Item 1. Condensed Consolidated Financial Statements
NCI, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Revenue
|
|
$
|
81,900
|
|
|
$
|
85,799
|
|
|
$
|
165,555
|
|
|
$
|
166,767
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
67,921
|
|
|
|
71,553
|
|
|
|
137,908
|
|
|
|
139,155
|
|
General and administrative expenses
|
|
|
6,812
|
|
|
|
6,866
|
|
|
|
12,941
|
|
|
|
13,495
|
|
Depreciation and amortization
|
|
|
1,684
|
|
|
|
1,892
|
|
|
|
3,476
|
|
|
|
3,981
|
|
Acquisition and integration related expenses
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
76,417
|
|
|
|
80,503
|
|
|
|
154,325
|
|
|
|
157,053
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,483
|
|
|
|
5,296
|
|
|
|
11,230
|
|
|
|
9,714
|
|
Interest expense, net
|
|
|
153
|
|
|
|
221
|
|
|
|
343
|
|
|
|
459
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5,330
|
|
|
|
5,075
|
|
|
|
10,887
|
|
|
|
9,255
|
|
Provision for income taxes
|
|
|
2,100
|
|
|
|
2,029
|
|
|
|
4,324
|
|
|
|
3,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,230
|
|
|
$
|
3,046
|
|
|
$
|
6,563
|
|
|
$
|
5,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings per common and common equivalent share:
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Basic:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted average shares outstanding
|
|
|
13,184
|
|
|
|
13,013
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|
|
|
13,169
|
|
|
|
12,991
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
$
|
0.50
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
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|
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Diluted:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted average shares outstanding
|
|
|
13,858
|
|
|
|
13,603
|
|
|
|
13,847
|
|
|
|
13,604
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.23
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|
|
$
|
0.22
|
|
|
$
|
0.47
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash dividend declared and paid per share
|
|
|
|
|
|
|
|
|
|
$
|
0.15
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements
1
NCI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except
par value)
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As of
June 30,
2016
|
|
|
As of
December 31,
2015
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|
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|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
138
|
|
|
$
|
233
|
|
Accounts receivable, net
|
|
|
54,398
|
|
|
|
60,044
|
|
Prepaid expenses and other current assets
|
|
|
4,932
|
|
|
|
3,447
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
59,468
|
|
|
|
63,724
|
|
Property and equipment, net
|
|
|
5,870
|
|
|
|
6,698
|
|
Other assets
|
|
|
1,523
|
|
|
|
1,548
|
|
Deferred tax assets, net
|
|
|
38,722
|
|
|
|
38,789
|
|
Intangible assets, net
|
|
|
17,410
|
|
|
|
19,231
|
|
Goodwill
|
|
|
33,878
|
|
|
|
33,878
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
156,871
|
|
|
$
|
163,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
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|
|
|
Current liabilities:
|
|
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|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
7,107
|
|
|
$
|
|
|
Accounts payable
|
|
|
12,112
|
|
|
|
19,693
|
|
Accrued salaries and benefits
|
|
|
15,928
|
|
|
|
18,977
|
|
Deferred revenue
|
|
|
2,285
|
|
|
|
2,217
|
|
Other accrued expenses
|
|
|
4,985
|
|
|
|
3,843
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
42,417
|
|
|
|
44,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
10,000
|
|
Other long-term liabilities
|
|
|
2,636
|
|
|
|
2,578
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
45,053
|
|
|
|
57,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Class A common stock, $0.019 par value37,500 shares authorized; 9,921 shares issued and
9,004 shares outstanding as of June 30, 2016, and 9,843 shares issued and 8,961 shares outstanding as of December 31, 2015
|
|
|
188
|
|
|
|
187
|
|
Class B common stock, $0.019 par value12,500 shares authorized; 4,500 shares issued and
outstanding as of June 30, 2016 and December 31, 2015
|
|
|
86
|
|
|
|
86
|
|
Additional paid-in capital
|
|
|
77,283
|
|
|
|
76,569
|
|
Treasury stock at cost917 shares of Class A common stock as of June 30, 2016 and
December 31, 2015
|
|
|
(8,331
|
)
|
|
|
(8,331
|
)
|
Retained earnings
|
|
|
42,592
|
|
|
|
38,049
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
111,818
|
|
|
|
106,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
156,871
|
|
|
$
|
163,868
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements
2
NCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,563
|
|
|
$
|
5,451
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,476
|
|
|
|
3,981
|
|
Share-based compensation
|
|
|
543
|
|
|
|
696
|
|
Deferred income taxes
|
|
|
67
|
|
|
|
73
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
5,646
|
|
|
|
1,254
|
|
Prepaid expenses and other assets
|
|
|
(1,462
|
)
|
|
|
2,682
|
|
Accounts payable
|
|
|
(7,581
|
)
|
|
|
2,386
|
|
Accrued expenses and other liabilities
|
|
|
(1,779
|
)
|
|
|
(2,546
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,473
|
|
|
|
13,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(827
|
)
|
|
|
(849
|
)
|
Cash paid for acquisition, net of cash acquired
|
|
|
|
|
|
|
(56,657
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(827
|
)
|
|
|
(57,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under credit facility
|
|
|
91,636
|
|
|
|
106,975
|
|
Repayments on credit facility
|
|
|
(94,529
|
)
|
|
|
(87,475
|
)
|
Proceeds from exercise of stock options
|
|
|
172
|
|
|
|
217
|
|
Repurchase of stock awards
|
|
|
|
|
|
|
(39
|
)
|
Dividends paid
|
|
|
(2,020
|
)
