,249

 
22,974

Revenue
$
632,492

 
$
537,037

 
$
1,243,404

 
$
1,038,967



 
Three months ended
June 30,
 
Six months ended
June 30,
2020
 
2019
 
2020
 
2019
Prime contractor
$
577,377

 
$
477,986

 
$
1,132,545

 
$
924,505

Subcontractor
55,115

 
59,051

 
110,859

 
114,462

Revenue
$
632,492

 
$
537,037

 
$
1,243,404

 
$
1,038,967



The components of our receivables are as follows (in thousands):
 
June 30, 2020
 
December 31, 2019
Billed receivables
$
357,092

 
$
311,061

Unbilled receivables
100,290

 
99,493

Allowance for doubtful accounts
(14,364
)
 
(11,578
)
Receivables—net
$
443,018

 
$
398,976



Receivables at June 30, 2020 are expected to be substantially collected within one year except for approximately $2.6 million, 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.

The following table discloses contract liabilities (in thousands):
 
June 30, 2020
 
December 31, 2019
Contract liabilities
$
47,766

 
$
27,620



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 June 30, 2020, the amount of revenue that was included in the opening contract liabilities balance were $1.8 million. For the six months ended June 30, 2020, the amount of revenue that was included in the opening contract liabilities balance was $18.5 million.


9



The remaining performance obligation as of June 30, 2020 is $2.2 billion. The following table discloses when we expect to recognize the remaining performance obligation as revenue (in billions):
For the remaining six months ending December 31, 2020
 
For the year ending
 
 
 
December 31, 2021
 
December 31, 2022
 
Thereafter
$
1.0

 
$
0.7

 
$
0.2

 
$
0.3



4.
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. 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 efficiently navigate large amounts of data and distill critical information to inform actionable intelligence and make mission-critical decisions.

The acquisition was accounted for as a business combination. 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.

The purchase price of $38.5 million, which includes the finalized working capital adjustment, was 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. The purchase price allocation for H2M is complete as of June 30, 2020.

Determining the fair value of assets acquired and liabilities assumed requires significant judgment, which includes, among other factors, analysis of historical performance and estimates of future performance of H2M's contracts. In some cases, we have used discounted cash flow analyses, which were based on our best estimate of future revenue, earnings and cash flows as well as our discount rate adjusted for risk.

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. 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. 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 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 other intangible assets is 17 years.

10




The following table represents the purchase price allocation for H2M (in thousands):
Cash and cash equivalents
$
29

Receivables
4,187

Prepaid expenses
188

Other current assets
5

Goodwill
25,089

Other intangible assets
11,900

Operating lease right of use assets
152

Property and equipment
56

Other assets
7

Accounts payable and accrued expenses
(1,956
)
Accrued salaries and related expenses
(1,023
)
Operating lease obligations—long term
(152
)
Net assets acquired and liabilities assumed
$
38,482



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 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. KGS provides services, IT solutions, transformation and management consulting and data analytics - most notably in the healthcare IT market. This acquisition expands our presence with important customers such as the Department of Veteran Affairs (VA).

The acquisition was accounted for as a business combination. The results of KGS's operations have been included in our consolidated financial statements since that date. We funded the acquisition with cash on hand and borrowings on our revolving credit facility.

The purchase price of $114.6 million, which includes the finalized working capital adjustment, was 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. The purchase price allocation of KGS is complete as of June 30, 2020.

Determining the fair value of assets acquired and liabilities assumed requires significant judgment, which includes, among other factors, analysis of historical performance and estimates of future performance of KGS’s contracts. In some cases, we have used discounted cash flow analyses, which were based on our best estimate of future revenue, earnings and cash flows as well as our discount rate adjusted for risk.

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.

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. 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 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 other intangible assets is 19 years.


11



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

Receivables
17,071

Prepaid expenses
368

Other current assets
168

Goodwill
80,374

Other intangible assets
34,839

Property and equipment
361

Accounts payable and accrued expenses
(6,895
)
Accrued salaries and related expenses
(4,421
)
Deferred income taxes
(7,087
)
Other long-term liabilities
(379
)
Net assets acquired and liabilities assumed
$
114,553



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 six months ended June 30, 2020 and 2019, we declared and paid a quarterly dividend in the amount of $0.32 per share and $0.27 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.


12



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
June 30,
 
Six months ended
June 30,
 
2020
 
2019
 
2020
 
2019
Distributed earnings
$
12,902

 
$
10,788

 
$
25,770

 
$
21,537

Undistributed earnings
17,046

 
13,426

 
32,857

 
23,795

Net income
$
29,948

 
$
24,214

 
$
58,627

 
$
45,332

 
 
 
 
 
 
 
 
Class A common stock:
 
 
 
 
 
 
 
Basic net income available to common stockholders
$
20,141

 
$
16,210

 
$
39,407

 
$
30,324

Basic weighted average common shares outstanding
27,082

 
26,707

 
27,037

 
26,646

Basic earnings per share
$
0.74

 
$
0.61

 
$
1.46

 
$
1.14

 
 
 
 
 
 
 
 
Diluted net income available to common stockholders
$
20,220

 
$
16,255

 
$
39,576

 
$
30,411

Effect of potential exercise of stock options
327

 
229

 
358

 
232

Diluted weighted average common shares outstanding
27,409

 
26,936

 
27,395

 
26,878

Diluted earnings per share
$
0.74

 
$
0.60

 
$
1.44

 
$
1.13

 
 
 
 
 
 
 
 
Class B common stock:
 
 
 
 
 
 
 
Basic net income available to common stockholders
$
9,807

 
$
8,004

 
$
19,220

 
$
15,008

Basic weighted average common shares outstanding
13,187

 
13,188

 
13,187

 
13,188

Basic earnings per share
$
0.74

 
$
0.61

 
$
1.46

 
$
1.14

 
 
 
 
 
 
 
 
Diluted net income available to common stockholders
$
9,728

 
$
7,959

 
$
19,051

 
$
14,921

Diluted weighted average common shares outstanding
13,187

 
13,188

 
13,187

 
13,188

Diluted earnings per share
$
0.74

 
$
0.60

 
$
1.44

 
$
1.13



For the three months ended June 30, 2020 and 2019, options to purchase 228,816 shares and 479,685 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 six months ended June 30, 2020 and 2019, options to purchase 231,938 shares and 496,859 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 six months ended June 30, 2020 and 2019, there were 103,660 shares and 144,585 shares, respectively, issued from the exercise of stock options. For the six months ended June 30, 2020 and 2019 there were 48,861 shares and 72,493 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):
 
June 30,
2020
 
December 31,
2019
Furniture and equipment
$
184,038

 
$
150,640

Leasehold improvements
50,817

 
49,625

Finance leases
704

 
641

Property and equipment—gross
235,559

 
200,906

Accumulated depreciation and amortization
(124,178
)
 
(115,275
)
Property and equipment—net
$
111,381

 
$
85,631




13



Depreciation and amortization expense related to property and equipment for the three months ended June 30, 2020 and 2019 was $9.7 million and $6.2 million, respectively. Depreciation and amortization related to property and equipment for the six months ended June 30, 2020 and 2019 was $18.5 million and $12.5 million, respectively.

7.
Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill during the year ended December 31, 2019 and six months ended June 30, 2020 are as follows (in thousands):
 
Goodwill Balance
Goodwill at December 31, 2018
$
1,085,806

Acquisitions
105,453

Goodwill at December 31, 2019
1,191,259

Acquisition fair value adjustment
11

Goodwill at June 30, 2020
$
1,191,270



Other intangible assets consisted of the following (in thousands):
 
June 30, 2020
 
December 31, 2019
 
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

 
$
231,971

 
$
170,561

 
$
402,532

 
$
221,437

 
$
181,095

Capitalized software
56,075

 
37,985

 
18,090

 
52,411

 
36,728

 
15,683

Total other intangible assets—net
$
458,607

 
$
269,956

 
$
188,651

 
$
454,943

 
$
258,165

 
$
196,778



Amortization expense relating to intangible assets for the three months ended June 30, 2020 and 2019 was $6.5 million and $6.1 million, respectively. Amortization expense relating to intangible assets for the six months ended June 30, 2020 and 2019 was $13.0 million and $11.9 million, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):
For the remaining six months ending December 31, 2020
$
12,865

For the year ending:
 
December 31, 2021
$
23,932

December 31, 2022
$
21,306

December 31, 2023
$
18,021

December 31, 2024
$
16,276

December 31, 2025
$
13,789



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).

The terms of the credit agreement permit prepayment and termination of the loan commitments at any time, subject to certain

14



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 six months ended June 30, 2020 and 2019, we were in compliance with the financial covenants under the credit agreement.

