XNYS:CBR CIBER Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:CBR (CIBER Inc): Fair Value Estimate
Premium
XNYS:CBR (CIBER Inc): Consider Buying
Premium
XNYS:CBR (CIBER Inc): Consider Selling
Premium
XNYS:CBR (CIBER Inc): Fair Value Uncertainty
Premium
XNYS:CBR (CIBER Inc): Economic Moat
Premium
XNYS:CBR (CIBER Inc): Stewardship
Premium
 

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                       to                      

 

Commission File Number: 001-13103

 

Ciber, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

38-2046833

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

6363 South Fiddler’s Green Circle, Suite 1400,
Greenwood Village, Colorado

 

80111

(Address of Principal Executive Offices)

 

(Zip Code)

 

(303) 220-0100

(Registrant’s telephone number, including area code)

 

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 x 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 x No 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

 

There were 73,129,965 shares of the registrant’s Common Stock outstanding as of June 30, 2012.

 

 

 



Table of Contents

 

Table of Contents

 

 

 

 

Page

Part I

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

Consolidated Statements of Operations — Three and Six Months Ended June 30, 2012 and 2011

 

3

 

Consolidated Statements of Comprehensive Income (Loss) — Three and Six Months Ended June 30, 2012 and 2011

 

4

 

Consolidated Balance Sheets — June 30, 2012 and December 31, 2011

 

5

 

Consolidated Statement of Changes in Equity — Six Months Ended June 30, 2012

 

6

 

Consolidated Statements of Cash Flows — Six Months Ended June 30, 2012 and 2011

 

7

 

Notes to Consolidated Financial Statements

 

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

30

Item 4.

Controls and Procedures

 

30

 

 

 

 

Part II

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

30

Item 1A.

Risk Factors

 

31

Item 4.

Mine Safety Disclosures

 

40

Item 6.

Exhibits

 

41

 

 

 

 

Signatures

 

42

 

2



Table of Contents

 

Ciber, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

REVENUES

 

 

 

 

 

 

 

 

 

Consulting services

 

$

223,942

 

$

228,614

 

$

452,063

 

$

472,171

 

Other revenue

 

13,057

 

12,373

 

25,954

 

23,729

 

Total revenues

 

236,999

 

240,987

 

478,017

 

495,900

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Cost of consulting services

 

168,379

 

184,705

 

342,252

 

367,368

 

Cost of other revenue

 

8,264

 

6,704

 

16,856

 

13,187

 

Selling, general and administrative

 

55,471

 

60,083

 

106,821

 

118,624

 

Goodwill impairment

 

 

16,300

 

 

16,300

 

Amortization of intangible assets

 

161

 

682

 

325

 

1,314

 

Total operating expenses

 

232,275

 

268,474

 

466,254

 

516,793

 

OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS

 

4,724

 

(27,487

)

11,763

 

(20,893

)

Interest income

 

226

 

148

 

423

 

204

 

Interest expense

 

(2,238

)

(1,875

)

(4,067

)

(3,367

)

Other income (expense), net

 

695

 

(2,689

)

114

 

(3,474

)

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

 

3,407

 

(31,903

)

8,233

 

(27,530

)

Income tax expense

 

3,139

 

27,070

 

7,125

 

28,147

 

NET INCOME (LOSS) FROM CONTINUING OPERATIONS

 

268

 

(58,973

)

1,108

 

(55,677

)

Income (loss) from discontinued operations, net of income tax

 

(143

)

708

 

220

 

1,608

 

CONSOLIDATED NET INCOME (LOSS)

 

125

 

(58,265

)

1,328

 

(54,069

)

Net income attributable to noncontrolling interests

 

206

 

108

 

266

 

181

 

NET INCOME (LOSS) ATTRIBUTABLE TO CIBER, INC.

 

$

(81

)

$

(58,373

)

$

1,062

 

$

(54,250

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share attributable to Ciber, Inc.:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

 

$

(0.82

)

$

0.01

 

$

(0.78

)

Discontinued operations

 

 

0.01

 

 

0.02

 

Basic and diluted earnings (loss) per share attributable to Ciber, Inc.

 

$

 

$

(0.81

)

$

0.01

 

$

(0.76

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

73,013

 

71,695

 

72,874

 

71,316

 

Diluted

 

73,504

 

71,695

 

73,423

 

71,316

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

Ciber, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Consolidated net income (loss)

 

$

125

 

$

(58,265

)

$

1,328

 

$

(54,069

)

Gain on hedging activity, net of tax

 

 

34

 

 

89

 

Foreign currency translation adjustments

 

(11,193

)

2,890

 

(3,405

)

14,439

 

Comprehensive loss

 

(11,068

)

(55,341

)

(2,077

)

(39,541

)

Comprehensive income attributable to noncontrolling interests

 

206

 

108

 

266

 

186

 

Comprehensive loss attributable to Ciber, Inc.

 

$

(11,274

)

$

(55,449

)

$

(2,343

)

$

(39,727

)

 

See accompanying notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

Ciber, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

 

 

 

June 30,
2012

 

December 31,
2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

29,073

 

$

65,567

 

Accounts receivable, net of allowances of $1,199 and $1,422, respectively

 

209,505

 

182,359

 

Prepaid expenses and other current assets

 

27,036

 

25,700

 

Deferred income taxes

 

2,296

 

3,302

 

Current assets of discontinued operations

 

 

20,382

 

Total current assets

 

267,910

 

297,310

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $70,328 and $64,929, respectively

 

22,934

 

26,845

 

Goodwill

 

273,584

 

275,504

 

Other intangible assets, net

 

316

 

649

 

Other assets

 

9,486

 

6,900

 

Long-term assets of discontinued operations

 

 

17,862

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

574,230

 

$

625,070

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

3,867

 

$

25,571

 

Accounts payable

 

28,921

 

35,112

 

Accrued compensation and related liabilities

 

58,926

 

60,124

 

Deferred revenue

 

19,364

 

22,308

 

Income taxes payable

 

7,718

 

8,613

 

Other accrued expenses and liabilities

 

43,114

 

45,454

 

Current liabilities of discontinued operations

 

 

7,310

 

Total current liabilities

 

161,910

 

204,492

 

 

 

 

 

 

 

Long-term debt

 

32,468

 

41,380

 

Deferred income taxes

 

20,092

 

15,462

 

Other long-term liabilities

 

1,031

 

6,729

 

Total liabilities

 

215,501

 

268,063

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Ciber, Inc. shareholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 1,000 shares authorized, no shares issued

 

 

 

Common stock, $0.01 par value, 100,000 shares authorized, 74,487 shares issued

 

745

 

745

 

Treasury stock, at cost, 1,357 and 1,919 shares, respectively

 

(7,778

)

(10,998

)

Additional paid-in capital

 

333,018

 

330,088

 

Retained earnings

 

43,048

 

44,337

 

Accumulated other comprehensive loss

 

(10,411

)

(7,006

)

Total Ciber, Inc. shareholders’ equity

 

358,622

 

357,166

 

Noncontrolling interests

 

107

 

(159

)

Total equity

 

358,729

 

357,007

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

574,230

 

$

625,070

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

Ciber, Inc. and Subsidiaries

Consolidated Statement of Changes in Equity

(In thousands)

(Unaudited)

 

 

 

Common Stock

 

Treasury Stock

 

Additional
Paid-in

 

Retained 

 

Accumulated
Other
Comprehensive

 

Noncontrolling

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Interests

 

Total Equity

 

BALANCES AT JANUARY 1, 2012

 

74,487

 

$

745

 

(1,919

)

$

(10,998

)

$

330,088

 

$

44,337

 

$

(7,006

)

$

(159

)

$

357,007

 

Consolidated net income

 

 

 

 

 

 

1,062

 

 

266

 

1,328

 

Foreign currency translation

 

 

 

 

 

 

 

(3,405

)

 

(3,405

)

Treasury shares issued under employee share plans

 

 

 

562

 

3,220

 

 

(2,351

)

 

 

869

 

Share-based compensation

 

 

 

 

 

2,930

 

 

 

 

2,930

 

BALANCES AT JUNE 30, 2012

 

74,487

 

$

745

 

(1,357

)

$

(7,778

)

$

333,018

 

$

43,048

 

$

(10,411

)

$

107

 

$

358,729

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6



Table of Contents

 

Ciber, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Consolidated net income (loss)

 

$

1,328

 

$

(54,069

)

Adjustments to reconcile consolidated net income (loss) to net cash used in operating activities:

 

 

 

 

 

Income from discontinued operations

 

(220

)

(1,608

)

Goodwill impairment

 

 

16,300

 

Depreciation

 

6,359

 

5,759

 

Amortization of intangible assets

 

325

 

1,314

 

Deferred income tax expense

 

2,606

 

24,277

 

Provision for (recovery on) doubtful receivables

 

(282

)

645

 

Share-based compensation expense

 

2,930

 

2,120

 

Change in value of contingent consideration

 

318

 

3,647

 

Amortization of debt costs

 

2,100

 

699

 

Other, net

 

211

 

212

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

(28,912

)

5,652

 

Other current and long-term assets

 

