NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended
December 31, 2018
,
2017
and
2016
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1.
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Description of the Business
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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 IT, systems engineering and software application development solutions that support national and homeland security.
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2.
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Summary of Significant Accounting
Policies
|
Principles of Consolidation
- Our consolidated financial statements include the accounts of ManTech International Corporation, subsidiaries we control and variable interest entities that are required to be consolidated. All intercompany accounts and transactions have been eliminated.
Use of Accounting Estimates
- We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates involve judgments with respect to, among other things, various future economic factors that are difficult to predict and are beyond the control of us. Therefore, actual amounts could differ from these estimates.
Revenue Recognition
- 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 pretax amount of
$0.8 million
, with the impact primarily related to fixed-price contracts. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with ASC 605,
Revenue Recognition
. Revenue
for the year ended December 31, 2018
increased
$2.4 million
as a result of applying ASC 606.
We account for a contract when: both we and the customer approve and commit; our rights and those of the customer are identified, payment terms are identified; the contract has commercial substance; and collectability of consideration is probable. At contract inception, we identify the distinct goods or services promised in the contract, referred to as performance obligations. Then we determine the transaction price for the contract; the consideration to which we can expect in exchange for the promised goods or services in the contract. The transaction price can be a fixed or variable amount. It is common for our contracts to contain award fees, incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and historical, current and forecasted information that is reasonably available to us. The transaction price is allocated to each distinct performance obligation using our best estimate of the standalone selling price for each distinct good or service promised in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service promised. Revenue is recognized when, or as, the performance obligation is satisfied.
We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. Based on the nature of the products and services provided in the contract, we use our judgment to determine if an input measure or output measure best depicts the transfer of control over time. For services contracts, we typically satisfy our performance obligations as services are rendered. We typically use a cost-based input method to measure progress. Contract costs include labor, material and allocable indirect expenses. Revenue is recognized proportionally as contract costs are incurred plus estimated fees. For time-and-material contracts, we bill the customer per labor hour and per material, and revenue
is recognized in the amount invoiced since the amount corresponds directly to the value of our performance to date. For stand-ready service contracts, a time-elapsed output method is used to measure progress, and revenue is recognized straight-line over the term of the contract. If a contract does not meet the criteria for recognizing revenue over time, we recognize revenue at a point in time. Revenue is recognized at the point in time when control of the good or service is transferred to our customer. We consider control to transfer when we have a present right to payment and our customer has legal title. Determining a measure of progress and when control transfers requires us to make judgments that affect the timing of when revenue is recognized. Essentially, all of our contracts satisfy their performance obligations over time.
Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications impact performance obligations when the modification either creates new or changes the existing enforceable rights and obligations. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue and profit cumulatively. Furthermore, a significant change in one or more estimates could affect the profitability of our contracts. We recognize adjustments in estimated profit on contracts in the period identified. The impact of adjustments in contract estimates can be reflected in either revenue or operating expenses on our consolidated statement of income.
We have an Estimate at Completion process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews 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 management’s judgment about the ability and cost to achieve the contract milestones and other technical contract requirements. Management must 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 profitability of our contracts.
For the year ended December 31, 2018
, the aggregate impact of adjustments in contract estimates increased our revenue by
$9.8 million
. No adjustment on any one contract was material to our consolidated financial statements
for the year ended December 31, 2018
.
Results for prior periods were reported in accordance with ASC 605. Revenue for cost-reimbursable contracts were recorded as reimbursable costs were incurred, including an estimated share of the applicable contractual fees earned. For performance-based fees under cost-reimbursable contracts, we recognized the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as our prior award experience and communications with the customer regarding performance, or upon approval by the customer. For time-and-materials contracts, revenue was recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. For long-term fixed-price contracts, revenue was recognized at a rate per unit as the units were delivered or by other methods to measure services provided. Revenue from other long-term fixed-price contracts were recognized ratably over the contract period or by other appropriate methods to measure services provided. Contract costs were expensed as incurred except for certain limited long-term contracts noted below. For long-term contracts, specifically described in the scope section of ASC 605-35,
Revenue Recognition - Construction-Type and Production-Type Contracts
, we applied the percentage of completion method. Under the percentage of completion method, income was recognized at a consistent profit margin over the period of performance based on estimated profit margins at completion of the contract. This method of accounting required estimating the total revenue and total contract cost at completion of the contract. These estimates were periodically reviewed and revisions were made as required using the cumulative catch-up method. The impact on revenue and contract profit as a result of these revisions were included in the periods in which the revisions were made. Estimated losses on contracts at completion were recognized when identified. In certain circumstances, revenue was recognized when contract amendments were not finalized.
Contract Assets
- Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Generally, revenue recognition occurs before billing, resulting in contract assets. These contract assets are referred to as unbilled receivables and are reported within receivables, net on our consolidated balance sheet.
Billed Receivables
- Amounts billed and due from our customers are classified as billed receivables and are reported within receivables, net on the consolidated balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer.
Contract Liabilities
- We receive advances and milestone payments from our customers on selected contracts that exceed revenue earned to date, resulting in contract liabilities. Contract liabilities typically are not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect
us from the customer failing to adequately complete some or all of its obligations under the contract. Contract liabilities are reported on our consolidated balance sheet on a net contract basis at the end of each reporting period.
Contract Costs
- Contract costs include direct labor, direct materials, overhead and, when applicable, general and administrative expenses. Incremental costs of obtaining a contract that we expect to recover are recognized as deferred contract costs and are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services. Other incremental costs are expensed when incurred. Costs of fulfilling a contract that relate directly to a contract or to an anticipated contract that can be specifically identified, generate or enhance resources that will be used in satisfying future performance obligations and are expected to be recovered are recognized as deferred contract costs and amortized on a systematic basis that is consistent with the transfer of the goods or services to the customer. Other costs of fulfilling a contract (costs of wasted materials, labor or other resources to fulfill the contracts that were not reflected in the price of the contract and costs that relate to satisfied performance obligations in the contract) are expensed when incurred.
Deferred Contract Costs
- Costs of obtaining or fulfilling a contract that meet the criteria in ASC 340,
Other Assets and Deferred Costs
, are capitalized and amortized on a systematic basis that is consistent with the transfer of goods or services to the customer. Deferred contracts costs are reported on our consolidated balance sheet within current or non-current other assets based on the expected life of the related contract. At
December 31, 2018
, we had
$7.8 million
of deferred contract costs related to the fulfillment of future contract obligations.
For the year ended December 31, 2018
we recorded amortization expense of
$0.5 million
.
General and Administrative Expenses
- General and administrative expenses include the salaries and wages, plus associated fringe benefits of our employees not performing work directly for customers, and associated facilities costs. Among the functions covered by these costs are corporate business development, bid and proposal, contracts administration, finance and accounting, legal, corporate governance and executive and senior management. In addition, we include stock-based compensation, as well as depreciation and amortization expenses related to the general and administrative function. We recognize interest related to unrecognized tax benefits within interest expense and penalties related to unrecognized tax benefits in general and administrative expenses.
We classify indirect costs incurred as cost of services and general and administrative expenses in the same manner as such costs are defined in our disclosure statements under U.S. Government Cost Accounting Standards.
Cash and Cash Equivalents
- For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and short-term investments with maturity dates of
three months
or less at the date of purchase.
Property and Equipment
- Property and equipment are recorded at original cost to us. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gain or loss is included in income. Maintenance and repairs are charged to expense as incurred.
Depreciation and Amortization Method
- Furniture and office equipment are depreciated using the straight-line method with estimated useful lives ranging from
one
to
seven years
. Leasehold improvements are amortized using the straight-line method over the shorter of the asset's useful life or the term of the lease.
