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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

Commission File Number: 001-13103

CIBER, INC.

(Exact name of Registrant as specified in its charter)

(303) 220-0100

(Registrant’s telephone number, including area code)

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.  Yes x No o

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

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

There were 72,271,031 shares of the registrant’s Common Stock outstanding as of September 30, 2011.

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CIBER, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Consolidated Statement of Changes in Equity

(In thousands)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(1)  Basis of Presentation

The accompanying unaudited interim consolidated financial statements of CIBER, Inc. and its subsidiaries (together, “CIBER,” “the Company,” “we,” “our,” or “us”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements.  These consolidated financial statements should therefore be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2010, included in our Annual Report on Form 10-K filed with the SEC.  The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include all adjustments of a normal, recurring nature that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the interim periods presented.  The results of operations for an interim period are not necessarily indicative of the results of operations for a full fiscal year.  We reclassified certain revenues for 2010 periods presented between “consulting services” and “other revenue,” and we reclassified the costs related to these revenues between “cost of consulting services” and “cost of other revenue” to conform to the current period presentation.

Other Income (Expense), Net — Other income (expense), net consisted of the following:

Through the second quarter of 2011, the estimated fair value of the acquisition-related contingent consideration was based on a probability-weighted approach derived from management’s estimates of profitability and sales targets, as well as the discount rate of 15% used to determine the present value of the liability, and accordingly, the liability was disclosed as a level 3 fair value measurement.  Based on a revised agreement with the sellers, the value of the future contingent acquisition consideration was fixed at approximately $10 million.  As a result, we calculated the present value of the contingent consideration liability at June 30, 2011, to be $9.2 million, based on a discount rate of 6%.  The change in management’s estimates of the amount to be paid increased the value of the liability by $3.2 million as of June 30, 2011, and this amount was recorded in “other income (expense), net” on the Consolidated Statements of Operations.  The change in the value of the liability from December 31, 2010 through September 30, 2011, was due to the following (in thousands):

Recently Issued Accounting Pronouncements — In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”).  ASU 2011-04 amended Accounting Standards Codification Topic 820 (“ASC 820”) to converge the fair value measurement guidance in U.S. GAAP and International Financial Reporting Standards (“IFRSs”).  Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in ASC 820.  In addition, ASU 2011-04 requires additional fair value disclosures.  The amendments are to be applied prospectively and are effective for annual periods beginning after December 15, 2011.  We are currently evaluating the effect that the provisions of ASU 2011-04 will have on our consolidated financial statements.

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In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amends the disclosure requirements for the presentation of comprehensive income.  This guidance, effective retrospectively for interim and annual periods beginning on or after December 15, 2011 (early adoption is permitted), requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive statements.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in equity.  ASU 2011-05 does not change the items that must be reported in other comprehensive income, or when an item of other comprehensive income must be reclassified to net income.  The implementation of this amended accounting guidance is not expected to have a material impact on our consolidated financial position and results of operations.

(2) Earnings (Loss) Per Share

Our computation of earnings (loss) per share — basic and diluted is as follows:

Dilutive securities are excluded from the diluted weighted average shares outstanding computation in periods in which they have an anti-dilutive effect, such as when we report a net loss or when stock options have an exercise price that is greater than the average market price of CIBER common stock during the period.  The approximate average number of anti-dilutive securities omitted from the computation of diluted weighted average shares outstanding was 8,746,000 and 9,289,000 for the three months ended September 30, 2011 and 2010, respectively, and 8,035,000 and 9,141,000 for the nine months ended September 30, 2011 and 2010, respectively.

(3) Executive Charge Liability

In 2010, we entered into an Executive Transition Agreement with our former President/Chief Executive Officer in connection with his separation from CIBER as its president and chief executive officer and his resignation as a director.  Under this agreement, we agreed to make certain cash payments to him in 2011, to accelerate vesting on certain stock options and restricted stock units and to provide certain insurance and other miscellaneous benefits.  At December 31, 2010, we had a remaining accrued liability balance of $5.5 million related to this agreement.  Since the beginning of 2011, we have paid out approximately $5.3 million, leaving a remaining accrued liability balance of $0.2 million at September 30, 2011, which is included in “other accrued expenses and liabilities” on the Consolidated Balance Sheets.

