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EX-32 - EXHIBIT 32 - MANTECH INTERNATIONAL CORPmant12-31x2017ex32.htm
EX-31.2 - EXHIBIT 31.2 - MANTECH INTERNATIONAL CORPmant12-31x2017ex312.htm
EX-31.1 - EXHIBIT 31.1 - MANTECH INTERNATIONAL CORPmant12-31x2017ex311.htm
EX-23.1 - EXHIBIT 23.1 - MANTECH INTERNATIONAL CORPmant12-31x2017ex231.htm
EX-21.1 - EXHIBIT 21.1 - MANTECH INTERNATIONAL CORPmant12-31x2017ex211.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 000-49604
ManTech International Corporation
(Exact name of registrant as specified in its charter) 
__________________________________________
 
Delaware
22-1852179
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
12015 Lee Jackson Highway, Fairfax, VA
22033
(Address of principal executive offices)
(Zip Code)

(703) 218-6000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
 
Name of each exchange on which registered
 
Class A Common Stock, Par Value $0.01 Per Share
 
Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2017 was $1.06 billion (based on the closing price of $41.38 per share on June 30, 2017, as reported by the Nasdaq Global Select Market).
There were the following numbers of shares outstanding of each of the registrant's classes of common stock as of February 21, 2018: ManTech International Corp. Class A Common Stock, $0.01 par value per share, 26,040,507 shares; ManTech International Corp. Class B Common Stock, $0.01 par value per share, 13,189,245 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement to be filed with the Securities Exchange Commission pursuant to Regulation 14A in connection with the registrant's 2018 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K. Such definitive Proxy Statement will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.



TABLE OF CONTENTS

 
Page
 
 
 
 
 
 
 
 






PART I

In this document, unless the context indicates otherwise, the terms “Company” and “ManTech” as well as the words “we,” “our,” “ours” and “us” refer to both ManTech International Corporation and its consolidated subsidiaries. The term “registrant” refers only to ManTech International Corporation, a Delaware corporation.

Industry and Market Data

Industry and market data used throughout this Annual Report on Form 10-K were obtained through surveys and studies conducted by third parties, industry and general publications. We have not independently verified any of the market data obtained from these third-party sources, nor have we validated any assumptions underlying such data.

Cautionary Note Regarding Forward-Looking Statements

All statements and assumptions contained in this Annual Report on Form 10-K that do not relate to historical facts constitute "forward-looking statements." These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include the use of words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate," "plan" and words and terms of similar substance in connection with discussions of future events, situations or financial performance. While these statements represent our current expectations, no assurance can be given that the results or events described in such statements will be achieved.

Forward-looking statements may include, among other things, statements with respect to our financial condition, results of operations, prospects, business strategies, competitive position, growth opportunities, and plans and objectives of management. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of our control, and include, without limitations, the risks and uncertainties discussed in Item 1A "Risk Factors" in Part I of this Annual Report on Form 10-K.
 
Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to, the following:

Failure to maintain our relationship with the U.S. government, or the failure to compete effectively for new contract awards or to retain existing U.S. government contracts;

Inability to recruit and retain a sufficient number of employees with specialized skill sets or necessary security clearances who are in great demand and limited supply;

Adverse changes in U.S. government spending for programs we support, whether due to changing mission priorities, socio-economic policies that reduce contracts that we may bid on, cost reduction and efficiency initiatives by our customers, or federal budget constraints generally;

Issues relating to competing effectively for awards procured through the competitive bidding process, including the adverse impact of delays caused by competitors' protests of contract awards received by us;

Failure to obtain option awards, task orders or funding under contracts;

Failure to realize the full amount of our backlog, or adverse changes in the timing of receipt of revenues under contracts included in backlog;

Renegotiation, modification or termination of our contracts, or failure to perform in conformity with contract terms or our expectations;

Disruption of our business or damage to our reputation resulting from security breaches in customer systems, internal systems or service failures (including as a result of cyber or other security threats), or employee or subcontractor misconduct;

Failure to successfully integrate acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions;

Increased exposure to risks associated with conducting business internationally;

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Adverse changes in business conditions that may cause our investments in recorded goodwill to become impaired;

Non-compliance with, or adverse changes in, complex U.S. government laws, procurement regulations or processes; and

Adverse results of U.S. government audits or other investigations of our government contracts.

We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to update any forward-looking statement made herein following the date of this Annual Report, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

Item 1.
Business

Corporate Overview and Background

We provide mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. Now in our 50th year, we excel in full-spectrum cyber, data collection & analytics, enterprise IT, systems engineering and software application development solutions that support national and homeland security. We are able to leverage our technical capabilities, our intimate knowledge of our customers' missions, and our experience providing a wide array of solutions and services to help our customers meet some of their greatest challenges and succeed in their most important endeavors. We provide services that support missions of national significance, such as military operations readiness and wellness, terrorist threat detection, information security and border protection.

We were co-founded by George J. Pedersen in 1968 as a New Jersey corporation, starting with a single U.S. Navy contract. We reincorporated as a Delaware corporation shortly before our initial public offering in February 2002. Since then we have grown substantially. Our annual revenues have increased from approximately $400 million at the end of 2001 to $1.72 billion in 2017. Additional financial information is provided in this Annual Report under Item 8 “Financial Statements and Supplemental Data.”

Our Solutions and Services

We combine deep domain understanding and technical capability to deliver comprehensive information technology (IT), systems engineering and other services and solutions, primarily in support of mission-critical programs for the intelligence community, the Department of Defense (DoD) and federal civilian agencies including the diplomatic, homeland security, healthcare and space communities. We integrate our broad capabilities into tailored solutions to meet the evolving requirements of our customers' long-term programs. The following solution sets are aligned with the long-term needs of our customers:

Cyber;
Enterprise IT;
Software, Application and Systems Development;
Multi-Disciplined Intelligence;
Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance and Reconnaissance (C5ISR);
Program Protection and Mission Assurance;
Systems Engineering;
Training; and
Supply Chain Management and Logistics.

Cyber

We provide full-spectrum cyber, encompassing defense, resilience, offense, analytics and compliance. Our cyber solutions and services includes security operations, threat intelligence, incident response and forensics, boundary defense, security systems engineering, infrastructure security, and computer forensics and exploitation. Our professionals tackle the most challenging problems facing the nation, preventing, identifying and neutralizing external cyber attacks, engineering tailored defensive security solutions and controls, developing robust insider threat detection programs, creating enterprise vulnerability management programs and supporting offensive and exploitation efforts.  Our forensics and incident response capabilities can provide our customers with additional insight and evidence for post-attack assessments, assisting our customers with efforts to strengthen their security posture. We offer customers insight into their infrastructure and the opportunity to deny, disrupt and degrade attempts to compromise our

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customers' business operations and reputation.

Enterprise IT

We develop, implement and sustain solutions that leverage technology across an enterprise delivering services that improve mission performance and reduce costs for our customers. Solutions typically involve hardware and software to support the core technology infrastructure, such as data centers, cloud services, e-mail or desktop computing and managed services. Specific applications include IT service management, help desk, data center consolidation, enterprise architecture, mobile computing and device management, network operations and infrastructure, virtualization/cloud computing and migration, network and database administration, enterprise systems development and management, infrastructure as a managed service, data collection and analytics including predictive and other types of analytics. We evaluate our customers' enterprise infrastructure with the goal of enhancing security, increasing efficiency, reducing system footprint and lowering total cost of ownership. We are at the forefront of helping our customers migrate to new, innovative enterprise IT management methodologies, including fully-outsourced, managed services models.

Software, Application and Systems Development

We develop, modify and maintain software solutions and complex systems that link different computing systems and software applications to act as a coordinated whole. This solution set includes a broad array of full lifecycle services, including requirements analysis; planning, design, implementation, integration and enhancement; testing, deployment, maintenance and quality assurance; and documentation and configuration management. Our software and systems development activities support all major software development lifecycle methodologies including Agile, DevOps, DevSecOps and hybrid methodologies. We develop software solutions and systems across many domains and mission-specific applications. Our experienced software engineers and developers design, develop, integrate, operate and sustain mission-critical software applications and systems across defense, intelligence and federal civilian customers worldwide.

Multi-Disciplined Intelligence

We provide specialized professional and technical solutions and mission support services in the interest of national security. Specific solutions include support to strategic and tactical intelligence systems, networks and facilities; development and integration of collection and analysis systems and techniques; and support to the development and application of analytical techniques to counterintelligence, homeland security operations, human intelligence operations/training and counterterrorist operations. We provide signals intelligence collection, analysis and dissemination, intelligence analysis and linguistics support, as well as cyber threat intelligence and insider threat support. We develop, integrate and maintain advanced signal processing systems to support classified programs and facilities that collect and process intelligence. We provide counterterrorism operations support and counterintelligence analytical expertise.

Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance and Reconnaissance

We are a proven leader in the design, development, analysis, implementation and support of all aspects of C5ISR systems and technology. Our experience includes land, sea, air, space and cyber domains, to include command-and-control infrastructure, intelligence, surveillance and reconnaissance platforms and sensors (manned and unmanned), and the communication, dissemination and analysis of data. Our C5ISR solutions and capabilities span the entire lifecycle continuum to include modeling and simulation; test and evaluation; supporting telecommunications systems and terrestrial sensors; developing, testing and incorporating new technology; and providing training for solutions needed by our customers. We have developed, tested, fielded and supported systems for the U.S. government across the globe, and have provided C4ISR and subsequent C5ISR operations and maintenance support for every major military deployment since Operation Desert Storm.

Program Protection and Mission Assurance

We support highly-classified programs with secrecy management and security infrastructure services. Our services include vulnerability assessment, insider threat protection, exposure analysis, secrecy architecture design, security policy development and implementation, lifecycle acquisition program security, (OPSEC, INFOSEC, COMSEC and PERSEC), anti-tamper, export compliance support, foreign disclosure, system security engineering, security awareness and training, comprehensive security support services and technical certification and accreditation services. Additionally, as part of our program protection support, we provide network architecture planning and implementation services and systems engineering services within secure environments requiring the application of multi-level security policies across the enterprise. We provide comprehensive mission assurance in the development, acquisition, manufacturing, testing, integration and site support for launch support and systems safety for mission-critical systems.

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Systems Engineering

With five decades of experience, we are recognized across markets for our operational, engineering and technical expertise across major domains, including land, sea, air, space and cyberspace. We apply systems engineering across a wide array of large-scale system development and acquisition programs used by government and industry. We provide world-class talent, proven management and technical processes to manage some of the most complex projects throughout their lifecycle, from concept through deployment. The systems engineering services we provide include requirement analysis, development and management; systems development and integration; enterprise architecture and concept of operations; and systems engineering and technical assistance. Our test and evaluation services are closely linked with our systems engineering capabilities, and include specific competencies in test engineering, preparation and planning; modeling and simulation; test range operations and management; systems and cyber vulnerability; and independent validation and verification.

Training

We deliver advanced training solutions using a range of environments including live, virtual, constructive, immersive and gaming scenarios. We leverage dedicated subject matter experts, a virtual cyber training range, and our longstanding, acclaimed learning center, ManTech University, in developing customized training solutions for our customers. We have also developed an online interactive multimedia instruction authoring environment that allows us to create optimal environments for "sharable content object reference" models to enhance e-learning. Specific offerings include mobile training teams; instructional systems design; web-based and instructor-led training; live, virtual, constructive training; and interactive courseware and simulations. We meet the global mission support demands of our customers by providing training and education tools in the most effective manner for our customers, whether in the classroom, in virtualized environments, or at customer locations in the U.S. and around the world.

Supply Chain Management and Logistics

We provide supply chain management and logistics services involving the use of sophisticated systems that secure the entire supply chain, from supplies to data. Our comprehensive set of integrated logistics and supply chain management services include supply chain management support (such as warehousing, logistics management, shipping/receiving and global property management), maintenance and reset of ground vehicles and electronics, business process outsourcing, transportation using contracted and government provided services and other field services support (including fielding, training and operations support). Our tools and systems can predict requirements and provide secure, real-time tracking analysis and reporting data to meet our customers' needs. We have overseen some of the most important mission-critical logistics and supply chain management efforts for the U.S. government and have provided a full range of logistics and maintenance support across the globe.

Our Employees

Our customer's success is the end result of the hard work of our talented and dedicated employees.  At year end, our workforce consisted of approximately 7,600 employees, 67% of whom hold security clearances and over 47% of whom are veterans.  In 2017, we continued to successfully attract, train, develop and retain highly skilled people across our organization by providing our employees with rewarding and challenging opportunities that meaningfully impact our customers’ missions. 

Our Customers

We derive the vast majority of our revenues from U.S. government customers. We have successful, long-standing relationships with these customers, having supported many of them for almost half a century. For each of the last three years we have derived approximately 98% of our annual revenues from our U.S. government customers, with at least 79% of our revenues each such year from intelligence and defense customers.

