NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited 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 ventures that are majority-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 Company’s debt outstanding as of September 30, 2018 under its bank credit facility approximates its carrying value. The fair value of the Company’s debt under its bank credit facility was estimated using Level 2 inputs based on market data of companies with a corporate rating similar to CACI’s that have recently priced credit facilities. See Notes 9 and 15.
In the opinion of management, the accompanying unaudited 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 Company’s latest annual report to the SEC on Form 10-K for the year ended June 30, 2018. The results of operations for the three months ended September 30, 2018 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 period’s financial statements to conform to the current presentation.
2.
|
Recent Accounting Pronouncements
|
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15,
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
, which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs associated with internal-use software (Subtopic 350-40). ASU 2018-15 becomes effective for the Company in the first quarter of FY2021 and may be adopted either retrospectively or prospectively. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which changes the presentation of net periodic pension and postretirement cost (net benefit cost) on the consolidated statements of operations. The service cost component of net benefit cost will continue to be part of operating income while all other components of net benefit cost (interest costs, actuarial gains and losses and amortization of prior service cost) will be shown outside of operating income. The Company adopted this standard on July 1, 2018 and applied the standard retrospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
, which clarifies how certain cash receipts and cash payments are presented and classified on the statement of cash flows to reduce diversity in practice. The Company adopted this standard on July 1, 2018 and applied the standard retrospectively. The adoption of this standard did not impact the Company’s consolidated statement of cash flows for the three months ended September 30, 2018 or 2017, respectively. However, adoption of this standard will require the reclassification of proceeds received from the settlement of COLI policies from operating activities to investing activities on the consolidated statements of cash flows for the six, nine and twelve month periods ended June 30, 2018.
7
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
In February 2016, the FASB issued ASU 2016-02,
Leases
, which amends the existing guidance on accounting for leases. The new standard requires lessees to put virtually all leases on t
he balance sheet by recognizing lease assets and lease liabilities. Lessor accounting is largely unchanged from that applied under previous guidance. The amended guidance is effective for the fiscal year, and interim periods within that fiscal year, beginn
ing after December 15, 2018, and requires a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. The Company plans to adopt
this standard on July 1, 2019 and is currently in the process of accumulating data required to measure its existing leases, reviewing lease contracts, implementing a new lease accounting solution and evaluating accounting policy and internal control change
s. We expect that upon adoption we will recognize a material right-of-use asset and lease liability on our balance sheet. We do not expect the standard to have a material impact on our cash flows or results of operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended (ASC 606), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In addition, ASU 2014-09 added Accounting Standard Codification (ASC) 340-40 to codify guidance on other assets and deferred costs for contracts with customers.
Effective July 1, 2018, we adopted the new revenue standard (ASC 606) using the modified retrospective method, whereby the cumulative effect of applying the standard was recognized through shareholders’ equity on the date of adoption. In addition, for our fiscal year ending June 30, 2019 and the interim reporting periods therein, the Company is required to disclose the amount by which each financial statement line item was affected by the new standard. The Company’s comparative information, for prior periods presented before July 1, 2018, has not been restated and continues to be reported under ASC 605.
The impact of adoption on our consolidated balance sheet is as follows (in thousands):
|
|
June 30, 2018
As Reported Under
ASC 605
|
|
|
Adjustments
Due to
ASC 606
|
|
|
July 1, 2018
Balance
Under ASC 606
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
806,871
|
|
|
$
|
20,454
|
|
|
$
|
827,325
|
|
Prepaid expenses and other current assets
|
|
|
58,126
|
|
|
|
2,342
|
|
|
|
60,468
|
|
Other long-term assets
|
|
|
39,175
|
|
|
|
3,923
|
|
|
|
43,098
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued expenses and current liabilities
|
|
|
150,602
|
|
|
|
2,212
|
|
|
|
152,814
|
|
Deferred income taxes
|
|
|
200,880
|
|
|
|
6,639
|
|
|
|
207,519
|
|
Other long-term liabilities
|
|
|
85,187
|
|
|
|
98
|
|
|
|
85,285
|
|
Retained earnings
|
|
|
2,126,790
|
|
|
|
17,770
|
|
|
|
2,144,560
|
|
ASC 606 changed the pattern of revenue recognition for some of our contracts with customers. For our award and incentive fee contracts, we recognize a constrained amount of variable consideration throughout the performance period rather than defer recognition of the relevant portion of fee until customer notification of the amount earned. Some of our fixed price services-type contracts in which revenue was previously recognized on a straight-line basis over the performance period converted to recognition of revenue over time using a cost-to-cost input method to measure our progress towards the complete satisfaction of the performance obligation.
The adoption of ASC 606 did not have a material impact on the Company’s revenue recognition for cost-plus-fee, fixed price/level-of-effort, time-and-materials (T&M), fixed price contracts previously recognized under ASC 605-35, and fixed price product revenue arrangements.
Under ASC 340-40, the Company capitalizes certain costs to fulfill and obtain a contract. These capitalized costs will be amortized over the period of contract performance as revenue is recognized from the transfer of goods or services and the underlying performance obligation is satisfied.
8
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The table below presents the impact of adoption of
ASC 606 on our consolidated statement of operations for the three months ended September 30, 2018 (in thousands):
|
|
As Adjusted Under
ASC 605
|
|
|
Effect of
ASC 606
|
|
|
As Reported Under
ASC 606
|
|
Revenue
|
|
$
|
1,158,702
|
|
|
$
|
7,162
|
|
|
$
|
1,165,864
|
|
Costs of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
782,760
|
|
|
|
—
|
|
|
|
782,760
|
|
Indirect costs and selling expenses
|
|
|
264,700
|
|
|
|
57
|
|
|
|
264,757
|
|
Depreciation and amortization
|
|
|
18,747
|
|
|
|
—
|
|
|
|
18,747
|
|
Total costs of revenue
|
|
|
1,066,207
|
|
|
|
57
|
|
|
|
1,066,264
|
|
Income from operations
|
|
|
92,495
|
|
|
|
7,105
|
|
|
|
99,600
|
|
Interest expense and other, net
|
|
|
8,886
|
|
|
|
—
|
|
|
|
8,886
|
|
Income before taxes
|
|
|
83,609
|
|
|
|
7,105
|
|
|
|
90,714
|
|
Income tax expense (benefit)
|
|
|
10,087
|
|
|
|
1,794
|
|
|
|
11,881
|
|
Net income
|
|
$
|
73,522
|
|
|
$
|
5,311
|
|
|
$
|
78,833
|
|
Basic earnings per share
|
|
$
|
2.97
|
|
|
$
|
0.21
|
|
|
$
|
3.19
|
|
Diluted earnings per share
|
|
$
|
2.89
|
|
|
$
|
0.21
|
|
|
$
|
3.10
|
|
The table below presents the impact of adoption of ASC 606 on our consolidated balance sheet as of September 30, 2018 (in thousands):
|
|
As Adjusted Under
ASC 605
|
|
|
Effect of
ASC 606
|
|
|
As Reported Under ASC 606
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
919,394
|
|
|
$
|
26,170
|
|
|
$
|
945,564
|
|
Prepaid expenses and other current assets
|
|
|
70,767
|
|
|
|
2,307
|
|
|
|
73,074
|
|
Other long-term assets
|
|
|
39,495
|
|
|
|
3,900
|
|
|
|
43,395
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued expenses and current liabilities
|
|
|
183,350
|
|
|
|
2,825
|
|
|
|
186,175
|
|
Deferred income taxes
|
|
|
211,307
|
|
|
|
6,471
|
|
|
|
217,778
|
|
Other long-term liabilities
|
|
|
82,139
|
|
|
|
—
|
|
|
|
82,139
|
|
Retained earnings
|
|
|
2,200,312
|
|
|
|
23,081
|
|
|
|
2,223,393
|
|
3.
|
Summary of Significant Accounting Policies
|
Revenue Recognition
The Company generates almost all of our revenue from three different types of contractual arrangements with the U.S. government: cost-plus-fee, time-and-materials (T&M), and fixed price contracts. Our contracts with the U.S. government are generally subject to the Federal Acquisition Regulation (FAR) and are competitively priced based on estimated costs of providing the contractual goods or services.
We account for a contract when the parties have approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance, and it is probable that we will collect substantially all of the consideration.
At contract inception, the Company determines whether the goods or services to be provided are to be accounted for as a single performance obligation or as multiple performance obligations. This evaluation requires significant professional judgment as it may impact the timing and pattern of revenue recognition. If multiple performance obligations are identified, we generally use the cost plus a margin approach to determine the relative standalone selling price of each performance obligation.
9
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
When determining the total transaction price, the Company identifies both fixed and variable consideration elements within the contract. Variable consideration includes any amount within the transa
ction price that is not fixed, such as: award or incentive fees; performance penalties; unfunded contract value; or other similar items. For our contracts with award or incentive fees, the Company estimates the total amount of award or incentive fee expec
ted to be recognized into revenue. Throughout the performance period, we recognize
as
revenue a constrained amount of variable consideration
only to the extent
that
it is probabl
e
that
a significant reversal of the cumulative amount recognized to date wil
l not be required in a subsequent period. Our estimate of variable consideration is periodically adjusted based on significant changes in relevant facts and circumstances. In the period in which we can calculate the final amount of award or incentive fee
earned - based on the receipt of the customer’s final performance score or determining that more objective contractually-defined criteria have been fully satisfied - the Company will adjust our cumulative revenue recognized to date on the contract. This
adjustment to revenue will be disclosed as the amount of revenue recognized in the current period for a previously satisfied performance obligation.
We generally recognize revenue over time throughout the performance period as the customer simultaneously receives and consumes the benefits provided on our services-type revenue arrangements. This continuous transfer of control for our U.S. government contracts is supported by the unilateral right of our customer to terminate the contract for a variety of reasons without having to provide justification for its decision. For our services-type revenue arrangements in which there are a repetitive amount of services that are substantially the same from one month to the next, the Company will apply the series guidance. We use a variety of input and output methods that approximate the progress towards complete satisfaction of the performance obligation, including: costs incurred, labor hours expended, and time-elapsed measures for our fixed-price stand ready obligations. For certain contracts, primarily our cost-plus and T&M services-type revenue arrangements, we apply the right-to-invoice practical expedient in which revenue is recognized in direct proportion to our right to consideration for our progress towards the complete satisfaction of our performance obligation.
When a performance obligation has a significant degree of interrelation or interdependence between one month’s deliverables and the next, when there is an award or incentive fee, or when there is a significant degree of customization or modification, the Company generally records revenue using a percentage of completion methodology. For these revenue arrangements, substantially all revenue is recognized over time using a cost-to-cost input method based on the ratio of costs incurred to date in proportion to total estimated costs at completion. When estimates of total costs to be incurred on a contract exceed total revenue, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.
Contract modifications are reviewed to determine whether they should be accounted for as part of the original performance obligation or as a separate contract. When there is a change in scope or price and the additional performance obligations are at their standalone selling price, the original contract is terminated and the Company accounts for the change prospectively when the new goods or services to be transferred are distinct from those already provided. When the contract modification includes goods or services that are not distinct from those already provided, the Company records a cumulative adjustment to revenue based on our remeasurement of progress towards the complete satisfaction of the not yet fully delivered performance obligation.
Based on the critical nature of our contractual performance obligations, the Company may proceed with work based on customer direction prior to the completion and signing of formal contract documents. The Company has a formal review process for approving any such work that considers previous experiences with the customer, communications with the customer regarding funding status, and our knowledge of available funding for the contract or program.
Contract Assets
Contract assets include unbilled receivables in which our right to consideration is conditional on factors other than the passage of time. Contract assets exclude billed and billable receivables.
In addition, the costs to fulfill and obtain a contract may be considered for capitalization and are included in the contract assets balance. Based on contract specific facts and circumstances, the incremental costs of fulfilling a contract may be capitalized when expenses are incurred prior to revenue being recognizable. Costs to fulfill are generally considered for capitalization at contract inception when the Company incurs ramp up costs prior to satisfying a performance obligation. The incremental costs of obtaining a contract (e.g. sales commissions) are capitalized as an asset when CACI expects to recover them either directly or indirectly through the revenue arrangement’s profit margins. These capitalized costs are then expensed over the revenue arrangement’s period of performance. The Company has elected to apply the practical expedient to immediately expense the costs to obtain a contract when the performance obligation will be completed within twelve months of contract inception.
Contract assets are periodically reassessed based on reasonably available information as of the balance sheet date to ensure they do not exceed their net realizable value.
10
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Contract Liabilities
Contract liabilities include advance payments received from the customer in excess of revenue that may be recognized as of the balance sheet date. The advance payment is then subsequently recognized into revenue as the performance obligation is satisfied.
Remaining Performance Obligations
The Company’s remaining performance obligations balance represents the expected revenue to be recognized for the satisfaction of remaining performance obligations on our existing contracts as of period end. The remaining performance obligations balance excludes unexercised contract option years and task orders that may be issued underneath an Indefinite Delivery/Indefinite Quantity (IDIQ) vehicle. The remaining performance obligations balance generally increases with the execution of new contracts and converts into revenue as our contractual performance obligations are satisfied.
The Company continues to monitor our remaining performance obligations balance as it is subject to change from execution of new contracts, contract modifications or extensions, government deobligations, or early terminations. Based on this analysis, an adjustment to the period end balance may be required.
Domestic Acquisition
On August 15, 2018, CACI acquired certain assets of the systems engineering and acquisition support services business unit (SE&A BU) of CSRA LLC, a managed affiliate of General Dynamics Information Technology, Inc. The initial purchase consideration paid at closing to acquire the SE&A BU was $84.0 million plus $6.0 million representing a preliminary net working capital adjustment. Subsequent to closing, CACI estimated that an additional payment may be due to the sellers for the final net working capital adjustment. The Company recognized fair values of the assets acquired and liabilities assumed and allocated $42.0 million to goodwill and $8.9 million to intangible assets. The intangible assets consist of customer relationships. The final purchase price allocation, which is provisional and is expected to be completed by Q1 FY2020, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation will have a material impact on its results of operations or financial position.
Intangible assets consisted of the following (in thousands):
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018 (1)
|
|
|
2018
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Customer contracts and related customer relationships
|
|
$
|
444,528
|
|
|
$
|
435,933
|
|
Acquired technologies
|
|
|
13,210
|
|
|
|
13,237
|
|
Other
|
|
|
804
|
|
|
|
804
|
|
Intangible assets
|
|
|
458,542
|
|
|
|
449,974
|
|
Less accumulated amortization:
|
|
|
|
|
|
|
|
|
Customer contracts and related customer relationships
|
|
|
(208,313
|
)
|
|
|
(199,018
|
)
|
Acquired technologies
|
|
|
(9,126
|
)
|
|
|
(8,761
|
)
|
Other
|
|
|
(459
|
)
|
|
|
(440
|
)
|
Less accumulated amortization
|
|
|
(217,898
|
)
|
|
|
(208,219
|
)
|
Total intangible assets, net
|
|
$
|
240,644
|
|
|
$
|
241,755
|
|
__________________
|
(1)
|
During the three months ended September 30, 2018, the Company removed $0.1 million in fully amortized intangible assets.
|
11
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Intangible assets are
primarily amortized on an accelerated basis over periods ranging from
one to
twenty
years. The weighted-average period of amortization for all customer contracts and related customer relationships as of
September 30,
2018 is
1
4.9
years
, and the weighted-average remaining period of amortization is
11.
6
years. The weighted-average period of amortization for acquired technologies as of
September 30,
2018 is
7.0
years, and the weighted-average remaining period of amortization is
5.5
years.
Expected amortization expense for the remainder of the fiscal year ending June 30, 2019, and for each of the fiscal years thereafter, is as follows (in thousands):
Fiscal year ending June 30,
|
|
Amount
|
|
2019 (nine months)
|
|
$
|
27,155
|
|
2020
|
|
|
32,462
|
|
2021
|
|
|
28,787
|
|
2022
|
|
|
25,017
|
|
2023
|
|
|
22,350
|
|
Thereafter
|
|
|
104,873
|
|
Total intangible assets, net
|
|
$
|
240,644
|
|
The changes in the carrying amount of goodwill for the year ended June 30, 2018 and the three months ended September 30, 2018 are as follows (in thousands):
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Balance at June 30, 2017
|
|
$
|
2,479,496
|
|
|
$
|
97,939
|
|
|
$
|
2,577,435
|
|
Goodwill acquired (1)
|
|
|
35,024
|
|
|
|
6,867
|
|
|
|
41,891
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
1,509
|
|
|
|
1,509
|
|
Balance at June 30, 2018
|
|
|
2,514,520
|
|
|
|
106,315
|
|
|
|
2,620,835
|
|
Goodwill acquired (1)
|
|
|
42,147
|
|
|
|
(192
|
)
|
|
|
41,955
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
(1,388
|
)
|
|
|
(1,388
|
)
|
Balance at September 30, 2018
|
|
$
|
2,556,667
|
|
|
$
|
104,735
|
|
|
$
|
2,661,402
|
|
|
(1)
|
Includes goodwill initially allocated to new business combinations as well as measurement period adjustments.
|
We disaggregate our revenue arrangements by contract type, customer, and whether the Company is the prime or subcontractor. We believe that these categories allow for a better understanding of the nature, amount, timing, and uncertainty of revenue and cash flows arising from our contracts.
Revenue by Contract Type
The Company generated revenue on our cost-plus-fee, firm fixed-price (including proprietary software product sales), and time-and-materials contracts as follows during the three months ended September 30, 2018 (in thousands):
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Cost-plus-fee
|
|
$
|
641,527
|
|
|
$
|
—
|
|
|
$
|
641,527
|
|
Firm fixed-price
|
|
|
321,071
|
|
|
|
22,933
|
|
|
|
344,004
|
|
Time and materials
|
|
|
163,925
|
|
|
|
16,408
|
|
|
|
180,333
|
|
Total
|
|
$
|
1,126,523
|
|
|
$
|
39,341
|
|
|
$
|
1,165,864
|
|
12
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Customer Information
The Company generated revenue from our primary customer groups as follows during the three months ended September 30, 2018 (in thousands):
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Department of Defense
|
|
$
|
818,266
|
|
|
$
|
—
|
|
|
$
|
818,266
|
|
Federal civilian agencies
|
|
|
292,202
|
|
|
|
—
|
|
|
|
292,202
|
|
Commercial and other
|
|
|
16,055
|
|
|
|
39,341
|
|
|
|
55,396
|
|
Total
|
|
$
|
1,126,523
|
|
|
$
|
39,341
|
|
|
$
|
1,165,864
|
|
Prime or Subcontractor
The Company generated revenue as either the prime or subcontractor as follows during the three months ended September 30, 2018 (in thousands):
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Prime contractor
|
|
$
|
1,050,531
|
|
|
$
|
39,341
|
|
|
$
|
1,089,872
|
|
Subcontractor
|
|
|
75,992
|
|
|
|
—
|
|
|
|
75,992
|
|
Total
|
|
$
|
1,126,523
|
|
|
$
|
39,341
|
|
|
$
|
1,165,864
|
|
Significant Estimates
The Company uses an estimate at completion (EAC) for each of our contracts in which revenue is recognized using a percentage of completion calculation. The EAC process requires the Company to use professional judgment when assessing risks, estimating contract revenue and costs, estimating variable consideration, and making assumptions for schedule and technical issues. Based on changes in a contract’s EAC, a cumulative adjustment to revenue will be recorded. During the three months ended September 30, 2018, we recognized $6.4 million of revenue from EAC adjustments primarily related to the final true-up of firm fixed-price contracts.
During the three months ended September 30, 2018, we recognized $0.3 million of revenue from previously satisfied performance obligations primarily related to the final true-up adjustment to award or incentive fee amounts. The Company records these final true-up adjustments to our estimated award or incentive fee amounts in the period in which we receive the customer’s final performance score or when we can determine that more objective contractually-defined criteria have been fully satisfied.
Remaining Performance Obligations
The Company’s remaining performance obligations balance represents the expected revenue to be recognized for the satisfaction of remaining performance obligations on our existing contracts as of period end. This balance excludes unexercised contract option years and task orders that may be issued underneath an IDIQ vehicle. Our remaining performance obligations balance as of September 30, 2018 was $5.7 billion.
The Company expects to recognize approximately 80.0 percent of our remaining performance obligations balance as revenue over the next year and the remaining 20.0 percent thereafter.
13
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Contract assets are primarily comprised of conditional unbilled receivables in which revenue has been recognized but an invoice has not yet been issued to the customer as of the balance sheet date. Contract assets exclude billed and billable receivables and are not stated above their net realizable value.
Contract liabilities are primarily comprised of advance payments in which consideration is received in advance of satisfying a performance obligation.
Net contract assets (liabilities) consisted of the following (in thousands):
|
|
|
|
September 30,
|
|
|
July 1,
|
|
Description of Contract Related Balance
|
|
Financial Statement Classification
|
|
2018
|
|
|
2018 (1)
|
|
Contract assets – current:
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
Accounts receivable, net
|
|
$
|
90,316
|
|
|
$
|
72,511
|
|
Costs to obtain – short-term
|
|
Prepaid expenses and other current assets
|
|
|
2,307
|
|
|
|
2,342
|
|
Contract assets – noncurrent:
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
Accounts receivable, long-term
|
|
|
9,336
|
|
|
|
8,620
|
|
Costs to obtain – long-term
|
|
Other long-term assets
|
|
|
3,900
|
|
|
|
3,923
|
|
Contract liabilities – current:
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
Other accrued expenses and current liabilities
|
|
|
(51,928
|
)
|
|
|
(43,940
|
)
|
Contract liabilities – noncurrent:
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
Other long-term liabilities
|
|
|
(4,848
|
)
|
|
|
(4,740
|
)
|
Net contract assets (liabilities)
|
|
|
|
$
|
49,083
|
|
|
$
|
38,716
|
|
|
(1)
|
Includes the cumulative effect to the Company’s opening balance sheet from the adoption of ASU 2014-09,
Revenue from
Contracts with Customers
, using the modified retrospective method.
|
During the three months ended September 30, 2018, we recognized $17.1 million of revenue that was included in a previously recorded contract liability as of the beginning of the period.