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(4,741
|
)
|
|
|
18,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(95
|
)
|
|
|
(25,412
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
233
|
|
|
|
25,819
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
138
|
|
|
$
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
263
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
3,010
|
|
|
$
|
2,333
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements
3
NCI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of NCI, Inc. and its subsidiaries (NCI or the Company)
have been prepared in accordance with generally accepted accounting principles in the U. S. (GAAP) for interim financial information and pursuant to the rules and regulations of the U. S. Securities and Exchange Commission
(SEC). As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments necessary to fairly present the Companys financial position as of June 30, 2016 and its results of operations for the three and six months ended June 30, 2016 and 2015, and cash
flows for the six months ended June 30, 2016 and 2015, which consists of normal and recurring adjustments. The information disclosed in the notes to the financial statements for these periods is unaudited. The current periods results of
operations are not necessarily indicative of results that may be achieved for any future period. All numbers in tables are presented in thousands except per share numbers. For further information, refer to the financial statements and footnotes
included in NCIs Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC
.
Recently Issued Accounting
Pronouncements
On November 20, 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. To simplify the presentation of
deferred income taxes, the amendments in this ASU require that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. As permitted, the Company elected to early adopt this ASU using the retrospective
approach, effective with its Form 10-Q filing for March 31, 2016. As a result of adopting this ASU, current net deferred taxes of $4.0 million were reclassified to net non-current deferred taxes as of December 31, 2015. The adoption of ASU 2015-17
had no impact on the Companys consolidated statements of income or cash flows for year ended December 31, 2015 or the condensed consolidated statements of income or cash flows three and six month periods ended June 30, 2016.
In February 2016, the FASB issued ASU 2016-02, which requires the recognition of right-to-use assets and lease liabilities arising from capital leases and
operating leases in the statement of comprehensive income and the statement of financial position, respectively. The Company will adopt the standard effective January 1, 2019. The Company has not yet completed its evaluation of the impact that the
standard may have on its consolidated balance sheet. The actual impact will depend on the Companys lease portfolio at the time of adoption.
In
March 2016, the FASB issued ASU 2016-08, which clarifies the implementation guidance with respect to principal versus agent considerations under the new revenue recognition standard, ASU 2014-09, Revenue from Contracts with Customers. In April 2016,
the FASB issued ASU 2016-10, which clarifies the implementation guidance with respect to identifying promised goods or services from a principal and agent perspective under ASU 2014-09. The Company will adopt the standard effective January 1, 2018
and is continuing to evaluate the full effect that ASU 2014-09 and related subsequent updates will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for share-based payments, including immediate recognition of
all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees maximum statutory tax rates, allowing an entity-wide accounting policy election to either
estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares
for tax-withholding purposes. The Company is evaluating the full effect that ASU 2016-09 will have on its consolidated financial statements and will adopt the standard effective January 1, 2017.
2. Business Overview
NCI is a leading provider of
enterprise solutions and services to U.S. defense, intelligence, health care and civilian government agencies. The Company has the expertise and proven track record to solve its customers most important and complex mission challenges through
technology and innovation. The Companys team of highly skilled professionals focuses on delivering cost-effective solutions and services in the areas of agile software application and systems development/integration; cybersecurity and
information assurance; engineering and logistics support; enterprise information management and advanced analytics; cloud computing and IT infrastructure optimization; health IT and medical support; IT service management; and modeling, simulation
and training. Headquartered in Reston,
4
Virginia, the Company has approximately 2,000 employees operating at more than 100 locations worldwide. The majority of the Companys revenue was derived from contracts with the U.S. Federal
Government, directly as a prime contractor or as a subcontractor. NCI primarily conducts business throughout the U. S. The Company reports operating results and financial data as one reportable segment.
For the three and six months ended June 30, 2016, the Company generated approximately 64% of revenue from the Department of Defense, including agencies
within the intelligence community, and approximately 36% of revenue from federal civilian agencies. For the three and six months ended June 30, 2015, the Company generated approximately 60% of revenue from the Department of Defense, including
agencies within the intelligence community, and approximately 40% of revenue from federal civilian agencies.
NCIs Program Executive Office Soldier
(PEO Soldier) contract is the Companys largest revenue-generating contract and accounted for approximately 17% and 10% of revenue for the three months ended June 30, 2016 and 2015, respectively. The Companys PEO Soldier
program is a cost-plus fee contract consisting of a base period and four option periods for a total term of five years, which commenced in October 2015. NCIs Cyber Network Operations and Security Support (CNOSS) program, supporting the U.S.
Army Network Enterprise Technology Command accounted for approximately 11% and 7% of revenue for the three months ended June 30, 2016 and 2015, respectively. This cost-plus-fixed-fee, single-award indefinite delivery indefinite quantity contract
consists of a
12-month
base period with two one-year option periods and one six-month option period, and commenced in October 2014.
3. Earnings Per Share
Basic earnings per share exclude
dilution and are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Diluted earnings per share include the incremental effect of stock options calculated using the treasury stock method. Shares that are anti-dilutive are not included in the computation of diluted
earnings per share. For the three months ended June 30, 2016 and 2015, approximately 8,000 and 131,000 shares, respectively, were not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive. For the
six months ended June 30, 2016 and 2015, approximately 4,000 and 115,000 shares, respectively, were not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive. The following table details the
computation of basic and diluted earnings per common share (Class A and Class B) for the three and six months ended June 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Net income
|
|
$
|
3,230
|
|
|
$
|
3,046
|
|
|
$
|
6,563
|
|
|
$
|
5,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic shares outstanding during the period
|
|
|
13,184
|
|
|
|
13,013
|
|
|
|
13,169
|
|
|
|
12,991
|
|
Dilutive effect of stock options and restricted stock after application of treasury stock
method
|
|
|
674
|
|
|
|
591
|
|
|
|
678
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding during the period
|
|
|
13,858
|
|
|
|
13,603
|
|
|
|
13,847
|
|
|
|
13,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
$
|
0.50
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.23
|
|
|
$
|
0.22
|
|
|
$
|
0.47
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Accounts Receivable
Accounts receivable consists of billed and unbilled amounts. The following table details accounts receivable at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Billed receivables
|
|
$
|
21,499
|
|
|
$
|
23,621
|
|
Unbilled receivables:
|
|
|
|
|
|
|
|
|
Amounts billable at end of period
|
|
|
26,480
|
|
|
|
27,185
|
|
Other
|
|
|
7,161
|
|
|
|
9,980
|
|
|
|
|
|
|
|
|
|
|
Total unbilled receivables
|
|
|
33,641
|
|
|
|
37,165
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
55,140
|
|
|
|
60,787
|
|
Less: Allowance for doubtful accounts
|
|
|
742
|
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
54,398
|
|
|
$
|
60,044
|
|
|
|
|
|
|
|
|
|
|
5
Other unbilled receivables primarily consist of amounts that will be billed upon milestone completions and other
accrued amounts that cannot be billed as of the end of the period. Substantially all unbilled receivables are expected to be billed and collected within the next 12 months.
5. Property and Equipment
The following table details
property and equipment at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
24,502
|
|
|
$
|
26,573
|
|
Leasehold improvements
|
|
|
9,388
|
|
|
|
9,323
|
|
Real property
|
|
|
549
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,519
|
|
|
|
36,444
|
|
Less: Accumulated depreciation and amortization
|
|
|
28,649
|
|
|
|
29,746
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
5,870
|
|
|
$
|
6,698
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the three months ended June 30, 2016 and 2015 was $0.8 million. Depreciation
expense for the six months ended June 30, 2016 and 2015 was $1.7 million and $1.8 million, respectively.
6. Intangible Assets
The following table details intangible assets at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Contract and customer relationships
|
|
$
|
39,594
|
|
|
$
|
39,594
|
|
Developed software
|
|
|
1,113
|
|
|
|
1,113
|
|
Less: Accumulated amortization
|
|
|
(23,297
|
)
|
|
|
(21,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
17,410
|
|
|
$
|
19,231
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangible assets for the three months ended June 30, 2016 and 2015 was $0.9 million and $1.1 million,
respectively. Amortization expense of intangible assets for the six months ended June 30, 2016 and 2015 was $1.8 million and $2.2 million, respectively. Intangible assets are primarily amortized on a straight line basis over periods ranging from
three to 11 years. Expected amortization expense for the remainder of the fiscal year ending December 31, 2016, and for each of the fiscal years thereafter, is as follows:
|
|
|
|
|
For the year ending December 31,
|
|
|
|
2016 (remaining six months)
|
|
$
|
1,823
|
|
2017
|
|
|
3,632
|
|
2018
|
|
|
3,149
|
|
2019
|
|
|
3,049
|
|
2020
|
|
|
3,027
|
|
Thereafter
|
|
|
2,730
|
|
|
|
|
|
|
|
|
$
|
17,410
|
|
|
|
|
|
|
6
7. Share-Based Payments
During the three and six months ended June 30, 2016, the Company granted 25,000 stock options to purchase shares of Class A common stock with a
weighted-average exercise price of $13.29, which represents the fair market value at the date of grant. During the three months ended June 30, 2016, no stock options were exercised. During the six months ended June 30, 2016, 38,332 stock options
were exercised at a weighted-average exercise price of $4.48. As of June 30, 2016, there were 1,534,500 stock options outstanding.
During the three
months ended June 30, 2016, 20,000 restricted shares were granted and 20,000 restricted shares were cancelled. During the six months ended June 30, 2016, 25,000 restricted shares were granted and 20,000 restricted shares were cancelled. As of June
30, 2016, there were 320,000 shares of restricted stock outstanding.
The following table summarizes stock compensation expense allocated to cost of
revenue and general and administrative costs for the three and six months ended June 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cost of revenue
|
|
$
|
36
|
|
|
$
|
59
|
|
|
$
|
115
|
|
|
$
|
122
|
|
General and administrative
|
|
|
178
|
|
|
|
267
|
|
|
|
428
|
|
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214
|
|
|
$
|
326
|
|
|
$
|
543
|
|
|
$
|
696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016, there was approximately $3.6 million of total unrecognized compensation cost related to unvested stock
compensation arrangements. This cost is expected to be fully amortized over the next five years, with approximately $0.5 million, $0.9 million, $0.9 million, $0.7 million and $0.6 million amortized during the remainder of 2016, and the full years of
2017, 2018, 2019, and 2020, respectively. The cost of stock compensation is included in the Companys Condensed Consolidated Statements of Income and expensed over the service period of the options.
8. Debt
NCIs senior credit facility, amended in
December 2014, and referred to herein as the credit facility, consists of a revolving line of credit with a borrowing capacity of up to an $80.0 million principal amount and a $45.0 million accordion feature allowing the Company to
increase its borrowing capacity to up to a $125.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding borrowings are collateralized by a security interest in
substantially all of the Companys assets. The lenders also require a direct assignment of all contracts at the lenders discretion. The outstanding balance under the credit facility accrues interest based on one-month LIBOR plus an
applicable margin, ranging from 210 to 310 basis points, based on the ratio of the Companys outstanding senior funded debt to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) as defined in the credit facility. The
credit facility expires on January 31, 2017. Accordingly all borrowings are classified as current liabilities as they are due and payable within the next 12 months.
The credit facility contains various covenants that limit, among other things, the Companys ability to incur or guarantee additional debt; make certain
distributions, investments and other restricted payments, including limits on cash dividends on the Companys outstanding common stock or equivalent equity interests; 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 fixed charge coverage ratio, maintain a minimum funded debt to earnings ratio; and
limit capital expenditures below certain thresholds. As of June 30, 2016, the Company was in compliance with all of its loan covenants.
The credit
facility allows the Company to use borrowings thereunder of up to $17.5 million to repurchase outstanding shares of Class A common stock. No stock repurchases took place in the three or six months ended June 30, 2016. At June 30, 2016, $16.7
million was remaining under the board of directors authorization for share repurchases.
7
During the second quarter of 2016, NCI had a weighted average outstanding loan balance of $16.4 million which
accrued interest at a weighted average borrowing rate of 2.5%. During the second quarter of 2015, NCI had a weighted average outstanding loan balance of $24.7 million which accrued interest at a weighted average borrowing rate of 2.3%.
As of June 30, 2016, the outstanding balance under the credit facility was $7.1 million and interest accrued at a rate of one-month LIBOR plus 210 basis
points, or 2.5%.
9. Computech Acquisition
On
January 1, 2015, the Company completed its purchase of 100% of the outstanding stock of Computech, Inc. (Computech), a leader in agile and lean application software development and IT operations and maintenance, for approximately
$56.7 million, net of cash acquired. The acquisition has been accounted for under the acquisition method of accounting, which requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates
of fair value. The excess of the purchase consideration over the amounts assigned to tangible or intangible assets acquired and liabilities assumed is recognized as goodwill.
Allocation of Purchase Price
NCI has completed the
valuation of the assets acquired and liabilities assumed of Computech. The fair values assigned to the intangible assets acquired were based on estimates, assumptions, and other information compiled by management, including independent valuations
that utilized established valuation techniques. Based on the Companys valuation, the total consideration of approximately $56.7 million, net of $3.3 million of cash acquired, has been allocated to assets acquired (including identifiable
intangible assets and goodwill) and liabilities assumed, as follows:
|
|
|
|
|
Accounts receivable and other assets
|
|
|
8,407
|
|
Goodwill
|
|
|
33,878
|
|
Definite-life intangible assets
|
|
|
19,720
|
|
Accrued salary and benefits
|
|
|
(4,112
|
)
|
Other accrued expenses
|
|
|
(1,236
|
)
|
|
|
|
|
|
|
|
$
|
56,657
|
|
|
|
|
|
|
The definite life intangibles recognized in the allocation of the Computech purchase price consists of $18.6 million in
contracts and customer relationships and $1.1 million in developed software. The fair value of the definite-lived intangible asset for contracts and customer relationships is based on existing customer contracts and anticipated follow-on contracts
with existing customers and will be amortized on a straight-line basis over its expected life of seven years. The fair value of the definite-lived intangible asset for developed software will be amortized on a straight-line basis over its expected
useful life of three years.
All goodwill and intangible asset amortization related to the acquisition of Computech is expected to be deductible for
income tax purposes.
10. Dividends
Our board of
directors declared and the Company paid the following dividends during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
|
Total Amount
|
|
|
Payment Date
|
|
|
|
|
|
|
February 10, 2015
|
|
$
|
0.12
|
|
|
|
February 25, 2015
|
|
|
$
|
1,561
|
|
|
|
March 13, 2015
|
|
|
|
|
|
|
February 8, 2016
|
|
$
|
0.15
|
|
|
|
February 26, 2016
|
|
|
$
|
2,020
|
|
|
|
March 18, 2016
|
|
11. Related Party Transactions
The Company purchases services under a subcontract from Renegade Technology Systems, Inc., which is a government contractor wholly-owned by Rajiv Narang, the
son of Charles K. Narang, Chairman of the Board. For the three months ended June 30, 2016 and 2015, the expense incurred under this agreement was approximately $201,000 and $182,000, respectively. For the six months ended June 30, 2016 and 2015, the
expense incurred under this agreement was approximately $358,000 and $348,000, respectively. As of June 30, 2016 and 2015, outstanding amounts due to Renegade Technology Systems, Inc. under this agreement were $65,566 and $60,378, respectively.
12. Contingencies
Government Audits
Payments to the Company on U.S. Federal Government contracts are subject to adjustment upon audit by various agencies of the U.S. Federal Government.
Audits of costs and the related payments have been performed through 2007 for NCI Information Systems, Inc., the Companys 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.
8
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the section titled Managements Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements regarding our business, financial condition, results of operations, and prospects. There are statements made herein, which may not address historical facts and, therefore, could be interpreted to
be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. The factors that
could cause actual results to differ materially from those anticipated include, but are not limited to, the following:
|
|
|
our dependence on our contracts with U.S. Federal Government agencies, particularly within the U.S. Department of Defense, for the majority of our revenue; delays performing work under our contracts due to bid protests;
changes in U.S. Federal Government spending priorities; changes in contract type, particularly changes from cost-plus fee or time-and-material type contracts to firm fixed-price type contracts
|
|
|
|
a reduction in the overall U.S. defense budget, volatility in spending authorizations for defense and intelligence-related programs by the U.S. Federal Government or a shift in spending to programs in areas where we do
not currently provide services
|
|
|
|
delays in the U.S. Federal Government appropriations process, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011; U.S. Federal
Governmental shutdowns (such as the shutdowns that occurred during the U.S. Federal Governments 1996 and 2013 fiscal years); and other potential delays in the U.S. Federal Government appropriations process
|
|
|
|
changes in U.S. Federal Government programs or requirements, including the increased use of small business providers
|
|
|
|
failure to achieve contract awards in connection with recompetes for present business and/or competition for new business
|
|
|
|
U.S. Federal Government agencies more frequently awarding contracts on a technically acceptable/lowest cost basis in order to reduce expenditures
|
|
|
|
adverse results of U.S. Federal Government audits of our government contracts
|
|
|
|
competitive factors, such as pricing pressures and competition to hire and retain employees (particularly those with security clearances)
|
|
|
|
failure to identify and successfully integrate acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions, or effectively integrate acquisitions
appropriate to the achievement of our strategic plans
|
|
|
|
economic conditions in the U.S., including conditions that result from terrorist activities or war
|
|
|
|
material changes in policies, laws, or regulations applicable to our businesses, particularly legislation affecting (i) U.S. Federal Government contracts for services, (ii) outsourcing of activities that have
been performed by the U.S. Federal Government, (iii) U.S. Federal Government contracts containing organizational conflict of interest clauses, (iv) delays related to agency specific funding freezes, and (v) competition for task orders
under Government Wide Acquisition Contracts (GWAC), agency-specific Indefinite Delivery/Indefinite Quantity (IDIQ) contracts and/or schedule contracts with the General Services Administration
|
|
|
|
the U.S. Federal Governments insourcing of previously contracted support services and the realignment of funds to non-defense related programs
|
|
|
|
our ability to achieve the objectives of near-term or long-range business plans, particularly revenue growth, and the ability to realize benefits from future deferred tax assets; and
|
|
|
|
risk of contract non-performance or termination
|
Some of these important factors are outlined under
Item 1A. Risk Factors and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the U.S. Securities and Exchange Commission (SEC), and from time to time in other filings with the SEC,
such as our Current Reports on Forms 8-K and Quarterly Reports on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, or
performance. We undertake no obligation to update publicly or revise any forward-looking statements. You should not place undue reliance on any forward-looking statements.
In this document, unless the context indicates otherwise, the terms Company, NCI, we, us, and our
refer to NCI, Inc., a Delaware corporation, and, where appropriate, its subsidiaries.
9
OVERVIEW
We
are a provider of information technology (IT) and professional services and solutions primarily to U.S. Federal Government agencies. Our technology and industry expertise enables us to provide a wide spectrum of services and solutions
that assist our customers in achieving their program goals. We deliver these complex services and solutions by leveraging our skills across eight core capabilities:
|
|
|
Cloud Computing and IT Infrastructure Optimization
|
|
|
|
Cybersecurity and Information Assurance
|
|
|
|
Engineering and Logistics Support
|
|
|
|
Enterprise Information Management and Advanced Analytics
|
|
|
|
Health IT and Medical Support
|
|
|
|
Modeling, Training and Simulation
|
|
|
|
Agile Development and Integration
|
Our team of highly skilled professionals is committed to service excellence
and delivers innovative, cost-effective enterprise services and solutions on time and within budget. We are focused on reshaping the way services and solutions are delivered to our customers in order to proactively understand and meet their mission
needs and enable them to rapidly adapt to dynamic environments. Headquartered in Reston, Virginia, the Company currently operates in more than 100 locations around the globe.
Key Financial Metrics
Prime
Contractor Revenue
The following table shows our revenue derived from contracts on which we serve as a prime contractor.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue derived from prime contracts
|
|
|
94
|
%
|
|
|
91
|
%
|
|
|
94
|
%
|
|
|
91
|
%
|
Customer Group Revenue
The following table shows our revenue from the customer groups listed as a percentage of total revenue for the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Department of Defense and intelligence agencies
|
|
|
64
|
%
|
|
|
60
|
%
|
|
|
64
|
%
|
|
|
60
|
%
|
U.S. Federal civilian agencies
|
|
|
36
|
%
|
|
|
40
|
%
|
|
|
36
|
%
|
|
|
40
|
%
|
Contract Type Revenue
Our services and solutions are provided under three types of contracts: time-and-materials; cost-plus fee; and firm fixed-price. Our contract mix varies from
year to year due to numerous factors including our business strategies and U.S. Federal Government procurement objectives.
10
The following table shows our revenue from each of these types of contracts as a percentage of our total revenue
for the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Time-and-materials
|
|
|
17
|
%
|
|
|
22
|
%
|
|
|
17
|
%
|
|
|
23
|
%
|
Cost-plus fee
|
|
|
61
|
%
|
|
|
49
|
%
|
|
|
60
|
%
|
|
|
47
|
%
|
Firm fixed-price
|
|
|
22
|
%
|
|
|
29
|
%
|
|
|
23
|
%
|
|
|
30
|
%
|
The amount of risk and potential reward varies under each type of contract. Under time-and-materials contracts, 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. For cost-plus fee contracts, there is limited financial risk, because we are reimbursed all our allowable costs, therefore the profit margins tend to be lower on
cost-plus fee contracts. Under firm fixed-price contracts, we perform specific tasks or provide specified goods for a predetermined price. Compared to time-and-materials and cost-plus fee contracts, firm fixed-price service contracts generally offer
higher profit margin opportunities but involve greater financial risk because we would bear the impact of potential cost overruns in return for the full benefit of any cost savings.
Contract Backlog
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(in millions)
|
|
Funded backlog
|
|
$
|
120
|
|
|
$
|
147
|
|
Total backlog
|
|
$
|
507
|
|
|
$
|
552
|
|
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 are more likely than not to be 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, not included above, as the total backlog less the funded backlog. Unfunded backlog includes values for
contract options that have been priced but not yet funded. Additional information on how we determine backlog is included in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC.
Results of Operations
Three Months Ended
June 30, 2016 Compared to Three Months Ended June 30, 2015
The following table sets forth certain items from our consolidated statements of
income and expresses each item in dollars and as a percentage of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
(as a percentage of revenue)
|
|
Revenue
|
|
$
|
81,900
|
|
|
$
|
85,799
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
67,921
|
|
|
|
71,553
|
|
|
|
83.0
|
|
|
|
83.4
|
|
General and administrative expenses
|
|
|
6,812
|
|
|
|
6,866
|
|
|
|
8.3
|
|
|
|
8.0
|
|
Depreciation and amortization
|
|
|
1,684
|
|
|
|
1,892
|
|
|
|
2.0
|
|
|
|
2.2
|
|
Acquisition and integration related expenses
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
76,417
|
|
|
|
80,503
|
|
|
|
93.3
|
|
|
|
93.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,483
|
|
|
|
5,296
|
|
|
|
6.7
|
|
|
|
6.2
|
|
Interest expense, net
|
|
|
153
|
|
|
|
221
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5,330
|
|
|
|
5,075
|
|
|
|
6.5
|
|
|
|
5.9
|
|
Provision for income taxes
|
|
|
2,100
|
|
|
|
2,029
|
|
|
|
2.6
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,230
|
|
|
$
|
3,046
|
|
|
|
3.9
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Revenue
For the three months ended June 30, 2016, revenue decreased by 4.5%, or $3.9 million, over the same period a year ago. The decrease was due mostly to completed
contracts, work that was set aside for small businesses, and reductions in staffing and scope of work on certain contracts, partially offset by revenues derived under the expanded PEO Soldier program, CNOSS program, and other new awards.