1,939

 

(984

)

Accounts payable

 

(6,280

)

(14,513

)

Accrued compensation and related liabilities

 

(270

)

(8,928

)

Other current and long-term liabilities

 

(10,396

)

(1,979

)

Income taxes payable/refundable

 

(1,204

)

726

 

Cash used in operating activities — continuing operations

 

(29,448

)

(20,730

)

Cash used in operating activities — discontinued operations

 

(2,301

)

(708

)

Cash used in operating activities

 

(31,749

)

(21,438

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(895

)

Purchases of property and equipment, net

 

(2,918

)

(5,676

)

Cash used in investing activities — continuing operations

 

(2,918

)

(6,571

)

Cash provided by (used in) investing activities — discontinued operations

 

31,461

 

(36

)

Cash provided by (used in) investing activities

 

28,543

 

(6,607

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Borrowings on long-term debt

 

194,402

 

198,897

 

Payments on long-term debt

 

(225,019

)

(190,912

)

Employee stock purchases and options exercised

 

869

 

6,321

 

Credit facility fees paid

 

(3,326

)

(190

)

Cash provided by (used in) financing activities — continuing operations

 

(33,074

)

14,116

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

(214

)

6,389

 

Net decrease in cash and cash equivalents

 

(36,494

)

(7,540

)

Cash and cash equivalents, beginning of period

 

65,567

 

69,329

 

Cash and cash equivalents, end of period

 

$

29,073

 

$

61,789

 

 

See accompanying notes to unaudited consolidated financial statements.

 

7



Table of Contents

 

Ciber, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

(1)  Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements of Ciber, Inc. and its subsidiaries (together, “Ciber,” “the Company,” “we,” “our” or “us”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements.  These consolidated financial statements should therefore be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC.  The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP and include all adjustments of a normal, recurring nature that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the interim periods presented.  The results of operations for an interim period are not necessarily indicative of the results of operations for a full fiscal year.

 

Recently Adopted Accounting Pronouncements — In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amends the disclosure requirements for the presentation of comprehensive income.  This guidance, effective retrospectively for interim and annual periods beginning on or after December 15, 2011, requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive statements.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in equity.  ASU 2011-05 does not change the items that must be reported in other comprehensive income, or when an item of other comprehensive income must be reclassified to net income.  We have included a Consolidated Statement of Comprehensive Income in our financial statements.  Other than the change in presentation, the adoption of this accounting guidance had no impact on our consolidated financial statements.

 

(2) Discontinued Operations

 

On March 9, 2012, we sold substantially all of the assets and certain liabilities of our Federal division to CRGT Inc. for an aggregate sales price of $40 million, subject to adjustment based on the final determination of the working capital of the Federal division at the time of closing.  Based upon our estimates of related working capital, we estimate the total cash proceeds will be approximately $39 million, subject to the resolution of CRGT’s proposed working capital adjustments discussed below.  We received net cash of approximately $35 million from the buyer after adjustment for working capital changes in March 2012.  We recorded a preliminary gain on sale of $0.9 million during the first quarter of 2012, which was net of transaction costs of $3.8 million and estimated lease exit costs of $1.6 million related to certain Federal division office space we vacated.  CRGT has proposed certain working capital adjustments to reduce the purchase price by approximately $6 million.  We disagree with such adjustments, and have invoked the dispute resolution mechanism under the sale agreement.  At this time, we cannot estimate the outcome of this dispute.  We expect to resolve this dispute during the second half of 2012.  We will record the impact of any adjustments on the determination of the gain on sale when such amount, if any, is probable and estimable.

 

The following table summarizes the operating results of the discontinued operations included in the Consolidated Statements of Operations.

 

8



Table of Contents

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Total revenues

 

$

 

$

26,855

 

$

17,644

 

$

54,392

 

Operating expenses

 

143

 

25,903

 

18,054

 

52,293

 

Operating income (loss) from discontinued operations

 

(143

)

952

 

(410

)

2,099

 

Interest and other expense

 

 

119

 

90

 

241

 

Income (loss) from discontinued operations before income taxes

 

(143

)

833

 

(500

)

1,858

 

Income tax expense

 

 

125

 

 

250

 

Income (loss) from discontinued operations, net of taxes

 

(143

)

708

 

(500

)

1,608

 

Gain on sale

 

 

 

920

 

 

Income tax expense

 

 

 

200

 

 

Gain on sale, net of income taxes

 

 

 

720

 

 

Total income (loss) from discontinued operations, net of income taxes

 

$

(143

)

$

708

 

$

220

 

$

1,608

 

 

Effective with the sale on March 9, 2012, the operations and cash flows of the Federal division were removed from our company.  However, we have retained certain historical accounts receivable as well as certain liabilities, and accordingly, adjustments to such items may be recorded through our results of operations in future periods.  In addition, we expect to incur post-sale general and administrative costs in connection with our former Federal business.

 

(3) Earnings (Loss) Per Share

 

Our computation of earnings (loss) per share — basic and diluted is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

268

 

$

(58,973

)

$

1,108

 

$

(55,677

)

Net income attributable to noncontrolling interests

 

206

 

108

 

266

 

181

 

Net income (loss) attributable to Ciber, Inc. from continuing operations

 

62

 

(59,081

)

842

 

(55,858

)

Income (loss) from discontinued operations, net of income tax

 

(143

)

708

 

220

 

1,608

 

Net income (loss) attributable to Ciber, Inc.

 

$

(81

)

$

(58,373

)

$

1,062

 

$

(54,250

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

73,013

 

71,695

 

72,874

 

71,316

 

Dilutive effect of employee stock plans

 

491

 

 

549

 

 

Diluted weighted average shares outstanding

 

73,504

 

71,695

 

73,423

 

71,316

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share attributable to Ciber, Inc.:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

 

$

(0.82

)

$

0.01

 

$

(0.78

)

Discontinued operations

 

 

0.01

 

 

0.02

 

Basic and diluted earnings (loss) per share attributable to Ciber, Inc.

 

$

 

$

(0.81

)

$

0.01

 

$

(0.76

)

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities omitted from the calculation

 

8,694

 

8,167

 

8,274

 

7,480

 

 

Dilutive securities, including stock options and restricted stock units, are excluded from the diluted weighted average shares outstanding computation in periods in which they have an anti-dilutive effect, such as when we report a net loss or when stock options have an exercise price that is greater than the average market price of Ciber common stock during the period.

 

9



Table of Contents

 

(4) Goodwill

 

We perform our annual impairment analysis of goodwill as of June 30 each year or more often if there are indicators of impairment present.  We test each of our reporting units for goodwill impairment.  Our reporting units are the same as our operating divisions and reporting segments.  The goodwill impairment test requires a two-step process.  The first step consists of comparing the estimated fair value of each reporting unit with its carrying amount, including goodwill.  If the estimated fair value of a reporting unit exceeds its carrying value, then it is not considered impaired and no further analysis is required.  If step one indicates that the estimated fair value of a reporting unit is less than its carrying value, then impairment potentially exists and the second step is performed to measure the amount of goodwill impairment.  Goodwill impairment exists when the estimated implied fair value of a reporting unit’s goodwill is less than its carrying value.

 

We compared the carrying values of our International and North America reporting units to their estimated fair values at June 30, 2012.  We estimated the fair value of each reporting unit based on a weighting of both the income approach and the market approach.  The discounted cash flows for each reporting unit serve as the primary basis for the income approach, and were based on discrete financial forecasts developed by management.  Cash flows beyond the discrete forecast period of five years were estimated using the perpetuity growth method calculation.  The annual average revenue growth rates forecasted for our reporting units for the first five years of our projections were approximately 5%.  We have projected a minor amount of operating profit margin improvement based on expected margin benefits from certain internal initiatives.  The terminal value was calculated assuming projected growth rates of 3% after five years, which reflects our estimate of minimum long-term growth in IT spending.  The income approach valuations also included each reporting unit’s estimated weighted average cost of capital, which were 11.5% and 13.5% for International and North America, respectively.  The market approach applied pricing multiples derived from publicly-traded companies that are comparable to the respective reporting units to determine their values.  For our International and North America reporting units, we used enterprise value/revenue multiples of 0.6 and 0.4, respectively, and enterprise value/EBITDA multiples of approximately 7 and 5, respectively, in order to value each of our reporting units under the market approach.  In addition, the fair value under the market approach included a control premium of 33%.  The control premium was determined based on a review of comparative market transactions.  Publicly-available information regarding our market capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units.

 

As a result of the first step of our goodwill impairment test as of June 30, 2012, we estimated that the fair values for our International and North America reporting units exceeded their carrying amounts by 70% and 12%, respectively, thus no impairment was indicated.  We have updated our cash flow forecasts and our other assumptions used to calculate the estimated fair value of our reporting units to account for our beliefs and expectations of the current business environment.  While we believe our estimates are appropriate based on our view of current business trends, no assurance can be provided that impairment charges will not be required in the future.