There was $20.0 million and $36.5 million outstanding on our revolving credit facility at June 30, 2020 and December 31, 2019, respectively. The maximum available borrowing under the revolving credit facility at June 30, 2020 was $473.7 million. As of June 30, 2020, we were contingently liable under letters of credit totaling $6.3 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 2019 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 $6.3 million outstanding on our letter of credit, of which $5.7 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, 2020, there were 602,684 additional shares made available for issuance under the Plan. Through June 30, 2020, the Board of Directors has authorized the issuance of up to 15,751,005 shares under this Plan. Through June 30, 2020, the remaining aggregate number of shares of our common stock available for future grants under the Plan was 7,068,410. 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 June 30, 2020 and 2019, we recorded $2.9 million and $1.9 million of stock-based compensation expense. For the six months ended June 30, 2020 and 2019, we recorded $5.5 million and $3.2 million 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 June 30, 2020 and 2019, we recorded $0.3 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. For the six months ended June 30, 2020 and 2019, we recorded $0.8 million and $0.7 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. 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.

15




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.

There were no option grants during the six months ended June 30, 2020. The following weighted-average assumptions were used for option grants during the six months ended June 30, 2019:

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. For the six months ended June 30, 2019, 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 six months ended June 30, 2019:
 
Six months ended
June 30, 2019
Volatility
27.00
%
Expected life of options
3 years

Risk-free interest rate
2.39
%
Dividend yield
2.00
%


Stock Option ActivityNo options were granted during the six months ended June 30, 2020. The weighted-average fair value of options granted during the six months ended June 30, 2019, as determined under the Black-Scholes-Merton valuation model, was $10.07. Option grants that vested during the six months ended June 30, 2020 and 2019 had a combined fair value of $1.7 million and $1.2 million, respectively.


16



The following table summarizes stock option activity for the year ended December 31, 2019 and the six months ended June 30, 2020:
 
Number of Shares
 
Weighted Average Exercise Price
 
Aggregate Intrinsic Value
(in thousands)
 
Weighted Average Remaining Contractual Life
Stock options outstanding at December 31, 2018
1,093,400

 
$
45.34

 
$
8,776

 
 
Granted
489,947

 
$
63.87

 
 
 
 
Exercised
(338,748
)
 
$
37.94

 
$
9,641

 
 
Cancelled and expired
(108,504
)
 
$
51.21

 
 
 
 
Stock options outstanding at December 31, 2019
1,136,095

 
$
54.98

 
$
28,291

 
 
Exercised
(103,660
)
 
$
47.10

 
$
3,227

 
 
Cancelled and expired
(98,446
)
 
$
60.89

 
 
 
 
Stock options outstanding at June 30, 2020
933,989

 
$
55.23

 
$
13,662

 
3 years
 
 
 
 
 
 
 
 
Stock options exercisable at June 30, 2020
382,652

 
$
46.37

 
$
8,467

 
2 years


The following table summarizes non-vested stock options for the six months ended June 30, 2020:
 
Number of Shares
 
Weighted Average Fair Value
Non-vested stock options at December 31, 2019
845,555

 
$
10.88

Vested
(197,689
)
 
$
8.76

Cancelled
(96,529
)
 
$
11.56

Non-vested stock options at June 30, 2020
551,337

 
$
11.52



Unrecognized compensation expense related to non-vested awards was $4.7 million as of June 30, 2020, 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, 2019 and the six months ended June 30, 2020.
 
Number of Shares
 
Weighted Average Fair Value
Non-vested restricted stock at December 31, 2018
20,000

 
$
52.83

Granted
24,000

 
$
62.66

Vested
(20,000
)
 
$
52.83

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 June 30, 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 no voting rights until the RSUs vest. Employees who are granted RSUs do not receive dividend payments during the vesting period. Our employees' performance-based RSUs will result in the delivery of shares if (a) performance criteria is met and (b) the employee

17



remains employed, in good standing, through the date of the performance period. Our employees' time-based RSUs will result in 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.

RSU Activity—For performance-based RSUs that vested in the six months ended June 30, 2020, each RSU awarded resulted in the issuance of one share, which were issued net of applicable payroll tax withholdings. For the year ended December 31, 2019, each RSU awarded resulted in the issuance of 1.5 shares, which were issued net of applicable payroll tax withholdings. The following table summarizes the non-vested RSU activity during the year ended December 31, 2019 and the six months ended June 30, 2020:
 
Number of Units
 
Weighted Average Fair Value
Non-vested RSUs at December 31, 2018
137,596

 
$
45.11

Granted
145,440

 
$
59.43

Vested
(60,915
)
 
$
42.75

Forfeited
(11,294
)
 
$
51.88

Non-vested RSUs at December 31, 2019
210,827

 
$
55.31

Granted
187,450

 
$
68.29

Vested
(35,882
)
 
$
51.80

Forfeited
(43,970
)
 
$
63.59

Non-vested RSUs at June 30, 2020
318,425

 
$
62.21



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, 2019.