Long-term debt consisted of the following (in thousands):
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Bank credit facility – term loans
|
|
$
|
926,664
|
|
|
$
|
938,394
|
|
Bank credit facility – revolver loans
|
|
|
180,000
|
|
|
|
135,000
|
|
Principal amount of long-term debt
|
|
|
1,106,664
|
|
|
|
1,073,394
|
|
Less unamortized discounts and debt issuance costs
|
|
|
(10,475
|
)
|
|
|
(11,054
|
)
|
Total long-term debt
|
|
|
1,096,189
|
|
|
|
1,062,340
|
|
Less current portion
|
|
|
(46,920
|
)
|
|
|
(46,920
|
)
|
Long-term debt, net of current portion
|
|
$
|
1,049,269
|
|
|
$
|
1,015,420
|
|
Bank Credit Facility
The Company has a $2,038.4 million credit facility (the Credit Facility), which consists of an $1,100.0 million revolving credit facility (the Revolving Facility) and a $938.4 million term loan (the Term Loan). The Revolving Facility has subfacilities of $100.0 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 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 Revolving Facility is a secured facility that permits continuously renewable borrowings of up to $1,100.0 million. As of September 30, 2018, the Company had $180.0 million outstanding under the Revolving Facility and no borrowings on the swing line. The Company pays a quarterly facility fee for the unused portion of the Revolving Facility.
14
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Term Loan is a five-year secured facility under which principal payments are due in quarterly installments of $
11.7
million through June 30, 20
21
and $
23.5
million thereafter until the balance is due in full on June
30
, 20
2
3
. As of
September 30,
2018, the Company had $
926.7
million outstanding under the Term Loan.
The interest rates applicable to loans under the Credit Facility are floating interest rates that, at the Company’s option, equal a base rate or a Eurodollar rate plus, in each case, an applicable rate based upon the Company’s consolidated total leverage ratio. As of September 30, 2018, the effective interest rate, including the impact of the Company’s 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 3.39 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 Company’s 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. As of September 30, 2018, the Company was in compliance with all of the financial covenants. A majority of the Company’s assets serve as collateral under the Credit Facility.
All debt issuance costs are being amortized from the date incurred to the expiration date of the Credit Facility.
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. The Company has entered into several floating-to-fixed interest rate swap agreements for an aggregate notional amount of $700.0 million which hedge a portion of the Company’s floating rate indebtedness. The swaps mature at various dates through 2022. The Company has designated the 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. Realized gains and losses in connection with each required interest payment are 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 consolidated statements of operations and accumulated other comprehensive loss for the three months ended September 30, 2018 and 2017 is as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
1,025
|
|
|
$
|
(346
|
)
|
Amounts reclassified to earnings from accumulated other
comprehensive loss
|
|
|
(808
|
)
|
|
|
854
|
|
Net current period other comprehensive income
|
|
$
|
217
|
|
|
$
|
508
|
|
15
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The aggregate maturities of long-term debt at September 30, 2018 are as follows (in thousands):
Twelve months ending September 30,
|
|
|
|
|
2019
|
|
$
|
46,920
|
|
2020
|
|
|
46,920
|
|
2021
|
|
|
58,650
|
|
2022
|
|
|
93,839
|
|
2023
|
|
|
860,335
|
|
Principal amount of long-term debt
|
|
|
1,106,664
|
|
Less unamortized discounts and debt issuance costs
|
|
|
(10,475
|
)
|
Total long-term debt
|
|
$
|
1,096,189
|
|
10
.
|
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 Company’s 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) and other government agencies that do not utilize DCAA’s services. The DCAA is nearing completion of audits of the Company’s annual incurred cost submissions through fiscal year 2016 and has begun auditing the Company’s incurred cost submissions for its fiscal year 2017. We are still negotiating the results of prior years’ audits with the respective cognizant contracting officers and believe our reserves for such are adequate. In the opinion of management, adjustments that may result from these audits and the audits not yet started are not expected to have a material effect on the Company’s 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.
