##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTER ENDED MARCH 31, 2011
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number
 000-51579
 
 NCI, Inc.
  Delaware
    
    20-3211574(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)11730 Plaza America DriveReston, Virginia
    
    20190-4764(Address of principal executive offices)
    
    (Zip Code)
 (703) 707-6900
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ




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##### 



PAGEPART I: FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    8Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4. Controls and Procedures
    
    
    13PART II: OTHER INFORMATION
    
    
    14Item 1. Legal Proceedings
    
    
    14Item 1A. Risk Factors
    
    
    14Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    14Item 3. Defaults Upon Senior Securities
    
    
    14Item 4. Removed and Reserved
    
    
    14Item 5. Other Information
    
    
    14Item 6. Exhibits
    
    
    14Signatures
    
    
    15Exhibit 31.1Exhibit 31.2Exhibit 32.1




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##### Table of Contents



PART 1
 FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 NCI, INC.
CONSOLIDATED STATEMENTS OF INCOME
 Three months ended March 31,2011
    
    
    2010Revenue
    
    $
    150,225
    
    
    $
    114,993Operating costs and expenses:Cost of revenue
    
    
    133,256
    
    
    
    99,392General and administrative expense
    
    
    5,759
    
    
    
    5,617Depreciation and amortization
    
    
    1,308
    
    
    
    1,172Acquisition and integration related costs
    
    
    201
    
    
    
    Total operating costs and expenses
    
    
    140,524
    
    
    
    106,181Operating income
    
    
    9,701
    
    
    
    8,812Interest expense, net
    
    
    197
    
    
    
    143Income before income taxes
    
    
    9,504
    
    
    
    8,669Provision for income taxes
    
    
    3,811
    
    
    
    3,203Net income
    
    $
    5,693
    
    
    $
    5,466Earnings per common and common equivalent share:Basic:Weighted average shares outstanding
    
    
    13,670
    
    
    
    13,568Net income per share
    
    $
    0.42
    
    
    $
    0.40Diluted:Weighted average shares and equivalent shares outstanding
    
    
    13,909
    
    
    
    13,877Net income per share
    
    $
    0.41
    
    
    $
    0.39
 The accompanying notes are an integral
part of these consolidated financial statements
  1




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NCI, INC.
CONSOLIDATED BALANCE SHEETS
 As of
    
    
    As ofMarch 31,
    
    
    December 31,2011
    
    
    2010(unaudited)Assets:Current assets:Cash and cash equivalents
    
    $
    802
    
    
    $
    2,791Accounts receivable, net
    
    
    121,460
    
    
    
    132,693Deferred tax assets
    
    
    4,512
    
    
    
    4,547Prepaid expenses and other current assets
    
    
    5,798
    
    
    
    3,347Total current assets
    
    
    132,572
    
    
    
    143,378Property and equipment, net
    
    
    11,596
    
    
    
    11,751Other assets
    
    
    1,324
    
    
    
    1,590Intangible assets, net
    
    
    5,664
    
    
    
    6,179Goodwill
    
    
    106,580
    
    
    
    106,580Total assets
    
    $
    257,736
    
    
    $
    269,478Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    37,271
    
    
    $
    61,046Accrued salaries and benefits
    
    
    17,868
    
    
    
    20,229Deferred revenue
    
    
    1,827
    
    
    
    2,951Other accrued expenses
    
    
    6,920
    
    
    
    3,468Total current liabilities
    
    
    63,886
    
    
    
    87,694Long-term debt
    
    
    25,900
    
    
    
    20,000Deferred tax liabilities, net
    
    
    7,523
    
    
    
    7,450Deferred rent and other long-term liabilities
    
    
    1,179
    
    
    
    1,287Total liabilities
    
    
    98,488
    
    
    
    116,431Stockholders equity:Class A common stock, $0.019 par
value37,500,000 shares authorized; 
8,471,492 shares issued and outstanding as
of March 31, 2011, and 8,469,242 shares
issued and outstanding as of December 31,
2010
    
    
    161
    
    
    
    161Class B common stock, $0.019 par
value12,500,000 shares authorized; 
5,200,000 shares issued and outstanding as
of March 31, 2011 and December 31, 2010
    
    
    99
    
    
    
    99Additional paid-in capital
    
    
    68,397
    
    
    
    67,889Retained earnings
    
    
    90,591
    
    
    
    84,898Total stockholders equity
    
    
    159,248
    
    
    
    153,047Total liabilities and stockholders equity
    
    $
    257,736
    
    
    
    269,478
 The accompanying notes are an integral
part of these consolidated financial statements
  2




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NCI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three months ended March 31,2011
    
    
    2010Cash flows from operating activities:Net income
    
    $
    5,693
    
    
    $
    5,466Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    1,308
    
    
    
    1,172Gain on sale and disposal of property and equipment
    
    
    (16
    )
    
    
    Non-cash stock compensation expense
    
    
    505
    
    
    
    397Deferred income taxes
    
    
    107
    
    
    
    178Changes in operating assets and liabilities:Accounts receivable, net
    
    
    11,234
    
    
    
    15,145Prepaid expenses and other assets
    
    
    (2,184
    )
    
    
    (1,675
    )Accounts payable
    
    
    (23,775
    )
    
    
    (8,584
    )Accrued expenses
    
    
    (32
    )
    
    
    (1,131
    )Deferred rent
    
    
    (92
    )
    
    
    (141
    )Net cash (used in) provided by operating activities
    
    
    (7,252
    )
    
    
    10,827Cash flows from investing activities:Purchase of property and equipment
    
    
    (641
    )
    
    
    (2,103
    )Proceeds from sale of property and equipment
    
    
    18
    
    
    
    Net cash used in investing activities
    
    
    (623
    )
    
    
    (2,103
    )Cash flows from financing activities:Proceeds from credit facility
    
    
    37,911
    
    
    
    31,199Payments on credit facility
    
    
    (32,011
    )
    
    
    (42,199
    )Principal payments under capital lease obligations
    
    
    (17
    )
    
    
    (20
    )Proceeds from exercise of stock options
    
    
    30
    
    
    
    2,179Excess tax deduction from exercise of stock options
    
    
    (27
    )
    
    
    34Net cash provided by (used in) financing activities
    
    
    5,886
    
    
    
    (8,807
    )Net change in cash and cash equivalents
    
    
    (1,989
    )
    
    
    (83
    )Cash and cash equivalents, beginning of period
    
    
    2,791
    
    
    
    1,193Cash and cash equivalents, end of period
    
    $
    802
    
    
    $
    1,110Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    193
    
    
    $
    161Income taxes
    
    $
    381
    
    
    $
    1,416
 The accompanying notes are an integral
part of these consolidated financial statements
  3




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NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. Basis of Presentation
  2. Business Overview
  3. Earnings Per Share
  Three months ended March 31,2011
    
    
    2010(in thousands, except per share data)Net Income
    
    $
    5,693
    
    
    $
    5,466Weighted average number of basic shares outstanding during the period
    
    
    13,670
    
    
    
    13,568Dilutive effect of stock options after application of treasury stock method
    
    
    239
    
    
    
    309Weighted average number of diluted shares outstanding during the period
    
    
    13,909
    
    
    
    13,877Basic earnings per share
    
    $
    0.42
    
    
    $
    0.40Diluted earnings per share
    
    $
    0.41
    
    
    $
    0.39
  4




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NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 4. Accounts Receivable
  As of:March 31,
    
    
    December 31,2011
    
    
    2010(in thousands)Billed receivables
    
    $
    58,690
    
    
    $
    51,611Unbilled receivables:Billable receivables at end of period
    
    
    48,697
    
    
    
    61,500Other
    
    
    14,659
    
    
    
    20,280Total unbilled receivables
    
    
    63,356
    
    
    
    81,780Total accounts receivable
    
    
    122,046
    
    
    
    133,391Less: allowance for doubtful accounts
    
    
    586
    
    
    
    698Total accounts receivable, net
    
    $
    121,460
    
    
    $
    132,693
  5. Property and Equipment
  As of:March 31,
    
    
    December 31,2011
    
    
    2010(in thousands)Property and equipmentFurniture and equipment
    
    $
    17,503
    
    
    $
    17,855Leasehold improvements
    
    
    5,289
    
    
    
    5,287Real property
    
    
    549
    
    
    
    54923,341
    
    
    
    23,691Less: Accumulated depreciation and amortization
    
    
    11,745
    
    
    
    11,940Property and equipment, net
    
    $
    11,596
    
    
    $
    11,751
  6. Intangible Assets
  As ofMarch 31,
    
    
    December 31,2010
    
    
    2010(in thousands)Contract and customer relationships
    
    $
    14,942
    
    
    $
    14,942Less: Accumulated amortization
    
    
    9,474
    
    
    
    8,9945,468
    
    
    
    5,948Non-compete agreements
    
    
    2,038
    
    
    
    2,038Less: Accumulated amortization
    
    
    1,842
    
    
    
    1,807196
    
    
    
    231Intangible assets, net
    
    $
    5,664
    
    
    $
    6,179
  5




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NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 6. Intangible Assets  continued
  7. Stock Compensation
   For the Three Months EndedMarch 31,2011
    
    
    2010(in thousands)Cost of revenue
    
    $
    221
    
    
    $
    193General and administrative
    
    
    284
    
    
    
    204$
    505
    
    
    $
    397
  8. Debt
     6




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NCI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 8. Debt  continued
  9. Related Party Transactions
     10. Subsequent Event
     7




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward Looking Statements
  
    
    Our dependence on our contracts with U.S. Federal Government agencies, particularly
within the U.S. Department of Defense, for substantially all our revenue; a change in
funding of our contracts due to bid protests; changes in U.S. Federal Government spending
priorities; changes in contract type, particularly changes from cost-plus fee or
time-and-material type contracts to firm fixed-price type contracts
 
    
    The overall U.S. Defense budget declined from time to time during the late 1980s and the
early 1990s. While spending authorizations for Defense and Intelligence-related programs
by the U.S. Federal Government have increased in recent years, future levels of
expenditures and authorizations for those programs may decrease, remain constant, or shift
to programs in areas where we do not currently provide services
 
    
    Risk of contract performance or termination
 
    
    Changes in U.S. Federal Government programs or requirements, including the increased use
of small business providers
 
    
    Failure to achieve contract awards in connection with recompetes for present business
and/or competition for new business
 
    
    U.S. Federal Government agencies are more frequently awarding contracts on a technically
acceptable/lowest cost basis in order to reduce expenditures
 
    
    Adverse results of U.S. Federal Government audits of our government contracts
 
    
    Competitive factors, such as pricing pressures and competition to hire and retain
employees (particularly those with security clearances)
 
    
    Failure to successfully integrate AdvanceMed Corporation which was purchased April 1,
2011 or identify and successfully integrate other future acquired companies or businesses
into our operations or to realize any accretive or synergistic effects from such
acquisitions, or effectively integrate acquisitions appropriate to the achievement of our
strategic plans
 
    
    Economic conditions in the United States, including conditions that result from
terrorist activities or war; material changes in laws or regulations applicable to our
businesses, particularly legislation affecting (i) U.S. Federal Government contracts for
services, (ii) outsourcing of activities that have been performed by the U.S. Federal
Government, (iii) U.S. Federal Government contracts containing organizational conflict of
interest clauses, (iv) delays related to agency specific funding freezes, (v) competition
for task orders under Government Wide Acquisition Contracts, agency-specific Indefinite
Delivery/Indefinite Quantity contracts and/or schedule contracts with the General Services
Administration, or (vi) our ability to achieve the objectives of near-term or long-range
business plans
 
    
    U.S. Federal Governmental shutdowns (such as that which occurred during the U.S. Federal
Governments 1996 fiscal year) and other potential delays in the U.S. Federal Government
appropriations process
    8




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OVERVIEW
  
    
    Enterprise systems management
 
    
    Network engineering
 
    
    Cybersecurity and information assurance
 
    
    Software development and systems engineering
 
    
    Program management, acquisition, and lifecycle support
 
    
    Engineering and logistics
 
    
    Health IT and informatics
 
    
    Training and simulation
  Three months ended March 31,2011
    
    
    2010Department of Defense and intelligence agencies
    
    
    93.4
    %
    
    
    88.8
    %U.S. Federal civilian agencies
    
    
    6.6
    %
    
    
    11.2
    %
  Contract Types
   Three months ended March 31,2011
    
    
    2010Time-and-materials
    
    
    59.1
    %
    
    
    49.7
    %Cost-plus fee
    
    
    12.5
    
    
    
    16.7Firm fixed-price
    
    
    28.4
    
    
    
    33.6
   9




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Results of Operations
 Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
  Three months ended March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010(in thousands)
    
    
    (as a percentage of revenue)Revenue
    
    $
    150,225
    
    
    $
    114,993
    
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Cost of revenue
    
    
    133,256
    
    
    
    99,392
    
    
    
    88.7
    
    
    
    86.4General and administrative expenses
    
    
    5,759
    
    
    
    5,617
    
    
    
    3.8
    
    
    
    4.9Depreciation and amortization
    
    
    1,308
    
    
    
    1,172
    
    
    
    0.9
    
    
    
    1.0Acquisition and integration related costs
    
    
    201
    
    
    
    
    
    
    
    0.1
    
    
    
    Total operating costs and expenses
    
    
    140,524
    
    
    
    106,181
    
    
    
    93.5
    
    
    
    92.3Operating income
    
    
    9,701
    
    
    
    8,812
    
    
    
    6.5
    
    
    
    7.7Interest expense, net
    
    
    197
    
    
    
    143
    
    
    
    0.2
    
    
    
    0.2Income before income taxes
    
    
    9,504
    
    
    
    8,669
    
    
    
    6.3
    
    
    
    7.5Provision for income taxes
    
    
    3,811
    
    
    
    3,203
    
    
    
    2.5
    
    
    
    2.7Net income
    
    $
    5,693
    
    
    $
    5,466
    
    
    
    3.8
    %
    
    
    4.8
    %
 Revenue
   Cost of revenue
  General and administrative expenses
   10




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Depreciation and amortization
  Acquisition and integration related costs
  Operating income
   Interest expense, net
  Income taxes
  Contract Backlog
  Liquidity and Capital Resources
   11




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Credit Facility
   Senior Debt to EBITDARatio
    
    SpreadBelow 1.0 to 1
    
    200 basis pointsBetween 2.0 and 1.0 to 1
    
    225 basis pointsBetween 2.0 and 2.5 to 1
    
    250 basis pointsBetween 2.5 and 3.0 to 1
    
    275 basis pointsGreater than 3.0 to 1
    
    300 basis points
   Off-Balance Sheet Arrangements
   12




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Critical Accounting Policies
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
 Evaluation of the Effectiveness of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
   13




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. [Removed and Reserved]
 
 Item 5. Other Information
  
 Item 6. Exhibits
 Number
    
    Description3.1
    
    
    Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference from Exhibit 3.1 to
registrants Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 4, 2005, as
amended).3.2
    
    
    Bylaws of the Registrant (incorporated herein by reference from Exhibit 3.2 to registrants Registration Statement on Form
S-1 (File No. 333-127006), as filed with the Commission on July 29, 2005).4.1
    
    
    Specimen Class A Common Stock Certificate (incorporated herein by reference from Exhibit 4.1 to registrants Registration
Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 20, 2005, as amended).4.2
    *
    
    NCI, Inc. 2005 Performance Incentive Plan (incorporated herein by reference from Exhibit 4.2 to registrants Registration
Statement on Form S-1 (File No. 333-127006), as filed with the Commission on July 29, 2005).4.3
    *
    
    Form of 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement (incorporated herein by
reference from Exhibit 4.4 to registrants Registration Statement on Form S-1 (File No. 333-127006), as filed with the
Commission on October 20, 2005, as amended).4.4
    *
    
    NCI, Inc. Amended and Restated 2005 Performance Incentive Plan (incorporated herein by reference from Appendix A to
registrants Proxy Statement on Form DEF 14A, as filed with the Commission on April 30, 2009).4.5
    *
    
    Form of Amended and Restated 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement
(incorporated herein by reference from Exhibit 4.2 to registrants Registration Statement on Form 8-K, as filed with the
Commission on June 12, 2009).10.1
    
    
    Amended and Restated Loan and Security Agreement, dated as of December 13, 2010, by and among NCI, Inc., NCI Information
Systems Incorporated, Operational Technologies Services, Inc., as Borrowers, the several banks and financial institutions
from time to time parties thereto, as Lenders, SunTrust Bank as the Administrative Agent to the Lenders and SunTrust
Robinson Humphrey, Inc., as Lead Arranger and Book Manager (incorporated by reference from Exhibit 10.1 to registrants
Current Report on Form 8-K dated December 13, 2010, and filed with the Commission on December 15, 2010).10.2
    *
    
    Executive Change in Control and Severance Agreement, dated March 16, 2010, by and among, NCI, Inc., and Terry W. Glasgow
(incorporated herein by reference from Exhibit 10.1 to registrants Current Report on Form 8-K (File No. 000-51579), as
filed with the Commission March 18, 2010).10.3
    *
    
    Executive Change in Control and Severance Agreement, dated March 16, 2010, by and among, NCI, Inc., and Michele R.
Cappello (incorporated herein by reference from Exhibit 10.3 to registrants Current Report on Form 8-K (File No.
000-51579), as filed with the Commission March 18, 2010).31.1
    
    
    Certification of the Chief Executive Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    
    Certification of the Chief Financial Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    
    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
    
    Included with this filing.*
    
    Management Contract or Compensatory Plan or Arrangement.  14




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SIGNATURES
  NCI, Inc.RegistrantDate: May 4, 2011
    
    By:
    
    /s/ BRIAN J. CLARK

Brian J. ClarkExecutive Vice President, Chief Financial Officerand Treasurer
  15