NCI Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 1.13 | About: NCI, Inc. (NCIT)

NCI (NASDAQ:NCIT)

Q4 2012 Earnings Call

February 28, 2013 5:00 pm ET

Executives

Ali Ferguson

Chander K. Narang - Founder, Chairman, Chief Executive Officer, Chairman of NCI Information Systems Inc, Chief Executive Officer of NCI Information Systems Inc and President of NCI Information Systems Inc

Brian J. Clark - President and Director

Lucas J. Narel - Chief Financial Officer, Executive Vice President and Treasurer

Marco F. de Vito - Chief Operating Officer

Analysts

George A. Price - BB&T Capital Markets, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the NCI Incorporated Fourth Quarter and Full Year 2012 Earnings Conference Call. My name is Brock, and I will be your conference operator today. [Operator Instructions] I would now like to turn the presentation over to host for today's call, Ali Ferguson, Corporate Communication Manager for NCI. Please go ahead.

Ali Ferguson

Good evening and thank you for participating in NCI's conference call today. By now, you should have a copy of the press release we issued a short time ago. If not, it is available on our website at www.nciinc.com. With us are our Chairman and CEO, Charles Narang; our President, Brian Clark; and our Chief Financial Officer, Lucas Narel, all of whom will deliver prepared remarks. Our Chief Operating Officer, Marco de Vito, is also here to participate on the Q&A portion of the call.

Before we begin our discussion, it is important that we remind you that on this call, we will make statements that do not address historical facts and are thus forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results and include the risks and uncertainties identified in our earnings press release under the caption Forward-Looking Statement. For a full discussion of these factors and other risks and uncertainties, please refer to the section titled Risk Factors in NCI's Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. Also, we undertake no obligation to update any of the forward-looking statements made on this call.

I will now turn the call over to Charles Narang.

Chander K. Narang

Thank you, Ali, and good evening. We have a lot to share with you on today's call. The fourth quarter and indeed fiscal year 2012 as a whole was challenging for NCI. Operationally, we exceeded our initial revenue and our main target we set out at this time last year. But we witnessed along with everyone else, the Federal funding and procurement process essentially grind to a halt in the fourth quarter of 2012.

Brian will talk more about our results in 2012 and expectations going forward. With the threat of long-term spending reductions hanging over our customers at large made by both the DoD and federal agencies, in the fourth quarter of 2012, we're down dramatically from the third quarter. We have adjusted our outlook to factor in anticipated impact of the secular decline in Federal spending being the reality with or without sequestration. Lucas will discuss how this reasoning affects our guidance for the first quarter and full year 2013. We also took steps in the fourth quarter of 2012 that we believe positions the company to be more competitive and successful in this new [indiscernible] contraction in Federal spending. Brian will outline these as well.

On a positive note, we've begun to see long-awaited RFPs issued since the beginning of 2013. In fact, we recently submitted the first several bids that reflect our new business pursued process here at NCI. In a few minutes, we will give a more details on expected data on award nativity 2013 and how we expect to define our success this year. It's clear to me that the health of the company going forward will depend on achieving positive growth momentum in 2013 and going into 2014. I can tell you that we have examined our pipeline of new business opportunities and our bid and win strategies. Once the procurement environment stabilizes and becomes clearer, I'm confident that we are well-positioned to pursue and win significant work.

I will now turn the call over to Brian. Brian?

Brian J. Clark

Thanks, Charles, and good evening. Charles talked about NCI need to post meaningful bookings in 2013. I'll update you on how we continued to transform and strengthen our business development efforts during the fourth quarter of 2012 and our plans for continued success in investment in this critical area going forward. But first I want to review NCI's performance for the fourth quarter including the effect of the additional noncash impairment charge related to goodwill and purchased intangibles that we disclosed in today's press release.