NCIs PEO Soldier program accounted for $13.6 million, or 16.6% of revenue, in the second quarter of 2016, up $5.4 million from $8.2 million, or 9.6% of
revenue, in the second quarter of 2015. NCIs CNOSS program accounted for $9.3 million, or 11.4% of revenue, in the second quarter of 2016, up $3.6 million from $5.6 million, or 6.6% of revenue, in the second quarter of 2015.
Cost of revenue
Cost of revenue for the three
months ended June 30, 2016 was $68.0 million, or 83.0% of revenue, compared to $71.6 million, or 83.4% of revenue, for the three months ended June 30, 2015. The decrease in cost of revenue was primarily the result of the greater contribution of
direct labor and more efficient absorption of indirect costs for the period.
General and administrative expenses
General and administrative expenses decreased 0.8%, or $0.1 million, for the three months ended June 30, 2016, as compared to the same period a year ago. The
decrease was primarily due to lower indirect labor costs, more efficient allocation of business development expenses, lower executive compensation costs, and decreased stock compensation expense, partially offset by an increase in external strategic
consulting costs.
Depreciation and amortization
Depreciation and amortization expense was approximately $1.7 million and $1.9 million for the three months ended June 30, 2016 and 2015, respectively. The
decrease was primarily due to certain fixed assets becoming fully depreciated in the beginning of the second quarter of 2016.
Interest expense, net
Interest expense, net, was $0.2 million and $0.2 million for the quarters ended June 30, 2016 and 2015, respectively. During the second quarter of
2016, we had a weighted average outstanding loan balance of $16.4 million which accrued interest at a weighted average borrowing rate of 2.5%. During the second quarter of 2015, we had a weighted average outstanding loan balance of $24.7 million
which accrued interest at a weighted average borrowing rate of 2.3%.
Provision for income taxes
Provision for income taxes increased by $0.1 million in the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. This
increase was due to slightly higher operating income for the period ended June 30, 2016, offset by a slightly lower effective income tax rate. The effective income tax rate for the quarters ended June 30, 2016 and 2015 was approximately 39.4% and
40.0%, respectively. The decrease in the effective income tax rate is due to changes in the blended state income tax rate and state apportionment factors.
12
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
The following table sets forth certain items from our consolidated statements of income and expresses each item in dollars and as a percentage of revenue for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
(as a percentage of revenue)
|
|
Revenue
|
|
$
|
165,555
|
|
|
$
|
166,767
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
137,908
|
|
|
|
139,155
|
|
|
|
83.3
|
|
|
|
83.4
|
|
General and administrative expenses
|
|
|
12,941
|
|
|
|
13,495
|
|
|
|
7.8
|
|
|
|
8.1
|
|
Depreciation and amortization
|
|
|
3,476
|
|
|
|
3,981
|
|
|
|
2.1
|
|
|
|
2.4
|
|
Acquisition and integration related expenses
|
|
|
|
|
|
|
422
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
154,325
|
|
|
|
157,053
|
|
|
|
93.2
|
|
|
|
94.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11,230
|
|
|
|
9,714
|
|
|
|
6.8
|
|
|
|
5.8
|
|
Interest expense, net
|
|
|
343
|
|
|
|
459
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,887
|
|
|
|
9,255
|
|
|
|
6.6
|
|
|
|
5.5
|
|
Provision for income taxes
|
|
|
4,324
|
|
|
|
3,804
|
|
|
|
2.6
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,563
|
|
|
$
|
5,451
|
|
|
|
4.0
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
For the
six months ended June 30, 2016, total revenue decreased 0.7%, or $1.2 million from $166.8 million to $165.6 million, over the same period a year ago. The decrease was primarily due to lower pass-through revenue, reductions in scope of work, and
the expiration of task orders and contracts, offset by revenues derived under our PEO Soldier and CNOSS programs and, to a lesser extent, from new awards.
Cost of revenue
Cost of revenue decreased 0.9% or
$1.3 million from $139.2 million to $137.9 million, for the six months ended June 30, 2016, as compared to the same period a year ago. This decrease was primarily the result of reduced hardware, software and subcontractor costs, offset by an
increase in direct labor costs. Cost of revenue represented 83.3% of revenue for the six months ended June 30, 2016, as compared to 83.4% for the six months ended June 30, 2015. This decrease was primarily the result of the greater
contribution of direct labor and more efficient absorbtion of indirect costs.
General and administrative expenses
General and administrative expenses decreased 4.1%, or $0.6 million, for the six months ended June 30, 2016, as compared to the same period a year ago.
The decrease was primarily due to lower indirect labor costs, more efficient allocation of business development expenses, lower executive compensation costs, and decreased stock compensation expense, partially offset by an increase in external
strategic consulting costs.
