News Column

MANTECH INTERNATIONAL CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 21, 2014

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 Supplemental Data." This discussion contains forward-looking statements that involve risks and uncertainties. For a description of these forward-looking statements, refer to Part I "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 discussed elsewhere in this Annual Report.



Overview

ManTech is a leading provider of innovative technologies and solutions for mission-critical national security programs for the intelligence community; the departments of Defense, State, Homeland Security, Energy and Justice, including the Federal Bureau of Investigation (FBI); the healthcare and space communities; and other U.S. federal government customers. We derive revenues primarily from contracts with U.S. government agencies that are focused on national security and consequently our operational results are affected by U.S. government spending levels in the areas of defense, intelligence and homeland security. During 2013, our financial performance was adversely impacted by the same factors affecting government services providers generally; public and political pressure regarding government funding levels, combined with uncertainty about the appropriations process, caused delays in awards and spending. The U.S. government did not complete its budget process 28 -------------------------------------------------------------------------------- before the end of its fiscal year on September 30, 2013 and did not provide for a continuing resolution, which resulted in a federal government shutdown lasting 16 days, further impacting certain of our programs. Our customers now have approved budgets through September 30, 2014 and a solid framework for a year longer. Although the delays in procurements and cautious spending in 2013 will continue to impact our business in the short term, we believe that the recent budget clarity will allow our customers to accelerate the procurement of services. We are well positioned to meet our customers' needs and grow our business as we move through 2014 and beyond.



Revenues

Substantially all of our revenues are derived from services and solutions provided to the federal government or to prime contractors supporting the federal government, including services provided by our employees, our subcontractors and through solutions that include third-party hardware and software that we purchase and integrate as a part of our overall solutions. These 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, 2013 2012



2011

Department of Defense and intelligence agencies 95.6 % 95.4 %

96.6 % Federal civilian agencies 3.4 % 3.8 % 2.6 % State agencies, international agencies and commercial entities 1.0 % 0.8 % 0.8 % Total 100.0 % 100.0 % 100.0 % Several years ago, management decided to pursue a prime position on contracts by bidding as a prime and through the acquisition of companies holding a prime position on desired contract vehicles. As a result, our prime contract revenues as a percentage of our total revenues have increased each year since 2008. The following table shows our revenues as prime contractor and as subcontractor as a percentage of our total revenues for the following periods: Year Ended December 31, 2013 2012 2011 Prime contractor 91.2 % 89.9 % 85.6 % Subcontractor 8.8 % 10.1 % 14.4 % Total 100.0 % 100.0 % 100.0 %



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 the Company to render services throughout a period is 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- 29 --------------------------------------------------------------------------------



materials contracts by multiplying the number of direct labor hours expended by the contract billing rates and adding the effect of other billable direct costs.

Our contract mix varies from year-to-year due to numerous factors, including our business strategies and federal government procurement objectives. Over the last few years, our customers have increasingly procured our services using cost-reimbursable contracts. 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, 2013 2012 2011 Cost-reimbursable 72.3 % 51.0 % 33.6 % Fixed-price 16.8 % 16.2 % 15.9 % Time-and-materials 10.9 % 32.8 % 50.5 % Total 100.0 % 100.0 % 100.0 % 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, and as a result of the shift in our contract mix, our profits have been impacted. Cost of Services Cost of services primarily includes direct costs incurred to provide our services and solutions to 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. Since we earn higher profits on our own labor services, we expect the ratio of cost of services as a percent 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 increase relative to our own labor services, we expect the ratio of cost of services as a percent of revenues to increase. The proportion that costs 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-material contracts than cost-reimbursable contracts. Fixed-price contracts generally offer higher profit margins opportunities but involve great financial risk because we bear 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 expense 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 7.25% senior secured notes and deferred financing charges. 30 --------------------------------------------------------------------------------



Interest Income

Interest income is primarily from cash on hand and notes receivable.

Results of Operations

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Consolidated Statements of Income and Loss

The following table sets forth certain items from our consolidated statements of income and loss 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, 2012 to December 31, 2013. Year Ended December 31, Year-to-Year Change 2013 2012 2013 2012 2012 to 2013 Dollars Percentages Dollars Percent (dollars in thousands) REVENUES $ 2,310,072$ 2,582,295 100.0 % 100.0 % $ (272,223 ) (10.5 )% Cost of services 1,995,630 2,213,894 86.4 % 85.7 % (218,264 ) (9.9 )% General and administrative expenses 173,772 197,413 7.5 % 7.7 % (23,641 ) (12.0 )% Goodwill impairment 118,427 - 5.1 % - % 118,427 100.0 % OPERATING INCOME 22,243 170,988 1.0 % 6.6 % (148,745 ) (87.0 )% Interest expense (16,266 ) (16,304 ) 0.7 % 0.6 % 38 (0.2 )% Interest income 608 344 - % - % 264 76.7 % Other income (expense), net (32 ) (74 ) - % - % 42 (56.8 )%

INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS 6,553 154,954 0.3 % 6.0 % (148,401 ) (95.8 )% Provision for income taxes (11,842 ) (59,935 ) 0.5 % 2.3 % 48,093 (80.2 )% Equity in losses of unconsolidated subsidiaries (860 ) - - %



- % (860 ) (100.0 )% NET INCOME (LOSS) $ (6,149 )$ 95,019 0.2 % 3.7 % $ (101,168 ) (106.5 )%

Revenues

The primary driver of our decrease in revenue relates to reduced demand for services supporting Overseas Contingency Operations (OCO) as a result of the accelerated withdrawal of U.S. forces and reduction in military operations in Afghanistan. The reduction in our OCO related work in 2013 was primarily due to reduced demand on a sustainment contract for Mine-Resistant Ambush-Protected (MRAP) vehicles and reduced demand for field service support on C4ISR systems. These reductions were partially offset by revenue provided from contracts in the intelligence area, including contracts for IT infrastructure modernization and from growth from healthcare IT programs. We expect the continued withdrawal from Afghanistan to impact revenues from our contracts providing OCO support throughout 2014.



Cost of services

The decrease in cost of services was primarily due to reductions in revenue. As a percentage of revenues, direct labor costs increased to 37.9% for the year ended December 31, 2013, as compared to 36.1% for the same period in 2012. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, was 48.5% for the year ended December 31, 2013, compared to 49.6% for the same period in 2012. We expect cost of services as a percentage of revenues to remain the same or slightly increase in 2014. 31 --------------------------------------------------------------------------------



General and administrative expenses

The decrease in general and administrative expense was due to cost reduction initiatives, including reductions in indirect support staff and lower stock based compensation expense. As a percentage of revenues, general and administrative expense was slightly lower for the year ended December 31, 2013 when compared to the same period in 2012. We expect general and administrative expenses as a percentage of revenues to remain relatively stable in 2014.



Goodwill impairment

During the fourth quarter of 2013, multiple events and circumstances indicated a significant reduction in the operating performance outlook of one of our reporting units. These events included being awarded fewer contracts than anticipated on several competitive opportunities, changing mission priorities of the U.S. government in relation to certain of our C4ISR contracts and OCO-related work (primarily on maintenance and sustainment of MRAP vehicles), continued delays in our customers' procurement cycle due, in part, to the U.S. government shutdown, and continued margin pressure on some of our contracts. The culmination of these events led us to conduct an interim impairment analysis on the impacted reporting unit. As a result of this analysis, we recorded a non-cash impairment charge of $118.4 million for the period ending December 31, 2013. For additional information, see "Critical Accounting Estimates and Policies - Accounting for Business Combinations, Goodwill and Other Intangible Assets" and Note 7 to our consolidated financial statements in Item 8.



Provision for income taxes

Our effective tax rate is affected by recurring items, such as tax rates and the relative amount of income we earn in various taxing jurisdictions. 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 rates were 208.0% and 38.7% for the years ended December 31, 2013 and 2012, respectively. The increase in the effective tax rate is due to the non-deductible portion of the non-cash goodwill impairment charge. We expect the effective tax rate to be more in line with our historical rates in 2014.



Equity in losses of unconsolidated subsidiaries

We account for our investment in the Fluor-ManTech Logistics Solutions, LLC under the equity method of accounting. We recorded $(0.9) million and $0 in equity method losses for the years ended December 31, 2013 and 2012, respectively.

Net income (loss)

The decrease in net income (loss) was due to a non-cash goodwill impairment charge, a reduction in revenues and margin pressure due to a shift to cost-reimbursable contract awards as well as the competitive market place. To see net income exclusive of the non-cash goodwill impairment charge, see "Non-GAAP Financial Measures" below.

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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

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, 2011 to December 31, 2012. Year Ended December 31, Year-to-Year Change 2012 2011 2012 2011 2011 to 2012 Dollars Percentages Dollars Percent (dollars in thousands) REVENUES $ 2,582,295$ 2,869,982 100.0 % 100.0 % $ (287,687 ) (10.0 )% Cost of services 2,213,894 2,453,679 85.7 % 85.5 % (239,785 ) (9.8 )% General and administrative expenses 197,413 188,949 7.7 % 6.6 % 8,464 4.5 % OPERATING INCOME 170,988 227,354 6.6 % 7.9 % (56,366 ) (24.8 )% Interest expense (16,304 ) (15,791 ) 0.6 % 0.5 % (513 ) 3.2 % Interest income 344 332 - % - % 12 3.6 % Other income (expense), net (74 ) 3,607 - % 0.1 % (3,681 ) (102.1 )% INCOME FROM OPERATIONS BEFORE INCOME TAXES 154,954 215,502 6.0 % 7.5 % (60,548 ) (28.1 )% Provision for income taxes (59,935 ) (82,196 ) 2.3 % 2.9 % 22,261 (27.1 )% NET INCOME $ 95,019$ 133,306 3.7 % 4.6 % $ (38,287 ) (28.7 )% Revenues



The primary driver of our decrease in revenues relates to reductions on our C4ISR support contracts and contracts that have ended. These reductions were partially offset by revenues provided from new contract awards in the intelligence area. The reduction in C4ISR work is primarily due to reduced demand for field service support and delays in enhancements to existing ISR systems.

Cost of services

The decrease in cost of services was primarily due to the decrease in revenues. As a percentage of revenues, direct labor costs increased to 36.1% for the year ended December 31, 2012, as compared to 34.2% for the same period in 2011 as a result of an increase in our percentage of work as a prime contractor. 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 from 51.3% for the year ended December 31, 2011 to 49.6% for the same period in 2012 due to a reduction in other direct costs on the C4ISR support contracts.



General and administrative expenses

The increase in general and administrative expense was primarily due our acquisitions and facility related costs from newly leased office space.

Other income (expense), net

The decrease in other income (expense), net was due to the sale of our investment in NetWitness in April 2011, which resulted in a gain of $3.7 million for the year ended December 31, 2011.

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Provision for income taxes

Our effective income tax rates were 38.7% and 38.1% for the years ended December 31, 2012 and 2011, respectively. Our tax rate is affected by recurring items, such as tax rates and the relative amount of income we earn in jurisdictions, which we expect to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The difference between our statutory U.S. federal income tax rate of 35.0% and our effective tax rate is state income taxes and non-deductible compensation.



Net income

The decrease was due to lower revenues, increased general and administrative expense and margin pressure on our contracts, both from the shift in contract type to cost-reimbursable and increased competitive market place. Non-GAAP Financial Measures Item 10(e) of Regulation S-K and other provisions of the securities laws regulate the use of financial measures that are not prepared in accordance with generally accepted accounting principles in the United States (GAAP). We are providing certain non-GAAP financial measures in this Annual Report on Form 10-K because we believe these non-GAAP measures provide important supplemental information to the GAAP financial measures contained in our consolidated financial statements. We believe these non-GAAP measures, which exclude the impact of the non-cash goodwill impairment charge taken in the fourth quarter of fiscal year 2013, provide useful information to our investors to better evaluate period-to-period comparisons of our operating results. Similarly, management uses these non-GAAP measures to gain a better understanding of our comparative operating performance from period-to-period and as a basis for forecasting future periods. The following table is a reconciliation of our unaudited non-GAAP financial measures (in thousands, except per share data): Year Ended December 31, 2013 2012 2011 Net income (loss) $ (6,149 )$ 95,019$ 133,306 Non-GAAP adjustments: Goodwill impairment 118,427 - - Tax effects (32,717 ) - - Adjusted non-GAAP net income $ 79,561$ 95,019$ 133,306 Basic earnings (loss) per share (Class A and Class B) $ (0.17 ) $ 2.57 $ 3.64 Non-GAAP adjustments $ 2.31 $ - $ - Adjusted basic earnings per share (Class A and Class B) $ 2.14 $ 2.57



$ 3.64

Diluted earnings (loss) per share (Class A and Class B) $ (0.17 ) $ 2.57 $ 3.63 Non-GAAP adjustments $ 2.31 $ - $ - Adjusted diluted earnings per share (Class A and Class B) $ 2.14 $ 2.57 $ 3.63 Backlog For the years ended December 31, 2013, 2012 and 2011 our backlog was $3.9 billion, $6.5 billion and $4.7 billion, respectively, of which $1.1 billion, $1.8 billion and $1.3 billion, respectively, was funded backlog. The decrease in our backlog is primarily due to reduced demand on OCO contracts resulting from the accelerated withdrawal from Afghanistan. Backlog represents estimates that we calculate on a consistent basis. For additional information on how we compute backlog, see "Backlog" in Item 1 "Business." 34 --------------------------------------------------------------------------------



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, 2013, our cash and cash equivalents balance was $269.0 million. There were no outstanding borrowings under our revolving credit facility at December 31, 2013. At December 31, 2013, we were contingently liable under letters of credit totaling $0.2 million, which reduces our ability to borrow under our revolving credit facility by that amount. The maximum available borrowings under our revolving credit facility at December 31, 2013 was $499.8 million. At December 31, 2013, we had $200.0 million outstanding of our 7.25% senior unsecured notes. For additional information concerning our revolving credit facility and 7.25% senior unsecured notes, see Note 8 to our consolidated financial statements in Item 8. Generally, cash provided by operating activities is adequate to fund our operations, including payments under our regular cash dividend program. Due to 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) was 84 and 79 for the years ended December 31, 2013 and 2012. For the years ended December 31, 2013, 2012 and 2011, our net cash flows from operating activities were $188.3 million, $126.3 million and $221.4 million, respectively. The increase in net cash flows from operating activities during the year ended December 31, 2013 when compared to the same period in 2012 was primarily due to the collection of accounts receivable and the timing of payments to our vendors and employees. The decrease in net cash flows from operating activities during the year ended December 31, 2012 compared to the same period in 2011 was primarily due to decreased billings in excess of revenue earned, lower net income, and the timing of payments under incentive compensation plans.



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 year ended December 31, 2013, 2012 and 2011 our net cash outflows from investing activities were were $24.8 million, $76.0 million and $165.5 million, respectively. For the year ended December 31, 2013, our net cash outflows from investing activities were primarily due to the acquisition of ALTA Systems, Inc. and capital expenditures. For the year ended December 31, 2012, our net cash outflows from investing activities were due to the acquisition of HBGary, Inc. and Evolvent Technologies, Inc. and capital expenditures. For the year ended December 31, 2011, our net cash outflows from investing activities were due to the purchase of property and equipment primarily related to a mobile telecommunication network built for use on one of our contracts in Afghanistan and the acquisition of WINS and TranTech.



Cash Flows from Financing Activities

For the years ended December 31, 2013, 2012 and 2011, our net cash outflows from financing activities were $29.4 million, $29.8 million and $26.2 million, respectively. For the years ended December 31, 2013, 2012 and 2011, our net cash outflows from financing activities resulted primarily from dividends paid.



Revolving Credit Facility

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 $500.0 million revolving credit facility, with a $25.0 million letter of credit sublimit and a $30.0 million swing line loan sublimit. The credit agreement also contains an accordion feature that permits the Company to arrange with the lenders for the provision of up to $250.0 million in additional commitments. The maturity date for this agreement is October 12, 2016. Borrowings under our credit agreement are collateralized by substantially all the assets of ManTech and its Material Subsidiaries (as defined in the credit agreement) and bear interest at one of the following variable rates as selected by the Company at the time of borrowing: a London Interbank Offer Rate (LIBOR) based rate plus market-rate spreads (1.25% to 2.25% based on our consolidated total leverage ratio) or Bank of America's base rate plus market spreads (0.25% to 1.25% based on our consolidated total leverage ratio). 35 -------------------------------------------------------------------------------- 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 the Company to comply with specified financial covenants, including the maintenance of a certain leverage ratios and a certain fixed charge 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 additional actions. As of, and during, December 31, 2013 and 2012, we were in compliance with our financial covenants under the credit agreement.



There was no outstanding balance on our revolving credit facility at December 31, 2013 and 2012.

7.25% Senior Unsecured Notes

We have $200.0 million in aggregate principal amount of 7.25% senior unsecured notes that are registered under the Securities Act of 1933, as amended. The 7.25% senior unsecured notes were issued April 13, 2010 and mature on April 15, 2018. We have determined that we will redeem these notes in April 2014 in accordance with their terms. The aggregate amount necessary to redeem the notes in accordance with the optional redemption provision of the notes is $207,250,000. We expect to fund the redemption of the notes with cash from operations and the use of our revolving credit facility. The indenture governing the 7.25% senior unsecured notes contains customary events of default, as well as restrictive covenants, which, subject to important exceptions and qualifications specified in such indenture, will, among other things, limit our ability and the ability of our subsidiaries that guarantee the 7.25% senior unsecured notes to: pay dividends or distributions, repurchase equity, prepay subordinated debt or make certain investments; incur additional debt or issue certain disqualified stock and preferred stock; incur liens on assets; merge or consolidate with another company or sell all or substantially all assets; and allow to exist certain control provisions. As of December 31, 2013 and 2012, the Company was in compliance with all covenants required by the indenture. Capital Resources We believe the capital resources available to us from cash on hand of $269.0 million at December 31, 2013, our $500.0 million 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, including payments under our regular cash dividend program. 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 borrowing or issuance of debt or equity.



Short-Term Borrowings

From time to time, we borrow funds against our revolving credit facility for working capital requirements and funding of operations, as well as acquisitions. Borrowings under our revolving credit facility bear interest at one of the following variable rates as selected by the Company at the time of the borrowing: a LIBOR based rate plus market spreads (1.25% to 2.25% based on our consolidated total leverage ratio) or the Bank of America's base rate plus market spreads (0.25% to 1.25% based on our consolidated total leverage ratio). In the next year we may use, as needed, our revolving credit facility or additional sources of borrowings in order to fund our anticipated cash requirements.



The following table summarizes the activity under our revolving credit facility for the years ended December 31, 2013, 2012 and 2011 (in thousands):

Year Ended December 31, 2013 2012 2011 Borrowings under revolving credit facility $ - $ 9,000 $ - Repayment of borrowings under revolving credit facility $ - $ (9,000 ) $ - 36

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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, 2013 and 2012, we declared and paid quarterly dividends in the amount of $0.21 per share on both classes of common stock. 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 or Directors deems relevant.



Off-Balance Sheet Arrangements

None.

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 accounting principles generally accepted in the United States of America. 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, firm-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. For long-term contracts, specifically described in the scope section of ASC 605-35, 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 37 -------------------------------------------------------------------------------- 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. Both the individual changes in contract estimates and aggregate net changes in contract estimates recognized using the cumulative catch-up method of accounting were not material to the consolidated statement of operations for all periods presented. 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. The goodwill impairment test is a two-step process performed at the reporting unit level. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount (including goodwill). If the reporting unit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit's fair value is less than its carrying value, an impairment of goodwill may exist, requiring a second step to be performed. Step two of this test measures the amount of the impairment loss, if any. Step two of this test requires the allocation of the reporting unit's fair value to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as a goodwill impairment charge in operations. The fair values of the reporting units are determined based on a weighting of the income approach, market approach and market transaction approach. The income approach is a valuation technique in which fair value is based from forecasted future cash flow discounted at the appropriate rate of return commensurate with the risk as well as current rates of return for equity and debt capital as of the valuation date. The forecast used in our estimation of fair value was developed by management based on a contract basis, incorporating adjustments to reflect known contract and market considerations (such as reductions and uncertainty in government spending, pricing pressure and opportunities). The discount rate utilizes a risk adjusted weighted average cost of capital. The market approach is a valuation technique in which the fair value is calculated based on market prices realized in an actual arm's length transaction. The technique consists of undertaking a detailed market analysis of publicly traded companies that provides a reasonable basis for comparison to the company. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to the company 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 provided a reasonable basis for comparison to the company. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to the company 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 the Company's 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. We have elected to perform our annual review during the second quarter of each calendar year. 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. During the fourth quarter of 2013, multiple events and circumstances indicated a significant reduction in the operating performance outlook of one of our reporting units. These events include lower than expected contract awards on several competitive opportunities, changing mission priorities of the U.S. government in relation to our C4ISR contracts and OCO-related work (primarily on maintenance and sustainment of MRAP vehicles), continued delays in our customers' procurement cycle due, in part, to the U.S. government shutdown, and continued margin pressures on some of our contracts. The culmination of these events 38 --------------------------------------------------------------------------------



led us to conduct an interim goodwill impairment analysis on the impacted reporting unit. As a result of this analysis, we recorded a non-cash goodwill impairment charge of $118.4 million for the period ending December 31, 2013.

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.



Accounting Standards Updates

In July 2013, Accounting Standard Update No. 2013-11, Income Taxes (Topic 740), was issued. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. In accordance with this Update, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled. The amendments in this Update do not require new recurring disclosures. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of Accounting Standard Update No. 2013-11 is not expected to have a material impact on our results of operations, financial position or cash flows. In February 2013, Accounting Standard Update No. 2013-2, Other Comprehensive Income (Topic 220), was issued. The amendments in this Update apply to all entities that issue financial statements that are presented in conformity with U.S. GAAP and that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods presented, including interim periods. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of Accounting Standard Update No. 2013-2 did not have an impact on our results of operations, financial position or cash flows. 39 --------------------------------------------------------------------------------



Contractual Obligations

Our contractual obligations as of December 31, 2013 are as follows (in thousands): Payments Due By Period Less than 1 More than 5

Contractual Obligations Total Year 1-3 Years 3-5 Years Years Debt obligations (1) $ 200,000 $ - $ - $ 200,000 $ - Interest on fixed rate debt (1) 65,250 14,500 29,000 21,750 - Operating lease obligations (2) 177,780 29,940 44,745 36,613 66,482 Other long-term liabilities (3) 12,540 1,771 2,290 1,977 6,502 Accrued defined benefit obligations (4) 1,260 138 265 250 607 Total $ 456,830$ 46,349$ 76,300 $ 260,590 $ 73,591 (1) See Note 8 to our consolidated financial statements in Item 8 for additional information regarding debt and related matters. (2) Excludes approximately $11.0 million of deferred rent liabilities. See Note 9 to our consolidated financial statements in Item 8 for additional information regarding operating leases. (3) Includes approximately $11.0 million of deferred rent liabilities as well as gross unrecognized tax benefits of $1.2 million. See Note 9 to our consolidated financial statements in Item 8 for additional information regarding deferred rent liabilities. See Note 12 to our consolidated financial statements in Item 8 for additional information regarding gross unrecognized tax benefits. (4) Includes approximately $1.3 million of 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. Excludes liabilities related to one non-qualified deferred compensation plan for certain highly compensated employees, which are included in the accrued retirement amount on our consolidated balance sheets. The funds deferred by the employees are invested and maintained in rabbi trusts, which are reflected in the employee supplemental savings plan assets on our consolidated balance sheets. These liabilities will be satisfied by assets held in rabbi trusts. See Note 11 to our consolidated financial statements in Item 8 for additional information regarding retirement plans.


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