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, 2010
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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 |
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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). Yes
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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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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller Reporting Company o |
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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, 2010 was approximately $180,441,273.
As of February 17, 2011, there were 8,469,242 shares outstanding of the registrants Class A common
stock. In addition, there are 5,200,000 shares outstanding of the registrants Class B common
stock, which are convertible on a one-for-one basis into Class A common stock.
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 2011 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), engineering, logistics, and professional services
and solutions to Federal Government agencies. NCIs capabilities are centered on overcoming our
customers challenges to help them meet their critical mission and objectives. Through our
comprehensive offerings, we are a full lifecycle capabilities company. We provide full lifecycle
IT specialties, complemented by our professional services. We have the agility, position, and
determination to focus on expanding market segments within the Federal IT and professional services
markets. We are extending our core capabilities in line with key market drivers and investing 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, acquisition, and lifecycle support; engineering and
logistics; health IT/medical transformation; and training and simulation. We provide these
services to defense, intelligence, and Federal civilian agencies. The majority of the Companys
revenue is derived from contracts with the Federal Government, directly as a prime contractor or as
a subcontractor. We primarily conduct business throughout 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 Federal Government, including customers such as the U.S. Army, U.S. Air Force, U.S.
Transportation Command, National Guard Bureau, U.S. Central Command, U.S. Special Operations
Command, Department of Transportation (DOT), Department of Energy (DOE), Department of Housing and
Urban Development (HUD), National Aeronautics and Space Administration (NASA), and the 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 average more than 25 years of
experience with Federal Government agencies, the U.S. military and Federal Government contractors.
Members of our management team have 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 85% of whom possess at least one Federal Government security clearance.
Our 2010 revenue was $581 million, a 24% increase over our 2009 revenue of $469 million. Our
organic revenue growth for 2010 as compared to 2009 was 22%, which reflects our increase in revenue
from year to year excluding the effect of acquisitions. Since 2005, our revenue, including the
effects of our acquisitions, has grown from $191 million during 2005 to $581 million during 2010,
representing a compound annual growth rate (CAGR) of 25%. Over the same period, our operating
income has increased 254%, from $11.2 million during 2005 to $39.8 million during 2010. As of
December 31, 2010, our total estimated contract backlog was $1.3 billion, of which approximately
$302 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, assuming the exercise of all related options. We are focused on
continuing to grow organically while improving margins, and intend to expand our capabilities
through strategic acquisitions.
MARKET OPPORTUNITY
The Federal Government continues to be among the worlds largest consumers of IT services and
solutions. According to INPUT, an independent Federal Government market research firm, the overall
Federal Government IT market is expected to grow from $85.8 billion during FY2010 to nearly $112
billion during FY2015. Due to the growth in cyber incidents, of special interest to the Federal
Government is cybersecurity and information assurance. Again according to INPUT, spending for
information security will rise from $8.6 billion in 2010 to $13.3 billion by 2015 at a compound
annual growth rate of 9.1%, nearly twice the rate of overall Federal IT spending. This creates a
large 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,
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situational and battlespace awareness; infrastructure upgrades
relating to base realignment and closure (BRAC); 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 $31.3 billion during FY2010 to
$39.6 billion during FY2015. Moreover, this data 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 Federal Government remains classified, INPUT estimates
total IT spending for contractor-addressable services for U.S. intelligence agencies during FY2010
at $9.9 billion, growing to $13.5 billion during FY2015. INPUT also reports that Civilian agency
spending on IT is expected to increase from $44.6 billion during FY2010 to $58.5 billion during
FY2015.
The Intelligence budget continues to outpace both Defense and Civilian budgets at a CAGR of 6.4%
compared to 5.6% and 4.8%, respectively, according to INPUT. Among civilian agencies, the
Departments of Veterans Affairs, Social Security Administration, and Justice rank among the highest
year-over-year budget growth rates. On average, DoD IT programs are growing at a slower rate due
to the constraints of ongoing war spending. Increased demands in information security,
surveillance, and other national security trends continue to drive the Intelligence market segment
compared to other segments. Despite the uncertainty related to the economy and the
administrations priorities, Federal IT spending continues to rise, and we believe there will be
significant market opportunities for providers of IT services and solutions to the Federal
Government because of the following outlined trends.
Current Market Challenges
While we continue to see favorable market opportunities, there are certain challenges facing all
Federal service providers. Most pressing is the fact that since October 2010, the Federal
Government has been operating under a Continuing Resolution to fund operations. A Continuing
Resolution essentially continues funding for most programs at the FY2010 level, and therefore,
generally does not allow for new contracts to be awarded. As such, there have been delays in
contract and task order awards. The current Continuing Resolution expires March 4, 2011. The
House has passed a new Continuing Resolution that would require significant reductions over the
FY2010 spending levels. The Senate is opposed to those cuts and the President has threatened a
veto if that bill were to be sent to him. While Congress is working on an agreement that would
provide short-term Continuing Resolution funding that would allow them to work out a longer-term,
acceptable plan for FY 2011. If they are unable to arrive at a near term solution, there is the
possibility of a Government work stoppage. The last Government work stoppage occurred in FY1996
and lasted for approximately 21 days. Under such a work stoppage, only essential work would be
authorized. The designation of essential is determined by the Federal Government and is directed
by contracting officers. As of this date, there is no direction from the Federal Government as to
what activities will be essential, but many defense related activities and programs associated with
safety or human life will most likely be funded. The determination of which programs will be
funded would be done on a case by case basis. It is unlikely that a government-wide work stoppage
would occur for an extended period of time. The greater likelihood is that the Federal Government
will operate on a Continuing Resolution basis for the balance of FY2011 and that there would
increased be budget pressures on both FY2011 and FY2012.
Economic Pressures Create Demand for Efficient, Effective Solutions
The Federal Government, and the DoD in particular, continues to find itself amid a significant
transformation. The Federal Government faces unprecedented financial, economic, and mission
challenges as it continually looks for opportunities to address its expanding mission
responsibilities amidst increasing budgetary pressures. A significant aspect of this
transformation is the use of IT to increase the Federal Governments effectiveness and efficiency.
The result is increased Federal Government spending on IT to upgrade networks and transform the
Federal Government from separate, isolated organizations into larger, enterprise-level,
network-centric organizations capable of sharing information broadly and quickly. Data center
consolidation, green computing, and cloud computing are examples of Federal Government priorities
that support the drive for improved effectiveness and efficiencies. While the transformation
initiative is driven by the need to prepare for new world threats, adopting these IT transformation
initiatives will also improve efficiency and reduce infrastructure costs across all Federal
Government agencies.
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Transformational Initiatives Driving Investments. Despite the challenging economic
environment today, Federal Government spending continues to rise in key technology and
professional services areas. IT
service providers can address common goals of the administration while providing efficient,
cost-effective solutions as the Federal Government plans its technology transformation.
INPUT defines the key emerging transformational markets as those that produce cost savings,
operational/process efficiency, energy efficiency, improved information
sharing/interoperability, transparency, and enhanced agility/flexibility. Federal
Government IT solution providers have an opportunity to apply key technology
solutions/architectures to address these goals in fastest-growing technology spending areas
of the Federal budget, including data center consolidation, cloud computing, virtualization,
Service Oriented Architecture (SOA), open source software (OSS), and geospatial
technologies.
Cybersecurity Remains Top Priority in Technology Spending. Cybersecurity and information
assurance-related technology spending (estimated to grow from $8.6 billion in FY2010 to
$13.3 billion in FY2015) remains as one of the Federal Governments top priorities in
response to the ever-increasing threat to our national information infrastructure. The
appointment of Howard Schmidt as the White House Cybersecurity Coordinator underscores the
continued emphasis of implementing a national-level cybersecurity strategy by creating the
role of a cybersecurity policy official who will coordinate the nations
cybersecurity-related policies, activities, and cyber response. The recent standup of
USCYBERCOM, led by General Keith Alexander (Director of the NSA), has the mission of not
only defending U.S. military networks, but also conducting full-spectrum cyberwar
operations. Department of Homeland Security continues to gain responsibilities to lead
cybersecurity efforts for the Federal civilian space, as well as public/private
partnerships. The evolving Federal cybersecurity strategy requires contractor support, and
we expect significant opportunities and growth in both the Civilian and Defense markets.
Within the overall market for cybersecurity services, the majority of the effort is
anticipated to be focused on integrated network and security operations, including threat
identification and vulnerability analysis, cyber threat warning dissemination, incident
response, information exploitation, situational awareness, data protection and secure
information sharing.
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Open Government Directive Creates Opportunity with Data Transparency Mandates. The current
administration is committed to creating an unprecedented level of openness in Government.
The Presidents Transparency and Open Government memorandum directs the Chief Technology
Officer, in coordination with the Director of the Office of Management and Budget (OMB) and
the Administrator of General Services, to take specific actions supporting the increased
transparency and collaboration objectives. We believe this mandate will create significant
opportunities for IT and professional service providers in open source software;
building/customizing geospatial tools; creating spatially aware databases and mapping
applications; developing agile applications and reusing code; and supporting better business
intelligence to reduce integration costs, lower licensing fees, improve service delivery,
and improve data transparency. |
Human Capital Issues
The Federal Government has increasingly relied on professional service providers, particularly for
IT services, in connection with its transformation initiatives. INPUT tracks Federal employment
because it has a direct correlation with technology spending and Government reliance on contractor
support. Discretionary spending has increased, but the Government has not spent those funds on the
salaries of a growing workforce; instead, it has increased spending on technology. The Federal
workforce has been flat over the past decade, while discretionary spending, and subsequently IT
spending, has increased considerably. With an Office of Personnel Management (OPM) estimated 4%
retirement rate over the next seven years, the administration will be unlikely to achieve its
workforce goals; therefore, there is still a significant gap that is unlikely to be filled without
contractor support. We believe two of the primary reasons contributing to the Federal Governments
increased spending on contractor support include:
Declining Federal Government Workforce. The increasing disparity between total Federal
full-time equivalents (FTEs) and contractor workforce represents one of the driving forces
underlying the push to reduce the contractor workforce and raise Federal employment. While
the contractor workforce has declined since 2005, contractors still outnumber Federal
employees 4:1. Based on the Obama administrations workforce objectives, INPUTs workforce
projections from FY2009-FY2014 indicate a slight increase based on the administrations need
to hire nearly 600,000 employees in his first term,
including Defense Secretary Gates proposal to move contractor employees into the Federal
workforce as part of his acquisition reform policy. INPUT projections are based on 2%
annual retirement rate, and at these levels, the 600,000 additions from FY2010-FY2014 would
barely address the attrition associated with the Federal workforce retirees.
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Increased Reliance on Technology and Professional Service Providers. Federal Government
agencies are seeking more innovative solutions and technology services in response to the
increasing pressure to operate more effectively and efficiently. The lack of Federal
contracting professionals is a Federal Government-wide issue that has increased in
visibility and consequence over the past few years. The IT workforce is under tremendous
pressure to manage evolving technology and contracts that continue to grow in size, scope,
and complexity. Shifts in acquisition trends increase complexity; acquisition challenges
around protests and inadequate contract management increase administrative burden; and
expanding requirements in best value procurement procedures and performance-based
contracting demand more highly skilled acquisition professionals. We believe these
acquisition trends and requirements, coupled with the declining Federal workforce, will
drive increased reliance on technology and professional service providers during the
FY2011-FY2015 timeframe.
Acquisition Reform and Procurement Practices
Federal Government procurement practices and policies are expected to continue to evolve as Federal
agencies increasingly rely on professional services providers for IT solutions and services. We
expect the following trends to continue to shape the Federal Governments procurement practices and
policies:
Contract Consolidation to Leverage Buying Power. The trend within the Federal Government to
consolidate contracts and create one-stop shops for professional and IT services continues
today. Agencies are consolidating multiple contracts into larger, single task order
contracts to provide a broad array of technical solutions and services. Agencies hope to
simplify contract administration, streamline acquisition timelines, and leverage their
buying power across a more expansive, diversified industrial base. The benefits to the
Government include: reduced operational costs, improved efficiency, improved services, and
reduced administrative costs. This consolidation trend benefits full-service professional
services and IT solution providers with a history of successfully transitioning and
integrating services.