Goodwill
- The purchase price of an acquired business is allocated to the tangible assets, financial assets and separately recognized intangible assets acquired less liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. We review goodwill at least annually for impairment, or whenever events or circumstances indicate that the carrying value of long-lived assets may not be fully recoverable.
Other Intangible Assets
- Contract rights and other intangible assets are amortized primarily using the pattern of benefits method over periods ranging from
one
to
twenty-five years
.
We account for the cost of computer software developed or obtained for internal use in accordance with ASC
350-985
,
Intangibles - Goodwill and Other - Software
. These capitalized software costs are included in other intangible assets, net.
We account for software development costs related to software products for sale, lease or otherwise marketed in accordance with ASC
985-20
,
Software - Costs of Software to Be Sold, Leased, or Marketed
. For projects fully funded by us, development costs are capitalized from the point of demonstrated technological feasibility until the point in time that the product is available for general release to customers. Once the product is available for general release, capitalized costs are amortized based on units sold or on a straight-line basis over a
five
-year period or other such shorter period as may be required.
Impairment of Long-Lived Assets
- Whenever events or changes in circumstances indicate that the carrying amount of long-
lived assets may not be fully recoverable, we evaluate the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. If any impairment were indicated as a result of this review, we would recognize a loss based on the amount by which the carrying amount exceeds the estimated fair value.
Employee Supplemental Savings Plan (ESSP) Assets
- We maintain several non-qualified defined contribution supplemental retirement plans for certain key employees that are accounted for in accordance with ASC
710-10-05
,
Compensation - General - Deferred Compensation - Rabbi Trust
, as the underlying assets are held in rabbi trusts with investments directed by the respective employee. A rabbi trust is a grantor trust generally set up to fund compensation for a select group of management and the assets of this trust are available to satisfy the claims of general creditors in the event of bankruptcy of us. The assets held by the rabbi trusts are recorded at cash surrender value in our consolidated financial statements as ESSP assets with a related liability to employees recorded as a deferred compensation liability in accrued retirement.
Stock-based Compensation
- We account for stock-based compensation in accordance with ASC
718
,
Compensation - Stock Compensation
, which requires the use of a valuation model to calculate the fair value of stock-based awards. We have elected to use the Black-Scholes-Merton pricing model to determine fair value of stock options on the dates of grant for our stock options. The fair value is included in operating expenses or capitalized, as appropriate, straight-line over the period in which service is provided in exchange for the award. The grant date fair value of the restricted stock is equal to the closing market price of our common stock on the date of grant. The compensation expense for restricted stock is recognized over the service period and is based on the grant date fair value of the shares. The grant date fair value of the restricted stock unit (RSU) is equal to the closing market price of our common stock on the grant date less the present value of dividends expected to be awarded during the service period. We recognize the grant date fair value of RSUs of shares we expect to issue as compensation expense ratably over the requisite service period. We account for forfeitures as they occur.
Income Taxes
- We account for income taxes in accordance with ASC
740
,
Income Taxes
. Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year-to-year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would “more likely than not” sustain the position following an audit. For tax positions meeting the “more likely than not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than
50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority.
Foreign-Currency Translation
- All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at fiscal year-end exchange rates. Income and expense items are translated at average monthly exchange rates prevailing during the fiscal year. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss).
Comprehensive Income (Loss)
- Comprehensive income (loss) consists of net income; translation adjustments, net of tax; and actuarial gain (loss) on defined benefit pension plan, net of tax.
Fair Value of Financial Instruments
- The carrying value of our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value because of the short-term nature of these amounts.
Variable Interest Entities (VIEs)
- We determine whether we have a controlling financial interest in a VIE. The reporting entity with a variable interest or interest that provides the reporting entity with a controlling financial interest in a VIE will have both (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. We have
one
entity that has been consolidated as a VIE. The purpose of the entity is to perform on certain U.S. Navy contracts. These contracts ended in 2018. The maximum amount of loss we were exposed to as of
December 31, 2018
was not material to our consolidated financial statements.
Investments
- Investments where we have the ability to exercise significant influence, but we do not control, are accounted for under the equity method of accounting and are included in other assets on our consolidated balance sheets. Significant influence typically exists if we have a
20%
to
50%
ownership interest in the investee. Under this method of accounting, our share of the net earnings or losses of the investee is included in equity in earnings or losses of unconsolidated subsidiaries on our consolidated statement of income.
Investments where we have
less than 20%
ownership interest in the investee and lack the ability to exercise significant influence are accounted for under the cost method. Under the cost method, we recognize our investment in the stock of an investee as an asset. The investment is measured initially at cost. We recognize as income dividends received that are distributed from net accumulated earnings. Dividends received in excess of earnings are considered a return of investment and are recorded as reductions of costs of the investment. Impairment is assessed at the individual investment level. An investment is impaired if the fair value of the investment is less than its costs. If it is determined that the impairment is other than temporary, then an impairment loss is recognized in earnings. The fair value of the investment would become the new cost basis of the investment and will not be adjusted for subsequent recoveries in fair value.
Business Combinations
- The accounting for our business combinations consists of allocating the purchase price to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values, with the excess recorded as goodwill. We have up to one year from the acquisition date to use information as of each acquisition date to adjust the fair value of the acquired assets and liabilities, which may result in material changes to their recorded values with an offsetting adjustment to goodwill.
Recently Adopted ASUs
ASU 2014-09,
Revenue from Contracts with Customers (ASC 606)
, supersedes existing revenue recognition guidance, including ASC 605-35,
Revenue Recognition - Construction-Type and Production-Type Contracts
. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue under GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time. It also requires new, expanded disclosures regarding revenue recognition. We elected to adopt using the modified retrospective method that applied to those contracts that were not substantially completed as of January 1, 2018. Additional details are included in the revenue recognition policy above and Note 3 below.
ASU 2017-09,
Compensation—Stock Compensation (ASC 718): Scope of Modification Accounting
, provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in ASC 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in ASU 2017-09. The adoption of this ASU on January 1, 2018 did not have an effect on our consolidated financial statements.
ASU 2017-01,
Business Combinations (ASC 805)—Clarifying the Definition of a Business
, clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the guidance in Topic 805, there are three elements of a business: inputs, processes and outputs. While an integrated set of assets and activities (collectively, a “set”) that is a business usually has outputs, outputs are not required to be present. Additionally, all of the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in ASU 2017-01 provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If, however, the screen is not met, then the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and (2) remove the evaluation of whether a market participant could replace missing elements. Finally, the amendments in this ASU narrow the definition of the term “output” so that the term is consistent with the manner in which outputs are described in ASC 606. The adoption of this ASU on January 1, 2018 did not have an effect on our consolidated financial statements.
ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. We applied the equity method of accounting for applicable investments.
We made an accounting policy election to classify distributions received from equity method investees using the cumulative earnings approach. Distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the investor (as adjusted for amortization of basis differences). When such an excess occurs, the current-period distribution up to this excess is considered a return of investment and should be classified as cash inflows from investing. Due to the adoption of ASU 2016-15 on January 1, 2018, we classified proceeds from settlements of corporate-owned life insurance policies as investing activities on our consolidated statement of cash flows for the year ended
December 31, 2018
.
Recently Issued But Not Yet Adopted ASUs
The FASB has issued ASU 2018-18,
Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
, which resolves the diversity in practice concerning the manner in which entities account for transactions on the basis of their view of the economics of the collaborative arrangement. A collaborative arrangement, as defined by the guidance in Topic 808, is a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success. In particular, the amendments in ASU 2018-18 (1) clarify that certain transactions between collaborative participants should be accounted for as revenue under Topic 606 when the collaborative participant is a customer in the context of the unit of account, and that, in those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements; (2) add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (i.e., a distinct good or service), limited to when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606; and (3) clarify that in a transaction that is not directly related to sales to third parties, presenting the transaction as revenue would be precluded if the collaborative participant counterparty was not a customer. The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. Note that early adoption is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. We are currently evaluating the effect on our consolidated financial statements.
The FASB issued ASU 2016-02,
Leases (Topic 842)
. The amendments in this ASU create Topic 842,
Leases
, and supersede the leases requirements in Topic 840,
Leases
. The objective of Topic 842 is to establish the principles that lessees and lessors should apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. This ASU is effective for public entities for annual periods after December 15, 2018, and interim periods therein. Early adoption is permitted for all entities. We developed and substantially completed a detailed implementation plan which includes; implementing a software platform for lease accounting; updating our policies and controls; and developing disclosures. We will adopt ASU 2016-02 retrospectively at the beginning of the period of adoption, January 1, 2019, through a cumulative adjustment to retained earnings and the recognition of a lease liability and corresponding right of use asset. We will elect the following transition related practical expedients; not to reassess whether any 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 for any existing lease. We have also elected not to apply the recognition and measurement requirements to short-term leases (less than 1 year). We expect the adoption of ASU 2016-02 to have a material effect on our consolidated financial statements resulting from the recognition of a lease liability of approximately
$125 million
and right of use asset of approximately
$115 million
as well as significant additional disclosures required under the ASU. The adoption will not impact financial covenant calculations required under our existing credit agreement.
The FASB has issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement
, which focuses on improving the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of each entity’s financial statements. The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements in Topic 820,
Fair Value
Measurement
. Specifically, the amendments in this ASU remove disclosure requirements in Topic 820 related to (1) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation processes for Level 3 fair value measurements. Additionally, the ASU adds disclosure requirements for public entities about (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. The amendments regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Note that early application is permitted for all entities; moreover, an entity is allowed to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the
additional disclosures until their effective date. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.
The FASB has issued ASU 2018-17,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
, which reduces the cost and complexity of financial reporting associated with consolidation of variable interest entities (VIEs). Specially, the indirect interests held through related parties in common control arrangements should be considered on a proportional basis (as opposed to a direct interest in its entirety) for determining whether fees paid to decision makers and service providers are variable interests. This is consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a VIE. The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.
The FASB has issued ASU 2018-15,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)
, which aims to reduce complexity in the accounting for costs of implementing a cloud computing service arrangement. In fact, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments in this ASU require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40,
Intangibles—Goodwill and Other—Internal-Use Software,
in order to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal-use software that cannot be capitalized under Subtopic 350-40 (e.g., training costs and certain data conversion costs) also cannot be capitalized for a hosting arrangement that is a service contract. Additionally, the amendments in this ASU require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (i.e., the noncancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement, and to classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. Note that the accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. We are currently evaluating methods of adoption as well as the effect on our consolidated financial statements.
The FASB has issued ASU 2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
which supersedes the guidance in Subtopic 505-50,
Equity—Equity-Based Payments to Non-Employees
. In particular, ASU 2018-07 expands the scope of topic 718,
Compensation—Stock Compensation
(which previously only included payments to employees), to include share-based payment transactions for acquiring goods and services from non-employees. In fact, an entity should now apply the requirements of Topic 718 to non-employee awards, except for specific guidance on inputs to an option pricing model and the attribution of cost (i.e., the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). Additionally, the amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations by issuing share-based payment awards, and clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer, or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606,
Revenue from Contracts with Customers
. The amendments are effective for fiscal years beginning after December 15, 2019, and for interim periods with fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.
The FASB has issued ASU 2018-02,
Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income
, which helps organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (TCJA), enacted on December 22, 2017. Specifically, this ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA, eliminating the stranded tax effects resulting from the TCJA and improving the usefulness of information reported to financial statement users. Because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. Additionally it requires financial statement preparers to disclose (1) a description of their accounting policy for releasing income tax effects from accumulated other comprehensive
income, (2) whether they elect to reclassify the stranded income tax effects from the TCJA and (3) information about other income tax effects related to the application of the TCJA that are reclassified from accumulated other comprehensive income to retained earnings, if any. The amendments are effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.
The FASB has issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which simplifies the manner in which an entity determines the amount of a goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Public entities should adopt the amendments in this ASU prospectively for their annual, or any interim periods, in fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.
Other ASUs effective after
December 31, 2018
are not expected to have a material effect on our consolidated financial statements.
|
|
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 generally reimbursed separately for allowable materials, costs and expenses at cost.
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. Prior period amounts have not been adjusted under the modified retrospective method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Cost-reimbursable
|
$
|
1,325,024
|
|
|
$
|
1,130,134
|
|
|
$
|
1,085,429
|
|
Fixed-price
|
435,599
|
|
|
370,517
|
|
|
306,735
|
|
Time-and-materials
|
197,934
|
|
|
216,367
|
|
|
209,432
|
|
|
$
|
1,958,557
|
|
|
$
|
1,717,018
|
|
|
$
|
1,601,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Department of Defense and intelligence agencies
|
$
|
1,436,627
|
|
|
$
|
1,359,309
|
|
|
$
|
1,331,551
|
|
Federal civilian agencies
|
476,834
|
|
|
315,036
|
|
|
230,399
|
|
State agencies, international agencies and commercial entities
|
45,096
|
|
|
42,673
|
|
|
39,646
|
|
|
$
|
1,958,557
|
|
|
$
|
1,717,018
|
|
|
$
|
1,601,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Prime contractor
|
$
|
1,742,097
|
|
|
$
|
1,514,924
|
|
|
$
|
1,404,490
|
|
Subcontractor
|
216,460
|
|
|
202,094
|
|
|
197,106
|
|
|
$
|
1,958,557
|
|
|
$
|
1,717,018
|
|
|
$
|
1,601,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
U.S
|
$
|
1,928,785
|
|
|
$
|
1,688,671
|
|
|
$
|
1,576,290
|
|
International
|
29,772
|
|
|
28,347
|
|
|
25,306
|
|
|
$
|
1,958,557
|
|
|
$
|
1,717,018
|
|
|
$
|
1,601,596
|
|
We deliver a broad array of IT and technical services solutions under contracts with the U.S. government, state and local governments and commercial customers. The components of contract receivables are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
January 1, 2018
|
|
December 31, 2017
|
Billed receivables
|
$
|
301,716
|
|
|
$
|
236,113
|
|
|
$
|
236,113
|
|
Unbilled receivables
|
109,895
|
|
|
88,767
|
|
|
81,454
|
|
Allowance for doubtful accounts
|
(6,233
|
)
|
|
(6,157
|
)
|
|
(6,157
|
)
|
Receivables-net
|
$
|
405,378
|
|
|
$
|
318,723
|
|
|
$
|
311,410
|
|
Receivables at
December 31, 2018
are expected to be substantially collected within one year except for approximately
$0.8 million
, of which
94%
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 have one contract which accounts for
12%
of our accounts receivable balance. We do not believe that we have significant exposure to credit risk as billed receivable and unbilled receivables are primarily due from the U.S. government. The allowance for doubtful accounts represents our estimate for exposure to compliance, contractual issues and bad debts related to prime contractors.
The following table discloses contract liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
January 1, 2018
|
|
December 31, 2017
|
Contract liabilities
|
$
|
28,209
|
|
|
$
|
22,156
|
|
|
$
|
18,816
|
|
Changes in the balance of contract liabilities are primarily due to the timing difference between our performance and our customers' payments.
For the year ended December 31, 2018
, the amount of revenue that was included in the opening contract liabilities balance was
$18.2 million
.
