NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
UNAUDITED
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|
1.
|
Description of the Business
|
ManTech International Corporation (depending on the circumstances, “ManTech” “Company” “we” “our” “ours” or “us”) provide mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. In business more than 50 years, we excel in full-spectrum cyber, data collection & analytics, enterprise information technology (IT), systems and software engineering solutions that support national and homeland security.
The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the U.S., have been condensed or omitted pursuant to those rules and regulations. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We recommend that you read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
, previously filed with the SEC. We believe that the condensed consolidated financial statements in this Form 10-Q reflect all adjustments that are necessary to fairly present the financial position, results of operations and cash flows for the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results that can be expected for the full year.
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3.
|
Revenue from Contracts with Customers
|
On January 1, 2018, we adopted Accounting Standards Codification (ASC) 606,
Revenue from Contracts with Customers
using the modified retrospective method applied to those contracts that were not substantially complete as of January 1, 2018. ASC 606 outlines a five-step model whereby revenue is recognized as performance obligations within the contract are satisfied. ASC 606 also requires new, expanded disclosures regarding revenue recognition. We recognized the cumulative effect of adopting ASC 606 as an increase to the 2018 opening balance of retained earnings in the amount of
$0.8 million
, with the impact primarily related to fixed-price contracts.
We derive revenue from contracts with customers primarily from contracts with the U.S. government in the areas of defense, intelligence, homeland security and other federal civilian agencies. Substantially all of our revenue is derived from services and solutions provided to the U.S. government or to prime contractors supporting the U.S. government, including services by our employees and our subcontractors, and solutions that include third-party hardware and software that we purchase and integrate as a part of our overall solutions. Customer requirements may vary from period-to-period depending on specific contract and customer requirements. We provide our services and solutions under three types of contracts: cost-reimbursable, fixed-price and time-and-materials. Under cost-reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and paid a fee representing the profit margin negotiated between us and the contracting agency, which may be fixed or performance based. Under fixed-price contracts, we perform specific tasks for a fixed price. Fixed-price contracts may include either a product delivery or specific service performance over a defined period. Under time-and-materials contracts, we are reimbursed for labor at fixed hourly rates and generally reimbursed separately for allowable materials, costs and expenses at cost. We typically recognize revenue for time and material contracts under the "right to invoice" model.
For contracts that do not meet the criteria to measure performance as a right to invoice, or under the series guidance, we utilize an Estimate at Completion process to measure progress toward completion. We typically estimate progress towards completion based on cost incurred or direct labor incurred. As part of this process, we review information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenue and costs. The risks and opportunities include judgments about the ability and cost to achieve the contract milestones and other technical contract requirements. We make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the timing in which we recognize revenue on our contracts. For the
three months ended
March 31, 2019
, the aggregate impact of adjustments in contract estimates increased our revenue by
$3.2 million
.
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.
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Three months ended
March 31,
|
2019
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|
2018
|
Cost-reimbursable
|
$
|
359,765
|
|
|
$
|
309,047
|
|
Fixed-price
|
47,102
|
|
|
116,171
|
|
Time-and-materials
|
95,063
|
|
|
48,018
|
|
Revenue
|
$
|
501,930
|
|
|
$
|
473,236
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|
|
|
|
|
|
|
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|
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|
Three months ended
March 31,
|
2019
|
|
2018
|
Department of Defense and intelligence agencies
|
$
|
389,829
|
|
|
$
|
333,914
|
|
Federal civilian agencies
|
101,188
|
|
|
128,233
|
|
State agencies, international agencies and commercial entities
|
10,913
|
|
|
11,089
|
|
Revenue
|
$
|
501,930
|
|
|
$
|
473,236
|
|
|
|
|
|
|
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|
Three months ended
March 31,
|
2019
|
|
2018
|
Prime contractor
|
$
|
446,519
|
|
|
$
|
422,233
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|
Subcontractor
|
55,411
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|
|
51,003
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|
Revenue
|
$
|
501,930
|
|
|
$
|
473,236
|
|
|
|
|
|
|
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|
Three months ended
March 31,
|
2019
|
|
2018
|
U.S.
