Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - NCI, Inc. | c22042exv31w2.htm |
EX-31.1 - EX-31.1 - NCI, Inc. | c22042exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - NCI, Inc. | Financial_Report.xls |
EX-32.1 - EX-32.1 - NCI, Inc. | c22042exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTER ENDED SEPTEMBER 30, 2011
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
000-51579
NCI, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
20-3211574 (I.R.S. Employer Identification No.) |
|
11730 Plaza America Drive | ||
Reston, Virginia | 20190-4764 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (703) 707-6900
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
þ Yes o No
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 definition 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 þ | Non-accelerated filer o (Do not check if a smaller reporting company) | 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).
o Yes þ No
As of October 27, 2011, there were 8,672,330 shares outstanding of the registrants Class A common
stock. In addition, there are 5,200,000 shares outstanding of the registrants Class B common
stock, which are convertible on a one-for-one basis into Class A common stock.
NCI, INC.
2
Table of Contents
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements |
NCI, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | 132,004 | $ | 168,769 | $ | 443,432 | $ | 410,319 | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of revenue |
116,855 | 151,138 | 395,781 | 361,456 | ||||||||||||
General and administrative expense |
6,768 | 6,194 | 18,612 | 17,179 | ||||||||||||
Depreciation and amortization |
1,870 | 1,359 | 4,995 | 3,725 | ||||||||||||
Acquisition and integration related expenses |
54 | | 1,003 | | ||||||||||||
Total operating costs and expenses |
125,547 | 158,691 | 420,391 | 382,360 | ||||||||||||
Operating income |
6,457 | 10,078 | 23,041 | 27,959 | ||||||||||||
Interest expense, net |
503 | 133 | 1,183 | 426 | ||||||||||||
Income before income taxes |
5,954 | 9,945 | 21,858 | 27,533 | ||||||||||||
Provision for income taxes |
2,472 | 3,841 | 8,825 | 10,567 | ||||||||||||
Net income |
$ | 3,482 | $ | 6,104 | $ | 13,033 | $ | 16,966 | ||||||||
Earnings per common and common equivalent
share: |
||||||||||||||||
Basic: |
||||||||||||||||
Weighted average shares outstanding |
13,588 | 13,639 | 13,646 | 13,612 | ||||||||||||
Net income per share |
$ | 0.26 | $ | 0.45 | $ | 0.96 | $ | 1.25 | ||||||||
Diluted: |
||||||||||||||||
Weighted average shares outstanding |
13,791 | 13,873 | 13,875 | 13,879 | ||||||||||||
Net income per share |
$ | 0.25 | $ | 0.44 | $ | 0.94 | $ | 1.22 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements
3
Table of Contents
NCI, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
As of | As of | |||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Assets: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,174 | $ | 2,791 | ||||
Accounts receivable, net |
100,411 | 132,693 | ||||||
Deferred tax assets, net |
4,522 | 4,547 | ||||||
Prepaid expenses and other current assets |
5,093 | 3,347 | ||||||
Total current assets |
111,200 | 143,378 | ||||||
Property and equipment, net |
16,382 | 11,751 | ||||||
Other assets |
1,507 | 1,590 | ||||||
Intangible assets, net |
9,230 | 6,179 | ||||||
Goodwill |
151,024 | 106,580 | ||||||
Total assets |
$ | 289,343 | $ | 269,478 | ||||
Liabilities and stockholders equity: |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 29,766 | $ | 61,046 | ||||
Accrued salaries and benefits |
19,685 | 20,229 | ||||||
Deferred revenue |
1,267 | 2,951 | ||||||
Other accrued expenses |
5,104 | 3,468 | ||||||
Total current liabilities |
55,822 | 87,694 | ||||||
Long-term debt |
61,700 | 20,000 | ||||||
Deferred tax liabilities, net |
7,814 | 7,450 | ||||||
Deferred rent and other long-term liabilities |
836 | 1,287 | ||||||
Total liabilities |
126,172 | 116,431 | ||||||
Stockholders equity: |
||||||||
Class A common stock, $0.019 par
value37,500 shares authorized; 8,672
shares issued and 8,384 outstanding as of
September 30, 2011, and 8,469 shares issued
and outstanding as of December 31, 2010 |
164 | 161 | ||||||
Class B common stock, $0.019 par
value12,500 shares authorized; 5,200
shares issued and outstanding as of
September 30, 2011 and December 31, 2010 |
99 | 99 | ||||||
Additional paid-in capital |
69,432 | 67,889 | ||||||
Treasury stock288 shares of Class A common
stock at cost as of September 30, 2011 and 0
shares of Class A common stock as of
December 31, 2010 |
(4,455 | ) | | |||||
Retained earnings |
97,931 | 84,898 | ||||||
Total stockholders equity |
163,171 | 153,047 | ||||||
Total liabilities and stockholders equity |
$ | 289,343 | $ | 269,478 | ||||
The accompanying notes are an integral part of these consolidated financial statements
4
Table of Contents
NCI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine months ended September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 13,033 | $ | 16,966 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
4,995 | 3,725 | ||||||
Stock compensation expense |
1,273 | 1,288 | ||||||
Deferred income taxes |
388 | 2,346 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
45,381 | (17,713 | ) | |||||
Prepaid expenses and other assets |
(1,244 | ) | (2,838 | ) | ||||
Accounts payable |
(32,566 | ) | 14,749 | |||||
Accrued expenses |
(4,588 | ) | (1,377 | ) | ||||
Deferred rent |
(404 | ) | (411 | ) | ||||
Net cash provided by operating activities |
26,268 | 16,735 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(2,080 | ) | (5,206 | ) | ||||
Proceeds from sale of property and equipment |
26 | 56 | ||||||
Cash paid for acquisitions, net of cash received |
(63,327 | ) | | |||||
Net cash used in investing activities |
(65,381 | ) | (5,150 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings under credit facility |
165,966 | 82,359 | ||||||
Repayments on credit facility |
(124,266 | ) | (95,859 | ) | ||||
Principal payments under capital lease obligations |
(23 | ) | (53 | ) | ||||
Proceeds from exercise of stock options |
252 | 2,441 | ||||||
Excess tax deductions from stock options |
22 | 258 | ||||||
Purchases of Class A common stock |
(4,455 | ) | | |||||
Net cash provided by (used in) financing activities |
37,496 | (10,854 | ) | |||||
Net change in cash and cash equivalents |
(1,617 | ) | 731 | |||||
Cash and cash equivalents, beginning of period |
2,791 | 1,193 | ||||||
Cash and cash equivalents, end of period |
$ | 1,174 | $ | 1,924 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 1,273 | $ | 466 | ||||
Income taxes |
$ | 9,927 | $ | 11,476 | ||||
The accompanying notes are an integral part of these consolidated financial statements
5
Table of Contents
NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of NCI, Inc. and its subsidiaries
(NCI or the Company) have been prepared in accordance with generally accepted accounting
principles in the United States (GAAP) for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). As a result, certain
information and footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted. In the opinion of management, the
accompanying unaudited interim consolidated financial statements reflect all adjustments
(consisting of only normal recurring accruals) necessary to fairly present the Companys financial
position as of September 30, 2011 and its results of operations and cash flows for the three and
nine months ended September 30, 2011 and 2010. The information disclosed in the notes to the
financial statements for these periods is unaudited. The current periods results of operations
are not necessarily indicative of results that may be achieved for any future period. For further
information, refer to the financial statements and footnotes included in NCIs Annual Report on
Form 10-K for the year ended December 31, 2010, as filed with the SEC.