(4) Goodwill

We perform our annual impairment analysis of goodwill as of June 30 each year, or more often if there are indicators of impairment present.  We test each of our reporting units for goodwill impairment.  Our reporting units are the same as our operating divisions and reporting segments.  The goodwill impairment test requires a two-step process.  The first step consists of comparing the estimated fair value of each reporting unit with its carrying amount, including goodwill.  If the estimated fair value of a reporting unit exceeds its carrying value, then it is not considered impaired and no further analysis is required.  If step one indicates that the estimated fair value of a reporting unit is less than its carrying value, then impairment potentially exists and the second step is performed to measure the amount of goodwill impairment.  Goodwill impairment exists when the estimated implied fair value of a reporting unit’s goodwill is less than its carrying value.

We compared the carrying value of each of our four reporting units to its estimated fair value at June 30, 2011.  We estimated the fair value of each of our reporting units based on a weighting of both the income approach and the market

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approach.  The discounted cash flows for each reporting unit that served as the primary basis for the income approach were based on discrete financial forecasts developed by management.  Cash flows beyond the discrete forecast period of five years were estimated using the perpetuity growth method calculation.  The annual average revenue growth rates forecasted for each reporting unit for the first five years of our projections ranged between 5% and 8%, with an overall weighted average of 6%.  We have projected operating profit margin improvement as we expect to obtain margin benefits from a number of internal initiatives.  The terminal value was calculated assuming projected growth rates of 3% after five years, which reflects our estimate of minimum long-term growth in IT spending.  The income approach valuations also included reporting unit cash flow discount rates, which represented each reporting unit’s estimated weighted average cost of capital and ranged from 13% to 15%.  The market approach applied pricing multiples derived from publicly-traded companies that are comparable to the respective reporting unit to determine its value.  We utilized enterprise value/revenue multiples ranging from 0.3 to 0.5 and enterprise value/EBITDA multiples ranging from 3.5 to 6.4 in order to value each of our reporting units under the market approach.  Also, the fair value under the market approach included a control premium of 37%.  The control premium was determined based on a review of comparative market transactions.  Publicly-available information regarding our market capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units.

As a result of the first step of our goodwill impairment test as of June 30, 2011, we estimated that the fair values for our International, North America and Federal reporting units exceeded their carrying amounts by 58%, 32% and 19%, respectively, thus no impairment was indicated.  We also determined that the estimated fair value of our IT Outsourcing reporting unit was less than its respective carrying amount by 24%, indicating impairment may exist for this division.

Because indicators of impairment existed for our IT Outsourcing reporting unit, we performed the second step of the test to determine the implied fair value of goodwill for that reporting unit.  The estimated implied fair value of goodwill was determined in a consistent manner utilized to estimate the amount of goodwill recognized in a business combination.  As a result, we calculated the estimated fair value of certain non-recorded assets, including customer relationships and trade name.  The implied fair value of goodwill was measured as the excess of the estimated fair value of the reporting unit over the amounts assigned to its assets and liabilities.  The impairment loss for the reporting unit was measured by the amount that the carrying value of goodwill exceeded the implied fair value of the goodwill.  Based on this assessment, we recorded an impairment charge of $16.3 million in 2011, which represented 63% of the goodwill of the IT Outsourcing reporting unit prior to the impairment charge.  The impairment charge in our IT Outsourcing division was primarily a result of the decreased operating performance of the division, including a lag in new sales and our inability to achieve operational efficiencies.

We adjusted our forecasted cash flows and the other assumptions used to calculate the estimated fair value of our reporting units to account for our beliefs and expectations of the current business environment.  While we believe our estimates are appropriate based on our view of current business trends, no assurance can be provided that additional impairment charges will not be required in the future.

For the quarter ended September 30, 2011, we reviewed for indicators of impairment and believed that the market decline in the government services industry, which was based on concerns about defense budget cuts and funding uncertainty, warranted a test for goodwill impairment in our Federal reporting unit.  There were no other events or circumstances that would more likely than not reduce the fair value below carrying amount for any of our other reporting units.  Accordingly, we performed the step one goodwill impairment test for our Federal reporting unit as of September 30, 2011.  We used current estimates of forecasted cash flows, current pricing multiples derived from publicly-traded companies that are comparable to the Federal reporting unit, and other assumptions to determine fair value.  Based on the results of our step one goodwill impairment test, which utilized a consistent methodology as described above, we estimated that the fair value exceeded the carrying amount, thus no impairment was indicated and no further analysis was required.