The remaining performance obligation at December 31, 2018 was
$2.8 billion
. The following table discloses when we expect to recognize the remaining performance obligation as revenue (in billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ending
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2020
|
|
Thereafter
|
|
Total
|
Revenue expected to be recognized
|
$
|
1.6
|
|
|
$
|
0.8
|
|
|
$
|
0.4
|
|
|
$
|
2.8
|
|
InfoZen LLC (InfoZen)
—On
October 2, 2017
, we completed the acquisition of InfoZen. The results of InfoZen's operations have been included in our consolidated financial statements since that date. The acquisition was completed through an equity purchase agreement dated
September 15, 2017
, by and among InfoZen LLC., IZ Holdings, LLC and other beneficiaries and ManTech Advanced Systems International, Inc. We funded the acquisition with cash on hand and borrowings on our revolving credit facility. InfoZen is a leading IT solution provider, with domain expertise in modernization, agile/DevOps software development, cloud migration and threat monitoring and assessment capabilities in support of critical national and homeland security missions. The purchase agreement did not contain provisions for contingent consideration.
For the year ended December 31, 2017, we incurred approximately
$0.8 million
of acquisition costs related to the InfoZen transaction, which are included in general and administrative expenses in our consolidated statement of income.
The purchase price of
$184.0 million
was allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. The goodwill recorded related to this transaction will be deductible for tax purposes over
15 years
. Recognition of goodwill is largely attributed to the value paid for InfoZen's capabilities to support customers in modernization, agile software development, cloud migration and threat monitoring assessment capabilities.
In allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of InfoZen's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at
$49.2 million
and
$5.7 million
, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with InfoZen's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately
20 years
. Backlog is amortized straight-line over its estimated useful life of
1 year
. The weighted-average amortization period for the intangible assets is
18 years
.
The following table represents the purchase price allocation for InfoZen (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,406
|
|
Receivables
|
8,991
|
|
Prepaid expenses
|
4,046
|
|
Other current assets
|
7
|
|
Goodwill
|
129,932
|
|
Other intangible assets
|
54,850
|
|
Property and equipment
|
485
|
|
Other assets
|
111
|
|
Accounts payable and accrued expenses
|
(7,488
|
)
|
Accrued salaries and related expenses
|
(3,092
|
)
|
Contract liabilities
|
(5,258
|
)
|
Net assets acquired and liabilities assumed
|
$
|
183,990
|
|
Under ASC
260
,
Earnings per Share
, the two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under that method, basic and diluted earnings per share data are presented for each class of common stock.
In applying the two-class method, we determined that undistributed earnings should be allocated equally on a per share basis between Class A and Class B common stock. Under our Certificate of Incorporation, the holders of the common stock are entitled to participate ratably, on a share-for-share basis as if all shares of common stock were of a single class, in such dividends, as may be declared by the Board of Directors. During the years ended
December 31, 2018
,
2017
and
2016
, we declared and paid quarterly dividends, in the amount of
$0.25
,
$0.21
and
$0.21
per share on both classes of common stock.
Basic earnings per share has been computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period in which the shares were outstanding. Diluted earnings per share have been computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares
that were outstanding during each period.
The net income available to common stockholders and weighted average number of common shares outstanding used to compute basic and diluted earnings per share for each class of common stock are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Distributed earnings
|
$
|
39,627
|
|
|
$
|
32,709
|
|
|
$
|
32,138
|
|
Undistributed earnings
|
42,470
|
|
|
81,432
|
|
|
24,253
|
|
Net income
|
$
|
82,097
|
|
|
$
|
114,141
|
|
|
$
|
56,391
|
|
|
|
|
|
|
|
Class A common stock:
|
|
|
|
|
|
Basic net income available to common stockholders
|
$
|
54,715
|
|
|
$
|
75,413
|
|
|
$
|
36,885
|
|
Basic weighted average common shares outstanding
|
26,354
|
|
|
25,685
|
|
|
24,944
|
|
Basic earnings per share
|
$
|
2.08
|
|
|
$
|
2.94
|
|
|
$
|
1.48
|
|
|
|
|
|
|
|
Diluted net income available to common stockholders
|
$
|
54,937
|
|
|
$
|
75,698
|
|
|
$
|
36,988
|
|
Effect of potential exercise of stock options
|
324
|
|
|
288
|
|
|
202
|
|
Diluted weighted average common shares outstanding
|
26,678
|
|
|
25,973
|
|
|
25,146
|
|
Diluted earnings per share
|
$
|
2.06
|
|
|
$
|
2.91
|
|
|
$
|
1.47
|
|
|
|
|
|
|
|
Class B common stock:
|
|
|
|
|
|
Basic net income available to common stockholders
|
$
|
27,382
|
|
|
$
|
38,728
|
|
|
$
|
19,506
|
|
Basic weighted average common shares outstanding
|
13,189
|
|
|
13,190
|
|
|
13,192
|
|
Basic earnings per share
|
$
|
2.08
|
|
|
$
|
2.94
|
|
|
$
|
1.48
|
|
|
|
|
|
|
|
Diluted net income available to common stockholders
|
$
|
27,160
|
|
|
$
|
38,443
|
|
|
$
|
19,403
|
|
Diluted weighted average common shares outstanding
|
13,189
|
|
|
13,190
|
|
|
13,192
|
|
Diluted earnings per share
|
$
|
2.06
|
|
|
$
|
2.91
|
|
|
$
|
1.47
|
|
For the years ended
December 31, 2018
,
2017
and
2016
, options to purchase
293,898
shares,
265,866
shares and
369,300
shares, respectively, were outstanding but not included in the computation of diluted earnings per share because the options' effect would have been anti-dilutive. For the years ended
December 31, 2018
,
2017
and
2016
, there were
420,524
shares,
463,800
shares and
1,045,789
shares, respectively, issued from the exercise of stock options.
|
|
6.
|
Property and Equipment
|
Major classes of property and equipment are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Furniture and equipment
|
$
|
97,577
|
|
|
$
|
79,218
|
|
Leasehold improvements
|
43,065
|
|
|
39,022
|
|
Property and equipment-gross
|
140,642
|
|
|
118,240
|
|
Accumulated depreciation and amortization
|
(89,215
|
)
|
|
(72,158
|
)
|
Property and equipment-net
|
$
|
51,427
|
|
|
$
|
46,082
|
|
Depreciation and amortization expense related to property and equipment for the years ended
December 31, 2018
,
2017
and
2016
was
$25.5 million
,
$9.5 million
and
$7.8 million
, respectively.
|
|
7.
|
Goodwill and Other Intangible Assets
|
Under ASC
350
,
Intangibles - Goodwill and Other
, goodwill is to be reviewed at least annually for impairment and whenever events or circumstances indicate that the carrying value of goodwill may not be fully recoverable. We have elected to perform this annual review as of October 31st of each calendar year.
In reviewing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test (described below), otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.
The goodwill impairment test is a two-step process performed at the reporting unit level. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount (including goodwill). If the reporting unit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit's fair value is less than its carrying value, an impairment of goodwill may exist, requiring a second step to be performed. Step two of this test measures the amount of the impairment loss, if any. Step two of this test requires the allocation of the reporting unit's fair value to its assets and liabilities, including any unrecognized intangible assets in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as a goodwill impairment charge in operations.
