ManTech International Corporation (depending on the circumstances, “ManTech” “Company” “we” “our” “ours” or “us”) provides mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. In business for more than 50 years, weWe excel in full-spectrum cyber, data collection & analytics, enterprise information technology (IT), and systems engineering and software engineeringapplication development solutions that support national and homeland security.

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the U.S., have been condensed or omitted pursuant to those rules and regulations. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We recommend that you read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, previously filed with the SEC. We believe that the condensed consolidated financial statements in this Form 10-Q reflect all adjustments that are necessary to fairly present the financial position, results of operations and cash flows for the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results that can be expected for the full year.

We derive revenue from contracts with customers primarily from contracts with the U.S. government in the areas of defense, intelligence, homeland security and other federal civilian agencies. Substantially all of our revenue is derived from services and solutions provided to the U.S. government or to prime contractors supporting the U.S. government, including services by our employees and our subcontractors, and solutions that include third-party hardware and software that we purchase and integrate as a part of our overall solutions. Customer requirements may vary from period-to-period depending on specific contract and customer requirements. We provide our services and solutions under three types of contracts: cost-reimbursable, fixed-price and time-and-materials. Under cost-reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and paid a fee representing the profit margin negotiated between us and the contracting agency, which may be fixed or performance based. Under fixed-price contracts, we perform specific tasks for a fixed price. Fixed-price contracts may include either a product delivery or specific service performance over a defined period. Under time-and-materials contracts, we are reimbursed for labor at fixed hourly rates and are generally reimbursed separately for allowable materials and expenses at cost. We typically recognize revenue for time and material contracts under the "right to invoice" model.

For contracts that do not meet the criteria to measure performance as a right to invoice under the series guidance, we utilize an Estimate at Completion process to measure progress toward completion. We typically estimate progress towards completion based on cost incurred or direct labor incurred. As part of this process, we review information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenue and costs. The risks and opportunities include judgments about the ability and cost to achieve the contract milestones and other technical contract requirements. We make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the timing in which we recognize revenue on our contracts. For the three months ended June 30,March 31, 2020 and 2019, and 2018, the aggregate impact of adjustments in contract estimates increased our revenue by $3.5$3.3 million and $4.3$3.2 million, respectively. For the six months ended June 30, 2019 and 2018, the aggregate impact of adjustments in contract estimates increased our revenue by $5.6 million and $5.8 million, respectively.

We have one1 reportable segment. Our U.S. government customers typically exercise independent decision-making and contracting authority. Offices or divisions within an agency or department of the U.S. government may directly, or through a prime contractor, use our services as a separate customer as long as the customer has independent decision-making and contracting authority within its organization. We treat sales to U.S. government customers as sales within the U.S. regardless of where the services are performed. We generated 99% of our revenue from sales in the U.S. for the both three months ended March 31, 2020 and 2019.

The following tables disclose revenue (in thousands) by contract type, customer and prime or subcontractor and geography for the periods presented.

The following table discloses contractcomponents of our receivables are as follows (in thousands):

Receivables at June 30, 2019March 31, 2020 are expected to be substantially collected within one year except for approximately $1.2$1.5 million, of which 100% is related to receivables from sales to the U.S. government or from contracts in which we acted as a subcontractor to other contractors selling to the U.S. government. We have one contract which accounts for 11% of our accounts receivable

The following table discloses contract liabilities (in thousands):

Changes in the balance of contract liabilities are primarily due to the timing difference between our performance and our customers' payments. For the three months ended June 30, 2019,March 31, 2020, the amount of revenue that was included in the opening contract liabilities balance was $4.5were $16.7 million. For the six months ended June 30, 2019, the amount of revenue that was included in the opening contract liabilities balance was $22.5 million.

The remaining performance obligation as of June 30, 2019March 31, 2020 is $2.7$2.4 billion. The following table discloses when we expect to recognize the remaining performance obligation as revenue (in billions):

The acquisition was accounted for as a wholly owned subsidiary of the publicly traded commercial technology and staffing company KForce, Inc.business combination. The results of KGS'sH2M's operations have been included in our condensed consolidated financial statements since that date. The acquisition was completed through an equity purchase agreement dated February 28, 2019, by and among Kforce Government Solutions, Inc and other beneficiaries and ManTech International Corporation. We funded the acquisition with cash on hand and borrowings on our revolving credit facility. KGS provides services IT solutions, transformation and management consulting and data analytics - most notably in the healthcare IT market. This acquisition will expand our presence with important customers such as the Department of Veteran Affairs (VA).

The purchase price of $114.6$38.5 million, which includes the finalized working capital adjustment, was preliminarily allocated to the underlying assets and liabilities based on their estimated fair value at the date of acquisition. As we are still inThe excess of the process of reviewingpurchase price over the fair value of the assets acquired and liabilities assumed thewas recorded as goodwill. The purchase price allocation for KGSH2M is not complete as of June 30, 2019. March 31, 2020.

Recognition of goodwill is largely attributed to the value paid for KGS'sH2M's capabilities to support customersgovernment agencies in IT solutions, transformationthe implementation of high-quality geospatial and management consulting and data analytics. A majority of theprofessional services. The goodwill recorded for this transaction will not be deductible for tax purposes.

The following table represents the preliminary purchase price allocation for KGSH2M (in thousands):

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 sixthree months ended June 30,March 31, 2020 and 2019, and 2018, we declared and paid a quarterly dividendsdividend in the amount of $0.27$0.32 per share and $0.25$0.27 per share, respectively, on both classes of common stock.

Basic earnings per share has been computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period in which the shares were outstanding. Diluted earnings per share have been computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares that were outstanding during each period.

For the three months ended June 30,March 31, 2020 and 2019, and 2018, options to purchase 479,685235,059 shares and 251,250514,224 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because the options' effect would have been anti-dilutive. For the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, options to purchase 496,859there were 47,224 shares and 280,833 shares, respectively, were outstanding but not included in the computation of diluted earnings per share because the options' effect would have been anti-dilutive. For the six months ended June 30, 2019 and 2018, there were 144,585 shares and 229,19151,089 shares, respectively, issued from the exercise of stock options. For the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 there were 72,49335,882 shares and 86,23372,188 shares, respectively, issued from the vesting of restricted stock units.

Depreciation and amortization expense related to property and equipment for the three months ended June 30,March 31, 2020 and 2019 and 2018 was $6.2$8.8 million and $6.8 million, respectively. Depreciation and amortization expense related to property and equipment for the six months ended June 30, 2019 and 2018 was $12.5 million and $12.7$6.3 million, respectively.

Amortization expense relating to intangible assets for the three months ended June 30,March 31, 2020 and 2019 and 2018 was $6.1$6.5 million and $6.4 million, respectively. Amortization expense relating to intangible assets for the six months ended June 30, 2019 and 2018 was $11.9 million and $13.5$5.8 million, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):

Borrowings under our credit agreement are collateralized by substantially all of our assets and those of our Material Subsidiaries (as defined in the credit agreement) and bear interest at one of the following variable rates as selected by us at the time of borrowing: a London Interbank Offer Rate base rate plus market-rate spreads (1.25% to 2.25% based on our consolidated total leverage ratio) or Bank of America's base rate plus market spreads (0.25% to 1.25% based on our consolidated total leverage ratio).

There was $43.5$115.0 million and $7.5$36.5 million outstanding on our revolving credit facility at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The maximum available borrowing under the revolving credit facility at June 30, 2019March 31, 2020 was $448.8$379.1 million. As of June 30, 2019,March 31, 2020, we were contingently liable under letters of credit totaling $7.7$5.9 million, which reduces our availability to borrow under our revolving credit facility.

Contracts with the U.S. government, including subcontracts, are subject to extensive legal and regulatory requirements and, from time-to-time, agencies of the U.S. government, in the ordinary course of business, investigate whether our operations are conducted in accordance with these requirements and the terms of the relevant contracts. U.S. government investigations of us, whether related to our U.S. government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting activities. Management believes it has adequately reserved for any losses that may be experienced from any investigation of which it is aware. The Defense Contract Audit Agency has substantially completed our incurred cost audits through 2016 with no material adjustments. The remaining audits for 2017 through 20182019 are not expected to have a material effect on our financial position, results of operations or cash flow and management believes it has adequately reserved for any losses.

In the normal course of business, we are involved in certain governmental and legal proceedings, claims and disputes and have litigation pending under several suits. Except for the matter noted below, current legal matters are individually immaterial and weWe believe that the ultimate resolution of these itemsmatters will not have a materialan effect on our financial position, results of operations or cash flows. Management believes it has adequately reserved for any losses that may be experienced from legal proceedings, claims and disputes and pending litigations of which it is aware.

We have $7.7$5.9 million outstanding on our letter of credit, of which $7.6$5.7 million is related to an outstanding performance bond in connection with a contract between ManTech MENA, LLC and Jadwalean International Operations and Management Company to fulfill technical support requirements for the Royal Saudi Air Force.

The Plan is administered by the compensation committee of our Board of Directors, along with its delegates. Subject to the express provisions of the Plan, the committee has the Board of Directors’ authority to administer and interpret the Plan, including the discretion to determine the exercise price, vesting schedule, contractual life and the number of shares to be issued.

There were 0 option grants during the three months ended March 31, 2020. The following weighted-average assumptions were used for option grants during the sixthree months ended June 30, 2019 and 2018:March 31, 2019:

The following table summarizes weighted-average assumptions used in our calculations of fair value for the sixthree months ended June 30, 2019 and 2018:March 31, 2019:

The following table summarizes stock option activity for the year ended December 31, 20182019 and the sixthree months ended June 30, 2019:March 31, 2020:

The following table summarizes non-vested stock options for the sixthree months ended June 30, 2019:March 31, 2020:

Unrecognized compensation expense related to non-vested awards was $6.1$6.3 million as of June 30, 2019,March 31, 2020, which is expected to be recognized over a weighted-average period of 2 years.

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

Forward-looking statements may include, among other things, statements with respect to our financial condition, results of operations, prospects, business strategies, competitive position, growth opportunities, and plans and objectives of management. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of our control, and include, without limitations, the risks and uncertainties discussed in the section titledItem 1A "Risk Factors" in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.

Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to, the following:

We provide mission-focused technology solutions and services for U.S. defense, intelligence community and federal civilian agencies. We excel in full-spectrum cyber, data collection & analytics, enterprise information technology (IT), systems and software engineering solutions that support national and homeland security.

AsApproximately 98% of February 15, 2019, all agencies ofour revenues are generated through contracts with the U.S. federal government, have fundingor through appropriations through Government fiscal year (GFY) 2019. On July 22,prime contractors supporting the U.S. government. The U.S. government is the largest consumer of services and solutions in the U.S. As such, our business is impacted by the overall U.S. government budget and our ability to match our capabilities and offerings to the U.S. government's spending priorities. In December 2019, Congress passed and the President and Congressional leadership announced an agreement on a new two-year budget deal,signed into law, two appropriation bills funding the Bipartisan Budget Act of 2019. The bill stipulates a national defense level of $738 billion ingovernment through GFY 2020. BothWe believe the budget dealcurrent appropriations and appropriations legislation are subject to passage by Congress. If Congress is unable to approve appropriations by October 1st, the U.S. GovernmentAdministration's stated priorities for national and its agencies may be subjected to funding restrictions through a Continuing Resolution or, if there is a failure to pass interim funding, potentially a government shutdown.homeland security aligns favorably with our capabilities and offerings.

We classify indirectcannot predict the future impact of the COVID-19 pandemic and the resulting impact on the economy; however, it could have a material adverse effect on our business, financial position, results of operations, and/or cash flows. The recent global outbreak of the COVID-19 pandemic, along with various measures that local, state and federal governments have adopted to mitigate its impact, have required us to make changes to our operations to enable our employees to continue supporting our customers' mission-critical needs in this period of disruption. As a result of travel restrictions, social distancing guidelines and other efforts that have been adopted by public health officials to mitigate the impact of the COVID-19 pandemic, we have made changes to our operating schedules and staffing plans to accommodate these restrictions while maintaining the ability of our employees to continue to support and work with our customers to the maximum extent possible. The changes include the implementation of telework or other means of remote work for our employees, who support both mission-critical programs and our internal support organization. With respect to our impacted programs that, by their nature, cannot be supported remotely, we have accommodated those customers who have implemented shiftwork or other mitigation protocols by maintaining our workforce in a “mission ready” state. Additionally, COVID-19 and the mitigation efforts adopted to limit the spread of the disease have had a significant impact on the global economy. With economic activity curtailing in the United States and other regions, we could experience delays in our supply chain or impacts accessing financial markets.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. The CARES Act is a $2 trillion stimulus package meant to combat the economic impacts of COVID-19. The CARES Act includes a provision under which government contractors can seek reimbursement for amounts lost due to the impacts of closed facilities, reduced work schedules or mandated quarantines to support social distancing. The precise application of this provision, including what type of costs will be reimbursed, the earliest date cost-reimbursement will be applicable, and whether fee recovery will be included in the reimbursement, are determinations being made at the individual government agency or contract level. Guidance from our customers continues to evolve, and the final determinations regarding reimbursement may vary among customers; however, we currently anticipate that many of our customers will reimburse costs incurred without fee. The relevant provision of the CARES Act is in effect until September 30, 2020. We continue to evaluate this and other provisions of the CARES Act, as costwell as any other legislative or regulatory initiatives that seek to address the impact of servicesthe COVID-19 pandemic.

To date, the majority of our programs have not been adversely impacted (or we have developed alternative means, including teleworking arrangements, to support program requirements). With respect to our programs that have been adversely impacted, we began experiencing the effects in or around mid-March. Due to the mission-critical nature of the majority of our business, the programs that were adversely impacted did not experience those effects until the final two weeks of the quarter, and generalthe overall impact of the COVID-19 pandemic on our results of operations and administrative expensesliquidity were immaterial in the same manner as such costs are definedfirst quarter of 2020. In addition to the measures described above, we have developed contingency plans (which we continuously reevaluate) to address additional disruptions to our operations or to the operations of our customers. See “Item IA. Risk Factors” in our disclosure statements under U.S. Government Cost Accounting Standards. Effective January 1, 2019, we updated our disclosure statementsPart II of this Quarterly Report for additional discussion of the risks associated with the Defense Contract Management Agency, resulting in certain costs being classified differently either as cost of services or as general and administrative expenses on a prospective basis. This change has caused a net increase in the reported cost of services and a net decrease in reported general and administrative expenses in 2019 as compared to 2018; however, total operating costs were not affected by this change.COVID-19.

We recommend that you read this discussion and analysis in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, previously filed with the Securities and Exchange Commission.

Revenue

The primary driver of our increase in revenues relates to revenue from new contract awards, growth on certain existing contracts and our recent acquisition,acquisitions, which were offset by contracts and tasks that ended and reduced scope of work or lower material purchases on some contracts. Due to the uncertainties around the potential impact of the COVID-19 pandemic on timing of new contract awards, the hiring environment, and customer actions, we believe our revenues during the remainder of 2020 could vary and modestly fluctuate from the first quarter revenue levels.

 

The increase in cost of services was primarily due to increases in revenue. As a percentage of revenue, direct labor costs were 49% and 48% for both the three months ended June 30,March 31, 2020 and 2019, and 2018.respectively. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, were 38%37% for the three months ended June 30, 2019,March 31, 2020, compared to 37%38% for the same period in 2018.2019. Due to the uncertainties of the impact of COVID-19 on our business, we believe our cost of services as a percentage of revenues may slightly increase depending primarily on levels of revenue changes.