Continued Growth of GWACs, MACs, and Agency-Specific IDIQs. As part of its shift in
procurement practices aimed at increasing flexibility and responsiveness, the Federal
Government continues to expand its use of Government Wide Acquisition Contracts (GWACs),
agency-specific Indefinite Delivery/Indefinite Quantity (IDIQ) contracts, and other
multiple-award contracts (MACs). Professional service providers compete to be pre-selected
under these umbrella contracts, which outline the basic terms and conditions for the
procuring customers and end users. Upon being pre-selected, the companies compete only
among themselves to provide the services under the vehicle. These contracts provide the
Federal Government contracting agencies with additional flexibility and responsiveness, as
projects can be awarded quickly to these preferred vendors. Agencies can bypass much of the
lengthy formal acquisition process involved in request for proposal purchases and the
pre-qualification of contractors makes this option easier. The continued growth of these
types of multiple-award contracts benefits professional service and IT solution providers
that have a broad portfolio of these contracts, allowing Federal Government customers easy
access to services and solutions.
Increased Emphasis on Transparency and OCI Avoidance. The current administration has
pledged comprehensive and sweeping changes to Government contracting including
identification of wasteful, inefficient, or ineffective programs; use and oversight of all
contract types, particularly sole-source, and other non-competitive contracts; increased
emphasis on contracting transparency; and avoidance of any organizational conflicts of
interest (OCIs). Concerns around OCI have steadily increased due to industry consolidation,
while the Government Accountability Office has sustained an increasing number of bid
protests due to the Federal Governments inadequate management and oversight of OCI issues.
The focus on transparency and increased scrutiny on OCI policies will benefit those
professional service and IT providers that have delivered cost-effective and efficient
solutions for customers; have avoided any real or perceived OCI issues particularly around
the hardware and weapons systems environment; and have
carefully mitigated production and support services.
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COMPETITIVE STRENGTHS
We believe we are well positioned to meet the rapidly evolving needs of 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, 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 79% 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.
Cybersecurity Expertise
NCI has 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 operations that 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, Federal Government policies, and new Federal Government initiatives, and this
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 NCI is 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. Finally, our competitive strengths are
further intensified by our portfolio of prime GWAC/IDIQ contract vehicles, which provide
unparalleled access to customers, opportunities, and service offerings.
Proven Ability to Win Business
During 2010, we were awarded task orders, single-award contracts, and contract modifications with a
total value of approximately $300 million. Year-over-year contract and task order award amounts
tend to be volatile, as they represent multi-year awards. As an example, during 2009, we were
awarded task orders, single-award contracts, and contract modifications with a total value of
approximately $767 million, which included one award for more than $400 million over several years.
Moreover, since our public offering during 2005, we have averaged an annual organic revenue growth
rate of 16% and have cumulatively booked $2.4 billion in new business. Our success in winning
business is based, in part, on our ability to anticipate customers emerging requirements, which
enables us to develop stronger technical proposals. With current budgetary constraints, however,
cost is becoming more of a factor in some procurements, and our cost structure allows us to be very
cost competitive when necessary.
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 GWACs, agency-specific IDIQs, and 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: General Services Administration (GSA) Alliant
contract with a ceiling of $50 billion over eight 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) 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 seven years; the Federal 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 II (DESP II) with a ceiling of $1.9 billion over six years; the U.S. Army Total
Engineering and Integration Services (TEIS) contract with a ceiling of $800 million over five
years; the Program Executive Office Soldier Equipment contract (PEO Soldier) with a ceiling of $382
million over eight years; and the GSA Schedule 70. While the 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.
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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, 2010, of which more than 85% possess at least one Federal Government security
clearance. Our senior managers have on average more than 25 years of experience with Federal
Government agencies, the U.S. military, and 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) Three NCI business units have been appraised
at CMMI-Development (DEV) Maturity Level 3 under 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.
ISO 9001:2008 NCI initially received ISO 9001:2000 certification during May 2002 based on
an 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. NCIs 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 NCI 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 NCI received ISO/International Electronics Community (IEC)
20000-1:2005 certification in September 2009 for its IT Service Management System for its
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) NCI received corporate-wide approval of its
purchasing system from its Administrative Contracting Officer (ACO) in December 2009 based
upon 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. We use metrics to better understand, predict, and optimize our processes to reduce
development costs and expedite
schedules, all while improving quality for our customers.
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STRATEGY
Our objective is to grow our business as a provider of IT and professional services and solutions
to Federal Government agencies while improving our profitability. To achieve our objective, we
intend to:
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. Our goal is to deliver 10% to 15% organic revenue growth per year as
we move forward.
Capitalize on Current Contract Base. Our contract base includes 21 prime
GWAC/agency-specific IDIQ/MAC contract vehicles with a total combined budgeted ceiling value
in excess of $105 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, though there is no assurance that the Federal Government will make awards up
to the ceiling amounts or that we will be awarded any task orders under these vehicles.
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 as the Federal Government continues to increase the volume of
services contracted to professional services providers. Moreover, we believe our strong
past performance record positions us to expand the level of services we provide to our
customers as the Federal Government places greater emphasis on past performance as a
criterion for awarding contracts.
Expand Customer Base. We also 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
Federal Government. Our long-term relationships with 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. 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: IT
consolidation/modernization, geospatial search and visualization, information
operations/warfare, and enterprise information assurance.
Operating Margins
While the overall market is experiencing margin pressure due to increased competition, we believe
we still have opportunity over the next three to five years to increase our operating margins and
improve profitability by capitalizing on our corporate infrastructure investments and concentrating
on high value-added services related to our core capabilities.
Capitalize on Corporate Infrastructure Investments. During the past several years, we have
made significant investments in our senior management and corporate infrastructure in
anticipation of future
revenue growth. These investments included hiring senior executives with significant
experience with Federal IT services companies, strengthening our internal control over
financial reporting and accounting staff in support of Exchange Act compliance and public
company reporting requirements, and expanding our Sensitive Compartmented Information
Facilities (SCIFs) and other corporate facilities. During 2010, we also successfully
implemented a new Enterprise Resource Planning (ERP) system.
Page 8
During 2010 and continuing into 2011, we continue to invest in the people and resources that
will support our future growth. As we continue to grow and expand our business base over
the next three to five years, we will be able to leverage these new investments in our
infrastructure base. A major area of investment over the past several years has been
opportunities associated with DoDs Base Realignment and Closure (BRAC) activities. Initial
BRAC work includes setting up headquarters locations for major defense customers. We
provide program management, engineering, logistics, and procurement associated with
establishing IT infrastructure at the new locations. Most of the initial BRAC work results
in little profit due to a higher level of material content. Thus, our total operating
margins have been lower in the short-term.
While there have been many BRAC bidding opportunities, we focused on the opportunities that
have potential long-term, follow-on growth opportunities in IT services that are more
aligned with our core service offerings. We see the follow-on BRAC work as a platform for
long-term growth in 2011 and beyond.
Concentrate on High Value-Added Services and Increasing Our Labor Content. Our goal is to
improve our operating margins in the long-term as we focus on higher-end value-added IT,
engineering, logistics, and professional services and less on commoditized IT services,
which have become very competitive, and IT productrelated revenue, which has historically
very low margins. Additionally, we are focused on increasing the percentage of revenue we
derive from our own employees, which carries higher margins than subcontracted work and
results in better indirect cost absorption, which can also increase margins.
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/or expand market share. We look to take advantage of these acquisitions by leveraging these
new service offerings to historical NCI customers, as well as offering historical NCI capabilities
to our newly acquired customers.
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, acquisition, and
lifecycle support; engineering and logistics; health IT/medical transformation; 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 customer mission-critical systems at peak performance. This methodology utilizes
network and traffic simulations to identify potential changes in performance or possible security
issues within a particular network, allowing our engineers to protect customers systems and data.
Our network engineers are trained and certified in the leading commercial enterprise tools and
combine that knowledge with our techniques, experience, and processes to deliver solutions to our
customers. Our enterprise systems management services include the following:
|
|
Infrastructure and Enterprise Systems Management |
|
|
|
Infrastructure Operations and Management |
|
|
|
Outsourcing and Managed Services |
|
|
|
Infrastructure Consolidation and Modernization |
|
|
|
Public/Private Cloud Computing |
|
|
Application and Network Management |
|
|
|
Application and Business System Performance
Measures |
|
|
|
Network Design, Implementation, and Migration |
|
|
|
Network Monitoring and Performance Evaluation |
Page 9
Network Engineering
We offer a full lifecycle of network engineering services to our customers from the initial
requirements analysis and network design through solutions implementation and testing, including
designing disaster recovery contingency plans. Our network engineering capabilities include
architecture development, design, implementation, configuration, and operation of Local Area
Networks (LANs), Metropolitan Area Networks (MANs), and Wide Area Networks (WANs). Our extensive
experience providing the following network engineering services for 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:
|
|
Architecture Development and Design |
|
|
|
Disaster Response Planning and
Recovery |
|
|
|
Installation, Test, and Evaluation |
|
|
|
Network Configuration |
|
|
|
Network Security Evaluation |
|
|
|
Protocol and Topology Selection |
|
|
|
Reliability and Contingency
Assessment |
|
|
|
Requirements Analysis |
|
|
|
Routing Design |
|
|
|
Vulnerability Assessment |
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 who operate
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. 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 information assurance services include the following:
|
|
Intrusion Detection/Prevention System Development |
|
|
|
Certification and Accreditation |
|
|
|
Policy and Procedures Development |
|
|
|
Products Evaluation and Integration |
|
|
|
Cybersecurity Fusion Centers |
|
|
|
Public Key Infrastructure (PKI)
Implementation |
|
|
|
Computer Forensics |
|
|
|
Risk and Threat Assessment |
|
|
|
Security Awareness and Training |
|
|
|
Security Test and Evaluation |
Software Development and Systems Engineering
We provide a full range of software development, systems engineering and integration services to
our customers. 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 technologies with our customers legacy systems to improve their operational
efficiency and increase our customers returns on IT investments. Our software development and
systems engineering services include:
|
|
Agile and Open Source Software Development |
|
|
|
Database Design and Management |
|
|
|
Enterprise Portal Implementation |
|
|
|
Integration, Test, and Evaluation |
|
|
|
Legacy System Integration |
|
|
|
Project Planning and Management |
|
|
|
Full Systems Lifecycle Development and
Deployment |
|
|
Software/Systems Development |
|
|
|
Analytical Computing Solutions |
|
|
|
Data Warehousing/Mining |
|
|
|
Advanced Graph Analytics |
|
|
|
Information Sharing and
Collaboration |
|
|
|
High Performance and Grid Computing |
Page 10
Program Management, Acquisition, and Lifecycle Support
NCI provides a full range of program management, acquisition, and lifecycle support services to our
customers. As an integral part of our professional services portfolio, we are at the forefront of
integrating 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, and efficiency. We combine deep functional and technical expertise
to deliver full lifecycle support capabilities, including:
|
|
Acquisition Management and Logistics |
|
|
|
Program and Portfolio Management |
|
|
|
Test and Evaluation |
|
|
|
Systems Engineering and Technical
Support |
|
|
|
Studies and Capabilities Analysis |
|
|
Financial
Management |
|
|
|
Security Management |
|
|
|
Training |
|
|
|
Risk Management |
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 some of our customers
most challenging fielded systems problems. By tailoring our engineering and logistics specialties
for our customers, NCI reduces 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 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., F-4, C-5, 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:
|
|
Software Development and Systems
Integration |
|
|
|
Prototype Design, Development and Testing |
|
|
|
Material and Component Sourcing |
|
|
|
Modeling and Simulation |
|
|
|
Acquisition Planning and Program Management |
|
|
Technology Assessments and Analysis of Alternatives |
|
|
|
Sustainment Engineering and Obsolescence Management |
|
|
|
Diminishing Manufacturing Sources and Material
Shortages |
|
|
|
Supply Chain Management and Business Process
Outsourcing |
|
|
|
Multi-Service Weapon Systems Reprogramming Capability |
Page 11
Health IT/Medical Transformation
By combining comprehensive IT services with deep medical business acumen, we have become a leader
in the health IT and medical logistics transformation field. We blend deep functional
subject-matter expertise with diverse technical talent, including public health experts, healthcare
administrators, network engineers, medical trainers, IT specialists, bioenvironmental engineers,
aerospace physiologists, and physicians. We have provided a broad spectrum of IT services,
including network operations, cybersecurity and information assurance, software development, and enterprise systems management to improve the quality and timeliness of healthcare
services provided to public health and medical personnel worldwide. These technologies provide a
new paradigm for collaboration, training, and education offering real-time, high-fidelity
interactions among patients and practitioners. Our capabilities and infrastructure support all
aspects of health IT and medical transformation, including:
|
|
Strategic Planning/Consulting |
|
|
|
Electronic and Personal Health Records |
|
|
|
Access-to-Care Program Support |
|
|
|
Data/System Consolidation, Migration,
and Modernization |
|
|
|
Doctrine/Policy Development |
|
|
|
Social Media/Networking
Tools/Solutions |
|
|
Occupational, Environmental, and Population Health
Programs |
|
|
|
Collaboration and Telemedicine Solutions |
|
|
|
Preparedness and Contingency Planning |
|
|
|
Aeromedical Evaluation and Combat Casualty Care |
|
|
|
Medical Education and Training |
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 the complex
challenges of our customers. Our solutions include solving complex problems for clients through
modeling, simulation, and analysis services. We provide a spectrum of services to clients in
national defense, intelligence, healthcare and civil agencies to support sophisticated programs
like airborne battle management training; virtual battlefield desktop simulation; command and
control; and surveillance modeling. NCIs training and simulation services include:
|
|
Modeling and Simulation |
|
|
|
Network Engineering, Operations and
Support |
|
|
|
Virtual/Desktop Simulation |
|
|
|
Exercise Support |
|
|
|
Development and Integration of
Distributed Simulation Systems |
|
|
Information Assurance |
|
|
|
Multi-level Security |
|
|
|
Distance Learning, Training, and Educational
Products |
|
|
|
Learning Management Systems |
CUSTOMERS
Our customers include a diverse base of Federal Government defense, intelligence, and civilian
agencies. For the year ended December 31, 2010, approximately 92% of our revenue was generated
from DoD and Intelligence agency customers, and approximately 8% of our revenue was generated from
Federal civilian agency customers. We believe our risk from adverse budgetary changes is reduced
by the mission-critical nature of the IT work we perform for our customers. We also believe our
diverse customer base within the Federal Government mitigates the impact of annual fluctuations in
our customers budgets.
