NCI Reports Third Quarter 2014 Financial and Operating Results

RESTON, Va.--(BUSINESS WIRE)--

NCI, Inc. NCIT, a leading provider of information technology (IT), engineering, logistics, and professional solutions and services to U.S. Federal Government agencies, today announced its financial and operating results for the third quarter ended September 30, 2014.

Third quarter 2014 revenue was at the high end of management's guidance range issued last quarter. Diluted earnings per share (EPS) exceeded the high end of guidance by $0.01.

Third Quarter 2014 Results

For the third quarter of 2014, NCI reported revenue of $75.7 million compared with third quarter 2013 revenue of $77.9 million, a decrease of 2.9%. Revenue under NCI's PEO Soldier contract was $8.5 million, a decrease of $2.7 million compared with the third quarter of 2013.

Operating income for the third quarter of 2014 was $4.0 million compared with $3.5 million in the third quarter of last year. Operating income for the third quarter of 2013 included a $0.9 million gain from the resolution of a purchase contingency related to the AdvanceMed acquisition in April 2011. Operating margin was 5.2% for the third quarter of this year and 4.4% for the third quarter of 2013. Excluding the effects of the purchase contingency gain, operating margin for the third quarter of 2013 was 3.3%. The increase in year-over-year operating income and margin resulted from a higher proportion of revenue derived from direct labor and lower depreciation and amortization, partially offset by higher business development costs.

Net income for the third quarter of 2014 was $2.4 million, or 17 cents per share, compared with $2.0 million, or 15 cents per share, for the third quarter of last year. The year-over-year increase in net income was attributable to improved operating income, lower interest expense, and a lower effective income tax rate. EPS increased for the third quarter of 2014 as a result of improved net income, partially offset by higher weighted average diluted shares outstanding.

Days sales outstanding (DSO) for the third quarter ended September 30, 2014, was 67 days, compared with 66 days at June 30, 2014, and 74 days at December 31, 2013.

Net cash provided by operating activities was $21.0 million for the nine months ended September 30, 2014, $7.3 million of which was generated in the third quarter.

NCI reported total backlog at September 30, 2014, of $435 million, of which $165 million was funded. This compared with total backlog of $362 million at June 30, 2014, of which $125 million was funded. Net bookings for the third quarter were $149 million, equating to 2.0 times revenue.

Based on the company's current contract backlog and management's estimate as to future tasking and contract awards, NCI is issuing guidance for the fourth quarter of 2014 and updating guidance previously issued for fiscal year 2014. The table below represents management's current expectations about future financial performance based on information available at this time:

		Fourth Quarter		Fiscal Year
		Fiscal Year 2014 Ending		Ending
		December 31, 2014		December 31, 2014
Revenue		$70 million–$76 million		$312 million–$318 million
Diluted EPS		$0.15–$0.17		$0.66–$0.681
Diluted projected share count		13.8 million		13.8 million

1 As previously disclosed, in the first quarter of 2014, NCI recognized $1.5 million, or $0.07 per diluted share, of accelerated stock compensation expense. Diluted EPS estimates for fiscal year 2014 exclude the effects of the accelerated stock compensation expense. NCI believes that removing the effects of the accelerated stock compensation expense from operating income, net income, and earnings per share portrays NCI's estimated fiscal year 2014 financial results in a more consistent manner. The company's position is that this non-GAAP financial measure provides useful information because it allows management and investors to better assess NCI's comparable financial results absent the expense. This non-GAAP financial measure should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Actual results for the first nine months of 2014 presented in the table “Condensed Consolidated Statements of Income” contained in today's press release include the effects of the accelerated stock compensation expense.

“NCI delivered a strong third quarter: Revenue and earnings per share were at or above the high end of guidance, largely as a result of continued strong operating performance. We also posted another quarter of outstanding cash flow from operations,” said Charles K. Narang, NCI's Chairman and CEO. “In addition, net bookings for the third quarter were robust, at two times revenue. Our third quarter net bookings of $149 million included a recompete award of one of our largest contracts, several smaller new wins and plus-ups to existing contracts.”