Fourth quarter revenue came in at $89.7 million in the top half of the guidance range we gave on last quarter's call. Excluding the effect of the impairment charge related to goodwill and purchased intangibles, adjusted earnings per share was $0.15 which exceeded the top-end of our EPS range by $0.03. As we anticipated, growth bookings in the fourth quarter were well below 1x revenue at approximately $15 million and debookings of approximately $130 million, distorted book-to-bill even further. DSO was a bright spot in the fourth quarter at 64 days which contributed to full year 2012 cash flow from operations being a robust $41.5 million.

Finally, at you'll note in today's release, we announced an additional noncash impairment charge related to goodwill and purchased intangibles up $58.0 million. As a result, NCI's balance sheet now shows no goodwill associated with acquisitions completed in prior years.

Operationally, while we have performed in line or better than projected throughout 2012, a number of factors led to the ultimate conclusion that further impairment existed and was appropriate to be measured and recorded in the fourth quarter. Once again, the impairment charge will not affect NCI's cash position, cash flows from operations or liquidity. It should not have any effect on our current or future results of operations. It should be noted, however, that all of the acquisitions that gave rise to the now-impaired book goodwill were treated as asset purchases for income tax purposes. Accordingly, the write off of the previously recorded goodwill resulted in approximately $42 million of deferred tax assets being recorded in the third and fourth quarters of 2012. These assets will be realized over the next 13 years and represent a previously unbooked value in excess of $3 per share.

Lucas will now provide further context to the numbers and provide guidance for the first quarter and full fiscal year 2013. I will then finish up with some final comments. Lucas?

Lucas J. Narel

Thanks, Brian, and good evening. For the fourth quarter ended December 31, 2012, revenue decreased by 22%, $25.2 million over the same period a year ago to $89.7 million. The decrease was primarily a result of reductions in scope, the expiration of task orders and contracts, and certain lost contract recompetes which collectively totaled $14 million; the ending of base realignment and closure, or BRAC-related, and other non-core projects which totaled $7 million; and the decrease in revenue from our PEO Soldier program, which accounted for $4 million of the year-over-year decline in revenue for the fourth quarter of 2012.

During the fourth quarter of 2012, PEO Soldier accounted for 15.9% of our revenue, down from 16.3% sequentially and 16.2% in the fourth quarter of 2011. Contracts for NCI as the prime contractor accounted for 89% of revenue for the quarter, compared with 87% in the third quarter of 2012, and 89% in the fourth quarter of 2011. DoD and Intelligence contracts made up 77% of total revenues, while Federal Civilian contracts comprised 23%. The DoD and Intel share was up 1 percentage point sequentially, and decreased by 4 percentage points year-over-year. The year-over-year decrease was largely a result of a decline in the BRAC-related and other non-core revenue, certain lost contract recompetes, and a reduction of PEO Soldier revenue.

Fixed-price contracts accounted for 29% of revenue, up 2 percentage points from the third quarter of 2012, unchanged year-over-year. Time and material contracts were 23% of revenue, down 1 percentage point sequentially and down 3 percentage points from the fourth quarter of 2011. The cost plus fee contracts accounted for 48% of revenue, down 1 percentage point sequentially, and up 3 percentage points year-over-year.

GAAP operating loss for the fourth quarter of 2012 was $54.3 million compared with GAAP operating income of $0.8 million in the fourth quarter of 2011. Operating income was lower in the fourth quarter of 2012, primarily due to the impairment charge. Excluding the impairment charge, operating income was $3.7 million or 4.1% of revenue. Operating income for the fourth quarter of 2011 included the effect of the $3.1 million restructuring charge taken during the period. Adjusted operating income for the fourth quarter of 2011 was $3.9 million or 3.4% of revenue.