As a result of the changes to our reportable segments effective January 1, 2011, $8.7 million of the goodwill previously attributable to our former U.S. ERP division was allocated to our IT Outsourcing division and the balance of $45.6 million was allocated to our North America division.  The changes in the carrying amount of goodwill during the nine months ended September 30, 2011, were as follows:

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(5) Borrowings

CIBER has a senior credit agreement with several financial institutions as lenders and Bank of America, N.A. as administrative agent (the “Senior Credit Facility”).  At September 30, 2011, we had outstanding borrowings of $80.7 million under the Senior Credit Facility.  The Senior Credit Facility provides for a revolving line of credit of up to $85 million and a term loan with a balance of $30 million at September 30, 2011.

On October 31, 2011, we executed an amendment and extension to the Senior Credit Facility with our lenders.  The amendment, among other things, 1) extends the maturity date to January 1, 2013; 2) increases the rates applicable to our borrowings by 0.50% on both November 1, 2011 and January 1, 2012, and by 1.00% on April 1, 2012; 3) revises the minimum and/or maximum levels permitted under the consolidated total leverage ratio, the consolidated fixed charge coverage ratio and the minimum EBITDA for the next five quarters; and 4) requires the Company to make a $5 million payment on the term loan on December 30, 2011, and to make a payment for the remaining outstanding principal balance of the term loan on January 31, 2012.  We paid a $0.8 million amendment fee to our lenders in relation to the amendment and extension.  Due to the revised term loan repayment schedule effective under the amendment, $30 million of our total obligation is classified as a current liability.  CIBER’s remaining obligation under the Senior Credit Facility is classified as long-term debt on our Consolidated Balance Sheets.  Based on the scheduled maturity date, and absent an amendment, all obligations under the Senior Credit Facility will need to be reclassified to short-term debt in our financial statements in our Quarterly Report on Form 10-Q for the period ended March 31, 2012.  As a result, prior to the issuance of our financial statements for the period ending on March 31, 2012, we intend to either amend this facility to provide for an extension of the maturity date, or replace the facility with alternative bank financing or other equity or debt financing.  We are also contemplating other alternatives to pay down the facility, including repatriating some of our foreign cash and possible asset sales.  There can be no assurance that we will be successful in achieving any of the above-mentioned alternatives, or that if available to us, the terms of any of these alternatives, such as an amended facility, will not be materially less favorable to the Company.

The Senior Credit Facility contains certain financial covenants, including: 1) a maximum consolidated total leverage ratio; 2) a minimum consolidated fixed charge coverage ratio; 3) a minimum EBITDA; and 4) an asset coverage test.  We are required to be in compliance with the financial covenants at the end of each calendar quarter.  At September 30, 2011, we were in compliance with all of our financial covenants under the Senior Credit Facility, which were amended on July 28, 2011, in connection with a waiver of our non-compliance under the financial covenants in place for June 30, 2011.  Based on management’s current estimates, we do not currently believe a further covenant violation to be probable of occurring for at least the next 12 months.

(6) Income Taxes

Valuation of Deferred Taxes — Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.  We are required to estimate income taxes in each jurisdiction where we operate.  This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the depreciable life of fixed assets for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheets.  We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent recovery is believed unlikely, we establish a valuation allowance.  Changes in the valuation allowance for deferred tax assets impact our income tax expense during the period.

As a result of our recent cumulative domestic losses, during the three months ended June 30, 2011, we recorded a non-cash charge of $29.1 million to provide a valuation allowance for all of our domestic deferred tax assets as of April 1, 2011.  In addition, we haven’t recorded any deferred tax benefit for our domestic tax operating losses incurred after April 1, 2011.  Our cumulative valuation allowance recorded against all of our deferred tax assets at September 30, 2011, was approximately $45 million.  Our reported net deferred tax assets are attributable to certain of our foreign operations.  The establishment of a valuation allowance does not impair our ability to use the deferred tax assets, such as net operating loss and tax credit carryforwards, upon achieving sufficient profitability.  As we generate domestic taxable income in future periods, we do not expect to record significant related income tax expense until the valuation allowance is significantly reduced.  As we are able to determine that it is more likely than not that we will be able to utilize the deferred tax assets, we will reduce our valuation allowance.  The Company’s estimated amounts of federal net operating loss and tax credit carryforwards of approximately $54 million and $10 million, respectively, do not begin to expire until 2022.

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(7) Fair Value Measurements

The Company is required to disclose the fair value of all assets and liabilities subject to fair value measurement and the nature of the valuation techniques, including their classification within the fair value hierarchy, utilized by the Company in performing these measurements.

The FASB provides a fair value framework that requires the categorization of assets and liabilities into three levels based upon the assumptions (or inputs) used to price the assets or liabilities, which are as follows:

The Company’s financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:

The fair value of the interest rate swap is recorded in “other accrued expenses and liabilities” on the Consolidated Balance Sheets.

The carrying values of our cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short-term nature.  The fair value of derivative instruments, such as interest rate swaps, is determined utilizing market-based information, such as LIBOR-based yield curves.  Our interest rate swap matures on March 31, 2012, and effectively converts $25 million of our borrowings under our Senior Credit Facility from a variable-rate instrument into a 1.77% fixed-rate instrument, plus the applicable margin.  The book values of the borrowing under our Senior Credit Facility and our other bank debt approximate their fair values, due to either their variable interest rates or their short-term nature.

(8) Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:

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(9) Segment Information

Our reportable segments are our four operating divisions, which consist of our International, North America, Federal and IT Outsourcing divisions.  Our International division operates primarily in Western Europe, but also has offices in China, Russia, Australia and New Zealand, and provides a broad range of IT consulting services, including package software implementation, application development, systems integration and support services.  Our North America division was formed at the beginning of 2011 through the combination of our former Custom Solutions division and substantially all of our former U.S. ERP division.  This division primarily provides application development, integration and support, as well as software implementation services for Enterprise Resource Planning (“ERP”) software from software vendors, such as Oracle, SAP and Lawson.  Our Federal division provides a range of custom support services, including infrastructure support, systems integration, mission support and enterprise security.  Our IT Outsourcing division offers outsourced enterprise infrastructure management solutions, including managed hosted infrastructure, service desk and desktop outsourcing and remote application support services.  Beginning in 2011, the IT Outsourcing division also includes our Technology Solutions Group Practice that provides IT infrastructure products and architecture.  In addition to the combination of our former Custom Solutions and U.S. ERP divisions in early 2011, we made several other changes in 2011 that impacted the amounts we report for our divisions, which included moving certain practices between divisions and moving certain costs between corporate and our operating divisions.  All 2010 segment data has been adjusted to conform to the 2011 presentation.

The following presents financial information about our reporting segments:

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(1) Operating segment assets directly attributed to an operating segment and provided to the chief executive officer only include net accounts receivable and deferred revenues.

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

The following discussion and analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and our Audited Consolidated Financial Statements and related Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010, and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2010.  References to “we,” “our,” “us,” “the Company” or “CIBER” in this Quarterly Report on Form 10-Q refer to CIBER, Inc. and its subsidiaries.

We use the phrase “constant currency adjusted” to indicate that we are comparing certain financial results after removing the impact of foreign currency exchange rate fluctuations, thereby allowing for the comparison of business performance between periods.  Financial results that are “constant currency adjusted” are calculated by restating current period activity into U.S. dollars using the comparable prior period’s foreign currency exchange rates.  This approach is used for all results where the functional currency is not the U.S. dollar.

Disclosure Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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.  For example, we make certain forward-looking statements regarding our current estimates for revenue and profitability for certain of our business units for 2011.  These statements reflect a number of risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by our forward-looking statements.  These risks include, without limitation, risks that: (1) economic and political conditions, including regulatory or legislative action, adversely affect us or our clients’ businesses and levels of business activity; (2) we cannot expand and develop our services and solutions in response to changes in technology and client demand; (3) we cannot compete effectively in the highly competitive consulting, systems integration and technology and outsourcing markets; (4) our work in the government contracting environment exposes us to additional risks; (5) our clients may terminate their contracts with us or they may be unable or unwilling to pay us for our services, which may impact our accounting assumptions; (6) our outsourcing services subject us to operational and financial risk; (7) the type and level of technology spending by our clients may change; (8) we cannot maintain favorable pricing and utilization rates; (9) our business is restricted by our current level of indebtedness and we could breach our financial covenants, and/or be unable to amend, extend or replace our current debt facility under favorable terms; (10) legal liability may result from solutions or services we provide; (11) we cannot anticipate the cost and complexity of performing our work or we are not able to control our costs; (12) our global operations are subject to complex risks, some of which might be beyond our control, including, but not limited to, fluctuations in foreign exchange rates; (13) we cannot balance our resources with client demand or hire sufficient employees with the required skills and background; (14) we may incur liability from our subcontractors’ or other third parties’ failure to deliver their project contributions on time or at all; (15) we cannot manage the organizational challenges associated with our size or our business strategy; (16) consolidation in the industries that we serve could adversely affect our business; (17) our ability to attract and retain business depends on our reputation in the marketplace; (18) our share price could fluctuate due to numerous factors, including variability in revenues, operating results and profitability; and/or (19) other factors discussed from time to time in the Company’s news releases and public statements, as well as the risks, uncertainties and other factors discussed under the “Risk Factors” heading in this Form 10-Q and our most recent Annual Report on Form 10-K and other documents filed with or furnished to the Securities and Exchange Commission.  Most of these factors are beyond our ability to predict or control.  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.  Readers are cautioned not to put undue reliance on forward-looking statements.

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Critical Accounting Policies and Estimates

Goodwill — We perform our annual impairment analysis of goodwill as of June 30 each year, or more often if there are indicators of impairment present.  We test each of our reporting units for goodwill impairment.  Our reporting units are the same as our operating divisions and reporting segments.  The goodwill impairment test requires a two-step process.  The first step consists of comparing the estimated fair value of each reporting unit with its carrying amount, including goodwill.  If the estimated fair value of a reporting unit exceeds its carrying value, then it is not considered impaired and no further analysis is required.  If step one indicates that the estimated fair value of a reporting unit is less than its carrying value, then impairment potentially exists and the second step is performed to measure the amount of goodwill impairment.  Goodwill impairment exists when the estimated implied fair value of a reporting unit’s goodwill is less than its carrying value.

We compared the carrying value of each of our four reporting units to its estimated fair value at June 30, 2011.  We estimated the fair value of each of our reporting units based on a weighting of both the income approach and the market approach.  The discounted cash flows for each reporting unit that served as the primary basis for the income approach were based on discrete financial forecasts developed by management.  Cash flows beyond the discrete forecast period of five years were estimated using the perpetuity growth method calculation.  The annual average revenue growth rates forecasted for each reporting unit for the first five years of our projections ranged between 5% and 8%, with an overall weighted average of 6%.  We have projected operating profit margin improvement as we expect to obtain margin benefits from a number of internal initiatives.  The terminal value was calculated assuming projected growth rates of 3% after five years, which reflects our estimate of minimum long-term growth in IT spending.  The income approach valuations also included reporting unit cash flow discount rates, which represented each reporting unit’s estimated weighted average cost of capital and ranged from 13% to 15%.  The market approach applied pricing multiples derived from publicly-traded companies that are comparable to the respective reporting unit to determine its value.  We utilized enterprise value/revenue multiples ranging from 0.3 to 0.5 and enterprise value/EBITDA multiples ranging from 3.5 to 6.4 in order to value each of our reporting units under the market approach.  Also, the fair value under the market approach included a control premium of 37%.  The control premium was determined based on a review of comparative market transactions.  Publicly-available information regarding our market capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units.

As a result of the first step of our goodwill impairment test as of June 30, 2011, we estimated that the fair values for our International, North America and Federal reporting units exceeded their carrying amounts by 58%, 32% and 19%, respectively, thus no impairment was indicated.  We also determined that the estimated fair value of our IT Outsourcing reporting unit was less than its respective carrying amount by 24%, indicating impairment may exist for this division.

Because indicators of impairment existed for our IT Outsourcing reporting unit, we performed the second step of the test to determine the implied fair value of goodwill for that reporting unit.  The estimated implied fair value of goodwill was determined in a consistent manner utilized to estimate the amount of goodwill recognized in a business combination.  As a result, we calculated the estimated fair value of certain non-recorded assets, including customer relationships and trade name.  The implied fair value of goodwill was measured as the excess of the estimated fair value of the reporting unit over the amounts assigned to its assets and liabilities.  The impairment loss for the reporting unit was measured by the amount that the carrying value of goodwill exceeded the implied fair value of the goodwill.  Based on this assessment, we recorded an impairment charge of $16.3 million in 2011, which represented 63% of the goodwill of the IT Outsourcing reporting unit prior to the impairment charge.  The impairment charge in our IT Outsourcing division was primarily a result of the decreased operating performance of the division, including a lag in new sales and our inability to achieve operational efficiencies.

We adjusted our forecasted cash flows and the other assumptions used to calculate the estimated fair value of our reporting units to account for our beliefs and expectations of the current business environment.  While we believe our estimates are appropriate based on our view of current business trends, no assurance can be provided that additional impairment charges will not be required in the future.

For the quarter ended September 30, 2011, we reviewed for indicators of impairment and believed that the market decline in the government services industry, which was based on concerns about defense budget cuts and funding uncertainty, warranted a test for goodwill impairment in our Federal reporting unit.  There were no other events or circumstances that would more likely than not reduce the fair value below carrying amount for any of our other reporting units.  Accordingly, we performed the step one goodwill impairment test for our Federal reporting unit as of September 30, 2011.  We used current estimates of forecasted cash flows, current pricing multiples derived from publicly-traded companies that are comparable to the Federal reporting unit, and other assumptions to determine fair value.  Based on the results of our step one goodwill impairment test, which utilized a consistent methodology as described above, we estimated that the fair value exceeded the carrying amount, thus no impairment was indicated and no further analysis was required.

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We currently have a remaining goodwill balance of $323.7 million at September 30, 2011.  The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis.  In estimating the fair value of the reporting units for the purpose of our annual or periodic goodwill impairment analysis, we make estimates and judgments about the future cash flows of the reporting units, including estimated growth rates and assumptions about the economic environment.  Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units.  In addition, we make certain judgments about allocating shared assets, such as cash and property and equipment, to the balance sheet for the reporting units.  We also consider our market capitalization, adjusted for unallocated monetary assets such as cash, debt, a control premium and other factors determined by management.  As a result, several factors could result in the impairment of a material amount of our goodwill balance in future periods, including, but not limited to:

(1)          Failure of CIBER to reach our internal forecasts could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated fair values of our reporting units;

(2)          A decline in our stock price and resulting market capitalization, if we determine that the decline is sustained and is indicative of a reduction in the fair value of any of our reporting units below their carrying values.

Adverse changes in our market capitalization, long-term forecasts and industry growth rates could result in additional impairment charges being recorded in future periods for goodwill attributed to any of our reporting units.  Any future impairment charges would adversely affect our results of operations for those periods.

Income taxes — Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.  We are required to estimate income taxes in each jurisdiction where we operate.  This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the depreciable life of fixed assets for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheets.  We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent recovery is believed unlikely, we establish a valuation allowance.  Changes in the valuation allowance for deferred tax assets impact our income tax expense during the period.

As a result of our recent cumulative domestic losses, during the three months ended June 30, 2011, we recorded a non-cash charge of $29.1 million to provide a valuation allowance for all of our domestic deferred tax assets as of April 1, 2011.  In addition, we haven’t recorded any deferred tax benefit for our domestic tax operating losses incurred after April 1, 2011.  Our cumulative valuation allowance recorded against all of our deferred tax assets at September 30, 2011, was approximately $45 million.  Our reported net deferred tax assets are attributable to certain of our foreign operations.  The establishment of a valuation allowance does not impair our ability to use the deferred tax assets, such as net operating loss and tax credit carryforwards, upon achieving sufficient profitability.  As we generate domestic taxable income in future periods, we do not expect to record significant related income tax expense until the valuation allowance is significantly reduced.  As we are able to determine that it is more likely than not that we will be able to utilize the deferred tax assets, we will reduce our valuation allowance.  The Company’s estimated amounts of federal net operating loss and tax credit carryforwards of approximately $54 million and $10 million, respectively, do not begin to expire until 2022.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year.  Adjustments based on filed returns are generally recorded in the period when the tax returns are filed.  We apply an estimated annual effective tax rate to our quarterly operating results to determine the provision for income tax expense.  In the event there is a significant unusual or infrequent item recognized in our quarterly operating results, the tax attributable to that item is recorded in the interim period in which it occurs.  Changes in the geographic mix or estimated level of annual income before taxes will affect our overall effective tax rate.

We are regularly audited by various taxing authorities, and sometimes these audits 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-

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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 income taxes may apply, which could materially affect our future tax expense.  We currently expect to repatriate approximately $30 million of foreign cash to the U.S. within the next six months.  The timing and sources of such cash will determine the amount of the additional tax costs, if any, associated with the repatriation.  Due to our current available net operating losses and tax credit carryforwards, a repatriation of foreign cash is not expected to have a material tax consequence to the Company.  However, the repatriation will reduce the tax benefits available to offset our future domestic profits.  Absent the availability of net operating losses or tax credits, the possible tax consequences of any repatriation could be significant.

For a description of our other critical accounting policies and estimates, see “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2010.

Business and Industry Overview

CIBER is a global IT consulting, services and outsourcing company primarily serving Global 2000 blue-chip companies and government agencies.  We compete in a large and growing marketplace offering services that include application development and management, ERP implementation, change management, project management, systems integration, infrastructure management and end-user computing, as well as strategic business and technology consulting.  To a lesser extent, we also resell certain IT hardware and software products.