“We're seeing heightened bid-and-proposal activity in the second half of 2014 in response to the release of long-delayed RFPs, and we expect to submit bids for contracts worth approximately $1 billion in the next six months. Although the federal budgetary and contracting climate continues to be challenging, we are beginning to realize the results of rebuilding our business development capability over the past couple of years,” said NCI's President, Brian J. Clark. “We also continue to actively pursue potential acquisition candidates to leverage the strength of our balance sheet and complement NCI's core strengths as well as add new capabilities and customers.”

Conference Call Information

As previously announced, NCI will conduct a conference call today at 4:30 p.m. EDT to discuss third quarter 2014 results and guidance for the fourth quarter and fiscal year 2014.

Analysts and institutional investors may listen to the conference call by dialing (888) 312-3048 (United States/Canada) or (719) 325-2323 (international) with pass code 7893871. The conference call will be provided simultaneously as a webcast through a link on the NCI website (www.nciinc.com).

A replay of the conference call will be available approximately two hours after the conclusion of the call through November 12, 2014, by dialing (877) 870-5176 (United States/Canada) or (858) 384-5517 (international) and entering pass code 7893871.

About NCI, Inc.

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. NCI's team of highly skilled professionals focuses on delivering cost-effective solutions and services in the areas of 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; software and systems development/integration; and modeling, simulation and training. Headquartered in Reston, Virginia, NCI has approximately 1,800 employees operating at more than 100 locations worldwide. NCI: Trust. Integrity. Performance. For more information, visit www.nciinc.com or email investor@nciinc.com. Like us on Facebook and follow us on Twitter (@nciinc_) and LinkedIn.

Forward-Looking Statement: Statements and assumptions made in this press release that do not address historical facts constitute “forward-looking” statements that NCI believes to be within the definition in the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties, many of which are outside of our control. Words such as “may,” “will,” “intends,” “should,” “expects,” “plans,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or “opportunity,” or the negative of these terms or words of similar import are intended to identify forward-looking statements.

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 Federal Government agencies, particularly within the U.S. Department of Defense, for substantially all of our revenue; 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; Federal Government shutdowns (such as that which occurred during the Federal Government's 1996 and 2014 fiscal years), other delays in the Federal Government appropriations process, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 and the Consolidated Appropriations Act of 2014), risk of contract performance or termination; failure to achieve contract awards in connection with recompetes for present business and/or competition for new business; adverse results of Federal Government audits of our government contracts; Government contract procurement (such as bid protest, small business set asides, etc.) and termination risks; competitive factors such as pricing pressures and competition to hire and retain employees (particularly those with security clearances); Federal Government agencies awarding contracts on a technically acceptable/lowest cost basis in order to reduce expenditures; failure to successfully identify and integrate future acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions or to effectively integrate acquisitions appropriate to the achievement of our strategic plans; economic conditions in the United States, including conditions that result from terrorist activities or war; material changes in laws or regulations applicable to our businesses, particularly legislation affecting (i) government contracts for services, (ii) outsourcing of activities that have been performed by the government, (iii) government contracts containing organizational conflict of interest (OCI) clauses, (iv) delays related to agency specific funding freezes, (v) competition for task orders under Government Wide Acquisition Contracts (GWACs), agency-specific Indefinite Delivery/Indefinite Quantity (IDIQ) contracts and/or schedule contracts with the General Services Administration; and (vi) our own ability to achieve the objectives of near-term or long-range business plans, including internal systems failures. These and other risk factors are more fully discussed in the section titled “Risk Factors” in NCI's Form 10-K filed with the Securities and Exchange Commission (SEC), and from time to time, in other filings with the SEC, such as our Forms 8-K and Forms 10-Q.

Any projections of revenue, margins, expenses, earnings, tax provisions, cash flows, benefit obligations, or share repurchases, and any statements of the plans, strategies and objectives of management for future operations, the execution of cost reduction programs, and restructuring and integration plans are also subject to factors that could cause actual results to differ materially from anticipated results.

The forward-looking statements included in this news release are only made as of the date of this news release, and NCI undertakes no obligation to publicly update any of the forward-looking statements made herein, whether as a result of new information, subsequent events or circumstances, or changes in expectations or otherwise.

NCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
		Three months ended September 30,							Nine months ended September 30,
		2014			2013				2014			2013
Revenue		$	75,660		$	77,918			$	242,588		$	252,430
Operating expenses:
Cost of revenue			64,102			67,832				208,033			220,300
General and administrative expenses			6,205			5,819				19,967			17,809
Depreciation and amortization			1,401			1,679				4,302			4,824
Purchase contingency gain			—			(864	)			—			(864	)
Total operating expenses			71,708			74,466				232,302			242,069
Operating income			3,952			3,452				10,286			10,361
Interest expense, net			95			157				302			656
Income before income taxes			3,857			3,295				9,984			9,705
Provision for income taxes			1,495			1,344				3,956			3,967
Net income		$	2,362		$	1,951			$	6,028		$	5,738
Earnings per common and common equivalent share:
Basic:
Weighted average shares outstanding			13,639			12,837				13,457			12,825
Net income per share		$	0.17		$	0.15			$	0.45		$	0.45
Diluted:
Weighted average shares outstanding			13,816			12,837				13,805			12,832
Net income per share		$	0.17		$	0.15			$	0.44		$	0.45

NCI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par values)
		As of				As of
		September 30,				December 31,
		2014				2013
Assets:
Current assets:
Cash and cash equivalents		$	19,672			$	50
Accounts receivable, net			54,782				63,991
Deferred tax assets, net			3,362				3,217
Prepaid expenses and other current assets			2,859				2,941
Total current assets			80,675				70,199
Property and equipment, net			7,959				9,752
Other assets			1,720				2,113
Deferred tax assets, net			39,917				39,990
Intangible assets, net			4,124				5,340
Total assets		$	134,395			$	127,394
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable		$	14,027			$	17,371
Accrued salaries and benefits			17,431				16,645
Deferred revenue			2,868				2,594
Other accrued expenses			6,164				4,578
Total current liabilities			40,490				41,188
Long-term debt			—				1,000
Other long-term liabilities			3,129				3,399
Total liabilities			43,619				45,587
Stockholders' equity:
Class A common stock, $0.019 par value—37,500 shares authorized; 9,175 shares issued and 8,259 shares outstanding as of September 30, 2014, and 9,142 shares issued and 8,226 shares outstanding as of December 31, 2013			174				174
Class B common stock, $0.019 par value—12,500 shares authorized; 4,700 shares issued and outstanding as of September 30, 2014 and December 31, 2013			89				89
Additional paid-in capital			73,846				70,905
Treasury stock, at cost—917 shares of Class A common stock as of September 30, 2014 and December 31, 2013			(8,331	)			(8,331	)
Retained earnings			24,998				18,970
Total stockholders' equity			90,776				81,807
Total liabilities and stockholders' equity		$	134,395				127,394

NCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
		Nine months ended September 30,
		2014				2013
Cash flows from operating activities:
Net income		$	6,028			$	5,738
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,302				4,824
Share-based compensation			2,774				1,067
Deferred income taxes			(72	)			299
Changes in operating assets and liabilities:
Accounts receivable, net			9,209				6,404
Prepaid expenses and other assets			474				7,436
Accounts payable			(3,344	)			(9,730	)
Accrued expenses and other liabilities			1,670				8
Net cash provided by operating activities			21,041				16,046
Cash flows from investing activities:
Purchases of property and equipment			(586	)			(734	)
Net cash used in investing activities			(586	)			(734	)
Cash flows from financing activities:
Borrowings under credit facility			42,496				62,300
Repayments on credit facility			(43,496	)			(78,300	)
Proceeds from exercise of stock options			253				—
Shares repurchased for tax withholdings on vesting of restricted shares			(86	)			(33	)
Net cash used in financing activities			(833	)			(16,033	)
Net change in cash and cash equivalents			19,622				(721	)
Cash and cash equivalents, beginning of period			50				763
Cash and cash equivalents, end of period		$	19,672			$	42
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	247			$	512
Income taxes		$	3,460			$	251
Non-cash investing and finance activities during the period for:
Leasehold improvements acquired under tenant improvement funds			706				—