Adjusted operating margin increased primarily as a result of fewer lower margin pass-through task orders as well as the timing of certain order fees and other one-time gains. Net interest expense is approximately $250,000 for the quarter ended December 31, 2012, compared with $515,000 for the corresponding quarter in 2011. This decrease is primarily attributed to a lower overall weighted average loan balance. GAAP net loss for 2012 was $86.8 million, compared with a GAAP net income for 2011 of $13.2 million. The decrease in net income year-over-year was primarily attributed to noncash after-tax dual impairment charges taken in the third and fourth quarters of 2012, totaling $92.3 million, as well as a stock option tender offer expense recorded in the third quarter of 2012 totaling $2.3 million. GAAP loss per share for 2012 was $6.51 compared with GAAP and diluted earnings per share of $0.95 for 2011. Excluding the effect of the impairment charges and the stock option tender offer, net income for 2012 was $6.9 million or $0.51 per diluted share. Excluding the effect of the restructuring charge taken on the fourth quarter of 2011, net income for 2011 was $15 million or $1.09 per diluted share.

Fourth quarter 2012 adjusted EPS exceeded the top end of our guidance by $0.03. Adjusted EPS was higher than previously forecast due to improved operational performance on several key contracts and onetime gains related to awards fees for successful completion of task orders.

Days sales outstanding of accounts receivable or DSO was 64 days for the quarter ended December 31, 2012, up 10 days from 54 days for the quarter ended September 30, 2012. This DSO reflects a more normalized collection of receivables. Cash flow provided by operating activities for the fiscal year 2012 was $41.5 million, including $2.3 million provided in the fourth quarter.

During the fourth quarter, we used $3.5 million to make payments on our senior credit facility resulting in an outstanding loan balance of $17.5 million at December 31, 2012. Contract backlog at December 31, 2012, totaled $706 million, of which $212 million was funded. This compares with total backlog of $910 million at September 30, 2012, of which $249 million was funded. As Brian said, given the current uncertainty in the federal procurement environment, we wrote down or debooked approximately $130 million of backlog in the fourth quarter of 2012. Contract bookings during the fourth quarter of 2012 totaled $15 million.

And now moving on to guidance. For the first quarter of 2013, we expect revenues to be $80 million to $86 million and diluted earnings per share to be $0.08 to $0.10 on a weighted average diluted share count of 13 million shares. We expect full year 2013 revenue to be in the range of $280 million to $320 million and diluted earnings per share to be $0.14 to $0.26. Charles mentioned, our guidance includes consideration for the impact of Federal budget constraints being the norm going forward. Despite not having a clear indication from our customers on the effects of sequestration to our programs, we decided we'd be prudent that the low-end of our guidance, $280 million and $0.14, should include a 5% cut to our core business beyond normal attrition.

No assumption of revenue from new awards for 2013 and no revenue from recompete wins this year. Our recompete exposure in this case is very small, less than $10 million. At the high end of guidance, we assume no additional erosion as a result of sequestration in our core business, a healthy recompete win rate and approximately 5% of revenue coming from new wins in 2013.

As we stated on last quarter's call, absent a near-term needle-moving contract award, we expect revenues to decrease each quarter throughout 2013. We estimate interest expense for the first quarter of 2013 will be approximately $250,000, and $950,000 for the full year. Depreciation and amortization is expected to be $1.5 million for the first quarter and $7.5 million for the full year. Stock comp expense is expected to be approximately $300,000 in the first quarter and about $1.4 million for the full year.

As we noted in today's press release, during the fourth quarter of 2012, NCI repurchased approximately 94,000 shares of our Class A common stock totaling $500,000. As of December 31, 2012, $16.7 million is remaining under the Board of Directors authorization for share repurchases. We will continue to update you on future quarters as events and circumstances warrant.

And with that, I'll turn the call back over to Brian.

Brian J. Clark

On last quarter's call, we shared some big-picture assumptions we're using to model our internal forecast for this year. We told you that as part of the goodwill impairment analysis we completed in the third quarter, we modeled a range of financial and operating assumptions for 2013. We said we expected this year to continue to be a period of rapidly declining quarterly revenue, beginning from a base that is well below the midpoint of our fourth quarter 2012 revenue guidance, which was $88 million.

We said this is a defining assumption to our forecast, where continued sequential erosion of existing revenue base as projects wrap up throughout 2013 and insufficient replenishing of new awards early enough in the year. We now believe that the erosion of NCI's core revenue base and profits will be more acute because we now expect, mandatory sequestration cuts occur starting as early as tomorrow.

At the very least, we believe we will continue to see significant disruption in the marketplace and uncertainty surrounding spending levels, priorities and the path forward on the path of our customers. As Lucas pointed out, our 2013 guidances reflects this view point with an assumed reduction of some level of NCI's core revenue base. As we told you last quarter, NCI must win significant new business in the next year to halt net erosion of our revenue base and begin to stabilize and grow operating profit and earnings per share. To put it another way, our target book-to-bill ratio for the next 12 months is at least 1.2x the midpoint of our full-year revenue guidance of $300 million. That equates to more than $360 million of bookings, assuming that there are a reasonable number of opportunities to bid on key prospects in our pipeline.

To underscore the importance of meaningful new business additions, bookings are a principal component of executive compensation for this year. Without net bookings of at least this magnitude in the next 12 months, the outlook for 2014 is unacceptable to me. I spent a lot of time on our last 2 calls outlining the revamp of our business development capability. We told you about the personnel, enhanced tools and processes that have resulted in significantly greater captured discipline as well as improved pipeline quality overall. I'm confident that our pipeline is more accurately qualified than it's ever been. I think the best way to validate our confidence in this is to break down some key statistics of our pipeline and let you see what we're seeing.

Last quarter, we said our pipeline was up slightly from Q2 instead of nearly $10.5 billion. Today, our total pipeline stands at approximately $9 billion. And while the overall pipeline dropped, our qualified pipeline increased by 45%. This is a good news story as the changes reflect our improved, new business processes and disciplines where opportunities are assessed earlier and either qualified or discarded. It allows us to focus on the most promising opportunities more efficiently and effectively applying our business development in capture resources.

Now, of this approximately $9 billion pipeline, we expect more than $2 billion to be bid this year. However, this assumption is very much dependent on RFPs being released without inordinate delays. In fact, several of our larger and more promising opportunities have already experienced delays of 6 to 9 months beyond their advertised RFP release dates.

The 4 questions we ask to reach opportunity in arriving at this number. Our first is a target reel. Is our natural program or contract to be decided? Second, what will the likely award value be? Not merely relying on what the customer said publicly but taking into account the recent competitive history and budget pressures. Third, when will it really be bid and awarded? Often, this process involved moving the target date back by up to 3 quarters. And finally, what is our probability of win? When all these factors are applied to our pipeline, we see several different scenarios for arriving at our bookings goal or greater in 2013. Again, assuming that there are not continued material delays in the procurement process or, worse, cancellations of entire programs.

Recall that our 2011 year end call announced that we committed nearly $2 million in planned new business development expenditures during 2012, to hire A-list talent to identify and capture new opportunities and revamp acquisition processes, as well as training and other investments aimed at increasing win probabilities. We're encouraged by the progress we've made in these areas thus far and, as a result, we're committing additional incremental investment to NCI's business development efforts in 2013. We believe that this added investment will be vital to achieving our bookings targets this year and beyond.

We will provide you with updates each quarter as to how we're performing against these expectations. But I should say that we expect the majority of 2013 bookings to come in the second half of the year. We now have approximately $650 million in bids submitted and awaiting award today, which is up considerably over the last quarter, with the increase largely due to do 1 large proposal that we submitted earlier this quarter. As Lucas indicated, revenue from new awards and recompetes accounted for less than 5% of the midpoint of revenue guidance for the year. A major win in the first half of the year could change this calculation considerably, but for now, a more conservative case defines our guidance posture.

In closing, we realized we've given you multitude of data points to evaluate this quarter, some which will not necessarily be viewed positively. Admittedly, was a painful process we went through in writing down backlog and arriving at further impairment charges to zeroed-out goodwill in the balance sheet. But I want to encourage you to consider the following before passing judgment on what we reported today.

First, we began a course of action to become a turnaround by late 2011, with a sheer drop-off of project-related revenue, and the need to immediately downsize infrastructure and realign the company's operations and resources was highly disruptive. At the same time, we had to identify new sources of revenue and focus on overhauling and building a business development organization. This takes us 18 months to identify and address the structural deficiencies begin to give NCI the proper tools to grow once again. NCI is now addressing today's challenges with a new tenacity and realism.

Second of 3 things, we believe the steps we have taken over the last year and into 2013 will best position NCI to win the transformative new awards that will generate new revenue and corresponding profits in 2014 and beyond. We'll define success in 2013 primarily in terms of our year-to-date bookings numbers at the end of third and fourth quarters. Of course, we will also continue to focus on cost containment and incremental revenue pickups throughout the year to protect and enhance earnings per share. But again, new wins in 2013 and early 2014 will be the key driver in defining the future of NCI.

With that, operator, we'll open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from George Price of BB&T Capital Markets.

George A. Price - BB&T Capital Markets, Research Division

First, just to be clear, I guess, on the 2013 guidance, so does it incorporate your best guess on the impacts of the looming sequester or not entirely or -- just so I understand?

Brian J. Clark

George, this is Brian. What we did was, I think we just gave some pretty good color around what the low end and the high end of our guidance range is represented on the -- from an earnings standpoint. I'm sorry, from a revenue standpoint. What we did, as Lucas indicated, was we basically took out 5% of our -- of what would otherwise be our existing revenue base for 2013 and just -- it's not specific to any particular programs. As a matter of fact, as we sit here today, we have not been -- we have no -- we have not been informed by any of our customers of any specific cuts, reductions, changes in scope, cancellations of contracts, anything of that -- of the sort. But we are aware that all of our customers are running arriving at and exercises to figure out how they may reduced their spending rates and what things may or may not get affected. So while we don't know where we may be affected, I think it would be bit remiss to tell you that we don't think we would have an impact. So for lack of better way of putting it, it's really an arbitrary cut, but we felt that it was prudent to do that. And at least for purposes of establishing a guidance range, we took a 5% cut out the existing business in order to establish where we point at the low-end of our revenue range for the year.

George A. Price - BB&T Capital Markets, Research Division

Okay, okay. And I guess, if -- what kind of -- can you talk about maybe what kind of guidance have you gone from clients? And perhaps maybe -- or your DoD clients maybe versus your civilian clients? I mean, does DoD seem to be ahead of the game in terms of thinking about how they might be impacted and better prepared than the civilians?

Brian J. Clark

I think at this point it seems -- it feels like it's really mixed bag. And a lot of what we hear from our customers is what they are doing internally with -- in a lot of ways with their personnel and some of the direction is coming down, but at this point, I don't think there's any -- I'm yet to hear if anybody has a definitive plan or -- and certainty anything with any kind of clarity in terms of how it would potentially impact us or the contract work that we do.

Marco F. de Vito

Yes, this is Marco. We know that there's been an ongoing prioritization of how funds are expended. That list has not been shared with us at this point. So I expect that we'll have greater clarity here over the next few weeks. This is obviously a sensitive topic for our customers because it involves their employees as well. So we know that this is going on, but they're not really sharing a whole lot with us yet.

George A. Price - BB&T Capital Markets, Research Division

Okay, okay. And the revenues not too far out of line, I guess with us in consensus, but EPS is well below. You talked some additional investments, I guess, primarily in the business development area that you're going to -- that you're going to make this year. Can you give any more color on how much of that impact is just the market factors like pricing pressure and just the overall cuts versus the investments that you're planning on making?

Brian J. Clark

George, I'd say it's a combination of all of those things. On the business development front, whereas we sit here today, I think as you've heard certainly, as you heard me talk about it over the last several quarters, and I think at the tone of our remarks, we've really put a lot of effort in this past year. We feel very good about what we've done, and how improved we are versus where we were, say, a year to 18 months ago. But we also realize at the same time, we could be better and we want to continue to make a smart investments in areas that were we believe they can pay off. And that's principally in -- and we'd like to continue to see our --both the total size of our pipeline as well as the qualified values of it increase and then continue to look for larger, more meaningful opportunities that can really move the needle. In order to do that, that does take additional people, it takes right people. So we're going to continue to look selectively where we can make some targeted investments to increase pipeline and, ultimately, when the number of opportunities and also with win probability. So the rest of it, in terms of -- when you look at the lower end on the revenue guidance in terms of how that translates to earnings per share, you end up with some level, you start to get to have bigger issues with the level of fixed infrastructure cost and how much you can actually -- how much is actually scalable at that point, as it starts to have a greater impact at that lower level. On the higher side, we think that, that would be a component of new business revenue that would probably involve some startup activity associated with it and would probably have margins that we'd definitely have to grow into a little bit. It also could comprise some onetime spends on customers. We ask where they've got hardware materials, IT, refresh, that kind of stuff. Those things don't carry as much margin so you don't see as great of a scale up in the earnings per share at the bottom line.

George A. Price - BB&T Capital Markets, Research Division

Okay, if I could just this 1 more thing, in terms of the $130 million that you debooked, how much of that came out of funded backlog? And can you talk at all about particular areas or contracts or programs that were impacted in that assessment?

Lucas J. Narel

George, this is Lucas. Primarily, all of that was from unfunded contract backlog. And really, obviously, we take a close look at our backlog every quarter, but what we're realizing over the last several quarters is that on a couple of a number of customers weren't actually utilizing the full value of the ceilings that they had. So we took a look at kind of the run rate of how those contracts were performing and how we might expect those to run through the end of the contract period. And really, the indication is that some of these contracts, it appears that some of the ceiling might be left over from the customers that we have. So we felt this time it made sense to debook a lot of that backlog. Moreover, on some of those other contracts that have a longer run rate, they go out past 2 years, let's say, just really the situation that we're in with the budget constraints that are going on, I think there was a higher level of concern for us as to be able to realize a lot of that backlog. So again, across a lot of those contracts, we decided it made a lot more sense to look at run rates and expectations based on conversations that we've had right now and lower those costs. There really wasn't specific to any one program or project, this really spread across our business base. And that's really how we got down to that number.

Operator

[Operator Instructions] The next question comes from Gautam Khanna from Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

Brian, I know you're doing a lot of -- kind of beef up the business development pipeline, but I just was wondering if you could kind of do a postmortem assessment of what you inherited when you got there? And what were the things that were not being done? Or is it just that the market environment changed such that you have to change the focus? Or were there a lot of internal processes that were, that's sort of low-hanging fruit, if you will?

Brian J. Clark

Yes, Gautam. I think we talked a lot about that at the end of '11, early, '12, I guess we haven't, as you said, kind of a postmortem of as you kind of look back on it. But I think if you view the last couple of years ago, there was a strategy in place. And I think you could at it in a rear-view mirror today and say, it was a -- maybe it wasn't the best strategy, but it certainly had those good reasoning behind it at the time, that was [indiscernible] into some of the BRAC work and some of the other things that were more, as I've termed it, more project-related versus program related. Now what really happened was, when you got into that kind of work, there was a massive ramp up and surge in revenue, which also pulled with it a very significant increase in infrastructure resources and management attention or, today, I might say management distraction to deal with that level of ramp up in growth that was short term in nature. If you recall, the strategy there was, that you might say, well it doesn't make any sense to do something that's disruptive. But the belief was that if by doing that work, getting into new locations and work with new customers, that would new relationships, new opportunities for new revenue streams, it will be ongoing versus being onetime in nature. At the tail end of this, BRAC was wrapping up in '11, this is when we really start to see the effect of the budgetary issues and whatnot. And a lot of the -- what was hoped to be follow-on work that would be there just never materialized. So we got to the end of '11 and early '12 when we did an initial guidance call, then our final guidance February of last year. It was clear at that time there was just -- there's going to be this very significant drop off over $200 million in revenue that was going to come off. And a couple of things that resulted from that, we had also just, in concert with that, had really done a lot to right-size the infrastructure of the company. But also, one of the other problems that came with that was, when you're in that situation with very significant growth coming in, in these onetime spurts and all the attention that went with it, that really was not the -- what really was lacking, there was an underlying business development engine to continue to look for, mine up and go after these opportunities that will provide long-term sustainable revenue base and platform for growth. So when that revenue cliff dried up, obviously, that resulted in what you've seen over the last 2 years now in terms of all the disruption. And what we've really spent our time on the last 12 to 18 months has been really rebuilding from the ground up the business development capability of the company. It may have been subtle in Charles' remarks here, but one of -- we've just now submitted -- the first round of bids have gone in that reflect all of the efforts that we've put forward in terms of how we go about pursuing new business. And so up until now, internally, we've not had an expectation that we would have a change in win rates or improved booking rates or anything else like that. But we believe we've done the right things in assuming that we have, then we would -- that's our belief that we will see improved bookings and win rates in the latter part of this year. And that's a result of the things that we will be bidding from this day forward. And like we said, the first couple of things have gone in literally in the last month or so that reflect those new efforts.

Chander K. Narang

Jonathan, this is Charles. Besides what Brian just mentioned, we just kind of had a pipeline, at that time, with $13 billion, $14 billion. Not very well qualified and there were a lot -- some of the very good typical recompetes, back work and a lot of product going through in that sense was supposed to be taken by new programs coming on the order of something like that. Our win rate just dropped -- was almost nothing. So all these things just contributed to the problems that we're facing today. And I think part of it is me who should have been more careful and should have looked at it more closely. And at that time, we just did not -- did not see what's coming down. And all of a sudden, the things have changed now. Sequestration is upon us and the buyers are being cut back and all those things. On top of that, we have improved a lot in the -- more business processes but the programs have been delayed, shifted to the live and thus causing all the other problems. And if you look at the numbers that you're doing for guidance, we've only given 5% of new business, and that's very, very extreme that you get only 5% growth because of new business. That's because we just did not prepare ourself for what was coming down the pike.

Gautam Khanna - Cowen and Company, LLC, Research Division

And I appreciate the candid and thorough explanation. The other thing I wanted to ask was, have you seen any evidence of particularly irrational customer behavior or draconian behavior with respect to maybe renegotiating billing rates lower, mid-contract, before a formal opportunity to on an option exercise or something. Just midstream, if you will. Are you seeing any development on that front?

Marco F. de Vito

This is Marco, I wouldn't say so. I think we are seeing customers that are increasingly stressed by tighter budgets and the same mission. And looking for help and finding ways to do the same amount of work for less money. And I think that, that pressure is calling across the board. It hasn't really hit us midstream in terms of trying to renegotiate rates down. It has hit us midstream in terms of reduction in our funding, and PEO Soldier is a good example of that where the size of the program is significantly smaller now than it was a few years ago, or even just a year ago. But with that, there's been recognition by the customers that they're going to get less support, but they're just trying to make it work with what they've got. So it obviously remains to be seen how the sequestration pressures are responded to. But we have contracts in place and a structure in place and all of those things put some constraints around how the customers can deal with, with the situations they have. So we're going to watch carefully and respond to what comes forward. But I wouldn't call anything draconian at this point.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And last one, if I may ask, is just you mentioned the contract mix now nearly 50% cost-plus. When you look at that bid pipeline and what you have outstanding, do expect that mix to shift more away from T&M and towards the cost plus? How should we think about that mix next year.

Marco F. de Vito

We don't see much T&M work coming down these days. And the mix between cost-plus and fixed price, I might expect, will stay pretty much the way it is. We see some existing T&M work today, switching over to cost-plus even in the next few months. So this is kind of the mode that we're in, especially in the DoD space and in the federal space across the board. It's a cyclical thing. 2 years from now, we'll be talking about everything moving to T&M again.

Gautam Khanna - Cowen and Company, LLC, Research Division

I know I said that was my last question, but I just had one other. Do you have any red programs or particularly unprofitable programs or break even programs in the fixed price and T&M mold? Or are you pretty much happy with the operating performance across the board given the circumstances?

Marco F. de Vito

What I would say -- this is Marco again. What I would say is that the significant challenges that we had a year, a year and a half ago on a couple of large programs have not been repeated. We don't have those kind of problems today. Frankly, we've done a lot of work both in terms of our tracking and our training, our ongoing monitoring, our quality assurance to try and minimize the possibility of those things happening again. And we've been able to execute to our plan pretty consistently over the last year.

Operator

We have a follow-up question from George Price of BB&T Capital Markets.

George A. Price - BB&T Capital Markets, Research Division

Just -- I was wondering, Brian, Lucas, if you had any thoughts perhaps on cash flow in 2013?

Brian J. Clark

Yes, I mean obviously, we're very pleased with what we did in 2012. I'd say that really, 1x net income was what we expect going into '13, maybe a little bit better than that, but that's kind of where we are right now. I think what we saw in 2012 really was a result of some of the payments of receivables being turned over from a large revenue coming out of 2011, which helped kind of generate a lot of that cash flow and certainly the DSOs over the course of the last couple of quarters have been very well, which have helped. But I think we're kind of seeing that stabilize now. So I'd expect it to drop back down right around a 1:1 ratio.

George A. Price - BB&T Capital Markets, Research Division

Okay. And should we assume the primary use of cash is going to continue be debt repayment?

Brian J. Clark

That's correct, yes.

George A. Price - BB&T Capital Markets, Research Division

Did notice though that you bought some shares in the quarter. Remind me, I don't think you've actually bought any -- you didn't buy any last quarter, right? I didn't think you bought any earlier in the year.

Brian J. Clark

Yes, we did. We bought some in the fourth quarter, we also bought a fair amount in the third quarter.

George A. Price - BB&T Capital Markets, Research Division

Okay, my mistake. In light of the environment, the challenging environment with that, I mean, should we read anything into that or just given where the -- how depressed the stock got?

Brian J. Clark

I think that's it, I think we'll continue just to assess kind of where the stock is trading at and what type of cash we have on hand and evaluate that decision as we go forward.

George A. Price - BB&T Capital Markets, Research Division

Okay, and last question, just on the, again, on the funded backlog. I know all the debookings you said were added unfunded backlog, I wonder, how much risk do you guys see just -- I know there's a lot of unknowns. But how much risk do you see to the current funded backlog? How are you kind of going about assessing that as we look into the depth of sequestration?

Brian J. Clark

I think where we stand right now, I don't think we see a whole lot of risk in that at all at this point in time. As we move forward and then we start getting better answers from our customer about how this might play out, we might think differently. But at this point in time, I don't do think that we have a very much risk at all in the funded backlog.

Operator

There are no further questions at this time. This concludes today's conference call. You may now disconnect your lines. Thank you for participating. And have a pleasant day.

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NCI Inc (NCIT): Q4 EPS of $0.15 beats by $0.04. Revenue of $89.7M (-21.9% Y/Y) beats by $0.4M. (PR)