Foreign Operations

We treat sales to U.S. government customers as sales within the U.S., regardless of where the services are performed. U.S. revenues were approximately 98%, 98% and 100% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. International revenues were approximately 2%, 2% and 0% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively.


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Backlog

At December 31, 2017, our backlog was $7.1 billion, of which $1.4 billion was funded backlog. At December 31, 2016, our backlog was $4.9 billion, of which $1.0 billion was funded backlog. We expect that approximately 23% of our total backlog will be recognized as revenue prior to December 31, 2018.

We define backlog as our estimate of the remaining future revenue from existing signed contracts, assuming the exercise of all options relating to such contracts and including executed task orders issued under Indefinite Quantity/Indefinite Delivery (ID/IQ) contracts. We also include an estimate of revenue for solutions that we believe we will be asked to provide in the future under the terms of ID/IQ contracts for which there are established patterns of revenues.

We define funded backlog to be the portion of backlog for which funding currently is appropriated and allocated to the contract by the purchasing agency or otherwise authorized for payment by the customer upon completion of a specified portion of work. Our funded backlog does not include the full value of our contracts because Congress often appropriates funds for a particular program or contract on a yearly or quarterly basis, even though the contract may call for performance over a much longer period of time.

A variety of circumstances or events may cause changes in the amount of our backlog and funded backlog, including the execution of new contracts, the extension of existing contracts, the non-renewal or completion of current contracts, the early termination of contracts, and adjustments to estimates for previously included contracts. Changes in the amount of our funded backlog also are affected by the funding cycles of the government.

Patents, Trademarks, Trade Secrets and Licenses

We own a limited number of patents. We also maintain a number of trademarks and service marks to identify and distinguish the goods and services we offer. While we protect our patents, marks, trade secrets and vital confidential information, our business does not depend on the existence or protection of such intellectual property.

Seasonality

Our business is not seasonal. However, in order to avoid the loss of unexpended fiscal year funds it is not uncommon for U.S. government agencies to award extra tasks or complete other contract actions in the weeks before the end of the U.S. government's fiscal year (GFY), which begins on October 1 and ends on September 30. Additionally, our quarterly results are impacted by the number of working days in a given quarter. There are generally fewer working days for our employees to generate revenues in the first and fourth quarters of our fiscal year.

Business Environment and Competitive Landscape

Our primary customer is the U.S. government, the largest consumer of services and solutions in the U.S. In U.S. GFY 2017, the U.S. government obligated approximately $306 billion on contracted services. Our principal focus is on the national security and defense of the U.S. homeland. The DoD is the largest purchaser of services and solutions in the U.S. government. With the U.S. GFY 2019 budget request of $686 billion, the DoD accounts for approximately 57% of the total discretionary budget.

We compete in a market that is shaped by customer requirements and federal budget priorities and constraints. Our key competitors currently include divisions of large defense contractors, as well as a number of mid-size U.S. government contractors with specialized capabilities. Because of the diverse requirements of U.S. government customers and the highly competitive nature of large procurements, we frequently collaborate with these and other companies to compete for large contracts and we bid against these companies in other situations.

The budget environment continued to improve in 2017. Federal spending grew in U.S. GFY 2017 for a second consecutive year following several years of budget constraints and uncertain funding levels. Congressional actions have alleviated much of the potential impact of sequestration historically but Budget Control Act (BCA) caps remain longer term. We are currently operating under a Continuing Resolution as Congress works to finalize the details of a bipartisan budget comprise, which would provide visibility into funding and spending levels for the GFY 2018 and GFY 2019 substantially above the BCA caps. The improved budget clarity resulted in our customers making more award decisions and procuring services to meet mission needs on a more regular and predictable basis. We also believe that our customers' use of lowest price/technically acceptable (LPTA) procurements, which contributed to pricing pressures and lower margins in prior years, has leveled off. Under the current Administration, we believe the defense budget outlook has improved meaningfully and we expect defense spending increases relative to prior years.


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The Administration has cited significant global threats, readiness and force structure needs within the military, diplomatic, homeland and border security, and cyber aggressions by both state and non-state actors, as priorities in establishing federal policy and budgets. Although the Administration's priorities will be subject to Congressional debate, we believe that the U.S. government's spending will remain robust in key areas that we are well positioned to serve, including national and homeland security programs, cyber security, sophisticated intelligence gathering and information sharing activities.

Company Information Available on the Internet

Our Internet address is www.mantech.com. Through links on the Investor Relations section of our website, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).

Item 1A.
Risk Factors

Set forth below are the risks that we believe are material to our investors. You should carefully consider the following risks, together with the other information contained in or incorporated by reference into this Annual Report on Form 10-K, including our consolidated financial statements and notes thereto. Any of the following risks could materially and adversely affect our business, financial condition, results of operations and prospects, as well as the actual outcome of matters as to which forward-looking statements are made in this Annual Report.

The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us, or those we currently deem to be immaterial, may also materially and adversely affect our business, financial condition or results of operations. This section contains forward-looking statements. You should refer to the explanation of the qualification and limitations of forward-looking statements set forth at the beginning of this Annual Report.

Risks Related to Our Business

We depend on contracts with the U.S. government for substantially all of our revenues. If our relationships with the U.S. government are harmed, our business, future revenues and growth prospects could be adversely affected.

We derive the vast majority of our revenues from our U.S. government customers. We expect that U.S. government contracts will continue to be the primary source of our revenues for the foreseeable future. For this reason, any issue that compromises our relationship with the U.S. government generally or any U.S. government agency that we serve could adversely and materially harm our business, prospects, financial condition or operating results. Among the key factors in maintaining our relationships with U.S. government agencies are our performance on our contracts and task orders, the strength of our professional reputation, compliance with applicable laws and regulations, and the strength of our relationships with our customers and client personnel. To the extent our reputation or relationships with U.S. government agencies is impaired, our revenue and operating profits could materially decline.

We derive most of our revenues from contracts awarded through competitive bidding processes, and our revenue and profitability may be adversely impacted if we fail to compete effectively in such processes, or if there are delays as a result of our competitors' protests of contract awards that we receive.

We derive a significant portion of revenues from U.S. government contracts awarded through a competitive bidding process. We do not anticipate that this will change in the foreseeable future. Our failure to compete effectively in this procurement environment would have a material adverse impact on our revenue and profitability. The competitive bidding process involves risk and significant costs to businesses operating in this environment including:

the substantial cost and managerial time and effort spent to prepare bids and proposals for contracts that may not be awarded to us;

the need to expend resources and make financial commitments (such as procuring leased premises) and bid on programs in advance of the completion of their design, which may result in unforeseen difficulties in execution, cost overruns, or, in the case of unsuccessful competitions, the loss of committed costs;

the expense and delays that may arise if our competitors protest or challenge contract awards made to us, and the risk that any such protest could result in the resubmission of bids on modified specifications, or in the termination, reduction or modification of the awarded contract; and

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the ability to accurately estimate the resources and costs structure required to service any contract we are awarded.

The current competitive environment has resulted in an increase in the number of bid protests from unsuccessful bidders on new program awards. It can take months to resolve protests by one or more of our competitors of contract awards we receive. Even where the protest does not result in us losing the awarded contract, the resulting delay in startup and funding of the work under such contracts may cause our actual results to differ materially and adversely from anticipated results.

If we are unable to win particular contracts that are awarded through the competitive bidding process, we may not be able to operate in the market for services that are provided under those contracts for the duration of those contracts, to the extent that there is no additional demand for such services. Our inability to win new contract awards over an extended period of time would have a material adverse effect on our business and results of operations.

We face aggressive competition from many competitors, which may adversely impact our profitability and growth prospects.

We operate in highly competitive markets and generally encounter intense competition to win contracts, which are usually subject to competitive bidding processes. We may not be able to continue to win competitively awarded contracts at historic levels. We compete with larger companies who may have greater financial resources than we have. We also compete with smaller, more specialized companies that may be able to concentrate their resources into highly-skilled niche markets. Our competitors may be able to provide our customers with different or greater capabilities or better contract terms than we can provide, including price, technical qualifications, past contract experience, geographic presence and the availability of qualified professional personnel. In particular, increased efforts by our competitors to meet U.S. government requirements for efficiency and cost reduction may require that we charge lower prices to pass along cost savings as a result of the 2017 Tax Act to the U.S. Government to win or retain contracts. If we lose business to our competitors or are forced to reduce our prices, our revenue and operating profits could decline.

We may fail to attract and retain skilled and qualified employees with requisite specialized skill sets or security clearances, which could impair our ability to effectively serve our clients, require more subcontracting work than is optimal, and limit our growth prospects.

Our business depends in large part upon our ability to attract and retain sufficient numbers of employees who have advanced IT and technical services skills. Often, these employees must also have some of the highest security clearances in the United States. Security clearances may take 12-24 months to complete depending upon the level of clearance and demand levels for cleared professionals. These employees are in great demand, and we compete intensely for such qualified personnel with other U.S. government contractors, the U.S. government, and private industry. Such personnel may remain a limited resource for the foreseeable future. If we are unable to recruit and retain a sufficient number of qualified employees or fail to obtain their appropriate security clearances in a timely manner, our ability to maintain and grow our business and effectively serve our clients could be limited and our future revenues and results of operations could be materially and adversely impacted. Furthermore, to the extent that we are unable to hire sufficient qualified employees to staff our contracts, we may be required to engage larger numbers of contracted personnel, which could reduce our profit margins. Even if we are able to attract the requisite skilled employees, the intense competition for such employees may result in attrition in our employee ranks, requiring us to expend additional resources to hire and train replacement personnel. The loss of services of key personnel could impair our ability to perform required services under some of our contracts, which could result in the termination of such contracts and limit our ability to win new business.

U.S. government spending and mission priorities could change in a manner that adversely affects our future revenues and limits our growth prospects.

Our business depends upon continued U.S. government expenditures on intelligence, defense, homeland security, federal health IT and other programs that we support. These expenditures have not remained constant over time, have been reduced in certain periods and, recently, have been affected by the U.S. government's efficiency and cost reduction efforts. Additionally, in recent years, in the face of growing national debt and long-term fiscal challenges facing the nation, spending levels for U.S. government programs generally, and in particular the U.S. defense budget, have come under pressure. During this period, Congress failed to approve budgets on a timely basis, eventually resulting in a government shutdown. Notwithstanding the recent stabilization of base budgets and improved budget clarity, discretionary spending may remain constrained, affect future levels of expenditures (or timing of expenditures), place pressure on operating margins, or result in a shift of expenditures to programs that we do not currently support. Each of these changes in U.S. government spending could adversely impact our business and future results of operations.


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The U.S. government may prefer minority-owned, small and small disadvantaged businesses; therefore, we may have fewer opportunities to bid for.

As a result of the Small Business Administration set-aside program, the U.S. government may decide to restrict certain procurements only to bidders that qualify as minority-owned, small, or small disadvantaged businesses. As a result, we would not be eligible to perform as a prime contractor on those programs and would be restricted to a maximum of 49% of the work as a subcontractor on those programs. An increase in the amount of procurements under the Small Business Administration set-aside program may impact our ability to bid on new procurements as a prime contractor or restrict our ability to recompete on incumbent work that is placed in the set-aside program. An increase in set-aside work, even where we are successful in teaming with a small business, could result in less revenue and profit for us.

We may not realize the full value of our backlog, which may result is lower revenues than anticipated.

As of December 31, 2017, our backlog was $7.1 billion, of which $1.4 billion was funded. Backlog is our estimate of the remaining future revenues from existing signed contracts, assuming the exercise of all options relating to such contracts and including executed task orders issued under ID/IQ contracts. Backlog also includes estimates of revenues for solutions that we believe we will be asked to provide in the future under the terms of ID/IQ contracts for which we have an established pattern of revenues. Our estimates are based on our experience using such vehicles and similar contracts. However, our estimates of future revenues are inexact and the receipt of these revenues are subject to various contingencies, many of which are beyond our control.

Historically, we have not realized all of the revenue included in our total backlog, and we may not realize all of the revenue included in our total backlog in the future. The actual accrual and recognition of revenues on programs that are included in backlog may never occur or may change for a number of reasons, including if a program is changed, delayed or cancelled; if the funding or scope of a contract is reduced, modified, delayed or terminated early (including as a result of a lack of appropriated funds or as a result of cost cutting initiatives); if an option that we have assumed would be exercised is not exercised; or if our estimates regarding the amount of services that we will provide under contracts prove to be inaccurate. Our unfunded backlog, in particular, contains management's estimate of amounts expected to be realized on unfunded contract work, and this work may never be realized as revenues. In addition, there can be no assurance that our backlog will result in actual revenue during any particular fiscal period, as the timing of the receipt of revenue under contracts included in backlog is subject to various contingencies, many of which are beyond our control.

If we fail to realize as revenues amounts included in our backlog, our future revenues and growth prospects may be adversely affected.

Our earnings and profitability may be adversely affected if we do not accurately estimate the expenses, time and resources necessary to satisfy some of our contractual obligations.

