UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-51579
NCI, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-3211574 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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11730 Plaza America Drive
Reston, Virginia
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20190-4764 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (703) 707-6900
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange On Which Registered |
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Class A Common Stock, par value $0.019 per share
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Nasdaq Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
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o Large accelerated filer
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þ Accelerated filer
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o Non-accelerated filer
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o Smaller Reporting Company |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of NCI, Inc. Class A common stock held by non-affiliates of the
registrant as of June 30, 2011 was approximately $182,568,491.
As of February 16, 2012, there were 8,870,395 shares outstanding of the registrants Class A common
stock. In addition, there are 4,700,000 shares outstanding of the registrants Class B common
stock, which are convertible on a one-for-one basis into Class A common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement to be filed with the Securities Exchange
Commission pursuant to Regulation 14A in connection with the registrants 2012 Annual Meeting of
Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part
III (Items 10, 11, 12, 13, and 14) of this Annual Report on Form 10-K. Such definitive Proxy
Statement will be filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
PART I
Forward-Looking Statements
This Annual Report on Form 10-K, 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. These statements are based on assumptions and assessments made by the Companys
management in light of its experience and its perception of historical trends, current conditions,
expected future developments, and other factors it believes to be appropriate. You can often
identify these statements by the use of words such as anticipate, believe, could, estimate,
expect, intend, may, plan, potential, should, will, would, expect, plan,
seek, continue, and other similar words or variations on such words.
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.
You should not place undue reliance on these forward-looking statements, which apply only as of the
date of this Form 10-K. Subsequent events and developments may cause our views to change.
However, while we may elect to update these forward-looking statements at some point in the future,
we specifically disclaim any obligation to do so. Our actual results may differ materially from
those discussed in or implied by any of the forward-looking statements as a result of various
factors, including but not limited to those listed in Risk Factors and elsewhere in this Form
10-K and those listed in other documents we have filed with the Securities and Exchange Commission
(SEC).
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.
Page 1
COMPANY OVERVIEW
We are a provider of information technology (IT) and professional services and solutions to U.S.
Federal Government Agencies. Our capabilities are centered on helping our customers overcome
challenges to carry out their critical missions and meet their objectives. Through our
comprehensive offerings, we are a full-lifecycle capabilities company offering IT specialties
complemented by professional services. We have the agility, position, and determination to focus
on expanding market segments within the Federal IT and professional services markets. Our core
capabilities are in line with many key market drivers and we have invested in a robust set of
business solutions and offerings. Our core capabilities include: enterprise systems management;
network engineering; cybersecurity and information assurance; software development and systems
engineering; program management and lifecycle support; engineering and logistics; health IT and
informatics; and training and simulation. We provide these services to Defense, Intelligence, and
Civilian Agencies. Primarily all of our revenue is derived from contracts with the U.S. Federal
Government, directly as a prime contractor or as a subcontractor to other prime contractors. We
conduct the majority of our business within the United States.
We have strong, long-term relationships with our customers, as evidenced by our record of retaining
business. For more than 20 years, we have provided IT and professional services and solutions to
the U.S. Federal Government, including customers such as the U.S. Army, U.S. Air Force, National
Guard Bureau, U.S. Special Operations Command, Department of Transportation (DOT), Department of
Health and Human Services, and the U.S. Intelligence Community. We believe our strong
relationships result from our in-depth understanding of customer missions, the strength of our
technical solutions, and the co-location of a majority of our employees with our customers.
We have made significant investments in our management, employees, and infrastructure in support of
our growth and profitability strategies. Our senior managers have extensive experience with U.S.
Federal Government Agencies, the U.S. military and U.S. Federal Government contractors. They also
have broad extensive experience growing businesses organically, as well as through acquisitions.
We deliver our services through a highly skilled workforce of approximately 2,600 employees, more
than 70% of whom possess at least one U.S. Federal Government security clearance.
MARKET OPPORTUNITY
The U.S. Federal Government continues to be among the worlds largest consumers of IT services and
solutions. According to INPUT, an independent U.S. Federal Government market research firm, the
overall addressable U.S. Federal Government IT market is expected to grow from $84.1 billion during
Government Fiscal Year (GFY) 2011 to nearly $91.3 billion during GFY2016. Due to the growth in
cyber incidents, cybersecurity and information assurance are of special interest to the U.S.
Federal Government. According to INPUT, spending for information security is expected to rise from
$9.2 billion in GFY2011 to $14.0 billion by GFY2016 at a compound annual growth rate (CAGR) of
8.8%. Information security spending is growing at a more substantial rate than that of overall
federal IT spending and this creates a significant opportunity for contractors to bring their
combined agency knowledge and operation security expertise to the market. In addition, Department
of Defense (DoD) IT budgets continue to grow in the areas related to, among others, situational and
battlespace awareness; headquarters consolidation and modernization; overseas activities;
high-performance computing; and business enterprise systems development, implementation, and
integration. DoDs spending on contractor-addressable IT is expected to increase from $33.2
billion in GFY2011 to $35.4 billion in GFY2016. Moreover, these projections may not fully reflect
Government spending on classified Intelligence programs, operational support services to our armed
forces, and complementary technical services, including sophisticated systems engineering.
Although spending on Intelligence-related activities by the U.S. Federal Government remains
classified, INPUT estimates that total IT spending for contractor-addressable services for U.S.
Intelligence Agencies in GFY2011 was $10.3 billion, growing to $12.8 billion in GFY2016. INPUT
also reports that Civilian Agency spending on IT is expected to increase from $39.5 billion in
GFY2011 to $41.8 billion in GFY2016.
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The Intelligence budget continues to outpace both Defense and Civilian budgets at a CAGR of 4.6%
compared to 1.3% and 1.1%, respectively, according to INPUT. Among Civilian Agencies, the
Departments of Veterans Affairs, Transportation, and Homeland Security rank among the highest
year-over-year budget growth rates. Increased demands in information security, surveillance, and
other national security trends continue to drive the Intelligence market segment compared to other
segments.
Current Market Environment
While we continue to see favorable longer-term market opportunities, there are certain near-term
challenges facing all Federal service providers. The market in which we serve has been under
intense budgetary pressure for the past several years as the industry has experienced a series of
delays in the approval of annual Federal appropriations and a series of continuing resolutions
(CR). In 2011, there was a significant downward turn of the market as the U.S. Federal Government
focused on reducing debt and budget deficits. In an attempt to control the nations budget
deficits, the Budget Control Act (BCA) of 2011 mandates the reduction of discretionary spending by
$1.2 trillion over 10 years, including a yearly cap on discretionary spending for the next decade.
Failure to remain below the annual spending caps will result in automatic across-the-board cuts
(known as a sequester).
A large percentage of our revenue base is tied to Defense and Intelligence spending, and while the
full extent is still unknown, it is clear that Defense and Intelligence budgets will be impacted by
these cost cutting measures. President Obamas proposed GFY2013 budget for Defense is $525
billion, down from $531 billion in GFY 2012. The funding request takes into account the BCA of
2011, which mandates Defense spending reductions of $487 billion over 10 years. It is expected
that over the next five years (GFY2013-GFY2017), approximately $259 billion (53% of the total) in
cuts will be made.
The Presidents proposed GFY 2013 budget for Federal IT Services is $78.9 billion, down 1.2% from
GFY2012. The reduction in proposed Federal IT Services spending is driven by lower DoD IT spending
of $37.2 billion in GFY2013, down 3.6% from GFY2012. Proposed Federal Civilian IT spending in
GFY2013 is $41.7 billion, up 1.1% from GFY2012, as a result of a purported focus on enhancement and
modernization of IT assets. For the Department of Homeland Security (DHS), the Presidents budget
request for GFY2013 assumes a decline of 0.6% from GFY2012s enacted level. However, the National
Cyber Security Division GFY2013 budget calls for $0.8 billion, up 67% from GFY2012.
The GFY2013 non-military Intelligence budget request is $52.6 billion, down 4% from GFY2012. The
major focus areas are integration of intelligence across agencies, focus on counter terrorism and
counter weapons of mass destruction, support of military operations, improvement of cybersecurity
capabilities, the safeguard of networks, and modernization of IT infrastructure. Key stated cuts
and reforms include reducing the contractor workforce and freezing hiring at GFY2012 levels, and
achieving savings through reducing or terminating lower-priority programs.
The U.S. Federal Government, and the DoD in particular, faces unprecedented financial, economic,
and mission challenges as it continually looks for opportunities to address its expanding mission
responsibilities amid increasing budgetary pressures. It is anticipated that certain areas,
particularly areas related to technology, may receive special safeguards in the budget-cutting
process. Such areas may include data center consolidation, cloud computing, cybersecurity,
healthcare IT modernization and mobile technologies.
COMPETITIVE STRENGTHS
We believe we are well positioned to meet the rapidly evolving needs of U.S. Federal Government
Agencies for IT and professional services and solutions because we possess the following key
business strengths:
In-Depth Understanding of Customers Missions
Since our founding in 1989, we have provided mission-critical services and solutions to our
customers, enabling us to develop an in-depth understanding of their missions and technical needs.
In addition, approximately 55% of our employees are located at customer sites, giving us valuable
strategic insights into customers ongoing and future program requirements. Our in-depth
understanding of our customer missions, in conjunction with the strategic location of our
employees, enables us to offer technical solutions tailored to our customers specific requirements
and consistent with their evolving mission objectives.
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Cybersecurity Expertise
We have a long and recognized history of utilizing cybersecurity to protect mission-critical
networks for customers worldwide. Much of our past cybersecurity experience is focused on network
operations, enterprise management, and security operationsthat is, the initial point of defense.
We offer an integrated approach in which cybersecurity is embedded within all our service
offerings. We believe our capabilities are aligned with our customers unique mission
requirements, U.S. Federal Government policies, and new U.S. Federal Government initiatives. In
addition, we believe our integrated approach remains one of our key differentiators, along with our
skilled, experienced, and cyber-certified employees. Our cybersecurity capabilities and
specialized services include integrated network and security operations; threat identification and
vulnerability analysis; cyber threat warning dissemination; incident response; information
exploitation; situational awareness; data protection; and secure information sharing. We believe
we are well-positioned in this important market and that our major area of expertise, security
operations, directly addresses the largest single component of the cybersecurity market.
Diverse Base of Key Prime Contract Vehicles
As a result of our business development focus on securing key contracts, we are a prime contractor
on numerous multi-year Government Wide Acquisition Contracts (GWACs), agency-specific Indefinite
Delivery/Indefinite Quantity (IDIQ), and other multiple-award contracts (MACs) that provide us the
opportunity to bid on hundreds of millions of dollars of business against a discrete number of
other pre-qualified companies each year. These contracts include the General Services
Administration (GSA) Alliant contract with a ceiling of $50 billion over ten years; the U.S. Army
Information Technology Enterprise Solutions-2 Services (ITES-2S) contract with a ceiling of $20
billion over nine years; the U.S. Army Rapid Response-Third Generation (R2-3G) contract with a
ceiling of $16.4 billion over five years; the U.S. Air Force Network-Centric Solutions (NETCENTS)
contract with a ceiling of $9 billion over eight years; the Food and Drug Administration Enterprise
System Lifecycle Management Support (FDA ELMS) contract with a ceiling of $2 billion over 10 years;
the Defense Logistics Agency Design and Engineering Support Program III (DESP III) contract with a
ceiling of $1.9 billion over seven years; the U.S. Army Total Engineering and Integration Services
(TEIS III) contract with a ceiling of $900 million over five years; the Department of Justice
Information Technology Support Services (ITSS 4) contract with a ceiling value of $1.1 billion over
six years, and the General Services Administration (GSA) Schedule 70. While the U.S. Federal
Government is not obligated to make any awards under these vehicles, we believe that holding prime
positions on these contract vehicles provides us an advantage as we seek to expand the level of
services we provide to our customers.
Highly Skilled Employees and an Experienced Management Team
We deliver our services through a highly skilled workforce of approximately 2,600 employees as of
December 31, 2011, of which more than 70% possess at least one U.S. Federal Government security
clearance. Our senior managers have extensive experience with U.S. Federal Government Agencies,
the U.S. military, and U.S. Federal Government contractors. Members of our management team have
experience growing businesses organically, as well as through acquisitions.
Industry-Leading Recognition for Quality Systems and Certifications
We are committed to the continual improvement of our internal quality systems and processes to
ensure that we deliver the highest quality products and services to our customers. We have earned
industry-leading and globally recognized certifications that demonstrate our mature, documented,
repeatable, and successful systems and processes, including:
Capability Maturity Model Integration (CMMI) One NCI business unit has been appraised at
CMMI-Development (DEV) Maturity Level 2 under the Software Engineering Institute (SEI) CMMI.
CMMI can be used to guide process improvement across a project, division, or entire
organization. CMMI appraisals assist customers in selecting reliable and low-risk suppliers
of software products and services. CMMI helps set process improvement goals and priorities,
provides guidance for quality processes, and offers a
point of reference for appraising current processes.
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ISO 9001:2008 We initially received ISO 9001:2000 certification in May 2002 with the
successful audit of our Quality Management System (QMS). Developed by the International
Organization for Standardization (ISO), the ISO 9000 series of standards provides a proven
framework for processes that enables an organization to consistently deliver products and
services that meet customer requirements. Our ISO 9001 certification was updated to ISO
9001:2008 in May 2010. ISO 9001:2008 enables us to enhance customer satisfaction through:
(1) the effective use of our QMS processes; (2) the assurance of conformity to requirements;
and (3) continual improvement of our QMS processes. Our ISO 9001:2008 registration scope
currently covers all our core IT and professional services provided to customers, including
systems design, development and integration, enterprise services, engineering and technical
services, and security and information management.
ISO/IEC 20000-1:2005 We received ISO/International Electronics Community (IEC)
20000-1:2005 certification in September 2009 for our IT Service Management System at our
headquarters facility in Reston, Virginia. ISO/IEC 20000-1:2005 promotes the adoption of an
integrated process approach to effectively deliver managed services to meet the business and
customer requirements.
Contractor Purchasing System Review (CPSR) We received corporate-wide approval of our
purchasing system from our Administrative Contracting Officer (ACO) in December 2009 as a
result of a review of our purchasing system by the Defense Contract Management Agency
(DCMA). The objective of the review is to evaluate the efficiency and effectiveness with
which the contractor spends Government funds and complies with Government policy when
subcontracting to ensure adequate protection of the Governments interests. Having an
approved purchasing system eliminates, in most cases, the requirement for Government consent
for material purchases and subcontracts and provides the opportunity to bid on work where an
approved purchasing system is a requirement.
We continue to pursue these certifications to continually improve and mature our processes for our
customers.
GROWTH STRATEGY
Our objective is to grow our business as a provider of IT and professional services and solutions
to U.S. Federal Government Agencies while improving our profitability. To achieve our objective,
we intend to focus on organic revenue growth.
Focus on Organic Revenue Growth
We intend to focus on our organic revenue growth rate by capitalizing on our current contract base,
expanding services provided to our existing customers, expanding our customer base, and offering
new, complementary services.
Capitalize on Current Contract Base. Our contract base includes more than 10 prime
GWAC/agency-specific IDIQ/MAC contract vehicles with a total combined budgeted ceiling value
in excess of $100 billion. While the Government is permitted to spend up to the ceiling
amount, there is no guarantee that it will do so, or that any particular pre-qualified
contractor, including us, will receive awards under that vehicle. We intend to aggressively
pursue task orders under these vehicles to maximize our revenue and strengthen our customer
relationships.
Expand Services Provided to Existing Customers. We intend to expand the services we provide
to our current customers by leveraging our strong relationships, technical capabilities, and
past performance record. We believe our understanding of customer missions, processes, and
needs in conjunction with our full-lifecycle IT offerings positions us to capture new work
from existing customers. Moreover, we believe our strong past performance record positions
us to expand the level of services we provide to our customers where the U.S. Federal
Government places greater emphasis on past performance as a criterion for awarding
contracts.
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Expand Customer Base. We plan to expand our customer base into areas with significant
growth opportunities by leveraging our industry reputation, long-term customer
relationships, and diverse contract base. We anticipate this expansion will enable us both
to pursue additional higher value work and further diversify our revenue base across the
U.S. Federal Government. Our long-term relationships with U.S. Federal Government Agencies,
together with our GWAC and agency-specific IDIQ vehicles, give us opportunities to win
contracts with new customers within these Agencies.
Offer New Complementary Services. We intend to leverage our strong reputation for providing
IT and professional services to offer new complementary services. We expect to focus on
high value-added services that are closely aligned with our current offerings, including
Intelligence, Surveillance and Reconnaissance (ISR) and Logistics. When appropriate, we
anticipate selectively identifying and hiring key personnel who possess unique customer,
mission, or technical experience to enhance our knowledge of and expertise in the new
service offering. We are extending our core capabilities in line with key market drivers
and investing in a robust set of business solutions and offerings, including cloud computing
and data center modernization; cybersecurity and information assurance; IT service
management; data mining and advanced analytics; open source and agile software development;
integrated logistics and supply chain management; health records and case management;
program and benefit integrity; and training and simulation.
Pursue Strategic Acquisitions
While we are primarily focused on organic growth, we will look to supplement that growth through
strategic acquisitions. When pursing strategic acquisitions, we will look for businesses that will
enable us to capture new customers, new service offerings, new capabilities, new contract vehicles,
and expand market share. We look to take advantage of these acquisitions by leveraging these new
service offerings to our customers, as well as offering our capabilities to our newly acquired
customers.
In April of 2011, we acquired AdvanceMed Corporation, which we refer to as AdvanceMed. AdvanceMed
is a premier provider of healthcare program integrity services focused on the detection and
prevention of fraud, waste, and abuse in healthcare programs. AdvanceMed provides investigative
services to Centers for Medicare and Medicaid Services (CMS). Serving CMS since 1999, AdvanceMed
has grown rapidly demonstrating the value and return on investment of integrity program activities.
AdvanceMed is one of the largest and most well-established healthcare integrity program
contractors focused on the U.S. Federal Government market. Our acquisition of AdvanceMed allowed
us to acquire a new customer, CMS, and expand our base in the Health IT market.
IT AND PROFESSIONAL SERVICES AND SOLUTIONS
We provide IT and professional services and solutions by leveraging our eight core service
offerings: enterprise systems management; network engineering; cybersecurity and information
assurance; software development and systems engineering; program management and lifecycle support;
engineering and logistics; health IT and informatics; and training and simulation.
Enterprise Systems Management
We design, install, and manage complex mission-critical enterprise systems for our customers,
increasing the reliability, security, and efficiency of their IT operations while meeting stringent
mission requirements. As part of our overall network operation and management services, we
continually analyze and monitor enterprise system components and create systems that can adapt to
rapidly changing needs. We employ a knowledge-centric service-delivery assurance methodology
designed to keep customers mission-critical systems at peak performance. This methodology uses
network and traffic simulations to identify changes in performance or security issues within a
particular network, allowing our engineers to protect customers systems and data. Our system
engineers are trained and certified in the leading commercial enterprise management tools and
combine their knowledge with our techniques, experience, and processes to deliver solutions to our
customers. Our enterprise systems management services in the IT Infrastructure Library (ITIL)
include the following:
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Infrastructure Operations and Management
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Application Performance and Network Management |
Outsourcing and Managed Services
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Application and Business System Performance Measures |
Infrastructure Consolidation and Modernization
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Network Design, Implementation, and Migration |
Public/Private/Hybrid Cloud Computing
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Network Monitoring and Performance Evaluation |
Continuity of Operations Planning and Disaster Recovery
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Scalable, Multi-Site Environments |
Virtual Desktop Infrastructure
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Data Center Modernization and Consolidation |
Network Engineering
We offer full lifecycle network engineering services to our customers from initial requirements
analysis and network design through solutions implementation and testing, including designing
disaster recovery contingency plans. Our wired and wireless network engineering capabilities
include the architecture development, design, implementation, configuration, and operation of local
area networks (LANs), campus area networks (CANs), metropolitan area networks (MANs), and wide area
networks (WANs). Our extensive experience providing the following voice/video/data network
engineering services for U.S. Federal Government customers allows us to rapidly identify potential
bottlenecks, security threats, and vulnerabilities, as well as address these potential issues with
cost-effective solutions, including the following:
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Architecture Development and Design
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Protocol and Topology Optimization |
Disaster Response Planning and Recovery
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Reliability and Contingency Assessment |
Installation, Test, and Evaluation
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Requirements Analysis |
Network Configuration and Compliance Audit
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Redundant Routing/Switching Solutions |
Network Security Evaluation
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Enterprise Vulnerability Management |
Cybersecurity and Information Assurance
We offer cybersecurity and information assurance (IA) solutions to secure enterprise systems and
networks with particular expertise in protecting IT infrastructures for our customers operating in
classified environments. We design, configure, and deploy security architectures based on
assessments of our customers current and future IT needs, mission objectives, and regulatory
requirements, in addition to specific threats from unauthorized users. In connection with
implementing tailored architectures, we help define and implement IA policies, procedures, and
guidelines to ensure effective future IT planning with direct linkage to portfolio management and
ITIL-based service catalogs. Our highly skilled and accredited employees research and implement
security policies, provide technical support, and develop comprehensive security assessment plans.
We also identify potential threats and vulnerabilities and design and implement corrective action
plans that employ advanced technologies, such as encryption, digital signatures, and firewalls,
using both commercial-off-the-shelf (COTS) and custom security and software solutions. Our
cybersecurity and IA services include the following:
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Intrusion Detection/Prevention System Development
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Public Key Infrastructure (PKI) Implementation |
Certification and Accreditation
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Computer Forensics and eDiscovery |
Policy and Procedures Development
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Threat Assessment and Mitigation |
Products Evaluation and Integration
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Security Test and Evaluation |
Cybersecurity Fusion Centers
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Risk Management and Continuous Monitoring |
Software Development and Systems Engineering
We are CMMI appraised, and we are an ISO company holding certifications in ISO 9001:2008 and ISO
20000-1:2005. We provide a full range of software development, systems engineering, and
integration services to our customers as codified in our agile Hybrid Engineering Lifecycle
MethodologySM (HELMSM). HELMSM combines best practices from ISO
9001:2008, IEEE 12207, CMMI, ISO 20000-1:2005, and ITIL V3 for comprehensive
requirements-to-retirement coverage. Initially, we leverage our business process reengineering
skills to analyze the activities, roles, and objectives of a proposed IT system or solution. Based
on this analysis, we integrate
advanced/emerging technologies with our customers legacy systems to improve their operational
efficiency and increase returns on IT investments as governed by portfolio management and the
service catalog discipline. Our software development and systems engineering services include the
following:
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Agile and Open Source Software Development
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Full Systems Lifecycle Development and Deployment |
Project Planning and Management
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Software/Systems Development |
Database Design and Management
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Advanced Analytical Computing Solutions |
Enterprise Portal Implementation
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Data Warehousing/Mining |
COTS/GOTS Integration, Test, and Evaluation
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Advanced Graph Analytics |
Legacy System Integration and Modernization
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Information Sharing and Collaboration |
Cloud-Based Development, Testing, and Quality Assurance
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High-Performance and Grid Computing |
Program Management and Lifecycle Support
We provide a full range of program management and lifecycle support services to our customers. As
an integral part of our professional services portfolio, we are at the forefront of integrating the
acquisition, logistics, engineering, and technology disciplines into a comprehensive lifecycle
management approach. Our approach strives to continually improve the process of developing,
procuring, and sustaining our customers systems to achieve their overarching goals of
transformation, consolidation, sustainment, and efficiency. We combine expert functional and
technical skills to deliver full lifecycle support capabilities, including the following:
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Acquisition Management
Integrated Logistics and Sustainment Operations
Program and Operations Support
Test and Evaluation
Systems Engineering and Technical Support
Studies and Capabilities Analysis
Portfolio Management
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Financial Management
Security Management
Training
Risk Management and Quality Assurance
IT Support
Program integrity |
Engineering and Logistics
We offer a wide array of professional engineering, logistics, and support services. We employ
experienced multi-disciplinary engineering and logistics teams to solve our customers most
challenging fielded-systems problems. By tailoring our engineering and logistics specialties for
our customers, we reduce customer costs while increasing fielded-system capabilities and improving
mission readiness. We offer rapid-prototyping and simulation-based designs to efficiently mitigate
obsolescence issues with improved performance. We seamlessly deliver supply chain management (SCM)
support and information integration through our statistical demand forecasting, inventory
optimization, and comprehensive data-mining capabilities. Our predictive analysis and service-life
extension capabilities ensure increased asset readiness and availability with reduced total cost of
ownership (TCO). We are actively engaged in extending service life through creative engineering
and logistics solutions, playing a vital role in supporting critical aging aircraft (e.g., C-5,
B-2, T-38, and F-16) readiness and multiple Air Force Space and Command, Control, Communications,
and Intelligence (C3I) platforms through Diminishing Manufacturing Sources and Material Shortages
(DMSMS) and Operational Safety, Suitability, and Effectiveness (OSS&E) capabilities. Our
engineering and logistics capabilities include the following:
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Software Development and Systems Integration
Prototype Design, Development, and Testing
Sustainment Engineering and Obsolescence Management
Modernization and Technology Insertion
Diminishing Manufacturing Sources and Material Shortages
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Modeling and Simulation
Acquisition Planning and Program Management
Technology Assessments and Analysis of Alternatives
Multi-Service Weapon Systems Reprogramming
Supply Chain Management and Business Process Outsourcing |
Page 8
Health IT and Informatics
Leveraging our deep and diverse skill base in IT services, healthcare data analysis, logistics, and
investigations, we are well positioned to apply our interdisciplinary experience to the health IT
and informatics challenges facing the U.S. Federal Government. Our talent pool includes public
health experts, healthcare administrators, investigators, nurses, physicians, statisticians,
network engineers, medical trainers, IT specialists, bioenvironmental engineers, and aerospace
physiologists. We provide a broad spectrum of health IT services and informatics experience,
including network operations, cybersecurity and information assurance, Health Insurance Portability
and Accountability Act (HIPAA) and Federal Information Security Management Act (FISMA) compliance,
software development, data analysis and data management, case management, and enterprise systems
management to support healthcare benefit programs and improve the quality and timeliness of
healthcare services provided to public health and medical personnel worldwide. Our solutions offer
real-time high-fidelity interactions among patients and their practitioners, in addition to
preserving the integrity of payments made under Federal health entitlement programs. Our
capabilities and infrastructure support all aspects of health IT and informatics, including the
following:
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Healthcare Program Integrity Services
Fraud Investigation and Medical Review
Medical Record Storage and Management
Healthcare Data Analysis and Management
Strategic Planning/Consulting
Electronic and Personal Health Records
Collaboration and Telemedicine Solutions
Occupational, Environmental, and Population Health Programs
Medical Education and Training
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Access-to-Care Program Support
Preparedness and Contingency Planning
Virtual Desktop Infrastructure
Aeromedical Evaluation and Combat Casualty Care
Doctrine/Policy Development
Social Media/Networking Tools/Solutions
Clinical review and assessment services
Data/System Consolidation, Migration, and Modernization |
Training and Simulation
By efficiently combining systems engineering and operational expertise, we solve our customers
most complex challenges and deliver increased productivity while improving organizational agility.
We offer a full range of modeling, simulation, training, and exercise support capabilities to
increase performance and identify the most cost-effective strategies to meet the unique training
needs of our customers. Our solutions leverage the in-depth operational expertise of our staff and
the engineering, software development, and network operations capabilities of the company. We have
a highly talented technical team and the program management experience to meet our customers
complex challenges. Our solutions include solving complex problems through modeling, simulation,
and analysis services for clients in Defense, Intelligence, Civil, and Healthcare Agencies to
support sophisticated programs like airborne battle management training, virtual battlefield
desktop simulation, command and control, and surveillance modeling. Our training and simulation
services include the following:
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Modeling and Simulation
Network Engineering, Operations, and Support
Modernization and Concurrency Management
Virtual/Desktop Simulation
Distributed Simulation Systems Development and Integration
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Exercise Support
Information Assurance
Multi-Level Security
Logistics Support and Configuration Management
Instructor-led Classroom and Distributed Learning Solutions |
CUSTOMERS
Our customers include a diverse base of U.S. Federal Government Defense, Intelligence, and Civilian
Agencies. For the year ended December 31, 2011, approximately 86% of our revenue was generated
from DoD and Intelligence Agency customers, and approximately 14% of our revenue was generated from
Federal Civilian Agency customers.
The following is a representative list of our customers for the year ended December 31, 2011. Due
to the sensitive nature of our work with the Intelligence Community, we are precluded from
providing detailed information
regarding specific Intelligence Agency customers.
Page 9
Department of Defense
U.S. Forces Korea (USFK)
U.S. Special Operations Command (USSOCOM)
U.S. Strategic Command (USSTRATCOM)
Defense Information Systems Agency (DISA)
Defense Logistics Agency (DLA)
National Guard Bureau (NGB)
Ogden Air Logistics Center
U.S. Air Force Air Combat Command (ACC)
U.S. Air Force Air Education and Training Command (AETC)
U.S. Air Force Civil Engineer Support Agency
U.S. Air Force Electronic Systems Center
U.S. Air Force Materiel Command (AFMC)
U.S. Air Force Medical Operations Agency (AFMOA)
U.S. Air Force Medical Service (AMC)
U.S. Air Force Medical Support Agency (AFMSA)
U.S. Air Force Air Mobility Command
U.S. Air Force Research Laboratory (AFRL)
U.S. Air Force Space Command (AFSPC)
U.S. Air Force Surgeon General
U.S. Army Communications-Electronics Life Cycle Management Command (CECOM LCMC)
U.S. Army Corps of Engineers (USACE)
U.S. Army Forces Command (FORSCOM)
U.S. Army Information Systems Engineering Command (USAISEC)
U.S. Army Medical Command (MEDCOM)
U.S. Army Medical Department Center and School (AMEDD)
U.S. Army National Guard (ARNG)/Air National Guard (ANG)
U.S. Army Network Enterprise Technology Command (NETCOM)
U.S. Army Ordnance School and Center
U.S. Army Program Executive Office Enterprise Information Systems (PEO EIS)
U.S. Army Program Executive Office for Simulation, Training, and Instrumentation (PEO STRI)
U.S. Army Program Executive Office Soldier (PEO Soldier)
U.S. Army Reserve Command (USARC)
U.S. Army Training and Doctrine Command (TRADOC)
U.S. Army Test and Evaluation Command
U.S. Army Western Regional Medical Command
U.S. Army William Beaumont Army Medical Center
U.S. Army XVIII Airborne Corps
U.S. Marine Corps
U.S. Naval Postgraduate School
Various National Intelligence Agencies
Page 10
Federal Civilian
Centers for Disease Control and Prevention (CDC)
Center for Medicare and Medicaid Services (CMS)
Department of Energy (DOE)
Department of Health and Human Services (HHS)
Department of Homeland Security (DHS)
Department of Justice
Department of State (DOS)
Department of Transportation
Federal Aviation Administration (FAA)
Food and Drug Administration (FDA)
General Services Administration (GSA)
Government Accountability Office (GAO)
National Aeronautics and Space Administration (NASA)
National Institutes of Health (NIH)
National Nuclear Security Administration (NNSA)
Office of Personnel Management (OPM)
U.S. Capitol Police
U.S. Senate
U.S. Patent and Trademark Office
CONTRACTS
Our contract terms typically extend from one to 10 years, including option years (which may be
exercised at the election of the customer). Many of our services are provided under GWAC or
agency-specific IDIQ vehicles. Our contract base includes more than 10 prime GWAC vehicles that
have an aggregate program ceiling value of $100 billion, excluding GSA Schedule 70. The following
table lists our most significant contract vehicles:
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Number of |
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Period of |
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Qualified |
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Vehicle |
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Owning Agency |
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performance |
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Ceiling value* |
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Bidders |
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GSA Alliant |
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General Services Administration |
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05/2009 04/2019 |
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$50.0 billion |
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60 |
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ITES-2S |
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U.S. Army |
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12/2006 04/2015 |
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20.0 billion |
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17 |
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R2-3G |
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U.S. Army |
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07/2010 07/2015 |
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16.4 billion |
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18 |
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NETCENTS |
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U.S. Air Force |
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09/2004 09/2012 |
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9.0 billion |
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8 |
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HHS FDA ELMS |
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Health and Human Service |
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06/2009 06/2019 |
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2.0 billion |
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21 |
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DESP III |
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U.S. Air Force |
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01/2012 01/2019 |
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1.9 billion |
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26 |
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ITSS 4 |
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Department of Justice |
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03/2011 09/2017 |
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1.1 billion |
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20 |
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TEIS III |
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U.S. Army |
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03/2011 03/2016 |
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0.9 billion |
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3 |
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* |
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Ceiling value refers to the overall contract ceiling for all contractors, and not our
individual ceiling value. |
We believe these types of contract vehicles are the preferred method of awarding work by many of
our customers because they enable U.S. Federal Government Agencies to rapidly obtain services
through a streamlined process. Under these GWAC vehicles, task orders can only be awarded to a
discrete number of pre-qualified companies. Revenue under our prime GWAC, agency-specific IDIQ,
MAC, and GSA Schedule 70 task orders accounted for approximately 76% of our total revenue for the
year ended December 31, 2011, down from 79% for the year ended December 31, 2010, and 76% for the
year ended December 31, 2009.
Page 11
The U.S. Federal Governments ability to select multiple winners under multiple-award contracts, as
well as its right
to award subsequent task orders among such multiple winners, means that there is no assurance that
these multiple-award contracts will result in the actual orders equal to the ceiling value, or
result in any actual orders. Our failure to compete effectively in this procurement environment
could reduce our revenue. While the Government is permitted to spend up to the ceiling amount,
there is no guarantee that it will do so, or that any particular pre-qualified contractor,
including us, will receive awards under that vehicle.
CONTRACT BACKLOG
Backlog represents the estimated amount of future revenues to be recognized under negotiated
contracts as work is performed. Our backlog consists of funded backlog and negotiated unfunded
backlog, each of which are described in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II of this Annual Report on Form 10-K.
Our estimates of funded, unfunded, and total backlog as of December 31, 2011 and 2010 are as
follows:
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Unfunded |
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As of |
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Funded backlog |
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backlog |
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Total backlog |
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(in millions) |
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December 31, 2011 |
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$ |
220 |
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$ |
781 |
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$ |
1,001 |
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December 31, 2010 |
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302 |
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999 |
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1,301 |
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We expect to realize approximately $300 million in revenue from backlog in 2012. There can be
no assurance that our backlog will result in actual revenue in any particular period, or at all, or
that any contract included in backlog will be profitable. There is a higher degree of risk in this
regard with respect to unfunded backlog. The actual receipt and timing of any revenue is subject
to various contingencies, many of which are beyond our control. The actual receipt of revenue on
contracts included in backlog may never occur or may change because a program schedule could change
or the program could be canceled, or a contract could be reduced, modified, or terminated early.
Our estimates are based on our experience under these and similar contracts.
BUSINESS DEVELOPMENT
Our business development process is closely aligned with our overall business strategy to focus on
our organic growth while improving our operating margins. We are focused on maximizing the work we
perform under our GWAC and agency-specific IDIQ vehicles, expanding our work with existing
customers, and expanding our customer base, as well as offering new, complementary services.
Working closely as a team, our business development and operations personnel assess market
activities with the objective of identifying, qualifying, and generating capture strategies for
contract opportunities consistent with our overall business development focus. Business
opportunities are carefully qualified and prioritized based on potential value and win probability.
A senior-level executive is assigned responsibility for evaluating and capturing each significant
opportunity.
We also recognize the need to identify and pursue larger mission programs with long-term visible
funding streams associated with them. With that in mind, we intend to make meaningful investments
in our business development infrastructure and processes.
GOVERNMENT REGULATION
We are subject to various laws and regulations that may affect our business. U.S. Federal
Government contracts are subject to a number of Federal laws and regulations, including the Federal
Acquisition Regulation (FAR), which limits our ability to compete for, or perform on, certain other
contracts due to conflicts of interest, the Cost Accounting Standards and Cost Principles, which
impose accounting requirements that govern our right to reimbursement under certain cost-based U.S.
Federal Government contracts, and the Truth in Negotiations Act, which requires certification and
disclosure of all cost and pricing data in connection with contract negotiations. We and our
subcontractors must also comply with the Foreign Corrupt Practices Act or U.S. export control
regulations and laws, regulations, and executive orders restricting the use and dissemination of
information classified for national security purposes and the export of certain products and
technical data. We may also become subject to other U.S. Federal Governmental regulations,
including those pertaining to environmental laws and potential climate
change legislation that could impose additional restrictions or costs in order to comply with such
regulations.
Page 12
COMPETITION
We believe that the major competitive factors in our market are strong customer relationships, a
record of successful contract performance, a reputation for quality, an experienced management
team, and employees with a wide range of technical expertise and security clearances, and
competitive pricing. We often compete against or team with divisions of large Defense and IT
services contractors, including Lockheed Martin Corporation, Northrop Grumman Corporation, General
Dynamics Corporation, Computer Sciences Corporation, Raytheon, Harris, BAE Systems, Booz Allen
Hamilton, and Science Applications International Corporation. We also compete against or team with
mid-tier Federal contractors, such as CACI International, ManTech International, and SRA
International that have specialized capabilities, as well as numerous non-public companies within
the sector. More recently, we have seen competition from new organizations that have been divested
by major Defense contractors due to organizational conflicts of interest (OCI). An example is the
sale of AdvanceMed to NCI, Inc. by Computer Sciences Corporation due to OCI issues. Some of our
competitors have significantly longer operating histories and more substantial resources. We
expect competition in the U.S. Federal Government IT and professional services sector to increase
in the future.
EMPLOYEES
As of December 31, 2011, we had approximately 2,600 employees, more than 70% of whom held at least
one U.S. Federal Government security clearance. Our employees are located at more than 100 sites
worldwide. More than 55% of our staff is located on-site with our customers, allowing us to build
long-term relationships. The majority of our technical staff is professionally certified in one or
more of the following areas:
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Microsoft Certified Professional (MCP)
Microsoft Certified Systems Engineer (MCSE)
Microsoft Certified Systems Administrator (MCSA)
Cisco Certified Network Associate (CCNA)
Cisco Certified Network Professional (CCNP)
Cisco Certified Design Professional (CCDP)
Cisco Certified Security Professional (CCSP)
Sun Certified Systems Administrator
CCDA, CCNA Security, CCENT, MCA, MCSE+1,MCDST, MCSA Security, MCT, MCSD, MCTS
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IT Infrastructure Library (ITIL)
Project Management Professional (PMP)
CompTIA Certifications (A+, Network +, Security +)
ISC2 Certifications (CISSP, SSCP, CAP, ISSEP, ISSAP)
Certified INFOSEC Professional
COMSEC Certification
Global Information Assurance Certification (GIAC) DoD 8570
SANS Institute Certifications (GSEC, GCIA, GCIH, GISF)
PgMP |
We believe we have a professional environment that encourages advanced training to acquire
industry-recognized certifications, rewards strong job performance with advancement opportunities,
and fosters ethical and honest conduct. Less than 10 of our employees are represented by a labor
union or subject to a collective bargaining agreement. We believe our salary structures, incentive
compensation, and benefit packages are competitive within our industry.
CORPORATE INFORMATION
We were incorporated as NCI, Inc. in Delaware in July 2005. In September 2005, we completed a
merger and share exchange as a result of which NCI Information Systems, Inc., a Virginia
corporation, which was incorporated in 1989, became a wholly-owned subsidiary. We primarily
contract with the U.S. Federal Government through NCI Information Systems, Inc.
COMPANY WEBSITE AND INFORMATION
Our Internet address is www.nciinc.com. Information contained on our website is not part
of this report. We make available free of charge on our Internet site our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Alternatively, you may access these reports at the SECs Internet website: www.sec.gov.
You may request a copy of the materials identified in the preceding paragraph, at no cost, by
writing or telephoning us at our corporate headquarters:
NCI, Inc.
11730 Plaza America Drive, Suite 700
Reston, Virginia 20190-4764
Attention: Investor Relations
Telephone: (703) 707-6900
Page 13
You should carefully consider the risks and uncertainties described below, together with
information included elsewhere in this Annual Report on Form 10-K and other documents we file with
the SEC, in your evaluation of our business. The risks and uncertainties described below are those
that we have identified as material, but are not the only risks and uncertainties facing us. If
any of these risks or uncertainties actually occurs, our business, financial condition, or
operating results could be materially harmed and the price of our stock could decline. Our
business is also subject to general risks and uncertainties that affect many other companies, such
as overall U.S. and non-U.S. economic and industry conditions, including a global economic
slowdown, geopolitical events, changes in laws or accounting rules, fluctuations in interest and
exchange rates, terrorism, international conflicts, major health concerns, natural disasters, or
other disruptions of expected economic and business conditions. Additional risks and uncertainties
not currently known to us or that we currently believe are immaterial also may impair our business
operations and liquidity.
Risks Related to Our Business
We depend on contracts with the U.S. Federal Government for substantially all of our revenue. If
our relationships with U.S. Federal Government Agencies are harmed, our future revenue and
operating profits would decline.
For the years ended December 31, 2011 and 2010, we derived substantially all our revenue from U.S.
Federal Government contracts, either as a prime contractor or a subcontractor, including
approximately 86% and 92% of our revenue from contracts with the DoD and Intelligence Agencies in
2011 and 2010, respectively. We believe that U.S. Federal Government contracts will continue to be
the source of substantially all of our revenue for the foreseeable future. For this reason, any
issue that compromises our relationship with U.S. Federal Government Agencies in general, or with
the DoD and Intelligence Agencies in particular, would cause our revenue to decline. Among the key
factors in maintaining our relationships with U.S. Federal Government Agencies are our performance
on individual contracts and task orders, the strength of our professional reputation, and the
relationships of our key executives with customer personnel. To the extent that our performance
does not meet customer expectations, or our reputation or relationships with one or more key
customers are impaired, our revenue and operating results could decline materially.
We face intense competition from many competitors that have greater resources than we do, which
could result in price reductions, reduced profitability, or loss of market share.
We operate in highly competitive markets and generally encounter intense competition to win
contracts from many other firms, including mid-tier Federal contractors with specialized
capabilities and large Defense and IT services providers. Competition in our markets may increase
as a result of a number of factors, such as the entrance of new or larger competitors, including
those formed through alliances or consolidation. These competitors may have greater financial,
technical, marketing and public relations resources; larger customer bases; and greater brand or
name recognition than we do. These competitors could, among other things:
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divert sales from us by winning very large-scale Government contracts; |
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force us to charge lower prices; or |
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adversely affect our relationships with current customers, including our ability to
continue to win competitively awarded engagements where we are the incumbent. |
If we lose business to our competitors or are forced to lower our prices, our revenue and our
operating profits could decline. In addition, we may face competition from our subcontractors who,
from time to time, seek to obtain prime contractor status on contracts for which they currently
serve as a subcontractor to us. If one or more of our current subcontractors are awarded prime
contractor status on such contracts in the future, it could divert sales from us or could force us
to charge lower prices, which could cause our margins to suffer.
Page 14
We cannot guarantee that our estimated contract backlog will result in actual revenue.
As of December 31, 2011, our estimated contract backlog totaled approximately $1.0 billion, of
which approximately $220 million was funded. We expect to realize approximately $300 million in
revenue from backlog in 2012. There can be no assurance that our backlog will result in actual
revenue in any particular period, or at all, or that any contract included in backlog will be
profitable. There is a higher degree of risk in this regard with respect to unfunded backlog. The
actual receipt and timing of any revenue is subject to various contingencies, many of which are
beyond our 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 we had assumed could not be
exercised. In 2011, we experienced significant reductions in contract backlog as a result of
reductions in scope of work, among other factors. Further, while many of our U.S. Federal
Government contracts require performance over a period of years, Congress often appropriates funds
for these contracts for only one year at a time. Consequently, our contracts typically are only
partially funded at any point during their term, and all or some of the work intended to be
performed under the contracts will remain unfunded pending subsequent Congressional appropriations
and the obligation of additional funds to the contract by the procuring agency. Our estimates are
based on our experience under such contracts and similar contracts. However, there can be no
assurances that all, or any, of such estimated contract backlog will be recognized as revenue.
Our revenue and operating profits could be adversely affected by significant changes in the
contracting or fiscal policies of the U.S. Federal Government.
We depend on continued U.S. Federal Government expenditures on Defense, Intelligence, and other
programs that we support. Accordingly, changes in U.S. Federal Government contracting policies
could directly affect our financial performance. Since 2009, President Obama has attempted to
reduce the amount of work federal contractors receive. The Presidents GFY2013 budget request
highlighted the fact that in 2010 contract spending fell for the first time in 13 years, a trend
that continued in 2011. In the GFY2013 budget, the Obama Administration indicated it will continue
these efforts in 2012, in part by having agencies reduce spending on management support service
contracts by 15%.
In addition, future levels of expenditures and authorizations for those programs may decrease,
remain constant, or shift to programs in areas where we do not currently provide services. Among
the factors that could materially adversely affect us are the following:
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budgetary constraints affecting U.S. Federal Government spending generally or specific
departments or agencies in particular, and changes in fiscal policies or available funding;
particularly, the Budget Control Act (BCA) of 2011 mandates the reduction of discretionary
spending by $1.2 trillion over 10 years, including a yearly cap on discretionary spending
for the next decade. Failure to remain below the annual spending caps will result in
automatic across-the-board cuts (known as a sequester). |
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changes in U.S. Federal Government programs or requirements, including the increased use
of small business providers; |
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U.S. Federal Government Agencies are more frequently awarding contracts on a lowest
price, technically acceptable basis in order to reduce expenditures; |
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U.S. Federal Governmental shutdowns (such as that which occurred during the U.S. Federal
Governments 1996 fiscal year) and other potential delays in the U.S. Federal Government
appropriations process; |
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the use of a Continuing Resolution to fund Agencies instead of a budget appropriation,
which may cause our customers within those Agencies to defer or reduce work under our
current contracts; |
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a failure of Congress to pass adequate supplemental appropriations to pay for an
international conflict or related reconstruction efforts; |
Page 15
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the FAR and certain of our U.S. Federal Government contracts contain OCI clauses that
may limit our ability to compete for, or perform on certain other contracts. OCIs arise
when we engage in activities that may make us unable to render impartial assistance or
advice to the U.S. Federal Government, impair our objectivity in performing contract work,
or provide us with an unfair competitive advantage. An OCI issue that precludes our
competition for, or performance on a significant program or contract could harm our
prospects and negative publicity about an OCI issue could damage our reputation; |
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curtailment of the U.S. Federal Governments use of professional services providers,
realignment of funds with changed Government priorities including insourcing of
previously contracted support services, and the realignment of funds to other non-defense
related programs, which may reduce the amount of funds available to defense-related and
other programs in our core service areas; |
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adoption of new laws or regulations; |
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competition and consolidation in the IT industry; |
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general economic conditions; and |
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these or other factors could cause U.S. Federal Governmental Agencies, or prime
contractors for which we are acting as a subcontractor, to reduce their purchases under
contracts, to exercise their right to terminate contracts, or elect not to exercise options
to renew contracts, any of which could cause our revenue and operating profits to decline. |
If we fail to attract and retain skilled employees or employees with the necessary security
clearances, we might not be able to perform under our contracts or win new business.
The growth of our business and revenue depends in large part upon our ability to attract and retain
sufficient numbers of highly qualified individuals who have advanced information technology and
technical services skills. These employees are in great demand and are likely to remain a limited
resource in the foreseeable future. Further, obtaining and maintaining security clearances for
employees involves a lengthy process, and it is difficult to identify, recruit, and retain
employees who already hold security clearances. If we are unable to recruit and retain a
sufficient number of these employees, our ability to maintain and grow our business could be
limited. In a tight labor market, our direct labor costs could increase or we may be required to
engage large numbers of subcontractor personnel, which could cause our profit margins to suffer.
In addition, some of our contracts contain provisions requiring us to staff an engagement with
personnel that the customer considers key to our successful performance under the contract. In the
event we are unable to provide these key personnel or acceptable substitutions, the customer may
terminate the contract and we may lose revenue.
In addition, certain U.S. Federal Government contracts require us, and some of our employees, to
maintain security clearances. If our employees lose or are unable to obtain security clearances,
or if we are unable to hire employees with the appropriate security clearances, the customer may
terminate the contract or decide not to renew it upon its expiration. As a result, we may not
derive the revenue anticipated from the contract, which if not replaced with revenue from other
contracts, could seriously harm our operating results.
If our subcontractors fail to perform their contractual obligations, our performance and reputation
as a prime contractor and our ability to obtain future business could suffer.
As a prime contractor, we often rely significantly upon other companies as subcontractors to
perform work we are obligated to perform for our customers. As we secure more work under our GWAC
and agency-specific IDIQ vehicles, we expect to require an increasing level of support from
subcontractors that provide complementary and supplementary services to our offerings. Depending
on labor market conditions, we may not be able to identify, hire, and retain sufficient numbers of
qualified employees to perform the task orders we expect to win. In such cases, we will need to
rely on subcontracts with unrelated companies. We are responsible for the work performed
by our subcontractors, even though in some cases we have limited involvement in that work. If one
or more of our subcontractors fail to satisfactorily perform the agreed-upon services on a timely
basis, or violate U.S. Federal Government contracting policies, laws, or regulations, our ability
to perform our obligations as a prime contractor or meet our customers expectations may be
compromised.
Page 16
We may have disputes with our subcontractors arising from, among other things, the quality and
timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our
decision not to extend existing task orders or issue new task orders under a subcontract, our
hiring of a subcontractors personnel or the subcontractors failure to comply with applicable law.
The current adverse economic conditions heighten the risk of financial stress of our
subcontractors, which could adversely impact their ability to meet their contractual requirements
to us. If any of our subcontractors fail to timely meet their contractual obligations or have
regulatory compliance or other problems, our ability to fulfill our obligations as a prime
contractor may be jeopardized. Significant losses could arise in future periods and subcontractor
performance deficiencies could result in a customer terminating a contract for default. A
termination for default could expose us to liability, including liability for the agencys costs of
recompetition, damage our reputation, and hurt our ability to compete for future contracts and
could have a material adverse impact on our earnings, cash flow, and financial position.
We are a subcontractor to other businesses on a portion of our business. If these businesses were
to encounter financial difficulty, they may fail to perform their contractual obligation.
Consequently, our contractual performance and reputation, as well as our financial position could
be affected.
We are a subcontractor to other businesses on some of our contracts or task orders (approximately
10% of our revenue in 2011 was derived from contracts where we were a subcontractor). We are not
in a position to control overall contract performance, and our payments are subject to the
financial capabilities of the prime, not the U.S. Federal Government. If our prime contractor
experiences difficulties, it may not have the financial resources to perform its contractual
obligations. This failure to perform could harm our reputation and affect our earnings and
financial position.
Failure to maintain strong relationships with other contractors could result in a decline in our
revenue.
In our role as a subcontractor, we often lack control over fulfillment of a contract, and poor
performance on the contract could impact our customer relationship, even when we perform as
required. We expect to continue to depend on relationships with other contractors for a portion of
our revenue in the foreseeable future. Moreover, our revenue and operating results could differ
materially and adversely from those anticipated if any prime contractor or subcontractor chose to
offer, directly to the client, services of the type that we provide or if they team with other
companies to provide those services.
If we experience systems or service failure, our reputation could be harmed and our customers could
assert claims against us for damages or refunds.
We create, implement, and maintain IT solutions that are often critical to our customers
operations. We may experience some systems and service failures, schedule or delivery delays, and
other problems in connection with our work. If we experience these problems, we may:
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lose revenue due to adverse customer reaction; |
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be required to provide additional services to a customer at no charge; |
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receive negative publicity, which could damage our reputation and adversely affect our
ability to attract or retain customers; and |
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suffer claims for substantial damages. |
In addition to any costs resulting from product or service warranties, contract performance, or
required corrective action, these failures may result in increased costs or loss of revenue if
customers postpone subsequently scheduled
work, or cancel or fail to renew contracts.
Page 17
While many of our contracts limit our liability for consequential damages that may arise from
negligence in rendering services to our customers, we cannot assure you that these contractual
provisions will be legally sufficient to protect us if we are sued.
In addition, our errors and omissions and product liability insurance coverage may not continue to
be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the
insurer may disclaim coverage as to some types of future claims. As we continue to grow and expand
our business into new areas, our insurance coverage may not be adequate. The successful assertion
of any large claim against us could seriously harm our business. Even if not successful, these
claims could result in significant legal and other costs, may be a distraction to our management,
and may harm our reputation.
Internal system or service failures could disrupt our business and impair our ability to
effectively provide our products and services to our customers, which could damage our reputation
and adversely affect our revenues and profitability.
We are also subject to systems failures, including network, software or hardware failures, whether
caused by us, third-party service providers, intruders or hackers, computer viruses, natural
disasters, power shortages, or terrorist attacks. Any such failures could cause loss of data and
interruptions or delays in our business, cause us to incur remediation costs, subject us to claims,
and damage our reputation. In addition, the failure or disruption of our communications or
utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our
business. Our property and business interruption insurance may be inadequate to compensate us for
all losses that may occur as a result of any system or operational failure or disruption and, as a
result, our future results could be adversely affected.
Security breaches in sensitive U.S. Federal Government systems could result in the loss of
customers and negative publicity.
Many of the systems we develop, install, and maintain involve managing and protecting information
involved in Intelligence, national security, and other sensitive or classified U.S. Federal
Government functions. A security breach in one of these systems could cause serious harm to our
business, damage our reputation, and prevent us from being eligible for further work on sensitive
or classified systems for U.S. Federal Government customers. We could incur losses from such a
security breach that could exceed the policy limits under our errors and omissions and product
liability insurance. Some of our contracts give us access to Private Health Information (PHI)
which is subject to HIPAA and other laws. A security breach in one of our systems could cause
serious harm to our business, damage our reputation, and prevent us from being eligible for further
work in these areas. Damage to our reputation or limitations on our eligibility for additional
work resulting from a security breach in one of the systems we develop, install, and maintain could
materially impact our earnings, cash flows, and financial position.
Our business could be negatively impacted by security threats and other disruptions.
As experienced by numerous organizations across the globe, companies in the IT industry are
challenged with responding to and mitigating advanced persistent threats (APTs) to their customers
systems and networking infrastructures. Though unpatched and zero-day exploits are common
issues, the most effective APTs begin with sophisticated socially-engineered communications (so
called phishing emails) to trick users into visiting websites that can inject malicious software
(malware) onto the users local computing devices. Once a company is infected with malware, the
APTs work to embed themselves further into the organization, gather information, and then slowly
and stealthily exfiltrate company data to parties outside of the compromised environment
(potentially for long periods of time). We combat APTs by leveraging a combination of management,
operational and technical controls. These controls include our risk management, continuous
monitoring methodology (and associated solution), ISO 20000 based IT processes, and our corporate
Computer, Network, and Internet Security Management policies. Failures to implement and operate
these controls may result in contract terminations, adverse legal actions (including potentially
the payment of damages to affected parties), additional investments in security management and
network/system monitoring tools, and damage to our reputation among our customers and the market at
large (leading to potential loss of competitive momentum). In aggregate, failure to focus on APTs
may result in a material
increase in our costs, reduction in our revenues, and lessened competitive positioning (or some
combination thereof).
Page 18
Our employees or subcontractors may engage in misconduct or other improper activities, which could
cause us to lose contracts.
We are exposed to the risk that employee or subcontractor fraud or other misconduct could occur.
Misconduct by employees or subcontractors could include intentionally failing to comply with U.S.
Federal Government procurement regulations, engaging in unauthorized activities, or falsifying time
records. Employee or subcontractor misconduct could also involve the improper use of our
customers sensitive or classified information, which could result in regulatory sanctions against
us, liability to third parties, and serious harm to our reputation and could result in a loss of
contracts and a reduction in revenue. It is not always possible to deter employee or subcontractor
misconduct, and the precautions we take to prevent and detect this activity may not be effective in
controlling unknown or unmanaged risks or losses, which could cause us to lose contracts or cause a
reduction in revenue.
Our estimates, forward-looking statements, and projections may prove to be inaccurate.
Our earnings and profitability may vary based on the type of contracts we perform and may be
adversely affected if we do not accurately estimate and manage the costs, time, and resources
necessary to satisfy our contractual obligations. Revenue from some of our firm fixed-price
contracts is recognized using the percentage-of-completion method with progress toward completion
of a particular contract based on actual costs incurred relative to total estimated costs to be
incurred over the life of the contract. Estimating costs at completion and award fees on our
contracts is complex and involves significant judgment. Adjustments to original estimates are
often required as work progresses, experience is gained and additional information becomes known,
even though the scope of the work required under the contract may not change. Any adjustment as a
result of a change in estimate is recognized as events become known. Adjustments in the underlying
assumptions, circumstances or estimates could result in changes that could have a material adverse
effect on our future results of operations.
If we fail to manage acquisitions, divestitures, and other transactions, our financial results,
business, and future prospects could be harmed.
One of our strategies is to pursue growth through acquisitions. We may not be able to identify
suitable acquisition candidates at prices that we consider appropriate. If we do identify an
appropriate acquisition candidate, we may not be able to successfully negotiate the terms of the
acquisition or finance the acquisition on terms that are satisfactory to us. Negotiations with
potential acquisitions and the integration of acquired business operations could disrupt our
business by diverting managements attention from day-to-day operations. Acquisitions of
businesses or other material operations may require additional debt or equity financing, resulting
in additional leverage or dilution of ownership. We may encounter increased competition for
acquisitions, which may increase the price of our acquisitions.
If we are unable to successfully integrate companies we may acquire, our revenue and operating
results could suffer. Integrating such businesses into our operations may result in unforeseen
operating difficulties (including incompatible accounting and information management systems), may
absorb significant management attention, and may require significant financial resources that would
otherwise be available for the ongoing development or expansion of our business. These
difficulties of integration may require us to coordinate geographically dispersed organizations,
integrate personnel with disparate business backgrounds, and reconcile different corporate
cultures. In certain acquisitions, the FAR may require us to enter into Government novation
agreements, a potentially time-consuming process. In addition, we may not be successful in
achieving the anticipated synergies from these acquisitions, including our strategy of offering our
services to customers of acquired companies to increase our revenue. We may experience increased
attrition, including, but not limited to, key employees of the acquired companies during and
following the integration of acquired companies that could reduce our future revenue. In addition,
we may need to record write-downs from future impairments of identified intangible assets and
goodwill, which could reduce our future reported earnings. Acquired companies may have liabilities
or adverse operating issues that we fail to discover through due diligence before the acquisition.
In particular, to the extent that prior owners of any acquired businesses or properties failed to
comply with or otherwise violated applicable laws or regulations, or failed to fulfill their
contractual obligations to the U.S. Federal Government or other customers, we, as the successor
owner, may be financially responsible for these violations and failures and may suffer reputational
harm or otherwise be adversely affected. The discovery of any material liabilities associated with
our acquisitions could cause us to incur additional expenses and cause a reduction in our operating
profits.
Page 19
Our acquisitions could cause unforeseen OCIs, which could preclude us from bidding on related
projects, thereby making the acquisition not as profitable as originally forecast. Additionally,
the Small Business Administration requires small businesses to re-certify their size standard
within 30 days of any sale or merger. It is likely that any small business we acquire will have
some component of small business contracts. These regulations may affect our ability to retain
some or all the contracts after the acquisition, which, in turn, may affect the value of the
acquisition.
Our operating results could cause us to violate one or more of our loan covenants, limiting our
access to working capital and our ability to make substantial acquisitions.
If our operating results deteriorate, we could violate one or more of our loan covenants. Such a
violation, depending on the severity, could cause us to renegotiate our senior debt facility,
possibly incurring significant bank fees and additional interest expense. Each of these could have
a material adverse impact to our earnings, cash flow, and financial position. However, based on
current projections, we do not anticipate violating our loan covenants.
To the extent that we do not generate sufficient cash from existing business to provide the capital
we require to fund our growth strategy and future operations, we will require additional debt or
equity financing. A substantial acquisition or acquisitions could cause us to expand or
renegotiate our current credit facility. We cannot be certain that additional funds will be
available if needed and, if available, that such funds will be available on acceptable terms. Any
such funding could require us to incur a significantly higher interest expense. If we cannot raise
additional funds on acceptable terms, we may not be able to make future acquisitions.
The loss of any member of our senior management could impair our relationships with U.S. Federal
Government customers and disrupt the management of our business.
We believe that the success of our business and our ability to operate profitably depends on the
continued contributions of the members of our senior management. We rely on our senior management
to generate business and execute programs successfully. In addition, the relationships and
reputation that many members of our senior management team have established and maintain with U.S.
Federal Government personnel contribute to our ability to maintain strong customer relationships
and identify new business opportunities. We do not have any employment agreements providing for a
specific term of employment with any member of our senior management. The loss of any member of
our senior management could impair our ability to identify and secure new contracts, maintain good
customer relations, and otherwise manage our business.
Our business commitments require our employees to travel to potentially dangerous places, which may
result in injury to our employees.
Our business involves providing services that require some of our employees to operate in countries
that may be experiencing political unrest, war, or terrorism, including Afghanistan and Iraq.
Certain senior-level employees or executives may, on occasion, be part of the teams deployed to
provide services in these countries. As a result, it is possible that certain of our employees or
executives will suffer injury, bodily harm, or death in the course of these deployments. It is
also possible that we will encounter unexpected costs in connection with additional risks inherent
in sending our employees to dangerous locations, such as increased insurance costs and the
repatriation of our employees or executives for reasons beyond our control. We maintain insurance
policies that mitigate risk and potential liabilities related to our operations. Our insurance
coverage may not be adequate to cover those claims or liabilities, and we may be forced to bear
substantial costs from an accident or incident. These problems could cause our actual results to
differ materially and adversely from those anticipated.
If we are unable to maintain our current financial position and improve our growth prospects, our
business could be adversely affected.
In 2011, we experienced significant expiration of high margin contracts which will impact us in
future years. Sustaining our current financial position and positioning ourselves for growth has
placed significant demands on our management, as well as on our administrative, operational, and
financial resources. For us to continue to sustain our current financial position and position
ourselves for growth, we must continue to improve our operational, financial, and management
information systems, as well as to expand, motivate, and manage our workforce. If we are unable
to maintain our current financial position and position ourselves for growth while maintaining our
quality of service and profit margins, or if new systems that we implement to assist us in
maintaining our current financial position and positioning ourselves for growth, do not produce the
expected benefits, our business, prospects, financial condition, or operating results could be
adversely affected.
Page 20
We may be harmed by intellectual property infringement claims and our failure to protect our
intellectual property could enable competitors to market products and services with similar
features.
We may become subject to claims from our employees or third parties who assert that software and
other forms of intellectual property that we use in delivering services and solutions to our
customers infringe upon intellectual property rights of such employees or third parties. Our
employees develop much of the intellectual property that we use to provide our services and
solutions to our customers, but we also license technology from other vendors. If our employees,
vendors, or other third parties assert claims that we or our customers are infringing on their
intellectual property rights, we could incur substantial costs to defend those claims. In
addition, if any of these infringement claims are ultimately successful, we could be required to:
cease selling or using products or services that incorporate the challenged software or technology;
obtain a license or additional licenses from our employees, vendors, or other third parties; or
redesign our products and services that rely on the challenged software or technology. In
addition, if we are unable to protect our intellectual property, our competitors could market
services or products similar to our services and products, which could reduce demand for our
offerings.
We may be unable to prevent unauthorized parties from attempting to copy or otherwise obtain and
use our technology. Policing unauthorized use of our technology is difficult, and we may not be
able to prevent misappropriation of our technology, particularly in foreign countries where the
laws may not protect our intellectual property as fully as those in the United States. Others,
including our employees, may circumvent the trade secrets and other intellectual property that we
own. Litigation may be necessary to enforce our intellectual property rights, protect our trade
secrets, and determine the validity and scope of the proprietary rights of others. Any litigation
could result in substantial costs and diversion of resources with no assurance of success.
We have substantial investments in recorded goodwill as a result of prior acquisitions, and changes
in future business conditions could cause these investments to become impaired, requiring
substantial write-downs that could reduce our operating income.
As of December 31, 2011, goodwill accounted for approximately $150 million, or approximately 53%,
of our recorded total assets. Under U.S. generally accepted accounting principles (GAAP), we
review our goodwill for impairment at least annually, or when events or changes in circumstances
indicate the carrying value may not be recoverable. If goodwill becomes impaired, we will record a
charge to earnings in our financial statements during the period in which any impairment of our
goodwill is determined, which may significantly reduce or eliminate our profits.
Risks Related to Our Industry
Our U.S. Federal Government contracts may be terminated by the U.S. Federal Government at any time,
and if we do not replace them, our revenue and operating profits may be adversely affected.
We derive most of our revenue from U.S. Federal Government contracts that typically span one or
more base years and one or more option years. U.S. Federal Government Agencies have the right not
to exercise these option periods. In addition, our contracts also contain provisions permitting a
U.S. Federal Government customer to terminate the contract on short notice and for its convenience,
as well as for default. A decision by a U.S. Federal Government Agency not to exercise option
periods or to terminate contracts could result in a reduction of our profitability on these
contracts and significant revenue shortfalls.
If the U.S. Federal Government terminates a contract for convenience, we may recover only our
incurred or committed allowable costs, settlement expenses, and profit on work completed before the
termination. We cannot recover anticipated profit on terminated work. If the U.S. Federal
Government terminates a contract for default, we may not recover even incurred amounts, and instead
may be liable for excess costs incurred by the U.S. Federal
Government in procuring undelivered items and services from another source.
Page 21
U.S. Federal Government contracts contain other provisions that may be unfavorable to us.
U.S. Federal Government contracts contain provisions and are subject to laws and regulations that
give the U.S. Federal Government rights and remedies not typically found in commercial contracts.
These provisions allow the U.S. Federal Government to terminate a contract for convenience or
decline to exercise an option to renew. They also permit the U.S. Federal Government to do the
following:
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reduce or modify contracts or subcontracts; |
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cancel multi-year contracts and related orders if funds for contract performance for any
subsequent year become unavailable; |
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limit our ability to compete for or perform certain other contracts as a result of OCI
clauses; |
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claim rights in products and systems produced by us; and |
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suspend or debar us from doing business with the U.S. Federal Government. |
If the U.S. Federal Government exercises its rights under any of these provisions, our revenue and
operating profits could decline.
Many of our U.S. Federal Government customers spend their procurement budgets through MACs under
which we are required to compete for post-award orders or for which we may not be eligible to
compete and could limit our ability to win new contracts and grow revenue.
Budgetary pressures and reforms in the procurement process have caused many U.S. Federal Government
customers to increasingly purchase goods and services through agency-specific IDIQ contracts, the
GSA Schedule 70 task orders, and other multiple-award and/or GWAC vehicles. These contract
vehicles have resulted in increased competition and pricing pressure, requiring us to make
sustained post-award efforts to realize revenue under the relevant contract vehicle. The U.S.
Federal Governments ability to select multiple winners under multiple-award schedule contracts,
GWACs, blanket purchase agreements, and other agency-specific IDIQ contracts, as well as its right
to award subsequent task orders among such multiple winners, means that there is no assurance that
these multiple-award contracts will result in the actual orders equal to the ceiling value, or
result in any actual orders. We are only eligible to compete for work (task orders and delivery
orders) as a prime contractor pursuant to GWACs already awarded to us. Our failure to compete
effectively in this procurement environment could reduce our revenue. If the U.S. Federal
Government elects to use a contract vehicle that we do not hold a position on, we will not be able
to compete as a prime contractor.
Our business could be adversely affected by delays caused by our competitors protesting major
contract awards received by us, resulting in the delay of the initiation of work.
There is an increasing trend in the number and duration of protests of the major contract awards we
have received in the last several years. The resulting delay in the startup and funding of the
work under these contracts may cause our actual results to differ materially and adversely from
those anticipated. Specifically, the expense and delay that we may face if our competitors protest
or challenge contract awards made to us pursuant to competitive procedures, and the risk that any
such protest or challenge could result in the resubmission of offers, or in termination, reduction,
or modification of the awarded contract, could result in increased cost and reduced profitability.
In addition, most U.S. Federal Government contract awards are subject to protest by competitors.
If specified legal requirements are satisfied, these protests require the U.S. Federal Government
Agency to suspend the contractors performance of the newly awarded contract pending the outcome of
the protest. These protests could also result in a requirement to resubmit bids for the contract
or in the termination, reduction, or modification of the awarded contract.
Page 22
Each of our contract types involves the risk that we could underestimate our costs and incur
losses.
We enter into three types of U.S. Federal Government contracts for our services:
time-and-materials, cost-plus fee, and firm fixed-price. For the year ended December 31, 2011, we
derived approximately 41%, 32%, and 27% of our revenue from time-and-materials, cost-plus fee, and
firm fixed-price contracts, respectively. If we acquire other businesses, our contract mix could
change significantly, depending on the size and contract mix of the acquired businesses.
Each of these types of contracts, to differing degrees, involves the risk that we could
underestimate our cost of performance, which may result in a reduced profit or a loss on the
contract for us. Under time-and-materials contracts, we are reimbursed for labor at negotiated
hourly billing rates and for certain expenses. We assume minimal financial risk on delivery of
time-and-materials contracts because we only assume the risk of performing those contracts at
negotiated hourly rates. However, to perform profitably under time-and-material contracts, we must
be able to staff the contract with appropriately priced individuals. If we cannot find individuals
whose fully-burdened cost is less than the contract value, we will incur a loss on the contract.
Under cost-plus fee contracts, we are reimbursed for allowable costs and paid a fee, which may be
fixed or performance based. To the extent that actual costs incurred in performing a cost-plus fee
contract are within the contract ceiling and allowable under the terms of the contract and
applicable regulations, we are entitled to reimbursement of our costs, plus a profit. However, if
our costs exceed the ceiling or are not allowable under the terms of the contract or applicable
regulations, we may not be able to recover those costs. Under firm fixed-price contracts, we
perform specific tasks for a fixed-price. Compared to time-and-materials and cost-plus fee
contracts, firm fixed-price contracts generally offer higher margin opportunities but involve
greater financial risk because we bear the impact of cost overruns. Because we assume the most
risk for cost overruns and contingent losses on firm fixed-price contracts, an increase in the
percentage of firm fixed-price contracts in our contract mix would increase our risk of suffering
losses.
Our failure to comply with complex procurement laws and regulations could cause us to lose business
and subject us to a variety of penalties.
We must comply with and are affected by laws and regulations relating to the formation,
administration, and performance of U.S. Federal Government contracts, which affect how we do
business with our customers and may impose added costs on us. Among the most significant laws and
regulations are:
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the FAR and agency regulations supplemental to the FAR, which comprehensively regulate
the formation, administration, and performance of U.S. Federal Government contracts; |
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the Truth in Negotiations Act, which requires certification and disclosure of all cost
and pricing data in connection with contract negotiations; |
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the FAR and certain of our U.S. Federal Government contracts contain OCI clauses that
may limit our ability to compete for or perform certain other contracts; |
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compliance with the Foreign Corrupt Practices Act or U.S. export control regulations by
us or our subcontractors; |
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the Cost Accounting Standards and Cost Principles, which impose accounting requirements
that govern our right to reimbursement under certain cost-based U.S. Federal Government
contracts; and |
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laws, regulations, and executive orders restricting the use and dissemination of
information classified for national security purposes and the export of certain products
and technical data. |
Moreover, we are subject to security regulations of the DoD and other Federal Agencies that are
designed to safeguard against foreigners access to classified information. If we were to come
under foreign ownership, control, or influence, our U.S. Federal Government customers could
terminate or decide not to renew our contracts, and our ability to obtain new contracts could be
impaired.
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The U.S. Federal Government may revise its procurement or other practices in a manner adverse to
us.
The U.S. Federal Government may revise its procurement practices or adopt new contracting rules and
regulations, such as cost accounting standards. It could also adopt new contracting methods
relating to GSA contracts, GWACs or other multi-award contracts, or adopt new standards for
contract awards intended to achieve certain social or other policy objectives. In addition, the
U.S. Federal Government may face restrictions from new legislation or regulations, as well as
pressure from U.S. Federal Government employees and their unions, on the nature and amount of
services the U.S. Federal Government may obtain from private contractors. These changes could
impair our ability to obtain new contracts or contracts under which we currently perform when those
contracts are up for recompetition bids. Any new contracting methods could be costly or
administratively difficult for us to implement, and as a result, could harm our operating results.
A realignment of funds with changed U.S. Federal Government priorities, including insourcing of
previously contracted support services, and the realignment of funds to other non-Defense-related
programs may reduce the amount of funds available to defense-related and other programs in our core
service areas.
A preference for set-aside programs such as minority-owned, small, small-disadvantaged businesses,
or other such programs, could affect our ability to be a prime contractor on certain governmental
procurements.
As a result of the Small Business Administration (SBA) set-aside program, the U.S. Federal
Government may decide to restrict certain procurements only to bidders that qualify as
minority-owned, small, small-disadvantaged businesses, or other such programs. As a result, we
would not be eligible to perform as a prime contractor on those programs, as we do not qualify for
such programs, and would be restricted to a maximum of 49% of the work as a subcontractor on those
programs. An increase in the amount of procurements under the SBA set-aside program may affect our
ability to bid on new procurements as a prime contractor or restrict our ability to recompete on
incumbent work that is placed in the set-aside program.
We derive significant revenue from contracts awarded through a competitive procurement process,
which may require significant upfront bid and proposal costs that could negatively affect our
operating results.
We derive significant revenue from U.S. Federal Government contracts that are awarded through a
competitive procurement process. We expect that most of the U.S. Federal Government business we
seek in the foreseeable future will be awarded through competitive processes. Competitive
procurements impose substantial costs and present a number of risks, including the substantial
cost, managerial time, and effort that we spend to prepare bids and proposals for contracts that
may not be awarded to us and could reduce our profitability.
Unfavorable U.S. Federal Government audit results could subject us to a variety of penalties and
sanctions and could harm our reputation and relationships with our customers and impair our ability
to win new contracts.
The U.S. Federal Government, including the Defense Contract Audit Agency (DCAA), audits and reviews
our performance on contracts, pricing practices, cost structure, and compliance with applicable
laws, regulations and standards. The DCAA reviews a contractors internal control system and
policies, including the contractors purchasing, property, estimating, compensation, and management
information systems, and the contractors compliance with such policies. Any costs found to be
improperly allocated to a specific contract will not be reimbursed, while such costs already
reimbursed may be required to be refunded. Adverse findings in a DCAA audit could materially
affect our competitive position and result in a substantial adjustment to our revenue and profit.
If a U.S. Federal Government audit uncovers improper or illegal activities, we may be subject to
civil and criminal penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing
business with U.S. Federal Government Agencies. In addition, we could suffer serious harm to our
reputation and competitive position if allegations of impropriety were made against us, whether or
not true. If our reputation or relationship with U.S. Federal Government Agencies were impaired,
or if the U.S. Federal Government otherwise ceased doing business with us or significantly
decreased the amount of business it does with us, our revenue and operating profit could decline.
Page 24
Other Risks Related to Our Stock
Our stock price is subject to volatility and could decline.
The stock market in general has been highly volatile. As a result, the market price of our Class A
common stock is likely to be similarly volatile, and investors in our Class A common stock may
experience a decrease in the value of their stock, including decreases unrelated to our operating
performance or prospects. The price of our Class A common stock could be subject to wide
fluctuations in response to a number of factors, including those listed in this Risk Factors
section.
In the past, securities class action litigation has, at times, been instituted against companies
following periods of volatility in their stock price. This type of litigation against us could
result in substantial costs and divert our managements attention and resources.
Our quarterly operating results may fluctuate significantly as a result of factors outside of our
control, which could cause the market price of our common stock to decline.
We expect our revenue and operating results to vary from quarter to quarter. As a result, our
operating results may fall below the expectations of securities analysts and investors, which could
cause the price of our common stock to decline. Factors that may affect our operating results
include those listed in this Risk Factors section and others such as:
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changes in contract type and profitability; |
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fluctuations in revenue recognized on contracts; |
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variability in demand for our services and solutions; |
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commencement, completion, or termination of contracts during any particular quarter; |
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timing of award or performance incentive-fee notices; |
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timing of significant bid and proposal costs; |
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timing of acquisition activities and the expensing of acquisition-related costs; |
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variable purchasing patterns under the GSA Schedule 70 task orders, GWACs, blanket
purchase agreements, and other agency-specific IDIQ contracts; |
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strategic decisions by us or our competitors, such as acquisitions, divestitures,
spin-offs, and joint ventures; |
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strategic investments or changes in business strategy; |
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changes in the extent to which we use subcontractors; |
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volume of product orders placed under our NETCENTS contract or other material-related
purchases under our contracts; |
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|
seasonal fluctuations in our staff utilization rates; and |
|
|
|
U.S. Federal Government shutdowns or temporary facility closings. |
Reductions in revenue in a particular quarter could lead to lower profitability during that quarter
because a relatively large amount of our expenses are fixed in the short-term. We may incur
significant operating expenses during the startup and early stages of large contracts and may not
be able to recognize corresponding revenue during that same quarter. We also may incur additional
expenses when contracts expire, are terminated, or are not renewed.
Page 25
In addition, payments due to us from U.S. Federal Government Agencies may be delayed due to billing
cycles or as a result of failures of Government budgets to gain Congressional and administration
approval in a timely manner. The U.S. Federal Governments fiscal year ends September 30. If a
Federal budget for the next Federal fiscal year has not been approved by that date in each year,
our customers may have to suspend engagements that we are working on until a budget has been
approved. Any such suspensions may reduce our revenue during the fourth quarter of that calendar
year or the first quarter of the subsequent year. The U.S. Federal Governments fiscal year-end
can also trigger increased purchase requests from customers for equipment and materials. Any
increased purchase requests we receive as a result of the U.S. Federal Governments fiscal year-end
would serve to increase our third- or fourth-quarter revenue but will generally decrease profit
margins for that quarter, as these activities generally are not as profitable as our typical
offerings.
Mr. Narang, our founder, Chairman and CEO, controls the Company, and his interests may not be
aligned with yours.
As of December 31, 2011, Mr. Narang, our founder, Chairman and CEO, through his beneficial
ownership of 4,700,000 shares of our Class B common stock and 378,946 shares of our Class A common
stock, owned or controlled 85% of the combined voting power and 37% of the outstanding shares of
the common stock. Accordingly, Mr. Narang controls the vote on all matters submitted to a vote of
our stockholders. As long as Mr. Narang beneficially owns the majority of the voting power of our
common stock, he will have the ability without the consent of our public stockholders to
elect all members of our board of directors and to control our management and affairs. Mr.
Narangs voting control may have the effect of preventing or discouraging transactions involving a
change in control, including proxy contests, tender offers, mergers, or other purchases of the
capital stock of the Company, regardless of whether a premium is offered over then-current market
prices.
A substantial number of shares of our common stock are eligible for sale by Mr. Narang, which could
cause our common stock price to decline significantly.
As of December 31, 2011, Mr. Narang beneficially owned 4,700,000 outstanding shares of Class B
common stock and 378,946 shares of Class A common stock of the Company. Mr. Narang may, at his
discretion, sell these shares in the public market, subject to applicable volume restriction and
manner of sale requirements imposed on affiliates under Rule 144 of the Securities Act. The market
price of our common stock could drop significantly if Mr. Narang sells his interests in the Company
or is perceived by the market as intending to sell them.
|
|
|
ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
We lease office facilities used in our business. Our executive offices and principal operations
are located at 11730 Plaza America Drive, Reston, Virginia, where we occupy space under a lease
that expires in 2013. We also lease space located in Alabama, Arizona, California, Illinois,
Maryland, Nebraska, Ohio, Tennessee, Texas, Virginia, and Washington. We have multiple high-level
Sensitive Compartmented Information Facilities (SCIFs). The majority of our employees are located
in facilities provided by the U.S. Federal Government. We do not currently own any real estate
used in the performance of ongoing contracts and maintain flexibility in facility occupancy through
termination and subleasing options concurrent with contract terms in many of our leases. We
believe our facilities meet our current needs and that additional facilities will be available as
needed.
Page 26
|
|
|
ITEM 3. |
|
LEGAL PROCEEDINGS |
From time to time, we are involved in legal proceedings arising in the ordinary course of business.
At this time, the probability is remote that the outcome of any litigation pending will have a
material adverse effect on our financial condition and results of operations.
|
|
|
ITEM 4. |
|
MINE SAFETY DISCLOSURES |
Not applicable.
PART II
|
|
|
ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
Since October 24, 2005, our Class A common stock has been listed on The NASDAQ Global Select Market
under the symbol NCIT. The following table sets forth, for the periods indicated, the high and
low prices of our shares of common stock, as reported on the NASDAQ Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Quarters |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
First |
|
$ |
24.48 |
|
|
$ |
20.01 |
|
|
$ |
32.57 |
|
|
$ |
25.34 |
|
Second |
|
|
25.24 |
|
|
|
21.55 |
|
|
|
29.94 |
|
|
|
20.22 |
|
Third |
|
|
24.25 |
|
|
|
11.26 |
|
|
|
25.24 |
|
|
|
18.15 |
|
Fourth |
|
|
15.15 |
|
|
|
10.77 |
|
|
|
24.26 |
|
|
|
18.15 |
|
There is no established public market for our Class B common stock.
As of February 16, 2012, there were 58 holders of record of our Class A common stock and one holder
of record of our Class B common stock. The number of holders of record of our Class A common stock
is not representative of the number of beneficial holders because many of the shares are held by
depositories, brokers, or nominees. As of February 16, 2012, the closing price of our Class A
common stock was $7.20.
Share Repurchases
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. If shares are repurchased, the shares will 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, our Companys cash needs, borrowing capacity under our credit facility,
interest rates, and the our financial performance and position. We may suspend or discontinue
repurchases at any time. In 2011, we purchased 288,000 shares at an average price of $15.47 per
share for a total purchase price of $4.5 million. We have $20.5 million remaining under the Board
of Directors authorization for shares repurchases.
We did not repurchase any shares in the fourth quarter of 2011.
Page 27
Dividend Policy
We currently intend to retain all future earnings, if any, for use in the operation, development,
and expansion of our business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future. Any future determination as to the declaration and payment of cash dividends
will be at the discretion of our Board of Directors and will depend on then-existing conditions,
business prospects, and any other factors our Board of Directors deems
relevant. Our existing credit facility prohibits us from paying a dividend if, after it is paid,
we will be in default under our credit agreement. In addition, the terms of any future credit
agreement may prevent us from paying any dividends or making any distributions or payments with
respect to our capital stock.
All our assets consist of the stock of our subsidiary. We will need to rely upon dividends and
other payments from our subsidiary to generate the funds necessary to make dividend payments, if
any, on our Class A common stock. However, our subsidiary is legally distinct from us and has no
obligation to pay amounts to us. The ability of our subsidiary to make dividend and other payments
to us is subject to, among other things, the availability of funds, the terms of our subsidiarys
indebtedness, and applicable state laws.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities in the fourth quarter of 2011.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Page 28
Performance Graph
The following graph compares the cumulative total stockholder return on our common stock from
December 31, 2006 through December 31, 2011, with the cumulative total return on (i) the NASDAQ
Composite Total Returns, (ii) the Russell 2000 stock index, and (iii) a peer group composed of
NCI and the following other U.S. Federal Government service providers with whom we compete: CACI
International Inc., Dynamics Research Corporation, ICF International, Inc., and ManTech
International Corporation. In 2011, an affiliate of Providence Equity Partners, L.L.C. purchased
SRA International, Inc. (SRA). Because SRA is no longer a stand-alone company, we removed SRA from
our peer group. The comparison also assumes that all dividends are reinvested and all returns are
market-cap weighted. The historical information set forth below is not necessarily indicative of
future performance.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURNS
AMONG NCI, INC., THE NASDAQ COMPOSITE TOTAL RETURNS, THE RUSSELL 2000 INDEX, AND
U.S. FEDERAL GOVERNMENT SERVICES PEER GROUP
|
|
|
|
|
|
|
December 31, 2011 |
|
NCI, Inc. |
|
$ |
76.21 |
|
NASDAQ CompositeTotal Returns |
|
|
113.16 |
|
Russell 2000 Index |
|
|
100.75 |
|
U.S. Federal Government services peer group |
|
|
98.32 |
|
Page 29
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The following tables set forth the selected consolidated financial data for each of the years
in the five-year period ended December 31, 2011. We derived the selected consolidated financial
data from our audited consolidated financial statements. Prospective investors should read this
selected financial data in conjunction with Item 7Managements Discussion and Analysis of
Financial Condition and Results of Operations and our consolidated financial statements and the
related notes included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 (a) |
|
|
2010 |
|
|
2009(b) |
|
|
2008 (c) |
|
|
2007 (d) |
|
|
|
(in thousands except per share data) |
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
558,261 |
|
|
$ |
581,341 |
|
|
$ |
468,910 |
|
|
$ |
390,596 |
|
|
$ |
304,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
499,398 |
|
|
|
512,779 |
|
|
|
407,322 |
|
|
|
336,473 |
|
|
|
263,679 |
|
General and administrative expenses |
|
|
24,150 |
|
|
|
23,730 |
|
|
|
21,848 |
|
|
|
20,079 |
|
|
|
15,396 |
|
Depreciation and amortization |
|
|
6,732 |
|
|
|
5,054 |
|
|
|
4,228 |
|
|
|
3,660 |
|
|
|
3,012 |
|
Acquisition and integration related expenses |
|
|
1,012 |
|
|
|
|
|
|
|
199 |
|
|
|
|
|
|
|
|
|
Restructuring charge |
|
|
3,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of contingent consideration liability |
|
|
|
|
|
|
|
|
|
|
(2,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
534,431 |
|
|
|
541,563 |
|
|
|
431,312 |
|
|
|
360,212 |
|
|
|
282,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
23,830 |
|
|
|
39,778 |
|
|
|
37,598 |
|
|
|
30,384 |
|
|
|
22,333 |
|
Interest expense, net |
|
|
1,698 |
|
|
|
598 |
|
|
|
657 |
|
|
|
2,026 |
|
|
|
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
22,132 |
|
|
|
39,180 |
|
|
|
36,941 |
|
|
|
28,358 |
|
|
|
20,991 |
|
Provision for income taxes |
|
|
8,974 |
|
|
|
15,309 |
|
|
|
14,784 |
|
|
|
11,318 |
|
|
|
8,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,158 |
|
|
$ |
23,871 |
|
|
$ |
22,157 |
|
|
$ |
17,040 |
|
|
$ |
12,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.96 |
|
|
$ |
1.75 |
|
|
$ |
1.65 |
|
|
$ |
1.28 |
|
|
$ |
0.94 |
|
Diluted |
|
$ |
0.95 |
|
|
$ |
1.72 |
|
|
$ |
1.61 |
|
|
$ |
1.25 |
|
|
$ |
0.93 |
|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
13,675 |
|
|
|
13,621 |
|
|
|
13,452 |
|
|
|
13,362 |
|
|
|
13,335 |
|
Diluted |
|
|
13,830 |
|
|
|
13,878 |
|
|
|
13,775 |
|
|
|
13,633 |
|
|
|
13,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,819 |
|
|
$ |
2,791 |
|
|
$ |
1,193 |
|
|
$ |
1,267 |
|
|
$ |
109 |
|
Net working capital |
|
|
48,786 |
|
|
|
55,684 |
|
|
|
48,073 |
|
|
|
41,146 |
|
|
|
38,563 |
|
Total assets |
|
|
282,614 |
|
|
|
269,478 |
|
|
|
241,651 |
|
|
|
200,333 |
|
|
|
178,746 |
|
Total long-term debt |
|
|
54,000 |
|
|
|
20,023 |
|
|
|
42,094 |
|
|
|
40,220 |
|
|
|
43,318 |
|
Total stockholders equity |
|
|
163,801 |
|
|
|
153,047 |
|
|
|
124,227 |
|
|
|
98,859 |
|
|
|
80,241 |
|
Notes to Five-Year Summary
|
|
|
(a) |
|
Effective April 1, 2011, we acquired AdvanceMed Corporation (AdvanceMed). |
|
(b) |
|
During the third quarter of 2009, we recognized a contingent liability
of $5.3 million as part of the TRS acquisition associated with future
earnout payments. During the fourth quarter of 2009, we and the
previous majority shareholder of TRS entered into negotiations to
terminate the contingent consideration earnout for an immediate cash
payment. Both parties determined it was in the best interest of the
combined entity to eliminate the earnout, and the parties mutually
agreed to the $3 million settlement. Consequently, we recognized a $2.3
million gain on the extinguishment of contingent consideration liability
in 2009. |
|
(c) |
|
Acquisition costs associated with the acquisition of the PEO Soldier
assets were capitalized in accordance with U.S. GAAP in effect at that
time. |
|
(d) |
|
Effective June 27, 2007, we acquired Karta Technologies, Inc. (Karta).
Acquisition costs associated with the acquisition of Karta were
capitalized in accordance with U.S. GAAP in effect at that time. |
Page 30
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our financial statements
and the related notes included elsewhere in this Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties, and assumptions, such as statements
of our plans, objectives, expectations, and intentions. Our actual results could differ materially
from those anticipated in the forward-looking statements. Factors that could cause or contribute
to our actual results differing materially from those anticipated include, but are not limited to,
those discussed in Item 1A. Risk Factors and elsewhere in this Form 10-K.
OVERVIEW
We are a provider of information technology (IT) 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 customers 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 |
|
|
|
Cybersecurity and information assurance |
|
|
|
Software development and systems engineering |
|
|
|
Program management and lifecycle support |
|
|
|
Engineering and logistics |
|
|
|
Health IT and informatics |
|
|
|
Training and simulation |
We generate substantially all 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 Federal Civilian Agencies. The following table shows our revenue from the customer groups
listed as a percentage of total revenue for the period shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Defense and Intelligence Agencies |
|
|
86 |
% |
|
|
92 |
% |
|
|
88 |
% |
Federal Civilian Agencies |
|
|
14 |
|
|
|
8 |
|
|
|
12 |
|
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).
We believe that our contract base is well diversified. As of December 31, 2011, our total contract
backlog was approximately $1.0 billion, of which approximately $220 million 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 that we
believe have a more likely than not probability of being exercised. Our backlog does not include
any estimate of future potential delivery orders that might be awarded under our GWAC,
agency-specific IDIQ, or other multiple-award contract vehicles. 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 funded backlog does not represent the full potential value of our
contracts, as Congress often appropriates funds for a particular program or agency on a quarterly
or yearly basis, even though the contract may provide for the provision of services over a number
of years. We define unfunded backlog as the total backlog less the funded backlog. Unfunded
backlog includes values for contract options that have been priced but not yet funded.
Page 31
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. We 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 of approximately $62.0 million 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.
Revenue
Substantially all of our revenue is derived from services and solutions provided to the U.S.
Federal Government, primarily by our employees and, to a lesser extent, our subcontractors. We
derived approximately 90%, 88%, and 84% of our revenue as a prime contractor for the years ended
2011, 2010, and 2009, respectively.
Contract Types
Our services and solutions are provided under three basic 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Time-and-materials |
|
|
41 |
% |
|
|
55 |
% |
|
|
51 |
% |
Cost-plus fee |
|
|
32 |
|
|
|
14 |
|
|
|
15 |
|
Firm fixed-price |
|
|
27 |
|
|
|
31 |
|
|
|
34 |
|
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 contract from time-and-materials type contract to cost-plus fee type contract in 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
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 firm fixed-price service contracts are firm fixed-price
level-of-effort work, which has a
lower risk than firm fixed-price completion or deliverable contracts, such as software development.
Some of our GWACs include provisions for both services, as well as product (hardware and software)
purchases. Firm fixed-price product sales, such as under our Base Realignment and Closure (BRAC)
and U.S. Air Forces Network Centric Solutions (NETCENTS) task orders, tend to carry lower margins,
but with lower risk as well, because our prices from our vendors are fixed.
Page 32
Operating Expenses
Cost of Revenue
Cost of revenue primarily includes direct costs incurred to provide our services and solutions to
customers. The most significant portion of these costs is salaries and wages, plus associated
fringe benefits, including stock compensation, of our employees directly serving customers, in
addition to the related management, facilities, and infrastructure costs. Cost of revenue also
includes the costs of subcontractors and outside consultants, third-party materials, such as
hardware or software that we purchase and provide to the customer as part of an integrated
solution, and any other related direct costs, such as travel expenses. Because we earn higher
profits on our own labor services, we expect the ratio of cost of revenue as a percentage of
revenue to decline when our labor services mix increases relative to subcontracted labor or
third-party material. Conversely, as subcontracted labor or third-party material purchases for
customers increase relative to our own labor services, we expect the ratio of cost of revenue as a
percentage of revenue to increase. Changes in the mix of services and equipment provided under our
contracts can result in variability in our contract margins. In addition, as we continue to bid
and win larger contracts, our own labor services component could decrease. This is because the
larger contracts typically are broader in scope and require more diverse capabilities, resulting in
more subcontracted labor and the potential for more third-party hardware and software purchases.
While these factors could lead to a higher ratio of cost of revenue as a percentage of revenue, the
economics of these larger jobs are nonetheless generally favorable because they increase revenue,
broaden our customer base, and have a favorable return on invested capital.
General and Administrative Expenses
General and administrative expenses include costs related to corporate business development, bid
and proposal, contracts administration, finance and accounting, legal, corporate governance, and
executive and senior management. The primary items of general and administrative expenses are the
salaries and wages, plus associated fringe benefits, including stock compensation, of our employees
performing these functions, as well as the related facilities related costs.
Depreciation and Amortization
Depreciation includes the depreciation of computers, furniture and other equipment, the
amortization of third-party software we use internally, and leasehold improvements. Amortization
of acquired intangible assets includes the amortization of identifiable, acquired intangible assets
over their estimated useful lives. Non-compete agreements are generally amortized straight line
over the term of the agreement, while contracts and related customer relationships are amortized
proportionately against the acquired backlog.
Acquisition and Integration Related Expenses
Acquisition and integration related expenses include costs related to our acquisitions or potential
acquisitions. These expenses include external professional fees such as accounting, legal,
investment bank, as well as other fees.
Restructuring Charge
Restructuring charges related to our corporate restructuring in December 2011. These expenses
include severance costs and lease costs for space no longer being utilized by us.
Interest Expense, net
Interest income is primarily related to earnings on short-term, highly liquid investments of our
excess cash. Interest
expense is primarily related to interest expense incurred or accrued under our outstanding
borrowings and amortization of deferred financing fees.
Page 33
Results of Operations
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
The following table sets forth certain items from our consolidated statements of income and
expenses for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
|
(as a Percentage of Revenue) |
|
Revenue |
|
$ |
558,261 |
|
|
$ |
581,341 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
499,398 |
|
|
|
512,779 |
|
|
|
89.5 |
|
|
|
88.2 |
|
General and administrative expenses |
|
|
24,150 |
|
|
|
23,730 |
|
|
|
4.3 |
|
|
|
4.1 |
|
Depreciation and amortization |
|
|
6,732 |
|
|
|
5,054 |
|
|
|
1.2 |
|
|
|
0.9 |
|
Acquisition and integration related expenses |
|
|
1,012 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
Restructuring charge |
|
|
3,139 |
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
534,431 |
|
|
|
541,563 |
|
|
|
95.7 |
|
|
|
93.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
23,830 |
|
|
|
39,778 |
|
|
|
4.3 |
|
|
|
6.8 |
|
Interest expense, net |
|
|
1,698 |
|
|
|
598 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
22,132 |
|
|
|
39,180 |
|
|
|
4.0 |
|
|
|
6.7 |
|
Provision for income taxes |
|
|
8,974 |
|
|
|
15,309 |
|
|
|
1.6 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,158 |
|
|
$ |
23,871 |
|
|
|
2.4 |
% |
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue for the year ended December 31, 2011 was $558.3 million, compared to $581.3 million for the
year ended December 31, 2010, representing a decrease of $23.0 million, or 4.0%. This decrease in
revenue is principally due to expiration of approximately $61 million of task orders and contracts
within our core contract base, a reduction of approximately $33 million associated with our core
contract base as a result of reductions in scope of work and lost contract recompetes, and a
reduction in our non-core BRAC programs and NETCENTS materials contract. These factors were
partially offset by increases in other program revenue derived from the acquisition of AdvanceMed,
our PEO Soldier program, and increases from new and existing contracts.
Our PEO Soldier contract accounted for approximately $86.0 million and $79.5 million of our revenue
in 2011 and 2010, respectively. This represented 15.4% and 13.7% of our revenue in 2011 and 2010,
respectively.
Cost of revenue
Cost of revenue for the year ended December 31, 2011 was $499.4 million, or 89.5% of revenue,
compared to $512.8 million, or 88.2% of revenue, for the year ended December 31, 2010. The
decrease in cost of revenue was attributable to a reduction in revenue. The increase of cost of
revenue as a percentage of revenue was primarily due to lower gross margin on our PEO Soldier
contract as a result of it moving from a time-and-materials contract type to a cost-plus contract
type and losses incurred on certain fixed-price contracts.
General and administrative expenses
General and administrative expenses for the year ended December 31, 2011 were $24.2 million, or
4.3% of revenue, compared to $23.7 million, or 4.1% of revenue, for the year ended December 31,
2010. The increase was due to higher indirect support expenses such as, higher indirect support
salaries and associated benefits, partially offset by a decrease in bid and proposal costs.
Page 34
Depreciation and amortization
Depreciation and amortization for the years ended December 31, 2011 and 2010 was $6.7 million and
$5.1 million, respectively. The year-over-year increase was due primarily to the added
depreciation expense associated with the assets acquired through the AdvanceMed acquisition.
Acquisition and integration related expenses
During 2011, we incurred $1.0 million in acquisition and integration related expenses to acquire
AdvanceMed.
Restructuring charge
During the fourth quarter of 2011, we incurred $3.1 million relating to a reduction in force and
leased space costs. The restructuring charge includes estimates for rents relating to leased space
which we are no longer using but we are subject to lease obligations in the amount of $2.6 million.
Severance costs for the terminated employees were approximately $0.5 million.
Operating income
For the year ended December 31, 2011, operating income was $23.8 million, or 4.3% of revenue,
compared to $39.8 million, or 6.8% of revenue, for the year ended December 31, 2010. Operating
income and margin were lower for the year ended December 31, 2011 as compared to the year ended
December 31, 2010 for the reasons discussed above.
Interest expense, net
For the year ended December 31, 2011, net interest expense was $1.7 million compared to $0.6
million for the year ended December 31, 2010. 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 2011, we had a weighted average
outstanding loan balance of $63.1 million and a weighted average borrowing rate of approximately
2.3%. During 2010, we had a weighted average outstanding loan balance of $30.9 million and a
weighted average borrowing rate of approximately 1.3%.
Provision for Income taxes
For the year ended December 31, 2011, our provision for income taxes was 40.5% of our income before
tax. This is an increase from 39.1% of our income before tax for the year ended December 31, 2010.
The increase was principally attributable to an increase in permanent tax differences and an
increase in the aggregate state tax rate.
Page 35
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
The following table sets forth certain items from our consolidated statements of income and
expenses for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
|
(as a Percentage of Revenue) |
|
Revenue |
|
$ |
581,341 |
|
|
$ |
468,910 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
512,779 |
|
|
|
407,322 |
|
|
|
88.2 |
|
|
|
86.9 |
|
General and administrative expenses |
|
|
23,730 |
|
|
|
21,848 |
|
|
|
4.1 |
|
|
|
4.7 |
|
Depreciation and amortization |
|
|
5,054 |
|
|
|
4,228 |
|
|
|
0.9 |
|
|
|
0.9 |
|
Acquisition and integration related expenses |
|
|
|
|
|
|
199 |
|
|
|
|
|
|
|
|
|
Gain on extinguishment of contingent
consideration liability |
|
|
|
|
|
|
(2,285 |
) |
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
541,563 |
|
|
|
431,312 |
|
|
|
93.2 |
|
|
|
92.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
39,778 |
|
|
|
37,598 |
|
|
|
6.8 |
|
|
|
8.0 |
|
Interest expense, net |
|
|
598 |
|
|
|
657 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
39,180 |
|
|
|
36,941 |
|
|
|
6.7 |
|
|
|
7.9 |
|
Provision for income taxes |
|
|
15,309 |
|
|
|
14,784 |
|
|
|
2.6 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,871 |
|
|
$ |
22,157 |
|
|
|
4.1 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue for the year ended December 31, 2010 was $581.3 million, compared to $468.9 million for the
year ended December 31, 2009, representing an increase of $112.4 million, or 24.0%. The increase
in revenue was due to new contract and task order awards and growth on existing contracts. New
contract awards consisted primarily of numerous new task order awards under our ITES-2S, NETCENTS,
TEIS (which includes BRAC), and PEO Soldier contracts. The additional revenue on these and other
contracts was partially offset by a reduction in revenue from expired contracts and lower orders
under the NETCENTS contract.
Our PEO Soldier contract accounted for approximately $79.5 million and $47.0 million of our revenue
in 2010 and 2009, respectively. This represented 13.7% and 10.0% of our revenue in 2011 and 2010,
respectively.
Cost of revenue
Cost of revenue for the year ended December 31, 2010 was $512.8 million, or 88.2% of revenue,
compared to $407.3 million, or 86.9% of revenue, for the year ended December 31, 2009. The
increase was due to approximately $16.1 million in higher direct labor and associated indirect
expenses, such as fringe benefits, and approximately $87.2 million in additional subcontractor
support, IT product costs, and other direct costs incurred under our contracts. These increases
are the result of new contract and task order awards and growth on existing contracts. The
increase in cost of revenue as a percentage of revenue is due to the increase in material-related
sales which carry a lower margin.
General and administrative expenses
General and administrative expenses for the year ended December 31, 2010 were $23.7 million, or
4.1% of revenue, compared to $21.8 million, or 4.7% of revenue, for the year ended December 31,
2009. General and administrative expenses as a percentage of revenue declined as we continue to
leverage our corporate infrastructure expenses over a larger revenue base. The increase in general
and administrative expenses is due to higher bid and proposal costs, increased software maintenance
fees relating to our new Enterprise Resource Planning (ERP) system implemented during 2010,
partially offset by a decrease in executive and other senior management overhead.
Page 36
Depreciation and amortization
Depreciation and amortization years ended December 31, 2010 and 2009 was $5.1 million and $4.2
million, respectively. The increase primarily was the result of the new ERP system implemented
during 2010.
Acquisition and integration related expenses
During 2009, we incurred $0.2 million in acquisition and integration related expenses to acquire
TRS Consulting Inc. (TRS).
Gain on extinguishment of contingent consideration liability
During the third quarter of 2009, we recognized a contingent liability of $5.3 million as part of
the TRS acquisition associated with future earnout payments. During the fourth quarter of 2009, we
and the previous majority shareholder of TRS entered into negotiations to terminate the contingent
consideration earnout for an immediate cash payment. The rationale for terminating the earnout was
based primarily on the operational issues around maintaining detailed financial information to
monitor the earnout, and the business impact due to the inability to leverage TRS resources into
our business areas without negatively affecting the achievement of the earnout targets, and the
attractive discount on the potential liability to settle the earnout early. The earnout potential
was $6 million and had a fair value of $5.3 million, which was recorded as a liability at the time
of the TRS acquisition. Both parties determined it was in the best interest of the combined entity
to eliminate the earnout, and the parties mutually agreed to the $3 million settlement, 50% of the
potential earnout payment. Consequently, we recognized a $2.3 million gain on the extinguishment
of contingent consideration liability in 2009.
Operating income
For the year ended December 31, 2010, operating income was $39.8 million, or 6.8% of revenue,
compared to $37.6 million, or 8.0% of revenue, for the year ended December 31, 2009. Operating
margin primarily decreased because our 2009 operating margin included $2.3 million from the gain
associated with the extinguishment of the contingent consideration related to our TRS acquisition
and due to the increase in material-related sales which typically carry a lower margin.
Interest expense, net
For the year ended December 31, 2010, net interest expense was $0.6 million compared to $0.7
million for the year ended December 31, 2009. The decrease in interest expense was the result of a
lower weighted average outstanding loan balance and lower borrowing rate. During 2010, we had a
weighted average outstanding loan balance of $30.9 million and a weighted average borrowing rate of
approximately 1.3%. During 2009, we had a weighted average outstanding loan balance of $36.6
million and a weighted average borrowing rate of approximately 1.5%.
Provision for Income taxes
For the year ended December 31, 2010, our provision for income taxes was 39.1% of our income before
tax. This is a decrease from 40.0% of our income before tax for the year ended December 31, 2009.
The decrease was principally attributable to a reduction in state income taxes as a result of
corporate restructuring which occurred in the first quarter of 2010.
Effects of Inflation
We generally have been able to price our contracts in a manner to accommodate the rates of
inflation experienced in recent years. During 2011, approximately 41% of our revenue was generated
under time-and-materials contracts, where labor rates are usually adjusted annually by
predetermined escalation factors. Also during 2011, approximately 32% of our revenue was generated
under cost-plus fee contracts, which automatically adjust for changes in cost. The remaining 27%
of our revenue was generated under firm fixed-price contracts, in which we include a predetermined
escalation factor and for which we generally have not been adversely affected by inflation.
Page 37
Contract Backlog
As of December 31, 2011 and 2010, our backlog was $1.0 billion and $1.3 billion, respectively, of
which $220 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.
In 2011, we experienced significant reductions in contract backlog as a result of reductions in
scope of work and lost contract recompetes, among other factors.
Trends in Revenue and Operating Margin
Revenue
We expect our revenue to decline in 2012 as compared to 2011, due to the completion of our BRAC
related and other noncore programs, the expiration of task orders and contracts within our core
contract base, the reduction in scope on certain contracts and lost contract recompetes, among
other factors, including shifting budget priorities of the U.S. Federal Government as described
more fully under Item 1. Business Market Opportunity Current Market Environment above. We
do not expect that revenue derived from new business in 2012 will meaningfully offset the reduction
in revenue.
Operating Margin
We expect our operating margin to decline in 2012 as compared to 2011, due to increased costs
related to investment in business development resources to support organic growth, and the
decreased absorption of our indirect costs on the lower revenue base.
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.
On April 1, 2011, we acquired AdvanceMed for $63.3 million in cash. The transaction was funded
through borrowings under our existing credit facility and cash on hand. During 2011, the balance
of accounts receivable decreased by $37.6 million to $95.1 million at the end of the year. Days
sales outstanding of accounts receivable (DSO) increased 5 days to 76 days at December 31, 2011 as
compared to 71 days at December 31, 2010.
As of December 31, 2011, there was $54.0 million due under the credit facility, reflecting
borrowings of $62.0 million for the AdvanceMed acquisition, $20.0 million outstanding as of
December 31, 2010, and $28.0 million of net repayments during 2011.
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. If shares are repurchased, the shares will 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, our Companys cash needs, borrowing capacity under our
credit facility, interest rates, and our financial performance and position. We may suspend or
discontinue repurchases at any time. During 2011, we purchased 288,000 shares at an average price
of $15.47 per share for a total purchase price of $4.5 million. We have $20.5 million remaining
under the Board of Directors authorization for share repurchases.
Page 38
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 amount
of our outstanding senior debt 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 our 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.
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 December 31, 2011, the spread above LIBOR was 225 basis points and thus, the loan
accrued interest at 2.5%.
The credit facility contains various restrictive covenants that, among other things, restrict our
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 us
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 December 31, 2011, we were in compliance with all our loan covenants.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2011 that require us
to make future cash payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
13 |
|
|
35 |
|
|
More than |
|
Contractual obligations: |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
|
(in thousands) |
|
Credit facility |
|
$ |
54,000 |
|
|
$ |
|
|
|
$ |
54,000 |
|
|
$ |
|
|
|
$ |
|
|
Operating lease obligations |
|
|
14,786 |
|
|
|
6,090 |
|
|
|
6,044 |
|
|
|
2,555 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68,786 |
|
|
$ |
6,090 |
|
|
$ |
60,044 |
|
|
$ |
2,555 |
|
|
$ |
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 39
Critical Accounting Policies
Revenue Recognition
Our revenue recognition policy addresses our three different types of contractual arrangements:
time-and-materials contracts; cost-plus fee contracts; and firm fixed-price contracts.
Time-and-Materials Contracts: Revenue for time-and-materials contracts is recognized as services
are performed, generally on the basis of contract allowable labor hours worked multiplied by the
contract defined billing rates, plus the direct costs and indirect cost burdens associated with
materials and other direct expenses used in performance on the contract. Profits on
time-and-material contracts result from the difference between the cost of services performed and
the contract-defined billing rates for these services.
Cost-plus Fee Contracts: Generally, revenue on cost-plus fee contracts is recognized as services
are performed, based on the allowable costs incurred during the period, plus any recognizable
earned fee. The Company does not recognize award-fee income until the
fees are fixed or
determinable. Due to such timing, and to fluctuations in the level of revenue, profit as a
percentage of revenue on award-fee contracts will fluctuate period to period.
Firm Fixed-price Contracts: Revenue recognition methods on firm fixed-price contracts will vary
depending on the nature of the work and the contract terms. Revenue on firm fixed-price service
contracts is recognized as services are performed. Generally, revenue is deferred until all of the
following have occurred: (1) there is a contract in place, (2) delivery has occurred, (3) the price
is fixed or determinable, and (4) collectability is reasonably assured. Revenue on firm
fixed-price contracts that require delivery of specific items is recognized based on a price per
unit as units are delivered. Revenue for firm fixed-price contracts in which we are paid a
specific amount to provide services for a stated period of time is recognized ratably over the
service period. Profits related to contracts accounted for under this method may fluctuate from
period to period, particularly in the early phases of the contract. Anticipated losses on
contracts accounted for under this method are recognized as incurred.
Revenue on certain firm fixed-price contracts where we are designing, engineering, or manufacturing
to the customers specifications is recognized on the percentage-of-completion method of
accounting, generally using costs incurred in relation to total estimated costs to measure progress
toward completion. Profits on firm fixed-price contracts result from the difference between the
incurred costs and the revenue earned. Contract accounting requires significant judgment relative
to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and
technical issues. Due to the size and nature of many of our contracts, the estimation of total
revenue and cost at completion requires the use of estimates. Contract costs include material,
labor, and subcontracting costs, as well as an allocation of allowable indirect costs. Assumptions
have to be made regarding the length of time to complete the contract because costs also include
expected increases in wages and prices for materials. For contract change orders, claims or
similar items, we apply judgment in estimating the amounts and assessing the potential for
realization. These amounts are only included in contract value when they can be reliably estimated
and realization is considered probable. Estimates of total contract revenue and costs are
continuously monitored during the term of the contract and are subject to revision as the contract
progresses. Anticipated losses on contracts accounted for under the percentage-of-completion
method of accounting are recognized in the period they are deemed probable and can be reasonably
estimated.
Our contracts may include the delivery of a combination of one or more of our service offerings
(e.g., a combination of hardware components, related integration or other services). Each
deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate unit
of accounting if both of the following criteria are met: (1) the delivered item or items have value
to the customer on a standalone basis and (2) for an arrangement that includes a general right of
return relative to the delivered item(s), delivery or performance of the undelivered item(s) is
considered probable and substantially in our control. We consider a deliverable to have standalone
value if we sell this item separately or if the item is sold by another vendor or could be resold
by the customer. Further, our revenue arrangements generally do not include a general right of
return relative to delivered products. Deliverables not meeting the criteria for being a separate
unit of accounting are combined with a deliverable that does meet that criterion. The appropriate
allocation of arrangement consideration and recognition of revenue is then determined for the
combined unit of accounting.
Page 40
In situations where we determine that our arrangements with multiple elements should be treated as
separate units of accounting, we allocate revenue to each element of the arrangement based on the
following hierarchy: (1) vendor-specific objective evidence of fair value (VSOE); (2) relevant
third-party evidence of selling price (TPE); or (3) managements best estimate of selling price.
Most often in our arrangements where we believe we can separate deliverables, VSOE and TPE do not
exist and we allocate revenue to any separate deliverables based on our best estimate of selling
price. In making this estimate, we consider all reasonably available information, including both
market data and conditions and entity-specific factors. Further, such estimate will vary depending
on the unique facts and circumstances of each contractual arrangement and deliverable.
Goodwill and the Amortization of Intangible Assets
Net tangible and identifiable intangible assets acquired and liabilities assumed are recognized at
their estimated fair values at the date of acquisition. At the time of the acquisition, all
intangibles, including contracts and related customer relationships and non-compete agreements, are
reviewed to determine the term of amortization for each intangible asset.
Goodwill is reviewed for impairment no less than annually or when circumstances change that would
more likely than not reduce the fair value of goodwill below its carrying amount. Annually on
October 1, and when circumstances dictate, we perform a fair value analysis of our reporting unit.
If goodwill becomes impaired, we will record a charge to earnings in our financial statements in
the period in which any impairment of our goodwill is determined. During 2010, the Company
performed a fair value analysis of its reporting unit as of October 1. During 2011, we reviewed
Goodwill for impairment as of October 1, 2011 and December 5, 2011 after our restructuring charge.
As of each measurement date, we determined goodwill was not impaired.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset many not be fully recoverable. An impairment loss is recognized if the
sum of the long-term undiscounted cash flows is less than the carrying amount of the long-lived
asset being evaluated. Any write-downs are treated as permanent reductions in the carrying amount
of the assets and will result in a reduction of earnings in the period incurred.
Contract rights are amortized proportionately against the acquired backlog. Non-compete agreements
are amortized over their estimated useful lives.
Our acquisitions to date have been treated as asset purchases under the Internal Revenue Code. As
such, the goodwill generated from those acquisitions is deductible for tax purposes. For the year
ended December 31, 2011, the tax deduction was $9.2 million. At our tax rate of 40.5%, this
deduction saved us approximately $3.7 million in current income tax expenditures. As of December
31, 2011, we have approximately $110 million in future goodwill tax deductions. As previously
noted, goodwill is not deducted for book purposes. Consequently, as we deduct the goodwill for tax
purposes, we are increasing our deferred tax liabilities.
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market risk relates to changes in interest rates for borrowings under our credit
facility. For the year ended December 31, 2011, a 1% change in interest rates would have changed
our interest expense and cash flows by approximately $0.6 million. This estimate is based on our
average loan balances for the year.
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 (i.e., 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.
Page 41
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements of NCI, Inc. are included in this report beginning on page
F-1.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
The Company has had no disagreements with its independent accountants on accounting principles,
practices, or financial statement disclosure during and through the date of the financial
statements included in this Report.
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate disclosure controls and
procedures and internal control over financial reporting. Disclosure controls and procedures are
designed to provide reasonable assurance that information required to be disclosed in the Companys
reports filed or submitted under the Securities Exchange Act of 1934, such as this Annual Report on
Form 10-K, is recorded, processed, summarized, and reported within the time periods specified in
the SECs rules and forms. Disclosure controls and procedures are also designed to provide
reasonable assurance that such information is accumulated and communicated to the Companys
management, including the Companys Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Internal control over financial reporting is a process designed by, or under the supervision of,
the Companys Chief Executive Officer and Chief Financial Officer, and effected by the Companys
management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with GAAP and includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the Companys assets; |
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that the Companys
receipts and expenditures are being made only in accordance with authorizations of
management and the Companys Board of Directors; and |
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material adverse
effect on the Companys financial statements. |
Limitations on the Effectiveness of Controls
Management, including the Companys Chief Executive Officer and Chief Financial Officer, do not
expect that the Companys disclosure controls and procedures or the Companys internal control over
financial reporting will prevent all errors or all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by managements override of the control. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all
potential
future conditions; over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and
not be detected. We believe we have designed our disclosure controls and procedures to provide a
reasonable level of assurance.
Page 42
Scope of the Assessments
The assessment by the Companys Chief Executive Officer and the Companys Chief Financial Officer
of the Companys disclosure controls and procedures and the assessment by our management of our
internal control over financial reporting included a review of procedures and discussions with
other employees in the Companys organization. In the course of the assessments, management sought
to identify data errors, control problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken. Management used the
framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) to assess the effectiveness of our internal control
over financial reporting. The assessments of the Companys disclosure controls and procedures is
done on a periodic basis, so the conclusions can be reported each quarter on the Companys
Quarterly Reports on Form 10-Q, including the Companys Annual Report on Form 10-K with respect to
the fourth quarter. Our internal control over financial reporting is also assessed on an ongoing
basis by management and other personnel in the Companys accounting department. We consider the
results of these various assessment activities as we monitor our disclosure controls and procedures
and internal control over financial reporting and when deciding to make modifications as necessary.
Managements intent in this regard is that the disclosure controls and procedures and the internal
control over financial reporting will be maintained and updated (including improvements and
corrections) as conditions warrant.
Evaluation of the Effectiveness of Disclosure Controls and Procedures
Based upon the evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of December 31, 2011, the Companys disclosure controls and procedures were
effective at a reasonable level of assurance.
Managements Report on Internal Controls Over Financial Reporting
Management is responsible for establishing and maintaining adequate control over financial
reporting. Management used the criteria issued by COSO in Internal ControlIntegrated Framework
to assess the effectiveness of our internal control over financial reporting. Based upon the
assessments, our management has concluded that as of December 31, 2011, our internal control over
financial reporting was effective. Our independent registered public accounting firm has issued an
attestation report on the effectiveness of our internal control over financial reporting, which is
included elsewhere in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
The Company made no change to its internal control over financial reporting in the three months
ended December 31, 2011, that has materially affected, or is reasonably likely to materially
affect, its internal control over financial reporting.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
Entry into a Material Compensatory Arrangement
On
March 9, 2012, NCI, Inc. (NCI or the Company) entered into separate change in control and
severance agreements (the Agreement) with each of the following executives: Brian J. Clark,
President, Marco de Vito, Chief Operating Officer, Lucas J. Narel, Chief Financial Officer, and
Michele R. Cappello, General Counsel (the Executives).
The terms of each agreement are summarized below.
The initial term of the Agreement is through December 31, 2012. The term is automatically renewed
for successive one year periods unless, not later than September 30, NCI or the Executive to this
Agreement has given notice to the other that the Agreement shall not be extended; provided,
however, that if a Change in Control or Potential Change in Control (each as defined in the
Agreement) has occurred during the term of the Agreement, the Agreement shall continue in effect
until the later of 36 months beyond the month in which the latest Change in Control occurred or the
next December 31 that is at least 18 months after the latest occurrence of a Potential Change in
Control unless earlier terminated as described below.
Upon a Change in Control, any outstanding unvested equity awards shall automatically vest and all
restrictions on such awards shall automatically lapse. All other severance and benefits have been
structured as double trigger events. The severance benefits are paid only if, during the term
and either within 36 months after a Change in Control or within a Potential Change in Control
Period (as defined in the Agreement), (i) the Executives employment is terminated by the Company
or any successor to the Company for any reason other than Cause (as defined in the Agreement), or
(ii) the Executive terminates his or her employment due to Good Reason (as defined in the
Agreement) (a Qualifying Termination).
Upon a Qualifying Termination, the Company will pay Executive the following:
(i) |
|
any accrued and unpaid salary, bonus, expense reimbursements, and vacation pay; and |
(ii) |
|
a cash amount equal to the sum of the following amounts: (a) two times the higher of
Executives annual base salary and Target Bonus in effect immediately prior to the
occurrence of the event or circumstance upon which the termination is based or Executives
annual base salary in effect immediately prior to the Change in Control; and (b) a
pro-rated amount of the aggregate amount of the Executives annual bonus opportunity at the
target level for the year in which the termination is made under the annual incentive plan
applicable to Executive as in effect immediately prior to the occurrence of the event or
circumstances giving rise to the termination, determined by multiplying your target level
bonus amount by a fraction, the numerator of which is the number of days in the annual
performance measurement period through the date of termination and the denominator of which
is 365. |
In addition, upon a Qualifying Termination, the Executive will also receive continuation under the
terms provided to similarly situated active employees, at no cost to Executive, of life, medical
and dental insurance coverage in which Executive (or your dependents) was participating as of the
date of termination (subject to such modifications as shall be established for all employees of the
Company) until the earliest of: (a) the 18 month anniversary of Executives date of termination;
(b) the date Executive first breaches the Release Agreement or any restrictive covenant hereunder
or in any employment or other agreement with the Company which survives termination of Executives
employment; or (c) the date Executive becomes eligible for comparable benefits under a similar
welfare benefit plan of a successor employer.
The Agreement also provides that the Company will gross-up any severance payments to the extent the
payments would be subject to an excise tax imposed under Section 4999 of the Internal Revenue Code
or any similar federal, state or local tax that may be imposed.
To receive the various benefits described above, the Executive must sign and not revoke a one year
non-competition agreement and a general release of claims.
Page 43
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE |
The information concerning our directors and executive officers required by Item 401 of Regulation
S-K is included under the captions Election of Directors and Executive Compensation,
respectively, in our definitive Proxy Statement to be filed with the SEC in connection with our
2012 Annual Meeting of Stockholders (the 2012 Proxy Statement), and that information is
incorporated by reference in this Form 10-K.
The information required by Item 405 of Regulation S-K concerning compliance with Section 16(a) of
the Exchange Act is included under the caption Section 16(a) Beneficial Ownership Reporting
Compliance in our 2012 Proxy Statement, and that information is incorporated by reference in this
Form 10-K.
The information required by Item 406 of Regulation S-K concerning the Companys Code of Ethics is
included under the caption Election of Directors in our 2012 Proxy Statement, and that
information is incorporated by reference in this Form 10-K.
The information required by Item 407(c)(3) of Regulation S-K concerning the procedures by which
Company stockholders may recommend nominees to the Companys Board of Directors is included under
the caption Election of Directors in our 2012 Proxy Statement, and that information is
incorporated by reference in this Form 10-K.
The information required by Item 407(d)(4) of Regulation S-K concerning the Audit Committee is
included under the caption Report of the Audit Committee of the Board of Directors in our 2012
Proxy Statement, and that information is incorporated by reference in this Form 10-K.
The information required by Item 407(d)(5) of Regulation S-K concerning the designation of an audit
committee financial expert is included under the caption Report of the Audit Committee of the
Board of Directors in our 2012 Proxy Statement, and that information is incorporated by reference
in this Form 10-K.
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information required by this Item 11 is included in the text and tables under the caption
Executive Compensation in our 2012 Proxy Statement, and that information is incorporated by
reference in this Form 10-K.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The information required by this Item 12 is included under the captions Beneficial Ownership and
Equity Compensation Plan Information in our 2012 Proxy Statement, and that information is
incorporated by reference in this Form 10-K.
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item 13 is included under the captions Election of Directors and
Certain Relationships and Related Transactions in our 2012 Proxy Statement, and that information
is incorporated by reference in this Form 10-K.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item 14 is included under the caption Ratification of Appointment
of Independent Registered Public Accounting Firm in our 2012 Proxy Statement, and that information
is incorporated by reference in this Form 10-K.
Page 44
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
|
(a) |
|
The following documents are filed as a part of this annual report on Form 10-K: |
Report of Independent Registered Public Accounting Firm On Internal Controls Over Financial
Reporting
Report of Independent Registered Public Accounting Firm On The Consolidated Financial Statements
Consolidated Statements of Income for the years ended December 31, 2011, 2010, and 2009
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Changes in Stockholders Equity for the years ended December 31,
2011, 2010, and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010, and 2009
Notes to Consolidated Financial Statements
|
F. |
|
Exhibits required by Item 601 of Regulation S-K: |
|
|
|
|
|
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. 2005 Performance Incentive Plan (incorporated herein by reference from Exhibit 4.2 to registrants Registration
Statement on Form S-1 (File No. 333-127006), as filed with the Commission on July 29, 2005). |
|
4.3* |
|
|
Form of 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement (incorporated herein by
reference from Exhibit 4.4 to registrants Registration Statement on Form S-1 (File No. 333-127006), as filed with the
Commission on October 20, 2005, as amended). |
|
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). |
|
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 9, 2012, by and among, NCI, Inc., and Brian J. Clark. |
|
10.3*
|
|
|
Executive Change in Control and Severance Agreement, dated March 9, 2012, by and among, NCI, Inc., and Marco F. de Vito. |
|
10.4*
|
|
|
Executive Change in Control and Severance Agreement, dated March 9, 2012, by and among, NCI, Inc., and Michele R. Cappello. |
|
10.5*
|
|
|
Executive Change in Control and Severance Agreement, dated March 9, 2012, by and among, NCI, Inc., and Lucas J. Narel. |
|
21.1 |
|
|
Subsidiaries of Registrant |
|
23.1 |
|
|
Consent of Ernst & Young LLP. |
|
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. |
|
(b) |
|
Exhibits. The exhibits required by this Item are listed under Item 15(a)(3). |
Page 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
NCI, Inc.
Registrant
|
|
Date: March 9, 2012 |
By: |
/s/ CHARLES K. NARANG
|
|
|
|
Charles K. Narang |
|
|
|
Chairman and Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
date indicated. Each person whose signature appears below hereby constitutes and appoints each of
Charles K. Narang and Lucas J. Narel as his attorney-in-fact and agent, with full power of
substitution and resubstitution for him in any and all capacities, to sign, any or all amendments
to this report and to file same, with exhibits thereto and other documents in connection therewith,
granting unto such attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary in connection with such matters and hereby ratifying
and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be
done by virtue hereof.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ BRIAN J. CLARK
Brian J. Clark
|
|
President and Director
|
|
March 9, 2012
|
|
|
|
|
|
/s/ LUCAS J. NAREL
Lucas J. Narel
|
|
Executive Vice President, Chief Financial Officer and Treasurer
|
|
March 9, 2012
|
|
|
|
|
|
/s/ JAMES P. ALLEN
James P. Allen
|
|
Director
|
|
March 9, 2012
|
|
|
|
|
|
/s/ TERRY W. GLASGOW
Terry W. Glasgow
|
|
Director
|
|
March 9, 2012
|
|
|
|
|
|
/s/ JOHN E. LAWLER
John E. Lawler
|
|
Director
|
|
March 9, 2012
|
|
|
|
|
|
/s/ PAUL V. LOMBARDI
Paul V. Lombardi
|
|
Director
|
|
March 9, 2012
|
|
|
|
|
|
/s/ J. PATRICK MCMAHON
J. Patrick McMahon
|
|
Director
|
|
March 9, 2012
|
|
|
|
|
|
/s/ PHILIP O. NOLAN
Philip O. Nolan
|
|
Director
|
|
March 9, 2012
|
|
|
|
|
|
/s/ STEPHEN L. WAECHTER
Stephen L. Waechter
|
|
Director
|
|
March 9, 2012
|
|
|
|
|
|
/s/ DANIEL R. YOUNG
Daniel R. Young
|
|
Director
|
|
March 9, 2012
|
Page 46
INDEX TO FINANCIAL STATEMENTS
NCI, INC.
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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F-8 |
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F-1
Report of Independent Registered Public Accounting Firm
On Internal Controls Over Financial Reporting
The Board of Directors and Stockholders of NCI, Inc.
We have audited NCI, Inc.s internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). NCI, Inc.s management
is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Controls Over Financial Reporting. Our responsibility
is to express an opinion on the companys internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, NCI, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of NCI, Inc. as of December 31, 2011 and
2010, and the related consolidated statements of operations, changes in stockholders equity and
cash flows for each of the three years in the period ended December 31, 2011 of NCI, Inc., and our
report dated March 9, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, VA
March 9, 2012
F-2
Report of Independent Registered Public Accounting Firm
On The Consolidated Financial Statements
The Board of Directors and Stockholders of NCI, Inc.
We have audited the accompanying consolidated balance sheets of NCI, Inc. as of December 31, 2011
and 2010, and the related consolidated statements of operations, stockholders equity and cash
flows for each of the three years in the period ended December 31, 2011. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of NCI, Inc. at December 31, 2011 and 2010, and the
consolidated results of its operations and its cash flows for each of the three years in the period
ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), NCI, Inc.s internal control over financial reporting as of December 31,
2011, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 9, 2012
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, VA
March 9, 2012
F-3
NCI, Inc.
Consolidated Statements of Income
(in thousands, except per share amounts)
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Year ended December 31, |
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2011 |
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2010 |
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2009 |
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Revenue |
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$ |
558,261 |
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$ |
581,341 |
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$ |
468,910 |
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Operating expenses: |
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Cost of revenue |
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499,398 |
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512,779 |
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407,322 |
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General and administrative expenses |
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24,150 |
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23,730 |
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21,848 |
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Depreciation and amortization |
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6,732 |
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5,054 |
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4,228 |
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Acquisition and integration related expenses |
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1,012 |
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199 |
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Restructuring charge |
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3,139 |
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Gain on extinguishment of contingent consideration liability |
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(2,285 |
) |
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Total operating expenses |
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534,431 |
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541,563 |
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431,312 |
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Operating income |
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23,830 |
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39,778 |
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37,598 |
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Interest expense, net |
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1,698 |
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598 |
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657 |
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Income before income taxes |
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22,132 |
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39,180 |
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36,941 |
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Provision for income taxes |
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8,974 |
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15,309 |
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14,784 |
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Net income |
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$ |
13,158 |
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$ |
23,871 |
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$ |
22,157 |
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Earnings per common and common equivalent share: |
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Basic: |
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Weighted average shares outstanding |
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13,675 |
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13,621 |
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13,452 |
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Net income per share |
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$ |
0.96 |
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$ |
1.75 |
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$ |
1.65 |
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Diluted: |
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Weighted average shares outstanding |
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13,830 |
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13,878 |
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13,775 |
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Net income per share |
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$ |
0.95 |
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$ |
1.72 |
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$ |
1.61 |
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The accompanying notes are an integral
part of these consolidated financial statements
F-4
NCI, Inc.
Consolidated Balance Sheets
(in thousands, except par value)
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As of December 31, |
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2011 |
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2010 |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
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$ |
2,819 |
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$ |
2,791 |
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Accounts receivable, net |
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95,075 |
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132,693 |
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Deferred tax assets, net |
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4,152 |
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4,547 |
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Prepaid expenses and other current assets |
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3,159 |
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3,347 |
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Total current assets |
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105,205 |
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143,378 |
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Property and equipment, net |
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15,495 |
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11,751 |
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Other assets |
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1,875 |
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1,590 |
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Intangible assets, net |
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9,717 |
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6,179 |
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Goodwill |
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150,322 |
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106,580 |
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Total assets |
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$ |
282,614 |
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$ |
269,478 |
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Liabilities and stockholders equity: |
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Current liabilities: |
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Accounts payable |
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$ |
30,018 |
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$ |
61,046 |
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Accrued salaries and benefits |
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18,717 |
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20,229 |
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Deferred revenue |
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1,987 |
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2,951 |
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Other accrued expenses |
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5,697 |
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3,468 |
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Total current liabilities |
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56,419 |
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87,694 |
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Long-term debt |
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54,000 |
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20,000 |
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Deferred tax liabilities, net |
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6,165 |
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|
7,450 |
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Other long-term liabilities |
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2,229 |
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|
1,287 |
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Total liabilities |
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118,813 |
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|
116,431 |
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Stockholders equity: |
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Class A common stock, $0.019 par
value37,500 shares authorized; 9,163
shares issued and 8,875 shares
outstanding as of December 31, 2011, and
8,469 shares issued and outstanding as
of December 31, 2010 |
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174 |
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|
161 |
|
Class B common stock, $0.019 par
value12,500 shares authorized; 4,700
shares issued and outstanding as of December 31,
2011 and 5,200 shares issued and
outstanding as of December 31, 2010 |
|
|
89 |
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|
99 |
|
Additional paid-in capital |
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|
69,937 |
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|
67,889 |
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Treasury stock at cost 288 and 0
shares of Class A commons stock as of
December 31, 2011 and 2010, respectively |
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(4,455 |
) |
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Retained earnings |
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|
98,056 |
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|
|
84,898 |
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|
|
|
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Total stockholders equity |
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|
163,801 |
|
|
|
153,047 |
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|
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|
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Total liabilities and stockholders equity |
|
$ |
282,614 |
|
|
$ |
269,478 |
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The accompanying notes are an integral
part of these consolidated financial statements
F-5
NCI, Inc.
Consolidated Statements of Changes in Stockholders Equity
(in thousands)
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Class A |
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Class B |
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Additional |
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Class A |
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Total |
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|
common stock |
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|
common stock |
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Paid-in |
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Retained |
|
|
Treasury Stock |
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Stockholders |
|
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|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
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Capital |
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Earnings |
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|
Shares |
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Amount |
|
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Equity |
|
Balance at December 31, 2008 |
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|
8,206 |
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|
$ |
156 |
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|
|
5,200 |
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|
$ |
99 |
|
|
$ |
59,734 |
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|
$ |
38,870 |
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$ |
|
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|
$ |
98,859 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
22,157 |
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|
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|
|
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|
22,157 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
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|
1,784 |
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|
|
|
|
|
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|
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|
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|
1,784 |
|
Exercise of stock options |
|
|
82 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
1,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,019 |
|
Net excess tax benefits
of stock option exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
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|
Balance at December 31, 2009 |
|
|
8,288 |
|
|
$ |
158 |
|
|
|
5,200 |
|
|
$ |
99 |
|
|
$ |
62,943 |
|
|
$ |
61,027 |
|
|
|
|
|
|
$ |
|
|
|
$ |
124,227 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,871 |
|
|
|
|
|
|
|
|
|
|
|
23,871 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,607 |
|
Exercise of stock options |
|
|
181 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
2,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,933 |
|
Net excess tax benefits
of stock option exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
8,469 |
|
|
$ |
161 |
|
|
|
5,200 |
|
|
$ |
99 |
|
|
$ |
67,889 |
|
|
$ |
84,898 |
|
|
|
|
|
|
$ |
|
|
|
$ |
153,047 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,158 |
|
|
|
|
|
|
|
|
|
|
|
13,158 |
|
Conversion of Class B
common stock to Class A
common stock |
|
|
500 |
|
|
|
10 |
|
|
|
(500 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
165 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,800 |
|
Exercise of stock options |
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261 |
|
Net excess tax benefits
of stock option exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
Purchase of Class A
common stock for Treasury |
|
|
(288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288 |
|
|
|
(4,455 |
) |
|
|
(4,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
|
8,875 |
|
|
$ |
174 |
|
|
|
4,700 |
|
|
$ |
89 |
|
|
$ |
69,937 |
|
|
$ |
98,056 |
|
|
|
288 |
|
|
$ |
(4,455 |
) |
|
$ |
163,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements
F-6
NCI, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,158 |
|
|
$ |
23,871 |
|
|
$ |
22,157 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,732 |
|
|
|
5,054 |
|
|
|
4,228 |
|
Loss (Gain) on sale and disposal of property and equipment |
|
|
84 |
|
|
|
(85 |
) |
|
|
2 |
|
Stock compensation expense |
|
|
1,800 |
|
|
|
1,607 |
|
|
|
1,784 |
|
Deferred income taxes |
|
|
(982 |
) |
|
|
3,290 |
|
|
|
1,038 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
50,353 |
|
|
|
(22,666 |
) |
|
|
(16,617 |
) |
Prepaid expenses and other assets |
|
|
324 |
|
|
|
(1,765 |
) |
|
|
191 |
|
Accounts payable |
|
|
(32,314 |
) |
|
|
18,713 |
|
|
|
9,531 |
|
Accrued expenses |
|
|
(2,908 |
) |
|
|
(947 |
) |
|
|
(3,113 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
36,247 |
|
|
|
27,072 |
|
|
|
19,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(2,775 |
) |
|
|
(6,218 |
) |
|
|
(4,622 |
) |
Proceeds from sale of property and equipment |
|
|
19 |
|
|
|
141 |
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
|
(63,327 |
) |
|
|
|
|
|
|
(17,953 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(66,083 |
) |
|
|
(6,077 |
) |
|
|
(22,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility |
|
|
201,152 |
|
|
|
119,349 |
|
|
|
113,719 |
|
Repayments on credit facility |
|
|
(167,152 |
) |
|
|
(141,349 |
) |
|
|
(111,719 |
) |
Financing costs paid |
|
|
|
|
|
|
(669 |
) |
|
|
|
|
Principal payments under capital lease obligations |
|
|
(23 |
) |
|
|
(70 |
) |
|
|
(127 |
) |
Proceeds from exercise of stock options |
|
|
261 |
|
|
|
2,933 |
|
|
|
1,019 |
|
Excess tax deduction from exercise of stock options |
|
|
81 |
|
|
|
409 |
|
|
|
408 |
|
Purchases of Class A common stock |
|
|
(4,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
29,864 |
|
|
|
(19,397 |
) |
|
|
3,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
28 |
|
|
|
1,598 |
|
|
|
(74 |
) |
Cash and cash equivalents, beginning of year |
|
|
2,791 |
|
|
|
1,193 |
|
|
|
1,267 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
2,819 |
|
|
$ |
2,791 |
|
|
$ |
1,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,798 |
|
|
$ |
646 |
|
|
$ |
712 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
11,589 |
|
|
$ |
12,690 |
|
|
$ |
13,374 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements
F-7
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
1. Business Overview
NCI provides IT and professional services and solutions by leveraging our eight core service
offerings: enterprise systems management; network engineering; cybersecurity and information
assurance; software development and systems engineering; program management 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.
Substantially all 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.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of wholly-owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated in consolidation.
Basis of Presentation
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Substantially all of the Companys revenue is derived from services and solutions provided to the
U.S. Federal Government, primarily by Company employees and, to a lesser extent, subcontractors.
The Company generates its revenue from three different types of contractual arrangements:
time-and-materials contracts; cost-plus fee contracts; and firm fixed-price contracts.
Revenue for time-and-materials contracts is recognized as services are performed, generally on the
basis of contract allowable labor hours worked multiplied by the contract defined billing rates,
plus the direct costs and indirect cost burdens associated with materials and other direct expenses
used in performance on the contract. Profits on time-and-materials contracts result from the
difference between the cost of services performed and the contract-defined billing rates for these
services.
Generally, revenue on cost-plus fee contracts is recognized as services are performed, based on the
allowable costs incurred in the period, plus any recognizable earned fee. The Company does not
recognize award-fee income until the fees are fixed or determinable. Due to such timing, and to
fluctuations in the level of revenue, profit as a percentage of revenue on award-fee contracts will
fluctuate period to period.
Revenue recognition methods on firm fixed-price contracts will vary depending on the nature of the
work and the contract terms. Revenue on firm fixed-price service contracts is recognized as
services are performed. Generally, revenue is deferred until all the following have occurred: (1)
there is a contract in place, (2) delivery has occurred, (3) the price is fixed or determinable,
and (4) collectability is reasonably assured. Revenue on firm fixed-price contracts that require
delivery of specific items is recognized based on a price per unit as units are delivered. Revenue
for firm fixed-price contracts in which the Company is paid a specific amount to provide services
for a stated period of time is recognized ratably over the service period.
F-8
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
Profits related to contracts accounted for under this method may fluctuate from period to period,
particularly in the early phases of the contract. Anticipated losses on contracts accounted for
under this method are recognized as incurred.
Revenue on certain firm fixed-price contracts where the Company is designing, engineering, or
manufacturing to the customers specifications is recognized on the percentage-of-completion method
of accounting, generally using costs incurred in relation to total estimated costs to measure
progress toward completion. Profits on firm fixed-price contracts result from the difference
between the incurred costs and the revenue earned. Contract accounting requires significant
judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions
for schedule and technical issues. Due to the size and nature of many of the Companys contracts,
the estimation of total revenue and cost at completion requires the use of estimates. Contract
costs include material, labor, and subcontracting costs, as well as an allocation of allowable
indirect costs. Assumptions have to be made regarding the length of time to complete the contract
because costs also include expected increases in wages and prices for materials. For contract
change orders, claims or similar items, the Company applies judgment in estimating the amounts and
assessing the potential for realization. These amounts are only included in contract value when
they can be reliably estimated and realization is considered probable. Estimates of total contract
revenue and costs are continuously monitored during the term of the contract and are subject to
revision as the contract progresses. Anticipated losses on contracts accounted for under the
percentage-of-completion method are recognized in the period they are deemed probable and can be
reasonably estimated.
Our contracts may include the delivery of a combination of one or more of the Companys service
offerings (e.g., a combination of hardware components, related integration or other services).
Each deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate
unit of accounting if both of the following criteria are met: (1) the delivered item or items have
value to the customer on a standalone basis and (2) for an arrangement that includes a general
right of return relative to the delivered item(s), delivery or performance of the undelivered
item(s) is considered probable and substantially in our control. We consider a deliverable to have
standalone value if we sell this item separately or if the item is sold by another vendor or could
be resold by the customer. Further, our revenue arrangements generally do not include a general
right of return relative to delivered products. Deliverables not meeting the criteria for being a
separate unit of accounting are combined with a deliverable that does meet that criterion. The
appropriate allocation of arrangement consideration and recognition of revenue is then determined
for the combined unit of accounting.
In situations where we determine that our arrangements with multiple elements should be treated as
separate units of accounting, we allocate revenue to each element of the arrangement based on the
following hierarchy: (1) vendor-specific objective evidence of fair value (VSOE); (2) relevant
third-party evidence of selling price (TPE); or (3) managements best estimate of selling price.
Most often in our arrangements where we believe we can separate deliverables, VSOE and TPE do not
exist and we allocate revenue to any separate deliverables based on our best estimate of selling
price. In making this estimate, we consider all reasonably available information, including both
market data and conditions and entity-specific factors. Further, such estimate will vary depending
on the unique facts and circumstances of each contractual arrangement and deliverable.
Cash and Cash Equivalents
The Company considers cash on deposit and all highly liquid investments with original maturities of
three months or less to be cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at face amount, less an allowance for doubtful accounts. The
Company maintains an allowance for doubtful accounts at an amount that it estimates to be
sufficient to cover the risk of collecting less than full payment on receivables. On a quarterly
basis, the Company reevaluates its receivables, especially receivables that are past due, and
reassesses the allowance for doubtful accounts primarily based on specific customer collection
issues.
F-9
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
Property and Equipment
Property, equipment, and leasehold improvements are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives, which range from three to seven years for
furniture and equipment, over the shorter of the lease term or the useful lives for leasehold
improvements, and 30 years for real property.
Long-Lived Assets (Excluding Goodwill)
A review of long-lived assets for impairment is performed annually or when events or changes in
circumstances indicate the carrying value of such assets may not be recoverable. If an indicator
of impairment is present, the Company compares the estimated undiscounted future cash flows to be
generated by the asset to its carrying amount. If the undiscounted future cash flows are less than
the carrying amount of the asset, the Company records an impairment loss equal to the excess of the
assets carrying amount over its fair value. Any write-downs are treated as permanent reductions
in the carrying amount of the assets. Based on the analysis performed, the Company determined that
there were no such impairments, nor indicators of impairments, for such assets during 2011 or 2010.
Intangible Assets
Intangible assets consist of acquisition-related contracts and customer relationships and
non-compete agreements. Contract and customer relationships are amortized over the expected
backlog life based on projected cash flows, which are proportionate to acquired backlog, or
generally between three to 11 years. Non-compete agreements are amortized over their contractual
life, which is between three to five years.
Goodwill
Goodwill is reviewed for impairment annually or when events or changes in circumstances indicate
the carrying value of such assets may not be recoverable. The Company has one reporting unit. On
October 1 each year, the Company performs a fair value analysis of its reporting unit. If goodwill
becomes impaired, the Company would record a charge to earnings in our financial statements during
the period in which any impairment of our goodwill is determined. During 2010, the Company
performed a fair value analysis of its reporting unit as of October 1.During 2011, the Company
performed a fair value analysis of its reporting unit as of October 1 and additionally as of
December 5, after our restructuring charge. Based on the analysis performed, the Company
determined that there were no such impairments for goodwill during 2011 or 2010.
Common Stock
Holders of Class A common stock are entitled to one vote for each share held of record, and holders
of Class B common stock are entitled to 10 votes for each share held of record, except with respect
to any going private transaction, as to which each share of Class A common stock and Class B
common stock are both entitled to one vote per share. The Class A common stock and the Class B
common stock vote together as a single class on all matters submitted to a vote of stockholders,
including the election of directors, except as required by law. Holders of the Companys common
stock do not have cumulative voting rights in the election of directors. Each share of Class B
common stock is convertible into one share of Class A common stock at any time at the option of the
Class B stockholder, and in certain other circumstances. During 2011, the Class B common stock
holder transferred ownership of 500,000 shares of Class B common stock to the control of an
unrelated party for estate planning purposes. This transfer resulted in the conversion of the
Class B common stock to Class A common stock.
Holders of common stock are entitled to receive, when and if declared by the Board of Directors
from time to time, such dividends and other distributions in cash, stock or property from the
Companys assets or funds legally available for such purposes. Each share of Class A common stock
and Class B common stock is equal with respect to dividends and other distributions in cash, stock
or property, except that in the case of stock dividends, only shares of Class A common stock will
be distributed with respect to the Class A common stock and only shares of Class B common stock
will be distributed with respect to Class B common stock.
F-10
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
Segment Information
Management has concluded that the Company operates in one segment based upon the information used
by management in evaluating the performance of its business and allocating resources and capital.
Income Taxes
We periodically assess our tax filing exposures related to periods that are open to examination.
Based on the latest available information, we evaluate tax positions to determine whether the
position will more likely than not be sustained upon examination by the applicable tax authorities.
The Company recognizes liabilities for uncertain tax positions on open tax years when it is more
likely than not that a tax position will not be sustained upon examination and settlement with
various taxing authorities. Liabilities for uncertain tax positions are measured at the Companys
best estimate of the taxes ultimately expected to be paid. If we determine that the tax position
is more likely than not to be sustained, we record the largest amount of benefit that is more
likely than not to be realized when the tax position is settled. If we cannot reach that
determination, no benefit is recorded. We record interest and penalties related to income taxes as
Interest Expense and General and Administrative Expenses in the Consolidated Statement of
Operations, respectively.
3. Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted earnings per share reflects
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 includes the incremental
effect of stock options calculated using the treasury stock method. For the years ended December
31, 2011, 2010, and 2009, approximately 241,000, 125,000, and 33,000 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 years ended December 31, 2011, 2010, and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands, except per share data) |
|
Net Income |
|
$ |
13,158 |
|
|
$ |
23,871 |
|
|
$ |
22,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic shares outstanding during the period |
|
|
13,675 |
|
|
|
13,621 |
|
|
|
13,452 |
|
Dilutive effect of stock options after application of treasury stock method |
|
|
155 |
|
|
|
257 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding during the period |
|
|
13,830 |
|
|
|
13,878 |
|
|
|
13,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.96 |
|
|
$ |
1.75 |
|
|
$ |
1.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.95 |
|
|
$ |
1.72 |
|
|
$ |
1.61 |
|
F-11
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
4. Major Customers
The Company earned substantially all of its revenue from the U.S. Federal Government for each of
the years ended December 31, 2011, 2010, and 2009. During 2011 and 2010, the Companys PEO Soldier
contract accounted for revenue in the amounts of $86.0 million and $79.5 million, respectively.
Revenue by customer for each of the three years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Defense and Intelligence Agencies |
|
$ |
478,299 |
|
|
|
85.7 |
% |
|
$ |
534,987 |
|
|
|
92.0 |
% |
|
$ |
411,646 |
|
|
|
87.8 |
% |
Federal Civilian Agencies |
|
|
79,962 |
|
|
|
14.3 |
|
|
|
46,354 |
|
|
|
8.0 |
|
|
|
57,264 |
|
|
|
11.9 |
|
5. Accounts Receivable (in thousands)
Accounts receivable consist of billed and unbilled amounts at December 31, 2011 and 2010, as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2011 |
|
|
2010 |
|
Billed receivables |
|
$ |
41,905 |
|
|
$ |
51,611 |
|
Unbilled receivables: |
|
|
|
|
|
|
|
|
Amounts billable at end of period |
|
|
34,196 |
|
|
|
61,500 |
|
Other |
|
|
19,564 |
|
|
|
20,280 |
|
|
|
|
|
|
|
|
Total unbilled receivables |
|
|
53,760 |
|
|
|
81,780 |
|
|
|
|
|
|
|
|
Total accounts receivable |
|
|
95,665 |
|
|
|
133,391 |
|
Less: allowance for doubtful accounts |
|
|
590 |
|
|
|
698 |
|
|
|
|
|
|
|
|
Total accounts receivable, net |
|
$ |
95,075 |
|
|
$ |
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
year.
The following table details the Allowance for Doubtful Accounts for the years ended December 31,
2011, 2010, and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Balance at beginning of period |
|
$ |
698 |
|
|
$ |
1,059 |
|
|
$ |
1,020 |
|
Charged to expense |
|
|
200 |
|
|
|
385 |
|
|
|
88 |
|
Deductions |
|
|
(308 |
) |
|
|
(746 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
590 |
|
|
$ |
698 |
|
|
$ |
1,059 |
|
|
|
|
|
|
|
|
|
|
|
6. Property and Equipment (in thousands)
The following table details property and equipment at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2011 |
|
|
2010 |
|
Property and equipment |
|
|
|
|
|
|
|
|
Furniture and equipment |
|
$ |
22,496 |
|
|
$ |
17,855 |
|
Leasehold improvements |
|
|
6,963 |
|
|
|
5,287 |
|
Real property |
|
|
549 |
|
|
|
549 |
|
|
|
|
|
|
|
|
|
|
|
30,008 |
|
|
|
23,691 |
|
Less: Accumulated depreciation and amortization |
|
|
14,513 |
|
|
|
11,940 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
15,495 |
|
|
$ |
11,751 |
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2011, 2010, and 2009 was $4.2 million,
$2.7 million, and
$2.1 million, respectively.
F-12
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
7. Intangible Assets (in thousands)
The following table details intangible assets at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2011 |
|
|
2010 |
|
Contract and customer relationships |
|
$ |
20,987 |
|
|
$ |
14,942 |
|
Less: Accumulated amortization |
|
|
11,365 |
|
|
|
8,994 |
|
|
|
|
|
|
|
|
|
|
|
9,622 |
|
|
|
5,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
|
2,038 |
|
|
|
2,038 |
|
Less: Accumulated amortization |
|
|
1,943 |
|
|
|
1,807 |
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
9,717 |
|
|
$ |
6,179 |
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2011, 2010, and 2009 was $2.5 million,
$2.4 million, and $2.1 million, respectively. Future amortization expense related to intangible
assets is expected to be as follows:
|
|
|
|
|
For the year ending December 31, |
|
|
|
|
2012 |
|
$ |
2,216 |
|
2013 |
|
|
1,920 |
|
2014 |
|
|
1,862 |
|
2015 |
|
|
1,178 |
|
2016 |
|
|
616 |
|
Thereafter |
|
|
1,925 |
|
8. Goodwill (in thousands)
The following table details the changes in the balances of goodwill for each period:
|
|
|
|
|
Balance as of December 31, 2009 |
|
$ |
106,580 |
|
Balance as of December 31, 2010 |
|
|
106,580 |
|
Purchase of AdvanceMed |
|
|
43,742 |
|
|
|
|
|
Balance as of December 31, 2011 |
|
$ |
150,322 |
|
|
|
|
|
For a discussion of the AdvanceMed purchase and goodwill added during 2011, see Note 13
AdvanceMed Acquisition.
9. Restructuring Charge (in thousands)
During December 2011, management committed to, implemented, and completed a restructuring plan.
The restructuring was done to reduce costs through downsizing our existing work force and physical
locations.
F-13
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
The activity and balance of the restructuring liability accounts for the year ended December 31,
2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Lease and |
|
|
|
|
|
|
and Related |
|
|
Facilities Exit |
|
|
|
|
|
|
Costs |
|
|
Costs |
|
|
Total |
|
Balance as of January 1, 2011 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Restructuring costs |
|
|
451 |
|
|
|
2,688 |
|
|
|
3,139 |
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
|
(87 |
) |
|
|
(111 |
) |
|
|
(198 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011 |
|
$ |
364 |
|
|
$ |
2,577 |
|
|
$ |
2,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts contained in balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued salaries and benefits |
|
$ |
364 |
|
|
$ |
|
|
|
$ |
364 |
|
Other accrued expenses |
|
|
|
|
|
|
1,050 |
|
|
|
1,050 |
|
Other long-term liabilities |
|
|
|
|
|
|
1,527 |
|
|
|
1,527 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
364 |
|
|
$ |
2,577 |
|
|
$ |
2,941 |
|
|
|
|
|
|
|
|
|
|
|
The accrued amounts related to severance will be paid in 2012. The accrued amounts related to
the lease and facilities exit costs will be reduced over the respective lease terms, the longest of
which extends through 2017.
10. Other Accrued Expenses (in thousands)
Other accrued expenses consist of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2011 |
|
|
2010 |
|
Accrued health claims |
|
$ |
1,833 |
|
|
$ |
1,525 |
|
Deferred rent, current |
|
|
757 |
|
|
|
695 |
|
Restructuring charge, current |
|
|
1,050 |
|
|
|
|
|
Other accrued expenses |
|
|
2,057 |
|
|
|
1,248 |
|
|
|
|
|
|
|
|
Total other accrued expenses |
|
$ |
5,697 |
|
|
$ |
3,468 |
|
|
|
|
|
|
|
|
11. Leases
The Company leases office space and equipment under operating leases that expire on various dates
through March 31, 2017. Several of the leases contain escalation clauses ranging from 2.5% to 5.0%
per year, which are reflected in the amounts below.
Minimum lease payments under the Companys non-cancelable operating leases are as follows:
|
|
|
|
|
|
|
Operating |
|
|
|
leases |
|
|
|
(in thousands) |
|
For the year ending December 31, |
|
|
|
|
2012 |
|
$ |
6,090 |
|
2013 |
|
|
3,977 |
|
2014 |
|
|
2,067 |
|
2015 |
|
|
1,534 |
|
2016 |
|
|
1,021 |
|
Thereafter |
|
|
97 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
14,786 |
|
|
|
|
|
The Company incurred rent expense including amortization of deferred rent expense, under
operating leases of $7.9 million, $5.9 million, and $6.6 million for the years ended December 31,
2011, 2010, and 2009, respectively.
F-14
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
12. 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. For a discussion of share repurchases, see Note
14. Stock Repurchase.
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 outstanding senior funded debt to EBITDA, adjusted for acquisitions.
For the years ending December 31, 2011, 2010, and 2009, NCI had a weighted average outstanding loan
balance of $63.1, $30.9, and $36.6 million, respectively, and a weighted average borrowing rate of
2.3%, 1.3%, and 1.5%, respectively.
As of December 31, 2011, the outstanding balance under the credit facility was $54.0 million with
an incremental borrowing rate of LIBOR plus 225 basis points, or 2.5%. 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 December 31, 2011 and 2010, the Company was in
compliance with all of its loan covenants.
13. Acquisitions
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 its 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. Since the acquisition date, revenue from AdvanceMed, included in the
consolidated statements of income, was approximately $47.3 million for the period ended December
31, 2011. We are in the process of integrating AdvanceMed into the rest of the Company, including
its operational and indirect support personnel. Due to the resulting changes in our indirect cost
structure pursuant to Federal contracting regulations, it is impracticable to provide earnings
information for AdvanceMed.
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 expenses
through December 31, 2011 were approximately $1.0 million.
F-15
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
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.
Preliminary Allocation of Purchase Price (in thousands)
Estimated fair values of purchased assets and liabilities assumed:
|
|
|
|
|
Accounts receivable |
|
$ |
12,701 |
|
Property and equipment |
|
|
5,330 |
|
Definite-lived intangible assets |
|
|
6,045 |
|
Other assets |
|
|
421 |
|
Goodwill |
|
|
43,742 |
|
Less liabilities assumed |
|
|
(4,912 |
) |
|
|
|
|
|
|
$ |
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 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 are considered for subsequent adjustment. The Company is in the process of
finalizing the valuation 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.
F-16
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
Unaudited Pro Forma Information (in thousands)
Except as otherwise provided, 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:
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
Revenue |
|
$ |
576,197 |
|
|
$ |
628,631 |
|
Operating income |
|
|
23,793 |
|
|
|
41,826 |
|
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.
TRS Acquisition
Effective July 31, 2009, the Company completed the acquisition of 100% of the equity interests of
TRS Consulting, Inc. (TRS). TRS is a provider of high-end IT and software development services to
the Intelligence community. NCI acquired TRS to expand NCIs presence in Intelligence Community.
The Company paid approximately $17.1 million in cash at closing. In addition, the purchase
agreement for the acquisition of TRS provided for contingent consideration.
During the third quarter of 2009, we recognized a contingent liability of $5.3 million as part of
the TRS acquisition associated with future earnout payments. During the fourth quarter of 2009, we
and the previous majority shareholder of TRS entered into negotiations to terminate the contingent
consideration earnout for an immediate cash payment. The rationale for terminating the earnout was
based primarily on the operational issues around maintaining detailed financial information to
monitor the earnout, and the business impact due to the inability to leverage TRS resources into
other NCI business areas without negatively affecting the achievement of the earnout targets, and
the attractive discount on the potential liability to settle the earnout early. The earnout
potential was $6 million and had a fair value of $5.3 million, which was recorded as a liability at
the time of the TRS acquisition. Both parties determined it was in the best interest of the
combined entity to eliminate the earnout and the parties mutually agreed to the $3 million
settlement, 50% of the potential earnout payment. Consequently, we recognized a $2.3 million gain
on the extinguishment of contingent consideration liability during the year ended December 31,
2009.
14. 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 2011, NCI purchased 288,000 shares at an average price of $15.47 per share for a total
purchase price of $4.5 million. The Company has $20.5 million authorized for additional shares
repurchases.
F-17
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
15. Performance Incentive Plan
The Board of Directors of the Company has adopted The Amended and Restated 2005 Performance
Incentive Plan (the Plan), which has been approved by the Companys stockholders. As of December
31, 2011, the Plan has reserved 3,800,000 shares of Class A common stock for issuance, which
increases annually by 100,000 shares. The Plan provides for the grant of incentive stock options
and non-qualified stock options, and the grant or sale of restricted shares of common stock to the
Companys directors, employees, and consultants. The Compensation Committee of the Company
administers the Plan.
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2011 |
|
|
|
(in thousands) |
|
Shares reserved under the plan |
|
|
3,800 |
|
|
|
|
|
|
Shares vested and options exercised |
|
|
1,347 |
|
Restricted shares and options outstanding |
|
|
1,529 |
|
|
|
|
|
|
|
|
|
|
Shares available for future grants |
|
|
924 |
|
|
|
|
|
Share-Based Payments
Compensation expense for all stock-based awards is measured at fair value on the date of grant and
recognition of compensation expense is recorded over the service period for awards expected to
vest. The Company determines the fair value of our stock options using the Black-Scholes-Merton
valuation model. The application of the Black-Scholes-Merton model to the valuation of options
requires the use of input assumptions, including expected volatility, expected term, expected
dividend yield, and expected risk-free interest rate.
Assumptions Used in Fair Value determination
The following weighted-average assumptions were used for option grants made during the years ended
December 31, 2011, 2010, and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Expected Volatility |
|
|
47 |
% |
|
|
46 |
% |
|
|
47 |
% |
Expected Term (in years) |
|
|
4.7 |
|
|
|
5.4 |
|
|
|
5.3 |
|
Risk-free Interest Rate |
|
|
1.53 |
% |
|
|
2.12 |
% |
|
|
2.15 |
% |
Dividend Yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
Expected Volatility. The expected volatility of the Companys shares was estimated
based upon the historical volatility of the Companys share price. |
|
|
|
Expected Term. Because the Company does not have significant historical data on
employee exercise behavior, we are using the Simplified Method as defined under SEC Staff
Accounting Bulletin No. 110 to calculate the expected term. The simplified method is
calculated by averaging the vesting period and contractual term of the option. |
|
|
|
Risk-free Interest Rate. The Company bases the risk-free interest rate used in the
Black-Scholes-Merton valuation method on the implied yield available on a U.S. Treasury
note with a term equal to the expected term of the underlying grants. |
|
|
|
Dividend Yield. The Black-Scholes-Merton valuation model calls for a single expected
dividend yield as an input. The Company has not paid dividends in the past nor does it
expect to pay dividends in the future. |
F-18
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
Stock Options Activity
The following table summarizes stock option and restricted stock activity for the period January 1,
2009 through December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Restricted Stock |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
Number of |
|
|
Average |
|
|
Number of |
|
|
Weighted- |
|
|
|
Options |
|
|
Exercise Price |
|
|
Restricted Shares |
|
|
Average |
|
|
|
(in thousands) |
|
|
per Share |
|
|
(in thousands) |
|
|
Fair Value |
|
Outstanding at January 1, 2009 |
|
|
978 |
|
|
$ |
13.20 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
213 |
|
|
|
28.42 |
|
|
|
|
|
|
|
|
|
Forfeited/cancelled |
|
|
(14 |
) |
|
|
15.10 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(82 |
) |
|
|
12.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
1,095 |
|
|
$ |
16.21 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
265 |
|
|
|
26.98 |
|
|
|
|
|
|
|
|
|
Forfeited/cancelled |
|
|
(81 |
) |
|
|
24.69 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(181 |
) |
|
|
16.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
1,098 |
|
|
$ |
18.18 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
373 |
|
|
|
18.87 |
|
|
|
175 |
|
|
|
18.03 |
|
Forfeited/cancelled |
|
|
(78 |
) |
|
|
25.63 |
|
|
|
(10 |
) |
|
|
14.50 |
|
Exercised/vested |
|
|
(29 |
) |
|
|
9.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011 |
|
|
1,364 |
|
|
$ |
18.14 |
|
|
|
165 |
|
|
$ |
18.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes stock option vesting and unvested options for the period
January 1, 2009 through December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Restricted Stock |
|
|
|
Number of |
|
|
Weighted- |
|
|
Number of |
|
|
Weighted- |
|
|
|
Options |
|
|
Average |
|
|
Restricted Shares |
|
|
Average |
|
|
|
(in thousands) |
|
|
Fair Value |
|
|
(in thousands) |
|
|
Fair Value |
|
Unvested January 1, 2009 |
|
|
471 |
|
|
$ |
7.04 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
213 |
|
|
|
12.61 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(236 |
) |
|
|
6.99 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(14 |
) |
|
|
6.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested December 31, 2009 |
|
|
434 |
|
|
$ |
9.81 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested December 31, 2009 |
|
|
661 |
|
|
$ |
4.79 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
265 |
|
|
|
11.99 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(161 |
) |
|
|
9.01 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(81 |
) |
|
|
10.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested December 31, 2010 |
|
|
457 |
|
|
$ |
11.17 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested December 31, 2010 |
|
|
641 |
|
|
$ |
5.16 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
373 |
|
|
|
7.79 |
|
|
|
175 |
|
|
|
18.03 |
|
Vested |
|
|
(171 |
) |
|
|
9.55 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(66 |
) |
|
|
10.80 |
|
|
|
(10 |
) |
|
|
14.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested December 31, 2011 |
|
|
593 |
|
|
$ |
9.07 |
|
|
|
165 |
|
|
$ |
18.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested December 31, 2011 |
|
|
771 |
|
|
$ |
5.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
The following table summarizes stock options outstanding at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Intrinsic Value |
|
|
Weighted-Average |
|
|
|
|
|
|
|
Range of |
|
Number of |
|
|
Average |
|
|
Outstanding |
|
|
Remaining |
|
|
Options |
|
|
Intrinsic Value |
|
exercise prices |
|
Options |
|
|
Exercise Price |
|
|
Options |
|
|
Contractual Life |
|
|
exercisable |
|
|
Vested Options |
|
|
|
(in thousands) |
|
|
|
|
|
|
(in thousands) |
|
|
(in years) |
|
|
(in thousands) |
|
|
(in thousands) |
|
$1.00 $7.00 |
|
|
191 |
|
|
$ |
6.52 |
|
|
$ |
978 |
|
|
|
1.17 |
|
|
|
191 |
|
|
$ |
978 |
|
$10.00 $12.99 |
|
|
156 |
|
|
|
10.17 |
|
|
|
236 |
|
|
|
2.81 |
|
|
|
156 |
|
|
|
236 |
|
$13.00 $20.00 |
|
|
413 |
|
|
|
15.82 |
|
|
|
|
|
|
|
4.08 |
|
|
|
241 |
|
|
|
|
|
$21.00 $27.00 |
|
|
400 |
|
|
|
23.38 |
|
|
|
|
|
|
|
5.48 |
|
|
|
100 |
|
|
|
|
|
$29.00 $32.00 |
|
|
204 |
|
|
|
29.46 |
|
|
|
|
|
|
|
4.98 |
|
|
|
83 |
|
|
|
|
|
Stock options and restricted stock granted vest over a period of three to four years from the
date of grant in accordance with the individual stock option agreement.
The following table summarizes stock compensation for the three years ended December 31, 2011,
2010, and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cost of revenue |
|
$ |
638 |
|
|
$ |
552 |
|
|
$ |
550 |
|
General and administrative |
|
|
1,162 |
|
|
|
1,055 |
|
|
|
1,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,800 |
|
|
$ |
1,607 |
|
|
$ |
1,784 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011, there was $5.8 million of total unrecognized compensation cost of
unvested stock compensation arrangements. This cost is expected to be fully amortized over the
next four years, with $2.1 million, $1.8 million, $1.3 million, and $0.6 million amortized during
2012, 2013, 2014, and 2015, respectively. These future costs include an estimated forfeiture rate.
Our stock compensation costs may differ based on actual experience. The cost of stock
compensation is included in the Companys Consolidated Statements of Income before, or in
conjunction with, the vesting of options.
The following table summarizes cash proceeds received, intrinsic value realized, and income tax
benefits realized for the three years ending December 31, 2011, 2010, and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cash proceeds received |
|
$ |
261 |
|
|
$ |
2,933 |
|
|
$ |
1,019 |
|
Intrinsic value realized |
|
|
288 |
|
|
|
2,048 |
|
|
|
1,385 |
|
Income tax benefits realized |
|
|
115 |
|
|
|
819 |
|
|
|
554 |
|
F-20
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
16. Provision for Income Taxes
Significant components of the provision for income taxes for the three years ended December 31,
2011, 2010, and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
8,029 |
|
|
$ |
9,593 |
|
|
$ |
11,610 |
|
State and Local |
|
|
1,763 |
|
|
|
2,392 |
|
|
|
2,137 |
|
|
|
|
|
|
|
|
|
|
|
Total Current |
|
|
9,792 |
|
|
|
11,985 |
|
|
|
13,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(617 |
) |
|
|
3,301 |
|
|
|
701 |
|
State and Local |
|
|
(201 |
) |
|
|
23 |
|
|
|
336 |
|
|
|
|
|
|
|
|
|
|
|
Total Deferred |
|
|
(818 |
) |
|
|
3,324 |
|
|
|
1,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Provision |
|
$ |
8,974 |
|
|
$ |
15,309 |
|
|
$ |
14,784 |
|
|
|
|
|
|
|
|
|
|
|
The differences between the expense (benefit) from income taxes at the statutory U.S. Federal
income tax rate of 35% and those reported in the Statements of Operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Federal income tax at statutory rates |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of Federal benefit |
|
|
4.6 |
|
|
|
3.8 |
|
|
|
4.8 |
|
Other |
|
|
0.9 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
|
40.5 |
% |
|
|
39.1 |
% |
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
|
|
Other differences include, among other things, the nondeductible portion of meals and
entertainment.
Deferred income taxes arise from temporary differences in the recognition of income and expense for
income tax purposes and were computed using the liability method reflecting the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial
statement purposes and the amounts used for income tax purposes.
F-21
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
Components of the Companys deferred tax assets and liabilities are as follows for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Accrued vacation and compensation |
|
$ |
3,375 |
|
|
$ |
3,800 |
|
Intangible assets excluding goodwill |
|
|
2,959 |
|
|
|
2,539 |
|
Stock compensation |
|
|
2,238 |
|
|
|
1,661 |
|
Restructuring charge and other accrued liabilities |
|
|
1,332 |
|
|
|
|
|
Property and equipment |
|
|
916 |
|
|
|
|
|
Accounts receivable |
|
|
159 |
|
|
|
|
|
Allowance for doubtful accounts |
|
|
230 |
|
|
|
512 |
|
Deferred rent |
|
|
568 |
|
|
|
777 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
11,777 |
|
|
|
9,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Self insurance |
|
|
|
|
|
|
54 |
|
Property and equipment |
|
|
|
|
|
|
1,558 |
|
Goodwill |
|
|
13,790 |
|
|
|
10,580 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
13,790 |
|
|
|
12,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
$ |
(2,013 |
) |
|
$ |
(2,903 |
) |
|
|
|
|
|
|
|
Although realization is not assured, management believes it is more likely than not that all
deferred tax assets will be realized.
The Companys analysis of uncertain tax positions determined that the Company had no material
uncertain tax positions and as such, no liability has been recorded as of December 31, 2011 and
2010. The Company does not anticipate any material changes in this position in the next 12 months.
The Company is subject to income taxes in the U.S. and various state jurisdictions. Tax statutes
and regulations within each jurisdiction are subject to interpretation and require significant
judgment to apply. Tax years related to U.S. Federal and various state jurisdictions remain
subject to examination for tax periods ended on or after December 31, 2008.
17. Profit Sharing
The Company has a 401(k) profit sharing plan that covers substantially all NCI employees meeting
certain criteria. The plan is a defined contribution plan whereby participants have the option
of contributing to the plan. The plan provides for the Company to contribute 50 cents for each
dollar contributed by the employee, up to the first 6% of their contribution. The participants are
vested 100% in their employee contributions immediately. The participants become fully vested in
the employer contributions ratably over four years of service.
TRS was acquired in July 2009 and had a 401(k) profit sharing plan that covered all employees. The
plan is a defined contribution plan whereby participants have the option of contributing to the
plan. The plan provides for the Company to make a 3% contribution on eligible compensation each
pay period and a 12% profit sharing contribution on eligible compensation quarterly. Participants
are vested 100% in their employee contributions and the 3% employer contribution immediately and
are 100% vested for the 12% quarterly employer contribution after three months of service. The
plan was merged with NCIs plan effective January 1, 2011.
The Companys contributions to both plans for the years ended December 31, 2011, 2010, and 2009
were approximately $3.9 million, $4.0 million, and $2.9 million, respectively.
F-22
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
18. Related Party Transactions
The Company purchased services under a subcontract from Net Commerce Corporation, which is a
Government contractor wholly-owned by Rajiv Narang, the son of Charles K. Narang, the
Chairman and Chief Executive Officer of the Company. The Company purchased services from Net
Commerce Corporation of approximately $765,000, $922,000, and $546,000 for the years ended December
31, 2011, 2010, and 2009, respectively. As of December 31, 2011 and 2010, there were amounts due
to Net Commerce Corporation of approximately $72,000 and $140,000, 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 approximately $15.00 per square foot with annual
escalation and shared common area operating expenses. The lease expires on June 30, 2015. For the
years ended December 31, 2011, 2010, and 2009, NCI paid $1.0 million, $1.0 million, and $1.0
million, respectively, in lease payments under the office lease. As of December 31, 2011 and 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.
19. Contingencies
Government Audits
Payments to the Company on U.S. Federal Government contracts are subject to adjustment upon audit
by various agencies of the U.S. Federal Government. Audits of costs and the related payments have
been performed by the various agencies through 2007 for NCI Information Systems, Inc., our primary
corporate vehicle for Government contracting. In the opinion of management, the final
determination of costs and related payments for unaudited years will not have a material effect on
the Companys financial position, results of operations, or liquidity.
Litigation
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 liquidity.
F-23
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2011
20. Supplemental Quarterly Information (unaudited, in thousands)
This data is unaudited, but in the opinion of management, includes and reflects all adjustments
that are normal and recurring in nature, and necessary, for a fair presentation of the selected
data for these interim periods. Quarterly financial operating results of the Company for the years
ended December 31, 2011 and 2010 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended |
|
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
June 30, |
|
|
Mar. 31, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
June 30, |
|
|
Mar. 31, |
|
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
114,829 |
|
|
$ |
132,004 |
|
|
$ |
161,203 |
|
|
$ |
150,225 |
|
|
$ |
171,021 |
|
|
$ |
168,769 |
|
|
$ |
126,558 |
|
|
$ |
114,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
103,617 |
|
|
|
116,855 |
|
|
|
145,670 |
|
|
|
133,256 |
|
|
|
151,322 |
|
|
|
151,138 |
|
|
|
110,927 |
|
|
|
99,392 |
|
General and administrative expenses |
|
|
5,538 |
|
|
|
6,768 |
|
|
|
6,085 |
|
|
|
5,759 |
|
|
|
6,550 |
|
|
|
6,194 |
|
|
|
5,369 |
|
|
|
5,617 |
|
Depreciation and amortization |
|
|
1,737 |
|
|
|
1,870 |
|
|
|
1,817 |
|
|
|
1,308 |
|
|
|
1,330 |
|
|
|
1,359 |
|
|
|
1,193 |
|
|
|
1,172 |
|
Acquisition and integration
related costs |
|
|
9 |
|
|
|
54 |
|
|
|
748 |
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charge |
|
|
3,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
114,040 |
|
|
|
125,547 |
|
|
|
154,320 |
|
|
|
140,524 |
|
|
|
159,202 |
|
|
|
158,691 |
|
|
|
117,489 |
|
|
|
106,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
789 |
|
|
|
6,457 |
|
|
|
6,883 |
|
|
|
9,701 |
|
|
|
11,819 |
|
|
|
10,078 |
|
|
|
9,069 |
|
|
|
8,812 |
|
Interest expense, net |
|
|
515 |
|
|
|
503 |
|
|
|
483 |
|
|
|
197 |
|
|
|
173 |
|
|
|
133 |
|
|
|
149 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
274 |
|
|
|
5,954 |
|
|
|
6,400 |
|
|
|
9,504 |
|
|
|
11,646 |
|
|
|
9,945 |
|
|
|
8,920 |
|
|
|
8,669 |
|
Provision for income taxes |
|
|
149 |
|
|
|
2,472 |
|
|
|
2,542 |
|
|
|
3,811 |
|
|
|
4,741 |
|
|
|
3,841 |
|
|
|
3,524 |
|
|
|
3,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
125 |
|
|
$ |
3,482 |
|
|
$ |
3,858 |
|
|
$ |
5,693 |
|
|
$ |
6,905 |
|
|
$ |
6,104 |
|
|
$ |
5,396 |
|
|
$ |
5,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
0.26 |
|
|
$ |
0.28 |
|
|
$ |
0.42 |
|
|
$ |
0.51 |
|
|
$ |
0.45 |
|
|
$ |
0.40 |
|
|
$ |
0.40 |
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.25 |
|
|
$ |
0.28 |
|
|
$ |
0.41 |
|
|
$ |
0.50 |
|
|
$ |
0.44 |
|
|
$ |
0.39 |
|
|
$ |
0.39 |
|
F-24