The following is a representative list of our customers for the year ended December 31, 2010. 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 12
Department of Defense
U.S. Forces Korea (USFK)
U.S. Special Operations Command (USSOCOM)
U.S. Strategic Command (USSTRATCOM)
U.S. Transportation Command (USTRANSCOM)
Defense Information Systems Agency (DISA)
Defense Logistics Agency (DLA)
National Guard Bureau (NGB)
U.S. Air Force Hanscom AFB
U.S. Air Force Maxwell AFB
U.S. Air Force Air Combat Command (ACC)
U.S. Air Force Air Education and Training Command (AETC)
U.S. Air Force Materiel Command (AFMC)
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 Materiel Command (AMC)
U.S. Army Medical Command (MEDCOM)
U.S. Army National Guard (ARNG)/Air National Guard (ANG)
U.S. Army Network Enterprise Technology Command (NETCOM)
U.S. Army North
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 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 13
Federal Civilian
Centers for Disease Control and Prevention (CDC)
Department of Energy (DOE)
Department of Health and Human Services (HHS)
Department of Homeland Security (DHS)
Department of Housing and Urban Development (HUD)
Department of State (DOS)
Department of Transportation
Department of Veterans Affairs (VA)
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
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 21 prime GWAC vehicles that have an
aggregate program ceiling value of $105 billion, excluding GSA Schedule 70. The following table
lists our most significant contract vehicles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
Period of |
|
|
|
|
|
pre-qualified |
|
Vehicle |
|
Owning agency |
|
performance |
|
Ceiling value* |
|
|
contractors |
|
GSA Alliant |
|
General Services Administration |
|
05/2009 08/2017 |
|
$50.0 billion |
|
|
|
59 |
|
ITES-2S |
|
U.S. Army |
|
12/2006 04/2015 |
|
20.0 billion |
|
|
|
16 |
|
R2-3G |
|
U.S. Army |
|
07/2010 07/2015 |
|
16.4 billion |
|
|
|
17 |
|
NETCENTS |
|
U.S. Air Force |
|
09/2004 09/2011 |
|
9.0 billion |
|
|
|
8 |
|
DESP II |
|
U.S. Air Force |
|
06/2005 08/2011 |
|
1.9 billion |
|
|
|
20 |
|
HHS FDA ELMS |
|
Health and Human Service |
|
06/2009 06/2019 |
|
2.0 billion |
|
|
|
10 |
|
TEIS |
|
U.S. Army |
|
11/2005 06/2011 |
|
0.8 billion |
|
|
|
3 |
|
PEO Soldier |
|
U.S. Army |
|
05/2007 04/2015 |
|
0.4 billion |
|
|
|
1 |
|
OPM TMA |
|
Office of Personnel Management |
|
04/2007 03/2011 |
|
0.3 billion |
|
|
|
25 |
|
|
|
|
* |
|
Ceiling value refers to the overall contract ceiling for all contractors, and not NCIs
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 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 79% of our total revenue for the year ended
December 31, 2010, up from 76% for the year ended December 31, 2009, and 66% for the year ended
December 31, 2008. We anticipate that this percentage may continue to increase as we have the
opportunity to bid on additional tasks under these contract vehicles, as well as pursue new GWAC,
agency-specific IDIQ, and MAC vehicles.
Page 14
The 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
Our estimates of funded, unfunded, and total backlog as of December 31, 2010 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded |
|
|
|
|
As of |
|
Funded backlog |
|
|
backlog |
|
|
Total backlog |
|
|
|
(in millions) |
|
December 31, 2010 |
|
$ |
302 |
|
|
$ |
999 |
|
|
$ |
1,301 |
|
December 31, 2009 |
|
$ |
250 |
|
|
$ |
1,251 |
|
|
$ |
1,501 |
|
We expect to realize approximately $400 million in revenue from backlog during 2011. 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.
Since October 2010, the Federal Government has been operating under a Continuing Resolution to fund
operations. A Continuing Resolution essentially continues funding for most programs at the FY2010
level, and therefore, generally does not allow for new contracts to be awarded. As such, there
have been delays in contract and task order awards.
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 opportunity.
We have centralized and dedicated staff resources for proposal development, pricing, contracts
administration, market research, and recruiting to support these business development activities.
We manage our business development activity with an industry-leading Customer Relationship
Management (CRM) tool. The entire process is defined and quality controlled using our ISO
9001:2008 best practices procedures. All major business development opportunities undergo
frequent, disciplined reviews with our senior management. In addition, our Chief Executive Officer
and President conduct monthly reviews of all opportunities in our pipeline to validate our business
development activities and ensure that resources are allocated to maximize the return on these
investments.
GOVERNMENT REGULATION
We are subject to various laws and regulations that may affect our business. 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 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
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 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 15
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, 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 TASC,
Inc. by Northrop Grummans Information Technology sector due to OCI issues. Some of our
competitors have significantly longer operating histories and more substantial resources. We
expect competition in the Federal Government IT and professional services sector to increase in the
future.
EMPLOYEES
As of December 31, 2010, we had approximately 2,600 employees, more than 85% of whom held at least
one Federal Government security clearance. Our employees are located at more than 95 sites
worldwide. More than 79% 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:
|
|
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 |
|
|
IT Infrastructure Library (ITIL) |
|
|
|
Project Management Professional (PMP) |
|
|
|
CompTIA Certifications (A+, Network +, Security +) |
|
|
|
ISC2 Certifications (CISSP, SCCP, CAP, ISSEP, ISSAP) |
|
|
|
Certified INFOSEC Professional |
|
|
|
COMSEC Certification |
|
|
|
Global Information Assurance Certification (GIAC) DoD
8570 |
|
|
|
SANS Institute Certifications (GSEC, GCIA, GCIH, GISF) |
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. Only 17 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 during July 2005. During September 2005, we
completed a merger and share exchange as a result of which NCI Information Systems, Inc., a
Virginia corporation, which was incorporated during 1989, became a wholly-owned subsidiary. We
primarily contract with the Federal Government through our wholly-owned subsidiary, NCI Information
Systems, Inc.
WEBSITE ACCESS TO SEC REPORTS
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.
Page 16
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 Federal Government for the majority of our revenue. If our
relationships with Federal Government agencies are harmed, our future revenue and operating profits
would decline.
For the years ended December 31, 2010 and 2009, we derived almost all our revenue from Federal
Government contracts, either as a prime contractor or a subcontractor, including approximately 92%
and 88% of our revenue from contracts with the DoD and intelligence agencies during 2010 and 2009,
respectively. We believe that Federal Government contracts will continue to be the source of the
majority of our revenue for the foreseeable future. For this reason, any issue that compromises
our relationship with 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 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, a risk that is
enhanced by the recent trend in Government procurement practices to bundle services into
larger 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.
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We cannot guarantee that our estimated contract backlog will result in actual revenue.
As of December 31, 2010, our estimated contract backlog totaled approximately $1.3 billion, of
which approximately $302 million was funded. We expect to realize approximately $400 million in
revenue from backlog during 2011. 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. Further, while many of our 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 Federal Government.
We depend on continued Federal Government expenditures on defense, intelligence, and other programs
that we support. Accordingly, changes in Federal Government contracting policies could directly
affect our financial performance. The overall U.S. Defense budget declined from time to time
during the late 1980s and the early 1990s. While spending authorizations for Defense- and
Intelligence-related programs by the Federal Government have increased in recent years, 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 Federal Government spending generally or specific
departments or agencies in particular, and changes in fiscal policies or available funding; |
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changes in Federal Government programs or requirements, including the increased use of
small business providers; |
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Federal Government agencies are more frequently awarding contracts on a technically
acceptable/lowest cost basis in order to reduce expenditures; |
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Federal Governmental shutdowns (such as that which occurred during the Federal
Governments 1996 fiscal year) and other potential delays in the 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; |
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a reduction in spending or a shift of expenditures from existing programs; |
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the FAR and certain of our Federal Government contracts contain OCI clauses that may
limit our ability to compete for or perform certain other contracts. OCIs arise when we
engage in activities that may make us unable to render impartial assistance or advice to
the 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 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 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 IT 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 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 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. In
extreme cases, performance or other deficiencies on the part of our subcontractors could result in
a customer terminating our 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.
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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
12% of our revenue in 2010 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 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 financial position
where we have financial exposure. Specifically, we could see an increase in bad debt expense and
reserves, which could negatively affect cash flows and earnings.
Failure to maintain strong relationships with other contractors could result in a decline in our
revenue.
As discussed above, 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 teammate
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 have experienced, and may in the future 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.
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.
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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 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 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 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. 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 reduce our revenue.
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 injected, these malicious software
programs work to embed themselves further into the compromised environment, gather information, and
then slowly and stealthily exfiltrate it to parties outside of the compromised environment
(potentially for long periods of time). We combat APTs by leveraging our SecureNet Continuous
Monitoring methodology in accordance with industry best practices and in alignment with our
corporate Computer, Network, and Internet Security Management policy. Failures to comply with our
network security policies 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).
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
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 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.
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Our estimates, forward-looking statements, and projections may prove to be inaccurate.
Revenue from some of our 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 long-term 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.
In the event updated estimates indicate that we will experience a loss on a
percentage-of-completion contract, we recognize the estimated loss at the time it is determined.
Additional information may subsequently indicate that the loss is more or less than initially
recognized, which requires further adjustments in our financial statements. Changes in the
underlying assumptions, circumstances or estimates could result in adjustments that could have a
material adverse effect on our future results of operations. We recognized approximately 5%, 6%,
and 6% of our revenue using the percentage-of-completion method for the years ended December 31,
2010, 2009, and 2008, respectively.
