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NCI Reports Fourth Quarter and Fiscal Year 2014 Financial and Operating Results

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NCI, Inc. (NASDAQ:NCIT) , a leading provider of information technology (IT) and professional services and solutions to U.S. Federal Government agencies, today announced its financial and operating results for the fourth quarter and fiscal year ended December 31, 2014.

Fourth quarter 2014 revenue was above the midpoint of management’s guidance range issued last quarter. Diluted earnings per share (EPS) exceeded the high end of guidance by $0.01.

Fourth Quarter 2014 Results

For the fourth quarter of 2014, NCI reported revenue of $74.4 million compared with fourth quarter 2013 revenue of $79.9 million, a decrease of 6.8%. The year-over-year decrease in revenue was primarily the result of lower revenues generated from NCI’s PEO Soldier and NETCOM programs, partially offset by contract extensions as well as revenues under new contracts awarded in 2014. During the fourth quarter of 2014, NCI’s PEO Soldier contract accounted for 10.2% of total revenue, compared with 13.4% in the fourth quarter of 2013.

Operating income for the fourth quarter of 2014 was $4.2 million compared with $3.8 million for the fourth quarter of 2013. Operating margin for the fourth quarter of 2014 was 5.6% compared with 4.7% for the fourth quarter of 2013. Operating income and margin increased primarily as the result of a higher proportion of revenue derived from NCI direct labor compared with subcontractors and materials; and one-time award fees and successful completion of fixed price contracts, partially offset by higher general and administrative expenses related to new business development initiatives.

Net income for the fourth quarter of 2014 was $2.4 million compared with $2.0 million for the fourth quarter of 2013. Diluted EPS for the fourth quarter of 2014 was $0.18 compared with $0.16 for the fourth quarter of 2013.

Days sales outstanding (DSO) at December 31, 2014, was 65 days compared with 66 days at September 30, 2014, a decrease of one day.

Fiscal Year 2014 Results

Revenue for the year ended December 31, 2014, was $317.0 million, compared with $332.3 million for the year ended December 31, 2013, representing a decrease of $15.3 million, or 4.6%. This decrease in revenue was principally due to lower year-over-year revenue from NCI’s PEO Soldier program; the expiration of task orders and contracts; reductions in scope of work; and certain lost contract recompetes. The decrease was partially offset by revenues under new contracts and plus-ups to existing contracts.

NCI’s PEO Soldier contract accounted for $36.5 million and $46.0 million of revenue in 2014 and 2013, respectively. This represented 11.5% and 13.9% of revenue in 2014 and 2013, respectively.

Operating income for 2014 was $14.5 million, or 4.6% of revenue, compared with $14.1 million, or 4.2% of revenue, for 2013. The year-over-year increase in operating margin was primarily attributable to a higher proportion of revenue derived from NCI direct labor compared with subcontractors and materials, as well as overall improved performance on certain contracts. Excluding the impact of the $1.5 million accelerated stock option expense recorded in the first quarter of 2014, operating income for 2014 was $16.0 million, or 5.0% of revenue.

Net income for 2014 was $8.5 million, or $0.63 per diluted share, compared with $7.7 million, or $0.60 per share for 2013. Excluding the impact of the accelerated stock compensation expense, net income was $9.4 million, resulting in adjusted diluted EPS of $0.69 for 2014.

Cash flow provided by operating activities for fiscal year 2014 was $27.7 million, $6.1 million of which was provided in the fourth quarter of 2014. Capital expenditures were $1.5 million, resulting in free cash flow of $26.2 million, or 3.1 times net income in 2014.

NCI reported total backlog at December 31, 2014, of $410 million, of which $184 million was funded. This compares with total backlog at September 30, 2014, of $435 million, of which $165 million was funded. Net bookings for the fourth quarter were $50 million, equating to 0.7 times revenue. Net bookings for fiscal year 2014 were $238 million, equating to 0.8 times revenue.