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;
disruptions to our business resulting from the recent outbreak of the novel coronavirus disease 2019 (known as COVID-19) or other similar global health epidemics, pandemics and/or other disease outbreaks;
adverse changes in U.S. government spending for programs we support, whether due to changing mission priorities, economic and political policy change or federal budget constraints generally;
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;
disruptions to our business or damage to our reputation resulting from cyber attacks and other security threats;
failure to obtain option awards, task orders or funding under our contracts;
the government renegotiating, modifying or terminating our contracts;

18



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;
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, data collection & analytics, enterprise information technology (IT), systems and software engineering solutions that support national and homeland security.

Approximately 98% 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. In December 2019, Congress passed, and the President signed into law, two appropriation bills funding the government through GFY 2020. We believe the current appropriations and the Administration's stated priorities for national and homeland security aligns favorably with our capabilities and offerings.

COVID-19 and Budgetary Outlook

We cannot predict the future impact of the COVID-19 pandemic and the resulting impact on the economy; however, it could have a material adverse effect on our business, financial position, results of operations, and/or cash flows. 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.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. The CARES Act includes a provision under which government contractors can seek reimbursement for amounts lost due to the impacts of closed facilities, reduced work schedules or mandated quarantines to support social distancing. 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. We currently expect our customers will reimburse costs incurred without fee. The relevant provision of the CARES Act is in effect until September 30, 2020. Should the CARES Act not be extended, or similar legislation enacted, while social distancing, travel restrictions, or other pandemic risk reduction measures remain in effect, it could have a material adverse effect on our business, financial position, results of operations, and/or cash flows. We continue to monitor and evaluate this and other provisions of the CARES Act, as well as any other legislative or regulatory initiatives that seek to reduce the impact of the pandemic. Additionally, there is a strong likelihood that the federal government will enter GFY 2021 under a Continuing Resolution as debates and negotiations on appropriations and funding priorities continue in Congress. It is possible that a Continuing Resolution could potentially delay new contract awards.

To date, the majority of our programs have not been adversely impacted (or we have developed alternative means, including teleworking arrangements, to support program requirements). With respect to our programs that have been adversely impacted, we have begun seeking reimbursements under the CARES Act. Due to the mission-critical nature of a majority of our business and the relief provided to us under the CARES Act, the overall impact of the COVID-19 pandemic on our results of operations and liquidity were immaterial. In addition to the measures described above, we have developed contingency plans (which we continuously reevaluate) to address additional disruptions to our operations or to the operations of our customers. See “Item IA. Risk Factors” in Part II of this Quarterly Report for additional discussion of the risks associated with COVID-19.

19




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, 2019, previously filed with the Securities and Exchange Commission.

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

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 June 30, 2019 to June 30, 2020.
 
Three months ended
June 30,
 
Period-to-Period Change
 
2020
 
2019
 
2020
 
2019
 
2019 to 2020
 
Dollars
 
Percentage
 
Dollars
 
Percentage
 
(dollars in thousands)
REVENUE
$
632,492

 
$
537,037

 
100.0
%
 
100.0
%
 
$
95,455

 
17.8
 %
Cost of services
539,473

 
459,266

 
85.3
%
 
85.5
%
 
80,207

 
17.5
 %
General and administrative expenses
53,433

 
44,474

 
8.4
%
 
8.3
%
 
8,959

 
20.1
 %
OPERATING INCOME
39,586

 
33,297

 
6.3
%
 
6.2
%
 
6,289

 
18.9
 %
Interest expense
(632
)
 
(945
)
 
0.1
%
 
0.2
%
 
(313
)
 
(33.1
)%
Interest income
137

 
121

 
%
 
%
 
16

 
13.2
 %
Other income, net

 
31

 
%
 
%
 
(31
)
 
(100.0
)%
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS
39,091

 
32,504

 
6.2
%
 
6.0
%
 
6,587

 
20.3
 %
Provision for income taxes
(9,143
)
 
(8,290
)
 
1.5
%
 
1.5
%
 
853

 
10.3
 %
NET INCOME
$
29,948