NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited condensed consolidated financial statements of CACI International Inc and subsidiaries (CACI or
the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and include the assets, liabilities, results of operations, comprehensive income and cash flows for the Company, including its
subsidiaries and joint ventures that are more than 50 percent owned or otherwise controlled by the Company. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally
accepted accounting principles (GAAP) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. All intercompany
balances and transactions have been eliminated in consolidation.
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and amounts included in other current assets and current liabilities that meet the definition of a financial instrument approximate fair value because of the short-term nature of these amounts. The fair value of the Companys
debt outstanding as of December 31, 2013 under its bank credit facility approximates its carrying value. The fair value of the Companys debt under its bank credit facility was estimated using Level 2 inputs based on market data on
companies with a corporate rating similar to CACIs that have recently priced credit facilities. The fair value of the Companys $300.0 million of 2.125 percent convertible senior subordinated notes issued May 16, 2007 and that mature
on May 16, 2014 (the Notes) is based on quoted market prices using Level 1 inputs. See Notes 4 and 10.
In the opinion of management,
the accompanying unaudited condensed consolidated financial statements reflect all adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for the fair presentation of the periods presented. It is
suggested that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Companys latest annual report to the SEC on Form 10-K for the year
ended June 30, 2013. The results of operations for the three and six months ended December 31, 2013 are not necessarily indicative of the results to be expected for any subsequent interim period or for the full fiscal year.
Certain reclassifications have been made to the prior periods financial statements to conform to the current presentation.
On November 15, 2013, CACI completed the acquisition of Six3 Systems Holdings II, Inc. (Six3 Systems). Six3 Systems
provides highly specialized support to the national security community in the areas of cyber and signals intelligence; intelligence, surveillance, and reconnaissance; and intelligence operations. In connection with the acquisition, on
November 15, 2013, CACI entered into a fifth amendment (the Amendment) to its credit agreement dated as of October 21, 2010 (the Credit Agreement). The Amendment modified the Credit Agreement to allow for the incurrence of $700 million in
additional term loans and a $100 million increase in the revolving facility to finance the acquisition of Six3 Systems.
The initial
purchase consideration paid at closing to acquire Six3 Systems was $820.0 million plus $25.8 million representing the estimated cash and net working capital adjustment, as defined in the agreement. Of the payment made at closing, $40.0 million was
deposited into an escrow account pending final determination of the net cash and working capital acquired and to secure the sellers indemnification obligations (the Indemnification Amount). Any remaining Indemnification Amount at the end of
the indemnification period not encumbered as a result of one or more indemnification claims will be distributed to the sellers.
8
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
CACI is in the process of finalizing its valuation of the assets acquired and liabilities
assumed. The fair values assigned to the intangible assets acquired were based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques.
Based on the Companys provisional valuation, the total estimated consideration of $847.3 million, which includes an estimated final cash and net working capital adjustment of $1.4 million, has been allocated to assets acquired (including
identifiable intangible assets and goodwill) and liabilities assumed (including deferred taxes on identifiable intangible assets that are not deductible for income tax purposes), as follows (in thousands):
|
|
|
|
|
Cash
|
|
$
|
10,166
|
|
Accounts receivable
|
|
|
80,615
|
|
Prepaid expenses and other current assets
|
|
|
17,551
|
|
Property and equipment
|
|
|
8,051
|
|
Customer contracts and customer relationships
|
|
|
164,300
|
|
Goodwill
|
|
|
702,747
|
|
Other assets
|
|
|
598
|
|
Accounts payable
|
|
|
(9,047
|
)
|
Accrued expenses and other current liabilities
|
|
|
(63,417
|
)
|
Long-term deferred tax liability
|
|
|
(64,275
|
)
|
|
|
|
|
|
Total estimated consideration
|
|
$
|
847,289
|
|
|
|
|
|
|
The estimated value attributed to customer contracts and customer relationships is being amortized on an
accelerated basis over approximately 14 years. Of the value attributed to goodwill, customer contracts and customer relationships, $55.1 million is deductible for income tax purposes.
From the date of acquisition through December 31, 2013, Six3 Systems generated $48.9 million of revenue and $0.1 million of net income.