Special Cash Dividend

NCI’s Board of Directors has declared a special cash dividend of $0.12 per share payable March 13, 2015, to shareholders of record on the close of business on February 25, 2015. The aggregate amount of payment to be made in connection with this special dividend will be approximately $1.6 million.

Computech Acquisition

On January 1, 2015, NCI completed the acquisition of Computech, Inc., a leader in agile and lean application software development and IT operations and maintenance. The purchase price was approximately $56 million, net of cash acquired, and was funded with cash on hand and borrowings under NCI’s senior credit facility.

Management’s Outlook

Based on the company’s current contract backlog and management’s estimate of future tasking and contract awards, NCI is issuing guidance for its first quarter and full fiscal year 2015. The table below represents management’s current expectations about future financial performance based on information available at this time:

First Quarter
Fiscal Year 2015 Ending
March 31, 2015

Fiscal Year
Ending
December 31, 2015

Revenue $74 million-$82 million $320 million-$350 million
Diluted EPS $0.14-$0.16 $0.62-$0.78
Diluted projected share count 13.6 million 13.6 million

“NCI again exceeded initial 2014 expectations for revenue and earnings and performed admirably throughout the year. We continued to prove that we can win important recompetes and showed that we’re capable of winning new business, even as final awards are under protest,” said Charles K. Narang, NCI’s Chairman and CEO. “As 2014 wrapped up, we celebrated our 25th year in business. I’m proud of all we’ve accomplished over the years but, more importantly, that NCI begins 2015 better positioned and more capable than ever.”

“We believe our growing qualified pipeline of new business opportunities and the strength of our balance sheet for further acquisitions give us the tools to reach $500 million in annualized revenue by the end of 2017,” said NCI’s President, Brian J. Clark. “In the near-term, we’re excited about our prospects for winning meaningful new awards in 2015, as we expect the issuance of many long-awaited RFPs that should result in record bid values for NCI. Moreover, our recently-completed acquisition of Computech brings us exciting new avenues for growth by way of access to new customers as well as capabilities in agile technology development and deployment. Finally, the authorization of this special dividend by our Board reflects NCI’s continued commitment to delivering value to our shareholders through various mechanisms. After completing 2014 with outstanding cash flow conversion, we’re able to distribute this dividend while not detracting from our primary intent to leverage our balance sheet for growth initiatives.”

Conference Call Information

As previously announced, NCI will conduct a conference call today at 4:30 p.m. EST to discuss fourth quarter and fiscal year 2014 results and issue guidance for the first quarter and fiscal year 2015.

Analysts and institutional investors may listen to the conference call by dialing (888) 572-7025 (United States/Canada) or (719) 325-2323 (international) with pass code 9211552. The conference call will be provided simultaneously as a webcast through a link on the NCI website (www.nciinc.com).

A replay of the conference call will be available approximately two hours after the conclusion of the call through February 25, 2015, by dialing (877) 870-5176 (United States/Canada) or (858) 384-5517 (international) and entering pass code 9211552.

About NCI, Inc.:

NCI is a leading provider of enterprise solutions and services to U.S. defense, intelligence, health care and civilian government agencies. The company has the expertise and proven track record to solve its customers’ most important and complex mission challenges through technology and innovation. NCI’s team of highly skilled professionals focuses on delivering cost-effective solutions and services in the areas of agile software application and systems development/integration; cybersecurity and information assurance; engineering and logistics support; enterprise information management and advanced analytics; cloud computing and IT infrastructure optimization; health IT and medical support; IT service management; and modeling, simulation and training. Headquartered in Reston, Virginia, NCI has more than 1,800 employees operating at more than 100 locations worldwide. NCI: Trust. Integrity. Performance. For more information, visit www.nciinc.com or email investor@nciinc.com. Like us on Facebook and follow us on Twitter (@nciinc_) and LinkedIn.

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

Such statements are subject to factors that could cause actual results to differ materially from anticipated results. The factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following: our dependence on our contracts with Federal Government agencies, particularly within the U.S. Department of Defense, for substantially all of our revenue; a reduction in the overall U.S. Defense budget, volatility in spending authorizations for Defense- and Intelligence-related programs by the U.S. Federal Government or a shift in spending to programs in areas where we do not currently provide services; Federal Government shutdowns (such as that which occurred during the Federal Government’s 1996 and 2014 fiscal years), other delays in the Federal Government appropriations process, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 and the Consolidated Appropriations Act of 2014), risk of contract performance or termination; failure to achieve contract awards in connection with recompetes for present business and/or competition for new business; adverse results of Federal Government audits of our government contracts; Government contract procurement (such as bid protest, small business set asides, etc.) and termination risks; competitive factors such as pricing pressures and competition to hire and retain employees (particularly those with security clearances); Federal Government agencies awarding contracts on a technically acceptable/lowest cost basis in order to reduce expenditures; failure to successfully identify and integrate future acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions or to effectively integrate acquisitions appropriate to the achievement of our strategic plans; economic conditions in the United States, including conditions that result from terrorist activities or war; material changes in laws or regulations applicable to our businesses, particularly legislation affecting (i) government contracts for services, (ii) outsourcing of activities that have been performed by the government, (iii) government contracts containing organizational conflict of interest (OCI) clauses, (iv) delays related to agency specific funding freezes, (v) competition for task orders under Government Wide Acquisition Contracts (GWACs), agency-specific Indefinite Delivery/Indefinite Quantity (IDIQ) contracts and/or schedule contracts with the General Services Administration; and (vi) our own ability to achieve the objectives of near-term or long-range business plans, including internal systems failures. These and other risk factors are more fully discussed in the section titled “Risk Factors” in NCI’s Form 10-K filed with the Securities and Exchange Commission (SEC), and from time to time, in other filings with the SEC, such as our Forms 8-K and Forms 10-Q.

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

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

NCI, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share data)

Three months ended December 31, Year ended December 31,
2014 2013 2014 2013
Revenue $ 74,440 $ 79,895 $ 317,028 $ 332,325
Operating expenses:
Cost of revenue 62,822 69,087 270,855 289,388
General and administrative expenses 5,883 5,583 25,850 23,393
Depreciation and amortization 1,390 1,475 5,692 6,298
Acquisition and integration expenses 150

150

Purchase contingency gain

(864 )
Total operating expenses 70,245 76,145 302,547 318,215
Operating income 4,195 3,750 14,481 14,110
Interest expense, net 104 128 406 784
Income before income taxes 4,091 3,622 14,075 13,326
Provision for income taxes 1,651 1,621 5,607 5,588
Net income $ 2,440 $ 2,001 $ 8,468 $ 7,738
Earnings per common and common equivalent share:
Basic:
Weighted average shares outstanding 12,958 12,842 12,899 12,829
Net income per share $ 0.19 $ 0.16 $ 0.66 $ 0.60
Diluted:
Weighted average shares outstanding 13,552 12,842 13,516 12,829
Net income per share $ 0.18 $ 0.16 $ 0.63 $ 0.60

NCI, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except par values)

As of December 31,
2014 2013
Assets:
Current assets:
Cash and cash equivalents $ 25,819 $ 50
Accounts receivable, net 52,856 63,991
Deferred tax assets, net 3,950 3,217
Prepaid expenses and other current assets 3,382 2,941
Total current assets 86,007 70,199
Property and equipment, net 7,371 9,752
Other assets 1,748 2,113
Deferred tax assets, net 37,839 39,990
Intangible assets, net 3,719 5,340
Total assets $ 136,684 $ 127,394
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable $ 15,646 $ 17,371
Accrued salaries and benefits 16,481 16,645
Deferred revenue 3,226 2,594
Other accrued expenses 4,653 4,578
Total current liabilities 40,006 41,188
Long-term debt 1,000
Other long-term liabilities 2,901 3,399
Total liabilities 42,907 45,587
Stockholders’ equity:
Class A common stock, $0.019 par value-37,500 shares authorized; 9,223 shares issued and 8,306 shares outstanding as of December 31, 2014, and 9,142 shares issued and 8,226 shares outstanding as of December 31, 2013 175 174
Class B common stock, $0.019 par value-12,500 shares authorized; 4,700 shares issued and outstanding as of December 31, 2014 and 2013 89 89
Additional paid-in capital 74,406 70,905
Treasury stock at cost-917 shares of Class A common stock as of December 31, 2014 and 2013 (8,331 ) (8,331 )
Retained earnings 27,438 18,970
Total stockholders’ equity 93,777 81,807
Total liabilities and stockholders’ equity $ 136,684 $ 127,394

NCI, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

Year ended December 31,
2014 2013 2012
Cash flows from operating activities:
Net income (loss) $ 8,468 $ 7,738 $ (86,824 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Impairment of goodwill and intangible assets 150,752
Depreciation and amortization 5,692 6,298 6,931
Stock compensation expense 3,044 1,399 4,204
Deferred income taxes 1,419 3,338 (51,851 )
Changes in operating assets and liabilities:
Accounts receivable, net 11,135 (1,698 ) 32,782
Prepaid expenses and other assets (72 ) 7,477 (7,197 )
Accounts payable (1,725 ) (6,777 ) (5,870 )
Accrued expenses and other liabilities (305 ) (515 ) (1,392 )
Net cash provided by operating activities 27,656 17,260 41,535
Cash flows from investing activities:
Purchases of property and equipment (1,467 ) (1,260 ) (1,785 )
Net cash used in investing activities (1,467 ) (1,260 ) (1,785 )
Cash flows from financing activities:
Borrowings under credit facility 42,496 123,922 130,304
Repayments on credit facility (43,496 ) (140,422 ) (166,804 )
Financing costs paid (5 ) (180 ) (120 )
Proceeds from exercise of stock options 482 10

Excess tax benefit from stock transactions

158
Repurchase of stock awards (55 ) (33 ) (1,320 )
Purchase of Class A common stock for Treasury

(3,876 )
Net cash used in financing activities (420 ) (16,713 ) (41,806 )
Net change in cash and cash equivalents 25,769 (713 ) (2,056 )
Cash and cash equivalents, beginning of year 50 763 2,819
Cash and cash equivalents, end of year $ 25,819 $ 50 $ 763
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 246 $ 596 $ 1,216
Income taxes $ 2,700 $ 975 $ 2,657
Supplemental disclosure of noncash activities:
Leasehold improvements acquired with tenant improvement funds $ 222 $ 496 $

NCI, INC.

RECONCILIATION OF NON-GAAP OPERATING MEASURES

(UNAUDITED)

(in thousands, except per share data)

Year ended December 31,
2014 2013
GAAP operating income $ 14,481 $ 14,110
Accelerated stock compensation expense 1,524

Adjusted operating income 16,005 14,110
Interest expense, net 406 784
Adjusted income before income taxes 15,599 13,326
Provision for income taxes 6,215 5,588
Adjusted net income $

9,384

$ 7,738
Earnings per common and common equivalent share:
GAAP Basic net income per share $ 0.66 $ 0.60
Per share effect of accelerated stock compensation expense 0.07

Adjusted net income per share $ 0.73 $ 0.60
GAAP Diluted net income per share $ 0.63 $ 0.60
Per share effect of accelerated stock compensation expense 0.06

Adjusted net income per share $ 0.69 $ 0.60
Weighted average shares outstanding:
Basic 12,899 12,829
Diluted 13,516 12,829

____________________

1 As previously disclosed, in the first quarter of 2014, NCI recognized $1.5 million of accelerated stock compensation expense. Diluted EPS estimates for fiscal year 2014 exclude the effects of the accelerated stock compensation expense. NCI believes that removing the effects of the accelerated stock compensation expense from operating income, net income and earnings per share in this non-GAAP financial measure, provides useful information because it allows management and investors to better assess NCI’s comparable financial results absent the expense. This non-GAAP financial measure should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Actual results for the fiscal year ended December 31, 2014, presented in the table “Condensed Consolidated Statements of Income” contained in today’s press release include the effects of the accelerated stock compensation expense.

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