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CIBER INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and related Notes included elsewhere in this
Annual Report on Form 10-K. This discussion and analysis also contains
forward-looking statements and should also be read in conjunction with the
disclosures and information contained in "Disclosure Regarding Forward-Looking
Statements" and "Risk Factors" in this Annual Report on Form 10-K. References to
"we," "our," "us," "the Company," or "Ciber" in this Annual Report on Form 10-K
refer to Ciber, Inc. and its subsidiaries. All references to years, unless
otherwise noted, refer to our fiscal year, which ends on December 31.
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 that are "in local currency" are calculated
by restating current period activity into U.S. dollars using the comparable
prior period's foreign currency exchange rates. This approach is used for all
results where the functional currency is not the U.S. dollar.
Business and Industry Overview
Ciber is a leading global information technology ("IT") company with nearly
40 years of proven IT experience, world-class credentials and a wide range of
technology expertise. With 65 offices worldwide operating on four continents and
over 60 supplier partners, Ciber has the infrastructure and expertise to deliver
IT services to almost any organization. The three pillars of our business
include Application Development and Maintenance ("ADM"), Ciber Managed Services
("CMS"), and Independent Software Vendor relationships ("ISVs"). At Ciber, we
take a client-focused, personalized service approach that includes the building
of long term relationships, creation of custom tailored IT solutions, and the
implementation of business strategies to reflect anticipated trends. Driven by
results, we are committed to delivering quality solutions precisely configured
to our clients' needs and achieving high client satisfaction. The consistent
goal is sustainable business value delivered on time and on budget.
We operate our business by geography. On March 9, 2012, we sold our Federal
division and on October 15, 2012, we sold our information technology outsourcing
practice. As a result, the sold businesses are now both reported as discontinued
operations within our financial statements and accordingly, our financial
position, results of operations, and cash flows have been reclassified for all
periods presented in this Annual Report on Form 10-K to conform to the current
presentation. Additionally, discussions throughout this Annual Report on
Form 10-K exclude the discontinued operations, unless otherwise noted. For
additional information see "Discontinued Operations" below.
Excluding discontinued operations, our reportable operating segments as of
December 31, 2012, consisted of International and North America. Our Ciber
International segment, is organized by country and primarily consists of
countries in Western Europe and the Nordic region. The four largest territories
are the Netherlands, Germany, the United Kingdom, and Norway. Our International
segment offers a range of services covering the full IT solution lifecycle to
both commercial enterprises and public sector organizations. Starting in January
2013, our North America segment is organized into two geographies, East and
West. This structure allows us to maximize our expertise to cross-sell and to
leverage delivery expertise across our new and existing client base of
commercial companies, educational institutions and state and local governments.
In 2012, we also began allocating the costs of our India global solutions center
to both our International and North America segments, whereas in previous years,
our India operations had been reported as part of our North America segment. All
2010 and 2011 segment data has been adjusted to conform to the 2012
presentation.
We recognize the majority of our services revenue under time-and-material
contracts as hours and costs are incurred. Under fixed-price contracts, which
currently make up approximately 15% of our services revenue, our revenue is
fixed under the contract, while our costs to complete our obligations under the
contract are variable. As a result, our profitability on fixed-price contracts
can vary significantly and occasionally can even be a loss. Changes in our
services revenue are primarily a
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function of hours worked on revenue-generating activities and, to a lesser
extent, changes in our average rate per hour and changes in contract mix. Hours
worked on revenue-producing activities vary with the number of consultants
employed and their utilization level. Utilization represents the percentage of
time worked on revenue-producing engagements divided by the standard hours
available (i.e., 40 hours per week). With time-and-materials contracts, higher
consultant utilization results in increased revenue; however, with fixed-price
contracts, it may result in higher costs and lower gross profit margins because
our revenue is fixed. We actively manage both our number of consultants and our
overall utilization levels. If we determine we have excess available resources
that we cannot place on billable assignments in the near future, we consider
reducing those resources. As a result, during the last three years, most of our
consultant turnover has been from involuntary termination of employment.
The hourly rate we charge for our services varies based on the level of the
consultant involved, the particular expertise of the consultant and the
geographic area. Our typical time-and-materials hourly rates range from $20 to
$200 per hour. As India-based resources become more significant, our average
hourly rates will decrease. For projects which are fixed-price or
level-of-effort, where our revenue is not directly based on labor hours
incurred, our realized rate per hour will vary significantly depending on
success or overages on such projects, as well as the blend of resources used to
deliver projects.
Selling, general and administrative ("SG&A") costs as a percentage of
revenue vary by business segment. Close to 60% of our overall SG&A expenses are
typically for personnel costs for our operations management, sales and
recruiting personnel and administrative staff, as well as our corporate support
staff and executive management personnel. These costs are generally not
immediately affected by changes in revenue, however management is constantly
evaluating such costs in relation to changes in business conditions. In many
foreign countries, short-term personnel actions are prohibited and/or may
require significant payments to such impacted employees. As we bid on larger and
longer-term projects, the sales cycle and related sales costs for such
opportunities have been increasing.
Other revenue includes sale of third-party software licenses and related
support agreements and commissions on sales of IT products. Our sales of
software generally involve relationships with the software vendors and are often
sold with implementation services. The gross profit margin on consolidated other
revenues is typically in the range of 30% to 50%. Depending on the mix of these
business activities, gross profit margin on other revenue will fluctuate.
The market demand for Ciber's services is heavily dependent on IT spending
by Fortune 500 and middle-market corporations, organizations and government
entities in the markets and regions that we serve. In recent 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. Over the last couple of years, economic conditions have had 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.
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, approximately 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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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. We have 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.
Discontinued Operations
On March 9, 2012, we sold substantially all of the assets and certain
liabilities of our Federal division to CRGT Inc. for a preliminary 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. In November
2012, we reached an agreement with CRGT on the final working capital
computation, which resulted in a final sales price of $37.4 million. Net cash
proceeds from the sale were $33.6 million, after transaction related costs of
$3.8 million. Based on the final sales price, we recorded a $0.7 million pre-tax
loss on this sale in 2012. The loss on sale is net of estimated lease exit costs
of $1.7 million, related to certain Federal division office space that was
vacated with the sale.
On October 15, 2012, we sold certain contracts and related property and
equipment and certain other assets associated with our information technology
outsourcing (ITO) practice to Savvis Communications Corporation ("Savvis") for
$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. There are no known contract losses at this time.
The ITO practice was split between our North America and International business
units. Net cash proceeds from the sale, after transaction-related costs, were
$3.8 million. The carrying value of the tangible assets included in the
transaction was $7.2 million, and
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we allocated $3.2 million of goodwill to the business being disposed resulting
in a $6.6 million pre-tax loss on sale.
Effective in the fourth quarter of 2011 for the Federal division, and in the
third quarter of 2012 for the ITO practice, these business met the criteria to
be reported as discontinued operations and accordingly, our financial position,
results of operations and cash flows have been reclassified for all prior
periods to conform to the presentation as a discontinued operation. The
following table summarizes the operating results of the discontinued operations
included in the Consolidated Statements of Operations.
