10-Q 1 a12-18889_110q.htm 10-Q

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 September 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 73,541,219 shares of the registrant’s Common Stock outstanding as of October 31, 2012.

 

 

 



Table of Contents

 

Table of Contents

 

 

 

Page

Part I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (unaudited):

 

 

Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2012 and 2011

3

 

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

4

 

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

5

 

Consolidated Statement of Changes in Equity — Nine Months Ended September 30, 2012

6

 

Consolidated Statements of Cash Flows — Nine Months Ended September 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

REVENUES

 

 

 

 

 

 

 

 

 

Consulting services

 

$

203,117

 

$

212,543

 

$

621,613

 

$

647,446

 

Other revenue

 

12,681

 

10,068

 

37,536

 

32,613

 

Total revenues

 

215,798

 

222,611

 

659,149

 

680,059

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Cost of consulting services

 

153,716

 

157,962

 

465,795

 

492,348

 

Cost of other revenue

 

7,529

 

6,047

 

23,626

 

18,138

 

Selling, general and administrative

 

49,781

 

52,439

 

152,080

 

164,974

 

Goodwill impairment

 

 

 

 

16,300

 

Amortization of intangible assets

 

157

 

131

 

482

 

1,445

 

Total operating expenses

 

211,183

 

216,579

 

641,983

 

693,205

 

OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS

 

4,615

 

6,032

 

17,166

 

(13,146

)

Interest income

 

149

 

203

 

572

 

407

 

Interest expense

 

(1,096

)

(2,005

)

(5,163

)

(5,372

)

Other income (expense), net

 

(449

)

469

 

(335

)

(3,005

)

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

 

3,219

 

4,699

 

12,240

 

(21,116

)

Income tax expense

 

2,638

 

2,960

 

9,279

 

31,194

 

NET INCOME (LOSS) FROM CONTINUING OPERATIONS

 

581

 

1,739

 

2,961

 

(52,310

)

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

 

(9,896

)

1,425

 

(10,948

)

1,405

 

CONSOLIDATED NET INCOME (LOSS)

 

(9,315

)

3,164

 

(7,987

)

(50,905

)

Net income attributable to noncontrolling interests

 

134

 

24

 

400

 

205

 

NET INCOME (LOSS) ATTRIBUTABLE TO CIBER, INC.

 

$

(9,449

)

$

3,140

 

$

(8,387

)

$

(51,110

)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.01

 

$

0.02

 

$

0.04

 

$

(0.73

)

Discontinued operations

 

(0.14

)

0.02

 

(0.15

)

0.02

 

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

 

$

(0.13

)

$

0.04

 

$

(0.11

)

$

(0.71

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

73,276

 

72,209

 

73,008

 

71,613

 

Diluted

 

73,647

 

72,609

 

73,498

 

71,613

 

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Consolidated net income (loss)

 

$

(9,315

)

$

3,164

 

$

(7,987

)

$

(50,905

)

Gain on hedging activity, net of tax

 

 

62

 

 

151

 

Foreign currency translation adjustments

 

8,216

 

(14,892

)

4,811

 

(453

)

Comprehensive loss

 

(1,099

)

(11,666

)

(3,176

)

(51,207

)

Comprehensive income attributable to noncontrolling interests

 

134

 

24

 

400

 

210

 

Comprehensive loss attributable to Ciber, Inc.

 

$

(1,233

)

$

(11,690

)

$

(3,576

)

$

(51,417

)

 

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)

 

 

 

September 30,
2012

 

December 31,
2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

33,028

 

$

65,567

 

Accounts receivable, net of allowances of $1,271 and $1,422, respectively

 

215,762

 

182,359

 

Prepaid expenses and other current assets

 

28,033

 

25,041

 

Deferred income taxes

 

2,577

 

3,302

 

Current assets of discontinued operations

 

 

21,041

 

Total current assets

 

279,400

 

297,310

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $48,795 and $43,617, respectively

 

14,444

 

17,827

 

Goodwill

 

274,837

 

275,504

 

Other intangible assets, net

 

162

 

649

 

Other assets

 

9,522

 

5,239

 

Long-term assets of discontinued operations

 

3,350

 

28,541

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

581,715

 

$

625,070

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

5,066

 

$

25,571

 

Accounts payable

 

27,592

 

35,112

 

Accrued compensation and related liabilities

 

58,866

 

60,124

 

Deferred revenue

 

21,146

 

19,876

 

Income taxes payable

 

6,810

 

8,613

 

Other accrued expenses and liabilities

 

43,589

 

45,454

 

Current liabilities of discontinued operations

 

 

9,742

 

Total current liabilities

 

163,069

 

204,492

 

 

 

 

 

 

 

Long-term debt

 

36,825

 

41,380

 

Deferred income taxes

 

21,216

 

15,462

 

Other long-term liabilities

 

906

 

6,729

 

Total liabilities

 

222,016

 

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, 1,063 and 1,919 shares, respectively

 

(6,090

)

(10,998

)

Additional paid-in capital

 

334,799

 

330,088

 

Retained earnings

 

32,199

 

44,337

 

Accumulated other comprehensive loss

 

(2,195

)

(7,006

)

Total Ciber, Inc. shareholders’ equity

 

359,458

 

357,166

 

Noncontrolling interests

 

241

 

(159

)

Total equity

 

359,699

 

357,007

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

581,715

 

$

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 loss

 

 

 

 

 

 

(8,387

)

 

400

 

(7,987

)

Foreign currency translation

 

 

 

 

 

 

 

4,811

 

 

4,811

 

Treasury shares issued under employee share plans

 

 

 

856

 

4,908

 

 

(3,751

)

 

 

1,157

 

Share-based compensation

 

 

 

 

 

4,711

 

 

 

 

4,711

 

BALANCES AT SEPTEMBER 30, 2012

 

74,487

 

$

745

 

(1,063

)

$

(6,090

)

$

334,799

 

$

32,199

 

$

(2,195

)

$

241

 

$

359,699

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6



Table of Contents

 

Ciber, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Consolidated net loss

 

$

(7,987

)

$

(50,905

)

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

 

 

 

 

 

Loss (income) from discontinued operations

 

10,948

 

(1,405

)

Goodwill impairment

 

 

16,300

 

Depreciation

 

5,816

 

6,104

 

Amortization of intangible assets

 

482

 

1,445

 

Deferred income tax expense

 

3,699

 

25,549

 

Provision for (recovery on) doubtful receivables

 

(139

)

345

 

Share-based compensation expense

 

4,534

 

2,975

 

Change in fair value of acquisition-related contingent consideration

 

 

3,222

 

Amortization of debt costs

 

2,385

 

1,191

 

Other, net

 

630

 

(481

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

(32,117

)

20,138

 

Other current and long-term assets

 

(3,389

)

(5,618

)

Accounts payable

 

(7,773

)

(19,115

)

Accrued compensation and related liabilities

 

(1,602

)

(6,078

)

Other current and long-term liabilities

 

(7,216

)

(8,640

)

Income taxes payable/refundable

 

(1,631

)

1,008

 

Cash used in operating activities — continuing operations

 

(33,360

)

(13,965

)

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

 

(1,758

)

4,853

 

Cash used in operating activities

 

(35,118

)

(9,112

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(895

)

Purchases of property and equipment, net

 

(2,588

)

(6,417

)

Cash used in investing activities — continuing operations

 

(2,588

)

(7,312

)

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

 

30,090

 

(2,100

)

Cash provided by (used in) investing activities

 

27,502

 

(9,412

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Borrowings on long-term debt

 

269,633

 

278,138

 

Payments on long-term debt

 

(294,698

)

(285,274

)

Employee stock purchases and options exercised

 

1,157

 

7,025

 

Credit facility fees paid

 

(3,547

)

(808

)

Cash used in financing activities — continuing operations

 

(27,455

)

(919

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

2,532

 

2,917

 

Net decrease in cash and cash equivalents

 

(32,539

)

(16,526

)

Cash and cash equivalents, beginning of period

 

65,567

 

69,329

 

Cash and cash equivalents, end of period

 

$

33,028

 

$

52,803

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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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 (Loss) 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 current estimates of related working capital, we estimate the total cash proceeds will be reduced to approximately $38 million, subject to the resolution of CRGT’s proposed working capital adjustments.   In June 2012, CRGT proposed certain working capital adjustments to reduce the purchase price by approximately $6 million.  We disagreed with such adjustments and invoked the dispute resolution mechanism under the sale agreement.  As a result of our ongoing negotiations with CRGT and our current expectation of total cash proceeds of $38 million, in the third quarter of 2012 we reduced our receivable due from CRGT by approximately $1 million.  At this time, the dispute has not been resolved, but we expect a resolution during the fourth quarter of 2012.  We will record the impact of any additional adjustments on the determination of the loss on sale when such amount, if any, is probable and estimable.  We have recorded an estimated pre-tax loss on sale for the nine months ended September 30, 2012, of approximately $0.4 million.  We received net cash of approximately $35 million from CRGT in March 2012.  In connection with the sale we incurred transaction costs of $3.8 million and estimated lease exit costs of $1.6 million related to certain Federal division office space we vacated.

 

On July 28, 2012, we entered into an agreement to sell certain contracts and the related fixed assets and to transfer the personnel associated with our information technology outsourcing practice to Savvis Communications Corporation (“Savvis”) and accordingly, our financial position, results of operations and cash flows have been reclassified for all periods to conform to the current period presentation as a discontinued operation.  The transaction closed on October 15, 2012, for an initial purchase price of $6 million in cash.  In addition, we may receive additional future consideration of up to $14 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.  Under the agreement, we are required to indemnify Savvis for certain losses, if any, incurred by them following the closing under the customer contracts being transferred.  Cash proceeds from the sale, after estimated transaction-related costs, are expected to be approximately $3 million.  The carrying value of the tangible assets included in the transaction is approximately $7 million, and relates predominantly to property and equipment in both our North America and International segments.  Additionally, we allocated $3 million of goodwill to the assets being disposed and recorded a $7 million pre-tax loss to write-down the net assets to fair value less estimated costs to sell.  This loss is included in our loss from discontinued operations for the three months and nine months ended September 30, 2012.  The fair value is based on the sales price and is considered a level 2 non-recurring fair value measurement.  The annualized revenue related to the contracts sold under the agreement was approximately $60 million.

 

8



Table of Contents

 

The following table summarizes the operating results of the discontinued operations included in the Consolidated Statements of Operations, which include those associated with the information technology outsourcing practice and our former Federal division.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Total revenues

 

$

16,766

 

$

48,115

 

$

69,076

 

$

140,959

 

Operating expenses

 

19,286

 

46,227

 

72,794

 

138,687

 

Operating income (loss) from discontinued operations

 

(2,520

)

1,888

 

(3,718

)

2,272

 

Interest and other expense

 

 

155

 

90

 

396

 

Income (loss) from discontinued operations before income taxes

 

(2,520

)

1,733

 

(3,808

)

1,876

 

Income tax expense

 

65

 

308

 

549

 

471

 

Income (loss) from discontinued operations, net of taxes

 

(2,585

)

1,425

 

(4,357

)

1,405

 

 

 

 

 

 

 

 

 

 

 

Loss on sale

 

(8,361

)

 

(7,441

)

 

Income tax benefit

 

(1,050

)

 

(850

)

 

Loss on sale, net of income taxes

 

(7,311

)

 

(6,591

)

 

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

 

$

(9,896

)

$

1,425

 

$

(10,948

)

$

1,405

 

 

Effective with their respective sales, the operations and cash flows of the Federal division and the information technology outsourcing practice were removed from our company.  However, in connection with the sale of the Federal division, we have retained certain historical accounts receivable as well as certain liabilities, and in connection with the sale of our information technology outsourcing practice, we retained all the net working capital assets.  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 and our information technology outsourcing practice.

 

9



Table of Contents

 

(3) Earnings (Loss) Per Share

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

581

 

$

1,739

 

$

2,961

 

$

(52,310

)

Net income attributable to noncontrolling interests

 

134

 

24

 

400

 

205

 

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

 

447

 

1,715

 

2,561

 

(52,515

)

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

 

(9,896

)

1,425

 

(10,948

)

1,405

 

Net income (loss) attributable to Ciber, Inc.

 

$

(9,449

)

$

3,140

 

$

(8,387

)

$

(51,110

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

73,276

 

72,209

 

73,008

 

71,613

 

Dilutive effect of employee stock plans

 

371

 

400

 

490

 

 

Diluted weighted average shares outstanding

 

73,647

 

72,609

 

73,498

 

71,613

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.01

 

$

0.02

 

$

0.04

 

$

(0.73

)

Discontinued operations

 

(0.14

)

0.02

 

(0.15

)

0.02

 

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

 

$

(0.13

)

$

0.04

 

$

(0.11

)

$

(0.71

)

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities omitted from the calculation

 

8,103

 

8,746

 

8,217

 

8,035

 

 

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.

 

(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

 

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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 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.  On July 28, 2012, we entered into an agreement to sell certain contracts and related assets associated with our information technology outsourcing practice.  As of that date, an allocation of goodwill was completed based on the relative fair value of the information technology outsourcing practice to each of the International and North America divisions, and we allocated $3.2 million of goodwill to the assets being disposed.  For further information on this sale, which closed on October 15, 2012, see note 2.

 

The changes in the carrying amount of goodwill during the nine months ended September 30, 2012, were as follows:

 

 

 

International

 

North America

 

Total

 

 

 

(In thousands)

 

Balance at January 1, 2012

 

$

139,723

 

$

135,781

 

$

275,504

 

Amount allocated to discontinued operation

 

(1,100

)

(2,100

)

(3,200

)

Effect of foreign exchange rate changes

 

2,533

 

 

2,533

 

Balance at September 30, 2012

 

$

141,156

 

$

133,681

 

$

274,837

 

 

(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 of the ABL Facility on October 1, 2012, was $58.4 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 September 30, 2012, we had $34.3 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

 

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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 was $30.9 million for September 2012 and then fluctuates monthly to a low of $27.6 million for November 2012 and then increases over 11 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 is 1.6 to 1.0 for September through November of 2012 and will increase 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 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 September 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 that we are amortizing to interest expense over the terms of the borrowing arrangements.  At September 30, 2012, the balance of unamortized debt fees was $3.1 million.

 

The carrying value of the outstanding borrowings under our Credit Agreement approximates its fair value due to interest rates approximating current market rates as the underlying interest rates were recently set in May 2012.  We estimate the fair

 

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value of our borrowings using discounted cash flow analysis based on current rates obtained from the lender for similar types of debt.  The inputs used to establish the fair value of the Credit Agreement are considered to be Level 2 inputs, 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Foreign exchange gains (losses), net

 

$

(449

)

$

469

 

$

(438

)

$

211

 

Change in fair value of acquisition-related contingent consideration

 

 

 

 

(3,222

)

Other

 

 

 

103

 

6

 

Other income (expense), net

 

$

(449

)

$

469

 

$

(335

)

$

(3,005

)

 

(7) Income Taxes

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Income (loss) from continuing operations before income taxes:

 

 

 

 

 

 

 

 

 

U.S.

 

$

(358

)

$

(2,633

)

$

(7,715

)

$

(42,498

)

Foreign

 

3,577

 

7,332

 

19,955

 

21,382

 

Total

 

$

3,219

 

$

4,699

 

$

12,240

 

$

(21,116

)

 

 

 

 

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

 

 

 

 

U.S.

 

$

1,509

 

$

1,539

 

$

4,296

 

$

26,761

 

Foreign

 

1,129

 

1,421

 

4,983

 

4,433

 

Total

 

$

2,638

 

$

2,960

 

$

9,279

 

$

31,194

 

 

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 miscellaneous U.S. current tax expense items.  During the nine months ended September 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, we recorded a domestic 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 split what was our IT Outsourcing division (“ITO”) into our existing North America and International divisions and stopped reporting ITO separately both externally and to our chief operating decision maker.  On July 28, 2012, we entered into an agreement to sell certain contracts and related assets associated with our information technology outsourcing practice, which closed on October 15, 2012, as discussed above in note 2.  The portion of the practice covered in the agreement is reported as a discontinued operation for all periods in our consolidated financial statements and accompanying notes.  The remainder will continue to be reported within our International and North America divisions.

 

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.  All 2011 segment data has been

 

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adjusted to conform to the 2012 presentation.

 

The following presents financial information about our reporting segments:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

International

 

$

106,809

 

$

113,956

 

$

334,829

 

$

356,117

 

North America

 

109,346

 

109,003

 

325,319

 

323,953

 

Other

 

802

 

976

 

2,309

 

2,606

 

Inter-segment

 

(1,159

)

(1,324

)

(3,308

)

(2,617

)

Total revenues

 

$

215,798

 

$

222,611

 

$

659,149

 

$

680,059

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) from continuing operations:

 

 

 

 

 

 

 

 

 

International

 

$

4,208

 

$

5,295

 

$

17,923

 

$

20,318

 

North America

 

7,825

 

8,242

 

22,443

 

6,772

 

Other

 

196

 

139

 

326

 

364

 

Corporate expenses

 

(7,517

)

(7,243

)

(22,482

)

(21,887

)

Unallocated benefits (expenses) of discontinued operations

 

60

 

(270

)

(562

)

(968

)

Earnings before interest, taxes and amortization

 

4,772

 

6,163

 

17,648

 

4,599

 

Goodwill impairment

 

 

 

 

(16,300

)

Amortization of intangible assets

 

(157

)

(131

)

(482

)

(1,445

)

Total operating income (loss) from continuing operations

 

$

4,615

 

$

6,032

 

$

17,166

 

$

(13,146

)

 

(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.  Camsoft subsequently filed motions to amend their complaint, or alternatively, to amend the July 2011 ruling dismissing the claims against Ciber and other defendants, and for the Judge to recuse himself.  The Court dismissed the motion to recuse but remanded remaining claims to state court. 

 

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Camsoft has filed a notice of appeal with the Federal Court of Appeals while Ciber and the other defendants have filed notices of appeal with the Fifth Circuit Court of Appeals and with the Federal Court of Appeals.  Given the complexity of these proceedings, we are unable to predict the outcome of this litigation.

 

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 November 5, 2012, we approved a corporate restructuring plan.  As a result, we anticipate recording restructuring charges in the fourth quarter of 2012 and in the first quarter of 2013.  This plan will commence in the fourth quarter of 2012 and relates primarily to the consolidation of our real estate footprint, as well as organizational changes designed to simplify business processes, move decision-making closer to the marketplace and create operating efficiencies.  We currently estimate the total amount of the restructuring charges to be approximately $14 million, of which approximately $4 million will be non-cash charges related to stock compensation, estimated lease exit costs and fixed-asset write-downs related to facility closures.  The estimated restructuring expenses include approximately $8 million related to personnel severance and related benefits, and approximately $6 million related to the closure of 15 offices and the consolidation of those locations into other existing Ciber locations, mostly in North America.  We expect the above restructuring activities to be completed by the end of 2013.

 

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

 

·                  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 an additional loss on that sale.

 

·                  Possible future consideration on the sale of certain contracts and assets associated with our information technology outsourcing practice may not be realized.

 

·                  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.

 

·                  Our presence in India 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.

 

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·                  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 public sector 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 and six months ended June 30, 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 split what was our IT Outsourcing division (“ITO”) into our existing North America and International divisions and stopped reporting ITO separately both externally and to our chief operating decision maker.  On July 28, 2012, we entered into an agreement to sell certain contracts and related assets associated with our information technology outsourcing practice as discussed below in “Discontinued Operations.”  This sale transaction was completed on October 15, 2012.  The portion of the practice covered in the agreement is reported as a discontinued operation for all periods in this Quarterly Report on Form 10-Q.  The remainder will continue to be reported within our International and North America divisions.

 

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.  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, with our largest operations located in Germany, the Netherlands and the U.K.  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.

 

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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.

 

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 that 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 may differ significantly from our estimates, and any such events may negatively impact our results of operations.

 

On November 5, 2012, we approved a corporate restructuring plan.  As a result, we anticipate recording restructuring charges in the fourth quarter of 2012 and in the first quarter of 2013.  This plan will commence in the fourth quarter of 2012 and relates primarily to the consolidation of our real estate footprint, as well as organizational changes designed to simplify business processes, move decision-making closer to the marketplace and create operating efficiencies.  We currently estimate the total amount of the restructuring charges to be approximately $14 million, of which approximately $4 million will be non-cash charges related to stock compensation, estimated lease exit costs and fixed-asset write-downs related to facility closures.  The estimated restructuring expenses include approximately $8 million related to personnel severance and related benefits, and approximately $6 million related to the closure of 15 offices and the consolidation of those locations into other existing Ciber locations, mostly in North America.  We expect the above restructuring activities to be completed by the end of 2013.  Pre-tax savings from the initiatives of approximately $7 million in 2013 and $11 million in 2014 and each year thereafter are expected.

 

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 current estimates of related working capital, we estimate the total cash proceeds will be reduced to approximately $38 million, subject to the resolution of CRGT’s proposed working capital adjustments.  In June 2012, CRGT proposed certain working capital adjustments to reduce the purchase price by approximately $6 million.  We disagreed with such adjustments and invoked the dispute resolution mechanism under the sale agreement.  As a result of our ongoing negotiations with CRGT and our current expectation of total cash proceeds of $38 million, we reduced our receivable due from CRGT by approximately $1 million.  At this time, the dispute has not been resolved, but we expect a resolution during the fourth quarter of 2012.  We will record the impact of any additional adjustments on the determination of the loss on sale when such amount, if any, is probable and estimable.  We have recorded an estimated pre-tax loss on sale for the nine months ended September 30, 2012, of approximately $0.4 million.  We received net cash of approximately $35 million from CRGT in March 2012.  In connection with the sale we incurred transaction costs of $3.8 million and estimated lease exit costs of $1.6 million related to certain Federal division office space we vacated.

 

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On July 28, 2012, we entered into an agreement to sell certain contracts and the related fixed assets and to transfer the personnel associated with our information technology outsourcing practice to Savvis Communications Corporation (“Savvis”) and accordingly, our financial position, results of operations and cash flows have been reclassified for all periods to conform to the current period presentation as a discontinued operation.  The transaction closed on October 15, 2012, for an initial purchase price of $6 million in cash.  In addition, we may receive additional future consideration of up to $14 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.  Under the agreement, we are required to indemnify Savvis for certain losses, if any, incurred by them following the closing under the customer contracts being transferred.  Cash proceeds from the sale, after estimated transaction-related costs, are expected to be approximately $3 million.  The carrying value of the tangible assets included in the transaction is approximately $7 million, and relates predominantly to property and equipment in both our North America and International segments.  Additionally, we allocated $3 million of goodwill to the assets being disposed and recorded a $7 million pre-tax loss to write-down the net assets to fair value less estimated costs to sell.  This loss is included in our loss from discontinued operations for the three months and nine months ended September 30, 2012.  The fair value is based on the sales price and is considered a level 2 non-recurring fair value measurement.  The annualized revenue related to the contracts sold under the agreement was approximately $60 million.

 

The following table summarizes the operating results of the discontinued operations included in the Consolidated Statements of Operations, which include those associated with the information technology outsourcing practice and our former Federal division.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Total revenues

 

$

16,766

 

$

48,115

 

$

69,076

 

$

140,959

 

Operating expenses

 

19,286

 

46,227

 

72,794

 

138,687

 

Operating income (loss) from discontinued operations

 

(2,520

)

1,888

 

(3,718

)

2,272

 

Interest and other expense

 

 

155

 

90

 

396

 

Income (loss) from discontinued operations before income taxes

 

(2,520

)

1,733

 

(3,808

)

1,876

 

Income tax expense

 

65

 

308

 

549

 

471

 

Income (loss) from discontinued operations, net of taxes

 

(2,585

)

1,425

 

(4,357

)

1,405

 

 

 

 

 

 

 

 

 

 

 

Loss on sale

 

(8,361

)

 

(7,441

)

 

Income tax benefit

 

(1,050

)

 

(850

)

 

Loss on sale, net of income taxes

 

(7,311

)

 

(6,591

)

 

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

 

$

(9,896

)

$

1,425

 

$

(10,948

)

$

1,405

 

 

Effective with their respective sales, the operations and cash flows of the Federal division and the information technology outsourcing practice were removed from our company.  However, in connection with the sale of the Federal division, we have retained certain historical accounts receivable as well as certain liabilities, and in connection with the sale of our information technology outsourcing practice, we retained all the net working capital assets.  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 and our information technology outsourcing practice.

 

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

 

The following table and related discussion provide information about our consolidated financial results for the periods presented.  At the end of 2011, our Federal division was classified as a discontinued operation.  In the current quarter, a portion of our information technology outsourcing practice has also been classified as a discontinued operation and therefore both are excluded in the results from our continuing operations in the tables and related discussion below, unless otherwise noted.

 

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

 

 

 

Three Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Consulting services

 

$

203,117

 

94.1

%

$

212,543

 

95.5

%

Other revenue

 

12,681

 

5.9

 

10,068

 

4.5

 

Total revenues

 

$

215,798

 

100.0

%

$

222,611

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Gross profit - consulting services

 

$

49,401

 

24.3

%

$

54,581

 

25.7

%

Gross profit - other revenue

 

5,152

 

40.6

 

4,021

 

39.9

 

Gross profit - total

 

54,553

 

25.3

 

58,602

 

26.3

 

 

 

 

 

 

 

 

 

 

 

SG&A costs

 

49,781

 

23.1

 

52,439

 

23.6

 

Amortization of intangible assets

 

157

 

0.1

 

131

 

0.1

 

Operating income from continuing operations

 

4,615

 

2.1

 

6,032

 

2.7

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

149

 

0.1

 

203

 

0.1

 

Interest expense

 

(1,096

)

(0.5

)

(2,005

)

(0.9

)

Other income (expense), net

 

(449

)

(0.2

)

469

 

0.2

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

3,219

 

1.5

 

4,699

 

2.1

 

Income tax expense

 

2,638

 

1.2

 

2,960

 

1.3

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

581

 

0.3

%

$

1,739

 

0.8

%

 

Revenues.  For the three months ended September 30, 2012, total revenues decreased $7 million, or 3% in U.S. dollars due to unfavorable currency rates in our International division.  On a local currency basis, revenues increased $4 million, or 2% as compared with the three months ended September 30, 2011, due entirely to revenue growth in our International division as North America revenues were flat.

 

Revenue by segment from continuing operations was as follows:

 

 

 

Three Months Ended
September 30,

 

 

 

 

 

2012

 

2011

 

% change

 

 

 

(In thousands)

 

 

 

International

 

$

106,809

 

$

113,956

 

(6.3

)%

North America

 

109,346

 

109,003

 

0.3

 

Other

 

802

 

976

 

n/m

 

Inter-segment

 

(1,159

)

(1,324

)

n/m

 

Total revenues

 

$

215,798

 

$

222,611

 

(3.1

)%

 


n/m = not meaningful

 

·                  International revenues decreased 6% overall or improved by 3% in local currency.  A significant weakening of the Euro during the current three month period as compared with the same period last year, was primarily responsible for the decrease.  Three of our fastest growing countries, Germany, Norway and the U.K., which compromised approximately 40% of International revenues, experienced revenue growth between the comparable periods due to continued demand for IT services.  Additionally, revenue in several territories benefited from improved current period

 

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sales of software licenses.  A decline in revenue in other countries as well as the reduction in revenue at one of our largest clients, offset some of the above growth.  International revenues continue to be impacted by certain larger European clients focusing on cost-cutting measures such as vendor consolidation, offshoring, and increasing pricing pressure on service providers.  Our largest European client accounted for 9% of the International division’s revenues and 6% of consolidated 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 and, during the second half of 2011, this client began cost-reduction initiatives.  These initiatives included reductions in the level of services that they purchased from us.  While we cannot predict future revenues from this client with any certainty, revenues from this client are down 34% in the three months ended September 30, 2012, compared to the comparable prior year period.  This decline represents almost half of our overall reported revenue decline in our International segment.  During the third quarter of 2012, this client accounted for approximately 6% of the International division’s revenues and 4% of consolidated revenues.

 

·                  North America revenues were flat between the comparable periods as increases in the level of services provided at several current clients, especially for application development services, and project work for new clients were offset by revenue attrition primarily from several concluded state and local government projects, as well as service-level reductions at other clients.

 

Gross Profit.  Gross profit margin declined to 25.3% for the three months ended September 30, 2012, compared to 26.3% for the same period in 2011.  North America gross margin declined due to pricing pressure on some of the additional work at existing clients, and higher margin revenue attrition, both of which were partially offset by improved utilization.  Gross profit margin for our International division declined due to reduced consultant utilization.

 

Selling, general and administrative costs.  Our SG&A costs decreased $2.7 million, or 5% to $49.8 million for the three months ended September 30, 2012, from $52.4 million for the three months ended September 30, 2011.  Foreign currency accounted for a significant portion of the decline, and North America SG&A savings also contributed.

 

Operating income.  Operating income decreased to $4.6 million for the three months ended September 30, 2012, as compared to $6.0 million for the same period of 2011, due primarily to reduced gross profit margins in both divisions, partially offset by reduced SG&A costs.

 

Operating income from continuing operations by segment was as follows:

 

 

 

Three Months Ended
September 30,

 

 

2012
% of 

 

2011
% of 

 

 

 

2012

 

2011

 

change

 

revenue*

 

revenue*

 

 

 

(In thousands)

 

 

 

 

 

 

 

International

 

$

4,208

 

$

5,295

 

(20.5

)%

3.9

%

4.6

%

North America

 

7,825

 

8,242

 

(5.1

)

7.2

 

7.6

 

Other

 

196

 

139

 

n/m

 

24.4

 

14.2

 

Corporate expenses

 

(7,517

)

(7,243

)

(3.8

)

(3.5

)

(3.3

)

Unallocated benefits (expenses) of discontinued operations

 

60

 

(270

)

n/m

 

 

(0.1

)

Earnings before interest, taxes and amortization

 

4,772

 

6,163

 

(22.6

)

2.2

 

2.8

 

Amortization of intangible assets

 

(157

)

(131

)

(19.8

)

(0.1

)

(0.1

)

Total operating income from continuing operations

 

$

4,615

 

$

6,032

 

(23.5

)%

2.1

%

2.7

%

 


n/m = not meaningful

 

*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 to $4.2 million compared to $5.3 million for the three months ended September 30, 2011, due to the decrease in gross profit margin from reduced consultant utilization that was partially offset by a reduction in SG&A costs mainly due to currency changes.

 

·                  North America operating income decreased to $7.8 million from $8.2 million in the prior year period.  Reduced gross margin was partially offset by reductions in SG&A expenses mainly for severance, legal fees and facilities costs.

 

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·                  Corporate expenses increased during the current three month period primarily due to an increase in stock compensation expense.

 

Interest expense.  Interest expense decreased $0.9 million for the three months ended September 30, 2012, compared to the same period of 2011 primarily due to a significant reduction in our average borrowings outstanding, as well as a lower interest rate on our new credit facility entered into in May 2012.

 

Other income (expense), net.  Other expense, net was $0.4 million for the three months ended September 30, 2012, compared to other income, net of $0.5 million for the three months ended September 30, 2011.  This change was due entirely to foreign exchange gains and losses.

 

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

 

 

 

Three Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Income (loss) from continuing operations before income taxes:

 

 

 

 

 

U.S.

 

$

(358

)

$

(2,633

)

Foreign

 

3,577

 

7,332

 

Total

 

$

3,219

 

$

4,699

 

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

U.S.

 

$

1,509

 

$

1,539

 

Foreign

 

1,129

 

1,421

 

Total

 

$

2,638

 

$

2,960

 

 

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.

 

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.

 

Results of Operations — Comparison of the Nine Months Ended September 30, 2012 and 2011

 

The following table and related discussion provide information about our consolidated financial results for the periods presented.  At the end of 2011, our Federal division was classified as a discontinued operation.  In the current period, a portion of our information technology outsourcing practice has also been classified as a discontinued operation and therefore both are excluded in the results from our continuing operations in the tables and related discussion below, unless otherwise noted.

 

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

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Consulting services

 

$

621,613

 

94.3

%

$

647,446

 

95.2

%

Other revenue

 

37,536

 

5.7

 

32,613

 

4.8

 

Total revenues

 

$

659,149

 

100.0

%

$

680,059

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Gross profit - consulting services

 

$

155,818

 

25.1

%

$

155,098

 

24.0

%

Gross profit - other revenue

 

13,910

 

37.1

 

14,475

 

44.4

 

Gross profit - total

 

169,728

 

25.7

 

169,573

 

24.9

 

 

 

 

 

 

 

 

 

 

 

SG&A costs

 

152,080

 

23.1

 

164,974

 

24.3

 

Goodwill impairment

 

 

 

16,300

 

2.4

 

Amortization of intangible assets

 

482

 

0.1

 

1,445

 

0.2

 

Operating income (loss) from continuing operations

 

17,166

 

2.6

 

(13,146

)

(1.9

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

572

 

0.1

 

407

 

0.1

 

Interest expense

 

(5,163

)

(0.8

)

(5,372

)

(0.8

)

Other expense, net

 

(335

)

(0.1

)

(3,005

)

(0.4

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

12,240

 

1.9

 

(21,116

)

(3.1

)

Income tax expense

 

9,279

 

1.4

 

31,194

 

4.6

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

2,961

 

0.4

%

$

(52,310

)

(7.7

)%

 

Revenues.  For the nine months ended September 30, 2012, total revenues decreased $21 million, or 3% in U.S. dollars due to unfavorable currency rates in our International division.  On a local currency basis, revenues increased $6 million, or approximately 1% as compared with the same period of 2011.  International division revenues improved 2% in local currency for the current nine month period compared with the same period last year.  In June 2011, North America recorded negative revenue adjustments on five fixed-price contracts.  Due to these negative adjustments, North America current period revenues are slightly improved in comparison to the prior year period.  Excluding the impact of these negative revenue adjustments in the prior 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:

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

2012

 

2011

 

% change

 

 

 

(In thousands)

 

 

 

International

 

$

334,829

 

$

356,117

 

(6.0

)%

North America

 

325,319

 

323,953

 

0.4

 

Other

 

2,309

 

2,606

 

n/m

 

Inter-segment

 

(3,308

)

(2,617

)

n/m

 

Total revenues

 

$

659,149

 

$

680,059

 

(3.1

)%

 


n/m = not meaningful

 

·                  International revenues decreased 6% overall, but improved approximately 2% in local currency.  The softer European economy caused revenue results to vary considerably by territory.  Revenue growth was strongest in the U.K. and Norway, which comprised approximately 25% of International revenues, due to continued demand for IT services where we have been successful at providing certain technology-specific and/or vertical-specific services.  Additionally, revenue in several territories benefited from improved current period sales of software licenses.  Revenue growth in these territories offset declines elsewhere that were predominately related to client-specific issues, which in certain cases were driven by economic concerns, and included canceled, delayed or completed projects. 

 

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International revenues continue to be impacted by certain larger European clients focusing on cost-cutting measures such as vendor consolidation, offshoring, and increasing pricing pressure on service providers.  Our largest European client accounted for 9% of the International division’s revenues and 6% of consolidated 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 and, during the second half of 2011, this client began cost-reduction initiatives.  These initiatives included reductions in the level of services that they purchased from us.  While we cannot predict future revenues from this client with any certainty, revenues from this client are down 41% in the nine months ended September 30, 2012, compared to the comparable prior year period.  This decline represents over half of our overall decline in our International segment.  During the first nine months of 2012, this client accounted for approximately 6% of the International division’s revenues and 4% of consolidated revenues.

 

·                  North America revenues improved slightly between the comparable nine month periods.  Excluding the impact of the 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 approximately 3% year over year.  This decline is due to concluded projects, a number of which were for state and local government clients, and service-level reductions at certain other clients, all of which not being sufficiently replaced with new project work and increases in the level of services provided at other clients.

 

Gross Profit.  Gross profit margin improved to 25.7% for the nine months ended September 30, 2012, compared to 24.9% 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 some improvement attributable to operational disciplines implemented during 2011, such as reducing the breadth of our service offerings, improving delivery quality and utilization.  Gross profit margin for our International division declined due to decreased utilization, increased use of more expensive subcontractor labor, and client pricing pressure.

 

Selling, general and administrative costs.  Our SG&A costs decreased $12.9 million, or 8% to $152.1 million for the nine months ended September 30, 2012, from $165.0 million for the nine months ended September 30, 2011.  Foreign currency, reductions in discretionary SG&A items, and lower bad debt expense all contributed to the overall decrease.

 

Operating income (loss).  Operating income improved to $17.2 million for the nine months ended September 30, 2012, as compared to an operating loss of $13.1 million for the same period of 2011, due primarily to negative revenue adjustments on five fixed-price contracts and goodwill impairment of $16.3 million both recorded during the prior year period.

 

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

 

 

 

Nine Months Ended
September 30,

 

 

2012
% of

 

2011
% of

 

 

 

2012

 

2011

 

change

 

revenue*

 

revenue*

 

 

 

(In thousands)

 

 

 

 

 

 

 

International

 

$

17,923

 

$

20,318

 

(11.8

)%

5.4

%

5.7

%

North America

 

22,443

 

6,772

 

231.4

 

6.9

 

2.1

 

Other

 

326

 

364

 

n/m

 

14.1

 

14.0

 

Corporate expenses

 

(22,482

)

(21,887

)

(2.7

)

(3.4

)

(3.2

)

Unallocated expenses of discontinued operations

 

(562

)

(968

)

n/m

 

(0.1

)

(0.1

)

Earnings before interest, taxes and amortization

 

17,648

 

4,599

 

283.7

 

2.7

 

0.7

 

Goodwill impairment

 

 

(16,300

)

100.0

 

 

(2.4

)

Amortization of intangible assets

 

(482

)

(1,445

)

66.6

 

(0.1

)

(0.2

)

Total operating income (loss)

 

$

17,166

 

$

(13,146

)

230.6

%

2.6

%

(1.9

)%

 


n/m = not meaningful

 

*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 decreased to $17.9 million from $20.3 million as the reduction in gross profit margin was partially offset by a decline in SG&A costs that was primarily related to foreign currency and reductions in management salaries.

 

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·                  North America operating income increased to $22.4 million from $6.8 million in the prior year that was due primarily to the prior year negative revenue adjustments for five fixed-price projects, as well as reductions in SG&A costs for discretionary items, facilities and external recruiting costs.

 

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

 

Interest expense.  Interest expense decreased $0.2 million for the nine months ended September 30, 2012, compared to the same period of 2011.  The current period includes the write-off of $1.1 million of capitalized debt facility fees related to our senior credit facility that was terminated during the second quarter of 2012.  Excluding the write-off, interest expense decreased due to a significant reduction in our average borrowings outstanding between the comparable nine month periods, slightly offset by an increase in average interest rates.

 

Other expense, net.  Other expense, net was $0.3 million for the nine months ended September 30, 2012, compared with$3.0 million, for the nine months ended September 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 as well as income tax expense were as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Income (loss) from continuing operations before income taxes:

 

 

 

 

 

U.S.

 

$

(7,715

)

$

(42,498

)

Foreign

 

19,955

 

21,382

 

Total

 

$

12,240

 

$

(21,116

)

 

 

 

 

 

 

Income tax expense:

 

 

 

 

 

U.S.

 

$

4,296

 

$

26,761

 

Foreign

 

4,983

 

4,433

 

Total

 

$

9,279

 

$

31,194

 

 

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 nine months ended September 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, we recorded a domestic 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 “NOL” carryforwards.

 

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Liquidity and Capital Resources

 

At September 30, 2012, we had an increase in working capital to $116.3 million from $92.8 million at December 31, 2011.  Our current ratio was 1.7:1 at September 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 $33.0 million at September 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 borrowings if needed; however, we presently have no immediate plans to borrow under this portion of the new credit agreement.  If future events, including material changes in estimates of cash, working capital and long-term investment requirements, necessitate that the undistributed earnings of our foreign subsidiaries be distributed, an additional provision for income taxes may apply, which could materially affect our future tax expense.  At September 30, 2012, we estimate we have approximately $41 million of U.S. Federal NOL carryforwards available to offset future taxable income.  Absent the availability of NOL carryforwards or tax credits, the possible tax consequences of any foreign cash repatriation could be significant.

 

As previously mentioned, we approved a corporate restructuring plan on November 5, 2012.  Related to the execution of this plan, we currently estimate that we will have cash outlays of approximately $5 million in the fourth quarter of 2012 and $5 million in 2013.

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Net cash used in continuing operations:

 

 

 

 

 

Operating activities

 

$

(33,360

)

$

(13,965

)

Investing activities

 

(2,588

)

(7,312

)

Financing activities

 

(27,455

)

(919

)

Net cash used in continuing operations

 

(63,403

)

(22,196

)

 

 

 

 

 

 

Net cash provided by (used in) discontinued operations:

 

 

 

 

 

Operating activities

 

(1,758

)

4,853

 

Investing activities

 

30,090

 

(2,100

)

Net cash provided by discontinued operations:

 

28,332

 

2,753

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

2,532

 

2,917

 

Net decrease in cash and cash equivalents

 

$

(32,539

)

$

(16,526

)

 

Operating activities.  Cash used in operating activities from continuing operations was $33.4 million during the nine months ended September 30, 2012, compared with $14.0 million for the nine months ended September 30, 2011.  Changes in normal short-term working capital items, partially offset by an improvement in earnings, contributed to the overall reduction in cash from continuing operations during the current nine month period as compared to the same period of the prior year.  Our working capital fluctuates significantly due to changes in accounts receivable (discussed below), as well as due to the timing of our domestic payroll and accounts payable processing cycles with regard to month-end dates and other seasonal factors.  During the nine months ended September 30, 2012 and 2011, our domestic operations used $18.4 million and $9.7 million, respectively, of cash from continuing operations while our International operations used $15.0 million and $4.3 million, respectively.  Typically, the seasonality of our business in many European countries results in negative cash from operations in the early part of the year with improvements in the second half of the year.  Cash flow from European receivables and payables are typically maximized in the fourth quarter.

 

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Table of Contents

 

Changes in accounts receivable can have a significant impact on our cash flow.  Items that can affect our cash flow from accounts receivable include: contractual payment terms, client payment patterns (including approval or processing delays and cash management), client mix (public vs. private), fluctuations in the level of IT product sales and the effectiveness of our collection efforts.  Many of the individual reasons are outside of our control and, as a result, it is normal for cash flow from accounts receivable to fluctuate from period to period, affecting our liquidity.

 

Total accounts receivable increased to $215.8 million at September 30, 2012, from $182.4 million at December 31, 2011.  Total accounts receivable day’s sales outstanding (“DSO”) increased to 66 days at September 30, 2012, from 53 days at December 31, 2011, an increase of 13 days, compared with DSO of 60 days at September 30, 2011 and 61 days at December 31, 2010, a decrease of 1 day, contributing considerably to the increase in cash used by operations during the current nine month period.  During the nine months ended September 30, 2012 , we experienced increased DSO both domestically and from our International division.  The increase in DSO in our International division was due to the seasonality in that business previously mentioned.  Domestic DSO was higher at September 30, 2012, due to higher trailing revenues, increased unbilled accounts receivable on certain  fixed-price projects, as well as longer payment terms with a large client that had increased incremental revenue during the current period.

 

Accrued compensation and related liabilities fluctuate from period to period based on a couple of primary factors, including the timing of our normal bi-weekly U.S. payroll cycle and the timing of variable compensation payments.  Bonuses are typically accrued throughout the year, and paid either quarterly or annually, based on the applicable bonus program associated with an employee’s role and country in which he or she works.  As such, bonus accruals can fluctuate from quarter to quarter.  Accounts payable and other accrued liabilities typically fluctuate based on when we receive actual vendor invoices and when they are paid.  The largest of such items typically relates to vendor payments for IT hardware and software products that we resell and payments to services-related subcontractors.

 

Investing activities.  Spending on property and equipment decreased to $2.6 million during the nine months ended September 30, 2012, from $6.4 million in the same period of 2011.  Generally, our capital spending is primarily for technology equipment and software and to support our global employee base, as well as our management and corporate support infrastructure, and for investment in our domestic and off-shore delivery centers.  Such investments will fluctuate from period to period.  Investing activities from discontinued operations for the nine months ended September 30, 2012, consisted primarily of current period net proceeds totaling $31.5 million from the sale of our Federal division offset by $1.0 million of transaction costs associated with the sale of our information technology outsourcing practice.

 

Financing activities.  Typically, our most significant financing activities consist of the borrowings and payments under our credit facility.  This primarily fluctuates based on net cash provided by, or used in, our domestic operations during the period as our U.S. cash receipts and disbursements are linked to the revolving credit facility.  During the nine months ended September 30, 2012, we had net payments on our long-term debt of $25.1 million primarily from the repatriation of $30 million of foreign cash to the U.S. in January and the sale of our Federal Division in March 2012, compared with net payments of $7.1 million for the nine months ended September 30, 2011.  Additionally, associated with our new credit agreement, we incurred a cash outflow of $3.5 million for credit facility fees.  During the nine months ended September 30, 2012, we had a cash inflow of $1.2 million for proceeds from employee stock plans, which was down from $7.0 million for the same period of 2011.

 

Credit Agreement.  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 of the ABL Facility on October 1, 2012, was $58.4 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 September 30, 2012, we had $34.3 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

 

27



Table of Contents

 

“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 was $30.9 million for September 2012 and then fluctuates monthly to a low of $27.6 million for November 2012 and then increases over 11 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 is 1.6 to 1.0 for September through November of 2012 and will increase 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 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 September 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

 

28



Table of Contents

 

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.

 

Off-Balance Sheet Arrangements

 

We do not have any reportable off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

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 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.

 

We currently have a remaining goodwill balance of $274.8 million at September 30, 2012.  The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis.  In estimating the fair value of the reporting units for the purpose of our annual or periodic goodwill impairment analysis, we make estimates and judgments about the future cash flows of the reporting units, including estimated growth rates and assumptions about the economic environment.  Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units.  We consider our market capitalization, adjusted for unallocated monetary assets such as cash, debt, a control premium and other factors determined by management.  As a result, several factors could result in the impairment of a material amount of our goodwill balance in future periods, including, but not limited to:

 

(1) Failure of Ciber to reach our internal forecasts could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated fair values of our reporting units;

 

(2) A decline in our stock price and resulting market capitalization, if we determine that the decline is sustained and is indicative of a reduction in the fair value of either of our reporting units below their carrying values.

 

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Table of Contents

 

Adverse changes in our market capitalization, long-term forecasts and industry growth rates could result in additional impairment charges being recorded in future periods for goodwill attributed to either of our reporting units.  Any future impairment charges would adversely affect our results of operations for those periods.

 

For a description of our other critical accounting policies and estimates, see “Item 7.  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.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

During the three months ended September 30, 2012, there were no material changes in our market risk exposure.  For a complete discussion of our market risk associated with foreign currency risk and interest rate risk as of December 31, 2011, see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures — During the fiscal period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  Based upon this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls — There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially