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, 2019 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 10 and 17.
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, 2019. The results of operations for the three months ended September 30, 2019 are not necessarily indicative of the results to be expected for any subsequent interim period or for the full fiscal year.
2.
|
Recent Accounting Pronouncements
|
Accounting Standards Updates Issued but Not Yet Adopted
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. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires companies to record an allowance for expected credit losses over the contractual term of financial assets, including short-term trade receivables and contract assets, and expands disclosure requirements for credit quality of financial assets. ASU 2016-13 becomes effective for the Company in the first quarter of FY2021. We do not expect a significant impact to our operating results, financial position or cash flows as a result of adopting this new standard.
Accounting Standards Updates Adopted
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 the balance sheet by recognizing lease assets and lease liabilities. Lessor accounting is largely unchanged from that applied under previous guidance. The amended guidance was effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2018, and requires a modified retrospective approach.
The Company adopted this standard on July 1, 2019. As part of our implementation, the Company accumulated data required to measure its existing leases, reviewed lease contracts, implemented a new lease accounting solution and evaluated accounting policy and internal control changes. The Company adopted certain practical expedients provided under ASC 842, including reassessment of whether expired or existing contracts contain leases, reassessment of lease classification for expired or existing leases, reassessing initial direct costs for existing leases, and an election to separate lease from non-lease components.
8
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Upon adoption of ASC 842, the Company recorded right of use assets of $354.3 million and current and non-current lease liabilities of $67.0 million and $331.8 million, respectively, on the consolidated balance sheet, inclusive of required reclassifications for prepaid and deferred rent, lease incentives, and other lease-related balances.
The impact of adoption on our consolidated balance sheet is as follows (in thousands):
|
|
June 30, 2019
As Reported Under
ASC 840
|
|
|
Adjustments
Due to
ASC 842
|
|
|
July 1, 2019
Balance
Under ASC 842
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
89,652
|
|
|
$
|
(3,199
|
)
|
|
$
|
86,453
|
|
Operating lease right-of-use assets
|
|
|
—
|
|
|
|
354,317
|
|
|
|
354,317
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued expenses and current liabilities
|
|
|
235,611
|
|
|
|
59,034
|
|
|
|
294,645
|
|
Operating lease liabilities, noncurrent
|
|
|
—
|
|
|
|
331,761
|
|
|
|
331,761
|
|
Other long-term liabilities
|
|
|
107,932
|
|
|
|
(39,677
|
)
|
|
|
68,255
|
|
The standard had no impact on our results of operations or cash flows. In addition, new disclosures are provided to enable users to assess the amount, timing and uncertainty of cash flows arising from leases.
3.
|
Summary of Significant Accounting Policies
|
The Company enters into contractual arrangements primarily for the use of real estate facilities, information technology equipment, and certain other equipment. These arrangements contain a lease when the Company controls the underlying asset and has the right to obtain substantially all of the economic benefits or outputs from the asset. All of our leases are operating leases.
The Company records a right of use (ROU) asset and lease liability as of the lease commencement date equal to the present value of the remaining lease payments. Most of our leases do not provide an implicit rate that can be readily determined. Therefore, we use a discount rate based on the Company’s incremental borrowing rate, which is determined using our credit rating and information available as of the commencement date. The ROU asset is then adjusted for initial direct costs and certain lease incentives included in the contractual arrangement. The Company has elected to not apply the lease recognition guidance for short-term equipment leases and to separate lease from non-lease components. Our operating lease arrangements may contain options to extend the lease term or for early termination. We account for these options when it is reasonably certain we will exercise them. ROU assets are evaluated for impairment in a manner consistent with the treatment of other long-lived assets.
Operating lease expense is recognized on a straight-line basis over the lease term and is recorded primarily within indirect costs and selling expenses on the consolidated statement of operations. Variable lease expenses are generally recorded in the period they are incurred and are excluded from the ROU asset and lease liability.
LGS
On March 1, 2019, CACI acquired all of the equity interests of Legos Intermediate Holdings, LLC and MDCP Legos Blocker, Inc., the parent companies of LGS Innovations (LGS). The purchase consideration was approximately $757.1 million, which includes $759.9 million of cash paid at close net of cash acquired and a $2.8 million net purchase price payment for returnable consideration due from the seller, deferred consideration, and post-close net working capital adjustments. LGS is a leading provider of SIGINT and cyber products and solutions to the Intelligence Community and Department of Defense.
9
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
CACI is in the process of finalizing its valuation of all the assets acquired and liabilities assumed. As the amounts recorded for certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances that existed at the acquisition date. The final determination of fair values of certain assets and liabilities will be completed within the measurement period of up to one-year from the acquisition date as permitted under GAAP. The LGS acquisition could necessitate the need to use the full one-year measurement period to adequately analyze and assess several factors used in establishing the asset and liability fair values as of the acquisition date, including intangible assets, receivables, inventory, deferred revenue, deferred taxes, income tax obligations, and certain reserves. Any potential adjustments made could be material in relation to the preliminary values.
During the three months ended September 30, 2019, we continued to obtain information to refine estimated fair values. As a result of the additional information, the Company recorded measurement period adjustments that increased receivables and goodwill by $1.4 million and $3.3 million, respectively, reduced accrued expenses and other current liabilities by $1.9 million, and increased purchase consideration by $6.6 million.
Intangible assets consisted of the following (in thousands):
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2019 (1)
|
|
|
2019
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Customer contracts and related customer relationships
|
|
$
|
547,801
|
|
|
$
|
549,552
|
|
Acquired technologies
|
|
|
138,031
|
|
|
|
137,959
|
|
Other
|
|
|
810
|
|
|
|
800
|
|
Intangible assets
|
|
|
686,642
|
|
|
|
688,311
|
|
Less accumulated amortization:
|
|
|
|
|
|
|
|
|
Customer contracts and related customer relationships
|
|
|
(245,547
|
)
|
|
|
(236,935
|
)
|
Acquired technologies
|
|
|
(18,558
|
)
|
|
|
(14,750
|
)
|
Other
|
|
|
(531
|
)
|
|
|
(511
|
)
|
Less accumulated amortization
|
|
|
(264,636
|
)
|
|
|
(252,196
|
)
|
Total intangible assets, net
|
|
$
|
422,006
|
|
|
$
|
436,115
|
|
__________________
|
(1)
|
During the three months ended September 30, 2019, the Company removed $2.0 million in fully amortized intangible assets.
|
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, 2019 is 16.6 years, and the weighted-average remaining period of amortization is 13.7 years. The weighted-average period of amortization for acquired technologies as of September 30, 2019 is 10.3 years, and the weighted-average remaining period of amortization is 9.7 years.
Expected amortization expense for the remainder of the fiscal year ending June 30, 2020, and for each of the fiscal years thereafter, is as follows (in thousands):
Fiscal year ending June 30,
|
|
Amount
|
|
2020 (nine months)
|
|
$
|
43,219
|
|
2021
|
|
|
56,520
|
|
2022
|
|
|
53,358
|
|
2023
|
|
|
48,181
|
|
2024
|
|
|
41,436
|
|
Thereafter
|
|
|
179,292
|
|
Total intangible assets, net
|
|
$
|
422,006
|
|
10
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The changes in the carrying amount of goodwill for the year ended June 30, 2019 and the three months ended September 30, 2019 are as follows (in thousands):
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Balance at June 30, 2018
|
|
$
|
2,514,520
|
|
|
$
|
106,315
|
|
|
$
|
2,620,835
|
|
Goodwill acquired (1)
|
|
|
710,165
|
|
|
|
9,038
|
|
|
|
719,203
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
(3,959
|
)
|
|
|
(3,959
|
)
|
Balance at June 30, 2019
|
|
$
|
3,224,685
|
|
|
$
|
111,394
|
|
|
$
|
3,336,079
|
|
Goodwill acquired (1)
|
|
|
5,663
|
|
|
|
(1,170
|
)
|
|
|
4,493
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
(3,519
|
)
|
|
|
(3,519
|
)
|
Balance at September 30, 2019
|
|
$
|
3,230,348
|
|
|
$
|
106,705
|
|
|
$
|
3,337,053
|
|
|
(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 performs on the contract as 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, and time-and-materials contracts as follows during the three months ended September 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Cost-plus-fee
|
|
$
|
747,714
|
|
|
$
|
—
|
|
|
$
|
747,714
|
|
|
$
|
641,527
|
|
|
$
|
—
|
|
|
$
|
641,527
|
|
Firm fixed-price
|
|
|
391,536
|
|
|
|
26,440
|
|
|
|
417,976
|
|
|
|
321,071
|
|
|
|
22,933
|
|
|
|
344,004
|
|
Time and materials
|
|
|
185,523
|
|
|
|
12,179
|
|
|
|
197,702
|
|
|
|
163,925
|
|
|
|
16,408
|
|
|
|
180,333
|
|
Total
|
|
$
|
1,324,773
|
|
|
$
|
38,619
|
|
|
$
|
1,363,392
|
|
|
$
|
1,126,523
|
|
|
$
|
39,341
|
|
|
$
|
1,165,864
|
|
Customer Information
The Company generated revenue from our primary customer groups as follows during the three months ended September 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Department of Defense
|
|
$
|
937,640
|
|
|
$
|
—
|
|
|
$
|
937,640
|
|
|
$
|
818,266
|
|
|
$
|
—
|
|
|
$
|
818,266
|
|
Federal civilian agencies
|
|
|
363,993
|
|
|
|
—
|
|
|
|
363,993
|
|
|
|
292,202
|
|
|
|
—
|
|
|
|
292,202
|
|
Commercial and other
|
|
|
23,140
|
|
|
|
38,619
|
|
|
|
61,759
|
|
|
|
16,055
|
|
|
|
39,341
|
|
|
|
55,396
|
|
Total
|
|
$
|
1,324,773
|
|
|
$
|
38,619
|
|
|
$
|
1,363,392
|
|
|
$
|
1,126,523
|
|
|
$
|
39,341
|
|
|
$
|
1,165,864
|
|
11
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Prime or Subcontractor
The Company generated revenue as either the prime or subcontractor as follows during the three months ended September 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Prime contractor
|
|
$
|
1,197,634
|
|
|
$
|
38,619
|
|
|
$
|
1,236,253
|
|
|
$
|
1,050,531
|
|
|
$
|
39,341
|
|
|
$
|
1,089,872
|
|
Subcontractor
|
|
|
127,139
|
|
|
|
—
|
|
|
|
127,139
|
|
|
|
75,992
|
|
|
|
—
|
|
|
|
75,992
|
|
Total
|
|
$
|
1,324,773
|
|
|
$
|
38,619
|
|
|
$
|
1,363,392
|
|
|
$
|
1,126,523
|
|
|
$
|
39,341
|
|
|
$
|
1,165,864
|
|
Significant Estimates
For many of our fixed price revenue arrangements and for revenue arrangements that have award or incentive fees, the Company uses an estimate at completion (EAC) to measure progress towards the complete satisfaction of its performance obligations. For these revenue arrangements, revenue is recognized over time primarily using a cost-to-cost input method based on the ratio of costs incurred to date to total estimated costs at completion. 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. The Company periodically reassesses its EAC assumptions and updates its estimates as needed. 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.
Based on changes in a contract’s EAC, a cumulative adjustment to revenue will be recorded. During the three months ended September 30, 2019 and 2018, we recognized an increase to income before income taxes of $6.5 million ($0.19 per diluted share) and $6.4 million ($0.19 per diluted share), respectively, from EAC adjustments. The Company used its statutory tax rate when calculating the impact to diluted earnings per share.
Remaining Performance Obligations
The Company’s remaining performance obligations balance as of period end represents the expected revenue to be recognized for the satisfaction of remaining performance obligations on our existing contracts. This balance excludes unexercised contract option years and task orders that may be issued underneath an Indefinite Delivery/Indefinite Quantity (IDIQ) vehicle until such task orders are awarded. 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 this 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. Our remaining performance obligations balance as of September 30, 2019 was $7.1 billion.
The Company expects to recognize approximately 73 percent of our remaining performance obligations balance as revenue over the next year and the remaining 27 percent thereafter.
Contract assets are primarily comprised of unbilled receivables in which revenue has been recognized but our right to consideration is conditional on factors other than the passage of time. Contract assets exclude billed and billable receivables.
The incremental costs of obtaining a contract (e.g. sales commissions) are capitalized as an asset when the Company expects to recover them either directly or indirectly through the revenue arrangement’s profit margins. These capitalized costs are subsequently expensed over the revenue arrangement’s period of performance. Contract assets 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. The advance payment is subsequently recognized into revenue as the performance obligation is satisfied.
12
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Net contract assets (liabilities) consisted of the following (in thousands):
|
|
|
|
September 30,
|
|
|
June 30,
|
|
Description of Contract Related Balance
|
|
Financial Statement Classification
|
|
2019
|
|
|
2019
|
|
Contract assets – current:
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
Accounts receivable, net
|
|
$
|
103,860
|
|
|
$
|
90,073
|
|
Costs to obtain – short-term
|
|
Prepaid expenses and other current assets
|
|
|
2,786
|
|
|
|
2,685
|
|
Contract assets – noncurrent:
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
Accounts receivable, long-term
|
|
|
7,730
|
|
|
|
7,381
|
|
Costs to obtain – long-term
|
|
Other long-term assets
|
|
|
5,927
|
|
|
|
5,353
|
|
Contract liabilities – current:
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue and other contract liabilities – short-term
|
|
Other accrued expenses and current liabilities
|
|
|
(71,216
|
)
|
|
|
(55,667
|
)
|
Contract liabilities – noncurrent:
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue and other contract liabilities – long-term
|
|
Other long-term liabilities
|
|
|
(7,247
|
)
|
|
|
(7,445
|
)
|
Net contract assets (liabilities)
|
|
|
|
$
|
41,840
|
|
|
$
|
42,380
|
|
During the three months ended September 30, 2019 and 2018, we recognized $25.7 million and $17.1 million of revenue, respectively, that was included in a previously recorded contract liability as of the beginning of the period.
On December 28, 2018, the Company entered into a Master Accounts Receivable Purchase Agreement (MARPA Facility) with MUFG Bank, Ltd. (the Purchaser), for the sale of certain designated eligible U.S. government receivables. The MARPA Facility has an initial term of one-year. Under the MARPA Facility, the Company can sell eligible receivables, including certain billed and unbilled receivables up to a maximum amount of $200.0 million. The Company’s receivables are sold under the MARPA Facility without recourse for any U.S. government credit risk.
The Company accounts for receivable transfers under the MARPA Facility as sales under ASC 860, Transfers and Servicing, and derecognizes the sold receivables from its balance sheets. The fair value of the sold receivables approximated their book value due to their short-term nature.
The Company does not retain an ongoing financial interest in the transferred receivables other than cash collection and administrative services. The Company estimated that its servicing fee was at fair value and therefore no servicing asset or liability related to these receivables was recognized as of September 30, 2019. Proceeds from the sold receivables are reflected in our operating cash flows on the statement of cash flows.
MARPA Facility activity consisted of the following (in thousands):
|
|
As of and for the
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2019
|
|
Outstanding balance – June 30, 2019:
|
|
$
|
192,527
|
|
Sales of receivables
|
|
|
493,879
|
|
Cash collections
|
|
|
(505,303
|
)
|
Outstanding balance sold to Purchaser – September 30, 2019: (1)
|
|
|
181,103
|
|
Cash collected, not remitted to Purchaser (2)
|
|
|
(90,850
|
)
|
Remaining sold receivables
|
|
$
|
90,253
|
|
|
(1)
|
For the three months ended September 30, 2019, the Company recorded a cash outflow in its cash flows from operating activities of $11.4 million from sold receivables. The cash outflow is calculated as the change in the outstanding balance of sold receivables as of September 30, 2019, compared with the outstanding balance as of June 30, 2019.
|
|
(2)
|
Includes the cash collected on behalf of but not yet remitted to the Purchaser as of September 30, 2019. This balance represents an obligation to the Purchaser and is included in other accrued expenses and current liabilities in the accompanying consolidated balance sheet.
|
13
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Long-term debt consisted of the following (in thousands):
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Bank credit facility – term loans
|
|
$
|
879,744
|
|
|
$
|
891,475
|
|
Bank credit facility – revolver loans
|
|
|
730,000
|
|
|
|
785,000
|
|
Principal amount of long-term debt
|
|
|
1,609,744
|
|
|
|
1,676,475
|
|
Less unamortized discounts and debt issuance costs
|
|
|
(10,873
|
)
|
|
|
(11,462
|
)
|
Total long-term debt
|
|
|
1,598,871
|
|
|
|
1,665,013
|
|
Less current portion
|
|
|
(46,920
|
)
|
|
|
(46,920
|
)
|
Long-term debt, net of current portion
|
|
$
|
1,551,951
|
|
|
$
|
1,618,093
|
|
Bank Credit Facility
The Company has a $2,438.4 million credit facility (the Credit Facility), which consists of an $1,500.0 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.
The Revolving Facility is a secured facility that permits continuously renewable borrowings of up to $1,500.0 million. As of September 30, 2019, the Company had $730.0 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.
The Term Loan is a five-year secured facility under which principal payments are due in quarterly installments of $11.7 million until the balance is due in full on June 30, 2024. As of September 30, 2019, the Company had $879.7 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, 2019, 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 3.09 percent.
The Credit Facility requires the Company to comply with certain financial covenants, including a maximum total leverage ratio and a minimum interest 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, 2019, 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.
The aggregate maturities of long-term debt at September 30, 2019 are as follows (in thousands):
Twelve months ending September 30,
|
|
|
|
|
2020
|
|
$
|
46,920
|
|
2021
|
|
|
46,920
|
|
2022
|
|
|
46,920
|
|
2023
|
|
|
46,920
|
|
2024
|
|
|
1,422,064
|
|
Principal amount of long-term debt
|
|
|
1,609,744
|
|
Less unamortized discounts and debt issuance costs
|
|
|
(10,873
|
)
|
Total long-term debt
|
|
$
|
1,598,871
|
|
14
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 $900.0 million which hedge a portion of the Company’s floating rate indebtedness. The swaps mature at various dates through 2026. 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. 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, 2019 and 2018 is as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
(4,196
|
)
|
|
$
|
1,025
|
|
Amounts reclassified to earnings from accumulated other comprehensive loss
|
|
|
(768
|
)
|
|
|
(808
|
)
|
Net current period other comprehensive income (loss)
|
|
$
|
(4,964
|
)
|
|
$
|
217
|
|
All of the Company’s leases are operating leases. The current portion of operating lease liabilities is included in other accrued expenses and current liabilities in our consolidated balance sheets. Lease balances in our consolidated balance sheet are as follows (in thousands):
|
|
September 30,
2019
|
|
Operating lease right-of-use assets
|
|
$
|
346,273
|
|
|
|
|
|
|
Operating lease liabilities, current
|
|
|
69,715
|
|
Operating lease liabilities, noncurrent
|
|
|
324,601
|
|
|
|
$
|
394,316
|
|
The Company’s total lease cost is recorded primarily within indirect costs and selling expenses and had the following impact on the consolidated statement of operations (in thousands):
|
|
Three Months
Ended
September 30, 2019
|
|
Operating lease cost
|
|
$
|
21,206
|
|
Short-term and variable lease cost
|
|
|
3,370
|
|
Sublease income
|
|
|
(464
|
)
|
|
|
$
|
24,112
|
|
15
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Company’s future minimum lease payments under non-cancelable operating leases for the remainder of the fiscal year ending June 30, 2020, and for each of the fiscal years thereafter, are as follows (in thousands):
Fiscal year ending June 30,
|
|
|
|
|
2020 (nine months)
|
|
$
|
61,044
|
|
2021
|
|
|
76,464
|
|
2022
|
|
|
67,172
|
|
2023
|
|
|
57,465
|
|
2024
|
|
|
45,953
|
|
Thereafter
|
|
|
134,390
|
|
Total undiscounted lease payments
|
|
|
442,488
|
|
Less: imputed interest
|
|
|
(48,172
|
)
|
Total discounted lease liabilities
|
|
$
|
394,316
|
|
The weighted-average remaining lease term (in years) and weighted-average discount rate was 6.62 years and 3.39 percent, respectively.
Cash paid for operating leases was $20.9 million for the three months ended September 30, 2019.
12.
|
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 T&M 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 has completed audits of the Company’s annual incurred cost proposals through fiscal year 2018. 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.
13.
|
Stock-Based Compensation
|
For the three months ended September 30, 2019 and 2018, the Company recognized $7.0 million and $5.7 million of stock-based compensation, respectively, that was related to restricted stock units (RSUs). The stock-based compensation was included in indirect costs and selling expenses in the consolidated statements of operations.
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, stock settled appreciation rights (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.
16
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Company granted performance-based stock awards to key employees in October of 2018 and September of 2017 and 2016. The final number of PRSUs that are earned by participants and vest is based on the achievement of a specified EPS for the fiscal year and on 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 number 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. During the second quarter of FY2020, the Company granted its annual performance-based stock awards to key employees.
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 2019
|
|
|
129,108
|
|
|
|
5,874
|
|
Fiscal year 2018
|
|
|
185,056
|
|
|
|
51,808
|
|
Fiscal year 2017
|
|
|
193,420
|
|
|
|
133,308
|
|
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, 2019, cumulative grants of 716,480 equity instruments underlying the shares authorized have been awarded, and 145,189 of these instruments have been forfeited.
Activity related to RSUs during the three months ended September 30, 2019 is as follows:
|
|
RSUs
|
|
Unvested at June 30, 2019
|
|
|
628,806
|
|
Granted
|
|
|
123,592
|
|
Vested
|
|
|
(126,140
|
)
|
Forfeited
|
|
|
(7,006
|
)
|
Unvested at September 30, 2019
|
|
|
619,252
|
|
As of September 30, 2019, there was $31.8 million of total unrecognized compensation costs related to RSUs scheduled to be recognized over a weighted-average period of 2.4 years.
Earnings per share and the weighted-average number of diluted shares are computed as follows (in thousands, except per share data):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net income
|
|
$
|
67,977
|
|
|
$
|
78,833
|
|
Weighted-average number of basic shares outstanding during the period
|
|
|
24,894
|
|
|
|
24,737
|
|
Dilutive effect of RSUs after application of treasury stock method
|
|
|
638
|
|
|
|
687
|
|
Weighted-average number of diluted shares outstanding during the period
|
|
|
25,532
|
|
|
|
25,424
|
|
Basic earnings per share
|
|
$
|
2.73
|
|
|
$
|
3.19
|
|
Diluted earnings per share
|
|
$
|
2.66
|
|
|
$
|
3.10
|
|
17
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 the Internal Revenue Service for the year 2015, two state jurisdictions for the years 2011 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, 2019 and June 30, 2019 was $1.7 million and $1.5 million, respectively. The $1.7 million unrecognized tax benefit at September 30, 2019, if recognized, would impact the Company’s effective tax rate.
For the three months ended September 30, 2019, the effective income tax rate was 18.4 percent compared with 13.1 percent for the same period last year. The Company’s effective income tax rate increased primarily due to the timing of excess tax benefits under ASU 2016-09, Stock Compensation. For both comparative reporting periods, the Company’s effective tax rate was impacted by excess tax benefits under ASU 2016-09, Stock Compensation, and the change in value of assets invested in COLI policies. If gains or losses on the COLI investments throughout the rest of the current fiscal year vary from our estimates, our FY2020 effective tax rate will fluctuate in future quarters for the year ending June 30, 2020.
16.
|
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 customers. 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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
1,324,773
|
|
|
$
|
38,619
|
|
|
$
|
1,363,392
|
|
Net income
|
|
|
64,211
|
|
|
|
3,766
|
|
|
|
67,977
|
|
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
|
|
17.
|
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.
18
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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.
|
The Company’s financial instruments measured at fair value included interest rate swap agreements and contingent consideration in connection with business combinations. The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and June 30, 2019, and the level they fall within the fair value hierarchy (in thousands):
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
Financial Statement
|
|
Fair Value
|
|
2019
|
|
|
2019
|
|
Description of Financial Instrument
|
|
Classification
|
|
Hierarchy
|
|
Fair Value
|
|
Contingent consideration
|
|
Other accrued expenses and
current liabilities
|
|
Level 3
|
|
$
|
12,800
|
|
|
$
|
12,000
|
|
Interest rate swap agreements
|
|
Other long-term assets
|
|
Level 2
|
|
$
|
892
|
|
|
$
|
2,081
|
|
Interest rate swap agreements
|
|
Other accrued expenses and
current liabilities
|
|
Level 2
|
|
$
|
49
|
|
|
$
|
43
|
|
Interest rate swap agreements
|
|
Other long-term liabilities
|
|
Level 2
|
|
$
|
17,804
|
|
|
$
|
12,264
|
|
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, 2019, this remeasurement resulted in a $0.8 million change to the liability recorded.
During the second quarter of FY2020, the Company completed three acquisitions for an aggregate purchase price of approximately $105.0 million.
19