Year Ended December 31,
2012 2011 2010
(In thousands)
Total revenues $ 71,936 $ 183,575 $ 189,720
Operating expenses 76,428 178,933 191,945
Goodwill impairment - 27,400 30,000
Operating loss from discontinued operations (4,492 ) (22,758 ) (32,225 )
Interest and other expense 90 528 484
Loss from discontinued operations before income
taxes (4,582 ) (23,286 ) (32,709 )
Income tax expense (benefit) 459 (6,777 ) (8,973 )
Loss from discontinued operations, net of income tax (5,041 ) (16,509 ) (23,736 )
Loss on sale (7,256 ) - -
Income tax benefit (687 ) - -
Loss on sale, net of income taxes (6,569 ) - -
Total loss from discontinued operations, net of
income taxes $ (11,610 ) $ (16,509 ) $ (23,736 )
In connection with the planned sale of the Federal division, at December 31,
2011, we performed a goodwill impairment test and based on the expected sales
price, we adjusted the carrying value of Federal division goodwill to its
implied fair value. As a result, we recorded a goodwill impairment charge of
$27.4 million during the quarter ended December 31, 2011, which is included
within the 2011 loss from discontinued operations of the Federal division. Refer
to Note 7 of the consolidated financial statements for further discussion on the
Federal impairment charge. To report the results of discontinued operations, we
are required to adjust the reported results of the business sold, from those
previously reported as part of operating income by reporting segment. These
adjustments eliminate corporate overhead allocations and adjust for costs of the
division that will not be recognized on a going-forward basis. In addition, we
have allocated interest expense to the Federal discontinued operation by
applying the effective interest rate towards the amount of debt that was
required to be repaid as a result of the transaction. We have also allocated
related tax expense or benefit to the discontinued operations. These adjustments
have been made for all periods presented.
Effective with their respective sales, operations and cash flows of these
sold businesses were removed from our consolidated operating results. However,
in connection with the sale of the Federal division, we have retained certain
historical accounts receivable as well as certain liabilities. With respect to
the sale of the ITO practice, we retained all of the related net working capital
assets. Some of these items, including certain possible contingent liabilities,
may not be settled for several years. Accordingly, adjustments to such items
will be recorded through our results of operations in future periods. In
addition, we expect to incur post-sale administrative costs in connection with
required government compliance activities related to our former Federal
business.
For additional information on the operating results of discontinued
operations included in our Consolidated Statements of Operations, please refer
to Note 2 of the Notes to our Consolidated
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Financial Statements included under "Financial Statements and Supplementary
Data" of this Annual Report.
Restructuring
On November 5, 2012, we approved a company restructuring plan. The
restructuring activities commenced in the fourth quarter of 2012 and relate
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 $13 million, of which approximately $1 million will be non-cash
charges related to stock compensation and fixed-asset write-downs related to
facility closures. The total estimated restructuring expenses include
approximately $7 million related to personnel severance and related benefits
primarily in our International division, and approximately $6 million related to
the closure of 17 offices and the consolidation of those locations into other
existing Ciber locations, mostly in North America. These activities began in the
fourth quarter of 2012, and we expect all 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.
Results of Operations-Comparison of the Years Ended December 31, 2012 and
2011-Consolidated
The following tables 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 third
quarter of 2012, a portion of our information technology outsourcing practice
was also classified as a discontinued operation and therefore both are excluded
from the results of 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:
Year Ended December 31,
2012 2011
(Dollars in thousands)
Consulting services $ 833,496 94.2 % $ 856,113 95.0 %
Other revenue 50,942 5.8 44,943 5.0
Total revenues $ 884,438 100.0 % $ 901,056 100.0 %
Gross profit-consulting services $ 208,767 25.0 % $ 209,160 24.4 %
Gross profit-other revenue 19,800 38.9 19,559 43.5
Gross profit-total 228,567 25.8 228,719 25.4
SG&A costs 205,550 23.2 219,723 24.4
Goodwill impairment - - 16,300 1.8
Amortization of intangible assets 644 0.1 1,534 0.2
Restructuring charges 7,981 0.9 - -
Operating income (loss) from continuing
operations 14,392 1.6 (8,838 ) (1.0 )
Interest income 743 0.1 987 0.1
Interest expense (5,976 ) (0.7 ) (7,898 ) (0.9 )
Other expense, net (258 ) - (2,524 ) (0.3 )
Income (loss) from continuing operations
before income taxes 8,901 1.0 (18,273 ) (2.0 )
Income tax expense 11,373 1.3 32,450 3.6
Net loss from continuing operations $ (2,472 ) (0.3 )% $ (50,723 ) (5.6 )%
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Percentage of revenue columns may not foot due to rounding.
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Revenue by segment from continuing operations was as follows:
Year Ended
December 31,
2012 2011 % change
(In thousands)
International $ 453,034 $ 472,867 (4.2 )%
North America 432,832 429,289 0.8
Other 3,109 3,510 n/m
Inter-segment (4,537 ) (4,610 ) n/m
Total revenues $ 884,438 $ 901,056 (1.8 )%
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n/m = not meaningful
Revenues. Total revenues decreased $16.6 million, or 1.8%, for 2012
compared with 2011. On a local currency basis, revenue increased 1.4% between
the comparable years. This change was attributable to the following:
º •
º International revenues decreased 4.2% overall, but improved
approximately 2% in local currency. The softer European economy caused
revenue results to vary considerably by territory. Revenue growth was
strong in the U.K., Germany, and Norway, which comprised approximately
half of International revenues. In the U.K. and Norway, this increase
was due to continued demand for IT services where we have been
successful at providing certain technology-specific and/or
vertical-specific services. Germany's revenue increase was due to the
strong performance of the Managed Services practice which improved 37%
compared with 2011. Additionally, revenue in several territories
benefited from improved sales of software licenses in 2012. 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. 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. In 2011, our largest client accounted
for 9% of our International division's revenues and 6% of our total
revenue. As a result of a bidding process the client conducted in
2011, 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 including reductions in the level of
services that they purchased from us. As a result, revenue from this
client is down 36% in 2012, compared to 2011. We believe revenue from
this client has stabilized and we do not expect significant further
deterioration at this time. However, as it is common practice in our
industry, our clients can generally reduce the use of our services on
relatively short notice and thus our level of revenue may fluctuate
and, we are subject to the inherent limitations of such uncertainty.
º •
º North America revenues were slightly up during 2012 compared to 2011.
However, excluding the impact of the negative revenue adjustments made
in 2011 for significant changes in estimates related to costs or scope
on fixed-price projects, North America revenues were down
approximately 2% year over year. This decrease is predominantly due to
service-level reductions and completed projects, which were not offset
by increased volume and new projects. This is particularly true for
our public sector clients due to recent declines in government
spending.
Gross Profit. Gross profit margin improved to 25.8% for the year ended
December 31, 2012, compared to 25.4% 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's gross margin was relatively flat as improvements in consultant
utilization were offset by volume discounts and pricing pressures, especially in
our core ADM business, as continued economic uncertainty has resulted in
heightened price sensitivity from many of our clients. Gross profit margin for
our International division declined due to decreased utilization, increased use
of more expensive subcontractor labor, and client pricing pressures.