We enter into three types of U.S. government contracts for our services: cost-reimbursable, time-and-materials and fixed-price. Our customers have increasingly procured our services under cost-reimbursable contracts, which tend to offer lower margin opportunities than other contract types.

For our last three fiscal years, we derived revenues from such contracts as follows:

 
Year Ended
December 31,
 
2017
 
2016
 
2015
Cost-reimbursable
66
%
 
68
%
 
68
%
Fixed-price
21
%
 
19
%
 
21
%
Time-and-materials
13
%
 
13
%
 
11
%
Total
100
%
 
100
%
 
100
%

Each of these types of contracts, to varying degrees, involves some risk that we could underestimate our cost of fulfilling the contract, which may reduce the profit we earn or lead to a financial loss on the contract.

Under cost-reimbursable contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based. To the extent that the actual costs incurred in performing a cost-reimbursable contract are within the contract ceiling and allowable under the terms of the contract and applicable regulations, we are entitled to

10



reimbursement of our costs, plus a profit. However, if our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs. In particular, there is increasing focus by the U.S. government on the extent to which contractors are able to receive reimbursement for employee compensation.

Under fixed-price contracts, we perform specific tasks for a fixed price. Compared to cost-plus contracts, fixed-price contracts generally offer higher margin opportunities, but involve greater financial risk because we bear the impact of cost overruns, which could result in increased costs and expenses. Because we assume such risk, an increase in the percentage of fixed-price contracts in our contract mix, whether caused by a shift by the U.S. government toward a preference for fixed-price contracts or otherwise, could increase the risk that we suffer losses if we underestimate the level of effort required to perform the contractual obligations. As we expand our fixed price managed services business, we expect our mix of fixed price work will be increasing over time.

Under time-and-materials contracts, we are reimbursed for labor at negotiated hourly billing rates and for certain expenses. We assume financial risk on time-and-materials contracts because we assume the risk of performing those contracts at negotiated hourly rates.

Our profits could be adversely affected if our costs under any of these contracts exceed the assumptions we used in bidding for the contract.

U.S. government contracts contain provisions giving government customers a variety of rights that are unfavorable to us, including the ability to terminate a contract at any time for convenience.

U.S. government contracts contain provisions and are subject to laws and regulations that give the government rights and remedies not typically found in commercial contracts. These provisions may allow the government to:

Terminate existing contracts for convenience, as well as for default;

Reduce orders under, or otherwise modify, contracts or subcontracts;

Cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;

Decline to exercise an option to renew multi-year contracts or issue task orders in connection with multiple award contracts;

Suspend or debar us from doing business with the U.S. government or with a government agency;

Prohibit future procurement awards with a particular agency as a result of a finding of an organizational conflict of interest based upon prior related work performed for the agency that is deemed to give a contractor an unfair advantage over competing contractors;

Subject the award of contracts to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit offers for the contract or in the termination, reduction or modification of the awarded contract;

Terminate our facility security clearances and thereby prevent us from receiving classified contracts;

Claim rights in products and systems produced by us; and

Control or prohibit the export of our products and services.

If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may not even recover those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. If one of our government customers were to unexpectedly terminate, cancel or decline to exercise an option to renew one or more of our significant contracts or programs, our revenues and operating results would be materially harmed.


11



Internal system or service failures, including those resulting from cyber or other security threats, could disrupt our business and impair our ability to effectively provide services to our customers, which could damage our reputation and have a material adverse effect on our business and results of operations.

We create, implement and maintain IT and engineering systems, and provide services that are often critical to our customers' operations, some of which involve classified or other sensitive information in intelligence, national security and other classified or sensitive customer functions. We are subject to systems or service failures (both our own failures and the failures of third-party service providers), which may be caused by natural disasters, power shortages or terrorist attacks, as well as from continuous exposure to cyber and other security threats, including computer viruses, attacks by computer hackers and physical break-ins. We also face a heightened risk of a security breach or disruption due to our custody of classified and other sensitive information. Many government contractors have already been targeted and these types of attacks are likely to occur in the future. Attacks on our network or other systems could result in the loss of customer or proprietary data, interruptions or delays in our customers' business, and damage to our reputation, which could have a material adverse effect on our business and results of operations. In addition, the failure or disruption of our systems, communications or utilities could result in the interruption or suspension of our operations, which could have a material adverse effect on our business and results of operations.

If our systems, services or other applications have significant defects or errors, if we are successfully attacked by cyber or other security threats, or if we suffer delivery delays or otherwise fail to meet our customers' expectations, we may:

lose revenue due to adverse customer reaction;

be required to provide additional services to a customer at no charge;

incur additional costs related to monitoring and increasing our cyber security;

lose revenue due to the deployment of internal staff for remediation efforts instead of customer assignments;

receive negative publicity, which could damage our reputation and adversely affect our ability to attract or retain customers;

be unable to successfully market services that rely on the creation and maintenance of secure IT systems;

suffer claims for substantial damages, particularly as a result of any successful network or systems breach and exfiltration of customer information; or

incur significant costs complying with applicable federal or state laws, including laws governing protection of personal information.

In addition to costs related to contract performance or required corrective action, these failures may result in increased costs or loss of revenues if our customers terminate or reduce the scope of our contracts, or do not renew our contracts as a result of such failures.

Our errors and omissions insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to some types of future claims. A successful large claim against us could seriously harm our business, and any claim, whether successful or not, may result in significant legal and other costs, may be a distraction to our management and may harm our customer relationships.

Security breaches in customer systems could adversely affect our business.

Many of the programs we support and the systems we develop, install and maintain involve managing and protecting information involved in intelligence, national security and other classified or sensitive customer functions. Losses from a security breach in one of these systems could cause serious harm to our business, damage our reputation, and impact our eligibility for further work on critical systems for our current customers or for other U.S. government customers generally. Losses could also exceed the policy limits that we have for errors and omissions and product liability insurance coverage. Damage to our reputation or limitations on our eligibility for additional work could materially reduce our revenues.


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We face risks associated with our international business.

Our business operations are subject to a variety of risks associated with conducting business internationally, including:

Changes in or interpretations of foreign laws or policies that may adversely affect the performance of our services;

Political instability in foreign countries;

Conducting business in places where laws, business practices and customs are unfamiliar, unknown or inconsistent with U.S. requirements;

Customary business practices and other factors in foreign countries, including requirements to provide up-front performance bonds (guaranteed by a letter of credit from our lender), may involve uncertainties not associated with the business of contracting with the U.S. government, including potential difficulties in collecting receivables and fewer available remedies to the contractor in the event of contract disputes or contract terminations;
    
Imposition of limitations on or increase of withholding and other taxes on payments by foreign subsidiaries or joint ventures;
    
Currency fluctuations and devaluations and limitations on the conversion of foreign currencies into U.S. dollars; and

Compliance with a variety of international and U.S. laws, including the Foreign Corrupt Practices Act and U.S. export control regulations.

These regulatory, geopolitical and other risks could have an adverse effect on our business in the future, particularly if we increase the amount of work that we plan to perform internationally.

Acquisitions could result in operating difficulties, dilution or other adverse consequences to our business.

One of our key operating strategies is to selectively pursue acquisitions. Our acquisitions strategy poses many risks, including:

As a result of an acquisition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings;

We may have difficulty retaining an acquired company's key employees, customers or contracts (particularly with respect to awards not made on a full and open basis);

We may have difficulty integrating acquired businesses, resulting in unforeseen difficulties, such as incompatible accounting, information management or other control systems; and

Acquisitions may disrupt our business or distract management from other responsibilities.

In connection with any acquisition that we make, there may be liabilities that we fail to discover or that we inadequately assess. Acquired entities may not operate profitably or result in improved operating performance. Additionally, we may not realize anticipated synergies. If our acquisitions perform poorly, our business and financial results could be adversely affected.

If we fail to comply with complex laws and procurement regulations, we could lose business and be liable for various penalties or sanctions.

We must comply with laws and regulations relating to the formation, administration and performance of U.S. government contracts. These laws and regulations affect how we conduct business with our U.S. government customers. In complying with these laws and regulations, we may incur additional costs. Non-compliance could result in the imposition of fines and penalties, including contractual damages.

Among the more significant laws and regulations affecting our business are the following:

The Federal Acquisition Regulation and the Defense Federal Acquisitions Regulation, which comprehensively regulates the formation, administration and performance of U.S. government contracts;


13



Truthful Cost or Pricing Data, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations;

The Cost Accounting Standards and Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. government contracts;

Laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the export of certain products, services and technical data;

U.S. export controls, which apply when we engage in international work; and

The Foreign Corrupt Practices Act.

Failure to comply with these laws and regulations can lead to severe penalties, both civil and criminal, and can include suspension or debarment from contracting with the U.S. government.

Our contracting agency customers periodically review our compliance with laws and procurement regulations, as well as our performance under the terms of our U.S. government contracts. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties or administrative sanctions, including the termination of contracts, forfeiture of profits, the triggering of price reduction clauses, suspension of payments, fines and the suspension or debarment from doing business with federal government agencies.

Additionally, the False Claims Act provides for substantial damages and penalties where, for example, a contractor presents a false or fraudulent claim to the government for payment or approval. Actions under the False Claims Act may be brought by the government or by individuals on behalf of the government (who may then share a portion of any recovery).

If we fail to comply with these laws and regulations, we may also suffer harm to our reputation, which could impair our ability to win awards of contracts in the future or receive renewals of existing contracts. If we are subject to civil and criminal penalties and administrative sanctions or suffer harm to our reputation, our current business, future prospects, financial condition or operating results could be materially harmed.

Unfavorable U.S. government audits or results of other investigations could subject us to penalties or sanctions, adversely affect our profitability, harm our reputation and relationships with our customers or impair our ability to win new contracts.

The Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA) and other government agencies routinely audit and investigate government contracts and contractor systems. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The DCAA and DCMA also review the adequacy of, and compliance with, internal control systems and policies, including accounting, purchasing, estimating, compensation and management information systems. Allegations of impropriety or deficient controls could harm our reputation or influence the award of new contracts. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If any of our internal control systems or policies is found to be non-compliant or inadequate, payments may be withheld or suspended under our contracts, or we may be subject to increased government scrutiny and approval requirements that could delay or adversely affect our ability to invoice and receive timely payment for services we perform on our contracts. Adverse findings by DCAA or DCMA may also impair our ability to compete for and win new contracts with the U.S. government. As a result, a DCAA or DCMA audit could materially affect our competitive position and result in a substantial adjustment to our revenues and adversely affect our profitability.

Goodwill represents a significant asset on our balance sheet, and changes in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income.

As of December 31, 2017, our goodwill was $1.1 billion. The amount of our recorded goodwill may substantially increase in the future as a result of any acquisitions that we make. We evaluate the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists. Impairment analysis is based on several factors requiring judgment and the use of estimates, which are inherently uncertain and based on assumptions that may prove to be inaccurate. Additionally, material changes in our financial outlook, as well as events outside of our control, such as deteriorating market conditions for companies in our industry, may indicate a potential impairment. When there is an impairment, we are required to write down the recorded amount of goodwill, which is reflected as a charge against operating income.


14



Our failure to maintain strong relationships with other contractors, or the failure of other contractors with whom we have entered into a subcontract or prime contract relationship to meet their contractual obligations to us or our clients, could have a material adverse effect on our business and results of operations.

As a prime contractor, we often rely on other companies to perform some of the work under a contract, and we expect to continue to depend on relationships with other contractors for portions of our delivery of services and revenue for the foreseeable future. There is a risk that we may have disputes with our subcontractors regarding a variety of issues, including the quality and timeliness of work performed by the subcontractor, client concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract, or our hiring of the subcontractor’s personnel. In addition, if any of our subcontractors fail to deliver supplies or perform services on a timely basis, our ability to fulfill our obligations as a prime contractor may be jeopardized and could result in our customer terminating our prime contract for default. A termination for default could expose us to liability and have an adverse effect on our ability to compete for future contracts and orders.

We derive a portion of our revenues from contracts where we are a subcontractor to other companies that have contracted directly with the end customer. As a subcontractor, we often lack control over whether the terms of the prime contract are being satisfied. Poor performance on such contracts could impact our reputation, even if we perform as required. In addition, as a subcontractor, we may be unable to collect payments owed to us by the prime contractor, even if we have performed our obligations, if the prime contractor has failed to satisfy the terms of the prime contract.

We occasionally enter into joint ventures with other companies to jointly bid on and perform a particular project. The success of our joint ventures typically depends on the satisfactory performance of contractual obligations by our joint venture partners. If our partners do not meet their obligations, our joint ventures may be unable to adequately perform and deliver the contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture, and could also adversely affect our reputation.

Our business operations in foreign countries involve considerable risks and hazards. An accident or incident involving our employees or third parties could harm our reputation, affect our ability to compete for business, and if not adequately insured or indemnified, adversely affect our results of operations and financial condition.

We provide services in foreign countries that may be experiencing political unrest, war or terrorism. In these deployments, we are exposed to the risk of liabilities arising from accidents or incidents involving our employees or third parties. Accidents or incidents could involve significant injury or other claims by employees or third parties. We may encounter unexpected costs in connection with additional risks inherent to such deployments, such as increased insurance costs, as well as the repatriation of our employees or executives for reasons beyond our control.

We maintain insurance policies that mitigate risk and potential liabilities related to our foreign operations. Substantial claims in excess of our insurance coverage could adversely affect our operating performance and may result in additional expenses and possible loss of revenues. Even fully insured claims may result in negative publicity that could adversely affect our reputation among our customers and the public, which could cause us to lose existing and future contracts, make it more difficult to compete effectively for future contracts, and result in additional expenses and possible loss of revenues.

Covenants in the instruments governing our revolving credit facility may restrict our financial and operating flexibility.

We maintain a credit agreement with a syndicate of lenders led by Bank of America, N.A., as administrative agent. The credit agreement provides for a $500 million revolving credit facility. The maturity date for the credit agreement is August 17, 2022. The credit agreement requires us to comply with specified financial covenants, including the maintenance of certain consolidated total leverage ratios and a certain fixed charge coverage ratio, and contains negative covenants that, among other things, may limit or impose restrictions on the ability of us to incur additional indebtedness, make investments, make acquisitions and undertake certain other actions. Additionally, an event of default under the credit agreement could result in our creditors exercising rights that could have a material adverse effect on our business.


15



Risks Related to Our Stock

Our quarterly operating results may fluctuate.

Our quarterly revenues and operating results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our operating results on a period-to-period basis may be of limited significance in some cases, and as such, you should not rely on our past results as an indication of our future performance. In addition to the risk factors already identified in this section of our Form 10-K, a number of additional factors could cause our revenues, cash flows and operating results to vary from quarter-to-quarter, including:

Fluctuations in revenues earned on fixed-price contracts and contracts with a performance-based fee structure;

Commencement, completion or termination of contracts during any particular quarter;

Timing of significant bid and proposal costs;

Variable purchasing patterns under government contracts, blanket purchase agreements and ID/IQ contracts;

Seasonal or quarterly fluctuations in our workdays and staff utilization rates;

Strategic decisions, such as acquisitions, divestitures, spin-offs and joint ventures; and

Changes in the volume of purchase requests from customers for equipment and materials.

Because a relatively large amount of our expenses are fixed, cash flows from our operations may vary significantly as a result of changes in the level of services we provide under existing contracts and the number of contracts that are commenced, completed or terminated during any quarter. Depending on the nature of the contract, we may incur significant operating expenses during the start-up and early stages of large contracts, and in such cases we typically do not receive corresponding payments from the customer in that same quarter. We may also incur significant or unanticipated expenses when a contract expires, terminates or is not renewed.

We may change our dividend policy in the future.

We have maintained a regular cash dividend program since 2011. We anticipate continuing to pay quarterly dividends during 2018. However, any future payment of dividends, including the timing and amount of any such dividends, is at the discretion of our Board of Directors and may depend upon our earnings, liquidity, financial condition, alternate capital deployment opportunities, or any other factors that our Board of Directors considers relevant. A change in our regular cash dividend program could have an adverse effect on the market price of our common stock.

Mr. Pedersen, our Executive Chairman and Chairman of the Board, effectively controls us, and his interests may not be aligned with those of other stockholders.

As of December 31, 2017, Mr. Pedersen owned approximately 34% of our total outstanding shares of common stock. Holders of our Class B common stock are entitled to ten votes per share, while holders of our Class A common stock are entitled to only one vote per share. Mr. Pedersen beneficially owned 13,189,245 shares of Class B common stock as of December 31, 2017; thus he controlled approximately 84% of the combined voting power of our stock as of December 31, 2017. Accordingly, Mr. Pedersen controls the vote on substantially all matters submitted to a vote of our stockholders. As long as Mr. Pedersen beneficially owns a majority of the combined voting power of our common stock, he will have the ability, without the consent of our public stockholders, to elect all members of our Board of Directors and to control our management and affairs.

Mr. Pedersen's voting control may have the effect of preventing or discouraging transactions involving an actual or a potential change of control of us, regardless of whether a premium is offered over then-current market prices. Mr. Pedersen will be able to cause a change of control of us. Mr. Pedersen's voting control could adversely affect the trading price of our common stock if investors perceive disadvantages in owning stock in a company with such concentrated ownership.

Mr. Pedersen could also cause a registration statement to be filed and to become effective under the Securities Act of 1933, thereby permitting him to freely sell or transfer the shares of common stock that he owns, which could adversely affect the trading price of our stock.


16



Provisions in our charter documents and Delaware law may inhibit potential acquisition bids that you and other stockholders may consider favorable, and the market price of our Class A common stock may be lower as a result.

There are provisions in our certificate of incorporation and bylaws that make it more difficult for a third party to acquire, or attempt to acquire, control of us, even if a change of control were considered favorable by you and other stockholders. Among the provisions that could have an anti-takeover effect, are provisions relating to the following:

The high vote nature of our Class B common stock;

The ability of the Board of Directors to issue preferred stock;

The inability of stockholders to take action by written consent; and

The advance notice requirements for director nominations or other proposals submitted by our stockholders.

Item 1B.
Unresolved Securities and Exchange Commission Staff Comments

We have not received any written comments from the SEC staff regarding our periodic or current reports under the Exchange Act that remain unresolved.

Item 2.
Properties

We lease our facilities, including offices, warehouses and labs, and we do not own any facilities or real estate that are material to our operations. Our facilities are leased in close proximity to our customers. As of December 31, 2017, we leased 18 facilities throughout the metropolitan Washington, D.C. area and 37 facilities in other parts of the U.S., for approximately 1.8 million square feet. We also have employees working at customer sites throughout the U.S. and in other countries. Our leases expire between 2018 and 2025.

We believe our current facilities are adequate to meet our current needs. We do not anticipate any significant difficulty in renewing our leases or finding alternative space to lease upon the expiration of our leases and to support our future growth.

Item 3.
Legal Proceedings

We are subject to certain legal proceedings, government audits, investigations, claims and disputes that arise in the ordinary course of our business. Like most large government defense contractors, our contract costs are audited and reviewed on a continual basis by an in-house staff of auditors from the DCAA. In addition to these routine audits, we are subject from time-to-time to audits and investigations by other agencies of the U.S. government. These audits and investigations are conducted to determine if our performance and administration of our government contracts are compliant with contractual requirements and applicable federal statutes and regulations. An audit or investigation may result in a finding that our performance, systems and administration are compliant or, alternatively, may result in the government initiating proceedings against us or our employees, including administrative proceedings seeking repayment of monies, suspension and/or debarment from doing business with the U.S. government or a particular agency or civil or criminal proceedings seeking penalties and/or fines. Audits and investigations conducted by the U.S. government frequently span several years.

Although we cannot predict the outcome of these and other legal proceedings, investigations, claims and disputes, based on the information now available to us, we do not believe the ultimate resolution of these matters, either individually or in the aggregate, will have a material adverse effect on our business, prospects, financial condition or operating results.

Item 4.
Mine Safety Disclosures

Not applicable.


17



PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our Class A common stock has been quoted on the Nasdaq Stock Market under the symbol “MANT” since our initial public offering on February 7, 2002. The following table sets forth, for the periods indicated, the high and low prices of our shares of common stock, as reported on the Nasdaq Stock Market.

2017
High
 
Low
First Quarter
$42.64
 
$34.01
Second Quarter 
$41.49
 
$33.50
Third Quarter 
$44.20
 
$37.02
Fourth Quarter 
$53.29
 
$44.00
 
 
 
 
2016
High
 
Low
First Quarter
$33.10
 
$25.76
Second Quarter 
$39.15
 
$30.80
Third Quarter 
$41.69
 
$36.78
Fourth Quarter 
$45.52
 
$36.68

There is no established public market for our Class B common stock.

As of February 21, 2018, there were 63 holders of record of our Class A common stock and 3 holders of record of our Class B common stock. The number of holders of record of our Class A common stock is not representative of the number of beneficial holders because many of the shares are held by depositories, brokers or nominees.

Dividend Policy

During fiscal years 2017 and 2016, we declared and paid quarterly dividends, each in the amount of $0.21 per share, on all issued and outstanding shares of common stock. For 2018, we anticipate we will continue paying quarterly dividends, and on February 21, 2018, the Board of Directors declared a quarterly cash dividend in the amount of $0.25 per share; however any future dividends declared will be at the discretion of our Board of Directors and will depend, among other factors, upon our earnings, liquidity, financial condition, alternate capital allocation opportunities, or any other factors our Board of Directors deems relevant.

Recent Sales of Unregistered Securities

We did not issue or sell any securities in fiscal year 2017 that were not registered under the Securities Act of 1933.

Equity Compensation Plan Information

Information regarding our equity compensation plans and the securities authorized for issuance thereunder is incorporated by reference in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Purchase of Equity Securities

We did not purchase equity securities during the year ended December 31, 2017.


18



Performance Graph

The stock performance graph compares the cumulative total shareholder return of our common stock to the NASDAQ Composite-Total Returns Index, Standard & Poor's MidCap 400 Index, Russell 2000 Index and Standard & Poor's 1500 IT Consulting & Services Index. The period measured is December 31, 2012 to December 31, 2017. The graph assumes an investment of $100 in our common stock and each of the indices with reinvestment of all dividends.


mant12-31x20_chartx06438a06.jpg

19



Item 6.
Selected Financial Data

The selected financial data presented for each of the five years ended December 31, 2017 is derived from our audited consolidated financial statements. The selected financial data presented should be read in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

 
 Year Ended
December 31,
 
2017 (1)
 
2016
 
2015
 
2014 (2)
 
2013 (3)
 
(in thousands, except per share amounts)
Statement of Income and Loss Data:
 
 
 
 
 
 
 
 
 
Revenues
$
1,717,018

 
$
1,601,596

 
$
1,550,117

 
$
1,773,981

 
$
2,310,072

Operating income
$
98,194

 
$
90,963

 
$
84,886

 
$
94,816

 
$
22,243

Net income (loss)
$
114,141

 
$
56,391

 
$
51,127

 
$
47,294

 
$
(6,149
)
Basic earnings (loss) per share (Class A and B)
$
2.94

 
$
1.48

 
$
1.36

 
$
1.27

 
$
(0.17
)
Diluted earnings (loss) per share (Class A and B)
$
2.91

 
$
1.47

 
$
1.36

 
$
1.27

 
$
(0.17
)
Dividend per share
$
0.84

 
$
0.84

 
$
0.84

 
$
0.84

 
$
0.84

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital
$
138,879

 
$
229,659

 
$
189,276

 
$
195,491

 
$
453,560

Goodwill (4)
$
1,084,560

 
$
955,874

 
$
919,591

 
$
851,640

 
$
752,867

Total assets
$
1,744,475

 
$
1,598,464

 
$
1,506,424

 
$
1,487,402

 
$
1,723,402

Long-term debt
$
31,000

 
$

 
$

 
$

 
$
200,000

 
 
 
 
 
 
 
 
 
 
(1) The Tax Cuts and Jobs Act, enacted on December 22, 2017, reduces the U.S. corporate tax rate from 35% to 21% beginning in 2018. Due to the enactment of the Tax Cuts and Jobs Act, our income tax expense was reduced by $50.6 million for the year ended December 31, 2017 from the re-measurement of our existing deferred tax assets and liabilities.
(2) On April 15, 2014, we paid the redemption price plus accrued and unpaid interest on our 7.25% senior unsecured notes issued on April 13, 2010 for $200.0 million. As a result of the redemption of our 7.25% senior unsecured notes, we recorded a loss on the extinguishment of debt for $10.1 million as non-operating income.
(3) We recorded a non-cash goodwill impairment charge of $118.4 million.
(4) Over the past five years, we completed 9 acquisitions. In aggregate, these acquisitions have added $345.1 million in goodwill. For additional information on our recent acquisitions, see Note 3 "Acquisitions" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data."

Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the notes to those statements included in Item 8 “Financial Statements and Supplementary Data." This discussion contains forward-looking statements that involve risks and uncertainties. For a description of these forward-looking statements, refer to Part I “Cautionary Statement Concerning Forward-Looking Statements.” A description of factors that could cause actual results to differ materially from the results we anticipate include, but are not limited to, those discussed in Item 1A “Risk Factors,” as well as those discussed elsewhere in this Annual Report.

Overview

We provide mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. Now in our 50th year, we excel in full-spectrum cyber, data collection & analytics, enterprise IT, systems engineering and software application development solutions that support national and homeland security.

Federal spending grew in U.S. GFY 2017 for a second consecutive year following several years of budget constraints and uncertain funding levels. The U.S. GFY 2018 and GFY 2019 budget includes near term expansion of budgets for the Department of Defense related to readiness and force structure needs, which are generally viewed as favorable to our industry. However,

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Congressional funding appropriations continue to be debated in relation to policy priorities, national budget deficits, debt ceilings and the Budget Control Act (BCA). Entering 2018, we continue to operate under a Continuing Resolution while Congress details the funding priorities contained in the recently passed two year spending bill. This two year bill provides a framework for substantial increases in defense spending above BCA caps in GFY 2018 and GFY 2019. While the government operates under a Continuing Resolution, there is a potential risk of additional shutdowns which could adversely impact our business. Based on the Administration's stated priorities in dealing with significant global threats, readiness and force structure needs within the military, diplomatic, homeland and border security, and cyber aggressions by both state and non-state actors, we expect increases to defense spending relative to prior years.

Despite an improved outlook for defense spending, our industry remains competitive on price. To ensure our cost structure remains competitive, we will continually evaluate and adjust our levels of indirect spending to stay in line with the expected business opportunities. Our industry also remains competitive in attracting and retaining employees with the necessary skills and security clearances to perform the services we have promised in our contracts. Additionally, we will continue to pursue acquisitions that broaden our domain expertise and service offerings and/or establish relationships with new customers. Since going public in 2002, we have acquired and integrated 28 businesses into our operations. During 2017, we acquired InfoZen, LLC, 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.

Revenues

Substantially all of our revenues are derived from services and solutions provided to the U.S. government or to prime contractors supporting the U.S. government, including services provided 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. The following table shows revenues from each type of customer as a percentage of total revenues for the periods presented.

 
Year Ended
December 31,
 
2017
 
2016
 
2015
DoD and intelligence agencies
79
%
 
83
%
 
84
%
Federal civilian agencies
18
%
 
14
%
 
15
%
State agencies, international agencies and commercial entities
3
%
 
3
%
 
1
%
Total
100
%
 
100
%
 
100
%

Our prime contractor revenues as a percentage of our total revenues were 88% for the three years ended December 31, 2017, 2016 and 2015.

We provide our services and solutions under three types of contracts: cost-reimbursable; time-and-materials; and fixed-price.

Cost-reimbursable contracts-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 cost-reimbursable contracts we recognize revenues and an estimate of applicable fees earned as costs are incurred. We consider fixed fees under cost-reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the contract. For performance based fees under cost-reimbursable contracts, we recognize 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 customer approval.

Fixed-price contracts-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. Revenues on fixed-price contracts that provide for us to render services throughout a period are recognized as earned according to contract terms as the service is provided on a proportionate performance basis. For fixed-price contracts that provide for the delivery of a specific product with related customer acceptance provisions, revenues are recognized as those products are delivered and accepted.

Time-and-materials contracts-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 recognize revenues under time-and-materials contracts by multiplying the number of direct labor hours expended by the contract billing rates and adding the effect

21



of other billable direct costs.

Our contract mix varies from year-to-year due to numerous factors, including our business strategies and U.S. government procurement objectives. The following table shows revenues from each of these types of contracts as a percentage of total revenues for the periods presented.

 
Year Ended
December 31,
 
2017
 
2016
 
2015
Cost-reimbursable
66
%
 
68
%
 
68
%
Fixed-price
21
%
 
19
%
 
21
%
Time-and-materials
13
%
 
13
%
 
11
%
Total
100
%
 
100
%
 
100
%

Under cost-reimbursable contracts, there is limited financial risk, because we are reimbursed for all allowable direct and indirect costs. However, profit margins on this type of contract tend to be lower than on time-and-materials and fixed-price contracts.

Cost of Services

Cost of services primarily includes direct costs incurred to provide services and solutions to our customers. The most significant portion of these costs are direct labor costs, including salaries and wages, plus associated fringe benefits of our employees directly serving customers, in addition to the related management, facilities and infrastructure costs. Cost of services also includes other direct costs, such as the costs of subcontractors and outside consultants and third-party materials, including hardware or software that we purchase and provide to the customer as part of an integrated solution.

Changes in the mix of services and equipment provided under our contracts can result in variability in our contract margins. As we earn higher profits on our own labor services, we expect the ratio of cost of services as a percentage of revenues to decline when our labor services mix increases relative to subcontracted labor or third-party materials. Conversely, as subcontracted labor or third-party material purchases for customers increases relative to our own labor services, we expect the ratio of cost of services as a percentage of revenues to increase.

The proportion that cost of services bears to revenues varies in part based on our mix of revenues by contract type. In general, cost-reimbursable contracts are the least profitable of our government contracts but offer the lowest risk of loss. Under time-and-materials contracts, to the extent that our actual labor costs are higher or lower than the billing rates under the contract, our profit under the contract may either be greater or less than we anticipated or we may suffer a loss under the contract. In general, we realize a higher profit margin on work performed under time-and-materials contracts than cost-reimbursable contracts. Fixed-price contracts generally offer higher profit margin opportunities but can involve greater financial risk because we bear the impact of cost overruns in return for the full benefit of any cost savings.
 
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 included stock-based compensation, as well as depreciation and amortization expenses related to the general and administrative function. Depreciation and amortization expenses include the depreciation of computers, furniture and other equipment, the amortization of third party software we use internally, leasehold improvements and intangible assets. Intangible assets include customer relationships and contract backlogs acquired in business combinations, and are amortized over their estimated useful lives.

Interest Expense

Interest expense is primarily related to interest expense incurred or accrued under our outstanding borrowings on our debt and deferred financing charges.


22



Interest Income
 
Interest income is primarily from cash on hand and late invoice payments by the government.

Results of Operations

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Consolidated Statements of Income

The following table sets forth certain items from our consolidated statements of income and the relative percentages that certain items of expense and earnings bear to revenues as well as the year-over-year change from December 31, 2016 to December 31, 2017.

 
Year Ended
December 31,
 
Year-to-Year Change
 
2017
 
2016
 
2017
 
2016
 
2016 to 2017
 
Dollars
 
Percentages
 
Dollars
 
Percent
 
(dollars in thousands)
REVENUES
$
1,717,018

 
$
1,601,596

 
100.0
 %
 
100.0
%
 
$
115,422

 
7.2
 %
Cost of services
1,463,599

 
1,369,775

 
85.3
 %
 
85.5
%
 
93,824

 
6.8
 %
General and administrative expenses
155,225

 
140,858

 
9.0
 %
 
8.8
%
 
14,367

 
10.2
 %
OPERATING INCOME
98,194

 
90,963

 
5.7
 %
 
5.7
%
 
7,231

 
7.9
 %
Interest expense
(1,375
)
 
(1,097
)
 
 %
 
0.1
%
 
278

 
25.3
 %
Interest income
104

 
121

 
 %
 
%
 
(17
)
 
(14.0
)%
Other income (expense), net
319

 
83

 
 %
 
%
 
236

 
284.3
 %
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS
97,242

 
90,070

 
5.7
 %
 
5.6
%
 
7,172

 
8.0
 %
Benefit (provision) for income taxes
16,859

 
(33,786
)
 
1.0
 %
 
2.1
%
 
(50,645
)
 
(149.9
)%
Equity in gains of unconsolidated subsidiaries
40

 
107

 
 %
 
%
 
(67
)
 
(62.6
)%
NET INCOME
$
114,141

 
$
56,391

 
6.7
 %
 
3.5
%
 
$
57,750

 
102.4
 %

Revenues

The primary driver of our increase in revenues relates to revenues from new contract awards, growth on existing contracts and our acquisitions, which were offset by contracts and tasks that ended and reduced scope of work on some contracts. We expect revenues to increase in 2018 due to new contract awards and our recent acquisition.

Cost of services

The increase in cost of services was primarily due to increases in revenues. As a percentage of revenues, direct labor costs remained stable at 48% for both the years ended December 31, 2017 and 2016. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, decreased to 37% for the year ended December 31, 2017, compared to 38% for the same period in 2016. In 2018, we expect cost of services as a percentage of revenues to remain relatively stable as compared to 2017.

General and administrative expenses

The increase in general and administrative expenses was primarily due to an increase in incentive compensation from performance based plans, staffing increases to support the growth of our business, amortization of acquisition intangibles and bid and proposal spending. As a percentage of revenues, general and administrative expenses increased for the year ended December 31, 2017 as compared to the same period in 2016, due to the above mentioned spending increases. In 2018, we expect general and

23



administrative expenses as a percentage of revenues to decrease slightly as compared to 2017.

Interest expense

The increase in interest expense was primarily due to increased borrowings on our revolving credit facility to fund the acquisition of InfoZen LLC (InfoZen). For additional information on the acquisition of InfoZen see Note 3 "Acquisitions" to our consolidated financial statements in Item 8.

Benefit (provision) for income taxes

Our effective tax rate is affected by recurring items, such as the relative amount of income we earn in various taxing jurisdictions and their tax rates. It is also affected by discrete items that may occur in any given year, but are not consistent from year-to-year. Our effective income tax rate was (17)% and 37% for the years ended December 31, 2017 and 2016, respectively. The Tax Cuts and Jobs Act, enacted on December 22, 2017, reduces the U.S. corporate tax rate from 35% to 21% beginning in 2018. Due to the enactment of the Tax Cuts and Jobs Act, our income tax expense was reduced by $50.6 million for the year ended December 31, 2017 from a re-measurement of our existing deferred tax assets and liabilities. For additional information concerning the re-measurement adjustment see Note 12 "Income Taxes" to our consolidated financial statements in Item 8. Our effective tax rate was also favorably impacted by tax benefits from the stock based compensation and deferred compensation plans. We expect our effective income tax rate for the year ended December 31, 2018 to be 26%.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Consolidated Statements of Income

The following table sets forth certain items from our consolidated statements of income and the relative percentages that certain items of expense and earnings bear to revenues as well as the year-over-year change from December 31, 2015 to December 31, 2016.

 
Year Ended
December 31,
 
Year-to-Year Change
 
2016
 
2015
 
2016
 
2015
 
2015 to 2016
 
Dollars
 
Percentages
 
Dollars
 
Percent
 
(dollars in thousands)
REVENUES
$
1,601,596

 
$
1,550,117

 
100.0
%
 
100.0
%
 
$
51,479

 
3.3
 %
Cost of services
1,369,775

 
1,320,697

 
85.5
%
 
85.2
%
 
49,078

 
3.7
 %
General and administrative expenses
140,858

 
144,534

 
8.8
%
 
9.3
%
 
(3,676
)
 
(2.5
)%
OPERATING INCOME
90,963

 
84,886

 
5.7
%
 
5.5
%
 
6,077

 
7.2
 %
Interest expense
(1,097
)
 
(1,193
)
 
0.1
%
 
0.1
%
 
(96
)
 
(8.0
)%
Interest income
121

 
160

 
%
 
%
 
(39
)
 
(24.4
)%
Other income (expense), net
83

 
1,501

 
%
 
0.1
%
 
(1,418
)
 
94.5
 %
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS
90,070

 
85,354

 
5.6
%
 
5.5
%
 
4,716

 
5.5
 %
Provision for income taxes
(33,786
)
 
(34,366
)
 
2.1
%
 
2.2
%
 
(580
)
 
(1.7
)%
Equity in gains of unconsolidated subsidiaries
107

 
139

 
%
 
%
 
(32
)
 
23.0
 %
NET INCOME
$
56,391

 
$
51,127

 
3.5
%
 
3.3
%
 
$
5,264

 
10.3
 %

Revenues

The primary driver of our increase in revenues relates to revenues from new contract awards, growth on existing contracts, including higher levels of material procurements and our acquisitions. These increases were offset by contracts and tasks that ended during 2016 and reduced scope of work on some contracts.


24



Cost of services

The increase in cost of services was primarily due to increases in revenues. As a percentage of revenues, direct labor costs decreased slightly to 48% for the year ended December 31, 2016, as compared to 49% for the same period in 2015. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, increased to 38% for the year ended December 31, 2016, compared to 37% for the same period in 2015.

General and administrative expenses

The decrease in general and administrative expenses was primarily due to the sale of ManTech Cyber Solutions International (MCSI) and cost reduction measures. As a percentage of revenues, general and administrative expenses decreased for the year ended December 31, 2016 as compared to the same period in 2015, due to the increase in revenues and reduced spending.

Other income (expense), net

The decrease in other income (expense), net was due to the gain on the sale of MCSI during 2015.

Provision for income taxes

Our effective tax rate is impacted by recurring items, such as tax rates and the relative amount of income we earn in various taxing jurisdictions and their tax rates. It is also affected by discrete items that may occur in any given year, but are not consistent from year-to-year. Our effective income tax rate was 37% and 40% for each of the years ended December 31, 2016 and 2015, respectively. The decrease in our effective tax rate is primarily due to favorable performance in our executive deferred compensation plan and changes in our state tax apportionments, as well as one-time items.

Backlog

For the years ended December 31, 2017, 2016 and 2015 our backlog was $7.1 billion, $4.9 billion and $4.1 billion, respectively, of which $1.4 billion, $1.0 billion and $1.0 billion, respectively, was funded backlog. The increase in our backlog is due to our receipt of new awards and the acquisition of InfoZen. The current trend is that contracts are awarded for a longer term, which increases the time over which backlog will be recognized as revenue. Backlog represents estimates that we calculate on a consistent basis. For additional information on how we compute backlog, see “Backlog” in Item 1 “Business.”

Liquidity and Capital Resources

Historically, our primary liquidity needs have been the financing of acquisitions, working capital, payment under our cash dividend program and capital expenditures. Our primary sources of liquidity are cash provided by operations and our revolving credit facility.

On December 31, 2017, our cash and cash equivalents balance was $9.5 million. There were $31.0 million in outstanding borrowings under our revolving credit facility at December 31, 2017. At December 31, 2017, we were contingently liable under letters of credit totaling $15.3 million, which reduced our ability to borrow under our revolving credit facility by that amount. The maximum available borrowings under our revolving credit facility at December 31, 2017 were $453.7 million.

Generally, cash provided by operating activities is adequate to fund our operations, including payments under our regular cash dividend program. Due to short-term fluctuations in our cash flows and level of operations, it may become necessary from time-to-time to increase borrowings under our revolving credit facility to meet cash demands.

Cash Flows from Operating Activities

Our operating cash flow is primarily affected by our ability to invoice and collect from our clients in a timely manner, our ability to manage our vendor payments and the overall profitability of our contracts. We bill most of our customers monthly after services are rendered. Our accounts receivable days sales outstanding (DSO) were 61 and 73 for the quarters ended December 31, 2017 and 2016, respectively. For the years ended December 31, 2017, 2016 and 2015, our net cash flows from operating activities were $153.0 million, $95.8 million and $153.9 million, respectively. The increase in net cash flows from operating activities during the year ended December 31, 2017 when compared to the same period in 2016 was primarily due to an increase in net income, timing of receivables, accounts payable and accrued salaries and other related expenses, offset by an increase in income tax payments. The decrease in net cash flows from operating activities during the year ended December 31, 2016 compared to the same period in 2015 was primarily due to significant improvements in our DSO, our ability to manage vendor payments and

25



higher net income.

Cash Flows from Investing Activities

Our cash flow from investing activities consists primarily of business combinations, purchases of property and equipment and investments in capitalized software for internal use. For the years ended December 31, 2017, 2016 and 2015, our net cash outflows from investing activities were $219.0 million, $72.1 million and $112.7 million, respectively. For the year ended December 31, 2017, our net cash outflows from investing activities were primarily due to the acquisition of InfoZen and capital expenditures. The increase in capital expenditures was primarily due to the purchase of assets in support of a new managed IT services contract. Managed IT contracts typically require upfront purchases of equipment and infrastructure to support the promised services in the contract. Managed IT contracts also require asset replenishments throughout the contract's life which will increase our capital expenditures above historical amounts. For the year ended December 31, 2016, our net cash outflows from investing activities were primarily due to the acquisition of Oceans Edge, Inc., Cyber Division and Edaptive Systems LLC as well as capital expenditures. For the year ended December 31, 2015, our net cash outflows from investing activities were primarily due to the acquisitions of Knowledge Consulting Group, Inc. and Welkin Associates, Ltd., our investment in CounterTack Inc. and capital expenditures.

Cash Flows from Financing Activities

For the years ended December 31, 2017, 2016 and 2015, our net cash inflows (outflows) from financing activities were $10.6 million, $(10) thousand and $(23.6) million, respectively. For the year ended December 31, 2017, our net cash inflows from financing activities were primarily due to net borrowings under our revolving credit facility to fund the acquisition of InfoZen and proceeds from the exercise of stock options which were partially offset by dividend payments and debt issuance costs related the amendment of our credit facility. For the year ended December 31, 2016, our net cash outflows from financing activities were primarily due to dividends paid offset by the proceeds from the exercise of stock options and the excess tax benefits from the exercise of stock options. For the year ended December 31, 2015, our net cash outflows from financing activities were primarily due to our dividend payments.

Revolving Credit Facility

We maintain a credit agreement with a syndicate of lenders led by Bank of America, N.A., as sole administrative agent. 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. On August 17, 2017, we amended the credit agreement, which among other things increased the letter of credit sublimit to $75 million. We deferred $2.2 million in debt issuance costs, cumulatively over the agreement, which are amortized over the term of the credit agreement.

Borrowings under our credit agreement are collateralized by substantially all the assets of us and our Material Subsidiaries (as defined in the credit agreement) and bear interest at one of the following variable rates as selected by us at the time of borrowing: a London Interbank Offer Rate (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 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 consolidated 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, 2017 and 2016, we were in compliance with our financial covenants under the credit agreement.

There was $31.0 million and $0 outstanding on our revolving credit facility at December 31, 2017 and 2016, respectively.

Capital Resources

We believe the capital resources available to us from cash on hand, our remaining capacity under our revolving credit facility, and cash from our operations are adequate to fund our anticipated cash requirements for at least the next year. We anticipate financing our external growth from acquisitions and our longer-term internal growth through one or more of the following sources: cash from operations; use of our revolving credit facility; and additional borrowings of debt or issuance of equity.


26



Cash Management

To the extent possible, we invest our available cash in short-term, investment grade securities in accordance with our investment policy. Under our investment policy, we manage our investments in accordance with the priorities of maintaining the safety of our principal, maintaining the liquidity of our investments, maximizing the yield on our investments and investing our cash to the fullest extent possible. Our investment policy provides that no investment security can have a final maturity that exceeds six months and that the weighted average maturity of the portfolio cannot exceed 60 days. Cash and cash equivalents include cash on hand, amounts due from banks and short-term investments with maturity dates of three months or less at the date of purchase.

Dividend

During the years ended December 31, 2017 and 2016, we declared and paid quarterly dividends in the amount of $0.21 per share on both classes of common stock. On February 21, 2018, we declared a quarterly cash dividend in the amount of $0.25 per share, to be paid in March 2018. While we expect to continue the regular cash dividend program, any future dividends declared will be at the discretion of our Board of Directors and will depend, among other factors, upon our results of operations, financial condition and cash requirements, as well as such other factors our Board of Directors deems relevant.

Off-Balance Sheet Arrangements

In the ordinary course of business, we use letters of credit to satisfy certain contractual terms with our customers.  As of December 31, 2017, $15.3 million in letters of credit were issued but undrawn.  We have an outstanding performance bond in connection with a contract between ManTech MENA, LLC and Jadwalean International Operations and Management Company to fulfill technical support requirements for the Royal Saudi Air Force. This performance bond is guaranteed by a letter of credit in the amount of $15.2 million. We have off-balance sheet arrangements related to operating leases.  For a description of our operating leases, see Note 9 "Commitments and Contingencies" to our consolidated financial statements in Item 8 "Financial Statement and Supplementary Data."

Critical Accounting Estimates and Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Application of these policies is particularly important to the portrayal of our financial condition and results of operations. The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies, including the critical policies listed below, are more fully described in the notes to our consolidated financial statements included in this report.

Revenue Recognition and Cost Estimation

We recognize revenues when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable and collectability is reasonably assured. We have a standard internal process that we use to determine whether all required criteria for revenue recognition have been met.

Our revenues consist primarily of services provided by our employees and the pass through of costs for materials and subcontract efforts under contracts with our customers. Cost of services consists primarily of compensation expenses for program personnel, the fringe benefits associated with this compensation and other direct expenses incurred to complete programs, including cost of materials and subcontract efforts.

We derive the majority of our revenues from cost-plus-fixed-fee, cost-plus-award-fee, fixed-price or time-and-materials contracts. Revenues for cost-reimbursable contracts are recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For performance-based fees under cost-reimbursable contracts, we recognize 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, revenues are recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. For long-term fixed-price production contracts, revenues are recognized at a rate per unit as the units are delivered or by other methods to measure services provided. Revenues from other long-term fixed-price contracts are recognized ratably over the contract period or by other appropriate methods to measure services provided. Contract costs are expensed as incurred except for certain limited long-term contracts noted below.

27




For long-term contracts, specifically described in the scope section of Accounting Standards Codification (ASC) 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts, we apply the percentage of completion method. Under the percentage of completion method, income is 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 requires estimating the total revenues and total contract cost at completion of the contract. During the performance of long-term contracts, these estimates are periodically reviewed and revisions are made as required using the cumulative catch-up method of accounting. The impact on revenues and contract profit as a result of these revisions is included in the periods in which the revisions are made. This method can result in the deferral of costs or the deferral of profit on these contracts. Because we assume the risk of performing a fixed-price contract at a set price, the failure to accurately estimate ultimate costs or to control costs during performance of the work could result, and in some instances has resulted, in reduced profits or losses for such contracts. Estimated losses on contracts at completion are recognized when identified. In certain circumstances, revenues are recognized when contract amendments have not been finalized.

Accounting for Business Combinations, Goodwill and Other Intangible Assets

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. Such fair value assessments require judgments and estimates that can be affected by contract performance and other factors over time, which may cause final amounts to differ materially from original estimates.

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. We perform this review at the reporting unit level, which is one level below our one reportable segment.

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 value (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.
 

28



We have elected to perform our annual review as of October 31st of each calendar year. The results of our annual goodwill impairment test as of October 31, 2017 indicated that the estimated fair value of each reporting unit substantially exceeded its respective carrying value. In addition, management monitors events and circumstances that could result in an impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred between annual testing dates. Events that could cause the fair value of our long-lived assets to decrease include: changes in our business environment or market conditions; a material change in our financial outlook, including declines in expected revenue growth rates and operating margins; or a material decline in the market price for our stock. If any impairment were indicated as a result of a review, we would recognize a loss based on the amount by which the carrying amount exceeds the estimated fair value.

Due to the many variables inherent in the estimation of a reporting unit's fair value and the relative size of our recorded goodwill, differences in assumptions may have a material effect on the results of our goodwill impairment analysis.

Recently Issued But Not Yet Adopted Accounting Standards Updates

For information on the recently issued but not yet adopted Accounting Standards Updates, see Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data."

Contractual Obligations

Our contractual obligations as of December 31, 2017 are as follows (in thousands):

 
 
Payments Due By Period
Contractual Obligations
 
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
Debt obligations (1)
 
$
31,000

 
$

 
$

 
$
31,000

 
$

Operating lease obligations (2)
 
131,276

 
32,737

 
49,190

 
33,356

 
15,993

Other long-term liabilities (3)
 
13,048

 
2,435

 
4,406

 
3,492

 
2,715

Accrued defined benefit obligations (4)
 
1,150

 
124

 
238

 
221

 
567

Total
 
$
176,474

 
$
35,296

 
$
53,834

 
$
68,069

 
$
19,275

 
 
 
 
 
 
 
 
 
 
 
(1) We may elect to pay all of or a portion of this obligation earlier than contractually required. See Note 8 "Debt" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding debt and related matters.
(2) See Note 9 "Commitments and Contingencies" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding operating leases.
(3) Includes approximately $10.6 million of deferred rent liabilities and $0.2 million of gross unrecognized tax benefits. See Note 9 "Commitments and Contingencies" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding deferred rent liabilities. See Note 12 "Income Taxes" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding gross unrecognized tax benefits.
(4) Includes unfunded pension obligations related to nonqualified supplemental defined benefit pension plans for certain retired employees of an acquired company, which is included in the accrued retirement amount on our consolidated balance sheets. See Note 11 "Retirement Plans" to our consolidated financial statements in Item 8 "Financial Statements and Supplementary Data" for additional information regarding retirement plans.

Item 7A.
Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk relates to changes in interest rates for borrowings under our revolving credit facility. At December 31, 2017, we had $31.0 million outstanding on our revolving credit facility. Borrowings under our revolving credit facility bear interest at variable rates. A hypothetical 10% increase in interest rates would have a $22 thousand dollar effect on our interest expense for the year ended December 31, 2017.

We do not use derivative financial instruments for speculative or trading purposes. When we have excess cash, we invest in short-term, investment grade, interest-bearing securities. Our investments are made in accordance with an investment policy. Under this policy, no investment security can have a maturity exceeding six months and the weighted average maturity of the portfolio cannot exceed 60 days.


29



Item 8.
Financial Statements and Supplementary Data

Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements



30




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of ManTech International Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ManTech International Corporation and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Mclean, Virginia
February 23, 2018
We have served as the Company's auditor since 1999.


31



MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share and Per Share Amounts)
 
December 31,
 
2017
 
2016
ASSETS
 
 
 
Cash and cash equivalents
$
9,451

 
$
64,936

Receivables—net
311,410

 
320,677

Prepaid expenses and other
46,207

 
34,423

Contractual inventory
96

 
1,277

Total Current Assets
367,164

 
421,313

Goodwill
1,084,560

 
955,874

Other intangible assets—net
194,348

 
154,931

Property and equipment—net
46,082

 
23,121

Employee supplemental savings plan assets
33,555

 
29,383

Investments
11,843

 
11,691

Other assets
6,923

 
2,151

TOTAL ASSETS
$
1,744,475

 
$
1,598,464

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
LIABILITIES
 
 
 
Accounts payable and accrued expenses
$
122,405

 
$
108,888

Accrued salaries and related expenses
87,064

 
70,768

Billings in excess of revenue earned
18,816

 
11,998

Total Current Liabilities
228,285

 
191,654

Long term debt, net of current portion
31,000

 

Deferred income taxes—non-current
97,194

 
122,081

Accrued retirement
34,517

 
30,581

Other long-term liabilities
10,505

 
12,481

TOTAL LIABILITIES
401,501

 
356,797

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS' EQUITY
 
 
 
Common stock, Class A—$0.01 par value; 150,000,000 shares authorized; 26,285,773 and 25,795,973 shares issued at December 31, 2017 and 2016; 26,041,660 and 25,551,860 shares outstanding at December 31, 2017 and 2016
263

 
258

Common stock, Class B—$0.01 par value; 50,000,000 shares authorized; 13,189,245 and 13,190,745 shares issued and outstanding at December 31, 2017 and 2016
132

 
132

Additional paid-in capital
492,030

 
471,906

Treasury stock, 244,113 and 244,113 shares at cost at December 31, 2017 and 2016
(9,158
)
 
(9,158
)
Retained earnings
860,027

 
778,710

Accumulated other comprehensive loss
(320
)
 
(181
)
TOTAL STOCKHOLDERS' EQUITY
1,342,974

 
1,241,667

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,744,475

 
$
1,598,464

See notes to consolidated financial statements.

32



MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)

 
Year Ended
December 31,
 
2017
 
2016
 
2015
REVENUES
$
1,717,018

 
$
1,601,596

 
$
1,550,117

Cost of services
1,463,599

 
1,369,775

 
1,320,697

General and administrative expenses
155,225

 
140,858

 
144,534

OPERATING INCOME
98,194

 
90,963

 
84,886

Interest expense
(1,375
)
 
(1,097
)
 
(1,193
)
Interest income
104

 
121

 
160

Other income (expense), net
319

 
83

 
1,501

INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS
97,242

 
90,070

 
85,354

Benefit (provision) for income taxes
16,859

 
(33,786
)
 
(34,366
)
Equity in gains of unconsolidated subsidiaries
40

 
107

 
139

NET INCOME
$
114,141

 
$
56,391

 
$
51,127

BASIC EARNINGS PER SHARE:
 
 
 
 
 
Class A common stock
$
2.94

 
$
1.48

 
$
1.36

Class B common stock
$
2.94

 
$
1.48

 
$
1.36

DILUTED EARNINGS PER SHARE:
 
 
 
 
 
Class A common stock
$
2.91

 
$
1.47

 
$
1.36

Class B common stock
$
2.91

 
$
1.47

 
$
1.36


See notes to consolidated financial statements.


33



MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)

 
Year Ended
December 31,
 
2017
 
2016
 
2015
NET INCOME
$
114,141

 
$
56,391

 
$
51,127

OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Actuarial gain (loss) on defined benefit pension plans, net of tax
(84
)
 
(29
)
 
84

Translation adjustments, net of tax
(55
)
 
(43
)
 
14

Total other comprehensive income (loss)
(139
)
 
(72
)
 
98

COMPREHENSIVE INCOME
$
114,002

 
$
56,319

 
$
51,225


See notes to consolidated financial statements.



34



MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)

 
December 31,
 
2017
 
2016
 
2015
Common Stock, Class A
 
 
 
 
 
At beginning of year
$
258

 
$
247

 
$
244

Stock option exercises
5

 
11

 
3

At end of year
263

 
258

 
247

Common Stock, Class B
 
 
 
 
 
At beginning of year
132

 
132

 
132

At end of year
132

 
132

 
132

Additional Paid-In Capital
 
 
 
 
 
At beginning of year
471,906

 
438,168

 
428,895

Stock option exercises
13,619

 
30,551

 
7,865

Stock compensation expense
6,319

 
3,323

 
4,379

Tax deficiency from the exercise of stock options

 
(136
)
 
(2,971
)
Cumulative-effect adjustment for adoption of Accounting Standards Update 2016-09
186

 

 

At end of year
492,030

 
471,906

 
438,168

Treasury Stock, at cost
 
 
 
 
 
At beginning of year
(9,158
)
 
(9,158
)
 
(9,158
)
At end of year
(9,158
)
 
(9,158
)
 
(9,158
)
Retained Earnings
 
 
 
 
 
At beginning of year
778,710

 
754,457

 
734,873

Net income
114,141

 
56,391

 
51,127

Dividends
(32,709
)
 
(32,138
)
 
(31,543
)
Cumulative-effect adjustment for adoption of Accounting Standards Update 2016-09
(115
)
 

 

At end of year
860,027

 
778,710

 
754,457

Accumulated Other Comprehensive Loss
 
 
 
 
 
At beginning of year
(181
)
 
(109
)
 
(207
)
Actuarial gain (loss) on defined benefit pension plans, net of tax
(84
)
 
(29
)
 
84

Translation adjustments, net of tax
(55
)
 
(43
)
 
14

At end of year
(320
)
 
(181
)
 
(109
)
Total Stockholders' Equity
$
1,342,974

 
$
1,241,667

 
$
1,183,737


See notes to consolidated financial statements


35



MANTECH INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
Year Ended
December 31,
 
2017
 
2016
 
2015
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
 
 
 
 
 
Net income
$
114,141

 
$
56,391

 
$
51,127

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
 
Depreciation and amortization
33,792

 
30,191

 
30,276

Deferred income taxes
(24,815
)
 
18,254

 
30,553

Stock-based compensation
6,319

 
3,323

 
4,379

(Gain) loss on sale and retirement of property and equipment
76

 
(12
)
 
(656
)
Equity in gains of unconsolidated subsidiaries
(40
)
 
(107
)
 
(139
)
Excess tax benefits from the exercise of stock options

 
(1,656
)
 
(73
)
Gain on disposition of business

 

 
(1,692
)
Change in assets and liabilities—net of effects from acquired businesses:
 
 
 
 
 
Receivables-net
18,643

 
(5,611
)
 
82,727

Prepaid expenses and other
(7,422
)
 
(10,641
)
 
(4,990
)
Contractual inventory
1,181

 
(1,277
)
 

Employee supplemental savings plan asset
(4,172
)
 
(1,826
)
 
4,184

Accounts payable and accrued expenses
(541
)
 
(162
)
 
(44,103
)
Accrued salaries and related expenses
13,095

 
6,926

 
2,703

Billings in excess of revenue earned
1,177

 
(687
)
 
913

Accrued retirement
3,936

 
704

 
(2,927
)
Other
(2,412
)
 
1,954

 
1,601

Net cash flow from operating activities
152,958

 
95,764

 
153,883

 
 
 
 
 
 
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
 
 
Acquisition of businesses-net of cash acquired
(177,193
)
 
(60,556
)
 
(101,556
)
Purchases of property and equipment
(31,118
)
 
(7,662
)
 
(5,202
)
Investment in capitalized software for internal use
(7,744
)
 
(2,748
)
 
(1,025
)
Deferred contract costs
(2,877
)
 

 

Payments to acquire investments
(110
)
 
(1,183
)
 
(4,500
)
Proceeds from sale of property and equipment
3

 
17

 
696

Transaction costs for disposition of business

 

 
(1,174
)
Proceeds from sale of investment

 

 
13

Net cash flow from (used in) investing activities
(219,039
)
 
(72,132
)
 
(112,748
)
 
 
 
 
 
 

36



CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
 
 
Borrowings under revolving credit facility
136,500

 

 
163,200

Repayments under revolving credit facility
(105,500
)
 

 
(163,200
)
Dividends paid
(32,705
)
 
(32,139
)
 
(31,543
)
Proceeds from exercise of stock options
13,624

 
30,562

 
7,868

Debt issuance costs
(1,323
)
 
(89
)
 

Excess tax benefits from the exercise of stock options

 
1,656

 
73

Net cash flow from (used in) financing activities
10,596

 
(10
)
 
(23,602
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(55,485
)
 
23,622

 
17,533

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
64,936

 
41,314

 
23,781

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
9,451

 
$
64,936

 
$
41,314

 
 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
 
 
Cash paid for interest
$
1,166

 
$
983

 
$
1,203

Noncash investing and financing activities:
 
 
 
 
 
Capital expenditures incurred but not yet paid
$
1,345

 
$
325

 
$

Deferred contract costs incurred but not yet paid
$
872

 
$

 
$


See notes to consolidated financial statements.

37



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017, 2016 and 2015

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. Now in our 50th year, we excel in full-spectrum cyber, data collection & analytics, enterprise IT, systems engineering and software application development solutions that support national and homeland security.

2.
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 require 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-We derive the majority of our revenues from cost-plus-fixed-fee, cost-plus-award-fee, fixed-price and time-and-materials contracts. Revenues for cost-reimbursable contracts are recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For performance-based fees under cost-reimbursable contracts, we recognize 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, revenues are recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. For long-term fixed-price contracts, revenues are recognized at a rate per unit as the units are delivered or by other methods to measure services provided. Revenues from other long-term fixed-price contracts are recognized ratably over the contract period or by other appropriate methods to measure services provided. Contract costs are 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 apply the percentage of completion method. Under the percentage of completion method, income is 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 requires estimating the total revenues and total contract cost at completion of the contract. During the performance of long-term contracts, these estimates are periodically reviewed and revisions are made as required using the cumulative catch-up method of accounting. The impact on revenues and contract profit as a result of these revisions is included in the periods in which the revisions are made. This method can result in the deferral of costs or the deferral of profit on these contracts. Because we assume the risk of performing a fixed-price contract at a set price, the failure to accurately estimate ultimate costs or to control costs during performance of the work could result, and in some instances has resulted, in reduced profits or losses for such contracts. Estimated losses on contracts at completion are recognized when identified. In certain circumstances, revenues are recognized when contract amendments have not been finalized.

Cost of Services-Cost of services consists primarily of compensation expenses for program personnel, the fringe benefits associated with this compensation and other direct expenses incurred to complete programs, including cost of materials and subcontractor efforts.

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

38



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.

Billings In Excess of Revenue Earned-We receive advances and milestone payments from customers that exceed the revenues earned to date. We classify such items as current liabilities.

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

39



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. The maximum amount of loss we are exposed to as of December 31, 2017 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
    
On January 1, 2017, we adopted Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718). The changes in the ASU were adopted prospectively. The ASU requires all excess tax benefits or deficiencies to be recognized as income tax expense or benefit in the consolidated statement of income. Previously, excess tax benefits and deficiencies were recorded as a component of paid-in capital. For the years ended December 31, 2016 and 2015, we recorded $0.1 million and $3.0 million to paid-in capital for the net tax deficiencies related to the exercise of stock options, vested cancellations and the vesting of restricted stock. For the year ended December 31, 2017, we recorded a net tax benefit of $2.7 million to income tax expense related to the exercise of stock options, vested cancellations and the vesting of restricted stock. The ASU allows a policy election to account for forfeitures as they occur verses requiring a forfeiture estimate. We have elected to account for forfeitures when

40



they occur. Upon transition we recognized a cumulative-effect adjustment to retained earnings of $0.2 million related to previously estimated forfeitures. Under the ASU, excess tax benefits are no longer presented as financing activities in the statement of cash flows. The change in the presentation in the statement of cash flows was applied prospectively beginning January 1, 2017.

Recently Issued But Not Yet Adopted ASUs

On May 10, 2017, Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which seeks to provide clarity, reduce diversity in practice and reduce cost and complexity when applying the guidance in ASC 718, Compensation—Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. ASU 2017-09 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 of the modified award is the same as the fair value 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 amendments are effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2017. 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.
On January 26, 2017, 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 is required to test goodwill for 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. However, 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. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. Finally, this ASU amends the Overview and Background sections of the ASC as part of the FASB’s initiative to unify and improve such sections across Topics and Subtopics. Public entities that are SEC filers should adopt the amendments in this ASU prospectively for their annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. Note that early adoption is permitted for all entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will continue to evaluate the effects of this ASU in conjunction with our goodwill impairment tests.
On January 5, 2017, the FASB has issued ASU 2017-01, Business Combinations (Topic 805)—Clarifying the Definition of a Business, which 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 current implementation 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 output 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 Topic 606. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permissible. We do not expect this ASU to have a material effect on our consolidated financial statements.

On August 26, 2016, the FASB issued 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

41



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. The amendments in ASU 2016-15 become effective for fiscal years that start after December 15, 2017. We plan to apply it retrospectively to all periods presented in our quarterly and annual reports on Form 10-Q and Form 10-K. We plan to apply the equity method of accounting for applicable investments. Therefore, we will make 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. We do not expect this ASU to have a material effect on our consolidated financial statements.

On February 25, 2016, 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 are currently evaluating methods of adoption as well as the effect on our consolidated financial statements. However, it is expected to increase total assets and total liabilities for current operating leases that are currently recorded off balance sheet.

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 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. These concepts, as well as other aspects of ASU 2014-09, may change the method and/or timing of revenue recognition for certain of our contracts. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 deferred the effective date of ASU 2014-09 for all entities by one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Several related ASUs have been issued since the issuance of ASU 2014-09. These ASUs, which modify certain sections of ASU 2014-09, are intended to promote a more consistent interpretation and application of the principles outlined in the standard.

The adoption of ASU 2014-09 will impact our policies, controls, business processes and information systems. To prepare for the changes in this guidance, we developed a plan for adoption. Based on our plan, we commenced an assessment in 2016 on the impacts of this guidance on a representative sample of our existing contract population. The sample contracts selected covered more than 20% of our existing revenue base and included contracts from all of our various contract types. A majority of the contracts we tested were not impacted by the new guidance. For contracts that were impacted, we identified two primary differences. First, the determination of performance obligations under this ASU has led to a different unit of accounting then we are currently applying. Second, we reassessed whether a contract, or performance obligation, met the definition of a "stand ready to perform" or "series" obligation. Those contracts that do not meet the "stand ready to perform" or "series" definition will be transitioned to revenue recognition model where revenue is recognized over time as the performance obligation is satisfied, primarily based on cost incurred. We expect the impact of these changes to produce a more consistent gross margin period-to-period as the obligations are satisfied.

We developed and substantially completed a detailed implementation plan during 2017, which includes, among other things, an update to our policies, development of disclosures, updates to our controls and application of the guidance across our contract population. We will adopt ASU 2014-09 under the modified retrospective method to contracts not substantially complete at January 1, 2018. Under the modified retrospective transition method, we will record a transition adjustment to retained earnings. We estimate the cumulative-effect adjustment to retained earnings to be less than $1 million. Based on the results of our detailed implementation plan, we do not expect the adoption of ASU 2014-09 to have a material effect on our consolidated statement of income or our consolidated statement of cash flows. We do expect a more significant impact from the additional disclosures required under the ASU as well as a change in the presentation of contract assets and liabilities on our consolidated balance sheet.

Other ASUs effective after December 31, 2017 are not expected to have a material effect on our consolidated financial

42



statements.

3.
Acquisitions

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 the general and administrative expenses in our consolidated statement of income.

The preliminary purchase price of $182.6 million, which includes an estimated working capital adjustment, was preliminarily allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. As we are still in the process of reviewing the fair value of the assets acquired and liabilities assumed and in finalizing the closing working capital adjustment, the purchase price allocation for InfoZen is not complete as of December 31, 2017. 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 the DHS and NASA customers and specifically in modernization, agile software development, cloud migration and threat monitoring and assessment capabilities.

In preliminarily 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 preliminary purchase price allocation for InfoZen (in thousands):

Cash and cash equivalents
$
1,406

Receivables
9,434

Prepaid expenses and other
4,245

Goodwill
128,686

Other intangible assets
54,850

Property and equipment
485

Other assets
112

Accounts payable and accrued expenses
(8,390
)
Accrued salaries and related expenses
(2,893
)
Unearned revenue
(4,297
)
Billings in excess of revenue earned
(1,018
)
Net assets acquired and liabilities assumed
$
182,620





43



The following unaudited pro forma financial information below represents our results of operations for years ended December 31, 2017 had the InfoZen acquisition occurred on January 1, 2017 (in thousands). The unaudited proforma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the acquisition at January 1, 2017. This information should not be taken as representative of our future consolidated results of operations. Revenues and earnings were immaterial for the prior comparative year.
 
Year Ended December 31, 2017
Revenues
$
1,793,752

Net income
$
118,564

Basic earnings per share
$
3.05

Diluted earnings per share
$
3.03


Edaptive Systems LLC (Edaptive)—On December 15, 2016, we completed the acquisition of Edaptive. The results of Edaptive's operations have been included in our consolidated financial statements since that date. The acquisition was completed through a membership interest purchase agreement dated December 15, 2016, by and among Edaptive, Everest Holdco, Inc., and certain members of Edaptive and ManTech Advanced Systems International, Inc. Edaptive provides innovative IT solutions primarily to federal health agencies, with a significant focus on the Centers for Medicare & Medicaid Services. The acquisition strategically expands our reach within the federal health community. We funded the acquisition with cash on hand. The membership interest purchase agreement did not contain provisions for contingent consideration.

For the year ended December 31, 2016, we incurred approximately $0.3 million of acquisition costs related to the Edaptive transaction, which are included in the general and administrative expenses in our consolidated statement of income.

The purchase price of $13.2 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 Edaptive's capabilities to support Department of Health and Human Services customers and, specifically, in agile software development, testing and automation and business intelligence.

In allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of Edaptive's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $1.1 million and $0.3 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with Edaptive's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 10 years. Backlog is amortized straight-line over its estimated useful life of 1 year. The weighted-average amortization period for the intangible assets is 8 years.

The following table represents the purchase price allocation for Edaptive (in thousands):
Cash and cash equivalents
$
1,955

Receivables
10,892

Prepaid expenses and other
261

Goodwill
6,193

Other intangible assets
1,689

Property and equipment
502

Other assets
116

Accounts payable and accrued expenses
(5,777
)
Accrued salaries and related expenses
(2,324
)
Billings in excess of revenue earned
(326
)
Net assets acquired and liabilities assumed
$
13,181


We have not disclosed current period, nor pro forma, revenues and earnings attributable to Edaptive as our integration of these operations post-acquisition and the entity's accounting methods pre-acquisition make it impracticable.

Oceans Edge, Inc, Cyber Division (OEC)—On June 10, 2016, we completed the acquisition of certain assets of OEC which constituted a business. The results of OEC's operations have been included in our consolidated financial statements since that date. The acquisition was completed through an asset purchase agreement dated June 10, 2016, by and among Oceans Edge, Inc.,

44



Oceans Edge Cyber, LLC, certain owners of Ocean's Edge, Inc. and ManTech Advanced Systems International, Inc. OEC provides technical and professional services under government contracts in the defense and intelligence industries, including turnkey system solutions in cyber offense and defense, mission operations support and operations assessment and analysis. The OEC team of computer network operations (CNO) professionals will enhance our advanced CNO tools and research and development offerings with new business across the DoD landscape, including United States Cyber Command. The acquisition strategically strengthens our capabilities to support our federal agency customers and, specifically, to engineer and develop new, advanced solutions for wireless devices, networks, and infrastructures. We funded the acquisition with cash on hand. The asset purchase agreement did not contain provisions for contingent consideration.

For the year ended December 31, 2016, we incurred approximately $1.2 million of acquisition costs related to the OEC transaction, which are included in the general and administrative expenses in our consolidated statement of income.

The purchase price of $47.7 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 OEC's capabilities in adding additional vulnerability research, development and analysis capabilities to our existing cyber intelligence business.

In allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of OEC's contracts. The components of other intangible assets associated with the acquisition were technology, customer relationships and backlog valued at $3.0 million, $14.0 million and $1.0 million, respectively. Technology represents a suite of mobile analysis and exploitation offerings, which is used by customers in support of their missions. Technology is amortized straight-line over its estimated useful life of 5 years. Customer contracts and related relationships represent the underlying relationships and agreements with OEC'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 16 years.

The following table represents the purchase price allocation for OEC (in thousands):

Receivables
$
138

Goodwill
30,090

Other intangible assets
18,000

Property and equipment
69

Accounts payable and accrued expenses
(29
)
Accrued salaries and related expenses
(586
)
Net assets acquired and liabilities assumed
$
47,682


We have not disclosed current period, nor pro forma, revenues and earnings attributable to OEC as our integration of these operations post-acquisition and the entity's accounting methods pre-acquisition make it impracticable.

Knowledge Consulting Group, Inc. (KCG)—On June 15, 2015, we completed the acquisition of KCG. The results of KCG's operations have been included in our consolidated financial statements since that date. The acquisition was completed through an agreement and plan of merger dated June 15, 2015, by and among ManTech Advanced Systems International, Inc., Knight Acquisitions Corporation and KCG. KCG provides comprehensive cyber security services including cloud security, certification and accreditation and various cyber defense solutions across federal and commercial markets. The acquisition strategically positions us to pursue additional cyber work in the Department of Homeland Security, FBI and the intelligence community by leveraging our enhanced cloud security expertise. We funded the acquisition through a combination of cash on hand and borrowings under our revolving credit facility. The agreement did not contain provisions for contingent consideration.

For the year ended December 31, 2015, we incurred approximately $0.3 million of acquisition costs related to the KCG transaction, which are included in the general and administrative expenses in our consolidated statement of income.

The purchase price of $68.2 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 KCG's capabilities in providing comprehensive cyber security services throughout the DoD and intelligence community.

In allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates

45



of future performance of KCG's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $12.4 million and $0.8 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with KCG's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 15 years. Backlog is amortized straight-line over its estimated useful life of 1 year. The weighted-average amortization period for the intangible assets is 14 years.

The following table represents the purchase price allocation for KCG (in thousands):

Cash and cash equivalents
$
658

Receivables
6,532

Prepaid expenses and other
460

Goodwill
47,487

Other intangible assets
13,219

Property and equipment
1,419

Investments
15

Other assets
31

Accounts payable and accrued expenses
(1,269
)
Accrued salaries and related expenses
(336
)
Billings in excess of revenue earned
(2
)
Net assets acquired and liabilities assumed
$
68,214


We have not disclosed current period, nor pro forma, revenues and earnings attributable to KCG as our integration of these operations post-acquisition and the entity's accounting methods pre-acquisition make it impracticable.

Welkin Associates, Ltd. (Welkin)—On April 27, 2015, we completed the acquisition of Welkin, formerly a wholly-owned subsidiary of Computer Sciences Corporation (CSC). The results of Welkin's operations have been included in our consolidated financial statements since that date. The acquisition was completed through a stock purchase agreement dated April 27, 2015, by and among ManTech International Corporation, CSC and Welkin. Welkin delivers mission-centric services in high-end systems engineering and advanced national security technology and business services. The acquisition strategically positions us to pursue large engineering and support opportunities throughout the intelligence community and DoD. We funded the acquisition with cash on hand. The stock purchase agreement did not contain provisions for contingent consideration.

For the year ended December 31, 2015, we incurred approximately $0.7 million of acquisition costs related to the Welkin transaction, which are included in the general and administrative expenses in our consolidated statement of income.

The purchase price of $34.0 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 Welkin's capabilities in providing high-end systems engineering and support services throughout the intelligence community and DoD.

In allocating the purchase price, we considered, among other factors, analysis of historical financial performance and estimates of future performance of Welkin's contracts. The components of other intangible assets associated with the acquisition were customer relationships and backlog valued at $6.0 million and $0.4 million, respectively. Customer contracts and related relationships represent the underlying relationships and agreements with Welkin's existing customers. Customer relationships are amortized using the pattern of benefits method over their estimated useful lives of approximately 15 years. Backlog is amortized straight-line over its estimated useful life of 1 year. The weighted-average amortization period for the intangible assets is 14 years.


46



The following table represents the purchase price allocation for Welkin (in thousands):

Receivables
$
3,901

Prepaid expenses and other
141

Goodwill
24,436

Other intangible assets
6,350

Property and equipment
100

Accounts payable and accrued expenses
(436
)
Accrued salaries and related expenses
(492
)
Net assets acquired and liabilities assumed
$
34,000


We have not disclosed current period, nor pro forma, revenues and earnings attributable to Welkin as our integration of these operations post-acquisition and the entity's accounting methods pre-acquisition make it impracticable.

4.
Earnings per Share

Under ASC 260, Earnings per Share, the two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under that method, basic and diluted earnings per share data are presented for each class of common stock.

In applying the two-class method, we determined that undistributed earnings should be allocated equally on a per share basis between Class A and Class B common stock. Under our Certificate of Incorporation, the holders of the common stock are entitled to participate ratably, on a share-for-share basis as if all shares of common stock were of a single class, in such dividends, as may be declared by the Board of Directors. During the years ended December 31, 2017, 2016 and 2015, we declared and paid quarterly dividends, each in the amount of $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.


47



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,
 
2017
 
2016
 
2015
Distributed earnings
$
32,709

 
$
32,138

 
$
31,543

Undistributed earnings
81,432

 
24,253

 
19,584

Net income
$
114,141

 
$
56,391

 
$
51,127

 
 
 
 
 
 
Class A common stock:
 
 
 
 
 
Basic net income available to common stockholders
$
75,413

 
$
36,885

 
$
33,145

Basic weighted average common shares outstanding
25,685

 
24,944

 
24,317

Basic earnings per share
$
2.94

 
$
1.48

 
$
1.36