AdvanceMed Acquisition

6 Months Ended

Jun. 30, 2011

AdvanceMed Acquisition [Abstract]

AdvanceMed Acquisition

9. AdvanceMed Acquisition

On April 1, 2011, pursuant to the terms of a Securities Purchase Agreement (the “Purchase Agreement”) dated February 24, 2011, NCI completed its purchase of 100% of the stock of AdvanceMed Corporation (AdvanceMed) from an affiliate of Computer Sciences Corporation. AdvanceMed is a premier provider of healthcare program integrity services focused on the detection and prevention of fraud, waste, and abuse in healthcare programs, providing investigative services to the Centers for Medicare and Medicaid Services (CMS). Serving CMS since 1999, AdvanceMed has grown rapidly demonstrating the value and return on investment of the Federal Government’s integrity program activities.

Under the terms of the Purchase Agreement, NCI ultimately acquired AdvanceMed for $63.3 million in cash. See reconciliation of the purchase price below. The transaction was funded through cash on hand and borrowings of approximately $62.0 million under NCI’s existing credit facility.

The acquisition has been accounted for under the Purchase Method of accounting which requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value. The excess of the purchase consideration over the amounts assigned to tangible or intangible assets acquired and liabilities assumed is recognized as goodwill. Total acquisition-related costs through June 30, 2011 were approximately $0.9 million.

Purchase Price

	(in thousands)
Base purchase price	$	62,000
Working capital adjustment at closing		2,308
Cash outlay as of June 30, 2011		64,308
Final working capital adjustment		(981	)
Final Purchase price	$	63,327

NCI purchased AdvanceMed for $62.0 million plus certain adjustments related to working capital. The purchase price was established based on upon estimated working capital and estimates of capital expenditures. Adjustments were made to the purchase price based on actual working capital balances acquired and capital expenditures made as of the acquisition date. The initial working capital adjustment occurred on April 1, 2011. The final working capital adjustment was received during July 2011 and is included in Prepaid expenses and other current assets in the consolidated balance sheet as of June 30, 2011.

Preliminary Allocation of Purchase Price

Estimated fair values of purchased assets and liabilities assumed:

	(in thousands)
Accounts receivable	$	16,188
Property and equipment		5,642
Definite-life intangible assets		4,981
Other assets		421
Goodwill		41,352
Less liabilities assumed		(5,257	)
	$	63,327

The fair value of the definite-lived intangible asset for customer relationships is based on existing customer contracts and anticipated follow-on contracts with existing customers and is expected to have a seven year life. Amortization of the definite-lived intangible asset for existing customer contracts and anticipated follow-on contracts with existing customers is based on an accelerated method.

Goodwill

The following table details the rollforward of our goodwill balance from December 31, 2010:

	Total Goodwill
	(in thousands)
Balance as of December 31, 2010	$	106,580
Purchase of AdvanceMed Corporation		41,352
Balance as of June 30, 2011	$	147,932

Goodwill represents the excess of purchase consideration over the amounts assigned to tangible and intangible assets acquired and liabilities assumed. As a result of the election under Section 338(h) (10) of the Internal Revenue Code, the amount allocated to intangible assets and goodwill for tax purposes is expected to be tax deductible.

The Company evaluates potential acquisitions that either strategically fit with the Company’s existing service offerings and/or expand the Company’s customer base. The Company has completed several acquisitions that have been accounted for as purchases and have resulted in the recognition of goodwill in the Company’s financial statements. This goodwill arises because the purchase prices for these businesses reflect a number of factors including the future earnings and cash flow potential of these businesses attributable to new customers; the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers; the competitive nature of the process by which the Company acquired the business; and the complementary strategic fit and resulting synergies these businesses bring to existing operations.

The Company makes an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company obtains this information during due diligence and through other sources. In the periods after closing, as the Company obtains additional information about these assets and liabilities, including finalizing asset appraisals, it is able to refine the estimates of fair value and more accurately allocate the purchase price. Only information available for estimates as of the acquisition date is considered for subsequent adjustment. The Company is in the process of finalizing valuation of acquired intangible assets in connection with the AdvanceMed acquisition. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.

Unaudited Pro Forma Information

The following unaudited pro forma results of operations data are presented as if the AdvanceMed acquisition had occurred as of the beginning of the periods presented:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
	(in thousands)
Revenue	$	161,203	$	138,254	$	329,364	$	241,551
Operating income		6,883		9,633		16,480		18,857

The pro forma results of operations information is presented as if the AdvanceMed acquisition had occurred as of the beginning of the periods presented. The pro forma results include certain purchase accounting adjustments such as estimated changes in depreciation and amortization expenses on acquired tangible and intangible assets. However, pro forma results do not include any anticipated costs savings or other effects of the planned integration of AdvanceMed. Accordingly, the pro forma results are not intended to represent or be indicative of the consolidated results of operations that the Company would have reported had the AdvanceMed acquisition been completed as of the dates and for the periods presented, nor are they necessarily indicative of future results.