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Selling, general and administrative costs. Our SG&A costs decreased
$14.2 million, or 6.5%, to $205.6 million for 2012, from $219.7 million for
2011. Both our International and North America segments had reductions in SG&A
costs in 2012. The decrease in SG&A costs in our International division was due
to foreign exchange rates and across the board SG&A savings. North America SG&A
costs decreased due to reduced salary and benefits costs for management, as well
as reductions in office rent, professional and legal fees, and other
discretionary items. 2012 corporate SG&A expenses increased due to an increase
in company-wide share based compensation that is all recorded as part of our
corporate department. SG&A costs as a percentage of revenue decreased to 23.2%
for 2012 from 24.4% for 2011.
Operating income (loss). We had operating income of $14.4 million in 2012
compared to an operating loss of $8.8 million in 2011, respectively. This change
is partially due to a $16.3 million goodwill impairment charge recorded in the
second quarter of 2011, which was partially offset by an $8.0 million
restructuring charge we recorded in the fourth quarter of 2012. See notes 7 and
14 of our consolidated financial statements for additional information on our
goodwill impairments and restructuring charges, respectively. Earnings before
interest, taxes and amortization ("EBITA") increased 156% to $23.0 million in
2012 from $9.0 million last year, primarily as a result of North America's gross
profit improvement, as well as significant SG&A cost reductions in both North
America and International.
Operating income (loss) from continuing operations by segment was as
follows:
Year Ended
December 31, 2012 2011
% % of % of
2012 2011 change revenue* revenue*
(In thousands)
International $ 24,969 $ 27,147 (8.0 )% 5.5 % 5.7 %
North America 30,169 12,385 143.6 7.0 2.9
Other 446 499 n/m 14.3 14.2
Corporate expenses (32,005 ) (29,680 ) (7.8 ) (3.6 ) (3.3 )
Unallocated results of
discontinued operations (562 ) (1,355 ) n/m - (0.2 )
Earnings before interest,
taxes, amortization, and
restructuring charges 23,017 8,996 155.9 2.6 1.0
Goodwill impairment - (16,300 ) 100.0 - (1.8 )
Amortization of intangible
assets (644 ) (1,534 ) 58.0 - (0.2 )
Restructuring charges (7,981 ) - n/m (0.9 ) -
Total operating income (loss)
from continuing operations $ 14,392 $ (8,838 ) 262.8 1.6 % (1.0 )%
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n/m = not meaningful
º *
º International, North America and Other calculated as a % of their
respective revenue, all other calculated as a % of total revenue. Column
may not total due to rounding.
º •
º International operating income decreased to $25.0 million from
$27.1 million mostly due to a reduction in gross profit margin which
was caused by decreased utilization, an increase in subcontractors and
pricing pressures. This reduction in gross margin was partially offset
by a decline in SG&A costs that was primarily related to foreign
currency and discretionary items.
º •
º North America operating income increased to $30.2 million in 2012 from
$12.4 million in 2011 primarily related to the prior year negative
revenue adjustments for five fixed-price projects, as well as
significant reductions in SG&A expenses, primarily related to reduced
management salary and benefits expense.
º •
º Corporate expenses increased $2.3 million due to increases in stock
compensation expense as well as equipment rental and maintenance,
partially offset by a decrease in external consulting and recruiting
fees.
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Interest expense. Interest expense decreased $1.9 million during 2012
compared to 2011. The current year 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 compared to 2011, slightly offset by an increase in average interest
rates.
Other expense, net. Other expense, net decreased $2.3 million during 2012
primarily due to a $3.2 million expense for acquisition-related consideration in
2011. This was slightly offset by $0.4 million of current year foreign exchange
losses compared with $0.6 million of foreign exchange gains in 2011.
Income taxes. Our tax expense is significantly impacted by the changes in
the amount and the geographic mix of our income and loss. From continuing
operations, our income (loss) before income taxes and our income tax expense is
as follows:
Year Ended
December 31,
2012 2011
(In thousands)
Income (loss) before income taxes:
United States $ (5,058 ) $ (49,104 )
Foreign 13,959 30,831
Total $ 8,901 $ (18,273 )
Income tax expense:
United States $ 5,491 $ 25,156
Foreign 5,882 7,294
Total $ 11,373 $ 32,450
For the year ended December 2011, our domestic loss from continuing
operations includes a goodwill impairment charge of $16.3 million and a related
deferred tax benefit of $4.5 million. In April 2011, we recorded deferred tax
expense of $29.1 million to establish a valuation allowance against all of our
U.S. deferred tax assets and we cannot record income tax benefits for any
additional U.S. operating 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, which
totaled $5.5 million of tax expense for 2012. For purposes of deferred taxes, we
estimate our domestic blended Federal and state rate to be approximately 40%.
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 24% to 33%. In both 2012 and 2011, certain of our foreign
operations benefited from the utilization of net operating loss ("NOL")
carryforwards while certain operations incurred losses without any current tax
benefit. The reduction of foreign pre-tax income from 2011 to 2012 is related to
an overall decrease in profitability of the business, including impact of
restructuring costs and increased inter-company transfer pricing. Although our
foreign income before tax decreased by 55%, the related tax expense decreased by
only 19% primarily as a result of the shift in the mix of profits and losses
across countries as well as increased tax reserves for certain tax exposure
items.
For interim periods, we base our tax provision on forecasted book and
taxable income for the entire year. As the forecast for the year changes, we
adjust our year-to-date tax provision. Our provision for income taxes is based
on many factors and is subject to significant volatility from year to year.
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Results of Operations-Comparison of the Years Ended December 31, 2011 and
2010-Consolidated
The following tables 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 third
quarter of 2012, a portion of our information technology outsourcing practice
also 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:
Year Ended December 31,
2011 2010
(Dollars in thousands)
Consulting services $ 856,113 95.0 % $ 840,913 95.4 %
Other revenue 44,943 5.0 40,710 4.6
Total revenues $ 901,056 100.0 % $ 881,623 100.0 %
Gross profit-consulting services $ 209,160 24.4 % $ 211,105 25.1 %
Gross profit-other revenue 19,559 43.5 16,923 41.6
Gross profit-total 228,719 25.4 228,028 25.9
SG&A costs 219,723 24.4 213,740 24.2
Goodwill impairment 16,300 1.8 82,000 9.3
Amortization of intangible assets 1,534 0.2 3,213 0.4
Operating loss from continuing operations (8,838 ) (1.0 ) (70,925 ) (8.0 )
Interest income
987 0.1 614 0.1
Interest expense (7,898 ) (0.9 ) (6,553 ) (0.7 )
Other income (expense), net (2,524 ) (0.3 ) 61 -
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (18,273 ) (2.0 ) (76,803 ) (8.7 )
Income tax expense (benefit) 32,450 3.6 (22,849 ) (2.6 )
NET LOSS FROM CONTINUING OPERATIONS $ (50,723 ) (5.6 )% $ (53,954 ) (6.1 )%
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Percentage of revenue columns may not foot due to rounding.
Revenue by segment from continuing operations was as follows:
Year Ended
December 31,
2011 2010 % change
(In thousands)
International $ 472,867 $ 385,155 22.8 %
North America 429,289 496,175 (13.5 )
Other 3,510 3,480 0.9
Inter-segment (4,610 ) (3,187 ) n/m
Total revenues $ 901,056 $ 881,623 2.2 %
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n/m = not meaningful
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Revenues. Total revenues increased $19.4 million, or 2.2%, for 2011
compared with 2010. In local currency, revenue decreased 1% between the
comparable years. This change is attributable to the following:
º •
º International segment revenues improved by 22.8% and approximately 16%
in local currency. The majority of our local currency revenue growth
was due to increased sales volume in our core territories, primarily
for SAP-related services and expansion in our German-based managed
services practice, which was a start-up business in 2010. Our strategy
of focusing on key technologies and verticals has yielded some
positive results in our International segment, especially in the
manufacturing and energy verticals in 2011. Although International
revenue growth was 22.8% for 2011, the segment experienced a
substantial deceleration in revenue growth rates throughout the year,
particularly between the third and fourth quarters. The deceleration
is attributed to a number of factors such as canceled or completed
projects, lack of availability of certain skilled SAP resources and
economic conditions negatively impacting some of our clients and
territories.
º •
º The decrease in North America revenues was predominantly due to our
inability to sufficiently replace revenue from concluded projects and
from reductions in the level of services provided at a number of other
clients. ERP implementation revenue declined by approximately
$39 million in 2011. Our inability to replace revenue was due to a
number of factors. We experienced some operational inefficiencies that
were created during our transition away from our previous branch model
to a matrixed operating model structured around strategic service
offerings and key verticals. Additionally, the segment leadership
transition during 2011 delayed efforts to focus on new revenue growth
opportunities. Our weaker than expected sales performance related to
prioritizing sales of higher-margin, solutions-based services, which
have a longer sales cycle, and a number of sales members that weren't
fully productive during 2011.
Gross Profit. In total, our gross profit margin decreased 50 basis points
to 25.4% for 2011, compared to 25.9% for 2010. Decreased revenues, lower
consultant utilization, and some low-margin fixed-price projects in our North
America segment were the predominant reasons for the decline in overall gross
profit margin in 2011. The International segment increased its overall gross
margin by approximately 140 basis points in 2011, a significant portion of which
was due to improved profitability of our German-based managed services practice
in 2011, a 2010 start-up business that was in the investment stages for much of
2010. 2011 year International gross margin was also positively impacted by the
full-year benefit from a June 2010 acquisition.
Selling, general and administrative costs. Our SG&A costs increased
$6.0 million, or less than 3%, to $219.7 million for 2011, from $213.7 million
for 2010. Increased SG&A costs of $18.1 million in our International segment
were partially offset by decreases in North America and corporate SG&A. The
increase in the International segment was predominantly related to salary costs,
mainly for additional sales and recruiting salaries, as well as higher severance
expenses. International also incurred higher facilities and support costs, which
increase with headcount growth. Bad debt expense also declined by $6.0 million
in 2011 from the prior year. North America implemented cost-cutting measures in
the second half of 2011 in response to the segment's continued revenue decline,
which contributed considerably to the $5.1 million reduction of SG&A costs.
Additionally, 2011 corporate SG&A expenses declined due to reductions in costs
related to executive severance and transition. SG&A costs as a percentage of
revenue increased slightly to 24.4% for 2011 from 24.2% for 2010.
Operating loss. In connection with our annual goodwill impairment test
(performed in the second quarter of each year), we recorded a $16.3 million
non-cash goodwill impairment charge in 2011 for our former IT Outsourcing
division (now allocated to our North America segment, refer to footnote 7 of our
financial statements for further discussion) while in 2010 we recorded an
$82.0 million impairment for our North America segment. Including the impairment
charges, we had operating losses of $8.8 million and $70.9 million in 2011 and
2010, respectively. Earnings before interest, taxes and amortization ("EBITA")
declined by 37% to $9.0 million in 2011 from $14.3 million in 2010, primarily as
a result of the North America revenue decline and its resulting impact on gross
profit and the negative impacts from some low-margin fixed-price contracts more
than offsetting our International segment's growth and profit improvements and
our reduced corporate expenses.
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Operating loss from continuing operations by segment was as follows:
Year Ended
December 31, 2011 2010
% of % of
2011 2010 % change revenue* revenue*
(In thousands)
International $ 27,147 $ 17,730 53.1 % 5.7 % 4.6 %
North America 12,385 34,817 (64.4 ) 2.9 7.0
Other 499 318 n/m 14.2 9.1
Corporate expenses (29,680 ) (36,767 ) 19.3 (3.3 ) (4.2 )
Unallocated results of
discontinued operations (1,355 ) (1,810 ) n/m (0.2 ) (0.2 )
Earnings before interest,
taxes, and amortization 8,996 14,288 (37.0 )% 1.0 1.6
Goodwill impairment (16,300 ) (82,000 ) 80.1 % (1.8 ) (9.3 )
Amortization of intangible
assets (1,534 ) (3,213 ) 52.3 % (0.2 ) (0.4 )
Total operating loss from
continuing operations $ (8,838 ) $ (70,925 ) 87.5 % (1.0 )% (8.0 )%
--------------------------------------------------------------------------------
º *
º Segments calculated as a % of segment revenue, all other calculated as a %
of total revenue
º •
º International operating income increased $9 million in 2011, primarily
due to revenue growth. Operating income margin improved 110 basis
points in 2011, driven by increased gross margins related in large
part to the positive contribution from our German managed services
business, which was in start-up mode for much of the previous year, as
well as the full year impact of a June 2010 acquisition. These margin
improvements were partially offset by an increase in SG&A costs as a
percentage of revenue, primarily for increased salary costs related to
business expansion.
º •
º North America operating income decreased to $12.4 million in 2011 from
$34.8 million for 2010 primarily related to the negative impact of
service-level reductions and concluded engagements. Low-margin
fixed-price projects and costs incurred by the division to exit
several of these fixed-price contracts and, to a lesser extent,
decreased consultant utilization also reduced operating income. In
2011, North America operating income was negatively impacted by
approximately $12 million from exiting certain contracts or from
contracts with losses. In addition, we estimate that the segment's
operating income was reduced by $9 million due to cost overruns on
fixed-price projects that reduced project profits below our expected
margins. North America began cost-reduction initiatives during the
second half of 2011, including staff reductions and discretionary
spending curtailments, but was unable to reduce costs as quickly as
revenue declined.
º •
º Corporate expenses were down $7.1 million. During 2010, we incurred
$6.1 million of executive charges and leadership transition costs and
we recorded a $2.2 million bad debt allowance. In 2011, we recorded
$2.3 million of severance costs. The reductions in bad debt and
separation-type expenses were partially offset by increased IT costs
and share-based compensation in 2011.
Interest expense. Interest expense increased $1.3 million during 2011
compared to 2010. Interest charges related to a liability for acquisition
consideration accounted for $0.7 million of the increase. The remaining
$0.6 million related to higher interest costs, including amortization of
facility fees, under the senior credit facility in place at that time.
Other income (expense), net. Other expense, net was $2.5 million in 2011,
down from other income, net of $0.1 million in 2010. A $3.2 million increase in
the fair value of our liability for acquisition-related consideration resulted
from a revised agreement that fixed the amount of the future
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consideration in 2011. This was slightly offset by $0.6 million of current year
foreign exchange gains compared with nominal foreign exchange losses in 2010.
Income taxes. Our tax expense is significantly impacted by the changes in
the amount and the geographic mix of our income and loss. From continuing
operations, our income (loss) before income taxes and our income tax expense
(benefit) is as follows:
Year Ended
December 31,
2011 2010
(In thousands)
Income (loss) before income taxes:
United States $ (49,104 ) $ (98,081 )
Foreign 30,831 21,278
Total $ (18,273 ) $ (76,803 )
Income tax expense (benefit):
United States $ 25,156 $ (27,005 )
Foreign 7,294 4,156
Total $ 32,450 $ (22,849 )
For the year ended December 31, 2011, our domestic loss from continuing
operations included a goodwill impairment charge of $16.3 million and a related
deferred tax benefit of $4.5 million. In April 2011, we recorded deferred tax
expense of $29.1 million to establish a valuation allowance against all of our
U.S. deferred tax assets and we cannot record income tax benefits for any
additional U.S. operating 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. For purposes
of deferred taxes, we estimate our domestic blended Federal and state rate to be
approximately 40%.
For the year ended December 31, 2010, our domestic loss from continuing
operations included a goodwill impairment charge of $82.0 million and a related
deferred tax benefit of $22.6 million. The remaining domestic loss resulted in a
27% tax benefit of approximately $4.4 million.
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 24% to 33%. Our actual tax expense is also impacted by the amount
of nondeductible expenses, which increases our effective tax rate. Our fourth
quarter 2010 tax rate also had a $1.0 million benefit from the utilization of
carried forward net operating losses in Europe, which were previously reserved.
A portion of the operations of our India subsidiary were not subject to taxes
under a tax holiday that expired March 2011. The income tax benefit attributable
to this tax holiday was approximately $0.3 million and $1.1 million in 2011 and
2010, respectively.
Liquidity and Capital Resources
At December 31, 2012, we had an increase in working capital to
$105.5 million from $92.8 million at December 31, 2011. Our current ratio was
1.6:1 at December 31, 2012, compared to1.5:1 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.
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Our balance of cash and cash equivalents was $58.8 million at December 31,
2012, compared to $65.6 million at December 31, 2011. Our domestic cash balances
are used daily to reduce our outstanding balance on 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 also provides for foreign borrowings if needed. 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
December 31, 2012, we estimate we have approximately $40 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 had cash outlays of
approximately $2 million in the fourth quarter of 2012. We estimate future cash
outlays of $7 million in 2013.
Cash flows from operating, investing and financing activities, as reflected
in our Consolidated Statements of Cash Flows, are summarized as follows:
Year Ended December 31,
2012 2011 2010
(In thousands)
Net cash provided by (used in) continuing
operations:
Operating activities $ 1,304 $ 18,909 $ 25,703
Investing activities (3,262 ) (14,112 ) (11,151 )
Financing activities (42,956 ) (17,336 ) (13,379 )
Net cash provided by (used in) continuing operations (44,914 ) (12,539 ) 1,173
Net cash provided by (used in) discontinued
operations:
Operating activities (2,981 ) 12,613 9,418
Investing activities 37,773 (2,214 ) (6,419 )
Net cash provided by discontinued operations 34,792 10,399 2,999
Effect of foreign exchange rates on cash 3,404 (1,622 ) (2,267 )
Net increase (decrease) in cash and cash equivalents $ (6,718 ) $ (3,762 ) $ 1,905
Operating activities. Cash provided by operating activities from continuing
operations was $1.3 million in 2012, compared with $18.9 million and
$25.7 million in 2011 and 2010, respectively. Changes in normal short-term
working capital items, partially offset by an improvement in earnings,
contributed to the overall reduction in cash from operations during 2012 as
compared to 2011. While in 2011, reduced earnings and changes in normal
short-term working capital items both contributed to the overall reduction in
cash from operations as compared to 2010. 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. Typically, the
seasonality of our business in many European countries results in
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negative cash from operations in the early part of the year with improvements in
the second half of the year. Cash flow from European operations are typically
maximized in the fourth quarter.
Changes in accounts receivable have a significant impact on our cash flow.
Items that can affect our cash flow 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
our cash flow from accounts receivable to fluctuate from period to period,
affecting our liquidity.
Total accounts receivable increased to $200.3 million at December 31, 2012,
from $182.4 million at December 31, 2011. At December 31, 2012, our total
unbilled accounts receivable for costs and earnings in excess of billings
totaled $16.3 million, which was a decrease of $3.6 million from the prior year.
Total accounts receivable day's sales outstanding ("DSO") was 61 days at
December 31, 2012, compared to 53 days at December 31, 2011, an increase of
8 days. During 2012, we experienced increased DSO both domestically and from our
International segment. The increase in DSO in International was due to longer
client payment terms, which was partially offset by some collection
improvements. Our International segment typically experiences slower receivable
payments during the first half of the year with improvement in the second half
of the year, and with their lowest DSO levels typically occurring in December.
Domestic DSO was higher at December 31, 2012 due to longer client payment terms,
higher revenues, and delayed payments from one of our largest clients. Overall
project delays have caused increases in unbilled accounts receivable as well.
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. Investing activities are primarily comprised of
purchases of property and equipment and cash paid for acquisitions. Spending on
property and equipment was $3.3 million during 2012, compared with $13.2 million
in 2011 and $7.6 million in 2010. 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. In 2011, we expanded our delivery center
operations in India, which cost approximately $3 million, and we also made other
capital investments to begin enhancing our information management systems and to
develop management and sales tools. Investing activities from discontinued
operations for 2012 consisted primarily of net proceeds totaling $33.6 million
from the sale of our Federal division and $4.5 million from 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 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 2012, we had net payments on our long-term
debt of $40.1 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 to net payments of $21.8 million and $11.1 million in 2011 and 2010,
respectively. Additionally, associated with our new credit agreement, we
incurred a cash outflow of $3.4 million for credit fees, compared to
$2.0 million and $0.7 million in 2011 and 2010, respectively. In 2012, we had a
cash inflow of $1.3 million for proceeds from employee stock plans,
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down from $7.5 million in 2011 and $2.4 million in 2010. We did not use cash in
2012 or 2011 to repurchase our own stock, however, in 2010 we used $2.4 million
for this purpose.
Credit Agreement. On May 7, 2012, we entered into a Credit Agreement (the
"Credit Agreement") with Wells Fargo Bank, N.A. The Credit Agreement replaced
our previous credit facility 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 (the
"Term Loan"). The full $60 million of the ABL Facility was available for
borrowing on December 31, 2012. The ABL Facility provides for borrowings in the
United States, the Netherlands, the United Kingdom and Germany and matures on
May 7, 2017. The Term Loan amortizes in monthly principal payments of
approximately $0.4 million starting October 31, 2012, with the balance of
approximately $2.1 million due at maturity on November 7, 2013. As of
December 31, 2012, we had $19.8 million outstanding under the ABL Facility and
$6.3 million outstanding under the Term Loan. Our obligations under the Credit
Agreement are guaranteed by us and and are secured by substantially all of our
U.S., Netherlands, United Kingdom, and German assets.
The Term Loan accrues interest at an annual rate of 12.0%. Under the ABL
Facility, U.S. borrowings accrue 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. All foreign borrowings accrue
interest at a rate of LIBOR plus a margin ranging from 225 to 275 basis points,
plus certain fees related to compliance with European banking regulations. 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. At December 31, 2012, our weighted average interest rate on our
outstanding borrowing under the ABL Facility was 4.38%.
The Credit Agreement can be prepaid in whole or in part at any time. In
addition, the Credit Agreement, subject to certain exceptions and conditions,
requires prepayment of the Term Loan with the net cash proceeds received from
certain events. These events include, amongst others, 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. The ABL Facility must
be repaid to the extent that any borrowings exceed the maximum availability
allowed under the ABL 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," (ii) a
minimum trailing 12-month fixed charge coverage ratio and (iii) a maximum
trailing 12-month leverage ratio. We were in compliance with the financial
covenants under our Credit Agreement at December 31, 2012. A summary of these
financial covenants is as follows:
º •
º We must maintain a minimum trailing 12-month "EBITDA," of at least
$30.0 million for January 2013. This minimum fluctuates monthly
throughout 2013 until maturity of the Term Loan in early November,
when the minimum is $41.4 million.
º •
º The minimum trailing 12-month fixed charge coverage ratio must not be
less than 1.1 to 1.0.
º •
º The maximum trailing 12-month leverage ratio may not be greater than
1.3 to 1.0 for January 2013. This maximum fluctuates monthly
throughout 2013 until maturity of the Term Loan in early November,
when the maximum is 1.0 to 1.0.
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The Company is required to be in compliance with the financial covenants at
the end of each calendar month until the Term Loan is repaid in full. The
Company is also required to be in compliance with the minimum trailing 12-month
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. The Company must then continue to comply
with the minimum trailing 12-month 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 above financial covenants at December 31,
2012, with the following calculations for our financial covenant ratios:
º •
º Consolidated trailing 12-month "EBITDA": $36.4 million. (Minimum
permitted is $27.7 million.)
º •
º Consolidated trailing 12-month fixed charge coverage ratio: 1.8 to
1.0. (Minimum permitted is 1.1 to 1.0.)
º •
º Consolidated trailing 12-month leverage ratio: 0.7 to 1.0. (Maximum
permitted is 1.5 to 1.0.)
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, and German borrowers and will automatically apply
such amounts to the ABL Facility on a daily basis. As a result, if we have any
outstanding borrowings that are subject to the bank's dominion, such amounts
will be classified as a current liability on our balance sheet. At December 31,
2012, no borrowings are subject to the bank's dominion.
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.
Based on management's current estimates, we do not currently believe a
covenant violation to be probable of occurring for at least the next 12 months.
However, given the current volatility of the global economy, there can be no
assurance that we will continue to be in compliance with these bank covenants.
If a covenant violation were to occur, we believe we would be able to obtain a
waiver or amendment from our lenders. Any such waiver or amendment would come at
additional costs to Ciber and such costs could be material. We believe that
other sources of credit or financing would be available to us; however, we
cannot predict at this time what types of credit or financing would be available
in the future, the costs of such credit or financing, or that the terms of any
amended or new facility will not be materially less favorable to the Company.
The carrying value of the outstanding borrowings under the ABL Facility
approximates its fair value as (1) it is based on a variable rate that changes
based on market conditions and (2) the margin applied to the variable rate is
based on Ciber's credit risk, which has not changed since entering into the
facility in May 2012. The carrying value of the outstanding borrowings under the
fixed rate Term Loan approximates its fair value as (1) market interest rates
have not changed significantly since May 2012 and (2) Ciber's credit risk is
relatively unchanged since entering into the loan. If market interest rates or
Ciber's credit risk were to change, we would estimate the fair value of our
borrowings using
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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.
Off-Balance Sheet Arrangements
We do not have any reportable off-balance sheet arrangements.
Contractual Obligations
The contractual obligations presented in the table below represent our
estimates of future payments under fixed contractual obligations and
commitments. Changes in our business needs, cancellation provisions, changing
interest rates and other factors may result in actual payments differing from
these estimates. We cannot provide certainty regarding the timing and amounts of
payments. We have presented below a summary of the most significant assumptions
used in our information within the context of our consolidated financial
position, results of operations and cash flows.
The following table is a summary of our contractual obligations as of
December 31, 2012:
Payments due by period
Total 2013 2014 - 2015 2016 - 2017 Thereafter
(In thousands)
Principal payments on
long-term debt $ 26,127 $ 6,337 $ 15 $ 19,775 $ -
Interest payments on
long-term debt(1) 3,277 1,032 1,146 1,099 -
Operating leases(2) 68,624 21,678 26,749 12,999 7,198
Other commitments(3) 23,467 17,594 5,596 275 2
Total $ 121,495 $ 46,641 $ 33,506 $ 34,148 $ 7,200
--------------------------------------------------------------------------------
º (1)
º Interest payments were calculated based on the terms of our Credit
Agreement and effective interest rates as of December 31, 2012, for our
borrowings.
º (2)
º Includes operating leases for all office locations, automobiles and office
equipment.
º (3)
º Other commitments include, among other things, information technology,
software support and maintenance obligations, as well as other obligations
in the ordinary course of business that we cannot cancel or where we would
be required to pay a termination fee in the event of cancellation. It does
not include our remaining unrecognized tax benefits of $5.5 million because
we are unable to make a reasonably reliable estimate as to when a cash
settlement, if any, with the appropriate taxing authority may occur.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with
U.S. generally accepted accounting principles requires management to make
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements, as well as the
reported amounts of revenue and expenses during the periods presented. We
continually evaluate our estimates, judgments and assumptions based on available
information and experience. We believe that our estimates, judgments and
assumptions are reasonable based on information available to us at the time they
are made. To the extent there are differences between our estimates, judgments
and assumptions and actual results, our financial statements will be affected.
Such differences may be material to our financial statements. The accounting
policies that reflect our more significant estimates, judgments and assumptions
are described below.