11
.
|
Stock-Based Compensation
|
Stock-based compensation expense recognized, together with the income tax benefits recognized, is as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Stock-based compensation related to RSUs included in
indirect costs and selling expense
|
|
$
|
5,698
|
|
|
$
|
6,351
|
|
Income tax benefit recognized for stock-based compensation expense
|
|
$
|
749
|
|
|
$
|
1,587
|
|
Under the terms of the 2016 Amended and Restated Incentive Compensation Plan (the 2016 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. The 2016 Plan was approved by the Company’s stockholders in November 2016 and amended and restated the 2006 Stock Incentive Plan (the 2006 Plan) which was due to expire at the end of the ten-year period. Previous grants that were made under the 2006 Plan, and equity instruments granted prior to approval of the 2016 Plan continue to be governed by the terms of the 2006 Plan. During the periods presented all equity instrument grants were made in the form of RSUs. Other than performance-based RSUs (PRSUs) which contain a market-based element, the fair value of RSU grants was determined based on the closing price of a share of the Company’s 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 2016 Plan, and previously the 2006 Plan, are generally made to the Company’s key employees during the first quarter of the Company’s fiscal year and to members of the Company’s Board of Directors during the second quarter of the Company’s 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.
16
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Company granted performance-based stock awards to key employees in September of 2017, 2016, and 2015. The final number of
P
RSUs that are earned by participants and vest is based on the achievement of a specified EPS for the fiscal year and o
n the average share price for the 90-day period ended for the following three years. If the 90-day average share price of the Company’s stock in years one, two and three exceeds the 90-day average share price at the grant date by 100 percent or more the nu
mber of shares ultimately awarded could range up to 200 percent of the specified target award. In addition to the performance and market conditions, there is a service vesting condition that stipulates 50 percent of the award will vest
approximately
three
years from the grant date and 50 percent will vest approximately
four
years from the grant date, depending on the award date.
The annual performance-based awards granted for each of the fiscal years presented were as follows:
|
|
Performance-based stock awards granted
|
|
|
Number of additional shares earned under performance-based stock awards
|
|
Fiscal year 2018
|
|
|
185,056
|
|
|
|
20,116
|
|
Fiscal year 2017
|
|
|
193,420
|
|
|
|
73,065
|
|
Fiscal year 2016
|
|
|
208,160
|
|
|
|
110,944
|
|
As of September 30, 2018, the total number of shares authorized by shareholders for grants under the 2016 Plan and its predecessor plan is 1,200,000 plus any forfeitures from the 2006 Plan. The aggregate number of grants that may be made may exceed this approved amount as forfeited RSUs become available for future grants. As of September 30, 2018, cumulative grants of 429,635 equity instruments underlying the shares authorized have been awarded, and 114,881 of these instruments have been forfeited.
Activity related to RSUs during the three months ended September 30, 2018 is as follows:
|
|
RSUs
|
|
Unvested at June 30, 2018
|
|
|
663,987
|
|
Granted
|
|
|
111,008
|
|
Vested
|
|
|
(231,700
|
)
|
Forfeited
|
|
|
(9,514
|
)
|
Unvested at September 30, 2018
|
|
|
533,781
|
|
Weighted-average grant date fair value for RSUs
|
|
$
|
187.90
|
|
As of September 30, 2018, there was $31.7 million of total unrecognized compensation costs related to RSUs scheduled to be recognized over a weighted-average period of 2.5 years.
17
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 excludes dilution and is computed by dividing income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects 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. Using the treasury stock method, diluted earnings per share include the incremental effect of RSUs that are no longer subject to a market or performance condition. The chart below shows the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
78,833
|
|
|
$
|
42,046
|
|
Weighted-average number of basic shares outstanding
during the period
|
|
|
24,737
|
|
|
|
24,487
|
|
Dilutive effect of RSUs after application of treasury
stock method
|
|
|
687
|
|
|
|
756
|
|
Weighted-average number of diluted shares outstanding
during the period
|
|
|
25,424
|
|
|
|
25,243
|
|
Basic earnings per share
|
|
$
|
3.19
|
|
|
$
|
1.72
|
|
Diluted earnings per share
|
|
$
|
3.10
|
|
|
$
|
1.67
|
|
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 one state jurisdiction for the years 2015 through 2017 and one foreign jurisdiction for the years 2011 through 2015. The Company does not expect resolution of these examinations to have a material impact on its results of operations, financial condition or cash flows.
The Company’s total liability for unrecognized tax benefits as of September 30, 2018 and June 30, 2018 was $4.2 million and $4.1 million, respectively. The $4.2 million unrecognized tax benefit at September 30, 2018, if recognized, would impact the Company’s effective tax rate.
The effective income tax rate for the three months ended September 30, 2018 decreased to 13.1 percent from 25.0 percent for the same period last year. The effective tax rate decreased primarily due to the reduced U.S. federal corporate tax rate due to the Tax Cuts and Jobs Act (the TCJA) along with a one-time tax benefit of $2.2 million recognized during Q1 FY2019 related to a reduction of our previously recorded transition tax liability and the excess tax benefits under ASU 2016-09 – Stock Compensation. The effective tax rate for both periods was also reduced by gains from the change in value of assets invested in corporate owned life insurance (COLI) policies. If gains or losses on the COLI investments throughout the rest of the current fiscal year vary from our estimates, our effective tax rate will fluctuate in future quarters for the year ending June 30, 2019.
Tax Cuts and Jobs Act
The TCJA was enacted on December 22, 2017. Among other things, the TCJA reduced the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent effective January 1, 2018. As of September 30, 2018, the Company’s accounting for the following elements of the TCJA was not complete: (1) transition tax liability; (2) remeasurement of deferred taxes; (3) Global Intangible Low-Taxed Income; (4) Foreign Derived Intangible Income; and (5) the limitation on the deductibility of certain executive compensation. However, the Company was able to make reasonable estimates and has recorded provisional amounts for all of these elements. Our provisional estimates may be materially impacted by additional clarifications and interpretations of the legislation as they are released. The Company expects to finalize its assessment of all provisional amounts within the allowed one-year measurement period.
18
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
During the three months ended September 30, 2018, the Company recognized a $2.2 million tax benefit related to the reduction of our provisional calculation of the one-time transition t
ax liability. The refinement of this estimate was primarily due to the issuance of new guidance by the IRS issued August 1, 2018. No other adjustments were made to FY2018 provisional amounts during the three months ended September 30, 2018.
14.
|
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 Company’s domestic operations include commercial enterprises. 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 Company’s business systems and enterprise IT markets. The Company evaluates the performance of its operating segments based on net income. Summarized financial information concerning the Company’s reportable segments is as follows (in thousands):
|
|
Domestic
Operations
|
|
|
International
Operations
|
|
|
Total
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
1,126,523
|
|
|
$
|
39,341
|
|
|
$
|
1,165,864
|
|
Net income
|
|
|
75,449
|
|
|
|
3,384
|
|
|
|
78,833
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
1,050,883
|
|
|
$
|
34,931
|
|
|
$
|
1,085,814
|
|
Net income
|
|
|
38,833
|
|
|
|
3,213
|
|
|
|
42,046
|
|
15.
|
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.
The Company’s 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 entity’s own assumptions about the assumptions of market participants that would be used in pricing the asset or liability.
|
19
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Company’s financial instruments measured at fair value included interest rate swap agreements and contingent consideration in co
nnection with business combinations. The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of
September 30,
2018 and June 30, 201
8
, and the level they fall within the fair value hierarchy (in th
ousands):
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
Financial Statement
|
|
Fair Value
|
|
2018
|
|
|
2018
|
|
Description of Financial Instrument
|
|
Classification
|
|
Hierarchy
|
|
Fair Value
|
|
Contingent consideration
|
|
Other accrued expenses and
current liabilities
|
|
Level 3
|
|
$
|
—
|
|
|
$
|
693
|
|
Contingent consideration
|
|
Other long-term liabilities
|
|
Level 3
|
|
$
|
9,000
|
|
|
$
|
11,000
|
|
Interest rate swap agreements
|
|
Prepaid expenses and other
current assets
|
|
Level 2
|
|
$
|
412
|
|
|
$
|
672
|
|
Interest rate swap agreements
|
|
Other long-term assets
|
|
Level 2
|
|
$
|
13,959
|
|
|
$
|
13,405
|
|
Changes in the fair value of the interest rate swap agreements are recorded as a component of accumulated other comprehensive income or loss.
Various acquisitions completed during prior fiscal years contained provisions requiring that the Company pay contingent consideration in the event the acquired businesses achieved certain specified earnings results during the two and three year periods subsequent to each acquisition. The Company determined the fair value of the contingent consideration as of each acquisition date using a valuation model which included the evaluation of the most likely outcome and the application of an appropriate discount rate. At the end of each reporting period, the fair value of the contingent consideration was remeasured and any changes were recorded in indirect costs and selling expenses. During the three months ended September 30, 2018 and 2017 this remeasurement resulted in a $2.0 million and $0.9 million change to the liability recorded.
20