The fair values of the reporting units are determined based on a weighting of the income approach, market approach and market transaction approach. The income approach is a valuation technique in which fair value is based from forecasted future cash flow discounted at the appropriate rate of return commensurate with the risk as well as current rates of return for equity and debt capital as of the valuation date. The forecast used in our estimation of fair value was developed by management based on a contract basis, incorporating adjustments to reflect known contract and market considerations (such as reductions and uncertainty in government spending, pricing pressure and opportunities). The discount rate utilizes a risk adjusted weighted average cost of capital. The market approach is a valuation technique in which the fair value is calculated based on market prices realized in an actual arm's length transaction. The technique consists of undertaking a detailed market analysis of publicly traded companies that provides a reasonable basis for comparison to us. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. The market transaction approach is a valuation technique in which the fair value is calculated based on market prices realized in actual arm's length transactions. The technique consists of undertaking a detailed market analysis of merged and acquired companies that provides a reasonable basis for comparison to us. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. To assess the reasonableness of the calculated reporting unit fair values, we compare the sum of the reporting units' fair values to our market capitalization (per share stock price times the number of shares outstanding) and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization) and then assess the reasonableness of our implied control premium.
The changes in the carrying amounts of goodwill during fiscal years
2018
and
2017
were as follows (in thousands):
|
|
|
|
|
|
Goodwill Balance
|
Goodwill at December 31, 2016
|
$
|
955,874
|
|
Acquisitions
|
128,686
|
|
Goodwill at December 31, 2017
|
1,084,560
|
|
Acquisition fair value adjustment
|
1,246
|
|
Goodwill at December 31, 2018
|
$
|
1,085,806
|
|
Other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Contract and program intangible assets
|
$
|
355,932
|
|
|
$
|
201,298
|
|
|
$
|
154,634
|
|
|
$
|
355,932
|
|
|
$
|
179,049
|
|
|
$
|
176,883
|
|
Capitalized software cost for internal use
|
50,925
|
|
|
33,597
|
|
|
17,328
|
|
|
46,995
|
|
|
29,530
|
|
|
17,465
|
|
Total other intangible assets-net
|
$
|
406,857
|
|
|
$
|
234,895
|
|
|
$
|
171,962
|
|
|
$
|
402,927
|
|
|
$
|
208,579
|
|
|
$
|
194,348
|
|
Amortization expense relating to intangible assets for the years ended
December 31, 2018
,
2017
and
2016
was
$26.3 million
,
$23.5 million
and
$21.8 million
, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):
|
|
|
|
|
Year ending:
|
|
December 31, 2019
|
$
|
22,621
|
|
December 31, 2020
|
$
|
21,781
|
|
December 31, 2021
|
$
|
19,051
|
|
December 31, 2022
|
$
|
16,456
|
|
December 31, 2023
|
$
|
13,485
|
|
Revolving Credit Facility
- We maintain a credit agreement with a syndicate of lenders led by Bank of America, N.A., as sole administrative agent. The credit agreement provides for a
$500 million
revolving credit facility, with a
$75 million
letter of credit sublimit and a
$30 million
swing line loan sublimit. The credit agreement also includes an accordion feature that permits us to arrange with the lenders for the provision of additional commitments. The maturity date is
August 17, 2022
.
Borrowings under our credit agreement are collateralized by substantially all of our assets and our Material Subsidiaries (as defined in the credit agreement) and bear interest at one of the following variable rates as selected by us at the time of borrowing: a LIBOR based rate plus market spreads (
1.25%
to
2.25%
based on our consolidated total leverage ratio) or Bank of America's base rate plus market spreads (
0.25%
to
1.25%
based on our consolidated total leverage ratio). The aggregate annual weighted average interest rates were
3.91%
and
2.99%
for the years ended
December 31, 2018
and
2017
, respectively.
The terms of the credit agreement permit prepayment and termination of the loan commitments at any time, subject to certain conditions. The credit agreement requires us to comply with specified financial covenants, including the maintenance of certain leverage ratios and a certain consolidated coverage ratio. The credit agreement also contains various covenants, including affirmative covenants with respect to certain reporting requirements and maintaining certain business activities, and negative covenants that, among other things, may limit or impose restrictions on our ability to incur liens, incur additional indebtedness, make investments, make acquisitions and undertake certain other actions. As of, and during the fiscal years ending,
December 31, 2018
and
2017
, we were in compliance with our financial covenants under the credit agreement.
There was
$7.5 million
and
$31.0 million
outstanding on our revolving credit facility at
December 31, 2018
and
2017
, respectively. The weighted average borrowings under the revolving portion of the facility during the years ended
December 31, 2018
and
2017
were
$34.2 million
and
$2.7 million
, respectively. The maximum available borrowing under the revolving credit facility at
December 31, 2018
was
$482.9 million
. At
December 31, 2018
and
2017
, we have
$9.6 million
and
$15.3 million
, respectively, outstanding on our letter of credit that 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 completed our incurred cost audits through 2015 with adjustments expected to be settled within established reserves. The remaining audits for 2016 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. We believe that the ultimate resolution of these matters will not have a material effect on our financial position, results of operations or cash flows, except for the matter noted below.
An officer of our Company is a party to a pending arbitration proceeding with a former employer that relates to certain breach of contract claims. Pursuant to indemnification arrangements we have with this officer, we may be exposed to a potential loss related to this claim. Pursuant to applicable accounting standards, we have determined that it is not probable that an unfavorable outcome could cause us to incur a liability/loss under these indemnification arrangements. However, given the nature of the claim, the early stage of the process, the limitations on information and other factual details relating to the claims that are available to us at this time and management’s intent to contest the matter vigorously, we are unable to make a reasonable estimate of loss at this time. As such, we have not accrued, nor disclosed an amount of potential loss as of
December 31, 2018
.
We were a defendant in a lawsuit filed by two former employees with allegations of retaliation under both the False Claims Act and the Defense Contractor Whistleblower Protection Act. A jury found ManTech liable for discharging the two former employees. Both parties filed appeals to the Fourth Circuit Court of Appeals. In August 2018, the Fourth Circuit Court of Appeals reversed the finding of liability as to one of the former employees and affirmed the finding of liability as to the other former employee
in the amount of
$1.4 million
. Our insurance policy covers the amount of the liability, therefore,
no
loss was recognized
for the year ended December 31, 2018
. The impact of future events in connection with this matter is not expected to have a material effect on our financial position, results of operations or cash flow.
We have
$9.6 million
outstanding on our letter of credit, of which
$9.5 million
is related to an outstanding performance bond in connection with a contract between ManTech MENA, LLC and Jadwalean International Operations and Management Company to fulfill technical support requirements for the Royal Saudi Air Force.
We lease office space and equipment under long-term operating leases. A number of the leases contain renewal options and escalation clauses. Office space and equipment rent expense totaled approximately
$39.9 million
,
$36.9 million
and
$37.4 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. We had
$13.2 million
and
$10.6 million
of deferred rent liabilities resulting from recording rent expense on a straight-line basis over the life of the respective lease for the years ended
December 31, 2018
and
2017
, respectively. At
December 31, 2018
, our aggregate future minimum rental commitments under these leases are as follows (in thousands):
|
|
|
|
|
|
|
|
Total
|
Year ending:
|
|
|
December 31, 2019
|
|
$
|
33,953
|
|
December 31, 2020
|
|
28,954
|
|
December 31, 2021
|
|
25,794
|
|
December 31, 2022
|
|
21,852
|
|
December 31, 2023
|
|
18,353
|
|
Thereafter
|
|
9,296
|
|
Total
|
|
$
|
138,202
|
|
|
|
10.
|
Stockholders' Equity and Stock-Based Compensation
|
Common Stock
- We have
150,000,000
shares of authorized Class A common stock, par value
$0.01
per share. We have
50,000,000
shares of authorized Class B common stock, par value
$0.01
per share. On
December 31, 2018
, there were
26,573,400
shares of Class A common stock outstanding,
244,113
shares of Class A common stock recorded as treasury stock and
13,188,045
shares of Class B common stock outstanding.
Holders of Class A common stock are entitled to
one
vote for each share held of record and holders of Class B common stock are entitled to
ten
votes for each share held of record, except with respect to any “going private transaction” (generally, a transaction in which George J. Pedersen (our Executive Chairman and Chairman of the Board), his affiliates, his direct and indirect permitted transferees or a group, generally including Mr. Pedersen, such affiliates and permitted transferees, seek to buy all outstanding shares), as to which each share of Class A common stock and Class B common stock are entitled to
one
vote per share. The Class A common stock and the Class B common stock vote together as a single class on all matters submitted to a vote of stockholders, including the election of directors, except as required by law. Holders of common stock do not have cumulative voting rights in the election of directors.
Stockholders are entitled to receive, when and if declared by the Board of Directors from time-to-time, such dividends and other distributions in cash, stock or property from our assets or funds legally and contractually available for such purposes subject to any dividend preferences that may be attributable to preferred stock that may be authorized. Each share of Class A common stock and Class B common stock is equal in respect to dividends and other distributions in cash, stock or property, except that in the case of stock dividends, only shares of Class A common stock will be distributed with respect to the Class A common stock and only shares of Class B common stock will be distributed with respect to Class B common stock. In no event will either Class A common stock or Class B common stock be split, divided or combined unless the other class is proportionately split, divided or combined.
The shares of Class A common stock are not convertible into any other series or class of securities. Each share of Class B common stock, however, is freely convertible into
one
share of Class A common stock at the option of the Class B stockholder. Upon the death of Mr. Pedersen, all outstanding shares of Class B common stock automatically convert to Class A common stock.
Preferred Stock
- We are authorized to issue an aggregate of
20,000,000
shares of preferred stock,
$0.01
par value per share, the terms and conditions of which are determined by our Board of Directors upon issuance. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of holders of any shares of preferred stock that we may designate and issue in the future. At
December 31, 2018
and
2017
,
no
shares of preferred stock were outstanding and the Board of Directors currently has no plans to issue a series of preferred stock.
Accounting for Stock-Based Compensation:
Our 2016 Management Incentive Plan (the Plan) was designed to attract, retain and motivate key employees. The types of awards available under the Plan include stock options, restricted stock and RSUs. Equity awards granted under the Plan are settled in shares of Class A common stock. At the beginning of each year, the Plan provides that the number of shares available for issuance automatically increases by an amount equal to
1.5%
of the total number of shares of Class A and Class B common stock outstanding on December 31st of the previous year. On
January 2, 2019
, there were
596,422
additional shares made available for issuance under the Plan. Through
December 31, 2018
, the Board of Directors has authorized the issuance of up to
14,551,899
shares under this Plan. Through
December 31, 2018
, the remaining aggregate number of shares of our common stock available for future grants under the Plan was
6,113,209
. The Plan expires in
March 2026
.
The Plan is administered by the compensation committee of our Board of Directors, along with its delegates. Subject to the express provisions of the Plan, the committee has the Board of Directors' authority to administer and interpret the Plan, including the discretion to determine the exercise price, vesting schedule, contractual life and the number of shares to be issued.
Stock Compensation Expense
- For the years ended
December 31, 2018
,
2017
and
2016
, we recorded
$5.1 million
,
$6.3 million
and
$3.3 million
of stock-based compensation expense, respectively.
No
compensation expense of employees with stock awards was capitalized during the years ended
December 31, 2018
,
2017
and
2016
. For the year ended
December 31, 2018
and
2017
, we recorded
$3.1 million
and
$2.7 million
to income tax expense for tax benefits related to the exercise of stock options, vested cancellations and the vesting of restricted stock. For the year ended
December 31, 2016
, we recorded
$0.1 million
to paid in capital related to tax deficiencies from the exercise of stock options, vested cancellations and the vesting of restricted stock.
Stock Options
- Under the Plan, we have issued stock options. A stock option granted gives the holder the right, but not the obligation to purchase a certain number of shares at a predetermined price for a specific period of time. We typically issue options
that vest over
three years
in equal installments beginning on the first anniversary of the date of grant. Under the terms of the Plan, the contractual life of the option grants may not exceed
eight years
. During the years ended
December 31, 2018
,
2017
and
2016
, we issued options that expire
five years
from the date of grant.
Fair Value Determination
- We have used the Black-Scholes-Merton option pricing model to determine fair value of our stock option awards on the date of grant. We will reconsider the use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that cannot be reasonably estimated under this model.
The following weighted-average assumptions were used for option grants during the years ended
December 31, 2018
,
2017
and
2016
:
|
|
•
|
Volatility
- The expected volatility of the options granted was estimated based upon historical volatility of our share price through weekly observations of our trading history.
|
|
|
•
|
Expected life of options
- The expected life of options granted to employees was determined from historical exercises of the grantee population. The options had graded vesting over
three years
in equal installments beginning on the first anniversary of the date of the grant and a contractual term of
five years
.
|
|
|
•
|
Risk-free interest rate
- The yield on zero-coupon U.S. Treasury strips was used to extrapolate a forward-yield curve. This “term structure” of future interest rates was then input into a numeric model to provide the equivalent risk-free rate to be used in the Black-Scholes-Merton model based on the expected term of the underlying grants.
|
|
|
•
|
Dividend yield -
The Black-Scholes-Merton valuation model requires an expected dividend yield as an input. For the years ended
December 31, 2018
,
2017
and
2016
, we have calculated our expected dividend yield based on an expected annual cash dividend of
$1.00
per share,
$0.84
per share and
$0.84
per share, respectively.
|
The following table summarizes weighted-average assumptions used in our calculations of fair value for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Volatility
|
26.57
|
%
|
|
25.59
|
%
|
|
23.70
|
%
|
Expected life of options
|
3 years
|
|
|
3 years
|
|
|
3 years
|
|
Risk-free interest rate
|
2.72
|
%
|
|
1.72
|
%
|
|
1.10
|
%
|
Dividend yield
|
2.00
|
%
|
|
2.75
|
%
|
|
2.88
|
%
|
Stock Option Activity
- The weighted-average fair value of options granted during the years ended
December 31, 2018
,
2017
and
2016
, as determined under the Black-Scholes-Merton valuation model, was
$10.42
,
$6.75
and
$4.60
, respectively. Option grants that vested during the years ended
December 31, 2018
,
2017
and
2016
had a combined fair value of
$1.5 million
,
$1.7 million
and
$2.6 million
, respectively.
The following table summarizes stock option activity for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Aggregate Intrinsic Value
(in thousands)
|
|
Weighted Average Remaining Contractual Life
|
Stock options outstanding at December 31, 2015
|
2,495,310
|
|
|
$
|
30.86
|
|
|
$
|
3,583
|
|
|
|
Granted
|
199,938
|
|
|
$
|
34.22
|
|
|
|
|
|
Exercised
|
(1,045,789
|
)
|
|
$
|
29.24
|
|
|
$
|
8,858
|
|
|
|
Cancelled and expired
|
(489,040
|
)
|
|
$
|
37.91
|
|
|
|
|
|
Stock options outstanding at December 31, 2016
|
1,160,419
|
|
|
$
|
29.93
|
|
|
$
|
14,299
|
|
|
|
Granted
|
534,030
|
|
|
$
|
42.90
|
|
|
|
|
|
Exercised
|
(463,800
|
)
|
|
$
|
29.34
|
|
|
$
|
7,203
|
|
|
|
Cancelled and expired
|
(61,241
|
)
|
|
$
|
33.80
|
|
|
|
|
|
Stock options outstanding at December 31, 2017
|
1,169,408
|
|
|
$
|
35.88
|
|
|
$
|
16,731
|
|
|
|
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
|
|
|
4 years
|
|
|
|
|
|
|
|
|
Stock options exercisable at December 31, 2018
|
318,998
|
|
|
$
|
35.57
|
|
|
$
|
5,336
|
|
|
2 years
|
The following table summarizes non-vested stock options for the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Fair Value
|
Non-vested stock options at December 31, 2017
|
684,979
|
|
|
$
|
6.23
|
|
Granted
|
466,828
|
|
|
$
|
10.42
|
|
Vested
|
(257,293
|
)
|
|
$
|
5.83
|
|
Cancelled
|
(120,112
|
)
|
|
$
|
7.04
|
|
Non-vested stock options at December 31, 2018
|
774,402
|
|
|
$
|
8.77
|
|
Unrecognized compensation expense related to outstanding stock options was
$5.6 million
as of
December 31, 2018
, which is expected to be recognized over a weighted-average period of
2 years
and will be adjusted for forfeitures as they occur.
Restricted Stock
- Under the Plan, we have issued restricted stock. A restricted stock award is an issuance of shares that cannot be sold or transferred by the recipient until the vesting period lapses. Restricted stock issued to members of our Board of Directors vest in
one year
. The related compensation expense is recognized over the service period and is based on the grant date fair value of the stock and the number of shares expected to vest. The grant date fair value of the restricted stock is equal to the closing market price of our common stock on the date of grant.
Restricted Stock Activity
- The following table summarizes the restricted stock activity during the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Fair Value
|
Non-vested restricted stock at December 31, 2016
|
18,000
|
|
|
$
|
33.84
|
|
Granted
|
24,000
|
|
|
$
|
37.90
|
|
Vested
|
(18,000
|
)
|
|
$
|
33.84
|
|
Non-vested restricted stock at December 31, 2017
|
24,000
|
|
|
$
|
37.90
|
|
Granted
|
24,000
|
|
|
$
|
52.83
|
|
Vested
|
(28,000
|
)
|
|
$
|
40.03
|
|
Non-vested restricted stock at December 31, 2018
|
20,000
|
|
|
$
|
52.83
|
|
RSUs
- Under the Plan, we issued performance-based and time-based RSUs. RSUs are not actual shares, but rather a right to receive shares in the future. The shares are not issued and the employee cannot sell or transfer shares prior to vesting and has no voting rights until the RSUs vest. Employees who are granted RSUs do not receive dividend payments during the vesting period. The employees' performance-based RSUs will result in the delivery of shares if (a) performance criteria is met and (b) the employee remains employed, in good standing, through the date of the performance period of
2 years
. The 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 2018, 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 RSU activity during the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Fair Value
|
RSUs at December 31, 2016
|
206,338
|
|
|
$
|
30.10
|
|
Granted
|
55,830
|
|
|
$
|
35.34
|
|
Vested
|
(3,300
|
)
|
|
$
|
30.60
|
|
Forfeited
|
(97,525
|
)
|
|
$
|
31.00
|
|
RSUs at December 31, 2017
|
161,343
|
|
|
$
|
31.36
|
|
Granted
|
76,713
|
|
|
$
|
53.97
|
|
Vested
|
(87,200
|
)
|
|
$
|
28.40
|
|
Forfeited
|
(13,260
|
)
|
|
$
|
38.98
|
|
RSUs at December 31, 2018
|
137,596
|
|
|
$
|
45.11
|
|
As of
December 31, 2018
, we maintained a qualified defined contribution plan. Our qualified defined contribution plan covers substantially all employees and complies with Section 401 of the Internal Revenue Code. Under this plan, we stipulated a basic matching contribution that matches a portion of the participants' contribution based upon a defined schedule. Additionally, this plan contains a discretionary contribution component where we may contribute additional amounts based on a percentage of eligible employees' compensation. Contributions are invested by an independent investment company. The choice of investment alternatives is at the election of each participating employee. Our contributions to the plan were approximately
$23.5 million
,
$20.6 million
and
$19.8 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
As of
December 31, 2018
, we also maintained an Employee Supplemental Savings Plan (ESSP), which is a nonqualified deferred compensation plan for certain key employees. Under this plan, eligible employees may defer up to
75%
of qualified annual base compensation and
100%
of bonus. In the ESSP, participant deferral accounts are credited with a rate of return based on investment elections as selected by the participant. The assets related to the ESSP are held in a rabbi trust owned by us for benefit of the participating employees. The trust investments are in the form of variable universal life insurance products, which
are owned by us. These investments seek to replicate the return of the participant investment elections. Employee contributions to this plan were approximately
$3.4 million
,
$3.0 million
and
$2.6 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
We maintained a nonqualified supplemental defined benefit pension plan for certain retired employees of an acquired company as of
December 31, 2018
. These plans were informally and partially funded beginning in 1999 through a rabbi trust. Assets held in a rabbi trust are not eligible to be included in the calculation of plan status. At both
December 31, 2018
and
2017
,
100%
of the rabbi trust assets were invested in a money market account with a commercial bank. All covered employees retired prior to 1998. Our benefit obligation was
$0.8 million
and
$1.2 million
at
December 31, 2018
and
2017
, respectively.
The domestic and foreign components of income operations before income taxes and equity method investments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Domestic
|
$
|
110,514
|
|
|
$
|
97,718
|
|
|
$
|
89,988
|
|
Foreign
|
91
|
|
|
(476
|
)
|
|
82
|
|
Income from operations before income taxes and equity method investments
|
$
|
110,605
|
|
|
$
|
97,242
|
|
|
$
|
90,070
|
|
The provision (benefit) for income taxes was comprised of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Federal
|
$
|
11,602
|
|
|
$
|
5,340
|
|
|
$
|
13,454
|
|
State
|
4,937
|
|
|
2,523
|
|
|
2,394
|
|
Foreign
|
133
|
|
|
38
|
|
|
(45
|
)
|
Current provision
|
16,672
|
|
|
7,901
|
|
|
15,803
|
|
Federal
|
8,010
|
|
|
(28,013
|
)
|
|
17,170
|
|
State
|
3,586
|
|
|
3,313
|
|
|
2,831
|
|
Deferred provision (benefit)
|
11,596
|
|
|
(24,700
|
)
|
|
20,001
|
|
Federal
|
234
|
|
|
(60
|
)
|
|
(1,573
|
)
|
State
|
28
|
|
|
—
|
|
|
(445
|
)
|
Non-current provision (benefit) resulting from allocating tax benefits directly to additional paid in capital and changes in liabilities
|
262
|
|
|
(60
|
)
|
|
(2,018
|
)
|
Provision (benefit) for income taxes
|
$
|
28,530
|
|
|
$
|
(16,859
|
)
|
|
$
|
33,786
|
|
For the years ended December 31,
2018
,
2017
and
2016
the non-current benefits related to liabilities for uncertain tax positions was
$0.3 million
,
$0.1 million
and
$0.2 million
, respectively.
The schedule of effective income tax rate reconciliation is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Statutory U.S. Federal tax rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Increase (decrease) in tax rate resulting from:
|
|
|
|
|
|
State taxes—net of Federal benefit
|
6.1
|
%
|
|
3.9
|
%
|
|
3.4
|
%
|
Stock-based compensation
|
(2.2
|
)%
|
|
(2.8
|
)%
|
|
—
|
%
|
Excess executive compensation
|
0.8
|
%
|
|
0.4
|
%
|
|
0.7
|
%
|
ESSP
|
0.4
|
%
|
|
(1.5
|
)%
|
|
(0.7
|
)%
|
Net deferred tax liability remeasurement
|
—
|
%
|
|
(52.0
|
)%
|
|
—
|
%
|
Section 199 deductions
|
—
|
%
|
|
(0.4
|
)%
|
|
(0.4
|
)%
|
Other, net
|
(0.3
|
)%
|
|
0.1
|
%
|
|
(0.5
|
)%
|
Effective tax rate
|
25.8
|
%
|
|
(17.3
|
)%
|
|
37.5
|
%
|
We received an income taxes refund, net of payments of
$4.3 million
for the year ended
December 31, 2018
. We paid income taxes, net of refunds, of
$15.9 million
and
$18.1 million
for the years ended
December 31, 2017
and
2016
, respectively.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. A summary of the tax effect of the significant components of deferred income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Goodwill and other assets
|
$
|
114,532
|
|
|
$
|
100,967
|
|
Property and equipment
|
8,168
|
|
|
7,303
|
|
Unbilled receivables - IRC Section 481(a)
|
8,816
|
|
|
11,693
|
|
Gross deferred tax liabilities
|
131,516
|
|
|
119,963
|
|
Retirement and other liabilities
|
(20,707
|
)
|
|
(20,636
|
)
|
Allowance for potential contract losses and other contract reserves
|
(1,681
|
)
|
|
(1,598
|
)
|
Foreign and state operating loss carryforwards
|
(1,709
|
)
|
|
(1,252
|
)
|
Less: Valuation allowance
|
1,537
|
|
|
717
|
|
Gross deferred tax assets
|
(22,560
|
)
|
|
(22,769
|
)
|
Net deferred tax liabilities
|
$
|
108,956
|
|
|
$
|
97,194
|
|
The Tax Cuts and Jobs Act of 2017 (TCJA) was enacted on December 22, 2017, TCJA reduced the U.S. federal corporate tax rate from
35%
to
21%
effective January 1, 2018. At
December 31, 2017
, we made a reasonable estimate of the effects on our existing deferred tax balances and effective tax rate for the deductibility of officer's compensation, the acquisition of InfoZen and assets that qualify for an immediate deduction. Our accounting for those items, as impacted by the TCJA, is now complete and no material adjustments were required. The re-measurement of the deferred taxes at
December 31, 2017
due to the decrease in the federal corporate tax rate resulted in a decrease to income tax expense of
$50.6 million
and reduced the 2017 effective tax rate by
52.0%
. After the 2017 corporate tax return was filed the adjustment related to the re-measurement of the deferred taxes changed by an immaterial amount.
At
December 31, 2018
, we had state and foreign net operating losses of approximately
$10.3 million
and
$5.7 million
, respectively. The state net operating losses expire beginning
2020
through
2036
. We recorded a full valuation allowance against the foreign net operating losses and a partial valuation allowance against the state net operating losses, as we do not believe those losses will be fully utilized in the future.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Gross unrecognized tax benefits at beginning of year
|
$
|
220
|
|
|
$
|
293
|
|
|
$
|
519
|
|
Lapse in statute of limitations
|
(86
|
)
|
|
(105
|
)
|
|
(285
|
)
|
Increases in tax positions for prior years
|
36
|
|
|
—
|
|
|
—
|
|
Increases in tax positions for current year
|
320
|
|
|
32
|
|
|
59
|
|
Gross unrecognized tax benefits at end of year
|
$
|
490
|
|
|
$
|
220
|
|
|
$
|
293
|
|
The total liability for gross unrecognized tax benefits as of
December 31, 2018
,
2017
and
2016
includes
$0.4 million
,
$0.2 million
and
$0.2 million
, respectively, of unrecognized net tax benefits which, if ultimately recognized, would reduce our annual effective tax rate in a future period.
We are subject to income taxes in the U.S., various state and foreign jurisdictions. Tax statutes and regulations within each jurisdiction are subject to interpretation and require significant judgment to apply. We are no longer subject to U.S. federal or non-U.S. income tax examinations by tax authorities for the years before 2014. We are no longer subject to U.S. state tax examinations by tax authorities for the years before 2013. We believe it is reasonably possible that
no
gross unrecognized tax benefits will be settled within the next year due to expirations of statute of limitations.
|
|
13.
|
Quarterly Financial Information (Unaudited)
|
The quarterly financial data reflects, in our opinion, all normal and recurring adjustments to present fairly the results of operations for such periods. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends. The following tables set forth selected unaudited quarterly financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
(in thousands, except per share data)
|
Revenues
|
$
|
473,236
|
|
|
$
|
491,044
|
|
|
$
|
497,205
|
|
|
$
|
497,072
|
|
Operating income
|
$
|
26,421
|
|
|
$
|
28,329
|
|
|
$
|
29,399
|
|
|
$
|
28,593
|
|
Income from operations before income taxes and equity method investments
|
$
|
25,706
|
|
|
$
|
27,757
|
|
|
$
|
28,827
|
|
|
$
|
28,315
|
|
Net income
|
$
|
20,067
|
|
|
$
|
19,915
|
|
|
$
|
21,923
|
|
|
$
|
20,192
|
|
|
|
|
|
|
|
|
|
Class A common stock:
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
26,115
|
|
|
26,339
|
|
|
26,421
|
|
|
26,536
|
|
Basic earnings per share
|
$
|
0.51
|
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
$
|
0.51
|
|
Diluted weighted average common shares outstanding
|
26,525
|
|
|
26,627
|
|
|
26,743
|
|
|
26,812
|
|
Diluted earnings per share
|
$
|
0.51
|
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
$
|
0.50
|
|
Class B common stock:
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
13,189
|
|
|
13,189
|
|
|
13,189
|
|
|
13,188
|
|
Basic earnings per share
|
$
|
0.51
|
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
$
|
0.51
|
|
Diluted weighted average common shares outstanding
|
13,189
|
|
|
13,189
|
|
|
13,189
|
|
|
13,188
|
|
Diluted earnings per share
|
$
|
0.51
|
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
$
|
0.50
|
|
|
|
|
2017
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
(in thousands, except per share data)
|
Revenues
|
$
|
418,374
|
|
|
$
|
413,694
|
|
|
$
|
422,665
|
|
|
$
|
462,285
|
|
Operating income
|
$
|
24,390
|
|
|
$
|
24,935
|
|
|
$
|
23,140
|
|
|
$
|
25,729
|
|
Income from operations before income taxes and equity method investments
|
$
|
24,159
|
|
|
$
|
24,651
|
|
|
$
|
23,114
|
|
|
$
|
25,318
|
|
Net income
|
$
|
15,028
|
|
|
$
|
15,561
|
|
|
$
|
15,182
|
|
|
$
|
68,370
|
|
|
|
|
|
|
|
|
|
Class A common stock:
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
25,547
|
|
|
25,618
|
|
|
25,684
|
|
|
25,886
|
|
Basic earnings per share
|
$
|
0.39
|
|
|
$
|
0.40
|
|
|
$
|
0.39
|
|
|
$
|
1.75
|
|
Diluted weighted average common shares outstanding
|
25,778
|
|
|
25,827
|
|
|
25,929
|
|
|
26,353
|
|
Diluted earnings per share
|
$
|
0.39
|
|
|
$
|
0.40
|
|
|
$
|
0.39
|
|
|
$
|
1.73
|
|
Class B common stock:
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
13,191
|
|
|
13,191
|
|
|
13,191
|
|
|
13,189
|
|
Basic earnings per share
|
$
|
0.39
|
|
|
$
|
0.40
|
|
|
$
|
0.39
|
|
|
$
|
1.75
|
|
Diluted weighted average common shares outstanding
|
13,191
|
|
|
13,191
|
|
|
13,191
|
|
|
13,189
|
|
Diluted earnings per share
|
$
|
0.39
|
|
|
$
|
0.40
|
|
|
$
|
0.39
|
|
|
$
|
1.73
|
|