 

As a result of the changes to our reportable segments effective January 1, 2012, $9.8 million of the goodwill previously attributable to our former IT Outsourcing division was allocated to our remaining divisions as follows: $1.8 million to International and $8.0 million to North America. The changes in the carrying amount of goodwill during the six months ended June 30, 2012, were as follows:

 

 

 

International

 

North America

 

Total

 

 

 

(In thousands)

 

Balance at January 1, 2012

 

$

139,723

 

$

135,781

 

$

275,504

 

Effect of foreign exchange rate changes

 

(1,920

)

 

(1,920

)

Balance at June 30, 2012

 

$

137,803

 

$

135,781

 

$

273,584

 

 

10



Table of Contents

 

(5) Borrowings

 

On May 7, 2012, we entered into a Credit Agreement (the “Credit Agreement”) among Ciber, as United States (“U.S.”) borrower, certain of our United Kingdom and Dutch subsidiaries (the “U.K. Dutch Borrowers”), certain of our German subsidiaries (the “German Borrowers”), Wells Fargo Bank, N.A., as administrative agent (“Wells Fargo”), and the other lenders from time to time party thereto.  The Credit Agreement replaced our previous credit agreement and refinanced all amounts outstanding thereunder.

 

The Credit Agreement provides for (1) an asset-based revolving line of credit of up to $60 million (the “ABL Facility”), with the amount available for borrowing at any time under such line of credit determined according to a borrowing base valuation of eligible account receivables, and (2) a $7.5 million term loan to Ciber (the “Term Loan”).  The total available borrowing base on June 30, 2012, was $56 million.  The ABL Facility matures on May 7, 2017, and the Term Loan matures on November 7, 2013.  The Term Loan amortizes in monthly principal payments of approximately $0.4 million starting on October 31, 2012, with the balance due at maturity of the Term Loan.  As of June 30, 2012, we had $28.7 million outstanding under the ABL Facility and $7.5 million outstanding under the Term Loan.

 

The ABL Facility contains sub-facilities for (i) a revolving line of credit in favor of the U.K. Dutch Borrowers providing for borrowings in Euros or Great Britain Pounds of up to the equivalent of $20 million (the “U.K. Dutch Revolver”), (ii) a revolving line of credit in favor of the German Borrowers providing for borrowings in Euros of up to the equivalent of $10 million (the “German Revolver”), (iii) letters of credit of up to $6.7 million, and (iv) shorter term swingline loans of up to $10 million.  The ABL Facility may be increased from time to time by us upon the satisfaction of certain conditions, including obtaining additional lender commitments for such increase, by up to an aggregate of $25 million.

 

The obligations of Ciber under the Credit Agreement are guaranteed by our U.S. subsidiaries and secured by substantially all the assets of Ciber and such subsidiaries.  The obligations of the U.K. Dutch Borrowers and the German Borrowers under the Credit Agreement are guaranteed by us and all our material U.S., Dutch and British subsidiaries, and secured by substantially all the assets of Ciber and such subsidiaries.

 

The Term Loan accrues interest at an annual rate of 12.0%.  The ABL Facility accrues interest at a rate of the London interbank offered rate (“LIBOR”) plus a margin ranging from 225 to 275 basis points, or, at our option, a base rate equal to the greatest of (a) the Federal Funds Rate plus 0.50%, (b) LIBOR plus 1%, and (c) the “prime rate” set by Wells Fargo plus a margin ranging from 125 to 175 basis points.  Borrowings under the U.K. Dutch Revolver and the German Revolver accrue interest at a rate of LIBOR plus a margin ranging from 225 to 275 basis points and certain fees related to compliance with European banks and regulators.  The interest rates applicable to borrowings under the Credit Agreement are subject to increase during an event of default.  We are also required to pay an unused line fee ranging from 0.375% to 0.50% annually on the unused portion of the ABL Facility.  In the case of the ABL Facility, the applicable margin and unused line fee is determined according to the amount of unused borrowing capacity under the ABL Facility.

 

If we terminate the Credit Agreement within one year of the date of the Credit Agreement, we must pay a prepayment fee equal to 1% of the amount of the ABL Facility plus the amount outstanding under the Term Loan.  Otherwise, loans under the Credit Agreement may be prepaid, in whole or in part, without premium or penalty.  In addition, the Credit Agreement contains certain mandatory prepayment provisions.  Subject to certain exceptions and conditions, we may be required to prepay the Term Loan with the net cash proceeds received from certain events, including, receipt of proceeds from a disposition of assets, a judgment or settlement, the issuance of indebtedness or the issuance of common stock or other equity interests.  In addition, a mandatory prepayment of the Term Loan is required on an annual basis in an amount equal to 50% of any excess cash flow (as defined in the Credit Agreement) less the amount of any other prepayments made that year.  The ABL Facility or any sub-facility must be prepaid to the extent that borrowings under such facility exceed the maximum availability under the ABL Facility or the applicable sub-facility.

 

The Credit Agreement includes a number of business covenants, including customary limitations on, among other things, indebtedness, liens, investments, guarantees, mergers, dispositions, acquisitions, liquidations, dissolutions, issuances of securities, payments of dividends, loans and advances, and transactions with affiliates.

 

The Credit Agreement also contains certain financial covenants, including: (i) a minimum trailing 12-month “EBITDA,” which starts at $39.2 million for April 2012, decreases over seven months to $27.6 million for November and December of 2012 and then increases over ten months to $41.4 million for October 2013; (ii) a minimum trailing 12-month fixed charge coverage ratio of 1.1 to 1.0; and (iii) a maximum trailing 12-month leverage ratio, which starts at 1.1 to 1.0 for April 2012, decreases over five months to 1.6 to 1.0 for September through November of 2012 and increases over 11 months to 1.0 to 1.0 for October 2013.  We are required to be in compliance with the financial covenants at the end of each calendar month until the Term Loan is repaid in full.  We are also required to be in compliance with the minimum fixed charge coverage ratio after the

 

11



Table of Contents

 

Term Loan is repaid in full if (i) an event of default has occurred and is continuing, (ii) less than 25% of the ABL Facility is available for borrowing, or (iii) less than $15 million is available for borrowing under the ABL Facility.  We must then continue to comply with the minimum fixed charge coverage ratio until (1) no event of default is continuing and (2) at least 25% of the ABL Facility and a minimum of $15 million have been available for borrowing under the ABL Facility for 30 consecutive days.  We were in compliance with the financial covenants under our Credit Agreement at June 30, 2012.

 

Wells Fargo will take dominion over our U.S. cash and cash receipts and will automatically apply such amounts to the ABL Facility on a daily basis if (i) an event of default has occurred and is continuing, (ii) less than 30% of the ABL Facility or less than $18 million is available for borrowing under the ABL Facility for five consecutive days, or (iii) less than 25% of the ABL Facility or less than $15 million is available for borrowing under the ABL Facility at any time.  Wells Fargo will continue to exercise dominion over our U.S. cash and cash receipts until (1) no event of default is continuing and (2) at least 30% of the ABL Facility and a minimum of $18 million have been available for borrowing under the ABL Facility for 30 consecutive days.   In addition, at all times during the term of the ABL Facility, Wells Fargo will have dominion over the cash of the U.K. Dutch Borrowers and the German Borrowers and will automatically apply such amounts to the ABL Facility on a daily basis.  As a result, any borrowings that will be outstanding subject to the banks’ dominion, will be classified as a current liability on our balance sheet.

 

The Credit Agreement generally contains customary events of default for credit facilities of this type, including nonpayment, material inaccuracy of representations and warranties, violation of covenants, default of certain other agreements or indebtedness, bankruptcy, material judgments, invalidity of the Credit Agreement or related agreements, and a change of control.  Upon an event of default that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to the lenders, the obligations under the Credit Agreement may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral.

 

In connection with the Credit Agreement, we capitalized debt issuance costs of approximately $3.5 million that will be amortized to interest expense over the terms of the borrowing arrangements.

 

The carrying value of the outstanding borrowings under our Credit Agreement approximate its fair value due to interest rates approximating current market rates as the underlying interest rates were recently set in May 2012.  The inputs used to establish the fair value of the Credit Agreement are considered to be Level 2 instruments, which include inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

 

(6) Other Income (Expense)

 

Other income (expense), net consisted of the following:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Foreign exchange gains (losses), net

 

$

625

 

$

(80

)

$

10

 

$

(258

)

Change in fair value of acquisition-related contingent consideration

 

 

(2,602

)

 

(3,222

)

Other

 

70

 

(7

)

104

 

6

 

Other income (expense), net

 

$

695

 

$

(2,689

)

$

114

 

$

(3,474

)

 

12



Table of Contents

 

(7) Income Taxes

 

Current period U.S. and foreign income (loss) before income taxes and income tax expense were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Income (loss) from continuing operations before income taxes:

 

 

 

 

 

 

 

 

 

U.S.

 

$

(5,000

)

$

(37,411

)

$

(9,331

)

$

(40,784

)

Foreign

 

8,407

 

5,508

 

17,564

 

13,254

 

Total

 

$

3,407

 

$

(31,903

)

$

8,233

 

$

(27,530

)

 

 

 

 

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

 

 

 

 

U.S.

 

$

1,399

 

$

25,815

 

$

2,787

 

$

25,222

 

Foreign

 

1,740

 

1,255

 

4,338

 

2,925

 

Total

 

$

3,139

 

$

27,070

 

$

7,125

 

$

28,147

 

 

Beginning in the second quarter of 2011, due to our history of losses in our U.S. operations, we no longer record tax benefits for our U.S. incurred losses.  Irrespective of our income or loss levels, we continue to record U.S. deferred tax expense related to goodwill amortization, as well as certain other current tax expense items.  During the three months ended June 30, 2011, we recorded a non-cash charge of $29.1 million to provide a valuation allowance for all of our domestic deferred tax assets as of April 1, 2011.  Additionally, in the three months ended June 30, 2011, we had U.S. deferred tax expense of $1.5 million, and a deferred tax benefit of $4.4 million related to the non-cash goodwill impairment charge recognized during that period.

 

(8) Segment Information

 

Our reportable segments are our operating divisions.  At the beginning of 2012, we combined the operations of our former IT Outsourcing division with our International and North America divisions and changed our reporting to our chief operating decision maker.  Our International division provides a range of IT consulting services, including ERP software implementation, application development, and systems integration and support services, with a significant emphasis on SAP-related solutions and services.  Our North America division primarily provides application development, integration and support, as well as software implementation services for ERP software from software vendors such as Oracle, SAP and Lawson.  In 2012, we also began sharing the costs of our India global solutions center with both our International and North America divisions, whereas in previous years, our India operations had been reported as part of our North America division with services provided to our International division recorded as inter-segment revenues.  All 2011 segment data has been adjusted to conform to the 2012 presentation.

 

13



Table of Contents

 

The following presents financial information about our reporting segments:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

International

 

$

114,827

 

$

126,938

 

$

237,576

 

$

248,198

 

North America

 

123,782

 

114,055

 

243,135

 

247,617

 

Other

 

736

 

772

 

1,507

 

1,630

 

Inter-segment

 

(2,346

)

(778

)

(4,201

)

(1,545

)

Total revenues

 

$

236,999

 

$

240,987

 

$

478,017

 

$

495,900

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) from continuing operations:

 

 

 

 

 

 

 

 

 

International

 

$

7,079

 

$

7,217

 

$

15,491

 

$

14,493

 

North America

 

6,123

 

(10,558

)

11,758

 

(3,095

)

Other

 

80

 

73

 

130

 

225

 

Corporate expenses

 

(8,397

)

(7,134

)

(15,049

)

(14,644

)

Unallocated expenses of discontinued operations

 

 

(103

)

(242

)

(258

)

Earnings (loss) before interest, taxes and amortization

 

4,885

 

(10,505

)

12,088

 

(3,279

)

Goodwill impairment

 

 

(16,300

)

 

(16,300

)

Amortization of intangible assets

 

(161

)

(682

)

(325

)

(1,314

)

Total operating income (loss) from continuing operations

 

$

4,724

 

$

(27,487

)

$

11,763

 

$

(20,893

)

 

(9) Contingencies

 

We are involved in legal proceedings, audits, claims and litigation arising in the ordinary course of business.  Although the outcome of such matters is not predictable, we do not expect that the ultimate outcome of any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.

 

Notwithstanding the foregoing, we are engaged in legal proceedings in Germany in connection with our acquisition of a controlling interest in Novasoft AG (now known as Ciber AG) in 2004.  In August 2006, we completed a buy-out of the remaining minority shareholders of Novasoft; however, certain of those former minority shareholders challenged the adequacy of the buy-out consideration in a German court.  The court appointed independent experts have evaluated the consideration and claims of the minority shareholders and on April 27, 2012, Ciber filed a brief on its positions with respect to the evaluation.  At this time, we are unable to predict the outcome of these proceedings, although, if the court awards additional consideration, such consideration will increase the goodwill associated with the acquisition and we will be liable for that additional consideration, as well as the costs associated with these proceedings.

 

CamSoft, Inc., a Louisiana corporation, claims that it had a role in an alleged joint venture that developed a wireless network for video camera surveillance systems to be deployed to municipal governments.  The lawsuit, CamSoft Data Systems, Inc. v. Southern Electronics, et al., was filed initially in October 2009 in Louisiana state court against numerous defendants, including Ciber.  The lawsuit was subsequently removed to federal court in the Middle District of Louisiana and the complaint was amended to include additional defendants and causes of action including antitrust claims, civil RICO claims, unfair trade practices, trade secret, fraud, unjust enrichment and conspiracy claims.  The suit has many of the same parties that were involved in related litigation in the state court in New Orleans, which was concluded in 2009 when Ciber settled the New Orleans suit with the plaintiffs, Active Solutions and Southern Electronics, who are now co-defendants in the current lawsuit and CamSoft’s former alleged joint venturers.  Ciber is vigorously defending the allegations and has filed a comprehensive motion to dismiss all claims, state and federal.  In July 2011, the Court granted Ciber’s motion to dismiss Plaintiffs’ unfair trade practices, trade secret, fraud and unjust enrichment claims, but not the state law conspiracy claim.  On April 30, 2012, the Court granted Ciber’s motion to dismiss the Plaintiffs’ antitrust and civil RICO claims.  Ciber is not certain at this point if the Plaintiffs will attempt to pursue the remaining state law claims in state court or a federal court appeal or what claims, if any, may survive in the future.

 

14



Table of Contents

 

On October 28, 2011, a putative securities class action lawsuit, Weston v. Ciber, Inc. et al., was filed in the United States District Court for the District of Colorado against Ciber, its current Chief Executive Officer David C. Peterschmidt, current Executive Vice President and Chief Financial Officer (“CFO”) Claude J. Pumilia and former CFO Peter H. Cheesbrough (the “Class Action”).  The Class Action purports to have been filed on behalf of all holders of Ciber common stock between December 15, 2010 and August 3, 2011 by alleged stockholder and plaintiff, Burt Weston.  The Class Action generally alleges that defendants Ciber, Mr. Peterschmidt, Mr. Pumilia and Mr. Cheesbrough (the “Class Action Defendants”) violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Securities and Exchange Commission (“SEC”) Rule 10b-5.  Specifically, the complaint alleges that the Class Action Defendants disseminated or approved alleged false statements concerning the Company’s outlook and forecast for fiscal year 2011 in: (1) the Company’s 8-K filed with the SEC and press conference held with investors on December 15, 2010; (2) the Company’s press release and earnings conference call on February 22, 2011; (3) the Company’s 10-K for fiscal year 2010 filed with the SEC on February 25, 2011; and (4) the Company’s press release, earnings conference call, and Form 10-Q for first quarter 2011 filed with the SEC on May 3, 2011.  The complaint also generally alleges that the Class Action Defendants violated Section 20(a) of the Exchange Act.  Specifically, the complaint alleges that the Class Action Defendants acted as controlling persons of Ciber within the meaning of Section 20(a) of the Exchange Act by reason of their positions with the Company.  The Class Action seeks, among other things:  (1) an order from the Court declaring the complaint to be a proper class action pursuant to Rule 23 of the Federal Rules of Civil Procedure and certifying plaintiff as a representative of the purported class; (2) awarding plaintiff and the members of the class damages, including interest; (3) awarding plaintiff reasonable costs and attorneys’ fees; and (4) awarding such other relief as the Court may deem just and proper.  The Court appointed Mr. Weston and City of Roseville Employees’ Retirement System as lead plaintiffs and the law firms of Robbins, Geller Rudman & Dowd LLP and Robbins Umeda LLP as lead plaintiffs’ counsel on January 31, 2012.  Lead Plaintiffs filed an amended complaint in early April 2012.  The Class Action Defendants have filed a motion to dismiss, which is currently pending.  The Company believes that the Class Action is without merit and intends to defend against it vigorously.  There can, however, be no assurance of the outcome of these actions.

 

On February 7, 2012, a purported verified shareholder derivative lawsuit, Seni v. Peterschmidt. et al., was filed in the United States District Court for the District of Colorado (the “Derivative Action”) against Messrs. Peterschmidt, Pumilia, and Cheesbrough, and Ciber’s current board of directors: Messrs. Bobby G. Stevenson, Jean-Francois Heitz, Paul A. Jacobs, Stephen S. Kurtz, Kurt J. Lauk, Archibald J. McGill, and James C. Spira (“Individual Defendants”).  Ciber is named as a nominal defendant (collectively, with the Individual Defendants, the “Derivative Defendants”).  The Derivative Action is largely based on the same alleged facts as the Class Action.  The complaint in the Derivative Action generally alleges that the Individual Defendants breached their fiduciary duties of good faith, fair dealing, loyalty, due care, reasonable inquiry, oversight, and supervision by approving the issuance of allegedly false statements that misrepresented material information about the finances and operations of the Company.  The Derivative Complaint also alleges that the Individual Defendants were unjustly enriched as a result of the compensation they received while breaching their fiduciary duties to the Company.  The complaint seeks, among other things:  (1) damages for losses sustained by the Company as a result of the Individual Defendants’ breaches; (2) various corporate therapeutics; (3) restitution for the Company from the Individual Defendants; (4) an award to plaintiff of reasonable costs and attorneys’ fees; and (5) such other relief as the Court may deem just and proper.  On April 30, 2012, the Court granted Ciber’s Motion to Stay Discovery and Vacate the Scheduling Conference and Related Deadlines.  Ciber filed a motion to dismiss, which is pending.  If that motion is denied, the Court will require a scheduling conference shortly after the ruling on the motion to dismiss.

 

(10) Subsequent Events

 

On July 28, 2012, we entered into an agreement to sell certain contracts and the related assets and to transfer the personnel associated with our information technology outsourcing practice to Savvis Communications Corporation (“Savvis”) for an initial purchase price of $7 million in cash.  In addition, we are entitled to receive additional future consideration of up to $13 million, which is mainly dependent upon the post-closing success of the transferred customer contracts to be measured based on December 2013 results, with the final amount, if any, to be determined and paid during the first quarter of 2014.  We cannot estimate the amount of the additional future consideration or its potential impact on our results of operations or financial position.  We expect the transaction to close within 60-90 days of the agreement date, but the transaction is contingent on a number of closing conditions, including, among other things, obtaining numerous customer and other third-party consents.  Under the agreement, we are also required to indemnify Savvis for certain losses, if any, incurred by them following the closing under the customer contracts being transferred.  We estimate initial net cash proceeds from the sale, after transaction-related costs, to be in the range of $4-5 million.  The carrying value of the tangible assets included in the transaction are approximately $10 million, and relate predominantly to property and equipment.  We also expect to allocate a portion of our goodwill to the assets being disposed.  As a result, we expect to record a net loss on the sale of these assets of approximately $9-10 million.  In connection with the sale, we will retain the net working capital assets of the information technology outsourcing practice.  The annualized revenue related to the contracts to be sold under the agreement is approximately $60 million.  We expect to account for these specific contracts and assets as a discontinued operation during the quarter ended September 30, 2012.

 

15



Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and our Audited Consolidated Financial Statements and related Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2011.  References to “we,” “our,” “us,” “the Company” or “Ciber” in this Quarterly Report on Form 10-Q refer to Ciber, Inc. and its subsidiaries.

 

We use the phrase “in local currency” to indicate that we are comparing certain financial results after removing the impact of foreign currency exchange rate fluctuations, thereby allowing for the comparison of business performance between periods.  Financial results “in local currency” are calculated by restating current period activity into U.S. dollars using the comparable prior year period’s foreign currency exchange rates.  This approach is used for all results where the functional currency is not the U.S. dollar.

 

Disclosure Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to our operations, results of operations and other matters that are based on our current expectations, estimates, forecasts and projections.  Words, such as “anticipate,” “believe,” “could,” “expect,” “estimate,” “intend,” “may,” “opportunity,” “plan,” “potential,” “project,” “should,” and “will” and similar expressions, are intended to identify these forward-looking statements.  These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.  Forward-looking statements are based on assumptions as to future events that may not prove to be accurate.  Risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by our forward-looking statements include, but are not limited to:

 

·                  Our results of operations may be adversely affected if we are unable to execute on the key elements of our strategic plan.

 

·                  Our results of operations can be adversely affected by economic conditions and the impacts of economic conditions on our clients’ operations and technology spending.

 

·                  Termination of a contract by a significant client and/or cancellation with short notice could adversely affect our results of operations.

 

·                  The IT services industry, in the U.S. and internationally, is highly competitive, with increased focus on offshore capability and we may not be able to compete effectively.

 

·                  Our new Credit Agreement, an asset-based and term loan facility, limits our operational and financial flexibility; we also face the need to comply with covenants in our Credit Agreement.

 

·                  We may not complete the sale of certain contracts and the related assets of our information technology outsourcing practice, or complete the sale within the timeframe we anticipate, or on the terms currently negotiated.

 

·                  Possible post-closing adjustments to the purchase price on the sale of our former Federal division could reduce the purchase price and cause us to recognize a loss on that sale.

 

·                  We may experience declines in revenue and profitability if we do not accurately estimate the cost of engagements conducted on a fixed-price basis.

 

·                  Our business could be adversely affected if our clients are not satisfied with our services, and we could face damage to our professional reputation and/or legal liability.

 

·                  If we are not able to anticipate and keep pace with rapid changes in technology, our business will be negatively affected.

 

·                  Our international operations are susceptible to different financial and operational risks than our domestic operations.

 

·                  We intend to increase our presence in India, which may expose us to operational risks.

 

·                  Our revenues, operating results and profitability will vary from quarter to quarter, which may impact our ability to comply with our debt covenants, and may also result in increased volatility in the price of our stock.

 

·                  A data security or privacy breach could adversely affect our business.

 

·                  If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected.

 

16



Table of Contents

 

·                  Our future success depends on our ability to continue to retain and attract qualified sales, delivery and technical employees.

 

·                  We could incur additional losses due to further impairment in the carrying value of our goodwill.

 

·                  We depend on contracts with various state and local government agencies for a significant portion of our revenue and, if the spending policies or budget priorities of these agencies change, we could lose revenue.

 

·                  Unfavorable government audits could require us to adjust previously reported operating results, to forego anticipated revenue and subject us to penalties and sanctions.

 

·                  Our services or solutions could infringe upon the intellectual property rights of others, or we might lose our ability to utilize rights we claim in intellectual property or the intellectual property of others.

 

·                  We have adopted anti-takeover defenses that could make it difficult for another company to acquire control of Ciber or limit the price investors might be willing to pay for our stock, thus affecting the market price of our securities.

 

For a more detailed discussion of these factors, see the information under the “Risk Factors” heading in this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the three months ended March 31, 2012, our Annual Report on Form 10-K for the year ended December 31, 2011, and other documents filed with or furnished to the Securities and Exchange Commission.  We undertake no obligation to publicly update any forward-looking statements in light of new information or future events.  Readers are cautioned not to put undue reliance on forward-looking statements.

 

Business Overview

 

Ciber is a provider of information technology (“IT”), business consulting and outsourcing services.  We serve a variety of clients, including Global 2000 blue-chip companies, governmental agencies and educational institutions.  We solve complex IT and business issues across growing industries like energy and utilities, telecommunications, retail, healthcare, financial services, entertainment and manufacturing.  Our offerings are focused around a set of core competencies which include: Application Development and Management (“ADM”), Enterprise Resource Planning (“ERP”), Customer Relationship Management (“CRM”), Business Intelligence and Data Warehousing, Managed Services, Testing and Quality Assurance, Mobility Services and Digital Marketing.  We combine local, on-site account management with a global delivery model to serve clients in an intimate manner while still utilizing the power and cost efficiencies of global resources.  To a lesser extent, we also resell certain IT hardware and software products.

 

On March 9, 2012, we sold substantially all of the assets and certain liabilities of our Federal division to CRGT Inc.  The Federal division is reported as a discontinued operation for all periods in this Quarterly Report on Form 10-Q.  At the beginning of 2012, we combined the operations of our former IT Outsourcing division with our International and North America divisions and changed our reporting to our chief operating decision maker.  Our International division provides a range of IT consulting services, including ERP software implementation, application development, and systems integration and support services, with a significant emphasis on SAP-related solutions and services.  Our North America division primarily provides application development, integration and support, as well as software implementation services for ERP software from software vendors such as Oracle, SAP and Lawson.  In 2012, we also began sharing the costs of our India global solutions center with both our International and North America divisions, whereas in previous years, our India operations had been reported as part of our North America division with services provided to our International division recorded as inter-segment revenues.  All 2011 segment data has been adjusted to conform to the 2012 presentation.

 

Representing approximately half of our consolidated revenues, our International division operates primarily in Western Europe.  These operations transact business in the local currencies of the countries in which they operate.  In recent years, generally 60% to 70% of our International division’s revenue has been denominated in Euros, 10% to 15% has been denominated in Great Britain Pounds (“GBP”) and the balance has come from a number of other European currencies.  Changes in the exchange rates between these foreign currencies and the U.S. dollar affect the reported amounts of our assets, liabilities, revenues and expenses.  For financial reporting purposes, the assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates at period end and revenues and expenses are translated at average exchange rates for the period.

 

The market demand for Ciber’s services is heavily dependent on IT spending by major corporations, organizations and government entities in the markets and regions that we serve.  In the last three to four years, economic recession and volatile economic conditions have negatively impacted many of our existing and prospective clients and caused fluctuations in their IT spending behaviors.  In 2011, economic conditions began to have a greater negative impact on clients in a number of our International division’s territories.  The pace of technological advancement, as well as changes in business requirements and practices of our clients all have a significant impact on the demand for the services that we provide.

 

17



Table of Contents

 

Our results of operations are affected by economic conditions, including macroeconomic conditions, credit market conditions and levels of business confidence.  Revenue is driven by our ability to secure new contracts and deliver solutions and services that add value relevant to our clients’ current needs and challenges.  In recent quarters and ongoing for the foreseeable future, we have been affected by significant efforts by our clients (both current and potential) to implement cost-savings initiatives.  These initiatives have included going to third-party vendor management systems, taking their business to larger, pure-play offshore vendors and vendor consolidation.  In some cases, these initiatives have benefited Ciber, but in others we have lost our revenue stream entirely or seen a decline in our level of revenues with particular clients.  The pricing environment continues to be extremely competitive.  A number of our competitors are structuring more offshore services into their bids, thereby lowering their pricing to help clients reduce costs, and making it more difficult for us to compete on pricing.  We also have global delivery options to offer to our current and potential clients as possible cost savings, and we are expanding our offshore capabilities and increasing the usage of these resources; however, they are on a smaller scale than the offshore offerings of some of our competitors.  Another issue which has had and continues to have an impact on our revenues and profitability involves a much longer sales cycle than we have seen historically, which has been driven by a much slower decision-making process in starting new projects in a variety of industries that we currently serve, or in which we are currently bidding for work.  The longer sales cycle increases the cost of our sales efforts and pushes potential revenues and profitability further into the future.  Some clients remain cautious, seeking flexibility by shifting to a more phased approach to contracting for work.  Over the past year, we have tightened our standards governing the quality of engagements that we will accept with the goal of growing revenue, increasing margins, improving collectability of receivables and delivering sustained, predictable performance.  However, there can be no assurances that we will be successful with such actions, and in certain cases, these actions may slow our revenue growth.  Economic conditions and other factors continue to impact the business operations of some of our clients, their ability to continue to use our services and their financial ability to pay for our services in full.  The impact of project cancellations cannot be accurately predicted and bad debt expense will differ from our estimates, and any such events may negatively impact our results of operations.

 

During the three months ended June 30, 2011, we recorded a $16.3 million non-cash goodwill impairment charge and a $29.1 million non-cash charge to provide a full valuation allowance on our U.S. deferred tax assets.  During the same period, we also incurred $13.4 million of negative revenue adjustments in our North America division from significant changes in estimates related to costs or scope on five fixed-price contracts signed in 2009 or earlier.

 

On July 28, 2012, we entered into an agreement to sell certain contracts and the related assets and to transfer the personnel associated with our information technology outsourcing practice.  This was an important step in continuing to narrow our services toward a more focused and high-value set of offerings.  The infrastructure outsourcing business that we agreed to sell is capital intensive and not considered one of our core offerings.  The sale will allow us to increase our level of investment in our core offerings.  This portion of our IT outsourcing practice was expected to generate approximately $60 million of annualized revenue and was not expected to have a material impact on our profitability in 2012.  We expect to record a net loss on the sale within discontinued operations of approximately $9-10 million.  We will receive $7 million in cash for the initial purchase price, and there is a possibility to receive additional future consideration of up to $13 million, as determined by the post-closing success of the transferred customer contracts as measured based on December 2013 results.  Additionally, we will retain the existing positive working capital from the outsourcing practice.

 

Discontinued Operations

 

On March 9, 2012, we sold substantially all of the assets and certain liabilities of our Federal division to CRGT Inc. for an aggregate sales price of $40 million, subject to adjustment based on the final determination of the working capital of the Federal division at the time of closing.  Based upon our estimates of related working capital, we estimate the total cash proceeds will be approximately $39 million, subject to the resolution of CRGT’s proposed working capital adjustments discussed below.  We received net cash of approximately $35 million from the buyer after adjustment for working capital changes in March 2012.  We recorded a preliminary gain on sale of $0.9 million during the first quarter of 2012, which was net of transaction costs of $3.8 million and estimated lease exit costs of $1.6 million related to certain Federal division office space we vacated.  CRGT has proposed certain working capital adjustments to reduce the purchase price by approximately $6 million.  We disagree with such adjustments, and have invoked the dispute resolution mechanism under the sale agreement.  At this time, we cannot estimate the outcome of this dispute.  We expect to resolve this dispute during the second half of 2012.  We will record the impact of any adjustments on the determination of the gain on sale when such amount, if any, is probable and estimable.

 

The following table summarizes the operating results of the discontinued operations included in the Consolidated Statements of Operations.

 

18



Table of Contents

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Total revenues

 

$

 

$

26,855

 

$

17,644

 

$

54,392

 

Operating expenses

 

143

 

25,903

 

18,054

 

52,293

 

Operating income (loss) from discontinued operations

 

(143

)

952

 

(410

)

2,099

 

Interest and other expense

 

 

119

 

90

 

241

 

Income (loss) from discontinued operations before income taxes

 

(143

)

833

 

(500

)

1,858

 

Income tax expense

 

 

125

 

 

250

 

Income (loss) from discontinued operations, net of taxes

 

(143

)

708

 

(500

)

1,608

 

Gain on sale

 

 

 

920

 

 

Income tax expense

 

 

 

200

 

 

Gain on sale, net of income taxes

 

 

 

720

 

 

Total income (loss) from discontinued operations, net of income taxes

 

$

(143

)

$

708

 

$

220

 

$

1,608

 

 

Effective with the sale on March 9, 2012, the operations and cash flows of the Federal division were removed from our company.  However, we have retained certain historical accounts receivable as well as certain liabilities, and accordingly, adjustments to such items may be recorded through our results of operations in future periods.  In addition, we expect to incur post-sale general and administrative costs in connection with our former Federal business.

 

Results of Operations — Comparison of the Three Months Ended June 30, 2012 and 2011

 

The following table sets forth certain Consolidated Statement of Operations data in dollars and expressed as a percentage of revenue:

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Consulting services

 

$

223,942

 

94.5

%

$

228,614

 

94.9

%

Other revenue

 

13,057

 

5.5

 

12,373

 

5.1

 

Total revenues

 

$

236,999

 

100.0

%

$

240,987

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Gross profit - consulting services

 

$

55,563

 

24.8

%

$

43,909

 

19.2

%

Gross profit - other revenue

 

4,793

 

36.7

 

5,669

 

45.8

 

Gross profit - total

 

60,356

 

25.5

 

49,578

 

20.6

 

 

 

 

 

 

 

 

 

 

 

SG&A costs

 

55,471

 

23.4

 

60,083

 

24.9

 

Goodwill impairment

 

 

 

16,300

 

6.8

 

Amortization of intangible assets

 

161

 

0.1

 

682

 

0.3

 

Operating income (loss) from continuing operations

 

4,724

 

2.0

 

(27,487

)

(11.4

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

226

 

0.1

 

148

 

0.1

 

Interest expense

 

(2,238

)

(0.9

)

(1,875

)

(0.8

)

Other income (expense), net

 

695

 

0.3

 

(2,689

)

(1.1

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

3,407

 

1.4

 

(31,903

)

(13.2

)

Income tax expense

 

3,139

 

1.3

 

27,070

 

11.2

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

268

 

0.1

%

$

(58,973

)

(24.5

)%

 

Revenues.  For the three months ended June 30, 2012, total revenues decreased $4.0 million, or 2% in U.S. dollars, but increased $7.9 million, or 3% in local currency as compared with the three months ended June 30, 2011.  International division revenues declined primarily from the impact of unfavorable currency rates.  Additionally, the softer European economy caused varying results by territory in the current period.  North America revenues for the current period were improved as compared to

 

19



Table of Contents

 

the three months ended June 30, 2011, when we recorded $13.4 million of negative revenue adjustments on five fixed-price contracts.  Excluding the impact of these negative revenue adjustments in the prior year period, North America current period revenues declined as sales of new projects and additional work from existing clients have not been sufficient to offset attrition.

 

Revenue by segment from continuing operations was as follows:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

2012

 

2011

 

% change

 

 

 

(In thousands)

 

 

 

International

 

$

114,827

 

$

126,938

 

(9.5

)%

North America

 

123,782

 

114,055

 

8.5

 

Other

 

736

 

772

 

n/m

 

Inter-segment

 

(2,346

)

(778

)

n/m

 

Total revenues

 

$

236,999

 

$

240,987

 

(1.7

)%

 


n/m = not meaningful

 

·                  International revenues decreased 10% overall and were nearly flat in local currency.  The decline of the Euro during the current three month period as compared with the same period last year, was primarily responsible for the decrease.  The softer European economy caused revenue results to vary considerably by territory.  The U.K., Germany and Norway experienced strong revenue growth between the comparable periods due to continued strong demand for IT services and due to our success in these countries at providing certain technology-specific and/or vertical-specific services.  Revenue declines elsewhere were predominately related to client-specific issues, which in certain cases were driven by economic concerns, and included several canceled, delayed or completed projects.  The ongoing impact from certain larger European clients focusing on cost-cutting measures such as vendor consolidation, offshoring, and increasing pricing pressure on service providers also affected International revenues.  One of our largest clients accounted for 6% of consolidated revenues and 9% of the International division’s revenues in 2011.  As a result of a bidding process the client conducted, we were notified that our status changed to secondary provider from primary provider.  The level of overall services we provided to this client increased in 2011 as compared with 2010; however, during the second half of 2011 this client began cost-reduction initiatives, which included reductions in the level of services they purchased from us.  While we cannot predict future revenues from this client with any certainty, during the first half of 2012, this client accounted for approximately 4% of consolidated revenues and 6% of the International division’s revenues.

 

·      North America revenues improved 9% between the comparable periods related to the prior year negative revenue adjustments made for significant changes in estimates related to costs or scope on five fixed-price projects.  Excluding the prior year revenue adjustments, North America revenue was down approximately 3% as compared to the same period last year as increases in the level of services provided at several current clients and new project work weren’t sufficient to replace revenues from concluded projects and service-level reductions at other clients.  We believe that North America revenues have mostly stabilized as total revenues for the current three month period improved 4% over the previous three month period.  We currently expect to achieve revenue growth in future quarters, however, the rate of that growth may be slower, depending upon our ability to win more new projects, especially those that are larger in size.

 

Gross Profit.  Gross profit margin improved to 25.5% for the three months ended June 30, 2012, compared to 20.6% for the same period in 2011.  The revenue adjustments recorded during the prior year period had a significant negative impact on North America’s 2011 gross profit margin.  Excluding these adjustments, North America gross margin showed improvement attributable to several operational disciplines implemented during 2011, such as reducing the breadth of our service offerings and improving delivery quality.  These disciplines, in addition to the conclusion of several large fixed-price projects with low margins, contributed to gross margin improvement by reducing the impact of cost overruns and delivery inefficiencies, and lowering the division’s overall risk profile.  Gross profit margin for our International division declined, partially offsetting the gain from North America, due to decreased utilization resulting from concluded and canceled projects, reliance on more expensive subcontractor labor and pricing pressure.

 

Selling, general and administrative costs.  Our SG&A costs decreased $4.6 million, or 8% to $55.5 million for the three months ended June 30, 2012, from $60.1 million for the three months ended June 30, 2011, due to reduced salary and benefit costs, savings in discretionary SG&A items, as well as lower recruiting and consulting costs.

 

20



Table of Contents

 

Operating income (loss).  Operating income improved to $4.7 million for the three months ended June 30, 2012, as compared to an operating loss of $27.5 million for the same period of 2011, due primarily to negative revenue adjustments of $13.4 million and goodwill impairment of $16.3 million both recorded during the prior year period, as well as the current period reduction in SG&A costs.

 

Operating income (loss) from continuing operations by segment was as follows:

 

 

 

Three Months Ended June 30,

 

%

 

2012
% of

 

2011
% of

 

 

 

2012

 

2011

 

change

 

revenue*

 

revenue*

 

 

 

(In thousands)

 

 

 

 

 

 

 

International

 

$

7,079

 

$

7,217

 

(1.9

)%

6.2

%

5.7

%

North America

 

6,123

 

(10,558

)

158.0

 

4.9

 

(9.3

)

Other

 

80

 

73

 

9.6

 

10.9

 

9.5

 

Corporate expenses

 

(8,397

)

(7,134

)

(17.7

)

(3.5

)

(3.0

)

Unallocated expenses of discontinued operations

 

 

(103

)

100.0

 

 

 

Earnings (loss) before interest, taxes and amortization

 

4,885

 

(10,505

)

146.5

 

2.1

 

(4.4

)

Goodwill impairment

 

 

(16,300

)

100.0

 

 

(6.8

)

Amortization of intangible assets

 

(161

)

(682

)

76.4

 

(0.1

)

(0.3

)

Total operating income (loss) from continuing operations

 

$

4,724

 

$

(27,487

)

117.2

%

2.0

%

(11.4

)%

 


*International, North America and Other calculated as a % of their respective revenue, all other items calculated as a % of total revenue.  Column may not total due to rounding.

 

·                  International operating income declined slightly, but improved 50 basis points as a percentage of revenue related to cost initiatives begun during 2011 that resulted in reduced SG&A expenses for salaries and benefit costs, as well as discretionary items, that were partially offset by a reduction in gross profit margin due to decreased utilization, an increased reliance on more expensive subcontractor labor and pricing pressure.

 

·                  North America operating income increased to $6.1 million from an operating loss of $10.6 million that was largely due to the prior year negative revenue adjustments of $13.4 million for five fixed-price projects.  Current quarter operating margin also reflects delivery efficiency improvements, combined with reductions in SG&A expenses for reduced severance, discretionary items, facilities and recruiting costs.

 

·                  Corporate expenses increased during the current three month period primarily due to increases in stock compensation and management salaries expense.

 

Interest expense.  Interest expense increased $0.4 million for the three months ended June 30, 2012, compared to the same period of 2011 primarily due to $1.1 million of capitalized debt facility fees that were written off when our senior credit facility was terminated during the current quarter, and partially offset by a reduction in interest expense due to a significant reduction in our average borrowings outstanding between the comparable three month periods.

 

Other income (expense), net.  Other income, net was $0.7 million for the three months ended June 30, 2012, primarily due to foreign exchange gains.  For the three months ended June 30, 2011, other expense, net was $2.7 million, mainly related to a $2.6 million expense for additional acquisition-related contingent consideration.

 

21



Table of Contents

 

Income taxes.  Current period U.S. and foreign income (loss) before income taxes and income tax expense were as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Income (loss) from continuing operations before income taxes:

 

 

 

 

 

U.S.

 

$

(5,000

)

$

(37,411

)

Foreign

 

8,407

 

5,508

 

Total

 

$

3,407

 

$

(31,903

)

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

U.S.

 

$

1,399

 

$

25,815

 

Foreign

 

1,740

 

1,255

 

Total

 

$

3,139

 

$

27,070

 

 

Beginning in the second quarter of 2011, due to our history of losses in our U.S. operations, we no longer record tax benefits for our U.S. incurred losses.  Irrespective of our income or loss levels, we continue to record deferred U.S. tax expense related to goodwill amortization and we expect to record approximately $6 million of related U.S. deferred tax expense in 2012.  In addition, we also continue to incur certain other miscellaneous U.S. current tax expense items.  During the three months ended June 30, 2011, we recorded a non-cash charge of $29.1 million to provide a valuation allowance for all of our domestic deferred tax assets as of April 1, 2011.  Additionally, in the three months ended June 30, 2011, we had United States deferred tax expense of $1.5 million, and a deferred tax benefit of $4.4 million related to the non-cash goodwill impairment charge recognized during that period.

 

The effective rate on our foreign tax expense varies with the mix of income and losses across multiple tax jurisdictions with most statutory tax rates varying from 25% to 33%.  In both 2012 and 2011, certain of our foreign operations benefited from the utilization of net operating loss (“NOL”) carryforwards resulting in a slightly lower than normal effective foreign tax rate.

 

22



Table of Contents

 

Results of Operations — Comparison of the Six Months Ended June 30, 2012 and 2011

 

The following table sets forth certain Consolidated Statement of Operations data in dollars and expressed as a percentage of revenue:

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Consulting services

 

$

452,063

 

94.6

%

$

472,171

 

95.2

%

Other revenue

 

25,954

 

5.4

 

23,729

 

4.8

 

Total revenues

 

$

478,017

 

100.0

%

$

495,900

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Gross profit - consulting services

 

$

109,811

 

24.3

%

$

104,803

 

22.2

%

Gross profit - other revenue

 

9,098

 

35.1

 

10,542

 

44.4

 

Gross profit - total

 

118,909

 

24.9

 

115,345

 

23.3

 

 

 

 

 

 

 

 

 

 

 

SG&A costs

 

106,821

 

22.3

 

118,624

 

23.9

 

Goodwill impairment

 

 

 

16,300

 

3.3

 

Amortization of intangible assets

 

325

 

0.1

 

1,314

 

0.3

 

Operating income (loss) from continuing operations

 

11,763

 

2.5

 

(20,893

)

(4.2

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

423

 

0.1

 

204

 

 

Interest expense

 

(4,067

)

(0.9

)

(3,367

)

(0.7

)

Other income (expense), net

 

114

 

 

(3,474

)

(0.7

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

8,233

 

1.7

 

(27,530

)

(5.6

)

Income tax expense

 

7,125

 

1.5

 

28,147

 

5.7

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

1,108

 

0.2

%

$

(55,677

)

(11.2

)%

 

Revenues.  For the six months ended June 30, 2012, total revenues decreased $17.9 million, or 4% in U.S. dollars and decreased $2.0 million, or less than 1% in local currency as compared with the same period of 2011.  Excluding the impact of unfavorable currency rates, International division revenues improved 2% for the current six month period compared with the same period last year.  North America revenues decreased between the comparable periods both before and after adjusting for $13.4 million of negative revenue adjustments recorded on five fixed-price projects during the second quarter of 2011.  North America current period revenues declined as sales of new projects and additional work from existing clients have not been sufficient to offset attrition.

 

Revenue by segment from continuing operations was as follows:

 

 

 

Six Months Ended June 30,

 

 

 

 

 

2012

 

2011

 

% change

 

 

 

(In thousands)

 

 

 

International

 

$

237,576

 

$

248,198

 

(4.3

)%

North America

 

243,135

 

247,617

 

(1.8

)

Other

 

1,507

 

1,630

 

n/m

 

Inter-segment

 

(4,201

)

(1,545

)

n/m

 

Total revenues

 

$

478,017

 

$

495,900

 

(3.6

)%

 


n/m = not meaningful

 

·                  International revenues decreased 4% overall, but improved 2% in local currency.  The impact of unfavorable currency rates during the current six month period were offset by a small overall improvement in revenue on a local currency basis.  The softer European economy caused revenue results to vary considerably by territory.  Revenue growth remained strongest in the U.K., Germany and Norway, as well as a few other countries, due to continued demand for IT services and where we have been successful at providing certain technology-specific and/or vertical-specific

 

23



Table of Contents

 

services.  Revenue growth in these territories more than offset declines elsewhere that were predominately related to client-specific issues, which in certain cases were driven by economic concerns, and included several canceled, delayed or completed projects.  The ongoing impact from certain larger European clients focusing on cost-cutting measures such as vendor consolidation, offshoring, and increasing pricing pressure on service providers also affected International revenues.  One of our largest clients accounted for 6% of consolidated revenues and 9% of the International division’s revenues in 2011.  As a result of a bidding process the client conducted, we were notified that our status changed to secondary provider from primary provider.  The level of overall services we provided to this client increased in 2011 as compared with 2010; however, during the second half of 2011 this client began cost-reduction initiatives, which included reductions in the level of services they purchased from us.  While we cannot predict future revenues from this client with any certainty, during the first half of 2012, this client accounted for approximately 4% of consolidated revenues and 6% of the International division’s revenues.

 

·                  North America revenues decreased 2% between the comparable six month periods, however, after adjusting for $13.4 million of negative revenue adjustments made in the prior year for significant changes in estimates related to costs or scope on five fixed-price projects, North America revenues are down 7% year over year.  This decline is due to concluded projects and service-level reductions at certain clients, which were not sufficiently replaced with new project work and increases in the level of services provided at other clients.  We believe that North America revenues have mostly stabilized as total revenues have steadily improved over the last six months.  We currently expect to achieve revenue growth in future quarters, however, the rate of that growth may be slower, depending upon our ability to win more new projects, especially those that are larger in size.

 

Gross Profit.  Gross profit margin improved to 24.9% for the six months ended June 30, 2012, compared to 23.3% for the same period in 2011.  The revenue adjustments recorded during the prior year period had a significant negative impact on North America’s 2011 gross profit margin.  Excluding these adjustments, North America gross margin showed improvement that was realized mainly during the current quarter and was attributable to several operational disciplines implemented during 2011, such as reducing the breadth of our service offerings and improving delivery quality.  These disciplines, in addition to the conclusion of several large fixed-price projects with low margins, contributed to gross margin improvement by reducing the impact of cost overruns and delivery inefficiencies, and lowering the division’s overall risk profile.  International division gross margin declined due to decreased utilization resulting from concluded and canceled projects, reliance on more expensive subcontractor labor and pricing pressure.

 

Selling, general and administrative costs.  Our SG&A costs decreased $11.8 million, or 10% to $106.8 million for the six months ended June 30, 2012, from $118.6 million for the six months ended June 30, 2011, in large part due to reduced salary and benefit costs, including severance, as well as reductions in discretionary SG&A items and bad debt expenses.

 

Operating income (loss).  Operating income improved to $11.8 million for the six months ended June 30, 2012, as compared to an operating loss of $20.9 million for the same period of 2011, due primarily to negative revenue adjustments of $13.4 million and goodwill impairment of $16.3 million both recorded during the prior year period, as well as the current period reduction in SG&A costs.

 

Operating income (loss) from continuing operations by segment was as follows:

 

 

 

Six Months Ended June 30,

 

 

2012
% of 

 

2011
% of

 

 

 

2012

 

2011

 

change

 

revenue*

 

revenue*

 

 

 

(In thousands)

 

 

 

 

 

 

 

International

 

$

15,491

 

$

14,493

 

6.9

%

6.5

%

5.8

%

North America

 

11,758

 

(3,095

)

479.9

 

4.8

 

(1.2

)

Other

 

130

 

225

 

(42.2

)

8.6

 

13.8

 

Corporate expenses

 

(15,049

)

(14,644

)

(2.8

)

(3.1

)

(3.0

)

Unallocated expenses of discontinued operations

 

(242

)

(258

)

6.2

 

(0.1

)

(0.1

)

Earnings (loss) before interest, taxes and amortization

 

12,088

 

(3,279

)

468.6

 

2.5

 

(0.7

)

Goodwill impairment

 

 

(16,300

)

100.0

 

 

(3.3

)

Amortization of intangible assets

 

(325

)

(1,314

)

75.3

 

(0.1

)

(0.3

)

Total operating income (loss)

 

$

11,763

 

$

(20,893

)

156.3

%

2.5

%

(4.2

)%

 


*International, North America and Other calculated as a % of their respective revenue, all other items calculated as a % of total revenue.  Column may not total due to rounding.

 

24



Table of Contents

 

·                  International operating income improved $1.0 million due to SG&A cost savings for salary and benefit costs and discretionary spending outweighing the reduction in gross profit margin resulting from decreased utilization, reliance on more expensive subcontractor labor and pricing pressure.

 

·                  North America operating income increased to $11.8 million from an operating loss of $3.1 million that was largely due to the prior year negative revenue adjustments of $13.4 million for five fixed-price projects, as well as reductions in SG&A expenses for discretionary items, bad debt expenses, and facilities and recruiting costs.

 

·                  Corporate expenses increased slightly during the current six month period due to increases in stock compensation and management salaries expense and equipment rental and maintenance, offset by decreased expenses for recruiting and consulting.

 

Interest expense.  Interest expense increased $0.7 million for the six months ended June 30, 2012, compared to the same period of 2011 primarily due to $1.1 million of capitalized debt facility fees that were written off when our senior credit facility was terminated during the current quarter, and partially offset by a reduction in interest expense due to a significant reduction in our average borrowings outstanding between the comparable six month periods.

 

Other income (expense), net.  Other income, net was $0.1 million for the six months ended June 30, 2012, compared with other expense, net of $3.5 million, for the six months ended June 30, 2011, primarily related to a $3.2 million expense for acquisition-related contingent consideration in 2011.

 

Income taxes.  Current period U.S. and foreign income (loss) before income taxes and income tax expense were as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Income (loss) from continuing operations before income taxes:

 

 

 

 

 

U.S.

 

$

(9,331

)

$

(40,784

)

Foreign

 

17,564

 

13,254

 

Total

 

$

8,233

 

$

(27,530

)

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

U.S.

 

$

2,787

 

$

25,222

 

Foreign

 

4,338

 

2,925

 

Total

 

$

7,125

 

$

28,147

 

 

Beginning in the second quarter of 2011, due to our history of losses in our U.S. operations, we no longer record tax benefits for our U.S. incurred losses.  Irrespective of our income or loss levels, we continue to record deferred U.S. tax expense related to goodwill amortization and we expect to record approximately $6 million of related U.S. deferred tax expense in 2012.  In addition, we also continue to incur certain other miscellaneous U.S. current tax expense items.  During the three months ended June 30, 2011, we recorded a non-cash charge of $29.1 million to provide a valuation allowance for all of our domestic deferred tax assets as of April 1, 2011.  Additionally, in the three months ended June 30, 2011, we had United States deferred tax expense of $1.5 million, and a deferred tax benefit of $4.4 million related to the non-cash goodwill impairment charge recognized during that period.

 

The effective rate on our foreign tax expense varies with the mix of income and losses across multiple tax jurisdictions with most statutory tax rates varying from 25% to 33%.  In both 2012 and 2011, certain of our foreign operations benefited from the utilization of net operating loss (“NOL”) carryforwards resulting in a slightly lower than normal effective foreign tax rate.

 

25



Table of Contents

 

Liquidity and Capital Resources

 

At June 30, 2012, we had an increase in working capital to $106.0 million from $92.8 million at December 31, 2011.  Our current ratio was 1.7:1 at June 30, 2012, compared to 1.5:1 at December 31, 2011.  Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity under our new credit agreement.  In addition, we could seek to raise additional funds through public or private debt or equity financings.  We believe that our cash and cash equivalents, our expected operating cash flow and our available credit agreement will be sufficient to finance our working capital needs through at least the next year.

 

Our balance of cash and cash equivalents was $29.1 million at June 30, 2012, compared to $65.6 million at December 31, 2011.  Our domestic cash balances are generally used to reduce our outstanding borrowings.  Typically, most of our cash balance is maintained by our foreign subsidiaries.  From time to time, we may engage in short-term loans from our foreign operations.  In order to meet the scheduled principal reduction requirements for the term loan under our previous senior credit facility, we repatriated $30 million of foreign cash to the U.S. in January 2012.  Due to our domestic NOL carryforwards, this repatriation did not result in any material current tax payments.  The repatriation reduced the available NOL carryforwards which are available to offset future U.S. taxable income.  Except for the $30 million cash repatriation, we have not provided for any additional U.S. income taxes on the undistributed earnings of our foreign subsidiaries, as we currently do not have plans to repatriate cash in the future and we consider these to be permanently reinvested in the operations of such subsidiaries.  Effective May 7, 2012, our new credit agreement provides for foreign