Our reportable segments are our four operating divisions, which consist of our International, North America, Federal and IT Outsourcing divisions.  Our International division operates primarily in Western Europe, but also has offices in China, Russia, Australia and New Zealand, and provides a broad range of IT consulting services, including package software implementation, application development, systems integration and support services.  Our North America division was formed at the beginning of 2011 through the combination of our former Custom Solutions division and substantially all of our former U.S. ERP division.  This division primarily provides application development, integration and support, as well as software implementation services for ERP software from software vendors, such as Oracle, SAP and Lawson.  Our Federal division provides a range of custom support services, including infrastructure support, systems integration, mission support and enterprise security.  Our IT Outsourcing division offers outsourced enterprise infrastructure management solutions, including managed hosted infrastructure, service desk and desktop outsourcing and remote application support services.  Beginning in 2011, the IT Outsourcing division also includes our Technology Solutions Group Practice that provides IT infrastructure products and architecture.  In addition to the combination of our former Custom Solutions and U.S. ERP divisions in early 2011, we made several other changes in 2011 that impacted the amounts we report for our divisions, which included moving certain practices between divisions and moving certain costs between corporate and our operating divisions.  All 2010 segment data has been adjusted to conform to the 2011 presentation.

Our International division, which transacts business in the local currencies of the countries in which it operates, comprised over one-third of our total revenues in 2010.  Generally in recent years, approximately 50% to 55% of our International division’s revenue has been denominated in Euros, approximately 15% to 20% has been denominated in Great Britain Pounds (“GBP”) and the balance has come from a number of other currencies.  Changes in the exchange rates between these foreign currencies and the U.S. dollar affect the reported amounts of our assets, liabilities, revenues and expenses.  For financial reporting purposes, the assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates at period end, and revenues and expenses are translated at average exchange rates for the period.

The market demand for CIBER’s services is heavily dependent on IT spending by major corporations, organizations and government entities in the markets and regions that we serve.  Our results of operations are also affected by economic conditions, including macroeconomic conditions, credit market conditions and levels of business confidence.  The pace of technological advancement and changes in business requirements and practices of our clients all have a significant impact on the demand for the services that we provide.

Revenue is driven by our ability to secure new contracts and deliver solutions and services that add value relevant to our

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clients’ current needs and challenges.  In recent quarters, we have been and expect to continue to be affected by significant efforts by our clients (both current and potential) to implement cost-savings initiatives.  These initiatives have included going to vendor management systems, taking their business to larger, pure-play offshore vendors and vendor consolidation.  In some cases, these initiatives have benefited CIBER, but in others we have lost our revenue stream entirely or seen a decline in our level of revenues with particular clients.  The pricing environment continues to be extremely competitive.  A number of our competitors are structuring more offshore services into their bids, thereby lowering their pricing to help clients reduce costs, and making it more difficult for us to compete on pricing.  We have global delivery options to offer to our current and potential clients as possible cost savings, and we are expanding our offshore capabilities and increasing the usage of these resources; however, they are on a smaller scale than the offshore offerings of some of our competitors.  Another issue which has had and continues to have an impact on our revenues and profitability, involves a much longer sales cycle than we have seen historically, as a result of much slower decision-making processes on new projects in the industries that we currently serve, or in which we are currently bidding for work.  The longer sales cycle increases the cost of our sales efforts and pushes potential revenues and profitability further into the future.  Some clients remain cautious, seeking flexibility by shifting to a more phased approach to contracting for work.  Additionally, we have encountered difficulty in hiring enough SAP-skilled resources globally and have relied more than usual on higher-priced subcontractors, which has a negative impact on our profitability.  In connection with the extensive strategic review of our business, which we began in 2010, we have tightened our standards governing the quality of engagements that we will accept with the goal of growing revenue, increasing margins, improving collectability of receivables and delivering sustained, predictable performance.  However, there can be no assurance that we will be successful with such actions.  Economic conditions and other factors continue to impact the business operations of some of our clients, their ability to continue to use our services and their financial ability to pay for our services in full.  The impact of project cancellations cannot be accurately predicted.  Consequently, our bad debt expense may differ from our estimates, and any cancellations or failures to make full payment may negatively impact our results of operations.

In addition to the $16.3 million non-cash goodwill impairment charge and the $29.1 million non-cash charge to provide a full valuation allowance on our United States deferred tax assets, we also incurred $13.4 million of revenue adjustments in our North America division during the three months ended June 30, 2011, from significant changes in estimates related to costs or scope on five fixed-price contracts signed in 2009 or earlier.  During the three months ended June 30, 2010, the Company recorded a $112.0 million non-cash goodwill impairment charge resulting from the 2010 annual impairment test, and we also incurred $6.1 million of expenses related to executive charges and leadership transition costs during the same period.

Results of Operations — Comparison of the Three Months Ended September 30, 2011 and 2010

The following table sets forth certain Consolidated Statement of Operations data in dollars and expressed as a percentage of revenue:

Revenues.  Total revenues increased 2%, for the three months ended September 30, 2011, compared to the same period of 2010.  Constant currency adjusted revenue decreased 2%.  Significant growth in our International division, primarily related to strong demand for SAP services and boosted by favorable currency rates offset decreased revenues from our North America division.

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Revenue by segment was as follows:

n/m = not meaningful

·                  International revenues improved 23% overall, or 12% on a constant currency adjusted basis.  The current period revenue growth was generally due to increased demand for our services at existing accounts in several key verticals such as Manufacturing, Utilities and Retail resulting from increased efforts undertaken by the division and by the Company’s global account team. Additionally, our German-based managed services practice, which was a start-up business in 2010, contributed to the current period revenue improvement.

·                  North America revenues declined 15% between the comparable quarters predominantly due to several concluded engagements and a reduction in the level of services provided at a number of other clients. The revenue from these engagements and reduced services has not been sufficiently replaced due to a number of factors. We have experienced some operational inefficiencies that were created during our transition away from our previous branch model to a more functional model structured around strategic service offerings and key verticals that leverage our expertise. Additionally, the current year leadership transition created a distraction and hindered efforts to focus on new revenue growth. Another by-product of these transitions has been weaker than expected sales performance related to prioritizing sales of higher-margin, solutions-based services, which have a longer sales cycle, along with a number of new sales members that aren’t yet fully productive in their roles, either due to our more rigorous training process or lingering operational issues from the transitions. These sales and operational challenges in North America are expected to impact the last quarter of 2011 as well; however, we are aggressively addressing these issues to improve our future results. We are aware that the possibility of a slowing economy could negatively impact our results through project delays or pricing pressure from current or potential customers, among other things, despite any efforts we make to improve our sales effectiveness.

·                  Federal revenues decreased 1% as a result of the ongoing delay in new contract awards and minimal funding of existing contracts due to government budgetary issues, downsized contracts at two large clients in our Defense Technology Systems practice, and disappointing recompete results on several expiring contracts subsequently awarded to qualified small businesses. The Federal division began an aggressive effort to leverage its 15 key government wide acquisition contract (“GWAC”) and multiple award contract (“MAC”) vehicles by establishing dedicated business development and proposal staff to work on GWAC/MAC opportunities.  This effort resulted in the receipt of new task order awards starting late in the current quarter.

·                  IT Outsourcing revenue improved 7% during the current quarter, related to expansion of services at several existing clients and starting work for a new client.

Gross Profit.  Our gross profit margin improved to 25.4% for the three months ended September 30, 2011, from 24.8% for the same period in 2010.  The improvement was predominantly driven by an increase in the International division’s gross profit margin.  Some of International’s improvement is attributable to our German-based managed services practice, which was an unprofitable start-up operation throughout much of 2010, but has been a positive contributor to the International division’s gross profit margin in 2011.  The International division’s gross margin was also positively impacted by improved consultant utilization rates and several gross margin improvement initiatives undertaken by the division.  Further improvements to the International division’s gross profit margin continue to be limited by a continued reliance on higher-priced subcontractors.  North America gross profit margin was flat between the comparable periods due to new higher-margin business being offset by the negative impact of service-level reductions and concluded engagements.

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Selling, general and administrative costs.  SG&A costs increased to $60.7 million, or 22.4% of revenue, for the three months ended September 30, 2011, from $57.6 million, or 21.7% of revenue, for the three months ended September 30, 2010.  The increase was primarily due to our International division, which incurred increased sales and recruiting costs, additional costs related to various global initiatives, and higher facilities and support costs, which increase with headcount growth.  Offsetting the increase in the International division, North America’s SG&A costs decreased primarily due to a reduction in salaries and bad debt expenses, and cost reduction initiatives in a number of other categories, such as travel and maintenance.

Operating income.  Operating income was $7.9 million for the three months ended September 30, 2011, compared with  $7.1 million for the same period of last year.

Operating income by segment was as follows: