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8-K - FORM 8-K - SRA INTERNATIONAL, INC. | y91691e8vk.htm |
Exhibit 99.1
Information for Potential Financing Sources
Adjusted EBITDA Reconciliation
Non-GAAP Measures
Included in this report are presentations of Adjusted EBITDA. Adjusted EBITDA is defined as
income from continuing operations plus (i) provisions for income taxes, (ii) interest
expense (income), net and (iii) depreciation and amortization (EBITDA) adjusted to exclude
non-cash items, transaction costs and other items that do not relate directly to the ongoing
operations of the Companys business expected to be permitted in calculating covenant compliance
(if and when applicable) under the Companys new senior secured credit facilities, comprising (i) a
seven-year senior secured term loan facility of up to $875.0 million (the Term Loan B Facility)
and (ii) a five-year senior secured revolving credit facility of up to $100.0 million (the
Revolver and, together with the Term Loan B Facility, the Senior Secured Credit Facilities). As
expected to be permitted under the credit agreement for the Companys Senior Secured Credit
Facilities, Adjusted EBITDA also is expected to include the estimated twelve-month benefit
associated with cost saving initiatives undertaken by the Company during the stated period as if
those initiatives had been fully implemented at the beginning of the period, less amounts reflected
in the financial statements for the period. In addition, the credit agreement is expected to permit
the Company to include or exclude, as the case may be, for the entire period the EBITDA of
businesses acquired or divested during the period.
Adjusted EBITDA presented in this report is a supplemental measure that is not required by, or
presented in accordance with GAAP. The Company believes that the inclusion of supplementary adjustments to
EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to
investors, analysts and other interested parties who will consider Adjusted EBITDA useful in measuring the Companys
ability to meet the Companys debt service obligations and to comply with the net senior secured leverage ratio
covenant under the Companys Senior Secured Credit Facilities (if and when applicable). Such supplementary adjustments
to EBITDA may not be in accordance with current SEC practice or with regulations adopted by the SEC that
apply to registration statements filed under the Securities Act and periodic reports under the Securities
Exchange Act of 1934, as amended.
This non-GAAP measure is not a measurement of the Companys financial performance under GAAP
and should not be considered as an alternative to net income, income from continuing operations,
operating income or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow
from operating activities as a measure of the Companys liquidity. In addition, the Companys measurement of this
non-GAAP measure may not be comparable to that of other companies.
SRAs presentation of this non-GAAP measure should not be construed as an inference that the
Companys future results will be unaffected by unusual or nonrecurring items. This non-GAAP measure has
limitations as an analytical tool and you should not consider it in isolation, or as a substitute for analysis of the
Companys operating results or cash flows as reported under GAAP.
Adjusted EBITDA does not reflect changes in, or cash requirements for, the Companys working
capital needs; the Companys interest expense, or the requirements necessary to service interest or
principal payments on debt; the Companys income tax expenses or the cash requirements to pay taxes or historical cash
expenditures or future requirements for capital expenditures or contractual commitments. Although depreciation and
amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be
replaced in the future. Adjusted EBITDA does not reflect any cash requirements for such replacements.
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Because of these limitations, Adjusted EBITDA should not be considered as a measure of
discretionary cash available to the Company to invest in the Companys business. The Company compensates for
these limitations by relying primarily on the Companys GAAP results and this non-GAAP measure only for
supplemental purposes.
The following table presents a reconciliation of income from continuing operations, a GAAP
measure, to Adjusted EBITDA for the periods presented.
Twelve | ||||||||||||||||||||||||
Months | ||||||||||||||||||||||||
Nine Months Ended | Ended | |||||||||||||||||||||||
Year Ended June 30, | March 31, | March 31, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Income from continuing
operations |
$ | 74,381 | $ | 68,352 | $ | 88,921 | $ | 65,396 | $ | 68,566 | $ | 92,091 | ||||||||||||
Provision for income taxes |
48,739 | 44,710 | 52,075 | 37,038 | 39,982 | 55,019 | ||||||||||||||||||
Interest (income)
expense, net |
(950 | ) | 2,859 | (636 | ) | (319 | ) | (210 | ) | (527 | ) | |||||||||||||
Depreciation and
amortization |
24,297 | 24,146 | 24,130 | 18,346 | 17,890 | 23,674 | ||||||||||||||||||
Non-cash stock
compensation (a) |
10,148 | 10,660 | 9,032 | 6,760 | 7,770 | 10,042 | ||||||||||||||||||
Other, net (b) |
2,268 | 1,864 | 2,189 | 1,999 | 2,755 | 2,946 | ||||||||||||||||||
Transaction costs (c) |
4,458 | 4,458 | ||||||||||||||||||||||
Cost savings (d) |
| | 1,469 | | 2,937 | 4,406 | ||||||||||||||||||
EBITDA impact of
acquisitions and
dispositions (e) |
3,569 | 5,958 | 11,574 | 7,900 | 3,750 | 7,424 | ||||||||||||||||||
Adjusted EBITDA |
$ | 162,452 | $ | 158,549 | $ | 188,754 | $ | 137,120 | $ | 147,898 | $ | 199,533 | ||||||||||||
(a) | Represents the non-cash stock compensation recognized during each period related to SRAs stock option and restricted stock plans. | |
(b) | Represents the EBITDA impact of certain items that do not relate directly to the ongoing operations of the Companys business. Other, net, primarily consists of: (i) in fiscal 2008, facility exit and restructuring costs of $3.1 million, retention compensation paid to key employees in connection with acquisitions of $1.9 million and a $1.8 million payment received by the Company as a settlement for legal claims; (ii) in fiscal 2009, retention compensation of $1.6 million, non-recurring professional fees of $1.3 million and a one-time gain on the sale of Constella Futures Holding, LLC (Futures) of $1.9 million; (iii) in each of fiscal 2010 and the nine months ended March 31, 2010, a one-time charge reducing the previously recorded gain on the sale of Futures of $1.9 million; (iv) in each of the nine months ended March 31, 2011 and the twelve months ended March 31, 2011, unusual severance costs of $1.3 million; and (v) in the nine months ended March 31, 2011 and the twelve months ended March 31, 2011, merger and acquisition transaction fees of $1.4 million and $1.6 million, respectively. | |
(c) | Represents legal, accounting and other expenses incurred in connection with the Transactions. | |
(d) | Represents $4.4 million in run-rate cost savings related to an indirect cost reduction initiative implemented in January 2011; cost savings primarily consist of the salaries, wages and fringe benefits associated with indirect labor reductions (approximately 55 positions), and overhead costs associated with these labor reductions. | |
(e) | Represents the estimated EBITDA impact on Adjusted EBITDA of the acquisition or divestiture, as the case may be, of the businesses listed below as if such business had been acquired or divested on the first day of the respective period in which an adjustment is recorded. In determining Adjusted EBITDA for a given period under the credit agreement governing the Companys Senior Secured Credit Facilities, the Company includes or excludes, as the case may be, for the entire period the EBITDA of businesses acquired or divested during the period. The Company believes that presentation of the EBITDA impact of the following acquisitions and divestitures for all periods prior to their acquisition or divestiture, respectively, shows the Companys ability over the periods presented to generate sufficient Adjusted EBITDA to comply with certain covenants in the credit agreement governing the Companys Senior Secured Credit Facilities (if and when applicable). In determining the EBITDA impact of acquired businesses, the Company used financial information provided by each acquired business, which information was prepared pursuant to applicable accounting principles for such acquired business (which may differ from GAAP and which was unaudited in certain circumstances), together with the Companys own assumptions and estimates, to derive an EBITDA for such acquired business. Accordingly, although the Company believes that the financial information provided by the acquired businesses is accurate, such information has not been, and cannot be, independently verified by the Company. There can be no assurance that the Company would have generated the |
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estimated levels of EBITDA had the Company owned the acquired businesses as of the first day of each period in which an adjustment is recorded. |
EBITDA impact of acquisitions and dispositions consists of the following:
Twelve | ||||||||||||||||||||||||
Months | ||||||||||||||||||||||||
Nine Months Ended | Ended | |||||||||||||||||||||||
Year Ended June 30, | March 31, | March 31, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Platinum acquisition (i) |
$ | 1,000 | $ | 2,844 | $ | 7,088 | $ | 4,462 | $ | 3,527 | $ | 6,153 | ||||||||||||
Sentech acquisition (ii) |
1,500 | 3,000 | 3,937 | 2,889 | 223 | 1,271 | ||||||||||||||||||
PQA acquisition (iii) |
700 | 400 | 549 | 549 | | | ||||||||||||||||||
Interface and Control
Systems acquisition
(iv) |
900 | | | | | | ||||||||||||||||||
Futures disposition (v) |
(1,131 | ) | (286 | ) | | | | | ||||||||||||||||
Constella Group
acquisition (vi) |
600 | | | | | | ||||||||||||||||||
Total EBITDA impact of
acquisitions and
dispositions |
$ | 3,569 | $ | 5,958 | $ | 11,574 | $ | 7,900 | $ | 3,750 | $ | 7,424 | ||||||||||||
i. | Represents the pre-acquisition EBITDA of Platinum Solutions, Inc., acquired in November 2010. | |
ii. | Represents the pre-acquisition EBITDA of Sentech, Inc., acquired in July 2010. | |
iii. | Represents the pre-acquisition EBITDA of Perrin Quarles Associates, Inc., acquired in January 2010. | |
iv. | Represents the pre-acquisition EBITDA of Interface & Control Systems, Inc., acquired in July 2008. | |
v. | In August 2007, the Company acquired Constella Group LLC (Constella) and in September 2009, the Company sold Futures, a wholly owned subsidiary of Constella. This adjustment removes the EBITDA of Futures from August 2007 to September 2009, the period of time Futures was owned by the Company. | |
vi. | Represents the pre-acquisition EBITDA of the remaining portion of Constella after the sale of Futures and after the planned divestitures of GCD, a subsidiary of Constella. |
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Consolidated Financial and Operating Data
for the Twelve Months Ended March 31, 2011
(unaudited)
for the Twelve Months Ended March 31, 2011
(unaudited)
Twelve | ||||
Months | ||||
Ended | ||||
March 31, | ||||
2011 | ||||
(dollars in | ||||
thousands) | ||||
Statement of Operations Data: |
||||
Revenues |
$ | 1,688,555 | ||
Operating costs and expenses: |
||||
Cost of services |
1,268,924 | |||
Selling, general and administrative expenses |
249,374 | |||
Depreciation and amortization |
23,674 | |||
Operating income |
146,583 | |||
Interest income (expense), net |
527 | |||
Income from continuing operations before income taxes |
147,110 | |||
(Provision for) benefit from income taxes |
(55,019 | ) | ||
Income from continuing operations |
$ | 92,091 | ||
Other Financial Data: |
||||
Net cash provided by (used in): |
||||
Operating activities of continuing operations |
$ | 170,801 | ||
Investing activities (a) |
(111,904 | ) | ||
Financing activities (a) |
6,611 | |||
Capital expenditures (a) |
(18,753 | ) |
(a) | Includes results of discontinued operations. |
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Key Business Information
The Company manages approximately 1,200 active contracts, each typically 3-5 years, with more
than 250 federal organizations.
Revenues
The Companys top ten contracts represented approximately 25% of revenue and no single contract
represented more than 9% of revenue for the LTM Period.
The Companys revenue based on contract type, revenue based on the Companys contract role and
organic revenue growth are:
Twelve | ||||||||||||||||||||||||
Months | ||||||||||||||||||||||||
Nine Months Ended | Ended | |||||||||||||||||||||||
Year Ended June 30, | March 31, | March 31, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue by Contract Type: |
||||||||||||||||||||||||
Cost-plus |
$ | 613,446 | $ | 540,979 | $ | 582,906 | $ | 436,543 | $ | 437,648 | $ | 584,011 | ||||||||||||
Time-and-materials |
611,292 | 642,009 | 640,227 | 478,133 | 481,280 | 643,374 | ||||||||||||||||||
Fixed-price |
237,912 | 280,943 | 391,399 | 287,001 | 356,772 | 461,170 | ||||||||||||||||||
Total |
1,462,650 | 1,463,931 | 1,614,532 | 1,201,677 | 1,275,700 | 1,688,555 | ||||||||||||||||||
Revenue by SRA Contract Role: |
||||||||||||||||||||||||
Prime contract revenue |
$ | 1,268,906 | $ | 1,244,693 | $ | 1,406,855 | $ | 1,042,438 | $ | 1,139,180 | $ | 1,503,597 | ||||||||||||
Subcontract revenue |
193,744 | 219,238 | 207,677 | 159,239 | 136,520 | 184,958 | ||||||||||||||||||
Total |
1,462,650 | 1,463,931 | 1,614,532 | 1,201,677 | 1,275,700 | 1,688,555 | ||||||||||||||||||
Organic revenue growth (a) |
4.4 | % | 2.8 | % | 10.8 | % | 12.2 | % | 2.1 | % | 3.2 | % |
(a) | For a definition of organic revenue growth and a reconciliation of organic revenue to revenue, see the Companys report on Form 8-K, filed on June 8, 2011, and its quarterly report on Form 10-Q for the quarter ended March 31, 2011. The Companys organic revenue growth in the nine-month period ended March 31, 2011 was negatively impacted by the Companys decision not to bid on a recompete of a large, low-margin national security contract which contributed $37.7 million of revenue in the nine-month period ended March 31, 2010. Excluding that contract, the Companys organic revenue growth was 5.3% in the period. |
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Revenue from multi-award and single award contract vehicles accounted for approximately 76%
and 24%, 81% and 19%, 81% and 19%, and 74% and 26%, respectively, of the Companys revenue for
fiscal years 2008, 2009 and 2010 and for the nine-month period ended on March 31, 2011.
Federal government organizations, across national security, civil, health and intelligence
agencies,
represented 97% of the Companys total revenue for the LTM Period.
The Companys revenue as derived from each of the Companys national security, health, civil
government
and intelligence and space markets for fiscal years 2008, 2009 and 2010 were as follows:
Year Ended June 30, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
National Security |
$ | 707,773 | $ | 664,009 | $ | 748,339 | ||||||
Civil Government |
$ | 411,676 | $ | 475,023 | $ | 512,911 | ||||||
Health |
$ | 218,052 | $ | 206,943 | $ | 214,076 | ||||||
Intelligence & Space |
$ | 125,149 | $ | 117,956 | $ | 139,206 |
Revenue from the Companys national security, civil government, health and intelligence and
space markets
accounted for 43%, 35%, 13% and 9%, respectively, of the Companys revenue for the LTM Period.
Other Operating Data
The Companys historical backlog, days sales outstanding, Recompete Win Rate, New Business Win Rate
and dollar award volume are as follows:
Twelve | ||||||||||||||||||||||||||||||||
Months | ||||||||||||||||||||||||||||||||
Nine Months Ended | Ended | |||||||||||||||||||||||||||||||
Year Ended June 30, | March 31, | March 31, | ||||||||||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||||||||
(dollars in thousands, except as indicated) | ||||||||||||||||||||||||||||||||
Funded backlog |
$ | 512,800 | $ | 600,400 | $ | 698,800 | $ | 721,300 | $ | 724,400 | $ | 881,000 | $ | 769,000 | $ | 769,000 | ||||||||||||||||
Unfunded backlog |
2,748,800 | 2,809,800 | 3,157,300 | 3,258,400 | 3,646,800 | 3,811,200 | 3,741,100 | 3,741,100 | ||||||||||||||||||||||||
Total backlog |
3,261,600 | 3,410,200 | 3,856,100 | 3,979,700 | 4,371,200 | 4,692,200 | 4,510,100 | 4,510,100 | ||||||||||||||||||||||||
Days sales outstanding (a) |
80 | 68 | 76 | 72 | 69 | 76 | 71 | 71 | ||||||||||||||||||||||||
Recompete Award Amount (b) |
n/a | $ | 1,047,391 | $ | 421,065 | $ | 990,113 | $ | 1,002,982 | $ | 901,569 | $ | 739,302 | $ | 840,715 | |||||||||||||||||
Recompete Win Rate (c) |
n/a | 90.0 | % | 37.4 | % | 92.9 | % | 89.7 | % | 93.4 | % | 93.9 | % | 89.5 | % | |||||||||||||||||
New Business Award
Amount (d) |
n/a | $ | 967,446 | $ | 1,133,429 | $ | 1,382,789 | $ | 1,765,212 | $ | 1,227,272 | $ | 1,313,334 | $ | 1,851,274 | |||||||||||||||||
New Business Win Rate (e) |
n/a | 38.2 | % | 39.3 | % | 46.5 | % | 56.2 | % | 59.6 | % | 33.8 | % | 37.2 | % |
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(a) | The Company calculates DSO by dividing accounts receivable at the end of each quarter, net of billings in excess of revenue, by revenue per day for the quarter. Revenue per day for a quarter is determined by dividing total revenue by 90 days, adjusted for partial periods related to acquisitions if necessary. | |
(b) | Represents the aggregate dollar amount of contracts won that were up for renewal in the period. The contract dollar amount used for a recompete of a multiple award contract, such as an ID/IQ vehicle, is an estimate of the total value of future revenue expected to be realized through that contract. | |
(c) | The Company calculates its Recompete Win Rate based on existing customer contracts that are up for renewal, for which the Company acts as prime contractor, by dividing the aggregate contract dollar amount won by the aggregate contract dollar amount of existing contracts for which the Company competed. The Companys Recompete Win Rate for fiscal 2008 was impacted by the Companys unsuccessful recompete bid for the Advanced Information Technology Services contract with the National Guard, which was the Companys largest contract at that time and accounted for approximately 6.4% of its revenue in fiscal 2008. Excluding the loss of this contract, the Companys Recompete Win Rate for fiscal 2008 would have been 73.1%. | |
(d) | Represents the aggregate dollar amount of contracts won in the period, other than existing contracts that were up for renewal. The contract dollar amount used for a new business contract which is a multiple award contract, such as an ID/IQ vehicle, is an estimate of the total value of future revenue expected to be realized through that contract. Amounts also do not include contract add-ons and therefore will not be equal to contract awards used to calculate the Companys backlog or its book-to-bill ratio. | |
(e) | The Company calculates its New Business Win Rate based on contracts, other than renewals, for which the Company acts as prime contractor by dividing the aggregate contract dollar amount won by the aggregate contract dollar amount of new contracts for which the Company competed. |
As of March 31, 2011, the Company expected to recognize approximately 23% of its backlog as
revenue over the next twelve months.
SRA achieved a 45% New Business Win Rate in the period from July 1,
2008 through March 31, 2011.
Employees and Attrition
The Company believes that its positive employment culture helps it achieve lower voluntary
attrition rates. According to a quarterly survey ending March 31, 2011 conducted by HumanR, an
independent consulting firm, the Company enjoyed a lower cumulative average voluntary attrition
rate over the past eight quarters than the average for a group of other medium and large-sized
federal contractor survey participants over the same period. The surveyed companies, which may
change from quarter-to-quarter, voluntarily choose to participate and, in the most recent quarter,
included seven surveyed companies in the medium group (based on number of employees) and six
surveyed companies in the large group, with SRA qualifying in the medium group. Although the
surveyed companies are federal contractors, SRA does not consider all of them to be competitors.
While the Companys cumulative average was favorable over the most recent eight quarters, in
several individual quarters the companys voluntary attrition rate was higher than the average for
each of the medium and large groups and, in particular, the Companys voluntary attrition was
higher than the average for the medium group in each of the two most recent quarters and higher
than for the large group for the most recent quarter. The Company cannot provide assurances as to
future survey results, particularly given the uncertainties employees may perceive about the
Companys future as a result of the planned merger transaction.
Technology and strategic consulting services and solutions in the health, energy and environment and intelligence markets accounted for approximately
13%, 6% and 9%, respectively, of the Companys total revenue in the LTM Period. Of the Companys full-time employees as of March 31, 2011, approximately 13% were working for customers in the health market,
approximately 7% were working for customers in the area of energy and environment and approximately 5% were working for customers in the
intelligence market. In addition, at least approximately 12% of the
Companys full-time employees as of March 31, 2011, were working in the area of cyber security.
Market and Customer Trends
The
Companys total addressable market for federal government
contracted IT and professional services was approximately $160.0 billion in federal fiscal
year 2010, according to The Avascent Group.
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Intellectual
Property / Research and Development
The Companys research and development (R&D) team works with professionals across the Company
to assess client needs and to focus investments on meeting those needs. The Company incurred $5.0
million of costs in R&D activities in the nine months ended March 31, 2011.
While substantially all of the Companys revenue is earned through its service offerings, the
Company also develops and sells proprietary software and, to a lesser extent, hardware. Software
licensing and related activity generated sales of $5.3 million and $6.2 million in the nine-month
periods ended March 31, 2010 and 2011, respectively.
Risk Factors
You should carefully consider the risks described below in evaluating the Company. If any of the
risks described below actually occurs, the Companys business, financial results and financial
condition could be materially adversely affected.
The Companys largest customer, the U.S. federal government, accounts for the vast majority of the
Companys revenue and earnings. Inherent in the government contracting process are unique risks
which may materially and adversely affect the Companys business and profitability.
Revenue from services provided as a prime contractor or subcontractor on contracts with federal
government clients accounted for more than 95% of the Companys revenue in all periods presented.
If a key federal government agency or department terminates its relationship with the Company for
any reason, the Company may not be able to replace or supplement such lost revenue with other
federal government agencies or other customers, and the Companys results of operations and
financial condition could be materially adversely affected. This customer relationship involves
certain unique risks, including:
| The Company may face a reduction in federal government spending or changes in spending policies or budget priorities, for example, the possibility of reduced levels of government spending due to in-sourcing efforts aimed at improving the organic capabilities of the federal government. Other changes in spending levels and budget priorities may result from changes in U.S. Government leadership, the number of and intensity of military conflicts, the growth of the federal budget deficit (which is expected to be high by historical standards in calendar year 2011), increasing political pressure to reduce overall levels of government spending, disruptions in the U.S. Treasury bond markets, shifts in spending priorities as a result of competing demands for federal funds, including the impact of efforts to stimulate the U.S. economy, or other factors. Some of the Companys major federal government customers have publicly stated their intentions to significantly reduce the use of private contractor services similar to those the Company provides. | ||
| The failure by Congress to pass the annual budget on a timely basis may delay funding the Company expects to receive from clients on work the Company is already performing and will likely result in any new initiatives being delayed, and potentially cancelled. | ||
| Federal government contracts generally are not fully funded at inception. These contracts typically span one or more base years and multiple option years. Congress generally appropriates funds for these contracts for only one year at a time. The government generally has the right to reduce or modify contracts or subcontracts, or decline to exercise an option to renew a multi-year contract. | ||
| The Company cannot guarantee that its estimated contract backlog will result in actual revenue. There is a higher degree of risk in this regard with respect to unfunded backlog. As of March 31, 2011, the Companys estimated contract backlog totaled approximately $4.5 billion, of which approximately $0.8 billion was funded. As of March 31, 2011, the Company expected to recognize approximately 23% of its backlog as revenue over the next twelve months. The Companys total backlog as of March 31, 2011 represented a 3.9% decrease over the March 31, 2010 backlog. In addition, the Companys book-to-bill ratio declined to 1.3:1 during the nine-month period ended March 31, 2011 from 1.7:1 in the nine-month period ended March 31, 2010. The actual receipt and timing of any revenue is subject |
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to various contingencies, many of which are beyond the Companys control. The actual receipt of revenue on contracts included in backlog may never occur or may change because a program schedule could change; the program could be canceled; a contract could be reduced, modified, or terminated early; or an option that the Company had assumed would be exercised is not exercised. For example, in the LTM Period, $537.7 million, or 11.9% of the Companys total backlog as of March 31, 2011, was de-obligated. | |||
| Federal government contracts generally allow the government to terminate a contract, with short or no prior notice, for convenience. The government may also terminate a contract for default in the event a contractor fails to meet contractual obligations. If a government client terminates one of the Companys contracts for convenience, the Company would generally be able to recover only its incurred or committed costs, settlement expenses, and profit on work completed prior to the termination. If one of the Companys contracts is terminated for default, the Company would generally be entitled to payments for its work that has been accepted by the government. A termination for default could expose the Company to liability for the clients costs of re-procurement, damage the Companys reputation, and hurt the Companys ability to compete for future contracts. | ||
| The federal government may change its procurement practices or adopt new contracting laws, rules or regulations, including cost accounting standards. For example, it could change its preference for procurement methods and/or contract types in a manner that is unfavorable to technology support contractors generally. Any such change could potentially place greater pressure on the Companys profit margins, and could materially harm the Companys operating results. Additionally, aspects of the federal governments procurement system, such as the number of acquisition personnel available to support the workload imposed by new federal procurement regulations and an increasing number of protests, could exacerbate delays in the procurement decision-making process, thus delaying the Companys ability to generate revenues from proposals and awards. If and to the extent such changes occur, they could impact the Companys results of operations and liquidity, and could affect whether and how the Company pursues certain opportunities and the terms under which the Company is able to do so. |
The Companys business could be negatively impacted by security threats and other disruptions.
Like others in the Companys industry, the Company continues to face advanced and persistent
attacks on its information infrastructure. These may include sophisticated malware introduced
through, amongst other methods, phishing emails. When activated, typically by an unknowing
recipient, these malware may attempt to surreptitiously capture data input or run malicious
software enabling, for example, remote control and possible data exfiltration. These intrusions
sometimes may be zero-day malware that are difficult to identify because they are not included in
the signature set of commercially available antivirus scanning programs. Persistent information
infrastructure threats require significant management attention and resources and potentially can
disrupt the Companys business and may expose sensitive personally identifiable and other critical
information of its customers, their employees or the Companys own employees, and other parties
with whom the Company conducts business. Any failure to comply with the Companys network security
and data privacy legal and contractual obligations may result in legal actions, contract
terminations and payment of damages to impacted parties. Any such failure may also require
increased expenditures for information infrastructure security and monitoring and may damage the
Companys reputation among its customers and the public, possibly resulting in a material increase
in the Companys costs and/or reduction in its revenues.
The Company depends heavily on U.S. federal government contracts. A delay in Congress raising the
amount of government debt may adversely affect the Companys sales and gross margins, operating
results and cash flows.
Since 1917, the amount of U.S. federal government debt has been limited by statute, and this
so-called debt ceiling can only be raised by an act of Congress. While the debt ceiling was
reached in mid-May, the Department of the Treasury has altered its funding strategies to allow the
government to continue borrowing in the debt markets until August 2, 2011. If Congress does not act
to raise the debt ceiling by such time, certain federal government spending would then be subject
to reduction, suspension or cancellation. Because the Company depends on revenue from
federal government contracts, failure to raise the debt ceiling could materially adversely impact
the Companys financial results.
14
The Companys failure to comply with complex laws and regulations could cause the Company to be
found liable and subject the Company to a variety of penalties.
The Company must comply with laws and regulations relating to the formation, administration,
and performance of government contracts, which affect how the Company does business with its
government clients and may impose added costs on the Companys business. These laws and regulations
are related to, for example, procurement integrity, disclosure of cost and pricing data,
allowability of costs, national security, and employment practices. These requirements impact the
Companys compliance costs and overall performance. Failure to comply with any of these regulations
could result in civil and criminal penalties and administrative sanctions, including termination of
contracts, forfeiture of profits, harm to the Companys reputation, suspension of payments, fines,
and suspension or debarment from doing business with the federal government. Among the most significant
of these regulations are:
| the Federal Acquisition Regulation (FAR) and supplements, which regulate the formation, administration and performance of U.S. Government contracts; | ||
| the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with certain contract negotiations; | ||
| the False Claims Act, which provides for substantial civil penalties for violations, including for submission of a false or fraudulent claim to the U.S. Government for payment or approval; and | ||
| U.S. Government Cost Accounting Standards, which impose accounting requirements that govern the Companys right to reimbursement under certain cost-based U.S. Government contracts. |
The Companys employees might engage in misconduct or other improper activities, which could harm
its business. Misconduct by employees could include intentional failures to comply with federal
government procurement regulations, engaging in unauthorized activities, seeking reimbursement for
improper expenses or falsifying time records. Employee misconduct could also involve the improper
use of the Companys clients sensitive or classified information, which could result in regulatory
sanctions against the Company and serious harm to its reputation. The precautions the Company takes
to prevent and detect employee misconduct may not be effective in controlling unknown or unmanaged
risks or losses, which could harm the Companys business.
The Companys failure to consider the impact of organizational conflicts of interest or personal
conflicts of interest could limit the Companys business opportunities and have an adverse impact
on the Companys business.
Government regulations on organizational conflicts of interest may limit the Companys ability to
compete for or perform certain contracts. The government could determine that an organizational
conflict of interest or other conflict of interest, such as a personal conflict of interest,
exists. Even the appearance of a conflict may cause the government to determine the Company is
unable to render impartial assistance or advice to the government,
and, therefore, the Company may
be ineligible to compete for certain procurements or the Company must implement mitigation
strategies that may be costly.
The potential for limitations on future contracting associated with a perceived organizational
conflict of interest could cause the Company to divest existing business in order to mitigate a
perceived or actual conflict. The Company may be forced to divest an existing business in an effort
to ensure that it is able to perform on other work at a time when market conditions are not
favorable to a divestiture. Similarly, if the Company hires former
government personnel, or engages
with other contractors or consultants who may have had unequal access to information related to a
particular procurement, the government may determine that the conflict creates an unfair
competitive advantage and the Company may be deemed ineligible for certain contracts.
Unfavorable government audit results could force the Company to adjust previously reported
operating results and could subject the Company to a variety of penalties and sanctions.
As a government contractor, the Company is subject to routine audits and investigations by U.S.
government agencies such as the Defense Contract Audit Agency (DCAA) and the Inspectors General for
various agencies with which the Company contracts in the ordinary course of business. These
agencies review, among other things, a
15
contractors performance under its contracts, cost
structure, pricing practices, and compliance with applicable contracting and procurement laws,
regulations and standards, including U.S. Government Cost Accounting Standards. The DCAA also
reviews the adequacy of and a contractors compliance with its internal control systems and
policies, including the contractors purchasing, property, estimating, cost accounting, labor,
billing, compensation, other management information systems and indirect rates and pricing
practices. DCAA issued guidance in late 2008 and provided clarification to existing guidance with
respect to its audits of government contractors. As a result, DCAA has placed a greater emphasis on
audits of accounting, estimating, billing, and other management internal control systems. With
greater scrutiny on SRAs and other government contractors systems, the number of alleged
deficiencies reported by DCAA has increased since the guidance was issued.
The Companys failure to obtain an adequate determination for these or any of the Companys
systems could adversely affect its business, including the Companys ability to invoice and receive
timely and complete payments on contracts. In addition, the Company could suffer serious
reputational harm if allegations of impropriety were made against it.
All significant incurred cost submission audits by the DCAA have been completed through fiscal year
2006. DCAAs increased emphasis on system audits is likely to delay the completion of incurred cost
audits, and DCAAs more aggressive interpretations could result in a higher percentage of
questioned costs than in the past. Any costs found to be improperly allocated to a specific
contract or not properly supported with sufficient documentation will not be reimbursed or must be
refunded if already reimbursed. If an audit uncovers improper or illegal activities, the Company
may be subject to civil and criminal penalties and administrative sanctions, which may include
termination of contracts, forfeiture of profits, unilateral reductions of the Companys fees,
suspension of payments, fines and suspension or prohibition from doing business with U.S. federal
government agencies. The Company does not know the outcome of any ongoing or future audits or
reviews and if future adjustments exceed the Companys estimates, the Companys profitability would
be adversely affected.
If the systems that the Company installs fail or have significant delays or errors, or products or
services the Company supplies have defects, the Company may be liable, which could adversely affect
its results of operations and harm its reputation.
Many of the systems the Company develops, installs, and maintains involve managing and protecting
information used in intelligence, national security, and other sensitive or classified government
functions. Some of the Companys contracts provide critical products and services related to
aviation, other transportation systems, space communications and other important civil and
government functions having potential for significant economic or personal liabilities. Damage to
the Companys reputation or limitations on the Companys eligibility for additional work resulting
from a security breach in one of these systems, or other failure could materially reduce the
Companys revenue.
If the Companys solutions, services, products or other applications have defects or errors, are
subject to delivery delays or fail to meet the Companys customers expectations, the Company may:
| Lose revenues due to adverse customer reaction; | ||
| Be required to provide additional services to a customer at no charge; | ||
| Receive negative publicity that could damage the Companys reputation and adversely affect the Companys ability to attract or retain customers; | ||
| Suffer claims for substantial damages against it; and | ||
| Face material claims for damage to personal property and injuries including loss of life. |
In addition to any costs resulting from product warranties, contract performance or required
corrective action, these failures may result in increased costs or loss of revenues if they result
in customers postponing subsequently scheduled work, canceling contracts or failing to renew
contracts. The Company may have agreed to indemnify the
Companys customers fully for damages and third party claims, the Company may have failed to obtain
or have negotiated insufficient contractual limitations of liability, and the Company may be found
liable for material direct, indirect, consequential, or punitive damages.
16
If the Company fails to estimate costs accurately or it fails to effectively perform its
contractual obligations, the Companys reputation, its ability to obtain future business, and its
revenue and operating results could suffer.
The Companys contracts are typically awarded through a competitive bidding process. The Company
may lose money on some contracts if, in the bidding process, it underestimates the resources the
Company needs to perform under the contract. If the Company fails to accurately estimate its costs
or the time required to complete a contract, the profitability of the Companys contracts may be
adversely affected.
Under fixed-priced contracts, the Company receives a fixed price irrespective of the actual costs
it incurs. Due to their nature and the potential for cost overruns, fixed-priced contracts
inherently have more risk than cost reimbursable contracts, particularly fixed-price development
contracts where the costs to complete the development stage of the program can be highly variable,
uncertain and difficult to estimate. Failure to meet contractual requirements timely under
fixed-price contracts may result in additional costs to satisfy obligations to the Companys
customers, reductions in profit, payment of damages or penalties, or termination of the contract.
The Company faces intense competition from many competitors that have greater resources than the
Company does, which could result in price reduction, reduced profitability, and loss of market
share.
The Company generally encounters intense competition to win federal government contracts. Many of
the Companys competitors are larger and have greater financial, technical, marketing, and public
relations resources, larger client bases, and greater brand or name recognition than the Company
does. The Companys larger competitors also may be able to provide clients with different or
greater capabilities or benefits than the Company can provide in areas such as technical
qualifications, past performance on large-scale contracts, geographic presence, the ability to
provide a broader range of services without creating conflicts of interest or intra-organizational
conflicts of interest, price, and the availability of key professional personnel. The Companys
competitors also have established or may establish relationships among themselves or with third
parties, including through mergers and acquisitions, joint ventures and teaming agreements to
increase their ability to address client needs. Increased competition in the industry may cause
some of the services the Company provides to become commoditized and more competitively priced,
causing downward pressure on profit margins.
The Company derives significant revenue from federal government contracts that are awarded through
a competitive bidding process. Competitive bidding presents a number of risks, including:
| Spending substantial cost and managerial time and effort to prepare bids and proposals for contracts that may not be awarded to us, which may result in reduced profitability; | ||
| Many federal government contract award decisions are subject to protest by competitors, which may require the contracting federal agency or department to suspend the Companys performance pending the outcome of the protest and may also result in a requirement to resubmit bids for the contract or in the termination, reduction, or modification of the awarded contract; and | ||
| Changes in policy and goals by the government providing set-aside funds to small business, disadvantaged businesses and other socio-economic requirements in the allocation of contracts. |
The Company faces competition when it recompetes on contracts for current customers. For example,
in the fourth quarter of 2008, the Company was informed that the company was not successful in
its recompete bid for the Advanced Information Technology Services contract with the National
Guard, which represented approximately 6.4% of the Companys revenue in fiscal 2008.
The Company often depends on other companies to deliver its products and services.
The Company often relies significantly upon other companies as subcontractors to perform work it is
obligated to deliver to its clients. Subcontractor costs represented approximately 25% of the
Companys total cost of services
in all periods presented. If the Companys subcontractors fail to deliver their services or
products on time, or violate government contracting policies, laws or regulations, the Companys
ability to complete the Companys contracts or meet the Companys customers expectations as a
prime contractor may be adversely affected which may have a material and adverse impact on the
Companys revenue and profitability. If the Company is the prime contractor and
17
the Companys
subcontractors fail to perform as agreed, the Company may be liable to its customers for
penalties, lost profits and additional costs to satisfy its contractual obligations. These
penalties or payments for lost profits may have a material and adverse effect on the Companys
profitability and could have a negative impact on the Companys reputation and ability to procure
other government contracts in the future.
The Companys business depends on obtaining and maintaining required employee and facility
clearances.
Many of the Companys government contracts require its employees to maintain various levels of
security clearances and the Company is required to maintain certain facility security clearances
complying with the Department of Defense and Intelligence Community requirements. Security-related
laws and regulations are complex, and the Company on several occasions has voluntarily disclosed
to the government the Companys failure to fully comply with each technical requirement. To the
extent the Company is not able to obtain facility clearances, engage employees with the required
security clearances for a particular contract, or maintain connections to controlled government
information systems, the Company may not be able to bid or win new contracts, or effectively
recompete on expiring contracts.
If the Company fails to attract and retain qualified employees, it might not be able to staff
recently awarded contracts and sustain the Companys profit margins and revenue growth.
As an advanced information technology and technical services company, the Companys business is
labor intensive, and, therefore, the Companys ability to attract and retain highly qualified
individuals who work well with its clients in a government environment is an important factor
in determining the Companys success. Some of the Companys government contracts require it to
employ individuals who have particular security clearances issued by the Department of Defense or
other government agencies. These employees are in great demand and are likely to remain a limited
resource for the foreseeable future. If the Company is unable to recruit and retain a sufficient
number of these employees, the Companys ability to staff recently awarded contracts and to
maintain and grow the Companys business could be limited. The Company is operating in a tight
labor market for cleared personnel and, if it continues to tighten, the Company could be required
to engage larger numbers of subcontractor personnel, which could cause the Companys profit margins
to suffer.
If the Company fails to manage acquisitions successfully, its revenue and operating results may be
impaired.
Part of the Companys growth strategy includes pursuing acquisitions of small or large companies.
Identification and valuation of acquisition targets and closing complicated transactions involve
significant risks to the Companys business. In pricing acquisitions, the Company may make overly
optimistic assumptions of future business growth. The Companys due diligence reviews may not
identify all of the material issues necessary to accurately estimate the cost and potential
liabilities of a particular acquisition. The Company may encounter increased competition for
acquisitions, which may increase the price of its acquisitions. Additionally, these transactions
often require substantial management resources and may divert the Companys attention away from
day-to-day operations.
Integrating acquired operations of the acquisitions the Company chooses to complete is a
significant challenge and there is no assurance that it will be able to manage the integrations
successfully. Failure to successfully integrate acquired operations may adversely affect the
Companys cost structure thereby reducing the Companys margins and return on investment.
Acquisitions may involve incurrence of additional indebtedness which may constrain further growth
and include restrictive financial covenants that, if not complied with, may lead to default.
Acquisitions may also increase organizational conflicts of interest, impacting current business and
limiting further growth.
In addition, the Company periodically divests businesses that are no longer part of its ongoing
strategic plan. These divestitures may result in losses on disposal of the divested business for a
period of time following the transaction. If claims or other costs are incurred following a
divestiture the Companys financial results may be adversely affected.
18
The Company has very limited ability to protect its intellectual property, which is important to
the Companys success. The Companys failure to adequately protect its proprietary information and
intellectual property rights could adversely affect its competitive position. In conducting the
Companys business, the Company may infringe the rights of others.
The Company relies principally on trade secrets to protect much of its intellectual property where
patent protection is not feasible and/or copyright protection is not appropriate. However, trade
secrets are difficult to protect. Confidentiality agreements may be inadequate to deter or prevent
misappropriation of the Companys confidential information. In addition, the Company may be unable
to detect unauthorized use of its intellectual property or otherwise take appropriate steps to
enforce the Companys rights. Failure to obtain or maintain trade secret protection could adversely
affect the Companys competitive business position. In addition, if the Company is unable to
prevent third parties from infringing or misappropriating the Companys copyrights, trademarks or
other proprietary information, the Companys competitive position could be adversely affected.
Moreover, use of the Companys trade secrets in performing contracts with the U.S. Government can
result in the government obtaining license rights in these trade secrets. The Company has a limited
patent portfolio in the United States and Europe and in some cases its
intellectual property rights may be limited to only the United States and certain other
jurisdictions. In the course of conducting its business, the Company might inadvertently infringe
the intellectual property rights of others, resulting in claims against the Company or its
customers. The Companys contracts generally indemnify the Companys customers for third-party
claims for intellectual property infringement by the services and products the Company provides.
The expense of defending these claims may adversely affect the Companys financial results.
The Companys insurance coverage may be inadequate to cover all of the Companys significant risks
or the Companys insurers may deny coverage of material losses it incurs, which could adversely
affect the Companys profitability and financial position.
The Company attempts to obtain adequate insurance to cover many of the Companys significant risks
and liabilities. Not every risk or liability can be protected by insurance, and for insurable
risks, the limits of coverage reasonably obtainable in the market may not be sufficient to cover
all actual losses incurred. Securing more coverage may impact profitability. Because of the
limitations in overall available coverage or the Companys business decisions regarding the amount
of coverage that it chooses to secure, the Company may have to bear substantial costs for uninsured
losses that could have a material adverse effect on the Companys results of operations and
financial position.
The Company is a defendant in pending litigation which may have a material and adverse impact on
the Companys profitability
The Company is subject to investigations, audits and reviews relating to compliance with various
laws and regulations with respect to the Companys role as a contractor to agencies and departments
of the U.S. Government, state, local and foreign governments, and otherwise in connection with
performing services in countries outside of the United States. Such matters can lead to criminal,
civil or administrative proceedings, the Company could be faced with penalties, fines, repayments
or compensatory damages or could lead to suspension or debarment from future U.S. government
contracting. Adverse findings could also have a material adverse effect on the Company because of
its reliance on government contracts. The Company is subject to periodic audits by state, local,
and foreign governments for taxes.
The Company is also involved in various claims and lawsuits arising in the normal conduct of the
Companys business including but not limited to various employment litigation matters and charges
before administrative agencies. The Company can give no assurance that the outcome of any such
matter would not have a material adverse effect on the Companys consolidated financial position,
results of operations or cash flows. The Company is not able to predict the ultimate outcome of
these disputes or the actual impact of these matters on the Companys profitability. If the Company
agrees to settle these matters or judgments are secured against it, the Company may incur charges
which may have a material and adverse impact on the Companys liquidity and earnings.
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