2. Business Overview
NCI is a provider of information technology (IT), engineering, logistics and professional services
and solutions to U.S. Federal Government agencies. The Companys capabilities are centered on
overcoming customers challenges to help them meet their critical mission and objectives. NCI
provides full lifecycle IT solutions, complemented by professional services through its core
capabilities which include: enterprise systems management; network engineering; cybersecurity and
information assurance; software development and systems engineering; program management,
acquisition, and lifecycle support; engineering and logistics; health IT and informatics; and
training and simulation. The Company provides these services to U.S. Defense, Intelligence, and
Federal Civilian agencies. The majority of the Companys revenue was derived from contracts with
the U.S. Federal Government, directly as a prime contractor or as a subcontractor. The Company
primarily conducts business throughout the United States.
3. Earnings Per Share
Basic earnings per share exclude dilution and are computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted earnings per share reflect
potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted earnings per share include the incremental
effect of stock options calculated using the treasury stock method. For the three months ended
September 30, 2011 and 2010, approximately 250,000 and 167,000 shares, respectively, were not
included in the computation of diluted earnings per share, because to do so would have been
anti-dilutive. For the nine months ended September 30, 2011 and 2010, approximately 156,000 and
119,000 shares, respectively, were not included in the computation of diluted earnings per share,
because to do so would have been anti-dilutive. The following details the historical computation
of basic and diluted earnings per common share (Class A and Class B) for the three and nine months
ended September 30, 2011 and 2010.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Net Income |
$ | 3,482 | $ | 6,104 | $ | 13,033 | $ | 16,966 | ||||||||
Weighted average number of basic shares outstanding during the period |
13,588 | 13,639 | 13,646 | 13,612 | ||||||||||||
Dilutive effect of stock options after application of treasury stock
method |
203 | 234 | 229 | 267 | ||||||||||||
Weighted average number of diluted shares outstanding during the
period |
13,791 | 13,873 | 13,875 | 13,879 | ||||||||||||
Basic earnings per share |
$ | 0.26 | $ | 0.45 | $ | 0.96 | $ | 1.25 | ||||||||
Diluted earnings per share |
$ | 0.25 | $ | 0.44 | $ | 0.94 | $ | 1.22 | ||||||||
6
Table of Contents
NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Accounts Receivable (in thousands)
Accounts receivable consist of billed and unbilled amounts at September 30, 2011 and December 31,
2010, as follows:
As of: | ||||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Billed receivables |
$ | 42,553 | $ | 51,611 | ||||
Unbilled receivables: |
||||||||
Amounts billable at end of period |
39,846 | 61,500 | ||||||
Other |
18,602 | 20,280 | ||||||
Total unbilled receivables |
58,448 | 81,780 | ||||||
Total accounts receivable |
101,001 | 133,391 | ||||||
Less: allowance for doubtful accounts |
590 | 698 | ||||||
Total accounts receivable, net |
$ | 100,411 | $ | 132,693 | ||||
Other unbilled receivables primarily consist of amounts that will be billed upon milestone
completions and other accrued amounts that cannot be billed as of the end of the period.
Substantially all unbilled receivables are expected to be billed and collected within the next one
year.
5. Property and Equipment (in thousands)
The following table details property and equipment at the end of each period:
As of: | ||||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Property and equipment |
||||||||
Furniture and equipment |
$ | 22,673 | $ | 17,855 | ||||
Leasehold improvements |
6,958 | 5,287 | ||||||
Real property |
549 | 549 | ||||||
30,180 | 23,691 | |||||||
Less: Accumulated depreciation and amortization |
13,798 | 11,940 | ||||||
Property and equipment, net |
$ | 16,382 | $ | 11,751 | ||||
Depreciation expense for the three months ended September 30, 2011 and 2010 was $1.1 million
and $0.7 million, respectively. Depreciation expense for the nine months ended September 30, 2011
and 2010 was $2.9 million and $2.0 million, respectively.
6. Intangible Assets (in thousands)
The following table details intangible assets at the end of each period:
As of | ||||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Contract and customer relationships |
$ | 19,923 | $ | 14,942 | ||||
Less: Accumulated amortization |
10,822 | 8,994 | ||||||
9,101 | 5,948 | |||||||
Non-compete agreements |
2,038 | 2,038 | ||||||
Less: Accumulated amortization |
1,909 | 1,807 | ||||||
129 | 231 | |||||||
Intangible assets, net |
$ | 9,230 | $ | 6,179 | ||||
7
Table of Contents
NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Intangible Assets (in thousands) continued
Amortization expense for the three months ended September 30, 2011 and 2010 was $0.8 million and
$0.7 million, respectively. Amortization expense for the nine months ended September 30, 2011 and
2010 was $2.1 million and $1.8 million, respectively.
7. Stock Compensation
During the three months ended September 30, 2011, the Company granted 160,000 stock options and had
exercises of 10,000 options. During the nine months ended September 30, 2011, the Company granted
373,000 stock options and had exercises of approximately 28,000 options. As of September 30, 2011,
there were approximately 1.4 million options outstanding.
During the three months ended September 30, 2011, the Company granted 95,000 shares of restricted
stock and none of those shares have vested. During the nine months ended September 30, 2011, the
Company granted 175,000 shares of restricted stock and none of those shares have vested. As of
September 30, 2011, there were 175,000 shares of restricted stock outstanding.
The following table summarizes stock compensation for the three and nine months ended September 30,
2011 and 2010:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Cost of revenue |
$ | 234 | $ | (55 | ) | $ | 460 | $ | 365 | |||||||
General and administrative |
420 | 424 | 812 | 923 | ||||||||||||
$ | 654 | $ | 369 | $ | 1,272 | $ | 1,288 | |||||||||
As of September 30, 2011, there was approximately $6.8 million of total unrecognized
compensation cost related to unvested stock compensation arrangements. This cost is expected to be
fully amortized over the next five years, with approximately $0.6 million, $2.3 million, $2.0
million, $1.4 million, and $0.5 million amortized during the remainder of 2011, 2012, 2013, 2014,
and 2015, respectively. The cost of stock compensation is included in the Companys Consolidated
Statements of Income before, or in conjunction with, the vesting of options.
