NCI 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

    x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

    ¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number

000-51579

NCI, Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-3211574
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11730 Plaza America Drive Reston, Virginia	20190-4764
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (703) 707-6900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of November 5, 2012, there were 8,326,350 shares outstanding of the registrant’s Class A common stock. In addition, there are 4,700,000 shares outstanding of the registrant’s Class B common stock, which are convertible on a one-for-one basis into Class A common stock.

NCI, INC.

		PAGE
PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements		1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 4.	Controls and Procedures		18
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings		19
Item 1A.	Risk Factors		19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3.	Defaults Upon Senior Securities		19
Item 4.	Mine Safety Disclosures		19
Item 5.	Other Information		19
Item 6.	Exhibits		20
	Signatures		21

PART 1

FINANCIAL INFORMATION

Item 1. Financial Statements

NCI, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	2012			2011		2012			2011
Revenue	$	88,467		$	132,004	$	278,729		$	443,432
Operating expenses:
Cost of revenue		77,147			116,855		244,855			395,781
General and administrative expenses		6,251			6,768		19,377			18,612
Depreciation and amortization		1,681			1,870		5,145			4,995
Stock option tender offer		2,311			—		2,311			—
Acquisition and integration related expenses		—			54		—			1,003
Goodwill impairment		92,793			—		92,793			—
Total operating expenses		180,184			125,547		364,481			420,391
Operating income (loss)		(91,717	)		6,457		(85,752	)		23,041
Interest expense, net		266			503		1,077			1,183
Income (loss) before income taxes		(91,983	)		5,954		(86,829	)		21,858
Provision (benefit) for income taxes		(36,788	)		2,472		(34,698	)		8,825
Net income (loss)	$	(55,195	)	$	3,482	$	(52,131	)	$	13,033
Earnings (loss) per common and common equivalent share:
Basic:
Weighted average shares outstanding		13,249			13,588		13,463			13,646
Net income (loss) per share	$	(4.17	)	$	0.26	$	(3.87	)	$	0.96
Diluted:
Weighted average shares outstanding		13,249			13,791		13,463			13,875
Net income (loss) per share	$	(4.17	)	$	0.25	$	(3.87	)	$	0.94

The accompanying notes are an integral

part of these consolidated financial statements

1

NCI, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except par value)

	As of September 30, 2012			As of December 31, 2011
Assets:
Current assets:
Cash and cash equivalents	$	3,084		$	2,819
Accounts receivable, net		51,631			95,075
Deferred tax assets, net		680			4,152
Prepaid expenses and other current assets		8,057			3,159
Total current assets		63,452			105,205
Property and equipment, net		13,383			15,495
Other assets		1,468			1,875
Deferred tax assets, net		27,127			—
Intangible assets, net		8,021			9,717
Goodwill		57,529			150,322
Total assets	$	170,980		$	282,614
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	12,985		$	30,018
Accrued salaries and benefits		17,783			18,717
Deferred revenue		2,061			1,987
Other accrued expenses		6,452			5,697
Total current liabilities		39,281			56,419
Long-term debt		21,000			54,000
Deferred tax liabilities, net		—			6,165
Other long-term liabilities		2,986			2,229
Total liabilities		63,267			118,813
Stockholders’ equity:
Class A common stock, $0.019 par value—37,500 shares authorized; 9,149 shares issued and 8,326 shares outstanding as of September 30, 2012, and 9,163 shares issued and 8,875 shares outstanding as of December 31, 2011		174			174
Class B common stock, $0.019 par value—12,500 shares authorized; 4,700 shares issued and outstanding as of September 30, 2012 and December 31, 2011		89			89
Additional paid-in capital		69,336			69,937
Treasury stock at cost— 823 shares of Class A common stock as of September 30, 2012, and 288 shares of Class A common stock as of December 31, 2011		(7,811	)		(4,455	)
Retained earnings		45,925			98,056
Total stockholders’ equity		107,713			163,801
Total liabilities and stockholders’ equity	$	170,980		$	282,614

The accompanying notes are an integral

part of these consolidated financial statements

2

NCI, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Nine months ended September 30,
	2012			2011
Cash flows from operating activities:
Net (loss) income	$	(52,131	)	$	13,033
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Goodwill Impairment		92,793			—
Stock-based compensation expense related to stock option tender offer		2,242			—
Depreciation and amortization		5,149			4,995
Share-based payments		1,703			1,273
Deferred income taxes		(29,820	)		388
Changes in operating assets and liabilities:
Accounts receivable, net		43,444			45,381
Prepaid expenses and other assets		(4,490	)		(1,244	)
Accounts payable		(17,034	)		(32,566	)
Accrued expenses		654			(4,992	)
Net cash provided by operating activities		42,510			26,268
Cash flows from investing activities:
Purchases of property and equipment		(1,343	)		(2,080	)
Proceeds from sale of property and equipment		—			26
Cash paid for acquisition, net of cash acquired		—			(63,327	)
Net cash used in investing activities		(1,343	)		(65,381	)
Cash flows from financing activities:
Payments related to stock option tender offer		(1,320	)		—
APIC from cancellation of stock options		(3,236	)		—
Borrowings under credit facility		103,138			165,966
Repayments of credit facility		(136,138	)		(124,266	)
Principal payments under capital lease obligations		—			(23	)
Proceeds from exercise of stock options		10			252
Excess tax deductions from stock options		—			22
Purchases of Class A common stock		(3,355	)		(4,455	)
Net cash (used in) provided by financing activities		(40,901	)		37,496
Net change in cash and cash equivalents		266			(1,617	)
Cash and cash equivalents, beginning of period		2,818			2,791
Cash and cash equivalents, end of period	$	3,084		$	1,174
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,048		$	1,273
Income taxes	$	2,927		$	9,927

The accompanying notes are an integral

part of these consolidated financial statements

3

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of NCI, Inc. and its subsidiaries (“NCI” or “the Company”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to fairly present the Company’s financial position as of September 30, 2012 and its results of operations and cash flows for the three and nine months ended September 30, 2012 and 2011. The information disclosed in the notes to the financial statements for these periods is unaudited. The current period’s results of operations are not necessarily indicative of results that may be achieved for any future period. For further information, refer to the financial statements and footnotes included in NCI’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC.

2. Business Overview

NCI provides IT and professional services and solutions by leveraging our eight core service offerings: enterprise systems management; network engineering; cybersecurity and information assurance; software development and systems engineering; program management and lifecycle support; engineering and logistics; health IT and informatics; and training and simulation. The Company provides these services to U.S. Defense, Intelligence, and Federal Civilian agencies. The majority of the Company’s revenue was derived from contracts with the U.S. Federal Government, directly as a prime contractor or as a subcontractor. The Company primarily conducts business throughout the United States.

3. Earnings Per Share

Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per share include the incremental effect of stock options calculated using the treasury stock method. Shares that are anti-dilutive are not included in the computation of diluted earnings per share. For the three and nine months ended September 30, 2012, the diluted effect of stock options of approximately 12,161 and 17,123 shares, respectively, were not included in the computation of diluted loss per share as the net loss would have made their effect anti-dilutive. For the three and nine months ended September 30, 2012, approximately 1,370,262 and 1,393,893 shares, respectively, were not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive. For the three and nine months ended September 30, 2011, approximately 250,000 and 156,000 shares, respectively, were not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive. The following details the historical computation of basic and diluted earnings per common share (Class A and Class B) for the three and nine months ended September 30, 2012 and 2011.

	Three months ended September 30,					Nine months ended September 30,
	2012			2011		2012			2011
	(in thousands, except per share data)
Net (loss) Income	$	(55,195	)	$	3,482	$	(52,131	)	$	13,033
Weighted average number of basic shares outstanding during the period		13,249			13,588		13,463			13,646
Dilutive effect of stock options after application of treasury stock method		—			203		—			229
Weighted average number of diluted shares outstanding during the period		13,249			13,791		13,463			13,875
Basic (loss) earnings per share	$	(4.17	)	$	0.26	$	(3.87	)	$	0.96
Diluted (loss) earnings per share	$	(4.17	)	$	0.25	$	(3.87	)	$	0.94

4

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

4. Accounts Receivable (in thousands)

Accounts receivable consist of billed and unbilled amounts at the end of each period:

	As of
	September 30, 2012		December 31, 2011
Billed receivables	$	14,051	$	41,905
Unbilled receivables:
Amounts billable at end of period		19,812		34,196
Other		18,570		19,564
Total unbilled receivables		38,382		53,760
Total accounts receivable		52,433		95,665
Less: allowance for doubtful accounts		802		590
Total accounts receivable, net	$	51,631	$	95,075

Other unbilled receivables primarily consist of amounts that will be billed upon milestone completions and other accrued amounts that cannot be billed as of the end of the period. All unbilled receivables are expected to be billed and collected within the next one year.

5. Property and Equipment (in thousands)

The following table details property and equipment at the end of each period:

	As of
	September 30, 2012		December 31, 2011
Property and equipment
Furniture and equipment	$	21,827	$	22,496
Leasehold improvements		7,520		6,963
Real property		549		549
		29,896		30,008
Less: Accumulated depreciation and amortization		16,512		14,513
Property and equipment, net	$	13,384	$	15,495

Depreciation expense for the three months ended September 30, 2012 and 2011 was $1.2 million and $1.1 million, respectively. Depreciation expense for the nine months ended September 30, 2012 and 2011 was $3.4 million and $2.9 million, respectively.

6. Intangible Assets (in thousands)

The following table details intangible assets at the end of each period:

	As of
	September 30, 2012		December 31, 2011
Contract and customer relationships	$	20,987	$	20,987
Less: Accumulated amortization		13,001		11,365
		7,986		9,622
Non-compete agreements		2,038		2,038
Less: Accumulated amortization		2,003		1,943
		35		95
Intangible assets, net	$	8,021	$	9,717

5

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Amortization expense for the three months ended September 30, 2012 and 2011 was $0.5 million and $0.8 million, respectively. Amortization expense for the nine months ended September 30, 2012 and 2011 was $1.7 million and $2.1 million, respectively.

7. Stock Option Tender Offer

In September 2012, the Company completed a cash tender offer for certain vested and unvested out-of-the-money stock options held by current and former employees, officers, and directors of NCI that were granted prior to January 1, 2012, provided that such stock options had not expired or terminated prior to the expiration of the offering period. The offer expired on September 19, 2012. Altogether we repurchased a total of 963,579 options for an aggregate cash purchase price of $1.3 million, which was paid in exchange for the cancellation of the eligible options. As a result of these repurchases, the Company incurred a charge of $2.3 million consisting of a non-cash charge of $2.2 million that consisted of the remaining unamortized stock based compensation expense associated with the unvested portion of the repurchased options and a small amount paid in excess of the estimated fair value of the options on the date of purchase, plus $0.1 million related to associated payroll taxes, professional fees and other costs.

The aggregate amount of the payments made in exchange for eligible options was charged to stockholder’s equity for stock options purchased at or below the estimated fair value of the options on the date of repurchase, which was the $1.3 million cash purchase price.

8. Share-Based Payments

During the three months ended September 30, 2012, the Company granted zero stock options and had zero exercises of options. During the nine months ended September 30, 2012, the Company granted 679,000 stock options and had exercises of 5,263 options. As of September 30, 2012, there were approximately 0.7 million options outstanding.

During the three and nine months ended September 30, 2012, the Company granted zero shares of restricted stock and 25,000 shares of restricted stock, respectively, and none of those shares have vested. During the three and nine months ended September 30, 2012, 12,500 shares of restricted stock vested and 32,500 shares of restricted stock vested, respectively, from restricted stock grants issued in 2011. As of September 30, 2012, there were 122,500 shares of restricted stock outstanding.

The following table summarizes stock compensation, exclusive of the stock option tender offer, for the three and nine months ended September 30, 2012 and 2011:

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
	(in thousands)
Cost of revenue	$	190	$	234	$	577	$	460
General and administrative		344		420		1,126		812
	$	534	$	654	$	1,703	$	1,272

As of September 30, 2012, there was approximately $3.0 million of total unrecognized compensation cost related to unvested stock compensation arrangements. This cost is expected to be fully amortized over the next five years, with approximately $0.2 million, $1.0 million, $1.0 million, $0.7 million, and $0.1 million amortized during the remainder of 2012, 2013, 2014, 2015, and 2016, respectively. The cost of stock compensation is included in the Company’s Consolidated Statements of Income before, or in conjunction with, the vesting of options.

9. Debt

The Company’s senior credit facility, as amended in December 2010, is a revolving line of credit with a borrowing capacity of up to a $125.0 million principal amount. The credit facility also has a $50.0 million accordion feature allowing us to increase our borrowing capacity to up to a $175.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding borrowings are collateralized by a security interest in substantially all the Company’s assets. The lenders also require a direct assignment of all contracts at the lenders’ discretion. The outstanding balance under the credit facility accrues

6

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

interest based on LIBOR plus an applicable margin, ranging from 200 to 300 basis points, based on the ratio of our outstanding senior funded debt to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) as defined in the credit facility agreement. The credit facility expires on December 13, 2014.

The credit facility contains various restrictive covenants that, among other things, restrict the Company’s ability to: incur or guarantee additional debt; make certain distributions, investments and other restricted payments, including cash dividends on the Company’s outstanding common stock; enter into transactions with certain affiliates; create or permit certain liens; and consolidate, merge, or sell assets. In addition, the credit facility contains certain financial covenants that require the Company to: maintain a minimum tangible net worth; maintain a minimum fixed charge coverage ratio and a minimum funded debt to earnings ratio; and limit capital expenditures below certain thresholds.

The credit facility allows us to use borrowings thereunder of up to $25 million to repurchase shares of the Company’s common stock. During the third quarter of 2012, NCI repurchased $3.4 million of the Company’s Class A common stock. At September 30, 2012, $17.2 million was remaining under the Board of Directors’ authorization for shares repurchases.

During the third quarter of 2012, NCI had a weighted average outstanding loan balance of $24.5 million which accrued interest at a weighted average borrowing rate of 2.5%. During the third quarter of 2011, NCI had a weighted average outstanding loan balance of $83.6 million which accrued interest at a weighted average borrowing rate of 2.3%. During the first nine months of 2012, NCI had a weighted average outstanding loan balance of $41.3 million which accrued interest at a weighted average borrowing rate of approximately 2.5%. During the first nine months of 2011, NCI had a weighted average outstanding loan balance of $61.5 million which accrued interest at a weighted average borrowing rate of approximately 2.2%. As of September 30, 2012 and December 31, 2011, the Company was in compliance with all its loan covenants. NCI did receive a waiver from the minimum tangible net worth covenant as of September 30, 2012, which the Company would not have met because of the goodwill impairment charge.

As of September 30, 2012, the outstanding balance under the credit facility was $21.0 million and interest accrued at a rate of LIBOR plus 225 basis points, or 2.5%. As of December 31, 2011, the outstanding balance under the credit facility was $54.0 million and interest accrued at a rate of LIBOR plus 225 basis points, or 2.5%. As of September 30, 2012 and December 31, 2010, the Company was in compliance with all of its loan covenants.

10. AdvanceMed Acquisition

On April 1, 2011, pursuant to the terms of a Securities Purchase Agreement (the “Purchase Agreement”) dated February 24, 2011, NCI completed its purchase of 100% of the stock of AdvanceMed Corporation (AdvanceMed) from an affiliate of Computer Sciences Corporation. NCI acquired AdvanceMed to enhance the scope of its information technology and professional services, as well as to develop the Company’s data analytics and informatics practice.

Under the terms of the Purchase Agreement, NCI acquired AdvanceMed for $63.3 million in cash. The transaction was funded through cash on hand and borrowings of approximately $62.0 million under NCI’s senior credit facility. The acquisition has been accounted for under the purchase method of accounting which requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value. The excess of the purchase consideration over the amounts assigned to tangible and intangible assets acquired and liabilities assumed is recognized as goodwill. Total acquisition and integration related expenses were approximately $1.0 million and all were incurred during the year ended December 31, 2011.

7

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. AdvanceMed Acquisition, continued

Final Allocation of Purchase Price (in thousands)

The Company made an allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company obtains this information during due diligence and through other sources. In the periods after closing, as the Company obtains additional information about these assets and liabilities, including finalizing asset appraisals, it is able to refine the estimates of fair value and more accurately allocate the purchase price. Only information available for estimates as of the acquisition date are considered for subsequent adjustment. The Company finalized the valuation of acquired intangible assets in connection with the AdvanceMed acquisition during the first quarter of 2012.

Estimated fair values of purchased assets and liabilities assumed:

Accounts receivable	$	12,701
Property and equipment		5,330
Definite-lived intangible assets		6,045
Other assets		421
Goodwill		43,742
Less liabilities assumed		(4,912	)
	$	63,327

The fair value of the definite-lived intangible asset for customer relationships is based on existing customer contracts and anticipated follow-on contracts with existing customers and is expected to have an 11 year life. Amortization of the definite-lived intangible asset for existing customer contracts and anticipated follow-on contracts with existing customers is based on an accelerated method.

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

11. Goodwill (in thousands)

On October 1 of each year, NCI performs its annual fair value analysis of the Company. In addition, interim evaluations are performed when NCI determines that a triggering event has occurred that would more likely than not reduce fair value of the Company’s goodwill below its carrying or book value. If goodwill becomes impaired, the Company would record a charge to earnings in the financial statements during the period in which any impairment of goodwill is determined. During the third quarter of 2012, due to a continued decline in the market price of the Company’s stock, the market capitalization of the Company remained below the carrying value. In addition, federal budget issues, delayed award activity and the resulting expectations for the Company’s future performance all factored into the determination that a potential triggering event had occurred during the third quarter ended September 30, 2012. As a result, the Company performed an interim fair value analysis.

A two-step impairment test is used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized. The first step is used to identify any potential impairment by comparing the fair value of the Company with its carrying amount. The second step is used to measure the amount of impairment loss, if any, by comparing the implied fair value of goodwill with the carry amount of goodwill. Management, with the assistance of a third party valuation specialist, completed the analysis for the first step and determined that the Company’s implied fair value was below its carrying value as of September 30, 2012. As a result, the Company commenced the second step to determine the implied fair value of goodwill. The estimated fair value of the Company was calculated using a combination of discounted cash flow projections, market values for comparable businesses, and terms, prices and conditions found in sales of comparable businesses.

Based on the analysis, management has concluded that a loss as of September 30, 2012 is probable and can be reasonably estimated. Accordingly, the Company recorded an impairment charge of $92.8 million during the three months ended September 30, 2012, which represents management’s best estimate of the impairment loss. Any adjustments to this impairment charge will be made in the fourth quarter of 2012. A tax benefit totaling $37.1 million was recorded related to the goodwill impairment charge.

The following table represents changes in goodwill:

	December 31, 2011		Goodwill Impairment		September 30, 2012
Goodwill	$	150,322	$	92,793	$	57,529

8

NCI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12. Restructuring Charge (in thousands)

During December 2011, management committed to, implemented, and completed a restructuring plan. The restructuring was done to reduce costs through downsizing our existing work force and physical locations.

The activity and balance of the restructuring liability accounts for the year ended December 31, 2011 (all within the fourth quarter of 2011) and for the nine months ended September 30, 2012 are as follows:

	Severance and Related Costs			Lease and Facilities Exit Costs			Total
Balance as of January 1, 2011	$	—		$	—		$	—
Restructuring costs		451			2,688			3,139
Adjustments		—			—			—
Cash payments		(87	)		(111	)		(198	)
Balance as of December 31, 2011		364			2,577			2,941
Restructuring costs		—			—			—
Adjustments		—			(4	)		(4	)
Cash payments		(364	)		(715	)		(1,079	)
Balance as of September 30, 2012	$	0		$	1,858		$	1,858
Amounts contained in balance sheet as of September 30, 2012
Other accrued expenses		—			693			693
Other long-term liabilities		—			1,165			1,165
Total	$	—		$	1,858		$	1,858

The accrued amounts related to the lease and facilities exit costs will be reduced over the respective lease terms, the longest of which extends through 2017.

13. Related Party Transactions

The Company purchased services under a subcontract from Net Commerce Corporation, which is a Government contractor wholly-owned by Mr. Rajiv Narang, the son of Mr. Charles K. Narang, the Chairman and Chief Executive Officer of the Company. For the three months ended September 30, 2012 and 2011, the expense incurred under this agreement was approximately $231,000 and $271,000, respectively. For the nine months ended September 30, 2012 and 2011, the expense incurred under this agreement was approximately $642,000 and $619,000, respectively. As of September 30, 2012 and December 31, 2011, approximate outstanding amounts due to Net Commerce Corporation were $81,000 and $76,000, respectively.

The Company rents office space from Gur Parsaad Properties, Ltd. which is controlled by Dr. Gurvinder Pal Singh. Dr. Singh was a member of NCI’s Board of Directors until September 9, 2010. The lease is for approximately 41,000 square feet at $15.00 per square foot with annual escalation and shared common area operating expenses. The lease expires on September 30, 2015. For the three months ended September 30, 2012 and 2011, NCI paid $260,000 and $214,000, respectively, for rent to Gur Parsaad Properties, Ltd. For the nine months ended September 30, 2012 and 2011, NCI paid $782,000 and $705,000, respectively, for rent to Gur Parsaad Properties, Ltd. As of September 30, 2012 and December 31, 2011, there were no outstanding amounts due to Gur Parsaad Properties, Ltd.

The Company believes these agreements were at market rates as of the date of each agreement.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding our business, financial condition, results of operations, and prospects. There are statements made herein, which may not address historical facts and, therefore, could be interpreted to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. The factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following:

• Our dependence on our contracts with U.S. Federal Government agencies, particularly within the U.S. Department of Defense, for the majority our revenue; a change in funding of our contracts due to bid protests; changes in U.S. Federal Government spending priorities; changes in contract type, particularly changes from cost-plus fee or time-and-material type contracts to firm fixed-price type contracts

• A reduction in the overall U.S. Defense budget, volatility in spending authorizations for Defense and Intelligence-related programs by the U.S. Federal Government or a shift in spending to programs in areas where we do not currently provide services

• U.S. Federal Governmental shutdowns (such as the shutdown that occurred during the U.S. Federal Government’s 1996 fiscal year) and other potential delays in the U.S. Federal Government appropriations process, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011)

• Changes in U.S. Federal Government programs or requirements, including the increased use of small business providers

• Failure to achieve contract awards in connection with recompetes for present business and/or competition for new business

• U.S. Federal Government agencies more frequently awarding contracts on a technically acceptable/lowest cost basis in order to reduce expenditures

• Adverse results of U.S. Federal Government audits of our government contracts

• Competitive factors, such as pricing pressures and competition to hire and retain employees (particularly those with security clearances)

• Failure to identify and successfully integrate future acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions, or effectively integrate acquisitions appropriate to the achievement of our strategic plans

• Economic conditions in the United States, including conditions that result from terrorist activities or war

• Material changes in policies, laws, or regulations applicable to our businesses, particularly legislation affecting (i) U.S. Federal Government contracts for services, (ii) outsourcing of activities that have been performed by the U.S. Federal Government, (iii) U.S. Federal Government contracts containing organizational conflict of interest clauses, (iv) delays related to agency specific funding freezes, and (v) competition for task orders under Government Wide Acquisition Contracts, agency-specific Indefinite Delivery/Indefinite Quantity contracts and/or schedule contracts with the General Services Administration

• U.S. Federal Government’s “insourcing” of previously contracted support services and the realignment of funds to non-defense related programs

• Our ability to achieve the objectives of near-term or long-range business plans, particularly revenue growth

• Risk of contract non-performance or termination

Some of these important factors are outlined under Item 1A. Risk Factors and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC, and from time to time, in other filings with the SEC, such as our Forms 8-K and 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, or performance. We undertake no obligation to update publicly or revise any forward-looking statements. You should not place undue reliance on any forward-looking statements.

In this document, unless the context indicates otherwise, the terms “Company,” “NCI,” “we,” “us,” and “our” refer to NCI, Inc., a Delaware corporation, and, where appropriate, its subsidiaries.

10

Overview

We are a provider of information technology (IT) and professional engineering services and solutions to U.S. Federal Government agencies. Our technology and industry expertise enables us to provide a full spectrum of services and solutions that assist our customers in achieving their program goals. We deliver a wide range of complex services and solutions by leveraging our skills across eight core competencies.

• Enterprise systems management

• Network engineering

• Cybersecurity and information assurance

• Software development and systems engineering

• Program management and lifecycle support

• Engineering and logistics

• Health IT and informatics

• Training and simulation

We generate the majority of our revenue from U.S. Federal Government contracts. We report operating results and financial data as one operating segment. Revenue from our contracts and task orders is generally linked to trends in U.S. Federal Government spending by defense, intelligence, and U.S. Federal civilian agencies.

Key Financial Metrics

Prime Contractor Revenue

The following table shows our revenue derived from contracts on which we serve as a prime contractor.

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenue derived from prime contracts		87	%		89	%		87	%		90	%

Customer Group Revenue

The following table shows our revenue from the client groups listed as a percentage of total revenue for the period shown.

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Department of Defense and intelligence agencies		75	%		82	%		76	%		87	%
U.S. Federal civilian agencies		25	%		18	%		24	%		13	%

The increase in the percentage of total revenue earned on work for Federal civilian agencies was primarily due to our revenue earned on work for U.S Federal civilian agencies remaining fairly constant in absolute dollars combined with lower revenue earned on work for Federal Department of Defense and intelligence agencies.

Contract Type Revenue

Our services and solutions are provided under three types of contracts: time-and-materials; cost-plus fee; and firm fixed-price. Our contract mix varies from year to year due to numerous factors including our business strategies and U.S. Federal Government procurement objectives.

The following table shows our revenue from each of these types of contracts as a percentage of our total revenue for the periods shown.

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	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Time-and-materials		24	%		30	%		25	%		44	%
Cost-plus fee		49	%		43	%		51	%		29	%
Firm fixed-price		27	%		27	%		24	%		27	%

The increase in our revenue under cost-plus fee type contracts primarily resulted from the transition of our U.S. Army Program Executive Office (PEO) Soldier contract from a time-and-materials type contract to a cost-plus fee type contract during the second quarter of 2011.

The amount of risk and potential reward varies under each type of contract. Under time-and-materials contracts, we are paid a fixed hourly rate by labor category. To the extent that our actual labor costs vary significantly from the negotiated hourly rates, we may generate more or less than the targeted amount of profit. We are typically reimbursed for other contract direct costs and expenses at our cost, and typically receive no fee on those costs. Under cost-plus fee contracts, there is limited financial risk, because we are reimbursed all our allowable costs, and therefore the profit margins tend to be lower on cost-plus fee contracts. Under firm fixed-price contracts, we perform specific tasks or provide specified goods for a predetermined price. Compared to time-and-materials and cost-plus fee contracts, firm fixed-price service contracts generally offer higher profit margin opportunities but involve greater financial risk because we would bear the impact of potential cost overruns in return for the full benefit of any cost savings. The majority of the services work we do under firm fixed-price service contracts is firm fixed-price level-of-effort work, which has a lower risk than firm fixed-price completion or deliverable contracts.

Contract Backlog

As of	Funded backlog		Total backlog
	(in millions)
September 30, 2012	$	249	$	910
December 31, 2011		220		1,001

We define backlog as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period and from the option periods of those contracts, assuming the exercise of all related options. We define funded backlog as the portion of backlog for which funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing agency, less the amount of revenue we have previously recognized. Our backlog does not include any estimate of future potential delivery orders that might be awarded under our Government Wide Acquisition Contract (GWAC) or other multiple-award contract vehicles. Additional information on how we determine backlog is included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC.

Other Significant Financial Events

AdvanceMed Acquisition

On April 1, 2011, pursuant to the terms of a Securities Purchase Agreement (the “Purchase Agreement”) dated February 24, 2011, we completed our purchase of 100% of the stock of AdvanceMed from an affiliate of Computer Sciences Corporation. NCI acquired AdvanceMed to enhance the scope of our information technology and professional services in general and to develop our data analytics and informatics practice.

Under the terms of the Purchase Agreement, we acquired AdvanceMed for $63.3 million in cash. The transaction was funded through cash on hand and borrowings under our existing credit facility.

The acquisition has been accounted for under the Purchase method of accounting which requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value. The excess of the purchase consideration over the amounts assigned to tangible or intangible assets acquired and liabilities assumed is recognized as goodwill.

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Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

The following table sets forth certain items from our consolidated statements of income and expresses each item in dollars and as a percentage of revenue for the periods indicated:

	Three months ended September 30,
	2012			2011		2012			2011
	(in thousands)					(as a percentage of revenue)
Revenue	$	88,467		$	132,004		100.0	%		100.0	%
Operating expenses:
Cost of revenue		77,147			116,855		87.2			88.5
General and administrative expenses		6,251			6,768		7.1			5.2
Depreciation and amortization		1,681			1,870		1.9			1.4
Stock option purchase		2,311			—		2.6			0.0
Acquisition and integration related expenses		—			54		0.0			0.0
Goodwill impairment		92,793			—		104.9			0.0
Total operating expenses		180,184			125,547		203.7			95.1
Operating income (loss)		(91,717	)		6,457		(103.7	)		4.9
Interest expense, net		266			503		0.3			0.4
Income (loss) before income taxes		(91,983	)		5,954		(104.0	)		4.5
Provision (benefit) for income taxes		(36,788	)		2,472		41.6			1.9
Net income (loss)	$	(55,195	)	$	3,482		(62.4	)%		2.6	%

Revenue

For the three months ended September 30, 2012, total revenue decreased by 33.0%, or $43.5 million, over the same period a year ago. This decrease in revenue was primarily due to a net decrease of approximately $22.5 million as a result of reductions of scope of work, the expiration of task orders and contracts, and certain lost contract recompetes, and the ending of our Base Realignment and Closure (BRAC) related and other non-core programs, which collectively accounted for $16.3 million of the decline in revenue year-over-year. Our PEO Soldier program decreased $4.7 million year-over-year mostly due to a reduced scope of work. During the third quarter of 2012, our PEO Soldier program accounted for 16.3% of our revenue as compared with 14.5% of our revenue for the same period during 2011.

Cost of revenue

Cost of revenue decreased 34.0%, or $39.7 million, for the three months ended September 30, 2012, as compared to the same period a year ago. The decrease was attributable to decreases in direct labor and associated indirect costs and hardware and product related expenses associated with the ending of our BRAC related and other non-core programs. As a percentage of revenue, cost of revenue was 87.2% and 88.5% for the quarters ended September 30, 2012 and 2011, respectively. The 1.3% decrease in cost of revenue as a percentage of revenue resulted from a decrease in lower-margin BRAC related and other non-core material costs and direct labor costs for the quarter ended September 30, 2012, compared to the quarter ended September 30, 2011, and from losses incurred on two unrelated fixed-price contracts that contributed to the cost of revenue for the quarter ended September 30, 2011.

General and administrative expenses

General and administrative expenses decreased 7.6%, or $0.5 million, for the three months ended September 30, 2012 as compared to the same period a year ago. The decrease was primarily due to lower compensation expense and to a lesser extent the timing of certain accrued expenses.

Depreciation and amortization

Depreciation and amortization expense was approximately $1.7 and $1.9 million for the quarters ended September 30, 2012 and 2011, respectively. The decrease was primarily due to reduced amortization expense of intangible assets associated with prior acquisitions.

Stock option purchase

In September 2012, we completed a cash tender offer for certain out-of-the-money stock options held by current and former employees, officers, and directors of NCI that were granted prior to January 1, 2012, provided that such stock options had not expired or terminated prior to the

13

expiration of the offering period on September 19, 2012. For the three months ended September 30, 2012, costs associated with the stock option purchase were approximately $2.3 principally consisting of $2.2 million related to the remaining unamortized stock based compensation expense associated with the unvested portion of the options tendered in the offer, plus $0.1 million related to associated payroll taxes, professional fees and other costs.

Acquisition and integration related expenses

On April 1, 2011, we completed the acquisition of AdvanceMed. For the three months ended September 30, 2011, acquisition expenses were $0.1 million principally consisting of accounting, legal and investment banking fees. There were no acquisition related costs for the three months ended September 30, 2012.

Goodwill impairment

On September 30, 2012, we completed a test for goodwill impairment due to certain triggering events and determined a goodwill impairment existed. For the three months ended September 30, 2012, we took a $92.8 million goodwill impairment. No goodwill impairment existed for the three months ended September 30, 2011.

Operating income

For the three months ended September 30, 2012, net operating loss was $91.7 million, or 103.7% of revenue, as compared to $6.5 million, or 4.9% of revenue, for the three months ended September 30, 2011. Operating income was lower for the three months ended September 30, 2012 due to costs associated with the impairment charge and the stock option tender offer.

Interest Expense, net

Net interest expense was approximately $0.3 million for the quarter ended September 30, 2012 as compared to net interest expense of $0.5 million for the corresponding quarter during 2011. The decrease was primarily attributed to a lower overall weighted average loan balance, offset slightly by a higher weighted average borrowing rate.

Income taxes

For the three months ended September 30, 2012, the decrease in income taxes of $39.3 million was the result of the decrease in pretax income due to the goodwill impairment, partially offset by a slightly lower effective income tax rate. The effective income tax rate was approximately 40.0% and 41.5% for the quarters ended September 30, 2012 and 2011, respectively. The lower effective income tax rate for the three months ended September 30, 2012 was the result of an increase in the permanent differences as a percent of lower book income due to the goodwill impairment.

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Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

The following table sets forth certain items from our consolidated statements of income and expresses each item in dollars and as a percentage of revenue for the periods indicated:

	Nine months ended September 30,
	2012			2011		2012			2011
	(in thousands)					(as a percentage of revenue)
Revenue	$	278,729		$	443,432		100.0	%		100.0	%
Operating expenses:
Cost of revenue		244,855			395,781		87.9			89.3
General and administrative expenses		19,377			18,612		7.0			4.2
Depreciation and amortization		5,145			4,995		1.8			1.1
Stock option tender offer		2,311			—		0.8			0.0
Acquisition and integration related expenses		—			1,003		0.0			0.2
Goodwill impairment		92,793			—		33.3			0.0
Total operating expenses		364,481			420,391		130.8			94.8
Operating income (loss)		(85,752	)		23,041		(30.8	)		5.2
Interest expense, net		1,077			1,183		0.4			0.3
Income (loss) before income taxes		(86,829	)		21,858		(31.2	)		4.9
Provision (benefit) for income taxes		(34,698	)		8,825		12.5			2.0
Net income (loss)	$	(52,131	)	$	13,033		(18.7	)%		2.9	%

Revenue

For the nine months ended September 30, 2012, total revenue decreased 37.1%, or $164.7 million, over the same period a year ago. This decrease in revenue was primarily due to the ending of our BRAC related and other non-core programs in 2011 which collectively accounted for $79.9 million of the decrease in revenue year-over-year, and a net decrease of approximately $65.4 million in revenue as a result of reductions of scope of work, the expiration of task orders and contracts, and certain lost contract recompetes. Our PEO Soldier program decreased $19.4 million in revenue year-over-year. These decreases were partially offset by revenue from our acquisition of AdvanceMed in 2011. During the first nine months of 2012, our PEO Soldier program accounted for 17.2% of our revenue as compared with 15.2% of our revenue for the same period during 2011. The increase was due to our top line revenue year over year decreasing more than the dollar decrease in the PEO Soldier program year over year.

Cost of revenue

Cost of revenue decreased 38.1%, or $150.9 million, for the nine months ended September 30, 2012, as compared to the same period a year ago. The decrease was attributable to decreases in direct labor and associated indirect costs, subcontractor labor costs, and hardware and product related costs due to the decrease in revenue primarily associated with the ending of our BRAC related and other non-core programs in 2011. As a percentage of revenue, cost of revenue was 87.9% and 89.3% for the nine months ended September 30, 2012 and 2011, respectively. The 1.6% decrease in cost of revenue as a percentage of revenue is due to decreases in lower-margin BRAC related and other non-core material costs, subcontractor labor costs and direct labor costs, and from losses incurred on two unrelated fixed-price contracts that contributed to the cost of revenue for the nine months ended September 30, 2011.

General and administrative expenses

General and administrative expenses increased 4.1%, or $0.8 million, for the nine months ended September 30, 2012, as compared to the same period a year ago. The increase was primarily due to general and administrative expenses associated with programs resulting from the acquisition of AdvanceMed, and higher stock compensation expense.

Depreciation and amortization

Depreciation and amortization expense was approximately $5.1 and $5.0 million for the nine months ended September 30, 2012 and 2011, respectively. The increase was primarily associated with the AdvanceMed acquisition which included significant property and equipment and purchased identified intangible assets.

Stock option tender offer

In September 2012, we completed a cash tender offer for certain out-of-the-money stock options held by current and former employees, officers, and directors of NCI that were granted prior to January 1, 2012, provided that such stock options had not expired or terminated prior to the

15

expiration of the offering period on September 19, 2012. For the nine months ended September 30, 2012, costs associated with the stock option purchase were approximately $2.3 million principally consisting of $2.2 million related to the remaining unamortized stock based compensation expense associated with the unvested portion of the options tendered in the offer, plus $0.1 million related to associated payroll taxes, professional fees and other costs.

Goodwill impairment

On September 30, 2012, we completed a test for goodwill impairment due to certain triggering events and determined a goodwill impairment existed. For the nine months ended September 30, 2012, we took a $92.8 million goodwill impairment. No goodwill impairment existed for the nine months ended September 30, 2011.

Acquisition and integration related expenses

On April 1, 2011, we completed the acquisition of AdvanceMed. For the nine months ended September 30, 2011, acquisition expenses were $0.1 million, principally consisting of accounting, legal and investment banking fees. There were no acquisition-related costs for the nine months ended September 30, 2012.

Operating income

For the nine months ended September 30, 2012, net operating loss was $85.8 million, or 30.8% of revenue, as compared to $23.0 million, or 5.2% of revenue, for the nine months ended September 30, 2011. Operating income was lower for the nine months ended September 30, 2012 due to costs associated with the impairment charge and the stock option tender offer, lower labor-related profit margin on the PEO Soldier program, and higher indirect costs as a percentage of revenue.

Interest expense, net

Net interest expense was approximately $1.1 million for the nine months ended September 30, 2012 and approximately $1.2 million for the nine months ended September 30, 2011. The decrease was primarily attributed to a higher weighted average borrowing rate on a lower weighted average loan and an increase in the interest expense related to the unutilized portion of NCI’s credit facility.

Income taxes

For the nine months ended September 30, 2012, income taxes decreased by $43.5 million from $8.8 million for the nine months ended September 30, 2011, on a lower pretax income and a slightly lower effective tax rate. The effective income tax rate for the nine months ended September 30, 2012 was approximately 40.0% as compared to an effective income tax rate of 40.4% for the nine months ended September 30, 2011. The lower effective income tax rate for the nine months ended September 30, 2012 was the result of lower permanent difference amounts as a percent of lower book income due to the goodwill impairment.

Liquidity and Capital Resources

Our primary liquidity needs are for financing working capital, capital expenditures, and making selective strategic acquisitions. Historically, we have relied primarily on our cash flow from operations and borrowings under our credit facility to provide the capital for our liquidity needs. As part of our growth strategy, we may pursue acquisitions that could require us to incur additional debt or issue new equity. We expect the combination of our current cash, cash flow from operations, and the available borrowing capacity under our credit facility to continue to meet our normal working capital and capital expenditure requirements.

The balance of accounts receivable decreased by $43.4 million to $51.6 million at the end of the third quarter 2012, as compared to the fourth quarter of 2011. Day’s sales outstanding of accounts receivable (DSO) decreased to 54 days as of September 30, 2012 down 22 days from the 76 days reported as of December 31, 2011. The decrease in DSO is associated with the collection of receivables outstanding that had been delayed by the adjudication and payment of award fees on several contracts, the timing of certain milestone payments for certain fixed price contracts, as well as the accelerated payment of certain receivables at the end of the third quarter of 2012.

Our Board of Directors authorized management to repurchase up to $25.0 million of our Class A common stock pursuant to a stock repurchase program. If shares are repurchased, the shares will be repurchased pursuant to open market purchases, privately negotiated transactions, or block transactions. We have no obligation to repurchase shares under the authorization, and the timing, actual number and value of the shares which are repurchased (and the manner of any such repurchase) will be at the discretion of management and will depend on a number of factors, including the price of our common stock, an increase in the Company’s cash needs, a decrease in the Company’s available cash, borrowing capacity under our credit facility, interest rates, and the Company’s financial performance and position. We may suspend or discontinue repurchases at any time. During the third quarter of 2011, we repurchased 287,935 shares of our Class A common stock for $4.5 million. During the third quarter of 2012, we repurchased 535,047 shares of our Class A common stock for $3.4 million. At September 30, 2012, $17.2 million was remaining under the Board of Directors’ authorization for shares repurchases.

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Credit Facility: Our senior credit facility is a revolving line of credit with a borrowing capacity of up to $125.0 million principal amount. The credit facility also has a $50.0 million accordion feature allowing us to increase our borrowing capacity to up to $175.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding balance under the credit facility accrues interest based on one-month LIBOR plus an applicable margin (spread), ranging from 200 to 300 basis points, based on the amount of our outstanding senior debt to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) as defined in the credit facility agreement. The accrued interest is due and payable monthly. The outstanding borrowings are collateralized by a security interest in substantially all the Company’s assets. The lenders also require a direct assignment of all contracts at the lenders’ discretion. The credit facility expires on December 13, 2014. We do not currently hedge our interest rate risk. The credit facility allows us to use borrowings thereunder of up to $25 million to repurchase shares of our common stock.

Funds borrowed under the credit facility will be used to finance possible future acquisitions, and for working capital requirements, stock repurchases, and general corporate uses. As of September 30, 2012, there was $21.0 million due under the credit facility, reflecting net repayments of $33.0 million during 2012.

The loan interest accrual rate is set monthly at one-month LIBOR plus a set amount (spread). As discussed above, one of the primary factors determining the spread is the ratio of our outstanding senior debt to EBITDA adjusted for acquisitions and other factors. The lower our ratio, the lower our spread above LIBOR will be. As of September 30, 2012, the spread above LIBOR was 225 basis points and thus, the loan accrued interest at 2.5%.

The credit facility contains various restrictive covenants that, among other things, restrict the Company’s ability to: incur or guarantee additional debt; make certain distributions, investments and other restricted payments, including cash dividends on the Company’s outstanding common stock; enter into transactions with certain affiliates; create or permit certain liens; and consolidate, merge, or sell assets. In addition, the credit facility contains certain financial covenants that require the Company to: maintain a minimum tangible net worth; maintain a minimum fixed charge coverage ratio and a minimum funded debt to earnings ratio; and limit capital expenditures below certain thresholds.

As of September 30, 2012, we were in compliance with all our loan covenants. NCI did receive a waiver from the minimum tangible net worth covenant as of September 30, 2012, which the Company would not have met because of the goodwill impairment charge.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

There have been no significant changes to our Critical Accounting Policies during the first nine months of 2012. Refer to our Critical Accounting Policies section in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk relates to changes in interest rates for borrowings under our credit facility. A change of 1% in interest rates would have changed our interest expense and cash flow by approximately $0.1 million for the three months ended September 30, 2012, and approximately $0.3 million for the nine months ended September 30, 2012.

Additionally, we are subject to credit risks associated with our cash, cash equivalents, and accounts receivable. We believe that the concentration of credit risk with respect to cash equivalents is limited due to the high credit quality of these investments. Our investment policy requires that we invest excess cash in high-quality investments which preserve principal, provide liquidity, and minimize investment risk. We believe that our credit risk associated with accounts receivable is limited as they are primarily with the U.S. Federal Government or prime contractors working for the U.S. Federal Government.

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Item 4. Controls and Procedures

Evaluation of the Effectiveness of Disclosure Controls and Procedures

Management carried out an evaluation, as of September 30, 2012, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. This evaluation was done under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based upon the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2012, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

The Company made no changes in its internal control over financial reporting during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The Company is party to various legal actions, claims, government inquiries, and audits resulting from the normal course of business. The Company believes that the probability is remote that any resulting liability will have a material effect on the Company’s financial position, results of operations, or cash flows.

Item 1A. Risk Factors

There have been no significant changes from those discussed in Item 1A. “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered securities during the third quarter of 2012.

The following table presents information about our repurchases of Class A common stock that were made through open market transactions during the third quarter of 2012.

Period	Total Number of Shares Purchased (1)		Weighted Average Price Paid Per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be  Purchased Under the Plans or Programs
July 1 – 31, 2012		254,656	$	5.27		254,656	$	19,203,537
August 1 – 31, 2012		160,465		6.98		160,465		18,083,473
September 1 – 30, 2012		119,926		7.37		119,926		17,199,947
Total		535,047		6.25		535,047		17,199,947

(1) During November 2010, our Board of Directors authorized management to repurchase up to $25.0 million of our Class A common stock pursuant to a stock repurchase program. We have $17.2 million authorized for additional shares repurchases.

(2) The amounts do not give effect to any fees, commissions or other costs associated with repurchases of shares.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

Number	Description
2.1	Stock Purchase Agreement among NCI Information Systems, Inc. (“NCIIS”), a wholly owned subsidiary of NCI, and stockholders of AdvanceMed Corporation dated as of February 24, 2011 (incorporated herein by reference from Exhibit 2.1 to registrant’s Current Report on Form 8-K, as filed with the Commission on April 4, 2011)
3.1	Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference from Exhibit 3.1 to registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 4, 2005, as amended).
3.2	Bylaws of the Registrant (incorporated herein by reference from Exhibit 3.2 to registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on July 29, 2005).
4.1	Specimen Class A Common Stock Certificate (incorporated herein by reference from Exhibit 4.1 to registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 20, 2005, as amended).
4.2*	NCI, Inc. Amended and Restated 2005 Performance Incentive Plan (incorporated herein by reference from Appendix A to registrant’s Definitive Proxy Statement on Schedule 14A, as filed with the Commission on April 30, 2009).
4.3*	Form of Amended and Restated 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement (incorporated herein by reference from Exhibit 4.2 to registrant’s Current Report on Form 8-K, as filed with the Commission on September 12, 2009).
4.4*	NCI, Inc. Amended and Restated 2005 Performance Incentive Plan (incorporated herein by reference from Appendix A to registrant’s Proxy Statement on Form DEF 14A, as filed with the Commission on April 30, 2009).
4.5*	Form of Amended and Restated 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement (incorporated herein by reference from Exhibit 4.2 to registrant’s Current Report on Form 8-K, as filed with the Commission on September 12, 2009).
10.1	Amended and Restated Loan and Security Agreement, dated as of December 13, 2010, by and among NCI, Inc., NCI Information Systems Incorporated, Operational Technologies Services, Inc., as Borrowers, the several banks and financial institutions from time to time parties thereto, as Lenders, SunTrust Bank as the Administrative Agent to the Lenders and SunTrust Robinson Humphrey, Inc., as Lead Arranger and Book Manager (incorporated by reference from Exhibit 10.1 to registrant’s Current Report on Form 8-K dated December 13, 2010, and filed with the Commission on December 15, 2010).
10.2*	Executive Change in Control and Severance Agreement, dated March 9, 2012, by and among, NCI, Inc., and Brian J. Clark. (incorporated herein by reference from Exhibit 10.2 to registrant’s Registration Statement on Form 10-K (File No. 000-51579), as filed with the Commission on March 9, 2012).
10.3*	Executive Change in Control and Severance Agreement, dated March 9, 2012, by and among, NCI, Inc., and Marco de Vito (incorporated herein by reference from Exhibit 10.3 to registrant’s Registration Statement on Form 10-K (File No. 000-51579), as filed with the Commission on March 9, 2012).
10.4*	Executive Change in Control and Severance Agreement, dated March 9, 2012, by and among, NCI, Inc., and Michele R. Cappello (incorporated herein by reference from Exhibit 10.4 to registrant’s Registration Statement on Form 10-K (File No. 000-51579), as filed with the Commission on March 9, 2012).
10.5*	Executive Change in Control and Severance Agreement, dated March 9, 2012, by and among, NCI, Inc., and Lucas J. Narel (incorporated herein by reference from Exhibit 10.5 to registrant’s Registration Statement on Form 10-K (File No. 000-51579), as filed with the Commission on March 9, 2012).
31.1‡	Certification of the Chief Executive Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2‡	Certification of the Chief Financial Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1‡	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Extension Schema
101.CAL	XBRL Extension Calculation Linkbase
101.DEF	XBRL Extension Definition Linkbase
101.LAB	XBRL Extension Label Linkbase
101.PRE	XBRL Extension Presentation Linkbase

‡ Included with this filing.

* Management Contract or Compensatory Plan or Arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	NCI, Inc.
	Registrant
Date: November 9, 2012	By:	/s/ LUCAS J. NAREL
		Lucas J. Narel
		Executive Vice President, Chief Financial Officer
		and Treasurer

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