Six3 Systems net income includes the impact of $2.8 million of amortization of customer contracts and customer relationships, as well as $0.8 million in expense associated with retention bonuses associated with retention agreements with
certain Six3 executives. The agreements provide for a payment upon the one and two year anniversaries of the acquisition, dependent upon continued employment by the executive as an employee of the Company. Six3 Systems net income does not
include the impact of acquisition-related expenses incurred by CACI.
CACI incurred $9.7 million of acquisition-related expenses during the
three months ended December 31, 2013, including expenses and a loss on extinguishment associated with the additional indebtedness incurred in connection with the Amendment to the Credit Facility described above. These expenses are included in
indirect costs and selling expenses. See Note 4 for additional information on the loss on extinguishment.
The following pro forma results
are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the years presented or the results which may occur in the future. The following unaudited
pro forma results of operations assume the Six3 Systems acquisition had occurred on July 1, 2012 (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Revenue
|
|
$
|
1,936,283
|
|
|
$
|
2,072,832
|
|
Net income
|
|
|
82,224
|
|
|
|
73,635
|
|
Basic earnings per share
|
|
|
3.52
|
|
|
|
3.21
|
|
Diluted earnings per share
|
|
|
3.28
|
|
|
|
3.10
|
|
9
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Intangible assets increased due to the Six3 Systems acquisition (see Note 2) and consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
June 30,
2013
|
|
Customer contracts and related customer relationships
|
|
$
|
516,541
|
|
|
$
|
351,349
|
|
Acquired technologies
|
|
|
27,177
|
|
|
|
27,177
|
|
Covenants not to compete
|
|
|
3,449
|
|
|
|
3,401
|
|
Other
|
|
|
1,593
|
|
|
|
1,639
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
548,760
|
|
|
|
383,566
|
|
Less accumulated amortization
|
|
|
(296,352
|
)
|
|
|
(279,378
|
)
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
252,408
|
|
|
$
|
104,188
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are primarily amortized on an accelerated basis over periods ranging from one to fifteen
years. The weighted-average period of amortization for all customer contracts and related customer relationships as of December 31, 2013 is 11.5 years, and the weighted-average remaining period of amortization is 11.8 years. The
weighted-average period of amortization for acquired technologies as of December 31, 2013 is 6.7 years, and the weighted-average remaining period of amortization is 5.0 years.
Expected amortization expense for the remainder of the fiscal year ending June 30, 2014, and for each of the fiscal years thereafter, is
as follows (in thousands):
|
|
|
|
|
Fiscal year ending June 30,
|
|
Amount
|
|
2014 (six months)
|
|
$
|
22,142
|
|
2015
|
|
|
39,343
|
|
2016
|
|
|
32,671
|
|
2017
|
|
|
29,361
|
|
2018
|
|
|
25,312
|
|
Thereafter
|
|
|
103,579
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
252,408
|
|
|
|
|
|
|
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
June 30,
2013
|
|
Convertible notes payable
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
Bank credit facility Term Loan
|
|
|
831,250
|
|
|
|
131,250
|
|
Bank credit facility Revolving Facility
|
|
|
330,000
|
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
|
Principal amount of long-term debt
|
|
|
1,461,250
|
|
|
|
611,250
|
|
Less unamortized discount
|
|
|
(4,653
|
)
|
|
|
(11,421
|
)
|
Less unamortized debt issuance costs
|
|
|
(6,029
|
)
|
|
|
(3,522
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,450,568
|
|
|
|
596,307
|
|
Less current portion
|
|
|
(41,562
|
)
|
|
|
(295,517
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
1,409,006
|
|
|
$
|
300,790
|
|
|
|
|
|
|
|
|
|
|
Bank Credit Facility
As of December 31, 2013, the Company has a $1.7 billion credit facility (the Credit Facility), which consists of an $850.0 million
revolving credit facility (the Revolving Facility) and an $831.3 million term loan (the Term Loan). The Revolving Facility has subfacilities of $50.0 million for same-day swing line loan borrowings and $25.0 million for stand-by letters of credit.