Depreciation and amortization
Depreciation and amortization expense was approximately $3.5 and $4.0 million for the six months ended June 30, 2016 and 2015, respectively. The decrease
was primarily due to certain intangible assets becoming fully amortized in the second quarter of 2015 and due to certain fixed assets becoming fully depreciated in the beginning of the second quarter of 2016.
Interest expense, net
Interest expense, net, was
approximately $0.3 million and $0.5 million for the six months ended June 30, 2016 and 2015, respectively. The decrease was primarily attributed to a lower weighted average loan balance.
Provision for income taxes
For the six months
ended June 30, 2016, the provision for income taxes increased to $4.3 million from $3.8 million in the same period a year ago, due to increased pretax income on an lower effective tax rate. The effective income tax rate for the six months ended
June 30, 2016 was
13
approximately 39.4% as compared to an effective income tax rate of 41.1% for the six months ended June 30, 2015. The lower effective income tax rate for the six months ended June 30,
2016 was the result of a decrease in the blended state income tax rate from our current state revenue allocation for the six months ended June 30, 2016 and 2015.
Liquidity and Capital Resources
Our primary liquidity
needs are for financing working capital, capital expenditures, stock repurchases, and making selective strategic acquisitions. Historically, we have relied primarily on our cash flow from operations and borrowings under our credit facility to
provide the capital for our liquidity needs. As part of our growth strategy, we may pursue acquisitions that could require us to incur additional debt or issue new equity. We expect the combination of our current cash, cash flow from operations, and
the available borrowing capacity under our credit facility to continue to meet our normal working capital, capital expenditures and other cash requirements.
During the six months ended June 30, 2016, the balance of accounts receivable decreased by $5.6 million to $54.4 million at the end of the quarter. Days sales
outstanding of accounts receivable (DSO) decreased 6 days to 60 days at June 30, 2016 as compared to 66 days at December 31, 2015. The decrease in DSO was mostly attributable to the resolution and payment of invoices related to certain
contracts. As of June 30, 2016, $7.1 million was due under the credit facility, as compared to $10.0 million outstanding as of December 31, 2015, reflecting $2.9 million of net pay downs during the first six months of 2016. Net cash provided by
operating activities was $5.5 million at June 30, 2016 and was used to pay down debt and meet working capital requirements.
Our board of directors
authorized management to repurchase up to $25.0 million of our Class A common stock pursuant to a stock repurchase program. If shares are repurchased, the shares will be repurchased pursuant to open market purchases, privately negotiated
transactions, or block transactions. We have no obligation to repurchase shares under the authorization, and the timing, actual number and value of the shares which are repurchased (and the manner of any such repurchase) will be at the discretion of
management and will depend on a number of factors, including the price of our common stock, our Companys cash needs, borrowing capacity under our credit facility, interest rates, and our financial performance and position. We may suspend or
discontinue repurchases at any time.
During 2015 and the three and six months ended June 30, 2016, we did not repurchase any shares. At June 30, 2016, we
had $16.7 million remaining under the board of directors authorization for share repurchases.
Credit Facility
: Our senior credit facility,
amended in December 2014, and referred to herein as the credit facility, consists of a revolving line of credit with a borrowing capacity of up to an $80.0 million principal amount, and a $45.0 million accordion feature allowing us to
increase our borrowing capacity to up to a $125.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding borrowings are collateralized by a security interest in
substantially all of the Companys assets. The lenders also require a direct assignment of all contracts at the lenders discretion. The outstanding balance under the credit facility accrues interest based on one-month LIBOR plus an
applicable margin, ranging from 210 to 310 basis points, based on the ratio of our outstanding senior funded debt to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) as defined in the credit facility.
The credit facility allows us to use borrowings thereunder of up to $17.5 million to repurchase shares of our common stock. Funds borrowed under the credit
facility may be used to finance possible future acquisitions, for working capital requirements, for stock repurchases, for cash dividends or for general corporate uses.
The loan interest accrual rate is set monthly at one-month LIBOR plus a set amount per the credit facility.
The credit facility contains various restrictive covenants that restrict, among other things, our ability to incur or guarantee additional debt; make certain
distributions, investments and other restricted payments such as dividends; enter into transactions with certain affiliates; create or permit certain liens; and consolidate, merge, or sell assets. In addition, the credit facility contains certain
financial covenants that require us to maintain a minimum tangible net worth; maintain a minimum fixed charge coverage ratio; maintain a minimum funded debt to earnings ratio; and limit capital expenditures below certain thresholds. There are no
restrictions on our retained earnings in the credit facility.
We intend to amend and extend our credit facility before the current facility expires in
January 2017. As of June 30, 2016, we were in compliance with all our loan covenants.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
14
Critical Accounting Policies
There have been no significant changes to our Critical Accounting Policies during the second quarter of 2016. Refer to the Critical Accounting Policies section
in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC.