Ciber 10-K 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
Commission File Number 0-23488
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (303) 220-0100
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act.
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 o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
The aggregate market value of the outstanding voting stock held by non-affiliates of the registrant as of June 29, 2007, was $446,400,809, based on the closing price of the registrants Common Stock of $8.18 per share reported on the New York Stock Exchange on such date.
As of February 29, 2008, there were 60,101,331 shares of the registrants Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrants 2008 Annual Meeting of Shareholders to be held on April 29, 2008, are incorporated by reference into Part III of this Report.
Table of Contents
Disclosure Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to our operations, results of operations and other matters that are based on our current expectations, estimates, forecasts and projections. Words, such as anticipate, believe, could, expect, estimate, intend, may, opportunity, plan, potential, project, should, and will and similar expressions, are intended to identify forward-looking statements. These statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from such forward-looking statements due to a number of factors, including without limitation, the factors set forth in this Annual Report on Form 10-K under the caption Item 1A. Risk Factors. Forward-looking statements are not guarantees of performance and speak only as of the date they are made, and we undertake no obligation to publicly update any forward-looking statements in light of new information or future events. Undue reliance should not be placed on such forward-looking statements.
In this Annual Report on Form 10-K, we use the terms CIBER, we, the Company, our and us to refer to CIBER, Inc. and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year, which ends on December 31.
CIBER, Inc. is a diversified, system integration and information technology (IT) services consulting firm, with approximately 8,400 employees and total revenue of approximately $1.1 billion in 2007. We operate in a geographically-based business model from over 100 offices in 18 countries. CIBER helps clients achieve their business goals by building, integrating and supporting mission-critical applications and systems for optimized quality, increased business value, faster time-to-market and reduced total cost of operations. Our clients consist primarily of governmental agencies and Fortune 1000 and middle market companies across most major industries.
Services and Operations
We organize our operations by the nature of their services, client base and geography. At December 31, 2007, we had five reportable segments as follows:
CIBERs Commercial Solutions segment provides IT project solutions and IT staffing in custom-developed software environments, including application development and maintenance, outsourcing and staffing services primarily to our U.S. commercial customers. We provide the full range of application portfolio management support, including analysis, design, development, testing, implementation and maintenance of business applications.
A key differentiator for our Commercial segment is the strength of our local relationships coupled with both our vertical and national practice expertise. Our geographically-based business model enables us to provide local accountability, which is the cornerstone of many of our long-standing client relationships. From this model, the Commercial segment has
developed expertise in a variety of verticals, including the automotive, manufacturing, services, retail, financial and telecommunications industries.
The Commercial segments key horizontal niches are its national practices - Enterprise Integration, Global Security and Travel and Hospitality. The Enterprise Integration Practice provides services to integrate data and applications for companies and organizations to deliver fully functional business solutions. We blend our proprietary tools, standardized processes and skilled resources in enterprise architecture, business performance management, enterprise information management, master data management and service-oriented and event-driven architecture to help our clients leverage information for optimal business value. The Global Security Practice provides assessment and remediation services, as well as managed security services that include intrusion monitoring and incident response. In 2007, this strategic practice broadened its scope of services to address a wider range of business hazards by integrating business continuity and disaster recovery. These highly-focused practices provide high-end consultants, best practices, methodologies and repeatable solutions to our clients.
Our delivery capabilities span service-oriented architectures, including J2EE and .NET, as well as traditional client/server and mainframe development. We also offer portal development, wireless and mobility applications and managed content services. Our strength lies in architecture frameworks and development, managed content services for integrating unstructured content into business processes, and alternative delivery channels such as mobility and wireless.
In addition, our IT Outsourcing Practice offers a comprehensive scope of IT-related outsourcing services, including on-going application support, infrastructure and IT operations outsourcing in the areas of technology solutions (including networks, servers, storage, security and desktops) and service desk solutions (including help desk and call center, data center hosting, monitoring and management and maintenance and systems support). In 2007, we expanded our data center, help desk, Enterprise Resource Planning (ERP) support and infrastructure services, with increased delivery coming from our India-based infrastructure services group.
Our CIBER Europe operations, headquartered in the United Kingdom, provide a broad range of business and technical consulting services that include package implementation, application development, systems integration and support services, as well as our own Customer Relationship Management software products. In recent years, CIBER Europe has undertaken a number of initiatives to expand its portfolio of services offered, specifically in the areas of outsourcing, hosting and managed services. These initiatives have helped CIBER Europe earn recognition as a full-line service provider, able to offer a range of services covering the entire project lifecycle.
Key geographies for CIBER Europe include the Netherlands, the United Kingdom, Germany and the Scandinavian region consisting of Norway, Sweden, Denmark and Finland, which in total accounted for approximately 89% of the European segments total revenues in 2007. Additionally, Europe had strong revenue growth from Russia, the Czech Republic, Austria, Spain and its relatively new territories of China, Australia and New Zealand. CIBER Europe has expertise in the following industry verticals: manufacturing, chemical and pharmaceutical, retail, healthcare, energy and utilities, public sector and publishing and media. Another key driver of our growth is a focus on developing and providing repeatable solutions that minimize cost and dramatically improve speed-to-market. CIBER Europe has template solutions for a number of markets, including sophisticated engineering, retail, aerospace and defense, sport and leisure, and not-for-profit and charitable organizations.
Our partner relationships in Europe include SAP, Sage and Microsoft. SAP-related solutions and services are a major part of the CIBER Europe business, accounting for approximately 60% of our European revenue. CIBER Europe is a SAP Alliance Partner, as well as a Special Expertise Partner for SAP Industry Solutions in Automotive, Retail and Chemicals.
State & Local Government Solutions
CIBERs State & Local Government Solutions segment primarily provides custom solutions that are similar to our Commercial segments offerings. However, our State & Local Government segments clients consist of each of the 50
states over the past three years, over 225 cities, and more than 150 counties, as well as hundreds of other quasi-governmental entities, such as school districts and utilities.
Our State & Local Government segment differentiates itself through the strength of its local relationships, combined with specific vertical expertise. Key verticals for this segment include health and human services, labor, transportation, law and justice and financial management. Additionally, we launched a K-12 education vertical in 2007. Increasingly, the State & Local Government segment is also cross-selling projects with our U.S. ERP segment, and leverages the horizontal expertise of our Enterprise Integration, Global Security and IT Outsourcing groups.
Federal Government Solutions
Our Federal Government segment provides custom solutions to defense and civilian agencies of the U.S. Federal Government. In the aggregate, the various agencies of the U.S. Federal Government represent our largest client and accounted for over 12% of our total revenue in 2007.
The Federal Government segment is aligned along a customer focus to allow each operating group to provide a full set of capabilities to customers with common missions, goals and requirements, and to create synergies within the groups. The alignment also allows us to build on the relationships we have built with clients. These customer-focused groups consist of Federal Civilian, Natural Resources, Defense Technology Systems and Defense and Intelligence. CIBER operates as both a prime vendor and a subcontractor within this segment. A key differentiator for our Federal Government segment is its strong client referrals driven by the expertise and high quality of our employees.
U.S. ERP Solutions
Our U.S. ERP segment provides consulting services to support multi-package ERP solutions for customers in the U.S. from vendors including SAP, Oracle (including PeopleSoft and JD Edwards) and Lawson, as well as several supply chain and education management products. We have vertical expertise in the public sector, education, healthcare, retail, manufacturing, grower management, food and beverage and supply chain execution. Our U.S. ERP segment frequently works with our Commercial and State & Local Government segments, leveraging the local relationships of these groups to cross-sell opportunities in ERP solutions, along with services provided by the other segments.
We are a SAP Services Alliance Partner and a Special Expertise Partner to SAP in various industries. Our comprehensive SAP solutions include implementations and upgrades, extensions, integrations and customizations. Our vertical focus for SAP products is in commercial industries such as retail, apparel and footwear, metals and mining and manufacturing, as well as K-12 education, tollways and public services.
We are an Oracle Certified Advantage Partner and a strategic partner to Oracle in several key industries such as the public sector, higher education, healthcare and food and beverage. Our Oracle, PeopleSoft and JD Edwards solutions involve building, integrating and supporting mission critical systems for real-time enterprises.
We are a Certified Lawson Consulting Partner, providing full functional, technical implementation and project management support. Our Lawson specific expertise focuses on change leadership, business process calibration, strategic visioning and knowledge transfer.
Additionally, this segments Technology Solutions Group Practice focuses on providing customers with the best infrastructure on which to deploy their mission critical business applications, and we are an authorized reseller of certain technology products, primarily from IBM. Services in this group include assessment and selection, configuration, installation, server consolidation, performance evaluation and system architecture design.
Financial Information about Segments and Geographic Areas
The information required by these items is incorporated herein by reference to Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 16 of the Notes to our Consolidated Financial Statements included under Financial Statements and Supplementary Data of this Annual Report.
Our clients consist primarily of Fortune 1000 and middle market companies across most major industries, as well as governmental agencies. These organizations typically have significant IT budgets and frequently depend on outside consultants to help achieve their business and IT objectives. In 2007, we estimate our approximate percentage of total revenue by client industry was:
Certain clients account for a significant portion of our revenue. Our largest client, the various agencies of the U.S. Federal Government, collectively accounted for approximately 15%, 14% and 12% of total revenue in 2005, 2006 and 2007, respectively. No other client accounted for more than 3% of our total revenue in 2007. In addition, our five largest clients (including the various agencies of the U.S. Federal Government as one client) accounted for, in the aggregate, approximately 22% of our total revenue in 2007. By segment, the largest client for each of our respective segments accounted for the following percentage of each segments 2007 total revenues: Commercial - 7%; Federal Government - 96%; State & Local Government - 21%; U.S. ERP - 12% and European Operations - 7%. Additionally, our State & Local Government segment had a second client in 2007 that accounted for 11% of its total segment revenue.
Client retention and turnover is highly dependent upon the type of solution we are providing. Many of our client relationships in which we are providing a custom solution have continued for many years. Each year, most of the services revenue in our Commercial, Federal Government and State & Local Government segments comes from clients for whom we have previously provided services. With services related to package software solutions, which includes our U.S. ERP segment, as well as a large part of our European segment, client engagements most typically involve a large enterprise software implementation over a period of six to eighteen months. Typically, once package software implementations are completed, future consulting services revenues from that client are minimal and, as a result, client turnover is high, and we are generally selling services to new customers.
Typically, both our commercial and government clients may cancel their contracts or reduce their use of our services on short notice. If any significant client terminates its relationship with us or substantially decreases its use of our services, it could have a material adverse affect on our financial condition and results of operations.
Since the late-1980s, CIBER has executed a strategy of growth and diversification that included expanding our range of IT-related services, developing a professional sales force and selectively acquiring established complementary companies. Since our initial public offering in March of 1994, we have completed over 60 business combinations. In the past three years, our acquisition strategy has centered upon our need to further augment business segments with additional vertical areas of expertise, consultants or geographic reach. Our acquisition strategy has been central to our ability to expand our business model in the following areas:
· Increased project-based capabilities - We have expanded our project-based delivery capabilities by adding expertise around SAP, Oracle (which now includes PeopleSoft and JD Edwards) and other ERP packages, such as with our 2007 acquisition of Metamor Enterprise Solutions, LLC, a provider of SAP software implementation services and a reseller of SAP products. In addition to acquiring project-based ERP capabilities, we have developed internal project level expertise in delivery of custom software applications, application maintenance and technology outsourcing services. This combination of acquired
and organically-developed project delivery capabilities has resulted in a shift in our mix of business to project-based work from staff supplementation services.
· Established significant public sector presence - Our acquisitions have enabled us to become an established firm in the public sector, providing services to all 50 states over the past three years, over 225 cities and more than 150 counties, as well as hundreds of other quasi-governmental entities, such as school districts and utilities and to the U.S. Federal government. Our public sector clients, including Europe, accounted for approximately 28% of our total revenue in 2007.
· Expanded geographic presence - Acquisitions have also allowed us to expand our geographic footprint to include a significant European presence. Beginning with our first foreign acquisition in the Netherlands in 1999, and most recently our 2007 acquisition of a Swedish SAP consultancy, we have expanded our European operations to include approximately 28 foreign offices located in 11 European countries, plus China, Australia and New Zealand.
The IT services industry is extremely competitive and characterized by continuous changes in customer requirements and improvements in technologies. Our competition varies significantly from city to city, as well as by the type of service provided. Our principal competitors include Accenture Ltd., BearingPoint, Inc., CACI International, Inc., CGI Group Inc. and MAXIMUS, Inc. We also compete with privately-held local and regional IT consulting firms, as well as the service divisions of various software developers. In addition, we must frequently compete with a clients own internal IT staff.
Our industry is being impacted by the growing use of lower-cost offshore delivery capabilities (primarily India). There can be no assurance that we will be able to continue to compete successfully with existing or future competitors or that competition will not have a material adverse effect on our results of operations and financial condition.
Our Competitive Strengths
We believe that our corporate strengths, identified below, position us to respond to the long-term trends, changing demands and competition within our principal markets.
· Long-term Client Relationships - We have been in business since 1974 and a prominent first-year client, Ford Motor Company, remains one of our top five clients today in terms of annual revenue. This relationship exemplifies the kind of long-term commitment that we have toward our clients and speaks to the quality and breadth of the services that we provide.
· Competitive Pricing Model - Our pricing structure is very competitive relative to the level of our service offerings. Because of the efficient overhead structure of our branch office operations and the high utilization of our billable consulting staff, we are able to offer our clients a pricing model that is very competitive. We believe that, on average, our hourly billing rates are significantly lower than the rates of our national competitors for similar services.
· Scale of Operations - The competitive landscape for the delivery of IT services is highly fragmented. In almost every major market we compete with larger national and international publicly-held firms, as well as a host of smaller regional and local privately-held firms. For the past several years, large clients have attempted to consolidate the purchasing of IT services and work with fewer firms. Because of the relatively large scale of our operations, we have been able to compete effectively to remain a vendor to these large clients. Our success has come at the expense of local and regional competitors that currently lack the scale to compete successfully for this work.
· Balanced Business Model - We have developed a business model that allows us to provide superior, leading-edge services that are routinely updated to meet the current needs of our clients. We have developed a reputation for thought leadership in industry verticals such as state government and higher education and in technology verticals such as wireless and security applications, including homeland security.
· Breadth of Service Offering - We offer a broad range of services to our clients in both the private and public sectors, including staff supplementation services, custom application development services, implementation of ERP packages, application maintenance outsourcing services, resale of certain hardware and software products, managed hosting and call center support. We believe that having this broad delivery capacity is often a competitive advantage, particularly when competing against smaller local and regional firms.
· Optimized Delivery Methodology - Our proprietary Optimized Delivery Model (ODM) is designed to determine the right mix of client and CIBER resources and the appropriate work site for an engagement, as well as balance the cost of the resources and the complexity of managing a diverse and distributed team. Our approach minimizes resource costs and maximizes delivery effectiveness for the benefit of the client. The approach consists of a series of steps to profile the customers business drivers and capabilities, create alternative resource scenarios and formalize governance around delivering the work. The output of these efforts is a recommended delivery model that is optimized to balance the clients resource costs with the risks and constraints of distributed delivery teams. The overall ODM process has been effective in our pursuit of project engagements and use of the methodology has become a distinct competitive advantage.
As of December 31, 2007, we had approximately 8,400 employees and consultants. We routinely supplement our employee consulting staff with the use of contractors. At December 31, 2007, we had approximately 7,325 billable consultants, of which approximately 1,375 were contractors. None of our employees are subject to a collective bargaining arrangement. We have employment agreements with our executive officers and certain other employees. We believe our relations with our employees are good.
Our future success depends in part on our ability to hire and retain adequately trained personnel who can address the changing and increasingly sophisticated IT needs of our clients. Our ongoing personnel needs arise from turnover, which is generally high in the industry, and client needs for consultants trained in the newest software and hardware technologies. Historically, competition for personnel in the IT services industry has been significant. We have had in the past, and expect at some point in the future to have, difficulty attracting and retaining an optimal level of qualified consultants. There can be no assurance that we will be successful in attracting and retaining the personnel we require to conduct and expand our operations successfully. Because of this, the recruitment of skilled consultants is a critical element to our success. We have an internal staff of recruiters devoted to meeting our personnel requirements.
We experience a moderate amount of seasonality. Typically, our billable hours, which directly affect our revenue and profitability, decrease in the second half of the year, especially during the fourth quarter, due to the large number of holidays and vacation time taken by our billable consultants. As a result, our operating income as a percentage of revenue is generally the lowest in the fourth quarter of each calendar year.
The Internet address of our website is http://www.ciber.com. On the Investor Relations section of our website, we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, as soon as reasonably practical after the reports are electronically filed with or furnished to with the Securities and Exchange Commission (the SEC) pursuant to Section 13(a) or 15(d) of the Exchange Act.
We operate in a dynamic and rapidly changing economic and technological environment that involves numerous risks and uncertainties, many of which are driven by factors that we cannot control or predict. The following section describes some, but not all, of the factors that could have a material adverse affect on our business, financial condition, results of operations and the market price of our common stock.
Our quarterly revenues, operating results and profitability will vary from quarter to quarter, which may result in increased volatility of our share price.
Our quarterly revenues, operating results and profitability have varied in the past and, in the future are likely to vary significantly from quarter to quarter, making them difficult to predict. This may lead to volatility in our share price. Some of the factors that are likely to cause these variations are:
· the business decisions of our clients regarding the use of our services;
· the stage of completion of existing projects and/or their termination;
· client satisfaction with our services;
· our ability to properly manage and execute client projects, especially those under fixed-price arrangements;
· our ability to properly price fixed-price contracts to provide for adequate profits;
· our ability to maintain our profit margins and manage costs, including those for personnel and support services;
· acquisition and integration costs related to possible acquisitions of other businesses;
· changes in, or the application of changes in, accounting principles or pronouncements under U.S. generally accepted accounting principles;
· currency exchange rate fluctuations;
· changes in estimates, accruals or payments of variable compensation to our employees; and
· global, regional and local economic and political conditions and related risks.
Our profit margin, and therefore our profitability, is largely a function of the rates we charge for our services and the utilization rate, or chargeability, of our consultants. Accordingly, if we are not able to maintain the rates we charge for our services or an appropriate utilization rate for our consultants, we will not be able to sustain our profit margin and our profitability will suffer. A number of factors affect the rates we charge for our services, including:
· our clients perception of our ability to add value through our services;
· changes in our pricing policies or those of our competitors;
· the introduction of new products or services by us or our competitors;
· the use of globally-sourced, lower-cost service delivery capabilities by our competitors and our clients; and
· general economic conditions.
Additionally, a number of factors affect our utilization rates, such as:
· seasonality, including number of workdays and holiday and summer vacations;
· our ability to transition consultants quickly from completed projects to new engagements;
· our ability to forecast demand for our services and thereby maintain an appropriately balanced and sized workforce; and
· our ability to manage employee turnover.
Economic conditions and levels of client spending materially affect our results of operations.
Our results of operations are affected by the level of business activity of our clients, which in turn is affected by regional and global economic conditions. During economic downturns, clients may cancel, reduce or defer expenditures for IT products and services. During such periods, we implement cost management programs to manage our expenses as a percentage of revenue. Cost management efforts may not be sufficient, however, to maintain our margins during economic downturns. In addition, our business tends to lag behind economic cycles and, consequently, the benefits of economic recoveries to our business typically take longer to realize.
If we are not able to anticipate and keep pace with rapid changes in technology, our business will be negatively affected.
Our success depends on our ability to develop and implement technology services and solutions that anticipate and keep pace with rapid and continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis, and our offerings may not be successful in the marketplace. In addition, services, solutions and technologies developed by current or future competitors may make our service or solution offerings uncompetitive or obsolete. Any one of these circumstances could have a material adverse effect on our ability to obtain and successfully complete client engagements.
Our business could be adversely affected if our clients are not satisfied with our services and we could face damage to our professional reputation and/or legal liability.
As a professional services firm, we depend largely on our relationships with our clients and our reputation for high-quality professional services and integrity to attract and retain clients. Additionally, many of our engagements involve projects that are critical to the operations of our clients businesses. If a client is not satisfied with the quality of work performed by us or a subcontractor, or with the type of services or solutions delivered, we could incur additional costs to address the situation, the profitability of that work might be impaired, and the clients dissatisfaction with our services could damage our ability to obtain additional work from that client. In addition, negative publicity related to our client relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new contracts with current and prospective clients.
If we do not meet our contractual obligations to a client, it could subject us to legal liability. Our contracts typically include provisions to limit our exposure to legal claims relating to our services and the applications we develop; however, these provisions may not protect us, or may not be enforceable under some circumstances or under the laws of some jurisdictions. We may enter into non-standard agreements because we perceive an important economic opportunity or because our personnel did not adequately adhere to our guidelines. We may find ourselves committed to providing services that we are unable to deliver or whose delivery will cause us financial loss. If we cannot or do not fulfill our obligations, we could face legal liability. Although we maintain professional liability insurance, the policy limits may not be adequate to provide protection against all potential liabilities. In addition, if we were to fail to properly deliver on a project, we may not be able to collect any related accounts receivable or could even be required to refund amounts paid by the client.
Termination of a contract by a significant client and/or cancellation with short notice could reduce our revenue and profitability and adversely affect our financial condition.
Our five largest clients accounted for approximately 22% of our revenue in 2007. The various agencies of the U.S. Federal Government represent our largest client, accounting for approximately 12% of total revenue in 2007, while no other client accounted for more than 3% of our total revenue. Our clients typically retain us on a non-exclusive, engagement-by-engagement basis. Most individual client assignments are from three to twelve months; however, many of our client relationships have continued for many years. Although they may be subject to penalty provisions, clients may generally cancel a contract at any time with short notice. Under many contracts, clients may reduce or delay their use of our services without penalty. These terminations, reductions or delays could result from factors unrelated to our work product or the progress of the project, but could be related to business or financial conditions of the client, changes in client strategies or the economy generally. When contracts are terminated, we lose the associated revenues and we may not be able to eliminate associated costs in a timely manner. Consequently, our profit margins may be adversely affected.
We may experience declines in revenue and profitability if we do not accurately estimate the cost of a large engagement conducted on a fixed-price basis.
Although the percentage may vary from year to year, we estimate that approximately 20-25% of our total services revenue in 2007 was from engagements performed in accordance with fixed-price contracts. When making a proposal or managing a fixed-price engagement, we rely on our estimates of costs and timing for completing the project. These estimates reflect our best judgment regarding the efficiencies of our methodologies and consultants as we plan to apply them to the project. Losses, if any, on fixed-price contracts are recognized when the loss is determined. Any increased or
unexpected costs or unanticipated delays in connection with the performance of fixed-price contracts, including delays caused by factors outside of our control, could make these contracts less profitable or unprofitable and may affect the amount of revenue reported in any period.
Financial and operational risks of our international operations could result in a decline in revenue and profitability.
We have continued to expand our international operations and estimate that our foreign offices currently represent approximately 30% of our total revenue. We operate in 17 foreign countries. Due to our international operations, we are subject to a number of financial and operational risks that may adversely affect our revenue and profitability, including:
· the costs and difficulties relating to managing geographically diverse operations;
· foreign currency exchange rate fluctuations (discussed in more detail below);
· differences in, and uncertainties arising from changes in, foreign business culture and practices;
· restrictions on the movement of cash and the repatriation of earnings;
· multiple and possibly overlapping or conflicting tax laws;
· the costs of complying with a wide variety of national and local laws;
· operating losses incurred in certain countries and the non-deductibility of those losses for tax purposes; and
· differences in, and uncertainties arising from changes in legal, labor, political and economic conditions, as well as international trade regulations and restrictions, and tariffs.
The revenues and expenses of our international operations generally are denominated in local currencies. Accordingly, we are subject to exchange rate fluctuations between such local currencies and the U.S. dollar. These exchange rate fluctuations subject us to currency translation risk with respect to the reported results of our international operations and the cost of potential acquisitions. There can be no assurance that we will not experience fluctuations in financial results from our operations outside of the U.S., and there can be no assurance that we will be able, contractually or otherwise, to reduce the currency risks associated with our international operations. We manage our exposure to changes in foreign currency exchange rates through our normal operating and financing activities and, when deemed appropriate, with derivative financial instruments. There is no assurance that we will continue to use such financial instruments in the future or that any such use will be successful in managing or controlling foreign currency risks.
We depend on contracts with various federal, state and local government agencies for a significant portion of our revenue, and if the spending policies or budget priorities of these agencies change, we could lose revenue.
In 2007, approximately 28% of our revenue was from public sector clients, including federal, state, local and foreign governments and agencies. The market for our services depends largely on federal and state legislative programs and the budgetary capability to support programs, including the continuance of existing programs. These programs can be modified or amended at any time by acts of federal and state governments. In addition, changes in federal initiatives or in the level of federal spending due to budgetary or deficit considerations may have a significant impact on our future financial performance, as may curtailment of the federal governments use of consulting and technology services firms, the adoption of new laws or regulations that affect companies providing services to the federal government and potential delays in the government appropriation process.
Additionally, federal government contracts contain provisions and are subject to laws and regulations that provide government clients with rights and remedies not typically found in commercial contracts. Among other things, governments may terminate contracts with short notice for convenience, as well as for default, and cancel multi-year contracts if funds become unavailable.
Unfavorable government audits could require us to adjust previously reported operating results, to forego anticipated revenue and subject us to penalties and sanctions.
The government agencies we contract with generally have the authority to audit and review our contracts with them. As part of that process, the government agency reviews our performance on the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. An audit of our work, including an audit of work performed by companies we have acquired or may acquire, could result in a substantial adjustment to our
previously reported operating results. For example, any costs that were originally reimbursed could be subsequently disallowed. In this case, cash we have already collected may have to be refunded and operating margins may be reduced.
If a government audit uncovers improper or illegal activities by us, or we otherwise determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or disqualification from doing business with the government. Any unfavorable determination could adversely affect our ability to bid for new work with one or more jurisdictions.
Our future success depends on our ability to continue to retain and attract qualified employees.
Our business involves the delivery of professional services and is highly labor intensive. Our future success depends upon our ability to continue to attract, train, effectively motivate and retain highly-skilled technical, managerial, sales and marketing personnel. Although we invest significant resources in recruiting and retaining employees, there is often considerable competition for certain personnel in the IT services industry, and as a result, employee turnover is generally high. From time to time, we have trouble locating enough highly-qualified candidates that are in our desired geographic locations, with the required specific expertise or at the desired compensation levels. The inability to attract and retain qualified employees in sufficient numbers could have a serious negative effect on us, including our ability to obtain and successfully complete important client engagements and thus, maintain or increase our revenues. Such conditions could also force us to resort to the use of higher-priced subcontractors, which would adversely affect the profitability of the related engagement.
In addition, we believe that there are certain key employees within the organization, primarily in the senior management team, who are important for us to meet our objectives. Due to the competitive employment nature of our industry, there is a risk that we will not be able to retain these key employees. The loss of one or more key employees could adversely affect our continued growth. In addition, uncertainty created by turnover of key employees could result in reduced confidence in our financial performance, which could cause fluctuations in our stock price and result in further turnover of our employees.
Our current level of indebtedness places restrictions upon our business and changes in interest rates may adversely affect our operating results.
As of December 31, 2007, we had $210.9 million of outstanding indebtedness, which includes $152.0 million of convertible senior subordinated debentures (Debentures) and $58.9 million of bank borrowings. Our $60 million unsecured bank revolving line of credit was replaced in early 2008 with a $200 million senior secured reducing revolving credit facility (Revolving Credit Facility) that expires on February 11, 2011. We obtained the Revolving Credit Facility to provide funds for our working capital and general corporate purpose needs, including the repurchase of most or all of our Debentures, which we expect we will be required to repurchase on December 15, 2008. Substantially all of our assets secure the Revolving Credit Facility.
The Revolving Credit Facility contains specific limitations on the incurrence of additional indebtedness and liens, stock repurchases, investments, guarantees, mergers, dispositions and acquisitions, and a prohibition on the payment of any dividends. Additionally, the Revolving Credit Facility requires CIBER to maintain specified financial covenants, including a maximum consolidated total leverage ratio, a maximum senior leverage ratio, a minimum interest coverage ratio and a minimum liquidity percentage. On occasion, we have experienced instances of covenant non-compliance under our previous bank revolving line of credit that were waived by our lender. If we fail to comply with any debt covenants in the future, however, we may not be able to obtain a waiver and could be in default under our Revolving Credit Facility.
The aggregate commitments under the Revolving Credit Facility reduce by $7.5 million each quarter end beginning on March 31, 2009, and continuing through December 31, 2010. The Revolving Credit Facility matures on February 11, 2011, at which time the remaining $140 million of maximum credit available will terminate and all outstanding balances must be repaid in full. In the past, we have been successful in generating sufficient cash flow from operations to reduce our indebtedness; however, that does not mean that we will be successful in doing so in the future. If we are unable to
repay outstanding balances that exceed our maximum credit available as the aggregate commitments under the Revolving Credit Facility are reduced, we will be in default unless we can obtain a waiver or extension.
Additionally, as we repurchase our Debentures using funds available under the Revolving Credit Facility, we are replacing a fixed rate borrowing with a variable rate borrowing. We pay an annual fixed rate of interest of 2.875% on our Debentures, whereas we pay a variable interest rate based on either the Wells Fargo prime lending rate (prime) or a London interbank offered market rate (LIBOR) under our Revolving Credit Facility. Given current interest rates, our annual interest expense is expected to increase and will vary based on changes in prime and LIBOR. For example, assuming the $152.0 million of Debentures are repurchased and converted into borrowings under the Revolving Credit Facility at an assumed rate of interest of 5.00%, we would incur annual interest expense of approximately $7.6 million, as compared to approximately $4.4 million of annual interest expense at the fixed rate of 2.875%.
The IT services industry is highly competitive, and we may not be able to compete effectively.
We operate in a highly competitive industry that includes a large number of participants. We believe that we currently compete principally with other IT professional services firms, technology vendors and the internal information systems groups of our clients. Many of the companies that provide services in our industry have significantly greater financial, technical and marketing resources than we do. Our marketplace is experiencing rapid changes in its competitive landscape. Some of our competitors have sought access to public and private capital and others have merged or consolidated with better-capitalized partners. Larger and better-capitalized competitors have enhanced abilities to compete for market share generally and our clients specifically, in some cases, through significant economic incentives to clients to secure contracts. These competitors may also be better able to compete for skilled professionals by offering them large compensation incentives.
One or more of our competitors may develop and implement methodologies that result in superior productivity and price reductions without adversely affecting their profit margins. In addition, there are relatively few barriers to entry into our industry. As a result, we have faced and expect to continue to face, competition from new entrants into our market. We may be unable to compete successfully with current or future competitors, and our revenue and profitability may be adversely affected.
If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against receivables, but actual losses on client balances could differ from those that we currently anticipate and as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. In addition, timely collection of client balances depends on our ability to complete our contractual commitments and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected.
We have adopted anti-takeover defenses that could make it difficult for another company to acquire control of CIBER or limit the price investors might be willing to pay for our stock, thus affecting the market price of our stock.
Our certificate of incorporation and bylaws each contain provisions that may make the acquisition of our Company more difficult without the approval of our Board of Directors. These provisions include adoption of a Preferred Stock Purchase Rights Agreement, commonly known as a poison pill that gives our Board of Directors the ability to issue preferred stock and determine the rights and designations of the preferred stock at any time without shareholder approval. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of CIBER. In addition, the staggered terms of our Board of Directors could have the effect of delaying or deferring a change in control. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, and as a result, the price of our common stock could decline.
The above factors and certain provisions of the Delaware General Corporation Law may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in the control or management of CIBER; this could adversely affect transactions in which our shareholders might otherwise receive a premium over the then-current market price for their shares of CIBER common stock.
Our corporate office is located at 5251 DTC Parkway, Suite 1400, Greenwood Village, Colorado 80111, where we occupy approximately 69,000 square feet under a lease that expires in December 2008. Our Denver area operations currently utilize approximately 13,000 square feet of this office space. In July 2007, we entered into a new 10-year lease for approximately 77,000 square feet of office space for our corporate headquarters and Denver area operations. The new space is currently under construction and scheduled for completion in late 2008, and is located near our current headquarters. Generally, we provide our services at client locations and therefore, our office locations are primarily used for sales and other administrative functions. At December 31, 2007, we had lease obligations for approximately 800,000 square feet of office space in approximately 100 locations.
We believe our facilities are adequate for our current level of operations.
The Company is involved in legal proceedings, audits, claims and litigation arising in the ordinary course of business. Although the outcome of such matters is not predictable with assurance, we do not expect that the ultimate outcome of any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.
No matters were submitted to a vote of our shareholders during the fourth quarter of 2007.
Market Information, Holders and Dividends
Our common stock is listed on the New York Stock Exchange under the symbol CBR. The table below sets forth, for the periods indicated, the low and high sales price per share of our common stock.
The closing price of our common stock on February 15, 2008, was $4.83. As of February 15, 2008, there were 2,899 registered holders of record of our common stock. We estimate there are approximately 12,100 beneficial owners of our common stock.
Our policy is to retain our earnings to support the growth of our business. Accordingly, we have never paid cash dividends on our common stock and have no present plans to do so. In addition, pursuant to the terms of our new senior secured reducing revolving credit facility, we are prohibited from paying dividends on our stock.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding securities authorized for issuance under our equity compensation plans can be found under Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
Purchases of Equity Securities by the Issuer
The following table sets forth the information required regarding repurchases of our equity securities made during the three months ended December 31, 2007.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among CIBER, Inc., The S&P 500 Index
And A Peer Group
The Company utilized a self-constructed Peer Group to better align itself with industry competition. Our Peer Group includes: Accenture Ltd., BearingPoint, Inc., CACI International, Inc., CGI Group Inc. and MAXIMUS, Inc.
Corresponding index value and common stock price values are given below:
We have derived the selected consolidated financial data presented below from our Consolidated Financial Statements and the related Notes. This information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and related Notes, included under Financial Statements and Supplementary Data of this Annual Report.
(1) We have completed various acquisitions during the periods presented. The revenue and operating results of acquired companies are included from the respective acquisition dates (see Note 2 to the Consolidated Financial Statements included herein).
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 section also contains forward-looking statements and should be read in conjunction with the section of this report titled Disclosure Regarding Forward-Looking Statements.
Business and Industry Overview
CIBER provides information technology (IT) system integration consulting and other IT services primarily to governmental agencies and Fortune 1000 and middle market companies across most major industries. From offices located throughout the United States and Europe, as well as Eastern Asia, we provide our clients with a broad range of IT services, including custom and package software development, maintenance, implementation and integration. To a lesser extent, we also resell certain IT hardware and software products.
Our five operating segments, Commercial Solutions, European Operations, State & Local Government Solutions, Federal Government Solutions and U.S. ERP Solutions (formerly U.S. Package Solutions) are organized internally primarily by the nature of their services, client base and geography. Our Commercial, State & Local and Federal segments comprise our U.S. geographically-based operations that provide IT services and products in custom-developed software environments. These offices report to a segment based on their primary client focus category (Commercial, State & Local or Federal); however, they also may have clients that fall into another category. For example, a Commercial office may also provide services to a government client. Our India-based operations are considered part of our Commercial segment. Our U.S. ERP segment primarily provides enterprise software implementation services, including ERP and supply chain management software from software vendors such as Oracle, SAP and Lawson. Our European segment represents our offices in Europe, Eastern Asia, Australia and New Zealand that provide a broad range of IT consulting services, including package software implementation, application development, systems integration and support services.
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 20-25% 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 is primarily a 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). Our average utilization rates are higher in our Commercial, Federal and State & Local segments (typically around 85% to 90%) as compared to our U.S. ERP and European segments (typically around 75% to 80%). With time-and-materials contracts, higher consultant utilization results in increased revenue; however, with fixed-price contracts, it results in higher costs and lowers 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 $50 to $200 per hour and, on average, are generally highest in our U.S. ERP segment and lowest in our Federal segment. We also have fixed-priced projects, as well as engagements whose pricing is based on cost-plus or level-of-efforts. For such projects, where our revenue is not directly based on hours incurred, our realized rate per hour will vary significantly depending on success or overages on such projects. In addition, our foreign revenue is impacted by changes in currency exchange rates.
Selling, general and administrative (SG&A) costs as a percentage of revenue vary by business segment. Our U.S. ERP segment typically has higher SG&A costs than our other domestic segments due to the longer sales cycle associated with ERP projects. ERP projects generally also have higher billing rates and higher gross margins. Our European segment typically has the highest SG&A costs as a percentage of revenue of all of our segments because it
carries overhead personnel and related expenses for general and administrative tasks, such as accounting and human resources, etc. in each of its 14 territories, as well as its high proportion of ERP project work. In the U.S., our general and administrative tasks are centralized corporate functions and are generally not charged to our domestic segments.
Other revenue includes resale of third-party IT hardware and software products, sales of proprietary software and commissions on sales of IT products. Our sales of IT hardware and software generally involve IT network infrastructure. Gross profit percentage on other revenues is approximately 40-45%. This is a blend of low-margin product sales (typically 5% to 10%) and higher-margin product commissions and proprietary software sales. Depending on the mix of these business activities, gross profit percentage on other revenue will fluctuate.
The market demand for CIBERs services is heavily dependent on IT spending by major corporations, organizations and government entities in the markets and regions that we serve. The pace of technology change and changes in business requirements and practices of our clients all have a significant impact on the demand for the services that we provide.
In 2007, we acquired California-based Metamor Enterprise Solutions LLC (Metamor), which had approximately 100 consultants at the time of the acquisition. Metamor provided SAP software implementation services and was a reseller of SAP products. The Metamor acquisition provided scale to our domestic SAP activities. Also in 2007, we acquired a small Swedish SAP consulting business. In 2006, we acquired two small SAP consulting businesses in Europe.
The results of operations of these acquired businesses have been included in our Consolidated Financial Statements since the closing date of the respective acquisition.
Impacts of Share-Based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123(R) and began recording compensation expense for employee stock options and employee stock purchase rights in our financial statements. Such compensation expense is recognized over the requisite service period based on the fair value of the options or rights on the date of grant. On January 1, 2006, substantially all of our outstanding stock options were fully vested due to vesting accelerations that occurred prior to January 1, 2006, and as such, they have little impact on our share-based compensation expense recognized under SFAS No. 123(R) during 2006 or in subsequent years.
Share-based compensation cost is included as part of our corporate expenses and is recognized in either Cost of Consulting Services or in SG&A expenses, as appropriate. The table below summarizes the amounts recorded in the Consolidated Statement of Operations for share-based compensation:
Comparison of the Years Ended December 31, 2007 and 2006 - Consolidated
The following table sets forth certain Consolidated Statement of Operations data in dollars and expressed as a percentage of revenue:
Revenue. Total revenue for the year ended December 31, 2007, increased 9% compared to total revenue for the year ended December 31, 2006. We are a global company; therefore, our revenue is denominated in multiple currencies and may be significantly affected by currency exchange-rate fluctuations. Throughout 2007, the U.S. dollar weakened against many currencies, resulting in favorable currency translation and greater reported U.S. dollar revenues. For the year ended December 31, 2007, the weak U.S. dollar resulted in an additional $28.8 million of reported revenue over the year ended December 31, 2006. Additionally, a fourth quarter 2007 acquisition completed in Europe and the domestic SAP acquisition completed in September 2007, plus two second quarter 2006 European acquisitions contributed incremental revenue of approximately $7.5 million to the current year results. Excluding the favorable currency translation effects and the incremental revenue from acquisitions, our total revenue for the year ended December 31, 2007, increased 5% from total revenue reported for the year ended December 31, 2006, primarily due to increased SAP software-related services in Europe.
Revenue by segment was as follows:
n/m = not meaningful
· Commercial segment revenue increased during the comparable years due to a couple of new, large clients and engagement wins led by growth in our Boston, Washington D.C. and Seattle offices. This segment can be characterized in 2007 as providing stable contributions, but lacking significant growth. Moving ahead, we are working to position this segment to be more successful in gaining market share.
· $28.8 million of the $75.6 million increase in our European segment revenue was due to favorable foreign currency fluctuations. Additionally, Europe had another $2.7 million of incremental revenue from small
acquisitions. Excluding these items, our European segment grew 18% resulting from strong sales of SAP implementation services in all of our major operating territories, and extending to Australia and New Zealand. In the current year, Europe represents approximately 30% of our consolidated revenue, compared to 24% of consolidated revenue in 2006. For the first time in our history, during the last quarter of 2007, Europe was our largest segment for that period. It would be difficult for this segment to continue such a high level of growth in 2008, especially if the U.S. dollar strengthens against the Euro and British Pound.
· State & Local segment revenue growth for 2007 was driven by incremental revenue from the Pennsylvania Turnpike Commission project that began in mid-2006. However, these gains were tempered by a decreasing level of services provided to the City of New Orleans during 2007, which resulted in current year revenues that were almost half of 2006 revenues earned from the City of New Orleans. For 2008, we have realigned this segment on a regional basis and plan to emphasize repeatable solutions to stimulate additional growth opportunities.
· The continued revenue decrease in our Federal segment is due to a very difficult governmental spending environment, illustrated by funding delays for information technology initiatives. Over the past two years, we have had a couple of our larger, long-term Federal contracts expire that we have not been able to replace with similar duration contracts. In 2007, this segment focused on qualifying for prime contractor bidding status and will continue this focus into 2008. When achieved, prime contractor bidding status will increase our growth opportunities.
· Over half of the growth in total revenue in our U.S. ERP segment, or $4.8 million during the year ended December 31, 2007, was related to an acquisition completed in September 2007. Excluding that acquisition, our U.S. ERP segment grew over 3% in 2007, compared to 2006. Software-related services, primarily for SAP products, are up approximately 7% this year; however, this was partially offset by reduced product commission revenue. Our sales of IBM products have slowed as customers have delayed their orders for some IBM product lines that are in the process of turning over. We expect our product commission revenues to improve once the new products are released.
Gross Profit. In total, our gross profit margin improved 30 basis points to 27.0% for the year ended December 31, 2007, compared to 26.7% for the same period in 2006. Gross profit margin on consulting services revenue, which grew by 130 basis points, accounted for the increase. The increase in gross profit margin reflects a strong consulting services margin improvement in our U.S. ERP, Europe and Commercial segments, which increased by 410 basis points, 260 basis points and 100 basis points, respectively. Additionally, Europes consulting services projects typically have higher gross profit margins compared to similar domestic projects. With Europe delivering a higher percentage of our consolidated revenues, our gross profit margins increase more than if the same revenue was generated domestically. Offsetting the above consulting services margin increases were decreases in consulting services margins of 140 basis points and 80 basis points in our State & Local and Federal segments, respectively. The decrease in gross profit margin on other revenue to 40.5% for the year ended December 31, 2007, from 54.9% for the year ended December 31, 2006, was due to reduced margins on software sales primarily in our Europe segment, as well as a decrease in high-margin product commission revenue in our U.S. ERP segment.
Selling, general and administrative. As a percentage of revenue, SG&A expenses improved slightly to 21.5% for the year ended December 31, 2007, compared to 21.6% for the year ended December 31, 2006. Our European and State & Local segments led the improvement for the current year with 150 basis point and 130 basis point improvements, respectively, and was aided by more modest decreases in the U.S. ERP and Commercial segments. Although Europe showed a sizable percentage decrease in SG&A expenses, its higher gross margin business carries inherently higher SG&A costs. With Europe representing a greater percentage of our overall revenue, SG&A expense as a percentage of revenue on a total company basis is driven upward. Overall, our domestic SG&A expense was held to less than a 2% increase year over year, but SG&A increased by $14.3 million in our European segment from last year, representing a 23% increase. About half of the increase in Europes SG&A is from foreign currency exchange rate changes, while the other half is from growth to support our expanding operations.
Operating income. As a result of the improved total gross profit margin and the slightly reduced SG&A expenses as a percentage of revenue, our operating income improved 50 basis points to 5.0% for the year ended December 31, 2007, compared to 4.5% for the year ended December 31, 2006.
Operating income by segment was as follows:
*Segments calculated as a % of segment revenue, all other calculated as a % of total revenue
· Commercial segment operating income percentage for the current year increased as a large, low-margin fixed-priced project ended in late 2006 and our newer engagements have been yielding slightly better margins.
· European segment operating income improved primarily due to a reduction in SG&A expenses as a percentage of revenue that was attained from operating leverage achieved on higher revenue volumes. The improvement in SG&A as a percentage of revenue was partially offset by a 70 basis point decrease in gross margin in 2007. Although consulting services margins improved by 260 basis points in 2007 as Europe continued to shift toward more higher-margin services, this was more than offset by decreased margins on other revenue. Margins decreased on other revenue due to lower sales of proprietary software products, as well as pricing pressures on our resale of third-party software products.
· State & Local operating income improved slightly in 2007 compared to 2006 primarily related to $1.4 million in reduced SG&A expenses, which more than offset the decrease in gross profit margin on consulting services in this segment.
· Federal segment operating income for 2007 was hurt by lower utilization and some low-margin fixed-price projects, as well as increased SG&A expenses for sales and operations infrastructure enhancements.
· U.S. ERP segment operating income improved considerably given the completion of several low gross profit projects earlier in the current year, as well as improved project delivery. Our improvement in consulting services margins was partially offset by decreased contributions from product commissions in 2007. Additionally, their reduction in SG&A expenses as a percentage of revenue also contributed to the improved operating income margin.
Other income (expense), net. Other expense, net was $1.8 million in 2007, compared to other income, net of $350,000 in 2006. Other expense in 2007 consisted mainly of minority interest expense of $1.9 million and net foreign currency transaction losses of $1.0 million, offset by a gain on the retirement of our convertible senior subordinated debentures of $887,000 and additional proceeds from the sale of our IBM staffing operation of $271,000. Other income in 2006 consisted mainly of net foreign currency transaction gains of $365,000 and additional proceeds from the sale of our IBM staffing operation of $280,000, offset by minority interest expense of $304,000.
Income taxes. Our effective tax rates were 36.3% and 35.1% for the years ended December 31, 2007 and 2006, respectively. The 2006 tax rate was favorably impacted by recording a multi-year benefit from amending certain prior years tax returns because of additional allowable deductions identified, as well as a U.S. Federal Research and Experimentation tax credit. Our effective tax rate in 2007 reflected an increase in our U.S. Federal Research and Experimentation tax credit. The U.S. Federal Research and Experimentation tax credit expired on December 31, 2007, and unless it is extended, it will negatively impact our tax rate in future years. Accordingly, we expect our effective tax rate will be higher in 2008.
Comparison of the Year Ended December 31, 2006 and 2005 - Consolidated
The following table sets forth certain Consolidated Statement of Operations data in dollars and expressed as a percentage of revenue:
Revenue. Total revenue for the year ended December 31, 2006, increased $39.8 million or over 4% compared to total revenue for the year ended December 31, 2005. This increase was despite an $18.8 million decrease in total revenue in 2006 related to the August 2005 sale of our IBM staffing operation. Offsetting the sale were some small acquisitions that contributed incremental revenue of $5.0 million to our 2006 results. Excluding from 2006 the impact of the sale and acquisitions mentioned above, as well as $2.1 million of additional revenue resulting from favorable currency translation effects, our total revenue for the year ended December 31, 2006, increased 6% over total revenue reported for the year ended December 31, 2005. This increase was primarily related to growth of 12% each in our Europe, State & Local and U.S. ERP segments.
Revenue by segment was as follows:
n/m = not meaningful
· Our Commercial segment results were relatively flat between the comparable years; however, absent the impact of the sale of our IBM staffing operation in mid-2005, the growth rate for this segment was actually 5% for 2006. This growth rate was achieved mainly because of a healthy demand environment.
· European revenues for 2006 were up 14%, including the positive impact from the two small acquisitions during 2006, which contributed approximately $3.0 million in incremental revenue, as well as an additional $2.1 million in revenue from positive exchange rate fluctuations. The remaining growth of 12% was primarily related to strong revenue growth in our Netherlands, Norway and Sweden-based operations. Additionally, our 2005 European segment revenue was constrained by approximately $4.5 million due to two fixed-price projects in our Denmark operation. These two fixed-price projects also constrained European segment revenues during 2006, although to a much lesser extent.
· State & Local revenue increased over 12% in 2006, compared to 2005. Incremental revenue from the City of New Orleans that began in June 2005 and the Pennsylvania Turnpike Commission project that began in mid-2006, accounted for much of the revenue increase.
· The decrease in Federal segment revenue is due primarily to the loss of revenue from a large outsourcing contract where CIBER was a subcontractor to a larger prime vendor. The term of the outsourcing contract ended and it was required by the Federal agency for which the work was being performed that the contract be re-bid. CIBER and the prime vendor with whom we partnered were unsuccessful in our effort to continue providing services under the contract. Loss of this contract resulted in a revenue decrease of approximately $8 million in the second half of 2005 and approximately $20 million during 2006.
· Growth in total revenue in our U.S. ERP segment for 2006 represented organic growth resulting from a very robust demand environment and an increased emphasis on our relationship with SAP.
Gross Profit. In total, our gross profit margin decreased 20 basis points to 26.7% of revenue in 2006 from 26.9% of revenue in 2005, primarily due to lower consulting services margins in our Federal and U.S. ERP segments, which decreased by 190 basis points and 660 basis points, respectively, between the comparative years. The decreased services margin in our Federal segment was due to higher margin revenue recognized in 2005 on an outsourcing contract that was lost in the middle of 2005. The U.S. ERP segment struggled with higher labor costs, continued reliance on higher-priced subcontractors, plus unexpected cost overruns associated with projects that were completed during 2006; all of which significantly affected its gross services margins in 2006. These decreases were primarily offset by a 130 basis point improvement in consulting services gross profit margin in our Commercial segment that was the result of a continued shift toward higher-margin solution business.
Selling, general and administrative. As a percentage of revenue, SG&A expenses increased 20 basis points to 21.6% in 2006 from 21.4% in 2005. The SG&A percentage increase is largely a function of business mix. Our European segment, which has expected higher SG&A costs and higher gross profit, accounted for a higher percentage of revenue in 2006 compared to 2005, and accounted for almost half of the increase in SG&A dollars spent during the year. Excluding Europe, SG&A costs as a percentage of revenue increased slightly as we continued to invest in our offshore operation and our national practices and as we began expensing stock options on January 1, 2006.
Operating income. As a result of the decrease in gross profit margin and the slightly increased SG&A expenses as a percentage of revenue, our operating income decreased 40 basis points to 4.5% for the year ended December 31, 2006, compared to 4.9% for the year ended December 31, 2005.
Operating income by segment was as follows:
*Segments calculated as a % of segment revenue, all other calculated as a % of total revenue
· The Commercial segments increase in gross profit margin was more than offset by higher SG&A costs, resulting in a 20 basis point decrease in operating income as a percentage of revenue in 2006 compared to 2005. Costs associated with the investment in our offshore operations and our national practices are all captured in this segment and account for the majority of the increase in SG&A expenses.
· The improvement in Europes 2006 operating income resulted almost entirely from a reduction in SG&A expenses as a percentage of revenue that was attained from operating leverage achieved on higher revenue volumes.
· The State & Local segments operating income percentage was significantly impacted by an improvement in SG&A costs as a percentage of revenue, which was the result of cost-cutting efforts within the segment.
· The decrease in the Federal segments 2006 operating income percentage reflects the 190 basis point decrease in the gross profit margin discussed above, coupled with an increase in SG&A costs as a percentage of revenue. Although SG&A expenses as a percentage of revenue increased, SG&A dollars decreased 4% for 2006 compared to 2005. SG&A expense did not decrease at the same rate that revenue declined as sales and deal pursuit efforts intensified in an attempt to replace the lost outsourcing revenue.
· U.S. ERP segment operating income decreased considerably due to the sizable decrease in gross profit margin on consulting services, mentioned above, which was only partially offset by a reduction in SG&A expenses as a percentage of revenue.
Other income (expense), net. Other income, net was $350,000 in 2006, compared to other expense, net of $143,000 in 2005. Other income in 2006 consisted mainly of net foreign currency transaction gains of $365,000 and additional proceeds from the sale of our IBM staffing operation of $280,000, offset by minority interest expense of $304,000. Other expense in 2005 was primarily comprised of a $1.0 million gain on the sale of our IBM staffing operation, offset by net foreign currency transaction losses of $490,000 and minority interest expense of $341,000.
Income taxes. Our effective tax rate was 35.1% in 2006, compared to 36.0% in 2005. Our effective tax rates in both 2006 and 2005 were favorably impacted by a Federal research credit. Additionally, the 2006 tax rate reflects the multi-year benefit from amending certain prior years tax returns because of additional allowable deductions identified. The lower rate in 2005 was due to an adjustment to the expected benefit of the research credit related to prior years activities.
Liquidity and Capital Resources
At December 31, 2007, we had $175.8 million of working capital and a current ratio of 2.1:1, compared to working capital of $140.8 million and a current ratio of 2.0:1 at December 31, 2006. Historically, we have used our operating cash flow and borrowings, as well as periodic sales of our common stock to finance ongoing operations and business combinations. We believe that our cash and cash equivalents, our operating cash flow and our available senior secured reducing revolving credit facility will be sufficient to finance our working capital needs through at least the next year.
Our balance of cash and cash equivalents was $31.7 million at December 31, 2007, compared to a balance of $33.3 million at December 31, 2006. Substantially all of our cash balance is maintained by our European subsidiaries. Primarily all of our domestic cash balances are used daily to reduce our line of credit balance.
Operating activities. Total accounts receivable increased to $269.1 million at December 31, 2007, from $226.1 million at December 31, 2006, primarily due to a revenue increase, and to a lesser extent, a slight slowdown in collections. Total accounts receivable days sales outstanding (DSO) was 78 days at December 31, 2007, compared to 76 days at December 31, 2006. Changes in accounts receivable have a significant impact on our cash flow. Items that can affect our accounts receivable DSO 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 DSO to fluctuate from period to period, affecting our liquidity. At December 31, 2007, we had approximately $17 million of outstanding accounts receivable from the City of New Orleans (the City). Although we continue to provide services to the City, approximately $11 million of this receivable is related to the hurricane disaster. The City continues to experience administrative complications and FEMA reimbursement delays, which have delayed payment for our services. We have been informed that FEMA has so far approved approximately $7.3 million of our invoices for reimbursement to the City and they began making reimbursements to the City in January 2008. We continue to work with the City and FEMA on the balance. Based on our communications with the City and FEMA, we believe we will be able to collect the balance in full. Through February 29, 2008, we have received payments totaling over $2.9 million from the City.
Accrued compensation and related liabilities increased to $54.8 million at December 31, 2007, from $43.6 million at December 31, 2006, due to increased payroll levels in Europe. These balances are subject to the effects from the timing of our normal bi-weekly U.S. payroll cycle. At both December 31, 2007 and 2006, there were 5 days of unpaid wages. In addition, annual bonuses are typically accrued throughout the year and paid in the first quarter of the following year, causing some fluctuation 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 contractors. Due to the slower IBM product sales during the second half of 2007, our accounts payable balance related to hardware is down $9.1 million at December 31, 2007, compared to 2006.
Investing activities. Investing activities are primarily comprised of cash paid for acquisitions and purchases of property and equipment. We used $22.3 million for acquisitions during the year ended December 31, 2007, compared to $9.9 million and $9.6 million for the years ended December 31, 2006 and 2005, respectively. Spending on property and equipment increased to $13.2 million in 2007, compared to $10.6 million and $10.8 million in 2006 and 2005, respectively. During 2007, we sold an aircraft acquired in the Novasoft AG acquisition in 2004 for $1.9 million.
Financing activities. Financing activity inflows consist of cash provided by borrowings on our line of credit and other bank debt, sales of stock under our employee stock purchase plan and the exercise of employee stock options. The cash provided by sales of stock under our employee stock purchase plan and options exercised was $5.6 million for the year ended December 31, 2007, compared to $4.9 million and $5.7 million for the years ended December 31, 2006 and 2005, respectively. Our financing activity outflows typically consist of cash used for the repayment of our line of credit and other bank debt and the purchase of treasury stock. We purchased $15.3 million of treasury stock during the year ended December 31, 2007, compared to $8.1 million and $10.5 million of treasury stock for the years ended December 31, 2006 and 2005, respectively. In 2007 and 2006, we also had outflows of $339,000 and $6.1 million related to the settlement of cross-currency interest rate swaps. Additionally in 2007, for a cash outlay of $22.1 million, we were able to retire $23.0 million of our Debentures, for a gain on retirement of approximately $887,000. At December 31, 2007, we had authorization for the repurchase of an additional $3.6 million of our common stock or our Debentures under our current repurchase plan. We may continue to use cash to repurchase our common stock (subject to limitations under our new Revolving Credit Facility discussed below) or our Debentures. We may voluntarily repurchase our Debentures if we can obtain them at favorable prices. In addition, in December 2008 we may be required to repurchase the Debentures (see below).
Bank Line of Credit At December 31, 2007, we had $49.5 million of outstanding borrowings under our $60 million revolving line of credit with Wells Fargo Bank, N.A. (Wells Fargo) with a borrowing rate of 6.00%. We were in compliance with the financial covenants for this line of credit as of December 31, 2007.
Revolving Credit Facility On February 11, 2008, we entered into a $200 million senior secured reducing revolving credit facility, with several financial institutions as lenders and Wells Fargo as administrative agent (the Revolving Credit Facility). The Revolving Credit Facility replaced our previous $60 million bank line of credit and refinanced all amounts outstanding thereunder. The credit available under the Revolving Credit Facility will be used for our working capital and general corporate purposes, including the repurchase of our convertible senior subordinated debentures (Debentures). Substantially all of our assets secure the Revolving Credit Facility.
Beginning on March 31, 2009, and continuing through December 31, 2010, the aggregate commitments under the Revolving Credit Facility will be reduced by $7.5 million each quarter end. The Revolving Credit Facility matures on February 11, 2011, at which time the remaining $140 million of maximum credit available will terminate and all outstanding balances must be repaid in full. Additionally, the Revolving Credit Facility is subject to mandatory prepayments (and commitment reductions) in amounts equal to the net cash proceeds resulting from specified events such as asset dispositions, event of loss, issuance or incurrence of indebtedness and issuance of equity, subject in each case to specified thresholds and other exceptions.
At our election, our borrowings under the Revolving Credit Facility bear interest at rates calculated in reference to either the Wells Fargo prime lending rate (prime) plus a margin that ranges from 0.00% to 0.25%, or a London interbank offered market rate (LIBOR) for one to six month maturities, plus a margin that ranges from 0.75% to 1.75%. At February 29, 2008, our weighted average interest rate on our outstanding borrowings was 4.99%. We are also required to pay a fee on the unused portion of the Revolving Credit Facility that ranges from 0.20% to 0.50%. For so long as our Debentures remain outstanding, we will also incur a facility fee of 0.15% on the entire amount of the commitment.
The terms of the Revolving Credit Facility include, among other provisions, specific limitations on the incurrence of additional indebtedness and liens, stock repurchases, investments, guarantees, mergers, dispositions and acquisitions, and a prohibition on the payment of any dividends. The Revolving Credit Facility also contains certain financial covenants, including a maximum consolidated total leverage ratio (Total Debt divided by EBITDA) of 3.25 to 1.00, a maximum senior leverage ratio (Total Debt excluding Debentures divided by EBITDA) of 1.50 to 1.00, a minimum interest coverage ratio (net income plus net interest expense (EBIT) divided by interest expense) of 3.50 to 1.00 and a minimum liquidity percentage (Total Liquidity divided by outstanding Debentures) of 100% to 115%. We are required to be in compliance with the financial covenants at the end of each quarter. Certain elements of these ratios are defined below:
· Total Debt includes borrowings under our Revolving Credit Facility, any foreign bank debt and our term loans with Wells Fargo, plus the face amount of any outstanding Letters of Credit. This includes our Debentures.
· EBITDA represents net income from continuing operations plus: net interest expense, income tax expense, depreciation expense, amortization expense, share-based compensation expense and minority interest expense, measured over the prior four quarters.
· Total Liquidity represents unrestricted cash and cash equivalents, plus the remaining available commitment under the Revolving Credit Facility, less debt of our foreign subsidiaries.
Convertible Senior Subordinated Debentures - In a private placement on December 2, 2003, we issued $175.0 million of 2.875% Debentures due to mature in December 2023. During 2007, for a total purchase price of $22.1 million and a resulting gain of approximately $887,000, we were able to retire $23.0 million of our Debentures, leaving an outstanding balance of $152.0 million at December 31, 2007. The Debentures are general unsecured obligations and are subordinated in right of payment to all of our indebtedness and other liabilities. Interest is payable semi-annually in arrears on June 15 and December 15 of each year.
The Debentures are convertible at the option of the holder into shares of our common stock at an initial conversion rate of 73.3138 shares per $1,000 principal amount of Debentures, which is equivalent to an initial conversion price of approximately $13.64 per share, subject to adjustments, prior to the close of business on the final maturity date only under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2003, if the closing sale price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter; (2) during the five business days after any ten consecutive trading day period in which the trading price per $1,000 principal amount of Debentures for each day of such period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the Debentures; (3) if the Debentures have been called for redemption; or (4) upon the occurrence of certain specified corporate transactions. The conversion price is subject to adjustment in certain circumstances. In 2005, we made an irrevocable election to settle in cash and not in shares 100% of the principal amount of the Debentures surrendered for conversion. As a result, upon conversion we will deliver cash in lieu of our common stock.
Debenture holders may require us to repurchase their Debentures on December 15, 2008, 2010, 2013 and 2018, or at any time prior to their maturity in the case of certain events, at a repurchase price of 100% of their principal amount plus accrued interest. From December 20, 2008, to, but not including December 15, 2010, we may redeem any of the Debentures if the closing price of our common stock exceeds 130% of the conversion price for at least 20 trading days in any 30 consecutive trading day period. Beginning December 15, 2010, we may, by providing at least 30-days notice to the holders, redeem any of the Debentures at a redemption price of 100% of their principal amount, plus accrued interest. Given our current stock price and market interest rates, we expect that we will be required to repurchase most or all of the remaining $152.0 million of Debentures on December 15, 2008. As such, from January 1, 2008, through March 3, 2008, we repurchased and retired $61.0 million of our Debentures, leaving $91.0 million outstanding. We may voluntarily continue to repurchase some of the Debentures prior to December 15, 2008. We believe our new Revolving Credit Facility (mentioned above) and our expected cash flow will provide sufficient available resources to cover the payment of any Debentures that we will have to settle in 2008.
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, 2007:
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which is effective for fiscal years beginning after November 15, 2007. SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements and requires new disclosures about fair value measurements for future transactions. In February 2008, the FASB issued Staff Positions No. 157-1 and No. 157-2, which partially defer the effective date of SFAS No. 157 for one year for certain nonfinancial assets and liabilities and remove certain leasing transactions from its scope. We are currently evaluating the impact of the adoption of SFAS No. 157 on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Under SFAS No. 159, entities may irrevocably elect fair value for the initial and subsequent measurement of certain financial instruments and certain other items. Subsequent measurements for the financial instruments and certain other items that an entity elects to record at fair value will be recognized in earnings. SFAS No. 159 also establishes additional disclosure requirements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. At the effective date, an entity may elect the fair value option for eligible items that exist at that date. The entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. The Company will not elect the fair value option for eligible items that exist as of January 1, 2008.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which changes accounting for business acquisitions. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration), exclude transaction costs from acquisition accounting, and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. For CIBER, SFAS No. 141(R) is effective for business combinations and adjustments to an acquired entitys deferred tax asset and liability balances occurring after December 31, 2008. We are currently evaluating the future impact and required disclosures of this standard.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, which establishes new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially-owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability, that increases and decreases in the parents ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. SFAS No. 160 is effective beginning January 1, 2009. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. We are currently evaluating the future impact and required disclosures of this standard.
Proposed New Accounting Pronouncement
In August 2007, the Financial Accounting Standards Board (FASB) proposed FASB Staff Position (FSP) APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash (Including Partial Cash Settlement) upon Conversion. The proposed FSP would require the proceeds from the issuance of such convertible debt instruments to be allocated between a liability component (issued at a discount) and an equity component. The resulting debt discount would be amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. The proposed FSP has been delayed, but it is expected to be effective for fiscal years beginning after December 15, 2008, and would require retrospective application to all periods presented. If adopted, this FSP would change the accounting treatment for our Debentures. Beginning in 2009 for financial statements covering past and future periods, it would impact our results of operations as we would record additional
non-cash interest expense for our Debentures. We are currently evaluating the potential impact of this issue on our consolidated financial statements in the event that this pronouncement is adopted by the FASB.
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.
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. CIBERs 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) 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 require management to make judgments and estimates in recognizing revenue. Fees for these contracts may be in the form of time-and-materials, cost-plus or fixed-price. 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 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 in accordance with The American Institute of Certified Public Accountants Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. 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 in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition. 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.
Managed IT services arrangements typically span several years. Revenue from managed services 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 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 are also deferred and recognized as revenue evenly over the period that the managed services are provided.
Revenue for contracts with multiple elements is accounted for pursuant to Emerging Issues Task Force Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables or SOP 97-2, Software Revenue Recognition. We recognize revenue on arrangements with multiple deliverables as separate units of accounting only if certain criteria are met. If such criteria are not met, then combined accounting is applied to all deliverables and all revenue is recognized based on the accounting applicable to the last element to be delivered.
Other revenue includes resale of third-party IT hardware and software products, sales of proprietary software and commissions on sales of IT products. Some software sales arrangements also include implementation services and/or post-contract customer support. In such multi-element arrangements, if the criteria are met, revenue is recognized based on the vendor specific objective evidence of the fair value of each element. Software support revenue is recognized ratably over the term of the related agreement. 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.
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 - At December 31, 2007, we had $457.8 million of goodwill resulting from acquisitions. Goodwill is not amortized, but rather is subject to impairment testing. We review goodwill for impairment annually at June 30, and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The provisions of SFAS No. 142 require that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. Our reporting units are consistent with the reportable segments identified in the Notes to our Consolidated Financial Statements. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not to be impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting units goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable, but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. Our most recent annual goodwill impairment analysis, which was performed during the second quarter of 2007, did not result in an impairment charge.
Income taxes - Significant judgment is required in determining our worldwide income tax provision. As a global company, we calculate and provide for income taxes in each of the tax jurisdictions in which we operate. This involves estimating current tax exposures in each jurisdiction, as well as making judgments regarding the recoverability of deferred tax assets. 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 can affect our overall effective tax rate.
We are regularly audited by various taxing authorities, and sometimes these audits result in 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.
No taxes have been provided on undistributed foreign earnings that are planned to be indefinitely reinvested. 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 withholding taxes may apply, which could materially affect our future effective tax rate.
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, 2007, we had gross accounts receivable of $271.1 million and our allowance for doubtful accounts was $2.1 million. Our allowance for doubtful accounts is based upon specific identification of probable losses. We review our accounts receivable and reassess our estimates of collectibility each month. Historically, our bad debt expense has been a very small percentage of our total revenue, as most of our revenues are from large, credit-worthy Fortune 1000 companies and governments. 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. At December 31, 2007, we had approximately $17 million of outstanding accounts receivable from the City of New Orleans (the City). Although we continue to provide services to the City, approximately $11 million of this receivable is related to the hurricane disaster. The City continues to experience administrative complications and FEMA reimbursement delays, which have delayed payment for our services. We have been informed that FEMA has so far approved approximately $7.3 million of our invoices for reimbursement to the City and they began making reimbursements to the City in January 2008. We continue to work with the City and FEMA on the balance. Based on our communications with the City and FEMA, we believe we will be able to collect the balance in full. Therefore, we have not provided for any reserves related to this balance at December 31, 2007. Through February 29, 2008, we have received payments totaling over $2.9 million from the City. We cannot be assured that we will be 100% successful in our collection efforts. Should the Citys financial condition deteriorate, or should other information arise in the future to indicate that we may not be paid in full, we would have to provide for an appropriate reserve at such time.
Accrued compensation and certain other accrued liabilities - Employee compensation costs are our largest expense category. We have several different variable compensation programs, which 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. We also 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 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.
Other intangible assets - In connection with our acquisitions, we are required to recognize other intangible assets separate and apart from goodwill, if such assets arise from contractual or other legal rights or if such assets are separable from the acquired business. Other intangible assets primarily include, among other things, customer-related assets such as order backlog, customer contracts and customer relationships. Determining a fair value for such items requires a high degree of judgment, assumptions and estimates. We often use third parties to assist us with such valuations. In addition, these intangible assets are amortized over our best estimate of their useful life.
We are exposed to market risks related to changes in foreign currency exchange rates and interest rates. We believe our exposure to market risks is immaterial.
During 2007, 30.6%, or $331.1 million of our total revenue was attributable to our foreign operations. Using sensitivity analysis, a hypothetical 10% increase or decrease in the value of the U.S. dollar (USD) against all currencies would change total revenue by 3.0%, or $32.2 million. In our opinion, a substantial portion of this fluctuation would be offset by expenses incurred in local currency. Additionally, we have exposure to changes in foreign currency rates related to short-term inter-company transactions with our foreign subsidiaries and from client receivables in different currencies. Foreign sales are mostly made by our foreign subsidiaries in their respective countries and are typically denominated in the local currency of each country. Our foreign subsidiaries incur most of their expenses in their local currency as well, which helps minimize our risk of exchange rate fluctuations.
Periodically, we enter into cross-currency swap arrangements with a financial institution to partially hedge the net assets of certain foreign operations (net investment hedges) and offset the foreign currency translation and economic exposures related to our investments in these foreign operations. Increases and decreases in the net investment in our subsidiaries due to foreign exchange volatility will be partially offset by foreign exchange losses and gains from the net investment hedge. At December 31, 2007, we had net investment hedges in both Great Britain Pounds (GBP) and in Euros. As of December 31, 2007, the GBP investment hedges had a notional amount of $30.1 million and a weighted average exchange rate of 0.4990 GBP for each USD. A 10% change in the value of the USD against the GBP would result in approximately a $3.0 million change in the value of our hedge instruments. As of December 31, 2007, the Euro investment hedges had a notional amount of $68.5 million and a weighted average exchange rate of 0.7303 Euros for each USD. A 10% change in the value of the USD against the Euro would result in approximately a $6.8 million change in the value of our hedge instruments. The hedges mature at varying dates up to September 2009. The combined fair value of these net investment hedges at December 31, 2007, was a loss of approximately $4.4 million.
We transact business in foreign currencies and from time to time, we will enter into foreign exchange forward contracts to offset the risk associated with the effects of certain foreign currency exposures. Increases or decreases in our foreign currency exposures are offset by gains or losses on the forward contracts, to mitigate the possibility of foreign currency transaction gains or losses. These foreign currency exposures typically arise from inter-company transactions, such as loans between foreign entities and/or CIBER, Inc. These derivative financial instruments generally have maturities of less than one year and are subject to fluctuations in foreign exchange rates, as well as credit risk. We have two outstanding Euro/USD foreign currency forward contracts at December 31, 2007, with a notional amount of $9.3 million and a weighted average exchange rate of 0.6984 Euros for each USD and which mature in 2008. A 10% change in the value of the USD against the Euro would result in approximately a $930,000 change in the value of our hedge instrument. The combined fair value of these contracts at December 31, 2007, was a loss of approximately $183,000. We also have a GBP/USD forward contract to purchase $206,500 monthly through June 2009 at an exchange rate of 0.4994 GBP for each USD. Fair value of this forward contract was not material at December 31, 2007.
We manage credit risk related to our net investment hedges and our foreign exchange forward contracts through careful selection of the financial institution utilized as the counterparty.
Our exposure to changes in interest rates arises primarily because our indebtedness under our bank line of credit has a variable interest rate. At December 31, 2007, our outstanding borrowings under our line of credit were $49.5 million and our interest rate was 6.00%.
Our Debentures carry a fixed rate of interest of 2.875%. However, we may be required to repurchase some or all of the Debentures as early as December 2008, depending upon, among other things, the interest rate environment and the price of our stock at that time. Given current market conditions, we believe that it is likely that we will have to repurchase most or all of the Debentures in December 2008. As such, we have already begun to repurchase some of the Debentures using our revolving credit facilities. Our credit facilities carry floating/variable interest rates. Assuming the $152.0 million is outstanding at a rate of interest of 5.00%, we would incur annual interest expense of approximately $7.6 million, as compared to approximately $4.4 million of annual interest expense at the fixed rate of 2.875%.
The following consolidated financial statements and supplementary data are included as part of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of CIBER, Inc.
We have audited the accompanying consolidated balance sheets of CIBER, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CIBER, Inc.s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2008 expressed an unqualified opinion thereon.
March 3, 2008
CIBER, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
CIBER, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)