At any time and so long as no default has occurred, the Company has the right to increase the
10
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Revolving Facility or the Term Loan in an aggregate principal amount of up to the greater of $400.0 million or an amount subject to 2.75 times senior secured leverage, calculated assuming the
Revolving Facility is fully drawn, with applicable lender approvals. The Credit Facility is available to refinance existing indebtedness and for general corporate purposes, including working capital expenses and capital expenditures. The Credit
Facility was amended on November 15, 2013 in connection with the Companys acquisition of Six3 Systems. See Note 2. Prior to the amendment, the Credit Facility consisted of a $750.0 million revolving credit facility and a $150.0 million
term loan. In connection with the amendment, which allowed for the incurrence of $700.0 million of additional term loans and a $100.0 million increase in the Revolving Facility, the Company evaluated each creditor with ownership in the debt before
and after the additional borrowings to determine whether the additional borrowings should be accounted for as a modification or an extinguishment of debt as it relates to each individual holder. As a result of this analysis, the Company recorded a
$4.1 million loss on extinguishment within indirect costs and selling expenses in the three month period ended December 31, 2013. The Credit Facility matures on November 15, 2018.
The Revolving Facility is a secured facility that permits continuously renewable borrowings of up to $850.0 million. As of December 31,
2013, the Company had $330.0 million outstanding under the Revolving Facility, no borrowings on the swing line and outstanding letters of credit of $0.5 million. The Company pays a quarterly facility fee for the unused portion of the Revolving
Facility.
The Term Loan is a five-year secured facility under which principal payments are due in quarterly installments of $10.4 million
through December 31, 2016 and $20.8 million thereafter until the balance is due in full on November 15, 2018.
The interest rates
applicable to loans under the Credit Facility are floating interest rates that, at the Companys option, equal a base rate or a Eurodollar rate plus, in each case, an applicable margin based upon the Companys consolidated total leverage
ratio. As of December 31, 2013, the effective interest rate, including the impact of the Companys floating-to-fixed interest rate swap agreements and excluding the effect of amortization of debt financing costs, for the outstanding
borrowings under the Credit Facility was 2.28 percent.
The Credit Facility requires the Company to comply with certain financial
covenants, including a maximum senior secured leverage ratio, a maximum total leverage ratio and a minimum fixed charge coverage ratio. The Credit Facility also includes customary negative covenants restricting or limiting the Companys ability
to guarantee or incur additional indebtedness, grant liens or other security interests to third parties, make loans or investments, transfer assets, declare dividends or redeem or repurchase capital stock or make other distributions, prepay
subordinated indebtedness and engage in mergers, acquisitions or other business combinations, in each case except as expressly permitted under the Credit Facility. Since the inception of the Credit Facility, the Company has been in compliance with
all of the financial covenants. A majority of the Companys assets serve as collateral under the Credit Facility.
The Company has
capitalized $18.1 million of debt issuance costs associated with the Credit Facility. All debt issuance costs are being amortized from the date incurred to the expiration date of the Credit Facility. As of December 31, 2013, $5.8 million of the
unamortized balance is included in long-term debt and $7.0 million is included in other long-term assets.
Convertible Notes Payable
Effective May 16, 2007, the Company issued the Notes in a private placement. The Notes were issued at par value and are
subordinate to the Companys senior secured debt. Interest on the Notes is payable on May 1 and November 1 of each year. The Notes mature on May 1, 2014.
Holders may convert their notes at a conversion rate of 18.2989 shares of CACI common stock for each $1,000 of note principal (an initial
conversion price of $54.65 per share) under the following circumstances: (1) if the last reported sale price of CACI stock is greater than or equal to 130 percent of the applicable conversion price for at least 20 trading days in the
period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) during the five consecutive business day period immediately after any ten consecutive trading day period (the note measurement period) in
which the average of the trading price per $1,000 principal amount of convertible note was equal to or less than 97 percent of the average product of the closing price of a share of the Companys common stock and the conversion rate of each
date during the note measurement period; (3) upon the occurrence of certain corporate events constituting a fundamental change, as defined in the indenture governing the Notes; or (4) during the last three-month period prior to maturity.
CACI is required to satisfy 100 percent of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in common stock. As of December 31, 2013, the condition in (1) above was satisfied
and, accordingly, holders of the Notes may exercise the conversion option beginning on January 1, 2014.
11
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
In the event of a fundamental change, as defined in the indenture governing the Notes,
holders may require the Company to repurchase the Notes at a price equal to the principal amount plus any accrued interest. Also, if certain fundamental changes occur prior to maturity, the Company will in certain circumstances increase the
conversion rate by a number of additional shares of common stock or, in lieu thereof, the Company may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that these notes are convertible into shares of
the acquiring or surviving company. The Company is not permitted to redeem the Notes.
The Company separately accounts for the liability
and the equity (conversion option) components of the Notes and recognizes interest expense on the Notes using an interest rate in effect for comparable debt instruments that do not contain conversion features. The effective interest rate for the
Notes excluding the conversion option was determined to be 6.9 percent.
The fair value of the liability component of the Notes was
calculated to be $221.9 million at May 16, 2007, the date of issuance. The excess of the $300.0 million of gross proceeds over the $221.9 million fair value of the liability component, or $78.1 million, represents the fair value of the equity
component, which was recorded, net of income tax effect, as additional paid-in capital within shareholders equity. This $78.1 million difference represents a debt discount that is amortized over the seven-year term of the Notes as a non-cash
component of interest expense. For the three and six months ended December 31, 2013 and 2012, the components of interest expense related to the Notes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Coupon interest
|
|
$
|
1,594
|
|
|
$
|
1,594
|
|
|
$
|
3,188
|
|
|
$
|
3,188
|
|
Non-cash amortization of discount
|
|
|
3,409
|
|
|
|
3,185
|
|
|
|
6,769
|
|
|
|
6,325
|
|
Amortization of issuance costs
|
|
|
205
|
|
|
|
205
|
|
|
|
410
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,208
|
|
|
$
|
4,984
|
|
|
$
|
10,367
|
|
|
$
|
9,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance of the unamortized discount as of December 31, 2013 and June 30, 2013, was $4.7 million
and $11.4 million, respectively. The balance as of December 31, 2013 will be amortized as additional, non-cash interest expense over the remaining term of the Notes (through May 1, 2014) using the effective interest method.
The fair value of the Notes as of December 31, 2013 was $405.5 million based on quoted market values.
The contingently issuable shares that may result from the conversion of the Notes were included in CACIs diluted share count for the
three months ended December 31, 2013 and 2012 because CACIs average stock price during both three month periods was above the conversion price of $54.65 per share. Of total debt issuance costs of $7.8 million, $5.8 million is being
amortized to interest expense over seven years. The remaining $2.0 million of debt issuance costs attributable to the embedded conversion option was recorded in additional paid-in capital. Upon closing of the sale of the Notes, $45.5 million of the
net proceeds was used to concurrently repurchase one million shares of CACIs common stock.
In connection with the issuance of the
Notes, the Company purchased in a private transaction at a cost of $84.4 million call options (the Call Options) to purchase approximately 5.5 million shares of its common stock at a price equal to the conversion price of $54.65 per share. The
cost of the Call Options was recorded as a reduction of additional paid-in capital. The Call Options allow CACI to receive shares of its common stock from the counterparties equal to the amount of common stock related to the excess conversion value
that CACI would pay the holders of the Notes upon conversion.
For income tax reporting purposes, the Notes and the Call Options are
integrated. This created an original issue discount for income tax reporting purposes, and therefore the cost of the Call Options is being accounted for as interest expense over the term of the Notes for income tax reporting purposes. The associated
income tax benefit of $32.8 million to be realized for income tax reporting purposes over the term of the Notes was recorded as an increase in additional paid-in capital and a long-term deferred tax asset. The majority of this deferred tax asset is
offset in the Companys balance sheet by the $30.7 million deferred tax liability associated with the non-cash interest expense to be recorded for financial reporting purposes.
12
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
In addition, the Company sold warrants (the Warrants) to issue approximately 5.5 million
shares of CACI common stock at an exercise price of $68.31 per share. The proceeds from the sale of the Warrants totaled $56.5 million and were recorded as an increase to additional paid-in capital.
On a combined basis, the Call Options and the Warrants are intended to reduce the potential dilution of CACIs common stock in the event
that the Notes are converted by effectively increasing the conversion price of these notes from $54.65 to $68.31. The Call Options are anti-dilutive and are therefore excluded from the calculation of diluted shares outstanding. The Warrants result
in additional diluted shares outstanding when CACIs average common stock price exceeds $68.31. The Call Options and the Warrants are separate and legally distinct instruments that bind CACI and the counterparties and have no binding effect on
the holders of the Notes.
The Company has classified the Notes as long-term on the accompanying balance sheet as of December 31, 2013
as the Company has sufficient borrowing capacity under the Credit Facility to repay the Notes when they come due.
Cash Flow Hedges
The Company periodically uses derivative financial instruments as part of a strategy to manage exposure to market risks associated
with interest rate fluctuations. On December 24, 2013, the Company entered into a floating-to-fixed interest rate swap agreement (the 2013 Swap) for $100.0 million related to a portion of the Companys floating rate indebtedness. The 2013
Swap is effective beginning July 1, 2014 and matures on January 2, 2019. On April 5, 2012, the Company entered into two floating-to-fixed interest rate swap agreements (the 2012 Swaps) for an aggregate notional amount of $100.0
million ($50.0 million for each agreement). The 2012 Swaps were effective beginning July 1, 2013 and mature July 3, 2017. The Company designated the 2013 Swap and the 2012 Swaps, as cash flow hedges. Unrealized gains are recognized as
assets while unrealized losses are recognized as liabilities. The interest rate swap agreements are highly correlated to the changes in interest rates to which the Company is exposed. Unrealized gains and losses on these swaps are designated as
effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses will be recorded as a component of interest
expense. Future realized gains and losses in connection with each required interest payment will be reclassified from accumulated other comprehensive income or loss to interest expense. The Company does not hold or issue derivative financial
instruments for trading purposes.
The effect of derivative instruments in the condensed consolidated statements of operations and
accumulated other comprehensive loss for the three and six months ended December 31, 2013 and 2012 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
36
|
|
|
$
|
(36
|
)
|
|
$
|
(195
|
)
|
|
$
|
(626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reclassified to earnings from accumulated other comprehensive loss
|
|
$
|
341
|
|
|
$
|
|
|
|
$
|
674
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to December 31, 2013, the Company entered into two additional interest rate swap agreements.
See Note 11.
13
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The aggregate maturities of long-term debt at December 31, 2013 are as follows (in
thousands):
|
|
|
|
|
Twelve months ending December 31,
|
|
|
|
|
2014
|
|
$
|
41,562
|
|
2015
|
|
|
41,563
|
|
2016
|
|
|
41,563
|
|
2017
|
|
|
83,125
|
|
2018
|
|
|
1,253,437
|
|
|
|
|
|
|
Principal amount of long-term debt
|
|
|
1,461,250
|
|
Less unamortized discount
|
|
|
(4,653
|
)
|
Less unamortized debt issuance costs
|
|
|
(6,029
|
)
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,450,568
|
|
|
|
|
|
|
5.
|
Commitments and Contingencies
|
The Company is involved in various lawsuits, claims, and administrative proceedings arising in the normal course of
business. Management is of the opinion that any liability or loss associated with such matters, either individually or in the aggregate, will not have a material adverse effect on the Companys operations and liquidity.
Government Contracting
Payments to the Company on cost-plus-fee and time-and-materials contracts are subject to adjustment upon audit by the Defense Contract Audit
Agency (DCAA). The DCAA is currently in the process of auditing the Companys incurred cost submissions for the years ended June 30, 2007 and 2008. The DCAA has completed its audits of the Companys incurred cost submissions for the
year ended June 30, 2006, and the Company is awaiting the Defense Contract Management Agencys decisions regarding those incurred cost submissions. In the opinion of management, audit adjustments that may result from audits not yet
completed or started are not expected to have a material effect on the Companys financial position, results of operations, or cash flows as the Company has accrued its best estimate of potential disallowances. Additionally, the DCAA
continually reviews the cost accounting and other practices of government contractors, including the Company. In the course of those reviews, cost accounting and other issues are identified, discussed and settled.
On March 26, 2012, the Company received a subpoena from the Defense Criminal Investigative Service seeking documents related to one of the
Companys contracts for the period of January 1, 2007 through March 26, 2012. The Company is providing documents responsive to the subpoena and cooperating fully with the governments investigation. The Company has
accrued its current best estimate of the potential outcome within its estimated range of zero to $1.8 million.
German Value-Added
Taxes
The Company is under audit by the German tax authorities for issues related to value-added tax returns. At this time, the
Company has not been assessed any deficiency and, based on sound factual and legal precedent, believes it is in compliance with the applicable value-added tax regulations. The Company has not accrued any liability for this matter because an
unfavorable outcome is not considered probable. The Company estimates the range of reasonably possible losses to be between $1.5 million and $3.5 million.