|
$
|
494,660
|
|
|
$
|
466,025
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|
International
|
7,270
|
|
|
7,211
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|
Revenue
|
$
|
501,930
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|
|
$
|
473,236
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|
The following table discloses contract receivables (in thousands):
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|
March 31, 2019
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|
December 31, 2018
|
Billed receivables
|
$
|
304,214
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|
|
$
|
301,716
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|
Unbilled receivables
|
92,843
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|
|
109,895
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|
Allowance for doubtful accounts
|
(6,206
|
)
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|
(6,233
|
)
|
Receivables—net
|
$
|
390,851
|
|
|
$
|
405,378
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|
Receivables at
March 31, 2019
are expected to be substantially collected within one year except for approximately
$0.9 million
, of which
100%
is related to receivables from sales to the U.S. government or from contracts in which we acted as a subcontractor to other contractors selling to the U.S. government. We have one contract which accounts for
11.4%
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):
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|
March 31, 2019
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|
December 31, 2018
|
Contract liabilities
|
$
|
28,830
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|
|
$
|
28,209
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|
For the
three months ended
March 31, 2019
, the amount of revenue that was included in the opening contract liabilities balance was
$18.0 million
.
The remaining performance obligation as of
March 31, 2019
is
$2.7 billion
. The following table discloses when we expect to recognize the remaining performance obligation as revenue (in billions):
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For the remaining nine months ending December 31, 2019
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|
For the year ending
|
|
|
|
December 31, 2020
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|
December 31, 2021
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|
Thereafter
|
$
|
1.4
|
|
|
$
|
0.8
|
|
|
$
|
0.4
|
|
|
$
|
0.1
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|
The Financial Accounting Standards Board (FASB) issued ASC 842,
Leases
, to increase transparency and comparability among organizations by requiring the recognition of right of use (ROU) assets and lease liabilities on the balance sheet. Most prominent among the changes in ASC 842 is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. We are also required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.
We elected to adopt ASC 842 on January 1, 2019, resulting in us recording operating lease liabilities of
$129.6 million
and operating lease right of use assets of
$118.7 million
. We elected the practical expedient to recognize the lease payments related to short-term leases as profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payment is incurred. We also elected the following transition related practical expedients: not to reassess whether expired or existing contracts are or contain leases, not to reassess lease classification as determined under ASC 840 and not to reassess initial direct costs from any existing lease. We also elected the practical expedient as an accounting election not to separate nonlease components from lease components on all classes of underlying assets. Our leases include nonlease components such as common area maintenance (CAM), utilities and operating expenses. We also implemented internal controls and key system functionality to enable the preparation of financial information upon adoption. ASC 842 had a material impact on our condensed consolidated balance sheets, but did not have an impact on our condensed consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged.
We determine if a contract is or contains a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of identified property or equipment (an identified asset) for a period of time in exchange for consideration. We have the right to control the use of the identified asset when we have both of the following: the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset. In making this determination, we consider all relevant facts and circumstances. We reassess whether a contract is or contains a lease only if the terms and conditions of the contract are changed. We account for lease components and nonlease components associated with a lease as a single lease component. Operating leases are included in Operating lease ROU assets, Operating lease liabilities—current and Operating lease liabilities—long term on our condensed consolidated balance sheets. Finance leases are included in Property and equipment—net, Accounts payable and other accrued expenses and Other long-term liabilities on our condensed consolidated balance sheets.
Our ROU asset is recognized as the lease liability, any initial indirect costs and any prepaid lease payments, less any lease incentives. Our lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Our lease payments consist of amounts relating to the use of the underlying asset during the lease term, specifically fixed payments, payment to be made in optional periods when we are reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease and the amounts probable of being owned by us under residual
guarantees. Our variable lease payments are excluded in measuring ROU asset and lease liability because they do not depend on an index or a rate or are not in substance fixed payments. We exclude lease incentives and initial direct cost incurred from our lease payments. Our leases typically do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.
For operating leases, after lease commencement, we measure our lease liability for each period at the present value of any remaining lease payments, discounted by using the rate determined at lease commencement. In our condensed consolidated statement of income, we recognize a single operating lease expense calculated on a straight-line basis over the remaining lease term. The amortization of the ROU asset increases each year as a result of the declining lease liability balance. Variable lease payments are not recognized in the measurement of the lease liability - they are recognized in the period in which the related obligation has been incurred.
For finance leases, after lease commencement, we measure our lease liability by using the effective interest rate method. In each period, the lease liability will be increased to reflect the interest that is accrued on the related lease liability by using the appropriate discount rate, offset by a decrease in the lease liability resulting from the periodic lease payments. We recognize the ROU asset at cost, reduced by any accumulated depreciation. The ROU asset is depreciated on a straight-line basis. Together, the interest expense and amortization expense result in a front-loaded expense profile. We will present interest expense and depreciation expense separately on our condensed consolidated statement of income.
We have operating and finance leases for real estate, transportation vehicles and equipment. Our variable lease payments do not depend on an index or a rate or are not in substance fixed payments. Our leases have remaining lease terms of
0.1 years
to
11 years
, some of which include options to extend the leases for up to
14 years
, and some of which include options to terminate the leases within
1 year
. Our transportation vehicles and equipment leases include a residual value guarantee, which is a guarantee made to the lessor that the value of the underlying asset returned to the lessor at the end of the lease will be at least a specific amount. We sublease some of our real estate lease space, resulting in sublease income of
$23 thousand
as of the
three months ended
March 31, 2019
. We do not have any leases that have not yet commenced due to construction or design of the underlying asset. We recognize payments related to short-term leases (less than one year) as profit or loss on a straight-line basis over the lease term and variable leases payments in the period in which the obligation for those payment is incurred. As such, our short-term lease expense as of
March 31, 2019
under ASC 842 was
$1.4 million
. For the
three months ended
March 31, 2019
, we incurred variable lease costs of
$0.5 million
.
The balance sheet information related to our leases was as follows (dollars in thousands):
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|
|
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|
March 31, 2019
|
Operating Leases
|
|
Operating lease right of use assets
|
$
|
119,807
|
|
|
|
Operating lease liabilities—current
|
$
|
26,260
|
|
Operating lease liabilities—long term
|
104,465
|
|
Total operating lease liabilities
|
$
|
130,725
|
|
Finance Leases
|
|
Property and equipment—gross
|
$
|
504
|
|
Accumulated depreciation
|
(109
|
)
|
Property and equipment—net
|
$
|
395
|
|
|
|
Accounts payable and other accrued expenses
|
$
|
112
|
|
Other long-term liabilities
|
293
|
|
Total finance lease liabilities
|
$
|
405
|
|
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
Three months ended,
March 31, 2019
|
Operating lease expenses
|
$
|
7,789
|
|
|
|
Depreciation of right of use assets
|
$
|
110
|
|
Interest on lease liabilities
|
9
|
|
Finance lease expenses
|
$
|
119
|
|
The weighted average information related to leases was a follows:
|
|
|
|
|
March 31, 2019
|
Weighted Average Remaining Lease Term
|
|
Operating leases
|
5 years
|
|
Finance leases
|
4 years
|
|
Weighted Average Discount Rate
|
|
Operating leases
|
4
|
%
|
Finance leases
|
5
|
%
|
Future minimum lease payments under non-cancellable leases as of
March 31, 2019
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Financing Leases
|
For the nine months ended December 31, 2019
|
$
|
22,331
|
|
|
$
|
118
|
|
2020
|
31,704
|
|
|
135
|
|
2021
|
28,610
|
|
|
115
|
|
2022
|
24,941
|
|
|
109
|
|
2023
|
20,661
|
|
|
12
|
|
Thereafter
|
16,404
|
|
|
—
|
|
Total future minimum lease payments
|
144,651
|
|
|
489
|
|
Less imputed interest
|
(13,926
|
)
|
|
(84
|
)
|
Total
|
$
|
130,725
|
|
|
$
|
405
|
|
Under ASC
260
,
Earnings per Share
, the two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under that method, basic and diluted earnings per share data are presented for each class of common stock.
In applying the two-class method, we determined that undistributed earnings should be allocated equally on a per share basis between Class A and Class B common stock. Under our Certificate of Incorporation, the holders of the common stock are entitled to participate ratably, on a share-for-share basis as if all shares of common stock were of a single class, in such dividends as may be declared by the Board of Directors. During the
three months ended
March 31, 2019
and
2018
, we declared and paid quarterly dividends in the amount of
$0.27
per share and
$0.25
per share, respectively, on both classes of common stock.
Basic earnings per share has been computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period in which the shares were outstanding. Diluted earnings per share have been computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares that were outstanding during each period.
The net income available to common stockholders and weighted average number of common shares outstanding used to compute basic and diluted earnings per share for each class of common stock are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
2019
|
|
2018
|
Distributed earnings
|
$
|
10,749
|
|
|
$
|
9,867
|
|
Undistributed earnings
|
10,369
|
|
|
10,200
|
|
Net income
|
$
|
21,118
|
|
|
$
|
20,067
|
|
|
|
|
|
Class A common stock:
|
|
|
|
Basic net income available to common stockholders
|
$
|
14,116
|
|
|
$
|
13,333
|
|
Basic weighted average common shares outstanding
|
26,584
|
|
|
26,115
|
|
Basic earnings per share
|
$
|
0.53
|
|
|
$
|
0.51
|
|
|
|
|
|
Diluted net income available to common stockholders
|
$
|
14,157
|
|
|
$
|
13,403
|
|
Effect of potential exercise of stock options
|
235
|
|
|
410
|
|
Diluted weighted average common shares outstanding
|
26,819
|
|
|
26,525
|
|
Diluted earnings per share
|
$
|
0.53
|
|
|
$
|
0.51
|
|
|
|
|
|
Class B common stock:
|
|
|
|
Basic net income available to common stockholders
|
$
|
7,002
|
|
|
$
|
6,734
|
|
Basic weighted average common shares outstanding
|
13,188
|
|
|
13,189
|
|
Basic earnings per share
|
$
|
0.53
|
|
|
$
|
0.51
|
|
|
|
|
|
Diluted net income available to common stockholders
|
$
|
6,961
|
|
|
$
|
6,664
|
|
Diluted weighted average common shares outstanding
|
13,188
|
|
|
13,189
|
|
Diluted earnings per share
|
$
|
0.53
|
|
|
$
|
0.51
|
|
For the
three months ended
March 31, 2019
and
2018
, options to purchase
514,224
shares and
310,745
shares, respectively, were outstanding but not included in the computation of diluted earnings per share because the options' effect would have been anti-dilutive. For the
three months ended
March 31, 2019
and
2018
, there were
51,089
shares and
203,854
shares, respectively, issued from the exercise of stock options. For the
three months ended
March 31, 2019
and
2018
there were
72,188
shares and
86,233
shares issued from the vesting of restricted stock units.
|
|
6.
|
Property and Equipment
|
Major classes of property and equipment are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Furniture and equipment
|
$
|
105,934
|
|
|
$
|
97,577
|
|
Leasehold improvements
|
43,529
|
|
|
43,065
|
|
Finance leases
|
504
|
|
|
—
|
|
Property and equipment—gross
|
149,967
|
|
|
140,642
|
|
Accumulated depreciation and amortization
|
(95,488
|
)
|
|
(89,215
|
)
|
Property and equipment—net
|
$
|
54,479
|
|
|
$
|
51,427
|
|
Depreciation and amortization expense related to property and equipment for the
three months ended
March 31, 2019
and
2018
was
$6.3 million
and
$5.9 million
, respectively.
|
|
7.
|
Goodwill and Other Intangible Assets
|
There was no change in the carrying amount of goodwill during the
three months ended
March 31, 2019
. The change in the carrying amount of goodwill during the year ended
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
Goodwill Balance
|
Goodwill at December 31, 2017
|
$
|
1,084,560
|
|
Acquisition fair value adjustment
|
1,246
|
|
Goodwill at December 31, 2018
|
$
|
1,085,806
|
|
Other intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Contract and program intangible assets
|
$
|
355,932
|
|
|
$
|
205,977
|
|
|
$
|
149,955
|
|
|
$
|
355,932
|
|
|
$
|
201,298
|
|
|
$
|
154,634
|
|
Capitalized software cost for internal use
|
51,836
|
|
|
34,699
|
|
|
17,137
|
|
|
50,925
|
|
|
33,597
|
|
|
17,328
|
|
Total other intangible assets—net
|
$
|
407,768
|
|
|
$
|
240,676
|
|
|
$
|
167,092
|
|
|
$
|
406,857
|
|
|
$
|
234,895
|
|
|
$
|
171,962
|
|
Amortization expense relating to intangible assets for the
three months ended
March 31, 2019
and
2018
was
$5.8 million
and
$7.1 million
. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):
|
|
|
|
|
For the remaining nine months ending December 31, 2019
|
$
|
16,814
|
|
For the year ending:
|
|
December 31, 2020
|
$
|
21,758
|
|
December 31, 2021
|
$
|
19,028
|
|
December 31, 2022
|
$
|
16,434
|
|
December 31, 2023
|
$
|
13,464
|
|
December 31, 2024
|
$
|
12,199
|
|
Revolving Credit Facility
—We maintain a credit facility with a syndicate of lenders led by Bank of America, N.A, as sole administrative agent. The credit agreement provides for a
$500 million
revolving credit facility, with a
$75 million
letter of credit sublimit and a
$30 million
swing line loan sublimit. The credit agreement also includes an accordion feature that permits us to arrange with the lenders for the provision of additional commitments. The maturity date is
August 17, 2022
.
Borrowings under our credit agreement are collateralized by substantially all of our assets and those of our Material Subsidiaries (as defined in the credit agreement) and bear interest at one of the following variable rates as selected by us at the time of borrowing: a London Interbank Offer Rate based rate plus market-rate spreads (
1.25%
to
2.25%
based on our consolidated total leverage ratio) or Bank of America's base rate plus market spreads (
0.25%
to
1.25%
based on our consolidated total leverage ratio).
The terms of the credit agreement permit prepayment and termination of the loan commitments at any time, subject to certain 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
three months ended
March 31, 2019
and
2018
, we were in compliance with the financial covenants under the credit agreement.
There was
$96.0 million
and
$7.5 million
outstanding on our revolving credit facility at
March 31, 2019
and
December 31, 2018
, respectively. The maximum available borrowing under the revolving credit facility at
March 31, 2019
was
$396.3 million
. As of
March 31, 2019
, we were contingently liable under letters of credit totaling
$7.7 million
, which reduces our availability to borrow under our revolving credit facility.
|
|
9.
|
Commitments and Contingencies
|
Contracts with the U.S. government, including subcontracts, are subject to extensive legal and regulatory requirements and, from time-to-time, agencies of the U.S. government, in the ordinary course of business, investigate whether our operations are conducted in accordance with these requirements and the terms of the relevant contracts. U.S. government investigations of us, whether related to our U.S. government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting activities. Management believes it has adequately reserved for any losses that may be experienced from any investigation of which it is aware. The Defense Contract Audit Agency has substantially completed our incurred cost audits through 2016 with no material adjustments. The remaining audits for 2017 through 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 reasonably possible 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 disclosed an amount of potential loss as of
March 31, 2019
.
We have
$7.7 million
outstanding on our letter of credit, of which
$14 thousand
is related to an outstanding performance bond in connection with a contract between ManTech MENA, LLC and Jadwalean International Operations and Management Company to fulfill technical support requirements for the Royal Saudi Air Force.
|
|
10.
|
Stock-Based Compensation
|
Our 2016 Management Incentive Plan (the Plan) was designed to attract, retain and motivate key employees. The types of awards available under the Plan include, among others, stock options, restricted stock and restricted stock units (RSUs). 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 31
st
of the previous year. On
January 2, 2019
, there were
596,422
additional shares made available for issuance under the Plan. Through
March 31, 2019
, the Board of Directors has authorized the issuance of up to
15,148,321
shares under this Plan. Through
March 31, 2019
, the remaining aggregate number of shares of our common stock available for future grants under the Plan was
6,685,056
. The Plan expires in
March 2026
.
The Plan is administered by the compensation committee of our Board of Directors, along with its delegates. Subject to the express provisions of the Plan, the committee has the Board of Directors’ authority to administer and interpret the Plan, including the discretion to determine the exercise price, vesting schedule, contractual life and the number of shares to be issued.
Stock Compensation Expense
—For the
three months ended
March 31, 2019
and
2018
, we recorded
$1.3 million
and
$1.1 million
of stock-based compensation expense.
No
compensation expense of employees with stock awards, including stock-based compensation expense, was capitalized during the periods. For the
three months ended
March 31, 2019
and
2018
, we recorded
$0.2 million
and
$1.1 million
, respectively, to income tax benefit related to 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 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
three months ended
March 31, 2019
and
2018
, we issued options that expire
five years
from the date of grant.
Fair Value Determination
—We have used the Black-Scholes-Merton option pricing model to determine the fair value of our awards on the date of grant. We will reconsider the use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that cannot be reasonably estimated under this model.
The following weighted-average assumptions were used for option grants during the
three months ended
March 31, 2019
and
2018
:
|
|
•
|
Volatility
—The expected volatility of the options granted was estimated based upon historical volatility of our share price through weekly observations of our trading history.
|
|
|
•
|
Expected life of options
—The expected life of options granted to employees was determined from historical exercises of the grantee population. The options had graded vesting over
three years
in equal installments beginning on the first anniversary of the date of grant and a contractual term of
five years
.
|
|
|
•
|
Risk-free interest rate
—The yield on zero-coupon U.S. Treasury strips was used to extrapolate a forward-yield curve. This “term structure” of future interest rates was then input into a numeric model to provide the equivalent risk-free rate to be used in the Black-Scholes-Merton model based on the expected term of the underlying grants.
|
|
|
•
|
Dividend Yield
—The Black-Scholes-Merton valuation model requires an expected dividend yield as an input. We have calculated our expected dividend yield based on an expected annual cash dividend of
$1.08
per share.
|
The following table summarizes weighted-average assumptions used in our calculations of fair value for the
three months ended
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
2019
|
|
2018
|
Volatility
|
26.99
|
%
|
|
26.34
|
%
|
Expected life of options
|
3 years
|
|
|
3 years
|
|
Risk-free interest rate
|
2.39
|
%
|
|
2.46
|
%
|
Dividend yield
|
2.00
|
%
|
|
2.00
|
%
|
Stock Option Activity
—The weighted-average fair value of options granted during the
three months ended
March 31, 2019
and
2018
, as determined under the Black-Scholes-Merton valuation model, was
$10.04
and
$9.96
, respectively. Option grants that vested during the
three months ended
March 31, 2019
and
2018
had a combined fair value of
$1.2 million
and
$0.7 million
, respectively.
The following table summarizes stock option activity for the year ended
December 31, 2018
and the
three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Aggregate Intrinsic Value
(in thousands)
|
|
Weighted Average Remaining Contractual Life
|
Stock options outstanding at December 31, 2017
|
1,169,408
|
|
|
$
|
35.88
|
|
|
$
|
16,731
|
|
|
|
Granted
|
466,828
|
|
|
$
|
54.87
|
|
|
|
|
|
Exercised
|
(420,524
|
)
|
|
$
|
30.85
|
|
|
$
|
12,411
|
|
|
|
Cancelled and expired
|
(122,312
|
)
|
|
$
|
43.85
|
|
|
|
|
|
Stock options outstanding at December 31, 2018
|
1,093,400
|
|
|
$
|
45.34
|
|
|
$
|
8,776
|
|
|
|
Granted
|
250,231
|
|
|
$
|
53.52
|
|
|
|
|
|
Exercised
|
(51,089
|
)
|
|
$
|
32.61
|
|
|
$
|
1,079
|
|
|
|
Cancelled and expired
|
(21,265
|
)
|
|
$
|
49.48
|
|
|
|
|
|
Stock options outstanding at March 31, 2019
|
1,271,277
|
|
|
$
|
47.39
|
|
|
$
|
8,846
|
|
|
4 years
|
|
|
|
|
|
|
|
|
Stock options exercisable at March 31, 2019
|
423,532
|
|
|
$
|
38.93
|
|
|
$
|
6,392
|
|
|
3 years
|
The following table summarizes non-vested stock options for the
three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Fair Value
|
Non-vested stock options at December 31, 2018
|
774,402
|
|
|
$
|
8.77
|
|
Granted
|
250,231
|
|
|
$
|
10.04
|
|
Vested
|
(157,473
|
)
|
|
$
|
7.38
|
|
Cancelled
|
(19,415
|
)
|
|
$
|
8.95
|
|
Non-vested stock options at March 31, 2019
|
847,745
|
|
|
$
|
9.40
|
|
Unrecognized compensation expense related to non-vested awards was
$7.3 million
as of
March 31, 2019
, which is expected to be recognized over a weighted-average period of
2 years
.
Restricted Stock
—Under the Plan, we have issued restricted stock. A restricted stock award is an issuance of shares that cannot be sold or transferred by the recipient until the vesting period lapses. Restricted stock issued to members of our Board of Directors vest on the
one year
anniversary of the grant date. The related compensation expense is recognized over the service period and is based on the grant date fair value of the stock. The grant date fair value of the restricted stock is equal to the closing market price of our common stock on the date of grant.
Restricted Stock Activity
— There was no restricted stock activity during the
three months ended
March 31, 2019
. The following table summarizes the restricted stock activity during the year ended
December 31, 2018
.
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Fair Value
|
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 have issued RSUs. RSUs are not actual shares, but rather a right to receive shares in the future. The shares are not issued and the employee cannot sell or transfer shares prior to vesting and have no voting rights until the RSUs vest. Employees who are granted RSUs do not receive dividend payments during the vesting period. Our employees have been granted performance-based RSUs and time-based RSUs. Performance-based RSUs result in the delivery of shares only if (a) performance criteria is met and (b) the employee remains employed, in good standing, through the date of the performance period.
Time-based RSUs vest 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
2019
and
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 non-vested RSU activity during the year ended
December 31, 2018
and the
three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Fair Value
|
Non-vested RSUs at December 31, 2017
|
161,343
|
|
|
$
|
31.36
|
|
Granted
|
76,713
|
|
|
$
|
53.97
|
|
Vested
|
(87,200
|
)
|
|
$
|
28.40
|
|
Forfeited
|
(13,260
|
)
|
|
$
|
38.98
|
|
Non-vested RSUs at December 31, 2018
|
137,596
|
|
|
$
|
45.11
|
|
Granted
|
88,955
|
|
|
$
|
51.60
|
|
Vested
|
(53,688
|
)
|
|
$
|
40.56
|
|
Forfeited
|
(3,267
|
)
|
|
$
|
52.09
|
|
Non-vested RSUs at March 31, 2019
|
169,596
|
|
|
$
|
49.81
|
|
Management has evaluated subsequent events after the balance sheet date through the financial statements issuance date for appropriate accounting and disclosure.
Acquisition of Kforce Government Solutions
On April 1, 2019, we completed the acquisition of Kforce Government Solutions (KGS). KGS was a wholly owned subsidiary of the publicly traded commercial technology and staffing company Kforce, Inc. KGS provides IT solutions, transformation and management consulting, data analytics - most notably in the healthcare IT market. This acquisition will also expand our presence with important customers such as the Department of Veteran Affairs (VA). As specialists in serving the IT needs of defense and federal civilian agencies, KGS complements and builds on our core capabilities and solutions, adding the high-value specialty of health care IT. KGS has delivered innovation and sustainable solutions that transformed technology and business operations to drive enhanced mission execution for these customers. In addition to the VA, KGS's customers include the National Science Foundation, the Federal Reserve System, Defense Threat Reduction Agency, U.S. Air Force and U.S. Transportation Command. We funded the acquisition with cash on hand and borrowings under on revolving credit facility.
The preliminary purchase price was
$115.0 million
.