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Revenue recognition-Ciber earns revenue primarily from providing IT services
to its clients, and to a much lesser extent, from the sale and resale of IT
hardware and software products. Ciber's consulting services revenue comes from
three primary sources: (1) technology integration services where we design,
build and implement new or enhanced system applications and related processes;
(2) general IT consulting services, such as system selection or assessment,
feasibility studies, training and staffing; and (3) outsourcing and managed IT
services in which we manage, staff, maintain, host or otherwise run solutions
and/or systems provided to our customers. Contracts for these services have
different terms based on the scope, deliverables and complexity of the
engagement, which requires management to make judgments and estimates in
recognizing revenue. Fees for these contracts may be in the form of
time-and-materials or fixed-price billings. The majority of our consulting
services revenue is recognized under time-and-materials contracts as hours and
costs are incurred. Consulting services revenue also includes project-related
reimbursable expenses for travel and other out-of-pocket expenses separately
billed to clients.
Revenue for technology integration consulting services where we
design/redesign, build and implement new or enhanced systems applications and
related processes for our clients is generally recognized based on the
percentage-of-completion method. Under the percentage-of-completion method,
management estimates the percentage of completion based upon the contract costs
incurred to date as a percentage of the total estimated contract costs. If the
total cost estimate exceeds revenue, we accrue for the estimated loss
immediately. The use of the percentage-of-completion method requires significant
judgment relative to estimating total contract revenue and costs, including
assumptions as to the length of time to complete the project, the nature and
complexity of the work to be performed and anticipated changes in estimated
costs. Estimates of total contract costs are continuously monitored during the
term of the contract and recorded revenues and costs are subject to revision as
the contract progresses. Such revisions may result in increases or decreases to
revenue and income and are reflected in the consolidated financial statements in
the periods in which they are first identified.
Revenue for general IT consulting services is recognized as work is
performed and amounts are earned. We consider amounts to be earned once evidence
of an arrangement has been obtained, services are delivered, fees are fixed or
determinable and collectability is reasonably assured. For contracts with fees
based on time-and-materials or cost-plus, we recognize revenue over the period
of performance. For fixed-price contracts, depending on the specific contractual
provisions and nature of the deliverables, revenue may be recognized on a
proportional performance model based on level-of-effort, as milestones are
achieved or when final deliverables have been provided.
Outsourcing and managed IT services arrangements typically span several
years. Revenue from time-and-materials contracts is recognized as the services
are performed. Revenue from unit-priced contracts is recognized as transactions
are processed based on objective measures of output. Revenue from fixed-price
contracts is recognized on a straight-line basis, unless revenues are earned and
obligations are fulfilled in a different pattern. Costs related to delivering
outsourcing and managed services are expensed as incurred, with the exception of
labor and other direct costs related to the set-up of processes, personnel and
systems, which are deferred during the transition period and expensed evenly
over the period services are provided. Amounts billable to the client for
transition or set-up activities, which do not have standalone value, are also
deferred and recognized as revenue evenly over the period that the managed
services are provided.
We sometimes enter into arrangements (excluding software license
arrangements) with customers that purchase multiple services, or a combination
of services and IT hardware products, from us at the same time, referred to as
multiple-element arrangements. Each element within a multiple-element
arrangement is accounted for as a separate unit of accounting provided that the
delivered services or products have value to the customer on a standalone basis.
We consider a deliverable element to have standalone value if the service or
product is sold separately by us or another vendor or could be resold by the
customer. For our multiple-element arrangements, the arrangement consideration
is allocated at
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the inception of the arrangement to all deliverable elements on the basis of
their relative selling price (the relative selling price method). When applying
the relative selling price method, the selling price for each deliverable is
determined using vendor-specific objective evidence ("VSOE") of selling price if
it exists; otherwise, third-party evidence ("TPE") of selling price is used. If
neither VSOE nor TPE of selling price exists for a deliverable, then we use our
best estimate of the selling price ("ESP") for that deliverable when applying
the relative selling price method. Since our services are typically customized
to each client's specific needs, VSOE and TPE are generally not available. We
determine ESP for purposes of allocating the arrangement by considering several
external and internal factors including, but not limited to, pricing practices,
margin objectives, competition, geographies in which we offer our products and
services, and internal costs. We limit the amount of revenue recognized for
delivered elements to an amount that is not contingent upon future delivery of
additional services or products.
Other revenue primarily includes resale of third-party IT hardware and
software products, commissions on sales of IT products and, to a lesser extent,
sales of proprietary software products. Revenue related to the sale of IT
products is generally recognized when the products are shipped or if applicable,
when delivered and installed in accordance with the terms of the sale. Where we
are the re-marketer of certain IT products, commission revenue is recognized
when the products are drop-shipped from the vendor to the customer. Our
commission revenue represents the sales price to the customer less the cost paid
to the vendor. Some software license arrangements also include implementation
services and/or post-contract customer support. In such multi-element software
arrangements, if the criteria are met, revenue is recognized based on the VSOE
of the fair value of each element. If a software license arrangement containing
multiple elements does not qualify for separate accounting for the
implementation services, then the software license revenue and the related costs
of third-party software products are generally recognized together with the
software implementation services using the percentage-of-completion method.
Revenue for software post-contract support is recognized ratably over the term
of the related agreement.
Unbilled accounts receivable represent amounts recognized as revenue based
on services performed in advance of billings in accordance with contract terms.
Under our typical time-and-materials billing arrangement, we bill our customers
on a regularly scheduled basis, such as biweekly or monthly. At the end of each
accounting period, we accrue revenue for services performed since the last
billing cycle. These unbilled amounts are generally billed the following month.
Unbilled accounts receivable also arise when percentage-of-completion accounting
is used and costs plus estimated contract earnings exceed billings. Such amounts
are billed at specific milestone dates or at contract completion. Management
expects all unbilled accounts receivable to be collected within one year of the
balance sheet date. Billings in excess of revenue recognized are recorded as
deferred revenue and are primarily comprised of deferred software support
revenue.
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
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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.
For the quarter ended December 31, 2012, we reviewed for indicators of
impairment and believed that the decline in our share price warranted an interim
test for goodwill impairment for our reporting units. We compared the carrying
values of our International and North America reporting units to their estimated
fair values at December 31, 2012. We estimated the fair value of each reporting
unit based on a weighting of both the income approach and the market approach.
We used similar methodologies as during our annual impairment test date of
June 30, 2012, and updated our business and valuation assumptions for the income
and market approach. The discounted cash flow method (income approach)
incorporates various Level 3 inputs including projected revenue growth rates,
earnings margins, and the present value, based on the discount rate and terminal
growth rate, of forecasted cash flows. The annual average revenue growth rates
forecasted for our reporting units for the first five years of our projections
were approximately 4%. Again, we 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. The income approach valuations also included each
reporting unit's estimated weighted average cost of capital, which were 13.0%
and 15.5% 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 0.4 and 0.3, respectively, and enterprise
value/EBITDA multiples of approximately 5 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 35%. 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
December 31, 2012, we estimated that the fair values for our International and
North America reporting units exceeded their carrying amounts by 20% and 19%,
respectively, thus no impairment was indicated. We updated our cash flow
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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 $276.6 million at
December 31, 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; and
(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.
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 any of our reporting
units. Any future impairment charges would adversely affect our results of
operations for those periods.
Income taxes-Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against net deferred tax assets. We are required to
estimate income taxes in each jurisdiction where we operate. This process
involves estimating actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as the
depreciable life of fixed assets for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in
the Consolidated Balance Sheets. We assess the likelihood that our deferred tax
assets will be recovered from future taxable income and to the extent recovery
is believed unlikely, we establish a valuation allowance. Changes in the
valuation allowance for deferred tax assets impact our income tax expense during
the period.
As a result of our cumulative domestic losses, effective April 1, 2011, we
recorded a non-cash charge of $29.1 million to provide a valuation allowance for
all of our domestic deferred tax assets. In addition, we haven't recorded any
deferred tax benefit for our domestic tax operating losses incurred after
April 1, 2011. Our cumulative valuation allowance recorded against all of our
deferred tax assets at December 31, 2012, was $35.7 million. The establishment
of a valuation allowance does not impair our ability to use the deferred tax
assets, such as net operating loss and tax credit carryforwards, upon achieving
sufficient profitability. As we generate domestic taxable income in future
periods, we do not expect to record significant related domestic income tax
expense until the valuation allowance is significantly reduced. As we are able
to determine that it is more likely than not that we will be able to utilize the
deferred tax assets, we will reduce our valuation allowance. At December 31,
2012, we have federal net operating loss ("NOL") and federal tax credit
carryforwards of approximately $40 million and $11 million, respectively. Of
this total, $3 million of U.S. NOL carryforwards are subject to annual usage
limitations under U.S. tax rules; however, they do not begin to expire until
2022. The remaining
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NOL carryforwards do not begin to expire until 2030. Our Federal tax credit
carryforwards are subject to annual usage limits but do not begin to expire
until 2025. At December 31, 2012, we also have approximately $39 million of
foreign NOL carryforwards. We have recorded a valuation allowance for
approximately 99% of the foreign NOL carryforwards, as we do not believe it is
more likely than not that we will utilize them. Approximately 30% of the foreign
NOL carryforwards may expire.
We calculate our current and deferred tax provision based on estimates and
assumptions that could differ from the actual results reflected in income tax
returns filed during the subsequent year. Adjustments based on filed returns are
generally recorded in the period when the tax returns are filed. We apply an
estimated annual effective tax rate to our quarterly operating results to
determine the provision for income tax expense. In the event there is a
significant unusual or infrequent item recognized in our quarterly operating
results, the tax attributable to that item is recorded in the interim period in
which it occurs. Changes in the geographic mix or estimated level of annual
income before taxes will affect our overall effective tax rate.
We are regularly audited by various taxing authorities, and sometimes these
audits involve proposed assessments where the ultimate resolution may result in
us owing additional taxes, plus interest and possible penalties. Tax exposures
can involve complex issues and may require an extended period to resolve. We
establish reserves when, despite our belief that our tax return positions are
appropriate and supportable under local tax law, we believe it is more likely
than not that all or some portion of a tax benefit will not be realized as the
result of an audit. We evaluate these reserves each quarter and adjust the
reserves and the related interest in light of changing facts and circumstances
regarding the estimates of tax benefits to be realized, such as the progress of
a tax audit or the expiration of a statute of limitations. We believe the
estimates and assumptions used to support our evaluation of tax benefit
realization are reasonable. However, final determinations of prior-year tax
liabilities, either by settlement with tax authorities or expiration of statutes
of limitations, could be materially different from estimates reflected in assets
and liabilities and historical income tax provisions. The outcome of these final
determinations could have a material effect on our income tax provision, net
income or cash flows in the period in which that determination is made. We
believe our tax positions comply with applicable tax law and that we have
adequately provided for any known tax contingencies.
In order to meet the scheduled principal reduction requirements for our term
loan that were accelerated in the October 2011 amendment to the Senior Credit
Facility, we repatriated $30 million of foreign cash to the U.S. in January
2012. We have recorded a $12 million deferred tax liability at December 31,
2011, based on our current estimate of the U.S. tax impact from the
repatriation. However, due to our currently available net operating losses and
tax credit carryforwards, the repatriation does not have a material tax impact
to the Company. The repatriation reduces the available deferred tax benefits
available to offset future domestic profits. 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 do not plan to
repatriate additional cash and we consider these to be permanently reinvested in
the operations of such subsidiaries. If future events, including material
changes in estimates of cash, working capital and long-term investment
requirements, necessitate that these earnings be distributed, an additional
provision for income taxes may apply, which could materially affect our future
tax expense. Absent the availability of net operating losses or tax credits, the
possible tax consequences of any foreign cash repatriation could be significant.
Allowance for doubtful accounts receivable-We maintain an allowance for
doubtful accounts at an amount we estimate to be sufficient to cover the risk of
collecting less than full payment on our receivables. At December 31, 2012, we
had gross accounts receivable of $202.0 million and our allowance for doubtful
accounts was $1.8 million. Our allowance for doubtful accounts is based upon
specific identification of probable losses. We review our accounts receivable
and reassess our estimates of collectability each quarter. Historically, our bad
debt expense has been a very small percentage of
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our total revenue, as most of our revenues are from large, credit-worthy Global
2000 blue-chip companies and government agencies. Since 2008, as global economic
conditions worsened, and we have taken on certain riskier clients, we have
experienced a higher number of client bankruptcies, clients with financial
difficulties, and clients refusing to pay for services. Our bad debt expense was
$0.8 million, $0.3 million, and $6.4 million in 2012, 2011, and 2010,
respectively. In 2010, four clients accounted for 77% of our total bad debt
expense. If our clients' financial condition or liquidity were to deteriorate,
resulting in an impairment of their ability to make payments, or if customers
were to express dissatisfaction with the services we have provided, additional
allowances may be required. Such items are very difficult to predict and require
significant management judgment.
Accrued compensation and certain other accrued liabilities-Employee
compensation costs are our largest expense category. We have several different
variable compensation programs that are highly dependent on estimates and
judgments, particularly at interim reporting dates. Some programs are
discretionary, while others have quantifiable performance metrics. Certain
programs are annual, while others are quarterly or monthly. Often actual
compensation amounts cannot be determined until after our results are reported.
We believe we make reasonable estimates and judgments using all significant
information available. In addition, the process to estimate the fair value of
share-based compensation also involves various assumptions, inputs, and
judgments. We estimate the amounts required for incurred but not reported health
claims under our self-insured employee benefit programs. Our accrual for health
costs is based on historical experience and specific claim activity and actual
amounts may vary. In the ordinary course of business, we are currently involved
in various claims and legal proceedings. We periodically review the status of
each significant matter and assess our potential financial exposure. If the
potential loss from any claim or legal proceeding is considered probable and the
amount can be reasonably estimated, we accrue a liability for the estimated
loss. We use significant judgment in both the determination of probability and
the determination as to whether an exposure is reasonably estimable. Because of
uncertainties related to these matters, accruals are based only on the best
information at that time. As additional information becomes available, we
reassess the potential liability related to our pending claims and litigation
and may revise our estimates. Such revisions in the estimates of potential
liabilities could have a material impact on our financial position and results
of operations. We expense legal fees as incurred.
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