Virginia Sales and Use Tax Audit
The Company is under audit for sales and use tax related issues by the Commonwealth of Virginia. While no assessment has been issued, the
Company has accrued its current best estimate of the potential outcome within its estimated range of $0.9 million to $3.7 million.
14
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
6.
|
Stock-Based Compensation
|
Stock-based compensation expense recognized, together with the income tax benefits recognized, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Stock-based compensation included in indirect costs and selling expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and restricted stock unit (RSU) expense
|
|
$
|
3,301
|
|
|
$
|
3,327
|
|
|
$
|
5,744
|
|
|
$
|
5,481
|
|
Non-qualified stock option and stock settled stock appreciation right (SSAR) expense
|
|
|
|
|
|
|
174
|
|
|
|
41
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3,301
|
|
|
$
|
3,501
|
|
|
$
|
5,785
|
|
|
$
|
5,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit recognized for stock-based compensation expense
|
|
$
|
1,278
|
|
|
$
|
1,302
|
|
|
$
|
2,225
|
|
|
$
|
2,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the terms of its 2006 Stock Incentive Plan (the 2006 Plan), the Company may issue, among others,
non-qualified stock options, restricted stock, RSUs, SSARs, and performance awards, collectively referred to herein as equity instruments. During the periods presented all equity instrument grants were made in the form of RSUs. Other than
performance-based RSUs which contain a market-based element, the fair value of RSU grants was determined based on the closing price of a share of the Companys common stock on the date of grant. The fair value of RSUs with market-based vesting
features was also measured on the grant date, but was done so using a binomial lattice model.
Annual grants under the 2006 Plan are
generally made to the Companys key employees during the first quarter of the Companys fiscal year and to members of the Companys Board of Directors during the second quarter of the Companys fiscal year. With the approval of
its Chief Executive Officer, the Company also issues equity instruments to strategic new hires and to employees who have demonstrated superior performance. In September 2013, the Company made its annual grant to its key employees consisting of
202,170 Performance Restricted Stock Units (PRSUs). The final number of such performance-based RSUs which will be considered earned by the participants and eventually vest is based on the achievement of a specified Net After Tax Profit (NATP) for
the year ending June 30, 2014 and on the average share price of Company stock for the 90 day period ending September 13, 2014 as compared to the average share price for the 90 day period ended September 13, 2013. No PRSUs will be
earned if the specified NATP for the fiscal year ending June 30, 2014 is not met. If NATP for the year ending June 30, 2014 exceeds the specified NATP and the average share price of the Companys stock for the 90 day period ending
September 13, 2014 exceeds the average share price of the Companys stock for the 90 day period ended September 13, 2013 by 100 percent or more then an additional 202,170 RSUs could be earned by participants. This is the maximum
number of additional RSUs that can be earned related to the September 2013 annual grant. In addition to the performance and market conditions, there is a service vesting condition which stipulates that 50 percent of the earned award will vest on
September 1, 2016 and 50 percent of the earned award will vest on September 1, 2017, in both cases dependent upon continuing service by the grantee as an employee of the Company, unless the grantee is eligible for earlier vesting upon
retirement, as defined.
The total number of shares authorized by shareholders for grants under the 2006 Plan and its predecessor plan is
12,450,000 as of December 31, 2013. The aggregate number of grants that may be made may exceed this approved amount as forfeited SSARs, stock options, restricted stock and RSUs, and vested but unexercised SSARs and stock options that expire,
become available for future grants. As of December 31, 2013, cumulative grants of 13,146,544 equity instruments underlying the shares authorized have been awarded, and 4,063,581 of these instruments have been forfeited.
15
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Activity related to SSARs/non-qualified stock options and RSUs during the six months ended
December 31, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
SSARs/
Non-qualified
Stock Options
|
|
|
RSUs
|
|
Outstanding, June 30, 2013
|
|
|
275,550
|
|
|
|
1,042,746
|
|
Granted
|
|
|
|
|
|
|
234,858
|
|
Exercised/Issued
|
|
|
(129,430
|
)
|
|
|
(300,488
|
)
|
Forfeited/Lapsed
|
|
|
(3,230
|
)
|
|
|
(27,130
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
142,890
|
|
|
|
949,986
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value for RSUs
|
|
|
|
|
|
$
|
72.09
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, there was $34.2 million of total unrecognized compensation cost related to RSUs
scheduled to be recognized over a weighted-average period of 3.4 years.
ASC 260,
Earnings Per Share
(ASC 260)
,
requires dual presentation of basic and diluted earnings per share on
the face of the income statement. Basic earnings per share exclude dilution and are computed by dividing income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted into common stock but not securities that are anti-dilutive, including stock options and SSARs with an exercise price greater than the average market
price of the Companys common stock. Using the treasury stock method, diluted earnings per share include the incremental effect of SSARs, stock options, restricted shares, and those RSUs that are no longer subject to a market or performance
condition. For both the three and six months ended December 31, 2012, there were 0.3 million weighted-average common stock equivalents excluded from the diluted per share computation due to their anti-dilutive effects. There were no
anti-dilutive common stock equivalents for the three or six months ended December 31, 2013. The PRSUs granted in September 2013 are excluded from the calculation of diluted earnings per share as the underlying shares are considered to be
contingently issuable shares. These shares will be included in the calculation of diluted earnings per share beginning in the first reporting period in which the performance metric is achieved. The shares underlying the Notes were included in the
computation of diluted earnings per share for the three and six months ended December 31, 2013 and the six months ended December 31, 2012 because the average share price was above the conversion price during those periods. The shares
underlying the Notes were not included in the computation of diluted earnings per share for the three months ended December 31, 2012 because the average share price was below the conversion price during that three month period. The Warrants
were included in the computation of diluted earnings per share during the three and six months ended December 31, 2013 because the Warrants exercise price of $68.31 was lower than the average market price of a share of Company common
stock during those periods. The Warrants were excluded from the computation of earnings per share during the three and six months ended December 31, 2012 because the Warrants exercise price was above the average market price during those
periods. The chart below shows the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net income attributable to CACI
|
|
$
|
34,962
|
|
|
$
|
39,676
|
|
|
$
|
67,954
|
|
|
$
|
75,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic shares outstanding during the period
|
|
|
23,433
|
|
|
|
22,852
|
|
|
|
23,374
|
|
|
|
22,942
|
|
Dilutive effect of SSARs/stock options and RSUs/restricted shares after application of treasury stock method
|
|
|
403
|
|
|
|
685
|
|
|
|
464
|
|
|
|
810
|
|
Dilutive effect of the Notes and Warrants
|
|
|
1,461
|
|
|
|
|
|
|
|
1,228
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding during the period
|
|
|
25,297
|
|
|
|
23,537
|
|
|
|
25,066
|
|
|
|
23,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.49
|
|
|
$
|
1.74
|
|
|
$
|
2.91
|
|
|
$
|
3.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.38
|
|
|
$
|
1.69
|
|
|
$
|
2.71
|
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Company is subject to income taxes in the U.S. and various state and foreign jurisdictions. Tax statutes and regulations
within each jurisdiction are subject to interpretation and require the application of significant judgment. The Company is currently under examination by three state jurisdictions and one foreign jurisdiction for years ended June 30, 2004
through June 30, 2012. The Company does not expect the resolution of these examinations to have a material impact on its results of operations, financial condition or cash flows.
The Companys total liability for unrecognized tax benefits as of December 31, 2013 and June 30, 2013 was $9.2 million and $8.2
million, respectively. Of the $9.2 million unrecognized tax benefit at December 31, 2013, $2.6 million, if recognized, would impact the Companys effective tax rate.
As of June 30, 2013, the Company corrected the classification of $4.2 million of deferred tax liabilities by reclassifying this amount
from non-current deferred tax liabilities to a reduction of current deferred tax assets and concluded that this reclassification was not material.
9.
|
Business Segment Information
|
The Company reports operating results and financial data in two segments: domestic operations and international operations.
Domestic operations provide information solutions and services to its customers. Its customers are primarily U.S. federal government agencies. Other customers of the Companys domestic operations include state and local governments and
commercial enterprises. The Company does not measure revenue or profit by its major market areas or service offerings, either for internal management or external financial reporting purposes, as it would be impractical to do so. The Company places
employees in locations around the world in support of its clients. International operations offer services to both commercial and non-U.S. government customers primarily within the Companys business systems and enterprise IT markets. The
Company evaluates the performance of its operating segments based on net income attributable to CACI. Summarized financial information concerning the Companys reportable segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Three Months Ended December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
857,457
|
|
|
$
|
36,729
|
|
|
$
|
894,186
|
|
Net income attributable to CACI
|
|
|
32,234
|
|
|
|
2,728
|
|
|
|
34,962
|
|
Three Months Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
897,346
|
|
|
$
|
34,281
|
|
|
$
|
931,627
|
|
Net income attributable to CACI
|
|
|
37,010
|
|
|
|
2,666
|
|
|
|
39,676
|
|
Six Months Ended December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
1,688,332
|
|
|
$
|
70,119
|
|
|
$
|
1,758,451
|
|
Net income attributable to CACI
|
|
|
62,914
|
|
|
|
5,040
|
|
|
|
67,954
|
|
Six Months Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
1,795,630
|
|
|
$
|
67,233
|
|
|
$
|
1,862,863
|
|
Net income attributable to CACI
|
|
|
70,417
|
|
|
|
4,967
|
|
|
|
75,384
|
|
10.
|
Fair Value of Financial Instruments
|
ASC 820,
Fair Value Measurements and Disclosures
, defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction. The market in which the reporting
entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the
market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants
would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the
reporting entity should use valuation models.
17
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Companys financial assets and liabilities recorded at fair value on a recurring
basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows:
|
|
|
Level 1 Inputs unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2 Inputs unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted
prices that are observable, and inputs derived from or corroborated by observable market data.
|
|
|
|
Level 3 Inputs amounts derived from valuation models in which unobservable inputs reflect the reporting entitys own assumptions about the assumptions of market participants that would be used in pricing the
asset or liability.
|
The Companys financial instruments measured at fair value included non-corporate owned life
insurance (COLI) money market investments and mutual funds held in the Companys supplemental retirement savings plan (the Supplemental Savings Plan), contingent consideration in connection with past acquisitions and interest rate swap
agreements. Contingent consideration recorded at December 31, 2013 and June 30, 2013 related to the February 1, 2012 U.K. acquisition of Tomorrow Communications, Ltd (TCL). The following table summarizes the financial assets and
liabilities measured at fair value on a recurring basis as of December 31, 2013 and June 30, 2013, and the level they fall within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Financial Instrument
|
|
Financial Statement
Classification
|
|
Fair Value
Hierarchy
|
|
December 31,
2013
|
|
|
June 30,
2013
|
|
|
|
|
Fair Value
|
|
Non-COLI assets held in connection with the Supplemental Savings Plan
|
|
Long-term asset
|
|
Level 1
|
|
$
|
|
|
|
$
|
830
|
|
Contingent Consideration
|
|
Current liability
|
|
Level 3
|
|
$
|
3,288
|
|
|
$
|
2,977
|
|
Interest rate swap agreements
|
|
Other long-term liabilities
|
|
Level 2
|
|
$
|
2,087
|
|
|
$
|
1,765
|
|
Changes in the fair value of the assets held in connection with the Supplemental Savings Plan are recorded in
indirect costs and selling expenses.
Contingent consideration at December 31, 2013 and June 30, 2013 related to the requirement
that the Company pay contingent consideration in the event TCL achieved certain specified earnings results during the one year period subsequent to acquisition. The Company determined the fair value of contingent consideration as of the acquisition
date using a valuation model which included the evaluation of all possible outcomes and the application of an appropriate discount rate. At the end of each reporting period, the fair value of the contingent consideration is remeasured and any
changes are recorded in indirect costs and selling expenses. During the three and six months ended December 31, 2013 and 2012, this remeasurement did not result in a significant change to the liability recorded. The maximum contingent
consideration associated with the TCL acquisition is approximately $6.0 million. During the year ended June 30, 2013, the Company determined that the maximum contingent consideration possible had been earned. One-half of this amount was paid to
the former shareholders of TCL in February 2013. The remaining one-half is scheduled to be paid in February 2014.
Changes in the fair
value of the interest rate swap agreements are recorded as a component of accumulated other comprehensive income or loss.
During January 2014, the Company entered into two floating-to-fixed interest rate swap agreements for an aggregate notional
amount of $200.0 million which hedge a portion of the Companys floating rate indebtedness. The agreements are effective beginning July 1, 2014. $100.0 million matures on each of July 2, 2018 and January 2, 2019. The Company designated the
interest rate swap agreements as cash flow hedges. The Company may choose to enter into additional interest rate swap agreements in the future.
18