8. Debt
The Companys senior credit facility, as amended in December 2010, consists of a revolving line of
credit with a borrowing capacity of up to $125.0 million principal amount. The credit facility
also has a $50.0 million accordion feature allowing us to increase our borrowing capacity to up to
$175.0 million principal amount, subject to obtaining commitments for the incremental capacity from
existing or new lenders. The outstanding borrowings are collateralized by a security interest in
substantially all the Companys assets. The lenders also require a direct assignment of all
contracts at the lenders discretion. The outstanding balance under the credit facility accrues
interest based on LIBOR plus an applicable margin, ranging from 200 to 300 basis points, based on
the ratio of our outstanding senior funded debt to Earnings before Interest, Taxes, Depreciation,
and Amortization (EBITDA), adjusted for acquisitions. The credit facility expires on December 13,
2014.
The credit facility contains various restrictive covenants that, among other things, restrict the
Companys ability to: incur or guarantee additional debt; make certain distributions, investments
and other restricted payments, including cash dividends on the Companys outstanding common stock;
enter into transactions with certain affiliates; create or permit certain liens; and consolidate,
merge, or sell assets. In addition, the credit facility contains certain financial covenants that
require the Company to: maintain a minimum tangible net worth; maintain a minimum fixed charge
coverage ratio and a minimum funded debt to earnings ratio; and limit capital expenditures below
certain thresholds. The credit facility allows us to use borrowings thereunder of up to $25
million to repurchase shares of our common stock. See Note 10. Stock Repurchase.
8
Table of Contents
NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The previous credit facility (the 2006 Credit Facility) provided for a revolving line of credit
with a borrowing capacity of up to $90.0 million principal amount. The 2006 Credit Facility
contained similar restrictive covenants and the outstanding borrowings were collateralized by a
security interest in substantially all the Companys assets. The outstanding balance of the
facility accrued interest based on LIBOR plus an applicable margin, ranging from 100 to 175 basis
points, based on a ratio of our outstanding senior funded debt to EBITDA, adjusted for
acquisitions.
During the third quarter of 2011, NCI had a weighted average outstanding loan balance of $83.6
million which accrued interest at a weighted average borrowing rate of 2.3%. During the third
quarter of 2010, NCI had a weighted average outstanding loan balance of $31.3 million which accrued
interest at a weighted average borrowing rate of 1.3%. During the first nine months of 2011, NCI
had a weighted average outstanding loan balance of $61.5 million which accrued interest at a
weighted average borrowing rate of approximately 2.2%. During the first nine months of 2010, NCI
had a weighted average outstanding loan balance of $32.4 million which accrued interest at a
weighted average borrowing rate of approximately 1.3%.
As of September 30, 2011, the outstanding balance under the credit facility was $61.7 million with
an incremental borrowing rate of LIBOR plus 200 basis points, or 2.3%. As of December 31, 2010,
the outstanding balance under the credit facility was $20.0 million and interest accrued at a rate
of LIBOR plus 200 basis points, or 2.3%. As of September 30, 2011 and December 31, 2010, the
Company was in compliance with all of its loan covenants.
9. AdvanceMed Acquisition
On April 1, 2011, pursuant to the terms of a Securities Purchase Agreement (the Purchase
Agreement) dated February 24, 2011, NCI completed its purchase of 100% of the stock of AdvanceMed
Corporation (AdvanceMed) from an affiliate of Computer Sciences Corporation. NCI acquired
AdvanceMed to enhance the scope of our information technology and professional services, as well as
to develop the Companys data analytics and informatics practice.
Under the terms of the Purchase Agreement, NCI acquired AdvanceMed for $63.3 million in cash. The
transaction was funded through cash on hand and borrowings of approximately $62.0 million under
NCIs senior credit facility.
The acquisition has been accounted for under the purchase method of accounting which requires the
total purchase consideration to be allocated to the assets acquired and liabilities assumed based
on estimates of fair value. The excess of the purchase consideration over the amounts assigned to
tangible and intangible assets acquired and liabilities assumed is recognized as goodwill. Total
acquisition and integration related costs through September 30, 2011 were approximately $1.0
million.
Purchase Price (in thousands)
Base purchase price |
$ | 62,000 | ||
Working capital adjustment at closing |
1,327 | |||
Final Purchase price |
$ | 63,327 | ||
The Companys purchase of AdvanceMed included certain post-closing adjustments to working
capital. The purchase price was established based on estimated working capital and estimates of
capital expenditures. Adjustments were made to the purchase price based on actual working capital
balances acquired and capital expenditures made as of the acquisition date.
9
Table of Contents
NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. AdvanceMed Acquisition continued
Preliminary Allocation of Purchase Price (in thousands)
Estimated fair values of purchased assets and liabilities assumed:
Accounts receivable |
$ | 13,064 | ||
Property and equipment |
5,509 | |||
Definite-lived intangible assets |
4,981 | |||
Other assets |
242 | |||
Goodwill |
44,444 | |||
Less liabilities assumed |
(4,913 | ) | ||
$ | 63,327 | |||
The fair value of the definite-lived intangible asset for customer relationships is based on
existing customer contracts and anticipated follow-on contracts with existing customers and is
expected to have an 11-year life. Amortization of the definite-lived intangible asset for existing
customer contracts and anticipated follow-on contracts with existing customers is based on an
accelerated method.
Goodwill (in thousands)
The following table details the rollforward of our goodwill balance from December 31, 2010:
Balance as of December 31, 2010 |
$ | 106,580 | ||
Purchase of AdvanceMed Corporation |
44,444 | |||
Balance as of September 30, 2011 |
$ | 151,024 | ||
Goodwill represents the excess of purchase consideration over the amounts assigned to tangible
and intangible assets acquired and liabilities assumed. As a result of the election under Section
338(h) (10) of the Internal Revenue Code, the total amount allocated to intangible assets and
goodwill for tax purposes is expected to be tax deductible.
The Company evaluates potential acquisitions that either strategically fit with the Companys
existing service offerings and/or expand the Companys customer base. The Company has completed
several acquisitions that have been accounted for as purchases and have resulted in the recognition
of goodwill in the Companys financial statements. This goodwill arises because the purchase
prices for these businesses reflect a number of factors including the future earnings and cash flow
potential of these businesses attributable to new customers; the multiple to earnings, cash flow
and other factors at which similar businesses have been purchased by other acquirers; the
competitive nature of the process by which the Company acquired the business; and the complementary
strategic fit and resulting synergies these businesses bring to existing operations.
The Company makes an initial allocation of the purchase price at the date of acquisition based upon
its understanding of the fair value of the acquired assets and assumed liabilities. The Company
obtains this information during due diligence and through other sources. In the periods after
closing, as the Company obtains additional information about these assets and liabilities,
including finalizing asset appraisals, it is able to refine the estimates of fair value and more
accurately allocate the purchase price. Only information available for estimates as of the
acquisition date is considered for subsequent adjustment. The Company is in the process of
finalizing valuations of acquired intangible assets in connection with the AdvanceMed acquisition.
The Company will make appropriate adjustments to the purchase price allocation prior to completion
of the measurement period, as required.
Unaudited Pro Forma Information (in thousands)
Except as otherwise specified, the following unaudited pro forma results of operations data are
presented as if the AdvanceMed acquisition had occurred as of the beginning of the periods
presented:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | 132,004 | $ | 181,038 | $ | 461,368 | $ | 445,376 | ||||||||
Operating income |
6,458 | 10,636 | 22,938 | 29,493 |
10
Table of Contents
NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. AdvanceMed Acquisition (continued)
The pro forma results of operations information is presented as if the AdvanceMed acquisition had
occurred as of the beginning of the periods presented. The pro forma results include certain
purchase accounting adjustments such as estimated changes in depreciation and amortization expenses
on acquired tangible and intangible assets. However, pro forma results do not include any
anticipated cost savings or other effects of the planned integration of AdvanceMed. Accordingly,
the pro forma results are not intended to represent or be indicative of the consolidated results of
operations that the Company would have reported had the AdvanceMed acquisition been completed as of
the dates and for the periods presented, nor are they necessarily indicative of future results.
10. Stock Repurchase
NCIs Board of Directors authorized management to repurchase up to $25.0 million of our Class A
common stock pursuant to a stock repurchase program. Shares may be repurchased pursuant to open
market purchases, privately negotiated transactions, or block transactions. NCI has no obligation
to repurchase shares under the authorization, and the timing, actual number and value of the shares
which are repurchased (and the manner of any such repurchase) will be at the discretion of
management and will depend on a number of factors, including the price of our common stock, the
Companys cash needs, borrowing capacity under our credit facility, interest rates, and the
Companys financial performance and position. NCI may suspend or discontinue repurchases at any
time.
During the third quarter of 2011, NCI purchased 288,000 shares at an average price of $15.45 per
share for a total purchase price of $4.5 million. The Company has $20.5 million authorized for
additional share repurchases.
11. Related Party Transactions
The Company purchased services under a subcontract from Net Commerce Corporation, which is a
Government contractor wholly-owned by Mr. Rajiv Narang, the son of Mr. Charles K. Narang,
the Chairman and Chief Executive Officer of the Company. For the three months ended September 30,
2011 and 2010, the expense incurred under this agreement was approximately $271,000 and $189,000,
respectively. For the nine months ended September 30, 2011 and 2010, the expense incurred under
this agreement was approximately $619,000 and $717,000, respectively. As of September 30, 2011 and
December 31, 2010, there were outstanding amounts due to Net Commerce Corporation of approximately
$29,000 and $0, respectively.
The Company rents office space from Gur Parsaad Properties, Ltd. which is controlled by Dr.
Gurvinder Pal Singh. Dr. Singh was a member of NCIs Board of Directors until June 9, 2010. The
lease is for approximately 41,000 square feet at $15.00 per square foot with annual escalation and
shared common area operating expenses. The lease expires on June 30, 2015. For the three months
ended September 30, 2011 and 2010, NCI paid $214,000 and $246,000, respectively, for rent to Gur
Parsaad Properties, Ltd. For the nine months ended September 30, 2011 and 2010, NCI paid $705,000
and $725,000, respectively, for rent to Gur Parsaad Properties, Ltd. As of September 30, 2011 and
December 31, 2010, there were no outstanding amounts due to Gur Parsaad Properties, Ltd.
The Company believes these agreements were at market rates as of the date of each agreement.
11
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q, including the section titled Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains forward-looking statements
regarding our business, financial condition, results of operations, and prospects. There are
statements made herein, which may not address historical facts and, therefore, could be interpreted
to be forward-looking statements as that term is defined in the Private Securities Litigation
Reform Act of 1995. Such statements are subject to factors that could cause actual results to
differ materially from anticipated results. The factors that could cause actual results to differ
materially from those anticipated include, but are not limited to, the following:
| Our dependence on our contracts with U.S. Federal Government agencies, particularly within the U.S. Department of Defense, for the majority our revenue; a change in funding of our contracts due to bid protests; changes in U.S. Federal Government spending priorities; changes in contract type, particularly changes from cost-plus fee or time-and-material type contracts to firm fixed-price type contracts |
| A reduction in the overall U.S. Defense budget, volatility in spending authorizations for Defense and Intelligence-related programs by the U.S. Federal Government or a shift in spending to programs in areas where we do not currently provide services |
| Risk of contract non-performance or termination |
| Changes in U.S. Federal Government programs or requirements, including the increased use of small business providers |
| Failure to achieve contract awards in connection with recompetes for present business and/or competition for new business |
| U.S. Federal Government agencies awarding more contracts on a technically acceptable/lowest cost basis in order to reduce expenditures |
| Adverse results of U.S. Federal Government audits of our government contracts |
| Competitive factors, such as pricing pressures and competition to hire and retain employees (particularly those with security clearances) |
| Failure to identify and successfully integrate other future acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions, or effectively integrate acquisitions appropriate to the achievement of our strategic plans |
| Economic conditions in the United States, including conditions that result from terrorist activities or war; material changes in laws or regulations applicable to our businesses, particularly legislation affecting (i) U.S. Federal Government contracts for services, (ii) outsourcing of activities that have been performed by the U.S. Federal Government, (iii) U.S. Federal Government contracts containing organizational conflict of interest clauses, (iv) delays related to agency specific funding freezes, (v) competition for task orders under Government Wide Acquisition Contracts, agency-specific Indefinite Delivery/Indefinite Quantity contracts and/or schedule contracts with the General Services Administration, (vi) the U.S. Federal Governments insourcing of previously contracted support services and the realignment of funds to non-defense related programs, and (vii) our ability to achieve the objectives of near-term or long-range business plans |
| U.S. Federal Governmental shutdowns (such as the shutdown that occurred during the U.S. Federal Governments 1996 fiscal year) and other potential delays in the U.S. Federal Government appropriations process, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011) |
Some of these important factors are outlined under Item 1A. Risk Factors and elsewhere in our
Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC, and from time
to time, in other filings with the SEC, such as our Forms 8-K and 10-Q. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
our future results, level of activity, or performance. We undertake no obligation to update
publicly or revise any forward-looking statements. You should not place undue reliance on any
forward-looking statements.
In this document, unless the context indicates otherwise, the terms Company, NCI, we, us,
and our refer to NCI, Inc., a Delaware corporation, and, where appropriate, its subsidiaries.
12
Table of Contents
OVERVIEW
We are a provider of information technology (IT), engineering, logistics, and professional
engineering services and solutions to U.S. Federal Government agencies. Our technology and
industry expertise enables us to provide a full spectrum of services and solutions that assist our
clients in achieving their program goals. We deliver a wide range of complex services and
solutions by leveraging our skills across eight core competencies:
| Enterprise systems management |
| Network engineering |
| Cybersecurity and information assurance |
| Software development and systems engineering |
| Program management, acquisition, and lifecycle support |
| Engineering and logistics |
| Health IT and informatics |
| Training and simulation |
We generate the majority of our revenue from U.S. Federal Government contracts. We report
operating results and financial data as one operating segment. Revenue from our contracts and task
orders is generally linked to trends in U.S. Federal Government spending by defense, intelligence,
and U.S. Federal civilian agencies. The following table shows our revenue from the client groups
listed as a percentage of total revenue for the period shown.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Department of Defense and intelligence agencies |
82 | % | 94 | % | 87 | % | 91 | % | ||||||||
U.S. Federal civilian agencies |
18 | % | 6 | % | 13 | % | 9 | % |
The increase in the percentage of total revenue earned on work for Federal civilian agencies
was primarily due to our acquisition of AdvanceMed Corporation (AdvanceMed). See AdvanceMed
Acquisition below.
Contract Types
Our services and solutions are provided under three types of contracts: time-and-materials;
cost-plus fee; and firm fixed-price. Our contract mix varies from year to year due to numerous
factors including our business strategies and U.S. Federal Government procurement objectives.
The following table shows our revenue from each of these types of contracts as a percentage of our
total revenue for the periods shown.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Time-and-materials |
30 | % | 65 | % | 44 | % | 58 | % | ||||||||
Cost-plus fee |
43 | % | 11 | % | 29 | % | 14 | % | ||||||||
Firm fixed-price |
27 | % | 24 | % | 27 | % | 28 | % |
The increase in our revenue under cost-plus fee type contracts primarily resulted from our
acquisition of AdvanceMed and the transition of our U.S. Army Program Executive Office (PEO)
Soldier program from time-and-materials type contract to cost-plus fee type contract during the
second quarter of 2011.
The amount of risk and potential reward varies under each type of contract. Under
time-and-materials contracts, where we are paid a fixed hourly rate by labor category, to the
extent that our actual labor costs vary significantly from the negotiated hourly rates, we may
generate more or less than the targeted amount of profit. We are typically reimbursed for other
contract direct costs and expenses at our cost, and typically receive no fee on those costs. Under
cost-plus fee contracts, there is limited financial risk, because we are reimbursed all our
allowable costs, and
therefore, the profit margins tend to be lower on cost-plus fee contracts. Under firm fixed-price
contracts, we perform specific tasks or provide specified goods for a predetermined price.
Compared to time-and-materials and cost-plus fee contracts, firm fixed-price service contracts
generally offer higher profit margin opportunities but involve greater financial risk because we
bear the impact of potential cost overruns in return for the full benefit of any cost savings. The
majority of our services work under firm fixed-price service contracts is firm fixed-price
level-of-effort work, which has a lower risk than firm fixed-price completion or deliverable
contracts.
13
Table of Contents
AdvanceMed Acquisition
On April 1, 2011, pursuant to the terms of a Securities Purchase Agreement (the Purchase
Agreement) dated February 24, 2011, we completed our purchase of 100% of the stock of AdvanceMed
from an affiliate of Computer Sciences Corporation. NCI acquired AdvanceMed to enhance the scope
of our information technology and professional services in general and to develop our data
analytics and informatics practice.
Under the terms of the Purchase Agreement, we acquired AdvanceMed for $63.3 million in cash. The
transaction was funded through cash on hand and borrowings under our existing credit facility.
The acquisition has been accounted for under the purchase method of accounting which requires the
total purchase consideration to be allocated to the assets acquired and liabilities assumed based
on estimates of fair value. The excess of the purchase consideration over the amounts assigned to
tangible or intangible assets acquired and liabilities assumed is recognized as goodwill.
14
Table of Contents
Results of Operations
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
The following table sets forth certain items from our consolidated statements of income and
expresses each item in dollars and as a percentage of revenue for the periods indicated:
Three months ended September 30, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (as a percentage of revenue) | |||||||||||||||
Revenue |
$ | 132,004 | $ | 168,769 | 100.0 | % | 100.0 | % | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of revenue |
116,855 | 151,138 | 88.5 | 89.6 | ||||||||||||
General and administrative expenses |
6,768 | 6,194 | 5.2 | 3.7 | ||||||||||||
Depreciation and amortization |
1,870 | 1,359 | 1.4 | 0.7 | ||||||||||||
Acquisition and integration related costs |
54 | | | | ||||||||||||
Total operating costs and expenses |
125,547 | 158,691 | 95.1 | 94.0 | ||||||||||||
Operating income |
6,457 | 10,078 | 4.9 | 6.0 | ||||||||||||
Interest expense, net |
503 | 133 | 0.4 | 0.1 | ||||||||||||
Income before income taxes |
5,954 | 9,945 | 4.5 | 5.9 | ||||||||||||
Provision for income taxes |
2,472 | 3,841 | 1.9 | 2.3 | ||||||||||||
Net income |
$ | 3,482 | $ | 6,104 | 2.6 | % | 3.6 | % | ||||||||
Revenue
For the three months ended September 30, 2011, total revenue
decreased by 21.8%, or $36.8 million,
from the same period a year ago. This decrease in revenue is due to our non-core Base Realignment
and Closure (BRAC) programs and U.S. Air Forces Network
Centric Solutions (NETCENTS) materials contract, which
collectively accounted for a decrease of $42.2 million due to
the winding down of the BRAC-related programs; our PEO Soldier program,
which accounted for a decrease of $4.6 million; and decreases in
revenue attributable to completion of task orders awarded under our Government Wide Acquisition
Contracts (GWAC) and Indefinite Delivery/Indefinite Quantity (ID/IQ) vehicles, such as the U.S. Army
Information Technology Enterprise Solutions-2 Services (ITES-2S), by $6.3 million year-over-year.
The decrease in revenue was partially offset by increases in revenue attributable to programs added
through our acquisition of AdvanceMed. For the third quarter of 2011, our DISA BRAC programs
accounted for 4.7%, or $6.2 million, and our PEO Soldier program accounted for 14.5%, or $19.1
million, of total revenue. For the third quarter of 2010, our DISA BRAC programs accounted for
22.3%, or $37.6 million, and our PEO Soldier program accounted for 14.1%, or $23.7 million, of total
revenue.
Cost of revenue
Cost of revenue decreased 22.7%, or $34.3 million, for the
three months ended September 30, 2011 compared with
the same period a year ago. The decrease in cost of revenue was attributable to a
reduction in revenue, primarily due to the BRAC-related programs winding down, partially offset by an
increase in our direct labor, which includes the AdvanceMed programs. As a percentage of revenue,
cost of revenue was 88.5% and 89.6% for the quarters ended September 30, 2011 and 2010,
respectively. The decrease of cost of revenue as a percentage of revenue was due to the lower
level of materials sales from the BRAC-related programs in the third quarter 2011, which carry a
lower margin than labor-related revenue.
General and administrative expenses
General and administrative expense increased 9.0%, or
$0.6 million, for the three months ended
September 30, 2011 compared with the same period a year ago. The increase was due to higher
indirect support expenses. This increase was partially offset by a decrease in bid and proposal
costs. As a percentage of revenue, general and administrative expenses were 5.2% and 3.7% for the
quarters ended September 30, 2011 and 2010, respectively. General and administrative
expenses for the quarter ended September 30, 2010 were significantly lower than normal due to the high volume of
material sales associated with BRAC and NETCENTS included in revenue, which did not require
significant general and administrative support.
Depreciation and amortization
Depreciation and amortization expense was $1.9 million and $1.4 million for the quarters ended
September 30, 2011 and 2010, respectively. The year-over-year increase was due primarily to the added depreciation
expense associated with the assets acquired through the AdvanceMed acquisition, as well as
amortization of purchased intangibles arising from the AdvanceMed acquisition.
15
Table of Contents
Operating income
For the three months ended September 30, 2011, operating
income was $6.5 million, or 4.9% of
revenue, compared with $10.1 million, or 6.0% of revenue, for the three months ended September 30,
2010. Operating income was lower for the three months ended September 30, 2011 due to lower
revenue volume compared with the same period in the prior year, higher indirect support expenses,
and higher depreciation and amortization and acquisition costs from the AdvanceMed acquisition.
Operating margin was lower for the three months ended September 30, 2011 primarily due to the PEO
Soldier bridge contracts changing from a time-and-material type contract to a cost-plus fee type contract,
as well as the addition of AdvanceMeds primarily cost-plus-fee
contract base. Under cost-plus
fee contracts, there is limited financial risk, because we are reimbursed all our allowable costs,
and therefore, the profit margins tend to be lower. In addition, the
current highly competitive contract bidding
environment has caused our operating margins to decrease compared
with historical operating margins
including, the current quarter year-over-year.
Interest expense, net
Net interest expense was approximately $0.5 and $0.1 million for the quarters ended September 30,
2011 and 2010, respectively. Net interest expense increased as a result of higher borrowings on
our senior credit facility to fund the purchase of AdvanceMed, as well
as a higher weighted average borrowing rate during the period. During the third quarter of 2011,
we had a weighted average outstanding loan balance of
$83.6 million, which accrued interest at a
weighted average borrowing rate of approximately 2.3%. During the third quarter of 2010, we had a
weighted average outstanding loan balance of $31.3 million which accrued interest at a weighted
average borrowing rate of approximately 1.3%.
Income taxes
For the three months ended September 30, 2011, the decrease in income taxes of $1.4 million was the
result of the decrease in pretax income offset by a non-deductible expense recorded during the
third quarter of 2011. The effective income tax rate for the quarter ended September 30, 2011 was
approximately 41.5% compared with an effective income tax rate of 38.6% for the quarter ended
September 30, 2010. The aforementioned non-deductible expense was the primary driver of the 2.9%
rate increase during third quarter 2011.
16
Table of Contents
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
The following table sets forth certain items from our consolidated statements of income and
expresses each item in dollars and as a percentage of revenue for the periods indicated:
Nine months ended September 30, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (as a percentage of revenue) | |||||||||||||||
Revenue |
$ | 443,432 | $ | 410,319 | 100.0 | % | 100.0 | % | ||||||||
Operating costs and expenses: |
||||||||||||||||
Cost of revenue |
395,781 | 361,456 | 89.3 | 88.1 | ||||||||||||
General and administrative expenses |
18,612 | 17,179 | 4.2 | 4.2 | ||||||||||||
Depreciation and amortization |
4,995 | 3,725 | 1.1 | 0.9 | ||||||||||||
Acquisition and integration related costs |
1,003 | | 0.2 | | ||||||||||||
Total operating costs and expenses |
420,391 | 382,360 | 94.8 | 93.2 | ||||||||||||
Operating income |
23,041 | 27,959 | 5.2 | 6.8 | ||||||||||||
Interest expense, net |
1,183 | 426 | 0.3 | 0.1 | ||||||||||||
Income before income taxes |
21,858 | 27,533 | 4.9 | 6.7 | ||||||||||||
Provision for income taxes |
8,825 | 10,567 | 2.0 | 2.6 | ||||||||||||
Net income |
$ | 13,033 | $ | 16,966 | 2.9 | % | 4.1 | % | ||||||||
Revenue
For the nine months ended September 30, 2011, total revenue increased 8.1%, or $33.1 million, over
the same period a year ago. This increase in revenue is primarily due
to our PEO Soldier program,
where we added a large amount of direct labor early in 2011. The increase in revenue is also
attributable to programs added through our acquisition of AdvanceMed, and other task orders under
our GWAC and ID/IQ vehicles, such as ITES-2S. The increase in revenue was partially offset by the
decrease in our non-core BRAC programs and NETCENTS materials
contracts, which collectively accounted for a $14.1
million decrease in revenue year-over-year for the nine-month period. During the first nine months of 2011, our DISA BRAC
programs accounted for 7.6%, or $33.6 million, and our PEO Soldier program accounted for 15.2%, or
$67.4 million, of total revenue. During the first nine months of 2010, the DISA BRAC programs
accounted for 9.5%, or $39.2 million and the PEO Soldier program accounted for 12.6%, or $51.9
million, of total revenue.
Cost of revenue
Cost of revenue increased 9.5%, or $34.3 million, for the nine months ended September 30, 2011
compared with the same period a year ago. The increase was attributable to an increase in direct
labor and associated indirect costs from the PEO Soldier and the AdvanceMed programs, as well as
higher overall subcontractor costs, hardware and product-related expenses, and other direct costs
associated with the increased revenue. As a percentage of revenue, cost of revenue was 89.3% and
88.1% for the nine months ended September 30, 2011 and 2010, respectively. The 1.2 percentage
point increase in cost of revenue as a percentage of revenue for the nine months ended September
30, 2011 compared to the nine months ended September 30, 2010 was due to a higher level of hardware
and product-related revenue, which typically carries lower margins than labor-related revenue.
General and administrative expenses
General
and administrative expenses increased 8.3%, or $1.4 million, for the nine months ended
September 30, 2011 compared with the same period a year ago. The increase was due to higher
indirect support expenses. This increase was offset by a decrease in bid and proposal costs. As a
percentage of revenue, general and administrative expenses were 4.2% for the nine months ended
September 30, 2011 and 2010.
Depreciation and amortization
Depreciation and amortization expense was approximately $5.0 million and $3.7 million for the nine
months ended September 30, 2011 and 2010, respectively. The increase was due primarily to the
higher depreciation expense associated with the assets acquired during the AdvanceMed acquisition, as well
as amortization of purchased intangibles arising from the AdvanceMed acquisition.
Acquisition and integration related expenses
On April 1, 2011, we completed the acquisition of AdvanceMed. For the nine months ended September
30, 2011, acquisition expenses were $1.0 million. There were no acquisition-related costs for the
nine months ended September 30, 2010.
17
Table of Contents
Operating income
For the nine months ended September 30, 2011, operating income was $23.0 million, or 5.2% of
revenue, compared with $28.0 million, or 6.8% of revenue, for the nine months ended September 30,
2010. Operating income was lower for the nine months ended September 30, 2011 due to higher
hardware and product-related sales, which typically carry a lower margin, higher indirect support
expenses, and higher depreciation and amortization and acquisition costs from the AdvanceMed
acquisition. Operating margin was lower for the nine months ended September 30, 2011 primarily due
to the PEO Soldier bridge contracts changing from a time-and-material type contract to a cost-plus fee type
contract, as well the addition of most of the AdvanceMeds
primarily cost-plus-fee contract base. Under
cost-plus fee contracts, there is limited financial risk, because we are reimbursed all our
allowable costs, and therefore, the profit margins tend to be lower. In addition, the current
highly competitive contract bidding environment has caused our
operating margins to decrease compared with historical
operating margins, including the current nine-month period year-over-year.
Interest expense, net
Net interest expense was approximately $1.1 million for the nine months ended September 30, 2011
compared with $0.4 million for the same period in the prior year. Net interest expense increased
as a result of higher borrowings on our senior credit facility to fund the purchase of AdvanceMed, as well as a higher weighted average borrowing rate during the
period. During the first nine months of 2011, we had a weighted average outstanding loan balance
of $61.5 million, which accrued interest at a weighted average borrowing rate of approximately 2.2%.
During the first nine months of 2010, we had a weighted average outstanding loan balance of $32.4
million, which accrued interest at a weighted average borrowing rate of approximately 1.3%.
Income taxes
For the nine months ended September 30, 2011, the decrease in income taxes of approximately $1.7
million was the result of the decrease in pretax income offset by a non-deductible expense recorded
during the third quarter of 2011. The effective income tax rate for the nine months ended
September 30, 2011 was approximately 40.4% compared with an effective income tax rate of 38.4% for
the nine months ended September 30, 2010. The 2.0% increase in the effective income tax rate was
due to (1) the 2011 effective tax rate increasing primarily due to the aforementioned
non-deductible expense recorded during the third quarter of 2011; and (2) the 2010 effective tax
rate decreasing due to a change in state income apportionment from the elimination of one of our
subsidiaries.
Contract Backlog
At
September 30, 2011 and December 31, 2010, our backlog was $1.3 billion and $1.3 billion,
respectively, of which $268 million and $302 million, respectively, was funded. We define backlog
as our estimate of the remaining future revenue from existing signed contracts over the remaining
base contract performance period and from the option periods of those contracts, assuming the
exercise of all related options. We define funded backlog as the portion of backlog for which
funding currently is appropriated and obligated to us under a contract or other authorization for
payment signed by an authorized purchasing agency, less the amount of revenue we have previously
recognized. Our backlog does not include any estimate of future potential delivery orders that
might be awarded under our GWAC or other multiple-award contract vehicles. Additional information
on how we determine backlog is included in our Annual Report on Form 10-K for the year ended
December 31, 2010 filed with the SEC.
Liquidity and Capital Resources
Our primary liquidity needs are for financing working capital, capital expenditures, stock
repurchases, and making selective strategic acquisitions. Historically, we have relied primarily
on our cash flow from operations and borrowings under our credit facility to provide the capital
for our liquidity needs. As part of our growth strategy, we may pursue acquisitions that could
require us to incur additional debt or issue new equity. We expect the combination of our current
cash, cash flow from operations, and the available borrowing capacity under our credit facility to
continue to meet our normal working capital and capital expenditure requirements.
During
the second quarter of 2011, we acquired AdvanceMed for $63.3 million in cash. During 2011, the
balance of accounts receivable decreased by $32.3 million to $100.4 million at the end of the third
quarter. Days sales outstanding of accounts receivable (DSO) decreased to 70 days as of September
30, 2011. This compares to a DSO of 71 days as of December 31, 2010. We are focused on keeping
DSOs in the range of the high 60s to mid 70s. Historically, we see an increase in DSOs at
calendar year-end due to the start of the new government fiscal year, and so we expect that DSOs
will increase in the near-term. An increase in our DSOs will impact our cash flow and working
capital requirements.
18
Table of Contents
Our Board of Directors authorized management to repurchase up to $25.0 million of our Class A
common stock pursuant to a stock repurchase program. Shares may be repurchased pursuant to open
market purchases, privately negotiated transactions, or block transactions. We have no obligation
to repurchase shares under the authorization, and the timing, actual number and value of the shares
which are repurchased (and the manner of any such repurchase) will be at the discretion of
management and will depend on a number of factors, including the price of our common stock, the
Companys cash needs, borrowing capacity under our credit facility, interest rates, and the
Companys financial performance and position. We may suspend or discontinue repurchases at any
time. During the third quarter of 2011, we purchased 288,000 shares at an average price of $15.45
per share for a total purchase price of $4.5 million. We have $20.5 million authorized for
additional shares repurchases.
Credit Facility: Our senior credit facility consists of a revolving line of credit with a
borrowing capacity of up to $125.0 million principal amount. The credit facility also has a $50.0
million accordion feature allowing us to increase our borrowing capacity to up to $175.0 million
principal amount, subject to obtaining commitments for the incremental capacity from existing or
new lenders. The outstanding balance under the credit facility accrues interest based on one-month
LIBOR plus an applicable margin (spread), ranging from 200 to 300 basis points, based on the ratio
of the amount of our outstanding senior debt ratio to Earnings before Interest, Taxes,
Depreciation, and Amortization (EBITDA), adjusted for acquisitions. The accrued interest is due
and payable monthly. The outstanding borrowings are collateralized by a security interest in
substantially all the Companys assets. The lenders also require a direct assignment of all
contracts at the lenders discretion. The credit facility expires on December 13, 2014. We do not
currently hedge our interest rate risk. The credit facility allows us to use borrowings thereunder
of up to $25 million to repurchase shares of our common stock.
Funds borrowed under the credit facility will be used to finance possible future acquisitions, for
working capital requirements, for stock repurchases, and for general corporate uses. As of
September 30, 2011, there was $61.7 million due under the credit facility, reflecting borrowings of
$62.0 million for the AdvanceMed acquisition and $20.0 million outstanding as of December 31, 2010,
net of $20.3 million of net repayments during 2011.
The loan interest accrual rate is set monthly at one-month LIBOR plus a set amount (spread). As
discussed above, one of the primary factors determining the spread is the ratio of our outstanding
senior debt to EBITDA adjusted for acquisitions. The lower our ratio, the lower our spread above
LIBOR will be. Our spread above LIBOR is based on the following loan covenant:
Senior Debt to EBITDA | ||
Ratio | Spread | |
Below 1.0 to 1 |
200 basis points | |
Between 2.0 and 1.0 to 1 |
225 basis points | |
Between 2.0 and 2.5 to 1 |
250 basis points | |
Between 2.5 and 3.0 to 1 |
275 basis points | |
Greater than 3.0 to 1 |
300 basis points |
As of September 30, 2011, the spread above LIBOR was 200 basis points and thus, the loan
accrued interest at 2.3%. The credit facility contains various restrictive covenants that, among
other things, restrict the Companys ability to: incur or guarantee additional debt; make certain
distributions, investments and other restricted payments, including cash dividends on the Companys
outstanding common stock; enter into transactions with certain affiliates; create or permit certain
liens; and consolidate, merge, or sell assets. In addition, the credit facility contains certain
financial covenants that require the Company to: maintain a minimum tangible net worth; maintain a
minimum fixed charge coverage ratio and a minimum funded debt to earnings ratio; and limit capital
expenditures below certain thresholds.
As of September 30, 2011, we were in compliance with all our loan covenants.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
19
Table of Contents
Critical Accounting Policies
There have been no significant changes to our Critical Accounting Policies during the first nine
months of 2011 other than the New Accounting Pronouncement for Goodwill as described above. Refer
to our Critical Accounting Policies section in our Annual Report on Form 10-K for the year ended
December 31, 2010 filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates to changes in interest rates for borrowings under our credit
facility. A 1% change in interest rates would have changed our interest expense and cash flow by
approximately $0.2 million for the quarter ended September 30, 2011, and approximately $0.5 million
for the nine months ended September 30, 2011.
Additionally, we are subject to credit risks associated with our cash, cash equivalents, and
accounts receivable. We believe that the concentration of credit risks with respect to cash
equivalents and investments are limited due to the high credit quality of these investments. Our
investment policy requires that we invest excess cash in high-quality investments which preserve
principal, provide liquidity, and minimize investment risk. We also believe that our credit risk
associated with accounts receivable is limited as they are primarily with the U.S. Federal
Government or prime contractors working for the U.S. Federal Government.
Item 4. Controls and Procedures
Evaluation of the Effectiveness of Disclosure Controls and Procedures
Management carried out an evaluation, as of September 30, 2011, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures. This evaluation was done under
the supervision and with the participation of management, including the Companys Chief Executive
Officer and Chief Financial Officer. Based upon the evaluation, the Companys Chief Executive
Officer and Chief Financial Officer have concluded that, as of September 30, 2010, the Companys
disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
The Company made no change to its internal control over financial reporting during the three months
ended September 30, 2011 that has materially affected, or is reasonably likely to materially
affect, its internal control over financial reporting.
20
Table of Contents
PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal actions, claims, government inquiries, and audits resulting
from the normal course of business. The Company believes that the probability is remote that any
resulting liability will have a material effect on the Companys financial position, results of
operations, or cash flows as a result of any currently known legal actions, claims, government
inquiries, or audits.
Item 1A. | Risk Factors |
There have been no significant changes from those discussed in Item 1A. Risk Factors included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered securities during the third quarter of 2011.
The following table presents information about our repurchases of Class A common stock that were
made through open market transactions during the third quarter of 2011.
Total Number of | ||||||||||||||||
Total | Shares Purchased | Approximate Dollar | ||||||||||||||
Number of | Weighted | as Part of | Value of Shares that | |||||||||||||
Shares | Average Price | Publicly | May Yet Be Purchased | |||||||||||||
Purchased | Paid Per Share | Announced Plans | Under the Plans or | |||||||||||||
Period | (1) | (2) | or Programs | Programs | ||||||||||||
July 1 31, 2011 |
| $ | | | $ | | ||||||||||
August 1 31, 2011 |
193,102 | 15.31 | 193,102 | 22,044,459 | ||||||||||||
September 1 30, 2011 |
94,833 | 15.76 | 94,833 | 20,550,334 | ||||||||||||
Total |
287,935 | 15.45 | 287,935 | 20,550,334 | ||||||||||||
(1) | During November 2010, our Board of Directors authorized management to repurchase up to $25.0 million of our Class A common stock pursuant to a stock repurchase program. We have $20.5 million authorized for additional shares repurchases. | |
(2) | The amounts do not give effect to any fees, commissions or other costs associated with repurchases of shares. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information
None.
Item 6. Exhibits
Number | Description | |||
2.1 | Stock Purchase Agreement among NCI Information Systems, Inc. (NCIIS), a wholly owned subsidiary of NCI, and stockholders
of AdvanceMed Corporation dated as of February 24, 2011 (incorporated herein by reference from Exhibit 2.1 to registrants
Current Report on Form 8-K, as filed with the Commission on April 4, 2011) |
|||
3.1 | Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference from Exhibit 3.1 to
registrants Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 4, 2005, as
amended). |
|||
3.2 | Bylaws of the Registrant (incorporated herein by reference from Exhibit 3.2 to registrants Registration Statement on Form
S-1 (File No. 333-127006), as filed with the Commission on July 29, 2005). |
|||
4.1 | Specimen Class A Common Stock Certificate (incorporated herein by reference from Exhibit 4.1 to registrants Registration
Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 20, 2005, as amended). |
|||
4.2 | * | NCI, Inc. Amended and Restated 2005 Performance Incentive Plan (incorporated herein by reference from Appendix A to
registrants Definitive Proxy Statement on Schedule 14A, as filed with the Commission on April 30, 2009). |
||
4.3 | * | Form of Amended and Restated 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement
(incorporated herein by reference from Exhibit 4.2 to registrants Current Report on Form 8-K, as filed with the
Commission on June 12, 2009). |
||
4.4 | * | NCI, Inc. Amended and Restated 2005 Performance Incentive Plan (incorporated herein by reference from Appendix A to
registrants Proxy Statement on Form DEF 14A, as filed with the Commission on April 30, 2009). |
||
4.5 | * | Form of Amended and Restated 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement
(incorporated herein by reference from Exhibit 4.2 to registrants Current Report on Form 8-K, as filed with the
Commission on June 12, 2009). |
21
Table of Contents
Number | Description | |||
10.1 | Amended and Restated Loan and Security Agreement, dated as of December 13, 2010, by and among NCI, Inc., NCI Information
Systems Incorporated, Operational Technologies Services, Inc., as Borrowers, the several banks and financial institutions
from time to time parties thereto, as Lenders, SunTrust Bank as the Administrative Agent to the Lenders and SunTrust
Robinson Humphrey, Inc., as Lead Arranger and Book Manager (incorporated by reference from Exhibit 10.1 to registrants
Current Report on Form 8-K dated December 13, 2010, and filed with the Commission on December 15, 2010). |
|||
10.2 | * | Executive Change in Control and Severance Agreement, dated March 16, 2010, by and among, NCI, Inc., and Terry W. Glasgow
(incorporated herein by reference from Exhibit 10.1 to registrants Current Report on Form 8-K (File No. 000-51579), as
filed with the Commission March 18, 2010). |
||
10.3 | * | Executive Change in Control and Severance Agreement, dated March 16, 2010, by and among, NCI, Inc., and Michele R.
Cappello (incorporated herein by reference from Exhibit 10.3 to registrants Current Report on Form 8-K (File No.
000-51579), as filed with the Commission March 18, 2010). |
||
31.1 | | Certification of the Chief Executive Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
||
31.2 | | Certification of the Chief Financial Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
||
32.1 | | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
||
101.INS | XBRL Instance Document |
|||
101.SCH | XBRL Extension Schema |
|||
101.CAL | XBRL Extension Calculation Linkbase |
|||
101.DEF | XBRL Extension Definition Linkbase |
|||
101.LAB | XBRL Extension Label Linkbase |
|||
101.PRE | XBRL Extension Presentation Linkbase |
| Included with this filing. | |
* | Management Contract or Compensatory Plan or Arrangement. |
22
Table of Contents
SIGNATURES
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 hereunto duly authorized.
NCI, Inc.
|
||||||
Date: November 2, 2011
|
By: | /s/ BRIAN J. CLARK
|
||||
Executive Vice President, Chief Financial Officer | ||||||
and Treasurer |
23