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 in the future, 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 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.
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 new 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.
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Current credit market conditions could affect our access to working capital and our ability to make
substantial acquisitions.
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 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
Federal Government personnel contribute to our ability 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 or bodily harm 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 manage our growth, our business could be adversely affected.
Sustaining our growth has placed significant demands on our management, as well as on our
administrative, operational, and financial resources. For us to continue to manage our 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 manage our growth while
maintaining our quality of service and profit margins, or if new systems that we implement to
assist in managing our growth do not produce the expected benefits, our business, prospects,
financial condition, or operating results could be adversely affected.
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 software and other forms of 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.
Page 23
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.
The Company has 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 the Companys operating income.
As of December 31, 2010, goodwill accounted for approximately $107 million, or approximately 40%,
of the Companys recorded total assets. Under U.S. generally accepted accounting principles
(GAAP), the Company reviews its 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, the Company would 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 Federal Government contracts may be terminated by the 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 Federal Government contracts that typically span one or more
base years and one or more option years. The option periods may cover more than half of a
contracts potential duration. Federal Government agencies have the right not to exercise these
option periods. In addition, our contracts also contain provisions permitting a Federal Government
customer to terminate the contract on short notice and for its convenience, as well as for our
default. A decision by a 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 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 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 Federal Government in procuring undelivered items and
services from another source.
Federal Government contracts contain other provisions that may be unfavorable to us.
Federal Government contracts contain provisions and are subject to laws and regulations that give
the Federal Government rights and remedies not typically found in commercial contracts. These
provisions allow the Federal Government to terminate a contract for convenience or decline to
exercise an option to renew. They also permit the 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 Federal Government. |
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If the Federal Government exercises its rights under any of these provisions, our revenue and
operating profits could decline.
Many of our 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 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 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 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 year. 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 Federal Government contract awards are subject to protest by competitors. If
specified legal requirements are satisfied, these protests require the 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.
Each of our contract types involves the risk that we could underestimate our costs and incur
losses.
We enter into three types of Federal Government contracts for our services: time-and-materials,
cost-plus, and fixed-price. For the year ended December 31, 2010, we derived approximately 55%,
14%, and 31% of our revenue from time-and-materials, cost-plus, and 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
time-and-materials contracts because we only assume the risk of performing those contracts at
negotiated hourly rates. Under cost-plus 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 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 fixed-price contracts, we perform specific tasks for a fixed price. Compared
to time-and-materials and cost-plus contracts, 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 fixed-price contracts,
an increase in the percentage of fixed-price contracts in our contract mix would increase our risk
of suffering losses.
Page 25
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 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:
|
|
|
the FAR and agency regulations supplemental to the FAR, which comprehensively regulate
the formation, administration, and performance of Federal Government contracts; |
|
|
|
the Truth in Negotiations Act, which requires certification and disclosure of all cost
and pricing data in connection with contract negotiations; |
|
|
|
the FAR and certain of our Federal Government contracts contain OCI clauses that may
limit our ability to compete for or perform certain other contracts; |
|
|
|
compliance with the Foreign Corrupt Practices Act or U.S. export control regulations by
us or our subcontractors; |
|
|
|
the Cost Accounting Standards and Cost Principles, which impose accounting requirements
that govern our right to reimbursement under certain cost-based Federal Government
contracts; 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. |
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 Federal Government customers could terminate or
decide not to renew our contracts, and our ability to obtain new contracts could be impaired.
The Federal Government may revise its procurement or other practices in a manner adverse to us.
The 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
Federal Government may face restrictions from new legislation or regulations, as well as pressure
from Federal Government employees and their unions, on the nature and amount of services the
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 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.
Page 26
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 SBA set-aside program, the 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 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 Federal Government contracts that are awarded through a
competitive procurement process. We expect that most of the 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 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 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 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
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 Federal Government agencies were impaired, or if the 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.
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.
Page 27
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:
|
|
|
fluctuations in revenue recognized on contracts; |
|
|
|
variability in demand for our services and solutions; |
|
|
|
commencement, completion, or termination of contracts during any particular quarter; |
|
|
|
timing of award or performance incentive-fee notices; |
|
|
|
timing of significant bid and proposal costs; |
|
|
|
timing of acquisition activities and the expensing of acquisition-related costs; |
|
|
|
variable purchasing patterns under the GSA Schedule 70 task orders, GWACs, blanket
purchase agreements, and other agency-specific IDIQ contracts; |
|
|
|
strategic decisions by us or our competitors, such as acquisitions, divestitures,
spin-offs, and joint ventures; |
|
|
|
strategic investments or changes in business strategy; |
|
|
|
changes in the extent to which we use subcontractors; |
|
|
|
volume of product orders placed under our NETCENTS contract or other material-related
purchases under our contracts; |
|
|
|
seasonal fluctuations in our staff utilization rates; and |
|
|
|
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 is 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.
In addition, payments due to us from 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 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 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 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.
Page 28
Mr. Narang, our founder, Chairman and CEO, controls the Company, and his interests may not be
aligned with yours.
As of December 31, 2010, Mr. Narang, our founder, Chairman and CEO, through his beneficial
ownership of 5,200,000 shares of our Class B common stock and 378,946 shares of our Class A common
stock, owned or controlled 87% of the combined voting power and 41% 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, 2010, Mr. Narang beneficially owned 5,200,000 outstanding shares of Class B
common stock and 378,946 shares of Class A common stock. 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 during 2013. We also lease space located in Alabama, Arizona, California, Colorado,
Georgia, Illinois, Maryland, Ohio, Tennessee, Texas, and Virginia. We have multiple high-level
Sensitive Compartmented Information Facilities (SCIFs). The majority of our employees are located
in facilities provided by the 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
we expand in the future.
|
|
|
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. |
|
REMOVED AND RESERVED |
Page 29
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Quarters |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
First |
|
$ |
32.57 |
|
|
$ |
25.34 |
|
|
$ |
33.08 |
|
|
$ |
22.33 |
|
Second |
|
|
29.94 |
|
|
|
20.22 |
|
|
|
34.23 |
|
|
|
23.55 |
|
Third |
|
|
25.24 |
|
|
|
18.15 |
|
|
|
32.99 |
|
|
|
27.20 |
|
Fourth |
|
|
24.26 |
|
|
|
18.15 |
|
|
|
29.82 |
|
|
|
24.20 |
|
There is no established public market for our Class B common stock.
As of February 17, 2011, there were 46 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 17, 2011, the closing price of our Class A
common stock was $21.93.
Share Repurchases
Our Board of Directors has authorized the repurchase of up to $25 million of our Class A common
stock. The timing, price, quantity, and manner of the purchases can be determined at the
discretion of our Chief Executive Officer. As of February 21, 2011, we have not repurchased any
shares in accordance with this authorization.
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
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Page 30
Performance Graph
The following graph compares the cumulative total stockholder return on our common stock from
December 31, 2005 through December 31, 2010, 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 Federal Government service providers with whom we compete: CACI
International Inc., Dynamics Research Corporation, ICF International, Inc., ManTech International
Corporation, and SRA International, Inc. During 2010, CGI Group Inc. purchased Stanley, Inc.
Because Stanley, Inc. is no longer a stand-alone company, we removed Stanley, Inc. 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
FEDERAL GOVERNMENT SERVICES PEER GROUP
|
|
|
|
|
|
|
December 31, 2010 |
|
NCI, Inc. |
|
$ |
167.48 |
|
NASDAQ CompositeTotal Returns |
|
|
125.93 |
|
Russell 2000 Index |
|
|
124.45 |
|
Federal Government services peer group |
|
|
97.19 |
|
Page 31
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The following tables set forth the selected consolidated financial data for each of the years
during the five-year period ended December 31, 2010. 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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 (a) |
|
|
2006 |
|
|
|
(in thousands except per share data) |
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
581,341 |
|
|
$ |
468,910 |
|
|
$ |
390,596 |
|
|
$ |
304,420 |
|
|
$ |
218,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
512,779 |
|
|
|
407,322 |
|
|
|
336,473 |
|
|
|
263,679 |
|
|
|
188,878 |
|
General and administrative expenses |
|
|
23,730 |
|
|
|
22,047 |
|
|
|
20,079 |
|
|
|
15,396 |
|
|
|
12,852 |
|
Depreciation and amortization |
|
|
5,054 |
|
|
|
4,228 |
|
|
|
3,660 |
|
|
|
3,012 |
|
|
|
2,586 |
|
Gain on extinguishment of contingent consideration liability |
|
|
|
|
|
|
(2,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
541,563 |
|
|
|
431,312 |
|
|
|
360,212 |
|
|
|
282,087 |
|
|
|
204,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
39,778 |
|
|
|
37,598 |
|
|
|
30,384 |
|
|
|
22,333 |
|
|
|
14,024 |
|
Interest expense, net |
|
|
598 |
|
|
|
657 |
|
|
|
2,026 |
|
|
|
1,342 |
|
|
|
(728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
39,180 |
|
|
|
36,941 |
|
|
|
28,358 |
|
|
|
20,991 |
|
|
|
14,752 |
|
Provision for income taxes |
|
|
15,309 |
|
|
|
14,784 |
|
|
|
11,318 |
|
|
|
8,420 |
|
|
|
5,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,871 |
|
|
$ |
22,157 |
|
|
$ |
17,040 |
|
|
$ |
12,571 |
|
|
$ |
9,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.75 |
|
|
$ |
1.65 |
|
|
$ |
1.28 |
|
|
$ |
0.94 |
|
|
$ |
0.69 |
|
Diluted |
|
$ |
1.72 |
|
|
$ |
1.61 |
|
|
$ |
1.25 |
|
|
$ |
0.93 |
|
|
$ |
0.69 |
|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
13,621 |
|
|
|
13,452 |
|
|
|
13,362 |
|
|
|
13,335 |
|
|
|
13,328 |
|
Diluted |
|
|
13,878 |
|
|
|
13,775 |
|
|
|
13,633 |
|
|
|
13,539 |
|
|
|
13,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Condensed Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,791 |
|
|
$ |
1,193 |
|
|
$ |
1,267 |
|
|
$ |
109 |
|
|
$ |
13,930 |
|
Net working capital |
|
|
55,684 |
|
|
|
48,073 |
|
|
|
41,146 |
|
|
|
38,563 |
|
|
|
46,320 |
|
Total assets |
|
|
269,478 |
|
|
|
241,651 |
|
|
|
200,333 |
|
|
|
178,746 |
|
|
|
106,799 |
|
Total debt, including current portion |
|
|
20,023 |
|
|
|
42,094 |
|
|
|
40,220 |
|
|
|
43,318 |
|
|
|
381 |
|
Total stockholders equity |
|
|
153,047 |
|
|
|
124,227 |
|
|
|
98,859 |
|
|
|
80,241 |
|
|
|
66,586 |
|
Notes to Five-Year Summary
|
|
|
(a) |
|
Effective June 27, 2007, the Company acquired Karta
Technologies, Inc. (Karta). Karta added $29 million in
revenue to our 2007 financial results. |
Page 32
|
|
|
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), engineering, logistics, and professional
engineering services and solutions to 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, acquisition, and lifecycle support |
|
|
|
Engineering and logistics |
|
|
|
Health IT/medical transformation |
|
|
|
Training and simulation |
We generate the majority of our revenue from 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 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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Defense and Intelligence agencies |
|
|
92.0 |
% |
|
|
87.8 |
% |
|
|
81.0 |
% |
Federal Civilian agencies |
|
|
8.0 |
|
|
|
11.9 |
|
|
|
16.3 |
|
Commercial, state, and local entities |
|
|
|
|
|
|
0.3 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
We believe that our contract base is well diversified. As of December 31, 2010, our total
contract backlog was approximately $1.3 billion, of which approximately $302 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 33
Revenue
The majority of our revenue is derived from services and solutions provided to the Federal
Government, primarily by our employees and, to a lesser extent, our subcontractors. We derived
approximately 88%, 84%, and 83% of our revenue as a prime contractor for the years ended 2010,
2009, and 2008, respectively.
Contract Types
Our services and solutions are provided under three basic types of contracts: time-and-materials;
cost-plus; and fixed-price. Our contract mix varies from year to year due to numerous factors
including our business strategies and 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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Time-and-materials |
|
|
55.1 |
% |
|
|
50.7 |
% |
|
|
45.4 |
% |
Cost-plus |
|
|
13.5 |
|
|
|
14.7 |
|
|
|
21.9 |
|
Fixed-price |
|
|
31.4 |
|
|
|
34.6 |
|
|
|
32.7 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
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 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 contracts. Under
fixed-price contracts, we perform specific tasks or provide specified goods for a predetermined
price. Compared to time-and-materials and cost-plus contracts, 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 fixed-price service contracts are fixed-price level-of-effort work, which has a lower risk
than fixed-price completion contracts, such as software development. Some of our GWACs include
provisions for both services, as well as product (hardware and software) purchases. Fixed-price
product sales, such as under our BRAC and NETCENTS task orders, tend to carry lower margins, but
with lower risk as well, because our prices from our vendors are fixed.
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.
Page 34
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.
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 35
Results of Operations
The following table sets forth certain items from our consolidated statements of operations 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 |
|
|
|
22,047 |
|
|
|
4.1 |
|
|
|
4.7 |
|
Depreciation and amortization |
|
|
5,054 |
|
|
|
4,228 |
|
|
|
0.9 |
|
|
|
0.9 |
|
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 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 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010, Compared to Year Ended December 31, 2009
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%. Our organic
revenue growth rate, which reflects our increase in revenue from year to year excluding the effect
of acquisitions, for the year ended December 31, 2010, was 22.0%. 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.
During 2010, our PEO Soldier contract accounted for 13.7%, or approximately $79.5 million of our
revenue, and our BRAC task orders accounted for 9.8%, or approximately $56.8 million of our
revenue. During 2009, PEO Soldier accounted for 10.0%, or $47.0 million, of our revenue. No
revenue was generated from BRAC task orders during 2009. Further, the BRAC task orders are
scheduled to end during 2011.
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 typically carry a lower margin.
Page 36
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 $22.0 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 the year, partially offset by a decrease in executive and
other senior management overhead.
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 the year.
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
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 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
income, as a percentage of revenue, 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 average outstanding loan balance and lower interest rates. During 2010, we had an average
outstanding loan balance of $30.9 million, which accrued interest at approximately 1.3%. During
2009, we had an average outstanding loan balance of $36.6 million, which accrued interest at
approximately 1.5%.
Income tax
For the year ended December 31, 2010, our income tax expense was 39.1% of our income. This is a
decrease from 40.0% for the year ended December 31, 2009. The decrease was principally
attributable to a reduction in state income tax as a result of corporate restructuring which
occurred during the first quarter of 2010.
Page 37
The following table sets forth certain items from our consolidated statements of operations for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(as a Percentage of Revenue) |
|
Revenue |
|
$ |
468,910 |
|
|
$ |
390,596 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
407,322 |
|
|
|
336,473 |
|
|
|
86.9 |
|
|
|
86.1 |
|
General and administrative expenses |
|
|
22,047 |
|
|
|
20,079 |
|
|
|
4.7 |
|
|
|
5.1 |
|
Depreciation and amortization |
|
|
4,228 |
|
|
|
3,660 |
|
|
|
0.9 |
|
|
|
1.0 |
|
Gain on extinguishment of
contingent consideration liability |
|
|
(2,285 |
) |
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
431,312 |
|
|
|
360,212 |
|
|
|
92.0 |
|
|
|
92.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
37,598 |
|
|
|
30,384 |
|
|
|
8.0 |
|
|
|
7.8 |
|
Interest expense, net |
|
|
657 |
|
|
|
2,026 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
36,941 |
|
|
|
28,358 |
|
|
|
7.9 |
|
|
|
7.3 |
|
Provision for income taxes |
|
|
14,784 |
|
|
|
11,318 |
|
|
|
3.2 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,157 |
|
|
$ |
17,040 |
|
|
|
4.7 |
% |
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009, Compared to Year Ended December 31, 2008
Revenue
Revenue for the year ended December 31, 2009 was $468.9 million, compared to $390.6 million for the
year ended December 31, 2008, representing an increase of $78.3 million, or 20.0%. Our organic
revenue growth rate, which reflects our increase in revenue from year to year excluding the effect
of acquisitions, for the year ended December 31, 2009, was 16.3%. The increase in revenue was due
to new contract and task order awards, growth on existing contracts, and from our acquisition of
TRS. New contract awards consisted primarily of numerous new task order awards under our ITES-2S,
NETCENTS, and TEIS contracts. Additionally, we saw significant revenue growth on a number of
contracts, primarily the NETCOM EMS and PEO Soldier contracts, and an increase in orders under the
NETCENTS contract. The additional revenue on these and other contracts was partially offset by a
reduction in revenue from expired contracts.
Cost of revenue
Cost of revenue for the year ended December 31, 2009 was $407.3 million, or 86.9% of revenue,
compared to $336.5 million, or 86.1% of revenue, for the year ended December 31, 2008. The
increase was due to approximately $36.2 million in higher direct labor and associated indirect
expenses, such as fringe benefits, and approximately $34.6 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, growth on existing contracts, and from our
acquisition of TRS. The increase in cost of revenue as a percentage of revenue is due to the
increase in material-related sales which typically carry a lower margin.
General and administrative expenses
General and administrative expenses for the year ended December 31, 2009 were $22.0 million, or
4.7% of revenue, compared to $20.1 million, or 5.1% of revenue, for the year ended December 31,
2008. 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 indirect support costs, higher stock compensation
expense, and severance-related costs related to the resignation of one individual, offset by lower
bid and proposal costs.
Page 38
Depreciation and amortization
Depreciation and amortization for the year ended December 31, 2009 was $4.2 million, compared to
$3.7 million for the year ended December 31, 2008. The increase was primarily the result of the
amortization associated with the contracts and customer relationships and non-compete intangible
assets recorded in connection with our acquisitions.
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
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 in 2009.
Operating income
For the year ended December 31, 2009, operating income was $37.6 million, or 8.0% of revenue,
compared to $30.4 million, or 7.8% of revenue for the year ended December 31, 2008. Operating
income, as a percentage of revenue, increased due to the gain on extinguishment of contingent
consideration.
Interest expense, net
For the year ended December 31, 2009, net interest expense was $0.7 million compared to $2.0
million for the year ended December 31, 2008. The decrease in interest expense was the result of a
lower average outstanding loan balance and lower interest rates. During 2009, we had an average
outstanding loan balance of $36.6 million, which accrued interest at approximately 1.5%. During
2008, we had an average outstanding loan balance of $51.6 million, which accrued interest at
approximately 3.8%.
Income tax
For the year ended December 31, 2009, our income tax expense was 40.0% of our income before tax.
This was a slight increase from 39.9% for the year ended December 31, 2008.
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 2010, approximately 55% of our revenue was generated
under time-and-materials contracts, where labor rates are usually adjusted annually by
predetermined escalation factors. Also during 2010, approximately 14% of our revenue was generated
under cost-plus contracts, which automatically adjust for changes in cost. The remaining 31% of
our revenue was generated under fixed-price contracts, in which we include a predetermined
escalation factor and for which we generally have not been adversely affected by inflation.
Liquidity and Capital Resources
Our primary liquidity needs are for financing working capital, capital expenditures, making
selective strategic acquisitions, and share repurchases. We expect the combination of current cash
on hand, cash flows from operations, and the available borrowing capacity under our credit facility
to continue to meet our normal working capital and capital expenditure requirements for at least
the next 12 months. As part of our growth strategy, we may pursue acquisitions that could require
us to obtain additional debt or issue equity.
Page 39
During 2010, we repaid approximately $22.0 million, net, to our credit facility. Also, during
2010, the balance of accounts receivable increased by $22.7 million to $132.7 million at the end of
the year; however, days sales outstanding of accounts receivable (DSO) decreased 10 days to 71 days
at December 31, 2010 as compared to 81 days at December 31, 2009.
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. 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, an
increase in the Companys cash needs, a decrease in the Companys available cash, borrowing
capacity under our credit facility, interest rates, and the Companys financial performance and
position. We may suspend or discontinue repurchases at any time. We have not repurchased any
shares in accordance with this authorization.
Credit Facility: During December 2010, we replaced our previous credit facility with a new credit
facility (the Credit Facility). The Credit Facility increased our borrowing capacity by $35
million and also increased our interest rate index spread above LIBOR from between 100 to 175 basis
points to a spread between 200 to 300 basis points. The Credit Facility is a revolving credit
facility with a principal amount of up to $125.0 million, which includes a swingline facility with
an original principal amount of up to $8.0 million. The outstanding balance under the Credit
Facility accrues interest based on one-month LIBOR plus an applicable margin (spread), ranging from
200 to 300 basis points, based on the ratio of the amount of our outstanding senior debt ratio to
Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) adjusted for acquisitions.
The accrued interest is due and payable monthly. The outstanding borrowings are collateralized by
a security interest in substantially all the Companys assets. The lenders also require a direct
assignment of all contracts at the lenders discretion. The Credit Facility expires on December
13, 2014. We do not currently hedge our interest rate risk. The Credit Facility allows us to use
borrowings from our credit facility 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 expenditures, for stock repurchases, and for general corporate uses. As of
December 31, 2010, there was approximately $20.0 million due under the Credit Facility, which
reflects approximately $22.0 million of net repayments during 2010.
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 the amount of
our outstanding senior debt ratio to Earnings Before Interest Taxes Depreciation and Amortization
(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, 2010, the spread above LIBOR was 200 basis points and thus, the loan
accrued interest at 2.3%.
The Credit Facility contains various restrictive covenants that, among other things, restrict the
Companys ability to: incur or guarantee additional debt; make certain distributions, investments
and other restricted payments, including cash dividends on the Companys outstanding common stock;
enter into transactions with certain affiliates; create or permit certain liens; and consolidate,
merge, or sell assets. In addition, the Credit Facility contains certain financial covenants that
require the Company to: maintain a minimum tangible net worth; maintain a minimum fixed charge
coverage ratio and a minimum funded debt to earnings ratio; and limit capital expenditures below
certain thresholds.
As of December 31, 2010, we were in compliance with all our loan covenants.
Page 40
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, 2010 that require us
to make future cash payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
Contractual obligations: |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
|
(in thousands) |
|
Credit Facility |
|
$ |
20,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20,000 |
|
|
$ |
|
|
Capital lease obligations |
|
|
23 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
23,922 |
|
|
|
7,731 |
|
|
|
10,959 |
|
|
|
4,137 |
|
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
43,945 |
|
|
$ |
7,754 |
|
|
$ |
10,959 |
|
|
$ |
24,137 |
|
|
$ |
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Accounting Policies
Revenue Recognition
Our revenue recognition policy addresses our three different types of contractual arrangements:
time-and-materials contracts; cost-plus contracts; and 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 Contracts: Revenue on cost-plus contracts is recognized as services are performed,
generally 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 and determinable,
generally upon contract notification confirming the award fee. 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.
Fixed-Price Contracts: Revenue recognition methods on fixed-price contracts will vary depending on
the nature of the work and the contract terms. Revenue on 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 fixed-price contracts
that require delivery of specific items is recognized based on a price per unit as units are
delivered. Revenue for 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.
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 fixed-price contracts where the Company is designing, engineering, or
manufacturing to the customers specifications is recognized on the percentage-of-completion method
using costs incurred in relation to total estimated costs. Profits on fixed-price contracts result
from the difference between the incurred costs and the revenue earned. A portion of the Companys
revenue is derived from arrangements that include software developed and/or provided by the
Company. The Company recognizes this revenue using the percentage-of-completion method of
accounting, generally using the cost-to-cost input measure. 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
Page 41
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 (TSE); 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, we perform a fair-value analysis of our 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. As of October 1, 2010, the Company determined
that its 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 2010, the tax
deduction was $6.9 million. At our tax rate of 39.1%, this deduction saved us approximately $2.7
million in current income tax expenditures. 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.
Page 42
|
|
|
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, 2010, a 1% change in interest rates would have changed
our interest expense and cash flows by approximately $0.2 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 Federal
Government.
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements of NCI, Inc. are submitted 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 (who is the Companys principal
executive officer and the acting principal financial officer), 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 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. |
Page 43
Limitations on the Effectiveness of Controls
Management, including the Companys Chief Executive Officer, does 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.
Scope of the Assessments
The assessment by the Companys Chief Executive 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 actions, 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.
Page 44
Evaluation of the Effectiveness of Disclosure Controls and Procedures
Based upon the evaluation, the Companys Chief Executive Officer concluded that, as of December 31,
2010, 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, 2010, 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 during the three months
ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect,
its internal control over financial reporting.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
Not Applicable.
Page 45
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
2011 Annual Meeting of Stockholders (the 2011 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 2011 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 2010 Proxy Statement, and that
information is incorporated by referenced 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 2011 Proxy Statement, and that information is
incorporated by referenced 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 2011
Proxy Statement, and that information is incorporated by referenced 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 2011 Proxy Statement, and that information is incorporated by referenced
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 2011 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 2011 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 2011 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 2011 Proxy Statement, and that information
is incorporated by reference in this Form 10-K.
Page 46
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:
|
(1) |
|
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 Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended December 31, 2010, 2009, and 2008
Consolidated Statements of Changes in Stockholders Equity for the years ended December 31,
2010, 2009, and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008
Notes to Consolidated Financial Statements
|
(2) |
|
Exhibits required by Item 601 of Regulation S-K: |
|
|
|
|
|
Number |
|
Description |
|
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 Registration Statement 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 16, 2010, by and among, NCI, Inc., and Terry W. Glasgow
(incorporated herein by reference from Exhibit 10.1 to
registrants Current Report on Form 8-K (File No. 000-51579),
as filed with the Commission March 18, 2010). |
|
10.3 |
* |
|
Executive Change in Control and Severance Agreement, dated
March 16, 2010, by and among, NCI, Inc., and Michele R.
Cappello (incorporated herein by reference from Exhibit 10.3 to
registrants Current Report on
Form 8-K (File No. 000-51579),
as filed with the Commission March 18, 2010). |
|
21.1 |
|
|
Subsidiaries of Registrant. |
|
23.1 |
|
|
Consent of Ernst & Young LLP. |
|
31.1 |
|
|
Certification of the Chief Executive Officer and Acting
Principal 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 Acting
Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
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 47
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: February 28, 2011
|
|
By:
|
|
/s/ CHARLES K. NARANG
Charles K. Narang
|
|
|
|
|
|
|
Chairman of the Board and Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer and Acting Principal Financial 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 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/ TERRY W. GLASGOW
Terry W. Glasgow
|
|
President and Director
|
|
February 28, 2011 |
|
|
|
|
|
/s/ JAMES P. ALLEN
James P. Allen
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
/s/ JOHN E. LAWLER
John E. Lawler
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
/s/ PAUL V. LOMBARDI
Paul V. Lombardi
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
/s/ J. PATRICK MCMAHON
J. Patrick McMahon
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
/s/ STEPHEN L. WAECHTER
Stephen L. Waechter
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
/s/ DANIEL R. YOUNG
Daniel R. Young
|
|
Director
|
|
February 28, 2011 |
Page 48
INDEX TO FINANCIAL STATEMENTS
NCI, INC.
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
|
|
|
F-8 |
|
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, 2010,
based on criteria established in Internal ControlIntegrated 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, 2010, 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, 2010 and
2009, 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, 2010 of NCI, Inc., and our
report dated February 28, 2011 expressed an unqualified opinion thereon.
McLean, VA
February 28, 2011
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, 2010
and 2009, and the related consolidated statements of operations, shareholders equity and cash
flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the
consolidated results of its operations and its cash flows for each of the three years in the period
ended December 31, 2010, 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,
2010, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28,
2011 expressed an unqualified opinion thereon.
McLean, VA
February 28, 2011
F-3
NCI, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,791 |
|
|
$ |
1,193 |
|
Accounts receivable, net |
|
|
132,693 |
|
|
|
110,027 |
|
Deferred tax assets, net |
|
|
4,547 |
|
|
|
4,525 |
|
Prepaid expenses and other current assets |
|
|
3,347 |
|
|
|
1,677 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
143,378 |
|
|
|
117,422 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
11,751 |
|
|
|
8,253 |
|
Other assets |
|
|
1,590 |
|
|
|
827 |
|
Intangible assets, net |
|
|
6,179 |
|
|
|
8,569 |
|
Goodwill |
|
|
106,580 |
|
|
|
106,580 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
269,478 |
|
|
$ |
241,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
61,046 |
|
|
$ |
42,333 |
|
Accrued salaries and benefits |
|
|
20,229 |
|
|
|
21,012 |
|
Deferred revenue |
|
|
2,951 |
|
|
|
1,782 |
|
Other accrued expenses |
|
|
3,468 |
|
|
|
4,222 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
87,694 |
|
|
|
69,349 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
20,000 |
|
|
|
42,000 |
|
Deferred tax liabilities, net |
|
|
7,450 |
|
|
|
4,138 |
|
Deferred rent and other long-term liabilities |
|
|
1,287 |
|
|
|
1,937 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
116,431 |
|
|
|
117,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Class A common stock, $0.019 par
value37,500,000 shares authorized;
8,469,242 shares issued and outstanding as
of December 31, 2010, and 8,288,454 shares
issued and outstanding as of December 31,
2009 |
|
|
161 |
|
|
|
158 |
|
Class B common stock, $0.019 par
value12,500,000 shares authorized;
5,200,000 shares issued and outstanding as
of December 31, 2010 and 2009 |
|
|
99 |
|
|
|
99 |
|
Additional paid-in capital |
|
|
67,889 |
|
|
|
62,943 |
|
Retained earnings |
|
|
84,898 |
|
|
|
61,027 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
153,047 |
|
|
|
124,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
269,478 |
|
|
$ |
241,651 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-4
NCI, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenue |
|
$ |
581,341 |
|
|
$ |
468,910 |
|
|
$ |
390,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
512,779 |
|
|
|
407,322 |
|
|
|
336,473 |
|
General and administrative expense |
|
|
23,730 |
|
|
|
22,047 |
|
|
|
20,079 |
|
Depreciation and amortization |
|
|
5,054 |
|
|
|
4,228 |
|
|
|
3,660 |
|
Gain on extinguishment of contingent consideration liability |
|
|
|
|
|
|
(2,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
541,563 |
|
|
|
431,312 |
|
|
|
360,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
39,778 |
|
|
|
37,598 |
|
|
|
30,384 |
|
Interest expense, net |
|
|
598 |
|
|
|
657 |
|
|
|
2,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
39,180 |
|
|
|
36,941 |
|
|
|
28,358 |
|
Income tax expense |
|
|
15,309 |
|
|
|
14,784 |
|
|
|
11,318 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,871 |
|
|
$ |
22,157 |
|
|
$ |
17,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common and common equivalent share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
13,621 |
|
|
|
13,452 |
|
|
|
13,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
1.75 |
|
|
$ |
1.65 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and equivalent shares outstanding |
|
|
13,878 |
|
|
|
13,775 |
|
|
|
13,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
1.72 |
|
|
$ |
1.61 |
|
|
$ |
1.25 |
|
See Notes to Consolidated Financial Statements.
F-5
NCI, Inc.
Consolidated Statements of Changes in Stockholders Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Additional |
|
|
|
|
|
|
Total |
|
|
|
common stock |
|
|
common stock |
|
|
Paid-in |
|
|
Retained |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Equity |
|
Balance at December 31, 2007 |
|
|
8,153 |
|
|
$ |
155 |
|
|
|
5,200 |
|
|
$ |
99 |
|
|
$ |
58,157 |
|
|
$ |
21,830 |
|
|
$ |
80,241 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,040 |
|
|
|
17,040 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
828 |
|
|
|
|
|
|
|
828 |
|
Exercise of stock options |
|
|
53 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
405 |
|
|
|
|
|
|
|
406 |
|
Excess tax benefits of stock option exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344 |
|
|
|
|
|
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
8,206 |
|
|
$ |
156 |
|
|
|
5,200 |
|
|
$ |
99 |
|
|
$ |
59,734 |
|
|
$ |
38,870 |
|
|
$ |
98,859 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,157 |
|
|
|
22,157 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,784 |
|
|
|
|
|
|
|
1,784 |
|
Exercise of stock options |
|
|
82 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
1,017 |
|
|
|
|
|
|
|
1,019 |
|
Excess tax benefits of stock option exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408 |
|
|
|
|
|
|
|
408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
NCI, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,871 |
|
|
$ |
22,157 |
|
|
$ |
17,040 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,054 |
|
|
|
4,228 |
|
|
|
3,660 |
|
(Gain) loss on sale and disposal of property and equipment |
|
|
(85 |
) |
|
|
2 |
|
|
|
(8 |
) |
Non-cash stock compensation expense |
|
|
1,607 |
|
|
|
1,784 |
|
|
|
828 |
|
Deferred income taxes |
|
|
3,290 |
|
|
|
1,038 |
|
|
|
485 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(22,666 |
) |
|
|
(16,617 |
) |
|
|
(3,699 |
) |
Prepaid expenses and other assets |
|
|
(1,765 |
) |
|
|
191 |
|
|
|
(484 |
) |
Accounts payable |
|
|
18,713 |
|
|
|
9,531 |
|
|
|
1,945 |
|
Accrued expenses |
|
|
(380 |
) |
|
|
(2,523 |
) |
|
|
2,584 |
|
Deferred rent |
|
|
(567 |
) |
|
|
(590 |
) |
|
|
(522 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
27,072 |
|
|
|
19,201 |
|
|
|
21,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(6,218 |
) |
|
|
(4,622 |
) |
|
|
(2,160 |
) |
Proceeds from sale of property and equipment |
|
|
141 |
|
|
|
|
|
|
|
28 |
|
Cash paid for acquisitions, net of cash acquired |
|
|
|
|
|
|
(17,953 |
) |
|
|
(16,190 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(6,077 |
) |
|
|
(22,575 |
) |
|
|
(18,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit |
|
|
119,349 |
|
|
|
113,719 |
|
|
|
100,489 |
|
Payments on line of credit |
|
|
(141,349 |
) |
|
|
(111,719 |
) |
|
|
(103,431 |
) |
Financing costs paid |
|
|
(669 |
) |
|
|
|
|
|
|
|
|
Principal payments under capital lease obligations |
|
|
(70 |
) |
|
|
(127 |
) |
|
|
(157 |
) |
Proceeds from exercise of stock options |
|
|
2,933 |
|
|
|
1,019 |
|
|
|
406 |
|
Excess tax deduction from exercise of stock options |
|
|
409 |
|
|
|
408 |
|
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(19,397 |
) |
|
|
3,300 |
|
|
|
(2,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
1,598 |
|
|
|
(74 |
) |
|
|
1,158 |
|
Cash and cash equivalents, beginning of year |
|
|
1,193 |
|
|
|
1,267 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
2,791 |
|
|
$ |
1,193 |
|
|
$ |
1,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
646 |
|
|
$ |
712 |
|
|
$ |
2,139 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
12,690 |
|
|
$ |
13,374 |
|
|
$ |
9,108 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-7
NCI, Inc.
Notes to Consolidated Financial Statements
December 31, 2010
1. Business Overview
NCI, Inc. (the Company or NCI) was incorporated in Delaware during July 2005.
NCI is a provider of information technology (IT), engineering, logistics and professional services
and solutions to Federal Government agencies. NCIs capabilities are centered on overcoming
customers challenges to help them meet their critical mission and objectives. NCI provides full
lifecycle IT specialties, complemented by professional services. NCI has the agility, position,
and determination to focus on expanding market segments within the Federal IT and professional
services markets. The Company is extending its core capabilities in line with key market drivers
and investing in a robust set of business solutions and offerings. NCIs core capabilities
include: enterprise systems management; network engineering; cybersecurity and information
assurance; software development and systems engineering; program management, acquisition, and
lifecycle support; engineering and logistics; health IT/medical transformation; and training and
simulation. The Company provides these services to Defense, Intelligence, and Federal Civilian
agencies. The majority of the Companys revenue was derived from contracts with the 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
The majority of the Companys revenue is derived from services and solutions provided to the
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 contracts; and 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.
F-8
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
Revenue on cost-plus contracts is recognized as services are performed, generally 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 and determinable, generally upon contract
notification confirming the award fee. 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 fixed-price contracts will vary depending on the nature of the work
and the contract terms. Revenue on 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 fixed-price contracts that require delivery of
specific items is recognized based on a price per unit as units are delivered. Revenue for
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. 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 fixed-price contracts where the Company is designing, engineering, or
manufacturing to the customers specifications is recognized on the percentage-of-completion method
using costs incurred in relation to total estimated costs. Profits on fixed-price contracts result
from the difference between the incurred costs and the revenue earned. A portion of the Companys
revenue is derived from arrangements that include software developed and/or provided by the
Company. The Company recognizes this revenue using the percentage-of-completion method of
accounting, generally using the cost-to-cost input measure. 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 (TSE); 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.
F-9
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
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.
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 two 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 2010 or 2009.
Intangible Assets
Intangible assets consist of acquisition-related contract 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 eight years. Non-compete agreements are amortized over their
contractual life, which is between three to five years.
Goodwill
A review of goodwill is reviewed for impairment is performed 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.
Based on the analysis performed, the Company determined that there were no such impairments, nor
indicators of impairments, for goodwill during 2010 or 2009.
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. 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. Holders of the Companys common stock do not have
cumulative voting rights in the election of directors.
F-10
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
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.
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 Expense 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. 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, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except per share data) |
|
Net Income |
|
$ |
23,871 |
|
|
$ |
22,157 |
|
|
$ |
17,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic shares outstanding during the period |
|
|
13,621 |
|
|
|
13,452 |
|
|
|
13,362 |
|
Dilutive effect of stock options after application of treasury stock method |
|
|
257 |
|
|
|
323 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding during the period |
|
|
13,878 |
|
|
|
13,775 |
|
|
|
13,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.75 |
|
|
$ |
1.65 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
1.72 |
|
|
$ |
1.61 |
|
|
$ |
1.25 |
|
F-11
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
4. Major Customers
The Company earned the majority of its revenue from the Federal Government for each of the years
ended December 31, 2010, 2009, and 2008. Revenue by customer for each of the three years ended
December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(dollars in thousands) |
|
Defense and Intelligence agencies |
|
$ |
534,987 |
|
|
|
92.0 |
% |
|
$ |
411,646 |
|
|
|
87.8 |
% |
|
$ |
316,316 |
|
|
|
81.0 |
% |
Federal Civilian agencies |
|
|
46,258 |
|
|
|
8.0 |
|
|
|
55,760 |
|
|
|
11.9 |
|
|
|
63,827 |
|
|
|
16.3 |
|
Commercial, state, and local entities |
|
|
96 |
|
|
|
|
|
|
|
1,504 |
|
|
|
0.3 |
|
|
|
10,453 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
581,341 |
|
|
|
100.0 |
% |
|
$ |
468,910 |
|
|
|
100.0 |
% |
|
$ |
390,596 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Accounts Receivable
Accounts receivable consist of billed and unbilled amounts at December 31, 2010 and 2009, as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Billed receivables |
|
$ |
51,611 |
|
|
$ |
59,132 |
|
Unbilled receivables: |
|
|
|
|
|
|
|
|
Billable receivables at end of period |
|
|
61,500 |
|
|
|
42,934 |
|
Other |
|
|
20,280 |
|
|
|
9,020 |
|
|
|
|
|
|
|
|
Total unbilled receivables |
|
|
81,780 |
|
|
|
51,954 |
|
|
|
|
|
|
|
|
Total accounts receivable |
|
|
133,391 |
|
|
|
111,086 |
|
Less: allowance for doubtful accounts |
|
|
698 |
|
|
|
1,059 |
|
|
|
|
|
|
|
|
Total accounts receivable, net |
|
$ |
132,693 |
|
|
$ |
110,027 |
|
|
|
|
|
|
|
|
Other unbilled receivables primarily consist of amounts billable as of year-end but where
invoices were not issued until after the end of the period and amounts that will be billed upon
milestone completions. Substantially all other unbilled receivables are expected to be billed and
collected within the next 12 months.
The following table details the Allowance for Doubtful Accounts for the years ended December 31,
2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Balance at beginning of period |
|
$ |
1,059 |
|
|
$ |
1,020 |
|
|
$ |
585 |
|
Charged to costs and expense |
|
|
385 |
|
|
|
88 |
|
|
|
610 |
|
Deductions |
|
|
(746 |
) |
|
|
(49 |
) |
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
698 |
|
|
$ |
1,059 |
|
|
$ |
1,020 |
|
|
|
|
|
|
|
|
|
|
|
F-12
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
6. Property and Equipment
The following table details property and equipment at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Property and equipment |
|
|
|
|
|
|
|
|
Furniture and equipment |
|
$ |
17,855 |
|
|
$ |
18,831 |
|
Leasehold improvements |
|
|
5,287 |
|
|
|
4,936 |
|
Real property |
|
|
549 |
|
|
|
549 |
|
|
|
|
|
|
|
|
|
|
|
23,691 |
|
|
|
24,316 |
|
Less: Accumulated depreciation and amortization |
|
|
11,940 |
|
|
|
16,063 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
11,751 |
|
|
$ |
8,253 |
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2010, 2009, and 2008 was $2.7 million,
$2.1 million, and $1.9 million, respectively.
7. Intangible Assets
The following table details intangible assets at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Contract and customer relationships |
|
$ |
14,942 |
|
|
$ |
14,942 |
|
Less: Accumulated amortization |
|
|
8,994 |
|
|
|
6,740 |
|
|
|
|
|
|
|
|
|
|
|
5,948 |
|
|
|
8,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
|
2,038 |
|
|
|
2,038 |
|
Less: Accumulated amortization |
|
|
1,807 |
|
|
|
1,671 |
|
|
|
|
|
|
|
|
|
|
|
231 |
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,179 |
|
|
$ |
8,569 |
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2010, 2009, and 2008 was approximately
$2.4 million, $2.1 million, and $1.8 million, respectively. Future amortization expense related to
intangible assets is expected to be as follows:
|
|
|
|
|
For the year ending December 31, |
|
(in thousands) |
|
2011 |
|
$ |
2,010 |
|
2012 |
|
|
1,450 |
|
2013 |
|
|
1,163 |
|
2014 |
|
|
1,087 |
|
2015 |
|
|
469 |
|
Thereafter |
|
|
|
|
F-13
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
8. Goodwill
The following table details the balance of goodwill for each acquisition at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Spectrum Systems Services, Inc. |
|
$ |
169 |
|
|
$ |
169 |
|
Scientific and Engineering Solutions, Inc. |
|
|
17,258 |
|
|
|
17,258 |
|
Operational Technology Services, Inc. |
|
|
5,766 |
|
|
|
5,766 |
|
Karta Technologies, Inc. |
|
|
53,373 |
|
|
|
53,373 |
|
PEO Soldier |
|
|
11,174 |
|
|
|
11,174 |
|
TRS Consulting, Inc. |
|
|
18,840 |
|
|
|
18,840 |
|
|
|
|
|
|
|
|
Total |
|
$ |
106,580 |
|
|
$ |
106,580 |
|
|
|
|
|
|
|
|
9. Other Accrued Expenses
Other accrued expenses consist of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Accrued health claims |
|
$ |
1,525 |
|
|
$ |
1,612 |
|
Accrued income tax |
|
|
|
|
|
|
989 |
|
Deferred rent, current |
|
|
695 |
|
|
|
634 |
|
Other accrued expenses |
|
|
1,248 |
|
|
|
987 |
|
|
|
|
|
|
|
|
Total other accrued expenses |
|
$ |
3,468 |
|
|
$ |
4,222 |
|
|
|
|
|
|
|
|
10. Leases
The Company has entered into certain capital lease obligations with various expiration dates
through December 2011. During October 2003, the Company entered into a lease line of credit to
finance various PC and networking equipment. The applicable interest rates on the capital leases
range from 1.6% to 12.3%.
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, |
|
|
|
|
2011 |
|
$ |
7,731 |
|
2012 |
|
|
6,558 |
|
2013 |
|
|
4,401 |
|
2014 |
|
|
2,451 |
|
2015 |
|
|
1,686 |
|
Thereafter |
|
|
1,095 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
23,922 |
|
|
|
|
|
The Company incurred rent expense including amortization of deferred rent expense, under
operating leases of $5.9 million, $6.6 million, and $5.8 million for the years ended December 31,
2010, 2009, and 2008, respectively.
F-14
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
11. Credit Facility
During December 2010, the Company entered into a new credit facility (the 2010 Credit Facility).
The 2010 Credit Facility consists of a revolving line of credit with a principal amount of up to
$125.0 million, which includes a swingline facility with an original principal amount of up to $8.0
million. The 2010 Credit Facility also has a $50.0 million accordion feature allowing us to
increase our borrowing capacity to up to $175.0 million, 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
2010 Credit Facility accrues interest based on LIBOR plus an applicable margin, ranging from 200 to
300 basis points, based on the ratio of the amount of our outstanding senior debt ratio to Earnings
Before Interest Taxes Depreciation and Amortization (EBITDA) adjusted for acquisitions. The 2010
Credit Facility expires on December 13, 2014.
The 2010 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 2010 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 previous credit facility (the 2006 Credit Facility) provided for a revolving line of credit
with a principal amount of up to $90.0 million, which included a swingline facility with an
original principal amount of up to $5.0 million. 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
funded debt to earnings.
As of December 31, 2010, the outstanding balance under the 2010 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, 2010,
NCI was in compliance with all its loan covenants. As of December 31, 2009, the outstanding
balance under the 2006 Credit Facility was $42.0 million and interest accrued at a rate of LIBOR
plus 100 basis points, or 1.2%. As of December 31, 2009, NCI was in compliance with all its loan
covenants.
12. Acquisitions
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.
F-15
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
13. 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, 2010, the Plan has reserved 3,700,000 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, |
|
|
|
2010 |
|
|
|
(in thousands) |
|
Shares reserved under the plan |
|
|
3,700 |
|
|
|
|
|
|
Options exercised |
|
|
1,318 |
|
Options outstanding |
|
|
1,098 |
|
|
|
|
|
|
|
|
|
|
Shares available for future grants |
|
|
1,284 |
|
|
|
|
|
Stock Compensation
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, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Expected Volatility |
|
|
46 |
% |
|
|
47 |
% |
|
|
39 |
% |
Expected Term (in years) |
|
|
5.4 |
|
|
|
5.3 |
|
|
|
5.4 |
|
Risk-free Interest Rate |
|
|
2.12 |
% |
|
|
2.15 |
% |
|
|
2.66 |
% |
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-16
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
Stock Options Activity
The following table summarizes stock option activity for the period January 1, 2008 through
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Exercise Price per |
|
|
|
Options |
|
|
Share |
|
|
|
(in thousands) |
|
|
|
|
Outstanding at January 1, 2008 |
|
|
834 |
|
|
$ |
10.96 |
|
Granted |
|
|
208 |
|
|
|
20.89 |
|
Forfeited/cancelled |
|
|
(11 |
) |
|
|
13.08 |
|
Exercised |
|
|
(53 |
) |
|
|
7.76 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
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 |
|
|
|
|
|
|
|
|
The following table summarizes stock option vesting and unvested options for the period
January 1, 2008 through December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Options |
|
|
Average |
|
|
|
(in thousands) |
|
|
Fair Value |
|
Unvested January 1, 2008 |
|
|
405 |
|
|
$ |
5.45 |
|
Granted |
|
|
208 |
|
|
|
8.39 |
|
Vested |
|
|
(131 |
) |
|
|
4.42 |
|
Forfeited |
|
|
(11 |
) |
|
|
5.48 |
|
|
|
|
|
|
|
|
Unvested December 31, 2008 |
|
|
471 |
|
|
$ |
7.04 |
|
|
|
|
|
|
|
|
Vested December 31, 2008 |
|
|
507 |
|
|
$ |
3.79 |
|
|
|
|
|
|
|
|
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 |
|
|
|
26.98 |
|
Vested |
|
|
(161 |
) |
|
|
9.01 |
|
Forfeited |
|
|
(81 |
) |
|
|
10.87 |
|
|
|
|
|
|
|
|
Unvested December 31, 2010 |
|
|
457 |
|
|
$ |
11.17 |
|
|
|
|
|
|
|
|
Vested December 31, 2010 |
|
|
642 |
|
|
$ |
5.16 |
|
|
|
|
|
|
|
|
F-17
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
The following table summarizes stock options outstanding at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Options |
|
Range of exercise prices |
|
Number of Options |
|
|
Exercise Price |
|
|
Life |
|
|
exercisable |
|
|
|
(in thousands) |
|
|
|
|
|
(in years) |
|
|
(in thousands) |
|
$1.00 $7.00 |
|
|
207 |
|
|
$ |
6.53 |
|
|
|
2.2 |
|
|
|
207 |
|
$10.00 $12.99 |
|
|
163 |
|
|
|
10.16 |
|
|
|
3.8 |
|
|
|
163 |
|
$13.00 $20.00 |
|
|
274 |
|
|
|
16.48 |
|
|
|
3.7 |
|
|
|
186 |
|
$21.00 $27.00 |
|
|
200 |
|
|
|
24.76 |
|
|
|
5.5 |
|
|
|
55 |
|
$29.00 $32.00 |
|
|
254 |
|
|
|
29.42 |
|
|
|
5.9 |
|
|
|
31 |
|
Stock options granted after 2006 vest over a period of three to four years from the date of
grant in accordance with the individual stock option agreement.
Stock Compensation
The following table summarizes stock compensation for the three years ended December 31, 2010,
2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Cost of revenue |
|
$ |
552 |
|
|
$ |
550 |
|
|
$ |
358 |
|
General and administrative |
|
|
1,055 |
|
|
|
1,234 |
|
|
|
470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,607 |
|
|
$ |
1,784 |
|
|
$ |
828 |
|
|
|
|
|
|
|
|
|
|
|
We recognized approximately $0.8 million, $0.7 million, and $0.3 million, respectively, of tax
benefits from share-based compensation during the years ended December 31, 2010, 2009, and 2008.
As of December 31, 2010, there was approximately $3.5 million of total unrecognized compensation
cost of unvested stock compensation agreements related to options. This cost is expected to be
fully amortized over the next four years, with approximately $1.5 million, $1.1 million, $0.8
million, and $0.1 million amortized during 2011, 2012, 2013, and 2014, respectively. These future
costs include an estimated forfeiture rate. Our stock compensation costs may differ based on
actual experience. The costs of the options are included in the Companys Statement of Operations
in the above referenced line items before or in conjunction with the vesting of options.
14. Provision for Income Taxes
Significant components of the provision for income taxes for the three years ended December 31,
2010, 2009, and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
9,593 |
|
|
$ |
11,610 |
|
|
$ |
8,755 |
|
State and Local |
|
|
2,392 |
|
|
|
2,137 |
|
|
|
2,078 |
|
|
|
|
|
|
|
|
|
|
|
Total Current |
|
|
11,985 |
|
|
|
13,747 |
|
|
|
10,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
3,301 |
|
|
|
701 |
|
|
|
498 |
|
State and Local |
|
|
23 |
|
|
|
336 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
Total Deferred |
|
|
3,324 |
|
|
|
1,037 |
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Provision |
|
$ |
15,309 |
|
|
$ |
14,784 |
|
|
$ |
11,318 |
|
|
|
|
|
|
|
|
|
|
|
F-18
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Federal income tax at statutory rates |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of Federal benefit |
|
|
3.8 |
|
|
|
4.8 |
|
|
|
4.7 |
|
Other |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
|
39.1 |
% |
|
|
40.0 |
% |
|
|
39.9 |
% |
|
|
|
|
|
|
|
|
|
|
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.
Components of the Companys deferred tax assets and liabilities are as follows for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Accrued vacation and compensation |
|
$ |
3,800 |
|
|
$ |
3,488 |
|
Allowance for doubtful accounts |
|
|
512 |
|
|
|
410 |
|
Deferred rent |
|
|
777 |
|
|
|
988 |
|
Intangible assets excluding goodwill |
|
|
2,539 |
|
|
|
2,243 |
|
Self insurance |
|
|
|
|
|
|
381 |
|
Stock compensation |
|
|
1,661 |
|
|
|
1,402 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
9,289 |
|
|
|
8,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Self insurance |
|
|
54 |
|
|
|
|
|
Property and equipment |
|
|
1,558 |
|
|
|
215 |
|
Goodwill |
|
|
10,580 |
|
|
|
8,310 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
12,192 |
|
|
|
8,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liabilities) assets |
|
$ |
(2,903 |
) |
|
$ |
387 |
|
|
|
|
|
|
|
|
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, 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, 2007.
F-19
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
15. 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 during 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, 2010, 2009, and 2008
were approximately $4.0 million, $2.9 million, and $2.2 million, respectively.
16. Related Party Transactions
The Company receives support services on an as-needed basis under a subcontract with Net Commerce
Corporation, a government contractor wholly-owned by Mr. Rajiv Narang, the son of Mr. Charles K.
Narang, the Chairman and Chief Executive Officer of the Company. The Company purchased services
from Net Commerce Corporation of approximately $922,000, $546,000, and $552,000 for the years ended
December 31, 2010, 2009, and 2008, respectively. As of December 31, 2010 and 2009, there was
approximately $140,000 and $0 in accounts payable, respectively, related to this contract.
The Company rents office space from Gur Parsaad Properties, Ltd., which is controlled by Dr.
Gurvinder Pal Singh. Dr. Singh was a member of the NCI 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, 2010, 2009, and 2008, NCI paid approximately $1.0 million, $1.0 million,
and $0.9 million, respectively, in lease payments under the office lease. As of December 31, 2010
and 2009, there were no outstanding accounts payable.
During June 2007, the Company entered into a Stock Purchase Agreement to purchase 100% of the
outstanding shares of Karta Technologies, Inc. This agreement included certain indemnifications
from the selling stockholders. Dr. Singh was one of the selling stockholders of Karta. At the
time of the purchase, an escrow account was established to pay for indemnification claims. As of
December 31, 2010 and 2009, the Company was owed approximately $0 and $51,000, respectively.
17. Contingencies
Government Audits
Payments to the Company on Federal Government contracts are subject to adjustment upon audit by
various agencies of the 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.
18. Subsequent Event
The Company evaluated events subsequent to December 31, 2010 for potential recognition and/or
disclosure through the issuance date of these financial statements.
F-20
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
On February 25, 2011, the Company entered into a securities purchase agreement (the Purchase
Agreement) to purchase all of the outstanding capital stock of AdvanceMed Corporation
(AdvanceMed) from Computer Science Services Corporation and DynCorp (together, the Sellers) for
$62 million in cash, subject to certain closing and post-closing adjustments (the Acquisition).
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). AdvanceMed supports
healthcare programs in 38 states with a staff of approximately 450 professionals, including
information specialists, nurses, physicians, statisticians, investigators, and other healthcare
professionals.
Each of the parties to the Purchase Agreement has made customary representations and warranties and
agreed to certain indemnification obligations. The Purchase Agreement also contemplates a five
year non-competition agreement to be entered into by each of the Sellers. The Company intends to
finance the Acquisition through cash on hand and borrowings under the 2010 Credit Facility. The
parties expect to close the Acquisition as soon as practicable after satisfaction of all the
conditions to closing contained in the Purchase Agreement, including the expiration or termination
without the objection of any of the relevant governmental authorities of all applicable waiting
periods (and any extensions thereof), which is expected to occur on or before April 2, 2011.
F-21
NCI, Inc.
Notes to Consolidated Financial Statements(Continued)
December 31, 2010
18. Supplemental Quarterly Information (unaudited)
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 condensed financial operating results of the Company for
the years ended December 31, 2010 and 2009 are presented below.
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For the quarter ended |
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|
Dec. 31, |
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|
Sept. 30, |
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June 30, |
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Mar. 31, |
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|
Dec. 31, |
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Sept. 30, |
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June 30, |
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Mar. 31, |
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2010 |
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2010 |
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2010 |
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|
2010 |
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2009 |
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2009 |
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2009 |
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|
2009 |
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|
(in thousands) |
|
Statement of Operations Data: |
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Revenue |
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$ |
171,021 |
|
|
$ |
168,769 |
|
|
$ |
126,558 |
|
|
$ |
114,993 |
|
|
$ |
125,177 |
|
|
$ |
130,198 |
|
|
$ |
108,519 |
|
|
$ |
105,017 |
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|
|
|
|
|
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|
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Operating costs and expenses: |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
Cost of revenue |
|
|
151,322 |
|
|
|
151,138 |
|
|
|
110,927 |
|
|
|
99,392 |
|
|
|
108,619 |
|
|
|
113,403 |
|
|
|
93,976 |
|
|
|
91,324 |
|
General and administrative
expenses |
|
|
6,550 |
|
|
|
6,194 |
|
|
|
5,369 |
|
|
|
5,617 |
|
|
|
6,121 |
|
|
|
6,271 |
|
|
|
4,894 |
|
|
|
4,762 |
|
Depreciation and amortization |
|
|
1,330 |
|
|
|
1,359 |
|
|
|
1,193 |
|
|
|
1,172 |
|
|
|
1,195 |
|
|
|
1,096 |
|
|
|
991 |
|
|
|
946 |
|
Gain on extinguishment of
contingent consideration
liability |
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(2,285 |
) |
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|
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|
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|
Total operating costs and expenses |
|
|
159,202 |
|
|
|
158,691 |
|
|
|
117,489 |
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|
|
106,181 |
|
|
|
113,650 |
|
|
|
120,770 |
|
|
|
99,861 |
|
|
|
97,032 |
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|
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|
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|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
Operating income |
|
|
11,819 |
|
|
|
10,078 |
|
|
|
9,069 |
|
|
|
8,812 |
|
|
|
11,527 |
|
|
|
9,428 |
|
|
|
8,658 |
|
|
|
7,985 |
|
Interest expense, net |
|
|
173 |
|
|
|
133 |
|
|
|
149 |
|
|
|
143 |
|
|
|
169 |
|
|
|
145 |
|
|
|
151 |
|
|
|
192 |
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|
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|
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|
|
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|
Income before income taxes |
|
|
11,646 |
|
|
|
9,945 |
|
|
|
8,920 |
|
|
|
8,669 |
|
|
|
11,358 |
|
|
|
9,283 |
|
|
|
8,507 |
|
|
|
7,793 |
|
Provision for income taxes |
|
|
4,741 |
|
|
|
3,841 |
|
|
|
3,524 |
|
|
|
3,203 |
|
|
|
4,622 |
|
|
|
3,658 |
|
|
|
3,387 |
|
|
|
3,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,905 |
|
|
$ |
6,104 |
|
|
$ |
5,396 |
|
|
$ |
5,466 |
|
|
$ |
6,736 |
|
|
$ |
5,625 |
|
|
$ |
5,120 |
|
|
$ |
4,675 |
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|
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|
Earnings per share |
|
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|
|
|
|
|
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|
|
Basic |
|
$ |
0.51 |
|
|
$ |
0.45 |
|
|
$ |
0.40 |
|
|
$ |
0.40 |
|
|
$ |
0.50 |
|
|
$ |
0.42 |
|
|
$ |
0.38 |
|
|
$ |
0.35 |
|
Diluted |
|
$ |
0.50 |
|
|
$ |
0.44 |
|
|
$ |
0.39 |
|
|
$ |
0.39 |
|
|
$ |
0.49 |
|
|
$ |
0.41 |
|
|
$ |
0.37 |
|
|
$ |
0.34 |
|
F-22