Attached files
file | filename |
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EX-31.2 - EX-31.2 - Vangent, Inc. | c04329exv31w2.htm |
EX-32.2 - EX-32.2 - Vangent, Inc. | c04329exv32w2.htm |
EX-32.1 - EX-32.1 - Vangent, Inc. | c04329exv32w1.htm |
EX-31.1 - EX-31.1 - Vangent, Inc. | c04329exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the three months ended July 3, 2010
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 333-145355
VANGENT, INC.
Delaware | 20-1961427 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) |
4250 North Fairfax Drive
Suite 1200
Arlington, Virginia 22203
(703) 284-5600
Suite 1200
Arlington, Virginia 22203
(703) 284-5600
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 þ 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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
There were 100 shares of common stock of Vangent, Inc. issued and outstanding at July 3, 2010.
VANGENT, INC.
Table of Contents
Table of Contents
Forward-Looking Statements
This quarterly report on Form 10-Q contains various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section
21E of the Securities Exchange Act of 1934, as expectation or belief concerning future events.
Forward-looking statements are those that do not relate solely to historical fact. They include,
but are not limited to, any statement that may predict, forecast, indicate or imply future results,
performance, achievements or events. Words such as, but not limited to, believe, expect,
anticipate, estimate, intend, plan, targets, projects, likely, will, would,
could and similar expressions or phrases identify forward-looking statements. All forward-looking
statements involve risks and uncertainties. The Company cautions that these statements are further
qualified by important economic, competitive, governmental and technological factors that could
cause our business, strategy or actual results of operations or events to differ materially from
those in the forward-looking statements, including, without limitation, changes in the demand for
services that the Company provides; our ability to generate new business in the United States and
abroad; activities of competitors; bid protests; changes in costs or operating expenses; our
substantial debt; changes in the availability of and cost of capital; general economic and business
conditions and the other factors set forth under Risk Factors in our annual report on Form 10-K for
the year ended December 31, 2009. Accordingly, such forward-looking statements do not purport to be
predictions of future events or circumstances, and there can be no assurance that any
forward-looking statement contained herein will prove to be accurate. The Company undertakes no
obligation, and specifically declines any obligation, to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
Vangent, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per-share amounts)
July 3, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 37,533 | $ | 44,638 | ||||
Trade receivables, net |
140,212 | 109,846 | ||||||
Prepaid expenses and other assets |
10,492 | 7,424 | ||||||
Deferred contract costs |
1,358 | 2,929 | ||||||
Assets of discontinued operations |
6,718 | 15,036 | ||||||
Total current assets |
196,313 | 179,873 | ||||||
Property and equipment, net |
22,914 | 25,124 | ||||||
Intangible assets, net |
140,948 | 151,860 | ||||||
Goodwill |
267,401 | 268,212 | ||||||
Deferred debt financing costs and other |
7,355 | 8,433 | ||||||
Assets of discontinued operations |
| 6,727 | ||||||
Total assets |
$ | 634,931 | $ | 640,229 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | | $ | 13,534 | ||||
Accounts payable and accrued liabilities |
75,422 | 64,849 | ||||||
Accrued interest payable |
7,950 | 8,186 | ||||||
Deferred tax liability |
4,412 | 5,628 | ||||||
Deferred revenue |
4,288 | 3,976 | ||||||
Liabilities of discontinued operations |
5,631 | 7,521 | ||||||
Total current liabilities |
97,703 | 103,694 | ||||||
Long-term debt, net of current portion |
406,754 | 406,832 | ||||||
Other long-term liabilities |
5,009 | 7,194 | ||||||
Deferred tax liability |
16,286 | 12,144 | ||||||
Liabilities of discontinued operations |
199 | 502 | ||||||
Total liabilities |
525,951 | 530,366 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares issued and outstanding |
| | ||||||
Additional paid-in capital |
207,875 | 207,376 | ||||||
Accumulated other comprehensive loss |
(13,815 | ) | (14,949 | ) | ||||
Accumulated deficit |
(85,080 | ) | (82,564 | ) | ||||
Total stockholders equity |
108,980 | 109,863 | ||||||
Total liabilities and stockholders equity |
$ | 634,931 | $ | 640,229 | ||||
See notes to condensed consolidated financial statements.
3
Table of Contents
Vangent, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||
July 3, | June 27, | July 3, | June 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
$ | 214,846 | $ | 135,115 | $ | 409,043 | $ | 267,988 | ||||||||
Cost of revenue |
182,459 | 115,918 | 340,685 | 223,284 | ||||||||||||
Gross profit |
32,387 | 19,197 | 68,358 | 44,704 | ||||||||||||
General and administrative expenses |
11,494 | 9,547 | 23,684 | 19,237 | ||||||||||||
Selling and marketing expenses |
5,447 | 4,386 | 11,122 | 8,529 | ||||||||||||
Operating income |
15,446 | 5,264 | 33,552 | 16,938 | ||||||||||||
Interest expense, net |
7,362 | 8,533 | 15,598 | 16,884 | ||||||||||||
Income (loss) from continuing operations
before income taxes |
8,084 | (3,269 | ) | 17,954 | 54 | |||||||||||
Provision for income taxes |
1,851 | 1,694 | 3,685 | 3,438 | ||||||||||||
Income (loss) from continuing operations |
6,233 | (4,963 | ) | 14,269 | (3,384 | ) | ||||||||||
Loss from discontinued operations,
net of tax |
(14,348 | ) | (1,149 | ) | (16,785 | ) | (1,764 | ) | ||||||||
Net loss |
$ | (8,115 | ) | $ | (6,112 | ) | $ | (2,516 | ) | $ | (5,148 | ) | ||||
See notes to condensed consolidated financial statements
4
Table of Contents
Vangent, Inc.
Condensed Consolidated
Statements of Stockholders Equity and Comprehensive Loss
(Unaudited)
(in thousands, except share amounts)
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders | ||||||||||||||||||||
Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||
Balance, December 31,
2008 |
100 | $ | | $ | 206,328 | $ | (13,135 | ) | $ | (48,556 | ) | $ | 144,637 | |||||||||||
Effect of hedging
activities, net of tax |
| | | 905 | | 905 | ||||||||||||||||||
Foreign currency
translation adjustment |
| | | 1,250 | | 1,250 | ||||||||||||||||||
Net loss |
| | | | (5,148 | ) | (5,148 | ) | ||||||||||||||||
Total comprehensive loss |
(2,993 | ) | ||||||||||||||||||||||
Equity-based compensation |
| | 511 | | | 511 | ||||||||||||||||||
Balance, June 27, 2009 |
100 | $ | | $ | 206,839 | $ | (10,980 | ) | $ | (53,704 | ) | $ | 142,155 | |||||||||||
Balance, December 31,
2009 |
100 | $ | | $ | 207,376 | $ | (14,949 | ) | $ | (82,564 | ) | $ | 109,863 | |||||||||||
Effect of hedging
activities, net of tax |
| | | 2,466 | | 2,466 | ||||||||||||||||||
Foreign currency
translation adjustment |
| | | (1,332 | ) | | (1,332 | ) | ||||||||||||||||
Net loss |
| | | | (2,516 | ) | (2,516 | ) | ||||||||||||||||
Total comprehensive loss |
(1,382 | ) | ||||||||||||||||||||||
Equity-based compensation |
| | 499 | | | 499 | ||||||||||||||||||
Balance, July 3, 2010 |
100 | $ | | $ | 207,875 | $ | (13,815 | ) | $ | (85,080 | ) | $ | 108,980 | |||||||||||
5
Table of Contents
Vangent, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended | ||||||||
July 3, | June 27, | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (2,516 | ) | $ | (5,148 | ) | ||
Less: Loss from discontinued operations, net of tax |
(16,785 | ) | (1,764 | ) | ||||
Income (loss) from continuing operations |
14,269 | (3,384 | ) | |||||
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by operating activities: |
||||||||
Amortization of intangible assets |
10,540 | 10,587 | ||||||
Depreciation and amortization |
5,901 | 5,565 | ||||||
Amortization of deferred debt financing costs |
1,126 | 1,126 | ||||||
Equity-based compensation expense |
499 | 511 | ||||||
Deferred income taxes |
3,360 | 3,028 | ||||||
Changes in operating assets and liabilities: |
||||||||
Trade receivables |
(30,544 | ) | 6,400 | |||||
Prepaid expenses and other assets |
(4,339 | ) | (4,682 | ) | ||||
Accounts payable and other liabilities |
13,045 | (9,502 | ) | |||||
Continuing operations, net |
13,857 | 9,649 | ||||||
Discontinued operations, net |
(2,870 | ) | (2,574 | ) | ||||
Net cash provided by operating activities |
10,987 | 7,075 | ||||||
Cash flows from investing activities |
||||||||
Capital expenditures, continuing operations |
(3,526 | ) | (4,779 | ) | ||||
Discontinued operations, net |
(811 | ) | (1,760 | ) | ||||
Net cash used in investing activities |
(4,337 | ) | (6,539 | ) | ||||
Cash flows from financing activities |
||||||||
Repayment of senior secured term loan |
(13,612 | ) | | |||||
Other |
(53 | ) | (163 | ) | ||||
Net cash used in financing activities, continuing operations |
(13,665 | ) | (163 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
(170 | ) | 258 | |||||
Net increase (decrease) in cash and cash equivalents |
(7,185 | ) | 631 | |||||
Total cash and cash equivalents, beginning of period |
45,584 | 21,134 | ||||||
Total cash and cash equivalents, end of period |
38,399 | 21,765 | ||||||
Less: Cash and cash equivalents, discontinued operations |
866 | 1,601 | ||||||
Cash and cash equivalents, continuing operations |
$ | 37,533 | $ | 20,164 | ||||
Supplemental noncash investing and financing activities |
||||||||
Leasehold improvements provided by lessor under operating leases |
$ | 773 | $ | 347 | ||||
Supplemental cash flow information |
||||||||
Interest paid, continuing operations |
$ | 15,226 | $ | 16,446 | ||||
Income taxes paid: |
||||||||
Continuing operations |
135 | 377 | ||||||
Discontinued operations |
299 | 247 |
See notes to condensed consolidated financial statements
6
Table of Contents
Vangent, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollars in thousands)
1. Organization and Basis of Presentation
Basis of Presentation
Vangent, Inc. (Vangent or Company) is a 100%-owned subsidiary of Vangent Holding Corp.
Vangent Holding LLC is the majority shareholder of Vangent Holding Corp. Vangent Holding LLC is
90% owned by The Veritas Capital Fund III, L.P. and 10% owned by Pearson plc (Pearson).
The unaudited condensed consolidated financial statements include the accounts of the Company
and its domestic and foreign subsidiaries and have been prepared in accordance with generally
accepted accounting principles for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Certain information and note disclosures normally included in
complete financial statements have been condensed or omitted pursuant to the applicable rules and
regulations. The Company believes that all disclosures are adequate to make the information
presented not misleading. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the related notes thereto included in
our annual report on Form 10-K for the year ended December 31, 2009.
All normal and recurring adjustments necessary to fairly present the financial position and
results of operations as of and for the periods presented have been included. The results of
operations presented are not necessarily indicative of the results to be expected for the full
fiscal year or for any future periods. The Company uses estimates and assumptions in the
preparation of its financial statements. The estimates are primarily based on historical experience
and business knowledge and are revised as circumstances change. Actual results could differ
materially from those estimates.
Nature of Operations
Vangent serves customers in the U.S. government, international governments, higher education,
and the private sector. The Companys primary customer focus is U.S. and international governmental
agencies that utilize third-party providers to design, build and operate technologically advanced
systems. The Department of Commerce represented 34%, Department of Health and Human Services
represented 30%, and the Department of Education represented 13% of total revenue for the six
months ended July 3, 2010.
Variable Interest Entities
The Company has interests in foreign joint ventures that provide government contract services
in the United Kingdom and in the United Arab Emirates. In the United Kingdom arrangement, the
Company has guaranteed joint venture performance under a fixed-priced subcontract and has committed
to fund working capital requirements. Under the joint venture agreements the Company holds less
than a majority ownership interest in the joint ventures; however, the Company is entitled to a
majority of the income and losses of the joint ventures and has determined that it is the primary
beneficiary of each of the joint ventures. The joint ventures are fully consolidated in the
Companys consolidated financial statements. Total assets of $2,041 and total liabilities of $511
of the joint ventures are included in the consolidated financial statements at July 3, 2010.
Fiscal Year and Quarterly Periods
The Companys fiscal year begins on January 1 and ends on December 31. Quarterly periods are
based on a four-week, four-week, five-week methodology ending on the Saturday nearest to the end of
the quarter to align with the Companys domestic business processes. The six-month period ended
July 3, 2010, is 6 days, or 3%, longer that the corresponding period in 2009. Foreign subsidiaries
are consolidated based on the calendar quarter.
7
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2. Discontinued Operations
At the end of 2009, Vangent completed an evaluation of its international business and
committed to a plan to sell its business operations in Latin America. The condensed consolidated
financial statements have been revised for all periods presented to report Latin America as
discontinued operations. The discontinued operations include: Vangent Mexico, S.A. de C.V.; Vangent
Servicios de Mexico, S.A. de C.V.; Vangent Argentina, S.A.; Vangent Venezuela, C.A.; Vangent Puerto
Rico, Inc.; and Proyectos Prohumane México, S. A. de C. V.
A summary of assets and liabilities, revenue, and cost and expenses of the discontinued
operations that are segregated and reported separately in the consolidated financial statements
follows:
July 3, | December 31, | |||||||
2010 | 2009 | |||||||
Balance Sheet Data |
||||||||
Cash |
$ | 866 | $ | 946 | ||||
Trade receivables |
10,236 | 9,323 | ||||||
Other assets |
5,526 | 4,767 | ||||||
Allowance for expected loss on disposal |
(9,910 | ) | | |||||
Total current assets |
6,718 | 15,036 | ||||||
Property and equipment , net |
| 4,744 | ||||||
Deferred income taxes and other |
| 1,983 | ||||||
Total assets |
6,718 | 21,763 | ||||||
Current liabilities |
5,631 | 7,521 | ||||||
Long-term liabilities |
199 | 502 | ||||||
Net assets of discontinued operations |
$ | 888 | $ | 13,740 | ||||
Three Months Ended | Six Months Ended | |||||||||||||||
July 3, | June 27, | July 3, | June 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Statements of Operations Data |
||||||||||||||||
Revenue |
$ | 7,075 | $ | 5,895 | $ | 14,210 | $ | 10,494 | ||||||||
Costs and expenses |
7,346 | 7,529 | 14,846 | 12,842 | ||||||||||||
Expected loss on disposal |
15,277 | | 17,895 | | ||||||||||||
Other (income) expense, net |
7 | (38 | ) | (746 | ) | (18 | ) | |||||||||
Loss from discontinued operations
before income taxes |
(15,555 | ) | (1,596 | ) | (17,785 | ) | (2,330 | ) | ||||||||
Provision (benefit) for income taxes |
(1,207 | ) | (447 | ) | (1,000 | ) | (566 | ) | ||||||||
Loss from discontinued operations, net of tax |
$ | (14,348 | ) | $ | (1,149 | ) | $ | (16,785 | ) | $ | (1,764 | ) | ||||
Based on estimates of fair value of the discontinued operations, a charge for expected loss on
disposal of $4,965 was recorded for the year ended December 31, 2009. The charge was calculated
based on estimates of fair value, less cost to sell, compared with net assets of discontinued
operations. The fair value estimates were revised in the second quarter of 2010 based on letters
of intent from market participants that are potential buyers of the operations in Latin America. As
a result, an additional charge of $17,895 for the expected loss on disposal was recorded for the
six months ended July 3, 2010. Charges for the expected loss on disposal include $4,692 for
cumulative translation losses recorded as part of other comprehensive loss for discontinued
operations. The final adjustment to the expected loss on disposal will be recorded based on the
terms and completion of a disposal transaction.
No corporate interest expense was allocated to the discontinued operations since there was no
corporate debt specifically attributable to the operations. The senior secured credit facility
provides that under certain circumstances a mandatory debt payment is required for 100% of the
proceeds of qualifying asset dispositions. The terms of the ultimate disposition of the
discontinued operations and other conditions will determine whether or not a mandatory debt payment
will result.
8
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Discontinued Operations in Venezuela Designation of Venezuelan Economy as Highly Inflationary
Revenue from Vangent Venezuela, C.A. was $617 for the three months and $1,007 for the six
months ended July 3, 2010. Venezuela has experienced significant inflation in the last several
years, and effective January 2010 the economy has been determined to be highly inflationary under
U. S. generally accepted accounting principles. An economy is considered highly inflationary when
cumulative three-year inflation exceeds 100% which occurred in the fourth quarter of 2009. As a
result Vangent Venezuela uses the U.S. dollar as the functional currency effective January 2010 and
net monetary assets held in bolivar fuertes are translated into U.S. dollars at each balance sheet
date with remeasurement adjustments and any foreign currency transaction gains or losses recognized
in income or expense. In June 2010, the Venezuelan government instituted foreign exchange controls
that replaced the parallel or market rate, and Vangent began to use the foreign currency exchange
rate controlled and regulated by the Central Bank of Venezuela under a system referred to as
Sistema de Transacciones con Titulos en Moneda Extranjera, or SITME, in place of the parallel rate
to consolidate Vangent Venezuela. Other income and expense, net, for discontinued operations
includes net foreign currency gains from Vangent Venezuela of $162 for the three months and $53 for
the six months ended July 3, 2010.
Discontinued Operations in Argentina Variable Interest Entity
Vangent Argentina, S.A. has an interest in a joint venture in Argentina that began providing
government services in the second quarter of 2009. Vangent Argentina and the joint venture partner
have each guaranteed joint venture performance under a fixed-priced subcontract. Vangent Argentina
holds less than a majority ownership interest in the joint venture and is entitled to 50% of the
income and losses of the joint venture. Vangent Argentina has determined that it does not have the
power to direct matters that most significantly impact the activities of the joint venture and that
it is not the primary beneficiary of the joint venture. The joint venture is accounted for under
the equity method of accounting as part of discontinued operations. Equity in net income of the
joint venture of $385 for the three months and $777 for the six months ended July 3, 2010, is
included in loss from discontinued operations. Investment in joint venture of $1,341, representing
the Companys maximum exposure to loss as of July 3, 2010, is included in assets of discontinued
operations.
3. Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued an Accounting
Standards Update (ASU), Multiple-Deliverable Revenue Arrangements, to (i) provide guidance on
whether multiple deliverables exist, how the arrangement should be separated, and the consideration
allocated; (ii) require an allocation of revenue using estimated selling prices of deliverables if
a vendor does not have vendor-specific objective evidence or third-party evidence of the selling
price; and (iii) eliminate the residual method. The update becomes effective on a prospective basis
in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The
Company does not expect that adoption will have a material effect on its results of operations or
financial position.
In October 2009, the FASB issued an ASU, Certain Revenue Arrangements that Include Software
Elements, that amends existing requirements to exclude from its scope tangible products that
contain both software and non-software components that function together to deliver a products
essential functionality. The update becomes effective on a prospective basis in fiscal years
beginning on or after June 15, 2010, with earlier application permitted. The Company does not
expect that adoption will have a material effect on its results of operations or financial
position.
In January 2010, the FASB issued an ASU, Improving Disclosures about Fair Value Measurements,
requiring additional disclosures on fair value measurements. Disclosure requirements for transfers
in and out of levels 1 and 2 of the hierarchy for fair value measurements, that became effective
January 1, 2010, did not have a material effect on the Companys results of operations or financial
position. Disclosures about purchases, sales, issuance, and settlements in a rollforward of
activity for level 3 fair value measurements are deferred until fiscal years beginning after
December 15, 2010. The Company does not expect that adoption will have a material effect on its
results of operations or financial position.
In April 2010, the FASB issued an ASU, Revenue Recognition Milestone Method, to provide
guidance on (i) defining a milestone; and (ii) determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development transactions. The guidance
applies to research or development deliverables or units of accounting under which a vendor
satisfies its performance obligations over a period of time, and when a portion or all of the
consideration is contingent upon uncertain future events and circumstances. The guidance becomes
effective on a prospective basis for milestones achieved in fiscal years beginning on or after June
15, 2010,
with early adoption and retrospective application permitted. The Company does not expect that
adoption will have a material effect on its results of operations or financial position.
9
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In June 2009, the FASB issued new requirements that are now part of the ASC topic on
Consolidations, dealing with the consolidation of variable interest entities. The new requirements
change how a reporting entity determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated and requires a reporting
entity to provide additional disclosures about its involvement with variable interest entities and
any significant changes in risk exposure due to that involvement. The new requirements became
effective on January 1, 2010. Adoption did not have a material effect on the Companys results of
operations or financial position.
In July 2010, the FASB issued an ASU, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses, to expand disclosures for exposure to credit
losses from lending arrangements, including credit risks involved in financing receivables and
allowances for credit losses. The new requirements will become effective in December 2010. The
Company does not expect that adoption will have a material effect on its results of operations or
financial position.
4. Trade Receivables
A summary of trade receivables and customers that represented 10% or more of trade receivables
follows:
July 3, | December 31, | |||||||
2010 | 2009 | |||||||
Billed trade receivables |
$ | 96,710 | $ | 74,929 | ||||
Billable trade receivables |
35,452 | 26,798 | ||||||
Unbilled trade receivables pending completion of milestones,
contract authorizations, or retainage |
7,992 | 7,432 | ||||||
Other |
217 | 840 | ||||||
140,371 | 109,999 | |||||||
Allowance for doubtful accounts |
(159 | ) | (153 | ) | ||||
Trade receivables, net |
$ | 140,212 | $ | 109,846 | ||||
Trade accounts receivable from major customers |
||||||||
Department of Commerce |
31 | % | * | % | ||||
Department of Health and Human Services |
28 | % | 34 | % | ||||
Department of Education |
13 | % | 16 | % |
* | Less than 10%. |
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Table of Contents
5. Intangible Assets
A summary of intangible assets follows:
Weighted | ||||||||||
Average Life | July 3, | December 31, | ||||||||
(in years) | 2010 | 2009 | ||||||||
Indefinite-life intangible assets |
||||||||||
Intellectual property |
Indefinite | $ | 10,328 | $ | 10,328 | |||||
Definite-life intangible assets |
||||||||||
Customer relationships |
10.7 | 200,729 | 201,101 | |||||||
Other |
4 | 658 | 658 | |||||||
201,387 | 201,759 | |||||||||
Accumulated amortization |
(70,767 | ) | (60,227 | ) | ||||||
Definite-life intangible assets, net |
130,620 | 141,532 | ||||||||
Intangible assets, net |
$ | 140,948 | $ | 151,860 | ||||||
Amortization of the unamortized balance of definite-life intangible assets for each of the
next five years and thereafter is scheduled as follows:
Years Ending December 31 | ||||
2010 (remaining six months) |
$ | 10,497 | ||
2011 |
20,702 | |||
2012 |
20,539 | |||
2013 |
20,539 | |||
2014 |
11,897 | |||
Thereafter |
46,446 | |||
$ | 130,620 | |||
6. Long-Term Debt
A summary of long-term debt follows:
July 3, | December 31, | |||||||
2010 | 2009 | |||||||
Term loan, due February 14, 2013, with interest at variable rates
(2.50% at July 3, 2010) |
$ | 216,754 | $ | 230,366 | ||||
9 5/8% Senior subordinated fixed rate notes, due February 15, 2015 |
190,000 | 190,000 | ||||||
406,754 | 420,366 | |||||||
Less: current portion of term loan |
| (13,534 | ) | |||||
Long-term debt, net of current portion |
$ | 406,754 | $ | 406,832 | ||||
Scheduled maturities of long-term debt follow:
2011 |
$ | | ||
2012 |
1,711 | |||
2013 |
215,043 | |||
2014 |
| |||
2015 |
190,000 | |||
$ | 406,754 | |||
Senior Secured Credit Facility
At July 3, 2010, the senior secured credit facility consisted of a term loan of $216,754 due
February 14, 2013, and, subject to certain limitations, an available revolving credit facility of
up to $49,800 that expires February 14, 2012. There were no borrowings outstanding under the
revolving credit facility at July 3, 2010, or December 31, 2009. A commitment fee of 0.5% per year
is paid on the available unused portion of the revolving credit facility.
11
Table of Contents
Borrowings under the senior secured credit facility bear interest at a rate equal to, at the
Companys option, either: (i) the base rate, as defined, plus an applicable margin of 1.00-1.50%,
or (ii) the adjusted LIBOR, as defined, plus an applicable margin of 2.00-2.50% (2.00% at July 3,
2010). Borrowings are subject to mandatory prepayment with (i) 100% of the net cash proceeds of
certain asset sales; (ii) 50% of the net cash proceeds of equity offerings or capital contributions
subject to certain exceptions; (iii) 100% of the net cash proceeds of additional debt; and (iv) a
percentage of annual excess cash flow, as defined. Payments resulting from the annual excess cash
flow requirement are due 90 days following the year end. Based on the excess cash flow calculation
for the year ended December 31, 2009, a mandatory payment of $13,612 was made March 31, 2010. Since
the excess cash flow requirement is based on annual cash flow, it is not possible to estimate the
amount, if any, that would become payable in March 2011 or March 2012.
Borrowings are secured by accounts receivable, cash, intellectual property and other assets
and are guaranteed jointly and severally, by all existing and future domestic subsidiaries.
Foreign subsidiaries do not guarantee the borrowings. The senior secured credit facility contains
various customary affirmative and negative covenants and events of default, including, but not
limited to, restrictions on the disposal of assets, incurring additional indebtedness or
guaranteeing obligations, paying dividends, creating liens on assets, making investments,
loans or advances, and compliance with a maximum consolidated leverage ratio. As of July 3, 2010,
the Company was in compliance with all of the affirmative and negative covenants.
The more restrictive covenants relate to (i) loans and advances by Vangent, Inc. to
non-guarantor subsidiaries, and (ii) compliance with a maximum allowable consolidated leverage
ratio. At July 3, 2010, the cumulative amount of net loans to and investments in Vangent Mexico,
S.A. de C.V., a non-guarantor subsidiary, by Vangent, Inc. amounted to $9,124 compared with the
maximum allowable amount of $10,000 for loans to or investments in non-guarantor subsidiaries under
the senior secured credit facility. The consolidated leverage ratio, as defined in the senior
secured credit facility, is based on consolidated indebtedness, as defined, reduced by unrestricted
cash and cash equivalents in excess of $5,000, divided by adjusted EBITDA (earnings before
interest, taxes, depreciation and amortization, adjusted for certain unusual and non-recurring
items, as defined) for a twelve-month period. At July 3, 2010, the consolidated leverage ratio was
4.34 to 1, compared with the maximum allowable ratio of 5.75 to 1 applicable to the period. The
maximum allowable consolidated leverage ratio steps down to 5.50 to 1 at December 31, 2010.
9 5/8% Senior Subordinated Notes
In February 2007, the Company completed an offering of $190,000 principal amount of 9 5/8%
senior subordinated notes due February 15, 2015. Interest accrues at the fixed rate of 9 5/8% and
is paid semi-annually. The notes are general unsecured obligations of the Company and are
subordinated to all existing and future senior loans including borrowings under the senior secured
credit facility. The notes are guaranteed, jointly and severally, by all existing and future
domestic subsidiaries. Foreign subsidiaries do not guarantee the notes.
The Company may redeem all or part of the notes at any time prior to February 15,
2011, at a redemption price of 100% of the principal amount plus an applicable premium, as defined
and additional interest, as defined. The notes are redeemable at the option of the Company at the
redemption price of 104.8125% of the principal amount on or after February 15, 2011, 102.4063% on
or after February 15, 2012, and 100% on or after February 15, 2013.
12
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7. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss and a summary of changes in accumulated
other comprehensive loss for hedging activities follows:
July 3, | December 31, | |||||||
2010 | 2009 | |||||||
Accumulated other comprehensive loss |
||||||||
Effect of hedging activities, net of tax: |
||||||||
Continuing operations Interest rate swap agreements |
$ | (2,481 | ) | $ | (4,634 | ) | ||
Discontinued operations Foreign currency forward contracts |
(79 | ) | (392 | ) | ||||
(2,560 | ) | (5,026 | ) | |||||
Foreign currency cumulative translation adjustments: |
||||||||
Continuing operations |
(6,642 | ) | (5,287 | ) | ||||
Discontinued operations |
(4,613 | ) | (4,636 | ) | ||||
(11,255 | ) | (9,923 | ) | |||||
Total accumulated other comprehensive loss |
$ | (13,815 | ) | $ | (14,949 | ) | ||
Hedging Activities | ||||||||||||
Continuing | Discontinued | |||||||||||
Operations | Operations | |||||||||||
Foreign | ||||||||||||
Interest | Currency | |||||||||||
Summary of changes in accumulated other | Rate | Forward | ||||||||||
comprehensive loss for hedging activities | Swaps | Contracts | Total | |||||||||
Balance, December 31, 2009 |
$ | (4,634 | ) | $ | (392 | ) | $ | (5,026 | ) | |||
Change in fair value |
(622 | ) | (8 | ) | (630 | ) | ||||||
Reclassification of loss to interest expense |
2,775 | | 2,775 | |||||||||
Reclassification of loss to discontinued
operations cost of revenue |
| 321 | 321 | |||||||||
Balance, July 3, 2010 |
$ | (2,481 | ) | $ | (79 | ) | $ | (2,560 | ) | |||
8. Derivative Instruments, Hedging Activities and Financial Instruments
Vangent, Inc. uses derivative financial instruments to manage interest rate risk and Vangent
Mexico, S.A. de C.V., a 100%-owned subsidiary included as part of discontinued operations, has used
derivative instruments to manage certain foreign currency exchange rate risks. Interest rate swap
agreements are used as cash-flow hedges of interest rate risk associated with variable-rate
borrowings under the senior secured credit facility. Foreign currency contracts have been used to
hedge exchange rate risks associated with purchase commitments and obligations in currencies other
than the Mexican peso. Derivatives can involve credit risk from the possible non-performance by the
parties. At July 3, 2010, the fair values of the derivative contracts resulted in derivative
liabilities, and the fair value liabilities reflect the Companys credit adjusted discount rate.
The Company does not enter into derivative transactions for trading or speculative purposes.
For derivative financial instruments that qualify as a cash-flow hedge, the effective portion
of the gain/loss is reported as a component of other comprehensive income/loss (OCI) and is
subsequently reclassified to the statements of operations in the period or periods in which the
hedged transaction affects the statement of operations.
Interest Rate Swap Agreements on Variable-Rate Term Loan
The Company has entered into interest rate swap agreements with a commercial bank to hedge
fluctuations in LIBOR interest rates on a portion of the term loan borrowing under the senior
secured credit facility. The Company exchanged its variable LIBOR interest rate for a fixed
interest rate. At July 3, 2010, an interest rate swap agreement at the notional amount of $150,000
to pay fixed interest at the rate of 3.28% and to receive variable interest based on three-month
LIBOR was outstanding and scheduled to mature in February 2011.
13
Table of Contents
The Company documented its risk management objective and nature of the risks being hedged and
designated the interest rate swaps as cash flow hedges at inception of the agreements. The Company
performs a quarterly analysis of the effectiveness of the hedge transactions and has concluded that
the hedging relationship is highly effective due to the consistency of critical terms of the
interest rate swap agreements and related term loan under the senior secured credit facility. The
fair value of the interest rate swap liability was $2,481 at July 3, 2010, and $4,657 at December
31, 2009. The unrealized loss on interest rate swaps was $2,481 at July 3, 2010, all of which
included in accumulated OCI in the consolidated statement of stockholders equity and is expected
to be reclassified to interest expense over the next twelve months.
Discontinued Operations Foreign Currency Contracts
In 2009, Vangent Mexico entered into foreign currency forward exchange contracts with a
commercial bank to hedge fluctuations in the Mexican peso exchange rates. At July 3, 2010, there
were no foreign currency forward exchange contracts outstanding.
Vangent Mexico documented its risk management objective and nature of the risks being hedged
for foreign currency contracts that qualify as cash flow hedges at inception of the agreements.
Some of the foreign currency hedge contracts no longer qualify as cash flow hedges since it is
probable that a forecasted transaction will not occur, and cost of revenue for discontinued
operations for the six months ended July 3, 2010, includes a loss of $89 reclassified from OCI for
contracts that no longer qualify. For hedge contracts that do qualify as cash flow hedges, an
unrealized loss of $79 at July 3, 2010, is included in accumulated OCI in the consolidated
statement of stockholders equity and is expected to be reclassified to cost of revenue over the
next twelve months.
Derivative Instruments and Hedging Activities
A tabular disclosure of the fair values of derivative instruments reported in the balance
sheet and the effect of derivative instruments on the statements of operations follows:
Balance Sheet Data | ||||||||||
Fair Value of | ||||||||||
Liability Derivatives | ||||||||||
July 3, | December 31, | |||||||||
Derivative Contracts | Balance Sheet Location | 2010 | 2009 | |||||||
Derivatives that qualify as
cash flow hedges |
||||||||||
Interest rate swap agreements |
Accrued liabilities | $ | 2,481 | $ | 4,657 | |||||
Foreign currency forward contracts |
Accrued liabilities, discontinued operations | | 251 | |||||||
Derivatives that do not qualify
as cash flow hedges |
||||||||||
Foreign currency forward contracts |
Accrued liabilities, discontinued operations | | 88 |
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Table of Contents
Statements of Operations Data | ||||||||||||||||
Amount of Gain | ||||||||||||||||
(Loss) Recognized | ||||||||||||||||
Amount of Gain | in Income on | |||||||||||||||
(Loss) | Location of Gain (Loss) | Derivative | ||||||||||||||
Recognized in | Amount of Gain | Recognized in Income on | (Ineffective | |||||||||||||
OCI on | Location of Gain (Loss) | (Loss) Reclassified | Derivative (Ineffective | Portion and | ||||||||||||
Derivative | Reclassified from | from Accumulated | Portion and Amount | Amount Excluded | ||||||||||||
(Effective | Accumulated OCI into | OCI into Income | Excluded from Effectiveness | from Effectiveness | ||||||||||||
Derivative Contracts | Portion) | Income (Effective Portion) | (Effective Portion) | Testing) | Testing) | |||||||||||
Three Months Ended July 3, 2010 |
||||||||||||||||
Derivatives that qualify as
cash flow hedges |
||||||||||||||||
Interest rate swap agreements |
$10 | Interest expense | $(1,108 | ) | Interest expense | $ | ||||||||||
Foreign currency forward contracts |
| Cost of revenue, discontinued operations |
(13 | ) | | | ||||||||||
Derivatives that do not qualify
as cash flow hedges |
||||||||||||||||
Foreign currency forward contracts |
| | Cost of revenue, discontinued operations |
| ||||||||||||
Three Months Ended June 27, 2009 |
||||||||||||||||
Derivatives that qualify as cash
flow hedges |
||||||||||||||||
Interest rate swap agreements |
806 | Interest expense | (1,585 | ) | Interest expense | 23 | ||||||||||
Foreign currency forward contracts |
(480 | ) | Cost of revenue | (27 | ) | | | |||||||||
Six Months Ended July 3, 2010 |
||||||||||||||||
Derivatives that qualify as cash
flow hedges |
||||||||||||||||
Interest rate swap agreements |
(622 | ) | Interest expense | 2,775 | Interest expense | 23 | ||||||||||
Foreign currency forward contracts |
(8 | ) | Cost of revenue, discontinued operations |
(321 | ) | | | |||||||||
Derivatives that do not qualify
as cash flow hedges |
||||||||||||||||
Foreign currency forward contracts |
| | Cost of revenue, discontinued operations |
(89 | ) | |||||||||||
Six Months Ended June 27, 2009 |
||||||||||||||||
Derivatives that qualify as
cash flow hedges |
||||||||||||||||
Interest rate swap agreements |
(1,152 | ) | Interest expense | (2,793 | ) | Interest expense | 48 | |||||||||
Foreign currency forward contracts |
(763 | ) | Cost of revenue | (27 | ) | | |
15
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Fair Value Measurements
Fair value is the price that would be received to sell an asset or to transfer a liability in
an orderly transaction between market participants at the measurement date. A summary of the bases
used to measure financial assets and financial liabilities reported at fair value on a recurring
basis in the consolidated balance sheets follows:
July 3, | December 31, | |||||||
2010 | 2009 | |||||||
Liabilities |
||||||||
Level 1 - Quoted prices in active markets for identical items |
$ | | $ | | ||||
Level 2 - Significant other observable inputs: |
||||||||
Interest rate swap agreements |
2,481 | 4,657 | ||||||
Foreign currency forward contracts |
| 339 | ||||||
Level 3 - Significant unobservable inputs |
| |
Financial Instruments
The fair values of financial instruments at July 3, 2010, follow:
Carrying | ||||||||
Amount | Fair Value | |||||||
Long-term debt |
||||||||
Variable-rate term loan under the senior secured credit facility |
$ | 216,754 | $ | 216,754 | ||||
9 5/8% senior subordinated notes, due February 15, 2015 |
190,000 | 181,212 | ||||||
$ | 406,754 | $ | 397,966 | |||||
Interest rate swap agreements to pay fixed and receive variable |
||||||||
Accrued liabilities |
$ | 2,481 | $ | 2,481 | ||||
The carrying amount of the variable-rate term loan under the senior secured credit facility
approximates fair value. The fair value of the 9 5/8% senior subordinated notes is based on quoted
market prices. At July 3, 2010, the quoted market price was $95.375 per $100 reflecting a yield of
11.1%. The fair value of interest rate swap
agreements and foreign currency forward contracts is based on quoted prices for similar assets
or liabilities in active markets adjusted for non-performance risk. The carrying amounts of other
financial instruments, including cash and cash equivalents, accounts receivable, and accounts
payable and accrued liabilities, approximate fair value due to their short term nature.
9. Income Taxes
The provision for income taxes is composed of U.S. federal, state and local and foreign income
taxes. The provision for income taxes of $3,685 for the six months ended July 3, 2010, was reduced
by $2,180 for a change in the tax valuation allowance for deferred tax assets resulting from the
utilization of a portion of the net operating loss carryforward against taxable income earned for
the six months ended July 3, 2010.
A tax valuation allowance is recorded against deferred tax assets when it is more likely than
not that a tax benefit will not be realized in the future. The assessment requires judgment with
respect to tax benefits that may be realized. The Company considers all available positive and
negative evidence, including future reversals of temporary differences, projected future taxable
income, tax planning strategies, and recent financial results. The Company has concluded as of July
3, 2010, based upon all available evidence, that it is more likely than not that the U.S. deferred
tax assets will not be realizable. The tax valuation allowance amounted to $42.5 million at July 3,
2010. In the event the Company determines in a future period that realization of deferred tax
benefits, primarily net operating loss carryforwards, is more likely than not, all or a portion of
the tax valuation allowance would be reversed. A reversal or reduction to the tax valuation
allowance would be recorded as a reduction to the provision for income taxes
Deferred tax liabilities aggregated $20,698 at July 3, 2010, and were primarily related to an
indefinite lived asset (goodwill) that is amortized for tax purposes, but is not amortized for
financial accounting and reporting purposes.
The ASC topic on Income Taxes prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of tax positions taken, or expected to be
taken, in a tax return. Vangent is indemnified and is not liable for any income taxes that relate
to the pre-acquisition periods prior to February 15, 2007. There was no liability for unrecognized
tax benefits at July 3, 2010. Vangent does not expect changes in unrecognized tax benefits, if any,
within the next twelve months to have a material impact on the provision for income taxes or the
effective tax rate.
16
Table of Contents
Vangent and its subsidiaries conduct business and are subject to income taxes in the United
States and certain foreign countries. Vangents income tax returns for 2009, 2008, and 2007 are
subject to examination by federal, state, local, or foreign tax authorities. Interest and
penalties, if any, relating to income taxes are charged to the provision for income taxes.
10. Commitments and Contingencies
Payments to the Company by U. S. Government agencies on cost-plus contracts are provisional
and are subject to adjustment based on audits performed by the Defense Contract Audit Agency.
Audits of incurred cost submissions for the years 2005 to 2009 are open. The Company is also
subject to audits, legal proceedings, investigations and claims arising out of the ordinary course
of business and accrues a liability if an unfavorable outcome is probable. In the opinion of
management, resolution of such matters is not expected to have a material effect on the Companys
results of operations or financial position.
11. Equity-Based Compensation
No stock options are authorized and no stock options have been granted by Vangent.
Certain members of management of Vangent and outside directors of Vangent Holding Corp. have
been granted Class B membership interests in Vangent Holding LLC, the majority shareholder of
Vangent Holding Corp. which in turn owns all of Vangents common stock. At July 3, 2010, the
outstanding balance of grants of Class B membership interests represented 5.3% of the profit
interests in Vangent Holding LLC. Pursuant to the terms of the operating agreement governing
Vangent Holding LLC, the Class B membership interests are subject to a five-year vesting schedule,
except in the event of a change of control. The unvested portion of Class B membership interests
resulting from forfeitures reverts to the holders of Class A membership interests in Vangent
Holding LLC. Class B
membership interests are granted with no exercise price or expiration date. Holders of Class
B membership interests are entitled to receive their respective proportional interest of all
distributions made by Vangent Holding LLC provided the holders of the Class A membership interests
have received an 8% per annum internal rate of return on their invested capital. Grants of Class B
membership interests are limited to 7.5% of the profits interest in Vangent Holding LLC in the
aggregate.
A summary of activity for grants and the outstanding balance of Class B membership interests
in Vangent Holding LLC follows:
Class B | Fair Value of | |||||||||||
Membership | Class B | |||||||||||
Interests | Membership | |||||||||||
Available for | Class B Interests | Interests at Date of | ||||||||||
Grant | Outstanding | Grant | ||||||||||
Balance, December 31, 2009 |
2.0 | % | 5.6 | % | $ | 5,602 | ||||||
Granted |
| | | |||||||||
Forfeited |
0.2 | (0.3 | ) | (178 | ) | |||||||
Balance, July 3, 2010 |
2.2 | % | 5.3 | % | $ | 5,424 | ||||||
At July 3, 2010: |
||||||||||||
Vested |
2.9 | % | ||||||||||
Not yet vested |
2.4 | |||||||||||
5.3 | % | |||||||||||
17
Table of Contents
Vangent charges equity-based compensation expense for awards of Class B membership interests
in Vangent Holding LLC granted to its employees and independent directors. Equity-based
compensation expense is amortized on a straight-line basis over the total requisite service period
for the award. The unamortized amount of equity-based compensation expense was $1,927 at July 3,
2010, and amortization is scheduled as follows:
Years Ending December 31 | ||||
2010 (remaining six months) |
$ | 491 | ||
2011 |
981 | |||
2012 |
321 | |||
2013 |
120 | |||
2014 |
14 | |||
$ | 1,927 | |||
12. Related Party Transactions
Vangent is a 100%-owned subsidiary of Vangent Holding Corp. Vangent Holding LLC is the
majority shareholder in Vangent Holding Corp. and is 90% owned by The Veritas Capital Fund III,
L.P.
Robert B. McKeon is the sole member of the board of directors of Vangent, is chairman of the
board of Vangent Holding Corp., and is the president of Veritas Capital Partners III, LLC. Mr.
Ramzi Musallam is a director of Vangent Holding Corp. and is a partner at Veritas Capital.
Certain members of management of Vangent and certain outside directors of Vangent Holding
Corp. have been granted Class B membership interests in Vangent Holding LLC, the majority
shareholder in Vangent Holding Corp.
Vangent pays an annual management fee of $1,000 to Veritas Capital, of which $500 was paid for
the six months ended July 3, 2010, along with fees of $43 for advisory services and expenses.
Vangent Argentina, a foreign subsidiary of Vangent, Inc., has an interest in an unconsolidated
joint venture in Argentina. Vangent Argentina and the joint-venture partner have each guaranteed
joint venture performance under a fixed-priced subcontract. Vangent Argentina provided contract
services of $206 to the joint venture for the six months ended July 3, 2010.
13. Business Segments and Major Customers
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Vangent reports operating results and financial data for three business segments: the
Government Group; the International Group; and the Human Capital Group. Government Group customers
are primarily U.S. federal agencies. The Government Group assists civilian, defense and
intelligence agencies as well as government related entities with the design and execution of
information and technology strategy, helps develop and maintain their complex, mission critical
systems and delivers a wide range of business process outsourcing solutions. The International
Group provides consulting, systems integration and business process outsourcing solutions to both
commercial and foreign local and central government customers. The Human Capital Group designs,
builds, and operates workforce solutions that automate and improve the recruitment, assessment,
selection and development of a customers workforce.
18
Table of Contents
A summary of revenue and operating income (loss) by business segment follows (dollars in
thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
July 3, | June 27, | July 3, | June 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue by business segment |
||||||||||||||||
Government Group |
$ | 198,677 | $ | 115,581 | $ | 375,914 | $ | 233,347 | ||||||||
International Group |
11,148 | 10,539 | 22,973 | 20,258 | ||||||||||||
Human Capital Group |
5,834 | 10,364 | 11,969 | 16,857 | ||||||||||||
Elimination |
(813 | ) | (1,369 | ) | (1,813 | ) | (2,474 | ) | ||||||||
Total revenue |
$ | 214,846 | $ | 135,115 | $ | 409,043 | $ | 267,988 | ||||||||
Operating income (loss) by business segment |
||||||||||||||||
Government Group |
$ | 15,966 | $ | 6,057 | $ | 34,835 | $ | 18,351 | ||||||||
International Group |
8 | (111 | ) | 70 | (110 | ) | ||||||||||
Human Capital Group |
(522 | ) | (669 | ) | (1,342 | ) | (1,285 | ) | ||||||||
Corporate |
(6 | ) | (13 | ) | (11 | ) | (18 | ) | ||||||||
Total operating income |
15,446 | 5,264 | 33,552 | 16,938 | ||||||||||||
Interest expense, net |
7,362 | 8,533 | 15,598 | 16,884 | ||||||||||||
Income (loss) from continuing operations
before income taxes |
$ | 8,084 | $ | (3,269 | ) | $ | 17,954 | $ | 54 | |||||||
Depreciation and amortization |
||||||||||||||||
Government Group |
$ | 7,183 | $ | 6,891 | $ | 14,488 | $ | 13,903 | ||||||||
International Group |
568 | 771 | 1,295 | 1,498 | ||||||||||||
Human Capital Group |
333 | 368 | 658 | 740 | ||||||||||||
Total depreciation and amortization |
$ | 8,084 | $ | 8,030 | $ | 16,441 | $ | 16,141 | ||||||||
Revenue from major customers as a percent
of total revenue |
||||||||||||||||
Department of Commerce |
42 | % | * | 34 | % | * | ||||||||||
Department of Health and Human Services |
25 | % | 42 | % | 30 | % | 44 | % | ||||||||
Department of Education |
11 | % | 16 | % | 13 | % | 18 | % | ||||||||
Department of Defense |
* | 12 | % | * | 10 | % |
* | Less than 10%. |
14. Condensed Issuer and Non-Guarantor Financial Information
In connection with the acquisition by Veritas Capital and the related financing, Vangent, Inc.
(Issuer) issued $190,000 of 9 5/8% senior subordinated notes due 2015. The notes were sold to
qualified institutional buyers pursuant to Rule 144A under the Securities Act and to non-U.S.
persons pursuant to Regulation S under the Securities Act. The assets and liabilities of the
guarantors have been transferred to Vangent, Inc., and, accordingly, their financial statements are
not presented separately. The following subsidiaries of the Issuer do not guarantee the notes
(Non-Guarantors) and are reported as part of continuing operations: Vangent Canada Limited and
Vangent, Ltd. In addition, the following subsidiaries of the Issuer do not guarantee the notes
(Non-Guarantors) and are reported as part of discontinued operations: Vangent Mexico, S.A. de
C.V.; Vangent Servicios de Mexico, S.A. de C.V.; Vangent Argentina, S.A.; Vangent Venezuela, C.A.;
Vangent Puerto Rico, Inc.; and Proyectos
Prohumane México, S. A. de C. V. Condensed combining balance sheets, statements of
operations, and statements of cash flows for the Issuer and for the Non-Guarantors follow:
19
Table of Contents
Issuer and Non-Guarantor Financial Information
Condensed Combining Balance Sheets (Unaudited)
Condensed Combining Balance Sheets (Unaudited)
July 3, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||
Guar- | Elimin- | Guar- | Elimin- | |||||||||||||||||||||||||||||
Issuer | antors | ations | Total | Issuer | antors | ations | Total | |||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 34,662 | $ | 2,871 | $ | | $ | 37,533 | $ | 41,098 | $ | 3,540 | $ | | $ | 44,638 | ||||||||||||||||
Trade receivables, net |
133,754 | 6,458 | | 140,212 | 101,410 | 8,436 | | 109,846 | ||||||||||||||||||||||||
Prepaid expenses and other |
9,705 | 2,145 | | 11,850 | 8,594 | 1,759 | | 10,353 | ||||||||||||||||||||||||
Assets of discontinued operations |
| 6,718 | | 6,718 | | 15,036 | | 15,036 | ||||||||||||||||||||||||
Total current assets |
178,121 | 18,192 | | 196,313 | 151,102 | 28,771 | | 179,873 | ||||||||||||||||||||||||
Property and equipment, net |
20,877 | 2,037 | | 22,914 | 22,499 | 2,625 | | 25,124 | ||||||||||||||||||||||||
Intangible assets, net |
134,450 | 6,498 | | 140,948 | 144,764 | 7,096 | | 151,860 | ||||||||||||||||||||||||
Goodwill |
258,905 | 8,496 | | 267,401 | 258,905 | 9,307 | | 268,212 | ||||||||||||||||||||||||
Deferred debt financing costs and other |
7,301 | 54 | | 7,355 | 8,379 | 54 | | 8,433 | ||||||||||||||||||||||||
Investment in and advances to
Non-Guarantor subsidiaries |
20,698 | | (20,698 | ) | | 37,299 | | (37,299 | ) | | ||||||||||||||||||||||
Assets of discontinued operations |
| | | | | 6,727 | | 6,727 | ||||||||||||||||||||||||
Total assets |
$ | 620,352 | $ | 35,277 | $ | (20,698 | ) | $ | 634,931 | $ | 622,948 | $ | 54,580 | $ | (37,299 | ) | $ | 640,229 | ||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | | $ | | $ | 13,534 | $ | | $ | | $ | 13,534 | ||||||||||||||||
Accounts payable and other liabilities |
85,257 | 6,815 | | 92,072 | 74,655 | 8,154 | (170 | ) | 82,639 | |||||||||||||||||||||||
Liabilities of discontinued operations |
53 | 9,806 | (4,228 | ) | 5,631 | 1,230 | 9,564 | (3,273 | ) | 7,521 | ||||||||||||||||||||||
Total current liabilities |
85,310 | 16,621 | (4,228 | ) | 97,703 | 89,419 | 17,718 | (3,443 | ) | 103,694 | ||||||||||||||||||||||
Long-term debt, net of current portion |
406,754 | | | 406,754 | 406,832 | | | 406,832 | ||||||||||||||||||||||||
Other long-term liabilities |
4,959 | 50 | | 5,009 | 7,132 | 62 | | 7,194 | ||||||||||||||||||||||||
Deferred tax liability |
14,349 | 1,937 | | 16,286 | 9,702 | 2,442 | | 12,144 | ||||||||||||||||||||||||
Liabilities of discontinued operations |
| 199 | | 199 | | 502 | | 502 | ||||||||||||||||||||||||
Total liabilities |
511,372 | 18,807 | (4,228 | ) | 525,951 | 513,085 | 20,724 | (3,443 | ) | 530,366 | ||||||||||||||||||||||
Total stockholders equity |
108,980 | 16,470 | (16,470 | ) | 108,980 | 109,863 | 33,856 | (33,856 | ) | 109,863 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 620,352 | $ | 35,277 | $ | (20,698 | ) | $ | 634,931 | $ | 622,948 | $ | 54,580 | $ | (37,299 | ) | $ | 640,229 | ||||||||||||||
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Table of Contents
Issuer and Non-Guarantor Financial Information
Condensed Combining Statements of Operations (Unaudited)
Condensed Combining Statements of Operations (Unaudited)
Three Months Ended July 3, 2010 | Three Months Ended June 27, 2009 | |||||||||||||||||||||||||||||||
Non | Non | |||||||||||||||||||||||||||||||
Guar- | Elimin- | Guar- | Elimin- | |||||||||||||||||||||||||||||
Issuer | antors | ations | Total | Issuer | antors | ations | Total | |||||||||||||||||||||||||
Revenue |
$ | 203,765 | $ | 11,081 | $ | | $ | 214,846 | $ | 124,737 | $ | 10,378 | $ | | $ | 135,115 | ||||||||||||||||
Cost of revenue |
172,792 | 9,667 | | 182,459 | 106,555 | 9,363 | | 115,918 | ||||||||||||||||||||||||
Gross profit |
30,973 | 1,414 | | 32,387 | 18,182 | 1,015 | | 19,197 | ||||||||||||||||||||||||
General and
administrative
expenses |
10,439 | 1,055 | | 11,494 | 9,137 | 410 | | 9,547 | ||||||||||||||||||||||||
Selling and marketing
expenses |
4,972 | 475 | | 5,447 | 3,945 | 441 | | 4,386 | ||||||||||||||||||||||||
Operating income |
15,562 | (116 | ) | | 15,446 | 5,100 | 164 | | 5,264 | |||||||||||||||||||||||
Interest expense, net |
7,483 | (121 | ) | | 7,362 | 8,562 | (29 | ) | | 8,533 | ||||||||||||||||||||||
Equity in net income
(loss) of
Non-Guarantor subsidiaries |
(15,394 | ) | | 15,394 | | (758 | ) | | 758 | | ||||||||||||||||||||||
Income (loss) from
continuing
operations before
income taxes |
(7,315 | ) | 5 | 15,394 | 8,084 | (4,220 | ) | 193 | 758 | (3,269 | ) | |||||||||||||||||||||
Provision for income
taxes |
1,715 | 136 | | 1,851 | 1,645 | 49 | | 1,694 | ||||||||||||||||||||||||
Income (loss) from
continuing
operations |
(9,030 | ) | (131 | ) | 15,394 | 6,233 | (5,865 | ) | 144 | 758 | (4,963 | ) | ||||||||||||||||||||
Income (loss) from discontinued
operations, net
of tax |
915 | (15,263 | ) | | (14,348 | ) | (247 | ) | (902 | ) | | (1,149 | ) | |||||||||||||||||||
Net loss |
$ | (8,115 | ) | $ | (15,394 | ) | $ | 15,394 | $ | (8,115 | ) | $ | (6,112 | ) | $ | (758 | ) | $ | 758 | $ | (6,112 | ) | ||||||||||
Six Months Ended July 3, 2010 | Six Months Ended June 27, 2009 | |||||||||||||||||||||||||||||||
Non | Non | |||||||||||||||||||||||||||||||
Guar- | Elimin- | Guar- | Elimin- | |||||||||||||||||||||||||||||
Issuer | antors | ations | Total | Issuer | antors | ations | Total | |||||||||||||||||||||||||
Revenue |
$ | 386,188 | $ | 22,855 | $ | | $ | 409,043 | $ | 247,974 | $ | 20,014 | $ | | $ | 267,988 | ||||||||||||||||
Cost of revenue |
320,942 | 19,743 | | 340,685 | 205,465 | 17,819 | | 223,284 | ||||||||||||||||||||||||
Gross profit |
65,246 | 3,112 | | 68,358 | 42,509 | 2,195 | | 44,704 | ||||||||||||||||||||||||
General and
administrative
expenses |
22,027 | 1,657 | | 23,684 | 18,468 | 769 | | 19,237 | ||||||||||||||||||||||||
Selling and marketing
expenses |
10,103 | 1,019 | | 11,122 | 7,597 | 932 | | 8,529 | ||||||||||||||||||||||||
Operating income |
33,116 | 436 | | 33,552 | 16,444 | 494 | | 16,938 | ||||||||||||||||||||||||
Interest expense, net |
15,768 | (170 | ) | | 15,598 | 16,915 | (31 | ) | | 16,884 | ||||||||||||||||||||||
Equity in net income
(loss) of
Non-Guarantor
subsidiaries |
(17,070 | ) | | 17,070 | | (887 | ) | | 887 | | ||||||||||||||||||||||
Income (loss) from
continuing
operations before
income taxes |
278 | 606 | 17,070 | 17,954 | (1,358 | ) | 525 | 887 | 54 | |||||||||||||||||||||||
Provision for income
taxes |
3,430 | 255 | | 3,685 | 3,282 | 156 | | 3,438 | ||||||||||||||||||||||||
Income (loss) from
continuing
operations |
(3,152 | ) | 351 | 17,070 | 14,269 | (4,640 | ) | 369 | 887 | (3,384 | ) | |||||||||||||||||||||
Income (loss) from discontinued
operations, net
of tax |
636 | (17,421 | ) | | (16,785 | ) | (508 | ) | (1,256 | ) | | (1,764 | ) | |||||||||||||||||||
Net loss |
$ | (2,516 | ) | $ | (17,070 | ) | $ | 17,070 | $ | (2,516 | ) | $ | (5,148 | ) | $ | (887 | ) | $ | 887 | $ | (5,148 | ) | ||||||||||
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Table of Contents
Issuer and Non-Guarantor Financial Information
Condensed Combining Statements of Cash Flows (Unaudited)
Condensed Combining Statements of Cash Flows (Unaudited)
Six Months Ended July 3, 2010 | Six Months Ended June 27, 2009 (1) | |||||||||||||||||||||||||||||||
Non | Non | |||||||||||||||||||||||||||||||
Guar- | Elimin- | Guar- | Elimin- | |||||||||||||||||||||||||||||
Issuer | antors | ations | Total | Issuer | antors | ations | Total | |||||||||||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||||||||||||||
Continuing operations, net |
$ | 10,960 | $ | 2,897 | $ | | 13,857 | $ | 8,392 | $ | 1,257 | $ | | $ | 9,649 | |||||||||||||||||
Discontinued operations, net |
| (2,870 | ) | | (2,870 | ) | | (2,574 | ) | | (2,574 | ) | ||||||||||||||||||||
Net cash used in operating activities |
10,960 | 27 | | 10,987 | 8,392 | (1,317 | ) | | 7,075 | |||||||||||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||||||||||||||
Loans from Vangent, Inc. to Vangent
Mexico, net |
(850 | ) | | 850 | | (1,245 | ) | | 1,245 | | ||||||||||||||||||||||
Capital expenditures |
(2,933 | ) | (593 | ) | | (3,526 | ) | (4,614 | ) | (165 | ) | | (4,779 | ) | ||||||||||||||||||
Continuing operations, net |
(3,783 | ) | (593 | ) | 850 | (3,526 | ) | (5,859 | ) | (165 | ) | 1,245 | (4,779 | ) | ||||||||||||||||||
Discontinued operations, net |
| (811 | ) | | (811 | ) | | (1,760 | ) | | (1,760 | ) | ||||||||||||||||||||
Net cash used in
investing activities |
(3,783 | ) | (1,404 | ) | 850 | (4,337 | ) | (5,859 | ) | (1,925 | ) | 1,245 | (6,539 | ) | ||||||||||||||||||
Cash flows from financing activities |
||||||||||||||||||||||||||||||||
Repayment of senior secured loan |
(13,612 | ) | | | (13,612 | ) | | | | | ||||||||||||||||||||||
Other |
(53 | ) | | | (53 | ) | (130 | ) | | | (130 | ) | ||||||||||||||||||||
Continuing operations, net |
(13,665 | ) | | | (13,665 | ) | (130 | ) | | | (130 | ) | ||||||||||||||||||||
Discontinued operations, net |
| 850 | (850 | ) | | | 1,212 | (1,245 | ) | (33 | ) | |||||||||||||||||||||
Net cash provided by (used in)
financing activities |
(13,665 | ) | 850 | (850 | ) | (13,665 | ) | (130 | ) | 1,212 | (1,245 | ) | (163 | ) | ||||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
51 | (221 | ) | | (170 | ) | | 258 | | 258 | ||||||||||||||||||||||
Net increase (decrease) in cash
and cash equivalents |
(6,437 | ) | (748 | ) | | (7,185 | ) | 2,403 | (1,772 | ) | | 631 | ||||||||||||||||||||
Total cash and cash equivalents,
beginning of period |
41,099 | 4,485 | | 45,584 | 15,519 | 5,615 | | 21,134 | ||||||||||||||||||||||||
Total cash and cash equivalents,
end of period |
34,662 | 3,737 | | 38,399 | 17,922 | 3,843 | | 21,765 | ||||||||||||||||||||||||
Less: Cash and cash equivalents,
discontinued operations |
| 866 | | 866 | | 1,601 | 1,601 | |||||||||||||||||||||||||
Cash and cash equivalents,
continuing operations |
$ | 34,662 | $ | 2,871 | $ | | $ | 37,533 | $ | 17,922 | $ | 2,242 | $ | | $ | 20,164 | ||||||||||||||||
(1) | Certain amounts previously reported for cash flows for the Issuer and for the Non-Guarantor subsidiaries for the six months ended June 27, 2009, have been reclassified. |
15. Subsequent Events
Senior Secured Credit Facility
On July 28, 2010, Vangent and the banks that are party to the senior secured credit facility
entered into an amendment that allows for the sale of Vangents Latin American operations, expands
the amounts allowed for acquisitions to $75.0 million per acquisition and to $175 million in the
aggregate, and reduces the mandatory prepayment requirement from net cash proceeds of equity
offerings to 25% from 50% as long as the consolidated leverage ratio, as defined, is below 4.00 to
1. Vangent agreed to pay lender fees and expenses of $1.8 million in connection with the amendment.
Acquisition
On August 5, 2010,
Vangent executed an agreement of merger to acquire all the issued and
outstanding stock of Buccaneer Computer Systems & Service, Inc. for a purchase price of $65.0
million, subject to a working capital adjustment. Buccaneer is an information technology firm
providing solutions to both government and corporate clients. Vangent intends to fund the
acquisition with a combination of cash on hand and the remainder with borrowings under its senior
secured revolving credit facility. The acquisition is expected to close during the third quarter of 2010, subject to
customary closing conditions, as defined in the merger agreement. The purchase of Buccaneer will be
accounted for under the acquisition method of accounting under which the assets and liabilities
acquired, including intangible assets for customer relationships, will be recorded at their fair
values, and operating results of Buccaneer will be included in Vangents financial statements from
the date of acquisition. The excess of the acquisition cost over the fair value of net assets
acquired will be allocated to goodwill.
22
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial condition and results of
operations should be read in conjunction with the unaudited condensed consolidated financial
statements contained elsewhere in this quarterly report on Form 10-Q and the Managements
Discussion and Analysis of Financial Condition and Results of Operations and the audited
consolidated financial statements and notes thereto, included in our annual report on Form 10-K for
the year ended December 31, 2009.
Overview
We are a leading provider of information management and business process outsourcing services
to several U.S. public health care and other civilian government agencies, as well as selected U.S.
defense and intelligence agencies, foreign governments and private sector entities. We design,
build and operate mission-critical systems and processes to seamlessly deliver vital information,
services and programs to our customers and their constituents. Most of our revenue is generated
from long-term contracts that typically have duration of approximately five years, including option
years. As of July 3, 2010, our total contract backlog was $1.7 billion, compared with $2.1 billion
at December 31, 2009.
The Department of Commerce (DoC) represented 34%, the Department of Health and Human
Services (HHS) represented 30%, and the Department of Education (DoED) represented 13% of total
revenue for the six months ended July 3, 2010. We manage our business through three segments: the
Government Group; the International Group; and the Human Capital Group.
The Government Group is our largest segment and has many years of experience in providing
information management and business process outsourcing to several civilian and defense agencies of
the federal government, including a 29-year history with the Department of Education, over 10 years
with the Defense Information Systems Agency and eight years with the Centers for Medicare and
Medicaid Services (CMS). The Government Group is also responsible for the development,
management, analysis and dissemination of healthcare information to the public sector and is one of
the largest non-government providers of health information in the United States The Government Group represented 92% of total revenue for the six months ended July 3, 2010.
The International Group serves government customers, primarily in the United Kingdom and
Canada, and provides consulting, systems integration, business process outsourcing, and the
management of data, identity, revenue and human capital. As of July 3, 2010, the Companys business
operations in Latin America were held for sale and are classified as discontinued operations in the
condensed consolidated financial statements. These operations were formerly part of the
International Group. The International Group represented 5% of total revenue for the six months
ended July 3, 2010.
The Human Capital Group designs, builds, and operates workforce solutions that automate and
improve the recruitment, assessment, selection, training and development of a customers workforce.
We provide solutions that automate pre-employment screening which improves the quality and
retention of new employees and reduces the cost and time associated with workforce planning and
hiring. The Human Capital Group represented 3% of total revenue for the six months ended July 3,
2010.
Discontinued Operations
At the end of 2009, Vangent completed an evaluation of its international business and made the
determination to sell its business operations in Latin America. The condensed consolidated
financial statements have been revised for all periods presented to report Latin America as
discontinued operations. The discontinued operations include: Vangent Mexico, S.A. de C.V.;
Vangent Servicios de Mexico, S.A. de C.V.; Vangent Argentina, S.A.; Vangent Venezuela, C.A.;
Vangent Puerto Rico, Inc.; and Proyectos Prohumane México, S. A. de C. V.
23
Table of Contents
Nature of Our Contracts
Contracts funded by U.S. government agencies represented 89% of total revenue for the six
months ended July 3, 2010, compared with 83% for the corresponding period in 2009. The continuation
and renewal of our existing government contracts and new government contracts are, among other
things, contingent upon the availability of adequate funding for the various federal government
agencies with which we do business. Refer to our annual report on Form 10-K for the year ended
December 31, 2009, for additional information concerning our business and the factors that could
impact federal government spending and our federal government contracting business.
We have cost-plus, fixed-price and time and materials contracts. Fixed-priced contracts
generally offer a higher profit margin opportunity but involve higher risks associated with
potential cost overruns. Revenue from each type of contract as a percent of total revenue follows:
Three Months Ended | Six Months Ended | |||||||||||||||
July 3, | June 27, | July 3, | June 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost-plus |
72 | % | 51 | % | 69 | % | 51 | % | ||||||||
Fixed-price |
24 | % | 44 | % | 27 | % | 44 | % | ||||||||
Time and materials |
4 | % | 5 | % | 4 | % | 5 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
The increases in cost-plus contracts for the three and six months ended July 3, 2010, is due
to work performed on the 2010 U.S. Census contract.
Contract Backlog
Total contract backlog is the amount of revenue we expect to realize over the remaining term
of our contracts. We include in backlog task orders awarded, but not contract ceiling values, under
government-wide acquisition contracts or indefinite delivery, indefinite quantity contracts. Funded
backlog is the portion for which funding has been authorized. Most of our federal government
contracts allow the customer the option of extending the period of performance for a period of one
or more years. A summary of contract backlog by business segment follows (in millions):
July 3, 2010 | December 31, 2009 | |||||||||||||||
Total | Funded | Total | Funded | |||||||||||||
Government Group |
$ | 1,410.8 | $ | 136.7 | $ | 1,782.6 | $ | 313.4 | ||||||||
International Group |
264.9 | 181.4 | 291.2 | 196.8 | ||||||||||||
Human Capital Group |
10.3 | 10.3 | 7.1 | 7.1 | ||||||||||||
Discontinued operations |
58.3 | 58.3 | 44.9 | 44.9 | ||||||||||||
$ | 1,744.3 | $ | 386.7 | $ | 2,125.8 | $ | 562.2 | |||||||||
The decline in total contract backlog of $381.5 million, or 18%, from December 31, 2009,
reflects revenue earned on major contracts awarded in prior years, including contracts with the
Centers for Medicare and Medicaid Services and the U.S. 2010 Census contract, and a slowdown in the
level of U.S. government contract opportunities and awards.
Critical Accounting Policies
The process of preparing financial statements in conformity with generally accepted accounting
principles requires the use of estimates and judgments to determine certain of the assets,
liabilities, revenue and expenses. These estimates and judgments are based upon what we believe is
the best information available at the time. Estimates and judgments could change materially as
conditions within and beyond our control change. Accordingly, actual results could differ
materially from those estimates. The critical accounting estimates and judgments used in the
preparation of the condensed consolidated financial statements are described in our annual report
on Form 10-K for the year ended December 31, 2009: revenue recognition and cost estimation on
long-term contracts; definite-life intangible assets; goodwill and an indefinite-life intangible
asset; equity-based compensation; and income taxes.
24
Table of Contents
A significant change in critical accounting estimates and judgments resulted in a charge of
$17.9 million for the six months ended July 3, 2010, representing an addition to the expected loss
on disposal of discontinued operations based on fair value estimates. The fair value estimates were
revised based on letters of intent from market participants that are potential buyers of the
discontinued operations in Latin America.
Goodwill and Indefinite-Life Intangible Asset
Vangent performs annual impairment assessments of goodwill for each reporting unit, or
segment, and of the indefinite-life intangible asset (not subject to amortization) of the Human
Capital Group in the fourth quarter of each year based on estimated fair values or more frequently
if indicators of impairment exist. Fair values are determined using the income approach based on a
discounted cash flow methodology. The Human Capital Group experienced an operating loss of $1.3
million and a negative operating margin of 11% for the six months ended July 3, 2010, and an
operating loss of $5.1 million and a negative operating margin of 15%, including impairment charges
that reduced the carrying amount of goodwill to fair value, for the year ended December 31, 2009.
The remaining balance of goodwill for the Human Capital Group was $8.5 million and indefinite-life
intangible asset was $10.3 million at July, 3, 2010. Continuing adverse changes in expected
operating results and/or unfavorable changes in economic factors used to estimate fair values could
result in non-cash impairment charges for the Human Capital Group in a future period.
Tax Valuation Allowance
A tax valuation allowance is recorded against deferred tax assets when it is more likely than
not that a tax benefit will not be realized in the future. The assessment requires judgment with
respect to tax benefits that may be realized. The Company considers all available positive and
negative evidence, including future reversals of temporary differences, projected future taxable
income, tax planning strategies, and recent financial results. The Company has concluded as of July
3, 2010, based upon all available evidence, that it is more likely than not that the U.S. deferred
tax assets will not be realizable. The tax valuation allowance amounted to $42.5 million at July 3,
2010. The Company has recently experienced positive trends in its continuing operating performance,
and the positive trends may continue in future periods. In the event the Company determines in a
future period that realization of deferred tax benefits, primarily net operating loss
carryforwards, is more likely than not, all or a portion of the tax valuation allowance would be
reversed. A reversal or reduction to the tax valuation allowance would be recorded as a reduction
to the provision for income taxes.
Recent Accounting Pronouncements
Reference is made to the notes to the condensed consolidated financial statements for
information on recent accounting pronouncements.
25
Table of Contents
Results of Operations
Statements of operations data follow (dollars in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
July 3, | June 27, | Increase | July 3, | June 27, | Increase | |||||||||||||||||||
2010 | 2009 | (Decrease) | 2010 | 2009 | (Decrease) | |||||||||||||||||||
Statements of Operations Data |
||||||||||||||||||||||||
Revenue |
$ | 214,846 | $ | 135,115 | $ | 79,731 | $ | 409,043 | $ | 267,988 | $ | 141,055 | ||||||||||||
Cost of revenue |
182,459 | 115,918 | 66,541 | 340,685 | 223,284 | 117,401 | ||||||||||||||||||
Gross profit |
32,387 | 19,197 | 13,190 | 68,358 | 44,704 | 23,654 | ||||||||||||||||||
General and administrative expenses |
11,494 | 9,547 | 1,947 | 23,684 | 19,237 | 4,447 | ||||||||||||||||||
Selling and marketing expenses |
5,447 | 4,386 | 1,061 | 11,122 | 8,529 | 2,593 | ||||||||||||||||||
Operating income |
15,446 | 5,264 | 10,182 | 33,552 | 16,938 | 16,614 | ||||||||||||||||||
Interest expense, net |
7,362 | 8,533 | (1,171 | ) | 15,598 | 16,884 | (1,286 | ) | ||||||||||||||||
Income (loss) from continuing
operations before income taxes |
8,084 | (3,269 | ) | 11,353 | 17,954 | 54 | 17,900 | |||||||||||||||||
Provision for income taxes |
1,851 | 1,694 | 157 | 3,685 | 3,438 | 247 | ||||||||||||||||||
Income (loss) from continuing operations |
6,233 | (4,963 | ) | 11,196 | 14,269 | (3,384 | ) | 17,653 | ||||||||||||||||
Loss from discontinued operations,
net of tax |
(14,348 | ) | (1,149 | ) | (13,199 | ) | (16,785 | ) | (1,764 | ) | (15,021 | ) | ||||||||||||
Net loss |
$ | (8,115 | ) | $ | (6,112 | ) | $ | (2,003 | ) | $ | (2,516 | ) | $ | (5,148 | ) | $ | 2,632 | |||||||
Statements of Operations
Data as a Percent of Revenue |
||||||||||||||||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Cost of revenue |
84.9 | 85.8 | 83.3 | 83.3 | ||||||||||||||||||||
Gross profit margin |
15.1 | 14.2 | 16.7 | 16.7 | ||||||||||||||||||||
General and administrative expenses |
5.3 | 7.1 | 5.8 | 7.2 | ||||||||||||||||||||
Selling and marketing expenses |
2.5 | 3.2 | 2.7 | 3.2 | ||||||||||||||||||||
Operating income margin |
7.2 | 3.9 | 8.2 | 6.3 | ||||||||||||||||||||
Interest expense, net |
3.5 | 6.3 | 3.8 | 6.3 | ||||||||||||||||||||
Income (loss) from continuing
operations before income taxes |
3.8 | (2.4 | ) | 4.4 | | |||||||||||||||||||
Provision for income taxes |
0.8 | 1.3 | 0.9 | 1.3 | ||||||||||||||||||||
Income (loss) from continuing operations |
2.9 | (3.7 | ) | 3.5 | (1.3 | ) | ||||||||||||||||||
Loss from discontinued operations,
net of tax |
(6.7 | ) | (0.8 | ) | (4.1 | ) | (0.6 | ) | ||||||||||||||||
Net loss |
(3.8) | % | (4.5) | % | (0.6) | % | (1.9) | % | ||||||||||||||||
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Three and Six Months Ended July 3, 2010 and June 27, 2009
Overview
The Companys fiscal year begins on January 1 and ends on December 31. Quarterly periods are
based on a four-week, four-week, five-week methodology ending on the Saturday nearest to the end of
the quarter to align with the Companys domestic business processes. There are 184 days in the
six-month period ended July 3, 2010, compared with 178 days in the corresponding period in 2009.
Results of operations cover a period that is 6 days, or 3%, longer than the corresponding period in
2009. Foreign subsidiaries are consolidated based on the calendar quarter.
Revenue
A summary of revenue by business segment follows (dollars in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
July 3, | June 27, | Increase (Decrease) | July 3, | June 27, | Increase (Decrease) | |||||||||||||||||||||||||||
2010 | 2009 | Amount | Percent | 2010 | 2009 | Amount | Percent | |||||||||||||||||||||||||
Revenue by
business segment |
||||||||||||||||||||||||||||||||
Government Group |
$ | 198,677 | $ | 115,581 | $ | 83,096 | 72 | % | $ | 375,914 | $ | 233,347 | $ | 142,567 | 61 | % | ||||||||||||||||
International Group |
11,148 | 10,539 | 609 | 6 | % | 22,973 | 20,258 | 2,715 | 13 | % | ||||||||||||||||||||||
Human Capital Group |
5,834 | 10,364 | (4,530 | ) | (44) | % | 11,969 | 16,857 | (4,888 | ) | (29 | )% | ||||||||||||||||||||
Elimination |
(813 | ) | (1,369 | ) | 556 | (41) | % | (1,813 | ) | (2,474 | ) | 661 | (27 | )% | ||||||||||||||||||
$ | 214,846 | $ | 135,115 | $ | 79,731 | 59 | % | $ | 409,043 | $ | 267,988 | $ | 141,055 | 53 | % | |||||||||||||||||
Business segment
revenue as a percent
of total revenue |
||||||||||||||||||||||||||||||||
Government Group |
92.5 | % | 85.5 | % | 91.9 | % | 87.1 | % | ||||||||||||||||||||||||
International Group |
5.2 | 7.8 | 5.6 | 7.6 | ||||||||||||||||||||||||||||
Human Capital Group |
2.7 | 7.7 | 2.9 | 6.3 | ||||||||||||||||||||||||||||
Elimination |
(0.4 | ) | (1.0 | ) | (0.4 | ) | (1.0 | ) | ||||||||||||||||||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||
The Department of Commerce (DoC) represented 34%, the Department of Health and Human
Services (HHS) represented 30%, and the Department of Education (DoED) represented 13% of total
revenue for the six months ended July 3, 2010.
The increases in Government Group revenue for the three and six months ended July 3, 2010,
compared with the corresponding periods in 2009 reflect the following:
| Revenue from DoC contracts increased $85.9 million for the three months and $134.7 million for the six months from the processing of census forms and data capture under the 2010 U.S. Census contract that is scheduled to be substantially completed in the third quarter of 2010. |
| Revenue from HHS contracts, primarily Centers for Medicare and Medicaid Services (CMS), declined $2.2 million for the three months but increased $3.4 million for the six months. |
| Revenue from Department of Defense (DoD) contracts declined $2.3 million for the three months but increased $1.1 million for the six months. |
| Revenue from DoED increased $1.6 million for the three months and $4.8 million for the six months primarily from contracts with the Office of Federal Student Aid. |
| Revenue from a contract with the Department of State (DoS) for the National Passport Information Center increased $1.5 million for the six months. |
In addition, the six month period is 3% longer than the corresponding period in 2009. The
increases were partially offset by reductions of $1.8 million for the three months and $3.4 million
for the six months from the Employee Retirement Income Security Act (ERISA) contracts with the
Department of Labor (DoL).
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Table of Contents
The increases in International Group revenue for the three and six months ended July 3, 2010,
reflect higher revenue from contracts in the United Kingdom partly offset by lower revenue from
contracts in Canada. Changes in foreign currency exchange rates increased revenue for the six
months by $1.5 million, compared with the average exchange rates prevailing during the
corresponding period in 2009.
The reductions in Human Capital Group revenue for the three and six months ended July 3, 2010,
reflect the completion of a foreign military contract with the U.S. Air Force to modernize the
Royal Saudi Air Force learning infrastructure.
Cost of Revenue
The increases in cost of revenue for the three and six months ended July 3, 2010, reflect
costs incurred for contract work performed under the U.S. 2010 Census contract with DoC. The
average number of employees increased 49% primarily from increased temporary staffing in connection
with the U.S. Census contract. The six-month period is 3% longer than the corresponding period in
2009, and changes in foreign exchange rates increased costs of the International Group by $1.3
million.
The increase in the gross profit margin, or the ratio of gross profit to revenue, to 15.1% for
the three months ended July 3, 2010, compared with 14.2 % for the corresponding period in 2009,
reflects changes in the mix of contracts. The gross profit margin remained at 16.7% for the six
months ended July 3, 2010, the same as for the corresponding period in 2009.
General and Administrative Expenses
The increases in general and administrative expenses for the three and six months ended July
3, 2010, reflects higher accrued expenses for annual incentive compensation awards and an increase
in consulting fees. Incentive compensation expense is accrued based upon the level of operating
results compared to established targets; there was no incentive compensation expense accrued for
the corresponding periods in 2009. The six-month period is 3% longer than the corresponding period
in 2009.
As a percentage of revenue, general and administrative expenses declined to 5.8% for the six
months ended July 3, 2010, compared with 7.2% for the corresponding period in 2009, reflecting the
revenue earned on the U.S. Census contract for which there was minimal incremental general and
administrative expenses.
Selling and Marketing Expenses
The increase in selling and marketing expenses for the three and six months ended July 3,
2010, reflects an increase of 29% in the number of new business development employees in the
Government Group in the six month period.
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Operating Income
A summary of operating income by business segment follows (dollars in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
July 3, | June 27, | Increase (Decrease) | July 3, | June 27, | Increase (Decrease) | |||||||||||||||||||||||||||
2010 | 2009 | Amount | Percent | 2010 | 2009 | Amount | Percent | |||||||||||||||||||||||||
Operating income
(loss) by business
segment |
||||||||||||||||||||||||||||||||
Government Group |
$ | 15,966 | $ | 6,057 | $ | 9,909 | 164 | % | $ | 34,835 | $ | 18,351 | $ | 16,484 | 90 | % | ||||||||||||||||
International Group |
8 | (111 | ) | 119 | | % | 70 | (110 | ) | 180 | | % | ||||||||||||||||||||
Human Capital Group |
(522 | ) | (669 | ) | 147 | 22 | % | (1,342 | ) | (1,285 | ) | (57 | ) | (4 | )% | |||||||||||||||||
Corporate |
(6 | ) | (13 | ) | 7 | | % | (11 | ) | (18 | ) | 7 | | % | ||||||||||||||||||
$ | 15,446 | $ | 5,264 | $ | 10,182 | 193 | % | $ | 33,552 | $ | 16,938 | $ | 16,614 | 98 | % | |||||||||||||||||
Operating margin
by business segment |
||||||||||||||||||||||||||||||||
Government Group |
8.0 | % | 5.2 | % | 9.3 | % | 7.9 | % | ||||||||||||||||||||||||
International Group |
0.1 | % | (1.1) | % | 0.3 | % | (0.5) | % | ||||||||||||||||||||||||
Human Capital Group |
(9.0) | % | (6.5) | % | (11.2) | % | (7.6) | % |
The increases in Government Group operating income for the three and six months ended July 3,
2010, primarily reflect work on the 2010 U.S. Census contract with DoC that is scheduled to be
substantially completed in the third quarter of 2010. Award fees earned under cost-plus contracts,
including the 2010 U.S. Census contract, increased $8.3 million for the three months and $14.3
million for the six months, compared with the corresponding periods in 2009. In addition, the six
month period is 3% longer than the corresponding period in 2009. The increase in operating income
for the six months was partly offset by (i) a reduction of $2.4 million in operating income resulting from upfront
development costs on fixed-price ERISA contracts with DoL, and (ii) higher accrued expenses of $2.7
million for incentive compensation compared with the corresponding period in 2009 when no incentive
compensation was earned or accrued.
International Group operating results continue to reflect breakeven operating margins as
higher income in the United Kingdom was partly offset with lower income from Canada.
The continuing operating loss for the Human Capital Group for the three and six months ended
July 3, 2010, reflects the adverse impact of lower revenue from completion of the Royal Saudi Air Force contract
in the 2010 periods and reductions in training needs and customer hiring patterns from continued
high unemployment levels.
Interest Expense, Net
The reductions in interest expense, net, reflect reductions of $0.9 million for the three
months and $1.4 million for the six months ended July 3, 2010, from lower average interest rates
and a reduction in February 2010 in the notional amount and the average interest rate on the hedged
portion of the term loan. The reduction for the six months was partly offset by the period that is
3% longer than the corresponding period in 2009 resulting in $0.5 million of additional interest
expense.
Provision for Income Taxes
A summary of the provision for income taxes follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
July 3, | June 27, | Increase | July 3, | June 27, | Increase | |||||||||||||||||||
2010 | 2009 | (Decrease) | 2010 | 2009 | (Decrease) | |||||||||||||||||||
Provision for income
taxes excluding
tax valuation
allowance |
$ | 2,961 | $ | 6 | $ | 2,955 | $ | 5,865 | $ | 1,022 | $ | 4,843 | ||||||||||||
Tax valuation allowance |
(1,110 | ) | 1,688 | (2,798 | ) | (2,180 | ) | 2,416 | (4,596 | ) | ||||||||||||||
Total provision
for income taxes |
$ | 1,851 | $ | 1,694 | $ | 157 | $ | 3,685 | $ | 3,438 | $ | 247 | ||||||||||||
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The provision for income taxes is composed of U.S. federal, state and local and foreign income
taxes. The provision for income taxes for the six months ended July 3, 2010, was reduced by $2.2
million for a change in the tax valuation allowance for deferred tax assets resulting from the
utilization of a portion of the net operating loss carryforward against taxable income earned for
the six months ended July 3, 2010. The Company has concluded as of July 3, 2010, based upon all
available evidence, that it is more likely than not that the U.S. deferred tax assets will not be
realizable. The tax valuation allowance amounted to $42.5 million at July 3, 2010. In the event the
Company determines in a future period that realization of deferred tax benefits, primarily net
operating loss carryforwards, is more likely than not, all or a portion of the tax valuation
allowance would be reversed. A reversal or reduction to the tax valuation allowance would be
recorded as a reduction to the provision for income taxes.
Discontinued Operations
A summary of revenue, cost and expenses for discontinued operations that are segregated and
reported separately in the condensed consolidated financial statements follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
July 3, | June 27, | Increase | July 3, | June 27, | Increase | |||||||||||||||||||
2010 | 2009 | (Decrease) | 2010 | 2009 | (Decrease) | |||||||||||||||||||
Revenue |
$ | 7,075 | $ | 5,895 | $ | 1,180 | $ | 14,210 | $ | 10,494 | $ | 3,716 | ||||||||||||
Costs and expenses |
7,346 | 7,529 | (183 | ) | 14,846 | 12,842 | 2,004 | |||||||||||||||||
Expected loss on
disposal |
15,277 | | 15,277 | 17,895 | | 17,895 | ||||||||||||||||||
Other (income)
expense, net |
7 | (38 | ) | 45 | (746 | ) | (18 | ) | (728 | ) | ||||||||||||||
Loss from
discontinued
operations
before income
taxes |
(15,555 | ) | (1,596 | ) | (13,959 | ) | (17,785 | ) | (2,330 | ) | (15,455 | ) | ||||||||||||
Provision (benefit)
for income taxes |
(1,207 | ) | (447 | ) | (760 | ) | (1,000 | ) | (566 | ) | (434 | ) | ||||||||||||
Loss from
discontinued
operations
net of tax |
$ | (14,348 | ) | $ | (1,149 | ) | $ | (13,199 | ) | $ | (16,785 | ) | $ | (1,764 | ) | $ | (15,021 | ) | ||||||
Revenue and costs and expenses for discontinued operations are denominated in multiple foreign
currencies, primarily the Mexican Peso, and are significantly affected by foreign currency exchange
rate changes.
The increases in revenue from discontinued operations for the three and six months ended July
3, 2010, resulted primarily from a contract with Mexicos social security agency that was in the
start up phase and experienced operational delays in the corresponding periods in 2009. Although
revenue from Mexico increased, revenue continues to be adversely affected by continuing low member
enrollments under the contract with Mexicos social security agency. The increases were partially offset by the completion of a contract in Mexico in March 2010.
Changes in foreign currency
exchange rates, primarily the Mexican Peso, reduced revenue by $0.6 million, or 4%, for the six
months, compared with the average exchange rates prevailing during the corresponding period in
2009.
The increase in costs and expenses from discontinued operations for the six months ended July
3, 2010, resulted from the contract with Mexicos social security agency that was in the start up
phase with operational delays in the corresponding period in 2009. Cost and expenses exceeded
revenue resulting in a negative operating margin for each of the three and six month periods.
Efforts continue to stabilize the operational aspects of the social security contract in Mexico and
to achieve breakeven operating results.
Based on estimates of fair value of the discontinued operations, a charge for expected loss on
disposal of $5.0 was recorded for the year ended December 31, 2009. The charge was calculated based
on estimates of fair value, less cost to sell, compared with net assets of discontinued operations.
The fair value estimates were revised in the second quarter of 2010 based on letters of intent from
market participants that are potential buyers of the operations in Latin America. As a result, an
additional charge of $17.9 million for the expected loss on disposal was recorded for the six
months ended July 3, 2010. Charges for the expected loss on disposal include $4.7 million for
cumulative translation losses recorded as part of other comprehensive loss for discontinued
operations. The final adjustment to expected loss on disposal will be recorded based on the terms
and completion of a disposal transaction.
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Table of Contents
Other income from discontinued operations for the six months ended July 3, 2010, includes
equity in net income of $0.8 million from a joint venture in Argentina that began operating in the
second quarter of 2009.
Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents, a line of credit
under the revolving credit facility, and cash flows from operating activities. Cash and cash
equivalents amounted to $37.5 million at July 3, 2010. Subject to certain limitations, including
compliance with the maximum allowable limits under the leverage ratio covenant under the senior
secured credit facility, availability of the line of credit under the revolving credit facility was
$49.8 million at July 3, 2010. Based on our current planned level of operations, we believe our
cash and cash equivalents, cash flow from operations, and available line of credit will be adequate
to meet our liquidity needs for at least the next twelve months, including scheduled interest
payments, scheduled lease payments and noncancelable purchase commitments, and planned capital
expenditures.
On
August 5, 2010, Vangent executed an agreement of merger to acquire all the issued and
outstanding stock of Buccaneer Computer Systems & Service, Inc. for a purchase price of $65.0
million. Vangent intends to fund the acquisition with a combination of cash on hand and the
remainder with borrowings under its senior secured revolving credit facility.
Cash and cash equivalents are composed of cash in banks and highly liquid instruments with
original maturities of 90 days or less. Cash equivalents or marketable securities are comprised of
repurchase agreements and
money market securities with major commercial banks under which cash is primarily invested in
U.S. Treasury and U.S. government agency securities. The Company does not invest in high yield or
high risk securities. Cash in bank accounts at times may exceed federally insured limits.
Long-Term Debt
Refer to the notes to the condensed consolidated financial statements for information on
long-term debt, revolving credit facility, scheduled maturities of long-term debt, affirmative and
negative covenants including the maximum allowable consolidated leverage ratio, interest rate swap
agreements on variable-rate term loan, and the fair value of the interest rate swap liability.
Long-term debt of $406.8 million at July 3, 2010, is scheduled to mature as follows: (i) the
term loan of $216.8 million under the senior secured credit facility is scheduled to mature in
February 2013, and (ii) senior subordinated fixed rate notes of $190.0 million are scheduled to
mature in February 2015. Our ability to generate sufficient cash flow from operations to repay
long-term debt when it matures, or to refinance our debt when it matures, depends on numerous
factors beyond our control, including those discussed under Risk Factors reported in our annual
report on Form 10-K for the year ended December 31, 2009. In view of current credit market
conditions and the credit ratings assigned to our outstanding debt and corporate credit by credit
rating agencies, in the event we were to refinance the senior secured credit facility or the senior
subordinated notes, we would likely encounter higher interest rates and limited availability of
debt financing capacity.
Debt Covenants
The more restrictive debt covenants relate to (i) compliance with a maximum allowable
consolidated leverage ratio, and (ii) loans and advances to non-guarantor subsidiaries. At July 3,
2010, the cumulative amount of net loans to and investments in Vangent Mexico, S.A. de C.V., a
non-guarantor subsidiary, by Vangent, Inc. amounted to $9.1 million, compared with the maximum
allowable amount of $10.0 million for loans to or investments in non-guarantor subsidiaries under
the senior secured credit facility. The consolidated leverage ratio, as defined in the senior
secured credit facility, is based on consolidated indebtedness, as defined, reduced by unrestricted
cash and cash equivalents in excess of $5.0 million, divided by adjusted EBITDA (earnings before
interest, taxes, depreciation and amortization, and adjusted for certain unusual and non-recurring
items, as defined) for a twelve-month period. At July 3, 2010, the consolidated leverage ratio was
4.34 to 1, compared with the maximum allowable ratio of 5.75 to 1 applicable to the period. The
maximum allowable consolidated leverage ratio steps down to 5.50 to 1 at December 31, 2010.
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Table of Contents
Interest Rate Swaps on Variable-Rate Term Loan under Senior Secured Credit Facility
The Company has entered into interest rate swap agreements to hedge fluctuations in LIBOR
interest rates on a portion of the term loan borrowing under the senior secured credit facility.
The Company exchanged its variable LIBOR interest rate for a fixed interest rate. At July 3, 2010,
the total notional amount of the pay-fixed/receive-variable interest rate swap agreements was
$150.0 million scheduled to mature in February 2011.
The fair value of the net interest rate swap liability was $2.5 million at July 3, 2010, all
of which represents an unrealized loss that is reported in accumulated other comprehensive loss in
the consolidated statement of stockholders equity. The fair value is based on quoted prices for
swaps in active markets adjusted for non-performance risks. The Company does not hold or issue
derivative financial instruments for speculative purposes.
Working Capital
A summary of working capital follows (in thousands):
Effect on | ||||||||||||
July 3, | December 31, | Working | ||||||||||
2010 | 2009 | Capital | ||||||||||
Cash and cash equivalents |
$ | 37,533 | $ | 44,638 | $ | (7,105 | ) | |||||
Trade receivables, net |
140,212 | 109,846 | 30,366 | |||||||||
Prepaid expenses and other |
11,850 | 10,353 | 1,497 | |||||||||
Current portion of long-term debt |
| (13,534 | ) | 13,534 | ||||||||
Accounts payable and accrued liabilities |
(75,422 | ) | (64,849 | ) | (10,573 | ) | ||||||
Accrued interest payable |
(7,950 | ) | (8,186 | ) | 236 | |||||||
Other liabilities |
(8,700 | ) | (9,604 | ) | 904 | |||||||
Discontinued operations, net |
1,087 | 7,515 | (6,428 | ) | ||||||||
Net working capital |
$ | 98,610 | $ | 76,179 | $ | 22,431 | ||||||
Cash Flows
A summary of net cash flows follows (in thousands):
Six Months Ended | ||||||||||||
July 3, | June 27, | Increase | ||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Net cash provided by (used in) |
||||||||||||
Operating activities: |
||||||||||||
Continuing operations |
$ | 13,857 | $ | 9,649 | $ | 4,208 | ||||||
Discontinued operations |
(2,870 | ) | (2,574 | ) | (296 | ) | ||||||
Investing activities: |
||||||||||||
Continuing operations |
(3,526 | ) | (4,779 | ) | 1,253 | |||||||
Discontinued operations |
(811 | ) | (1,760 | ) | 949 | |||||||
Financing activities: |
||||||||||||
Continuing operations |
(13,665 | ) | (163 | ) | (13,502 | ) |
Net Cash Provided by (Used in) Operating Activities
In assessing cash flows from operating activities for continuing operations, we consider
several principal factors: (i) income or loss from continuing operations, (ii) adjustments for
non-cash charges, primarily amortization of intangible assets, depreciation and amortization of
property and equipment, and deferred income taxes, and (iii) the extent to which trade receivables,
accounts payable and other liabilities, or other working capital components increase or decrease.
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Net cash provided by in operating activities for continuing operations was $13.9 million for
the six months ended July 3, 2010, compared with $9.6 million for the corresponding period in 2009.
Income/loss from continuing operations adjusted for non-cash charges generated operating cash flow
of $35.7 million for the six months ended July 3, 2010, compared with $17.4 million for the
corresponding period in 2009.
The increase in net cash flow from operating activities for the six months ended July 3, 2010,
was partially offset by an increase in trade receivables of $30.5 million, or 28%, compared with
December 31, 2009. The increase resulted from higher revenue, primarily the U.S. Census contract,
and the timing of collections from customers. Trade receivables at July 3, 2010, reflect DSO (days
sales outstanding) of 59 days, compared with 57 days at December 31, 2009. For the corresponding
period in 2009, a reduction in trade receivables of $6.4 million contributed to net cash flow from
operating activities.
An increase in accounts payable and other liabilities of $13.0 million contributed to cash
flow from
operating activities for the six months ended July 3, 2010. A reduction of $9.5 million in
accounts payable and other liabilities reduced cash flow from operating activities for the
corresponding period in 2009; the reduction reflects payments of $6.3 million for incentive
compensation that had been earned and accrued in 2008. There were no payments for incentive
compensation in 2010 as there were no liabilities for incentive compensation earned or accrued for
2009. The timing of payments to vendors affects the level of accounts payable and the effect on
operating cash flow, including the level of activities with small-business vendors and
subcontractors that require more frequent cash payments.
Discontinued operations used net cash flow of $2.9 million for operating activities for the
six months ended July 3, 2010. The net loss from discontinued operations of $16.8 million for the
six months reflects a noncash charge of $17.9 million for expected loss on disposal based on letters of
intent from market participants. For the corresponding period in 2009, discontinued operations used
net cash flow of $2.6 million for operating activities.
Net Cash Used in Investing Activities
Net cash used in investing activities reflects capital expenditures of $3.5 million for
continuing operations for the six months ended July 3, 2010, and $4.8 million for the corresponding
period in 2009 for contractual and general infrastructure requirements. Capital expenditures for
discontinued operations were $0.8 million for the six months ended July 3, 2010, and $1.8 million
for the corresponding period in 2009 primarily for a contract in Mexico. Total capital expenditures
of $14.0 million are expected for 2010.
Net Cash Used in Financing Activities
Net cash used in financing activities of $13.7 million for continuing operations for the six
months ended July 3, 2010, reflects a mandatory term loan payment under the senior secured credit
facility resulting from excess cash flow for 2009. Based on the excess cash flow for 2008, there
was no excess cash flow payment required in 2009.
Contractual Obligations
Contractual commitments to make future cash payments under long-term debt agreements,
contracts, and contingent commitments at July 3, 2010, follow (in millions):
Payments Due by Year | ||||||||||||||||||||||||
2010 (remaining | 2011 and | 2013 and | ||||||||||||||||||||||
Total | six months) | 2012 | 2014 | 2015 | Thereafter | |||||||||||||||||||
Long-term debt: |
||||||||||||||||||||||||
Term loan under senior secured
credit
facility due February 2013 (1) |
$ | 216.8 | $ | | $ | 1.7 | $ | 215.1 | $ | | $ | | ||||||||||||
Senior subordinated notes due 2015 |
190.0 | | | | 190.0 | | ||||||||||||||||||
Interest relating to long-term debt (2) |
109.9 | 14.1 | 48.8 | 37.8 | 9.2 | | ||||||||||||||||||
Operating leases |
73.6 | 11.0 | 31.8 | 13.7 | 3.4 | 13.7 | ||||||||||||||||||
Purchase and other contractual
commitments (3) |
18.9 | 8.9 | 10.0 | | | | ||||||||||||||||||
$ | 609.2 | $ | 34.0 | $ | 92.3 | $ | 266.6 | $ | 202.6 | $ | 13.7 | |||||||||||||
(1) | Scheduled payments for the term loan under the senior secured credit facility do not give effect to possible future mandatory prepayments in March 2011 or March 2012 that could result from excess cash flow from the prior calendar year. |
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(2) | Future interest payments consist of interest on the variable-rate term loan under the senior secured credit facility based on the prevailing rate of 2.50% at July 3, 2010, the estimated future payments based on fair value of the related interest rate swaps, and interest based on the fixed rate of 9 5/8 % for the senior subordinated notes. | |
(3) | Purchase and other contractual commitments represent the minimum noncancelable obligations under service and other agreements, primarily information technology and telecommunications services. |
Variable Interest Entities
The Company has interests in foreign joint ventures that provide government contract services
in foreign countries. In certain arrangements, the Company and the joint-venture partner have each
guaranteed joint venture performance under fixed-priced subcontracts and each has committed to fund
its contractual share of joint venture working capital requirements. Over the next twelve months,
the Company does not expect any material adverse impact to its consolidated financial condition or
results of operations from its performance guaranty under the fixed-priced contracts or its working
capital commitments.
Off-Balance Sheet Arrangements
As of July 3, 2010, there were no off-balance sheet arrangements other than operating leases
for office facilities and equipment for which future minimum lease payments aggregated $73.6
million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided under
Quantitative and Qualitative Disclosures about Market Risk in our annual report on Form 10-K for
the year ended December 31, 2009.
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, has evaluated our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the
end of the period covered by this report, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in reports that we file or submit under the
Securities Exchange Act are: (i) recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms; and (ii) accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended July 3, 2010, there have been no changes in the internal control
over financial reporting that have materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings, investigations and claims arising out of the
ordinary course of business and accrues a liability if an unfavorable outcome is probable. In the
opinion of management, resolution of such matters is not expected to have a material effect on the
Companys results of operations or financial position.
ITEM 1A. RISK FACTORS
There have been no material changes in risk factors from the information provided under Risk
Factors in our annual report on Form 10-K for the year ended December 31, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 5. OTHER INFORMATION
Entry into a Material Definitive Agreement
On
August 5, 2010, Vangent, Inc. (Vangent) entered into an Agreement and Plan of Merger (the
Merger Agreement) by and among VBCSS Acquisition Corp., a wholly owned subsidiary of Vangent
(Merger Sub), Buccaneer Computer Systems & Service, Inc., a Virginia corporation (Buccaneer),
the majority shareholder of Buccaneer and the agent of Buccaneers shareholders. Pursuant to the
terms of the Merger Agreement, Merger Sub will be merged with and into Buccaneer, and as a result
Buccaneer will continue as the surviving corporation and be a wholly owned subsidiary of Vangent
(the Merger).
As of the closing date of the Merger, Vangent will acquire all outstanding shares of Buccaneer
stock in exchange for aggregate consideration of approximately $65.0 million (the Merger
Consideration). The Merger Consideration is subject to adjustment based on the working capital
position of Buccaneer on the closing date of the Merger. Pursuant to the Merger Agreement: (i) $3.0
million of the Merger Consideration will be placed in escrow and will be used to satisfy certain
tax obligations of Buccaneer, and (ii) $5.0 million of the Merger Consideration will be withheld from
the Merger Consideration due to the majority shareholder for a period
of fifteen months to satisfy certain potential indemnification
obligations of the majority shareholder of Buccaneer. Vangent intends to fund the acquisition with
a combination of cash on hand and borrowings under its senior secured revolving credit facility.
The Merger Agreement contains customary representations and warranties and pre-closing
covenants. The completion of the Merger is subject to a number of customary closing conditions
including, among others, the absence of certain governmental restraints, approval by Buccaneers
shareholders and the absence of a material adverse effect on Buccaneer. The Merger Agreement also
includes termination provisions for each of Buccaneer and Vangent and provides that, in certain
specified circumstances, Vangent must pay Buccaneer a termination fee of $1.6 million. The Merger
is expected to close during the third quarter of 2010.
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ITEM 6. EXHIBITS
Exhibit | ||
Number | Description | |
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Vangent, Inc. |
||||
August 5, 2010 | /s/ James C. Reagan | |||
James C. Reagan | ||||
Senior Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
||||
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
37