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 more than 50 percent owned or otherwise controlled by the Company. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. All intercompany balances and transactions have been eliminated in consolidation.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and amounts included in other current assets and current liabilities that meet the definition of a financial instrument approximate fair value because of the short-term nature of these amounts. The fair value of the Company’s debt outstanding as of March 31, 2016 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 6 and 12.
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, 2015. The results of operations for the three and nine months ended March 31, 2016 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
|
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments, including income tax consequences and classification on the statement of cash flows. Under the new standard, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Additionally, excess tax benefits will be classified as an operating activity on the statement of cash flows. In regards to forfeitures, the entity can make an accounting policy election to either recognize forfeitures as they occur or estimate the number of awards expected to be forfeited. The guidance in ASU 2016-09 is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 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 is effective for the fiscal year, and interim periods within that fiscal year, beginning 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.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The guidance in ASU 2015-17 is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2016, with early adoption permitted. The Company early adopted this standard as of January 1, 2016 and applied the standard retrospectively. As a result of adopting this standard, current deferred tax assets of $10.4 million were reclassified to net non-current deferred tax liabilities as of June 30, 2015.
8
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which simplifies t
he accounting for adjustments made to preliminary amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. Instead, adjustments will be recognized in the period in which the adjustments a
re determined, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. The Company early adopted this standard as of January 1, 2016, and will prospecti
vely apply the standard to business combination adjustments identified after the date of adoption.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. Under the new standard, debt issuance costs related to a recognized debt liability are required to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance in ASU 2015-03 is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2015. The Company early adopted this standard as of January 1, 2016 and applied the standard retrospectively. As a result of adopting this standard, $4.7 million of debt issuance costs were reclassified from other long-term assets to long-term debt as of June 30, 2015.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues 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. On July 9, 2015, the FASB approved a one-year deferral of the effective date of ASU 2014-09 to annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2017, using either a full retrospective approach or a modified approach. Early adoption up to the original effective date is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and has not yet determined the method by which the Company will adopt the standard.
NSS Acquisition
On February 1, 2016, the Company acquired 100 percent of the outstanding shares of L-3 National Security Solutions, Inc. and L-3 Data Tactics Corporation (together, “NSS”). NSS is a prime mission partner to the U.S. Department of Defense (DoD), U.S. government intelligence agencies, and U.S. federal civilian agencies. The acquisition will expand CACI’s opportunities in many of our key market areas and expand our current customer base. CACI financed the acquisition by borrowing $250.0 million under its existing revolving facility and by entering into an eighth amendment and first incremental facility amendment to its credit facility to allow for the incurrence of $300.0 million in additional term loans.
The initial purchase consideration paid at closing to acquire NSS was $550.0 million plus $11.2 million representing a preliminary net working capital adjustment. Subsequent to closing, CACI estimated that a refund of $13.3 million is due from the sellers for the final net working capital adjustment, which is recorded within prepaid expenses and other current assets on the consolidated balance sheet.
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 liabilit
ies 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 co
mpleted within the measurement period of up to one year from the acquisition date as permitted under GAAP. The NSS acquisition could necessitate the need to use the full one year measurement period to adequately analyze and assess a number of factors used
in establishing the asset and liability fair values as of the acquisition date, including receivables and deferred revenue, property and equipment, contractual obligations, income tax obligations, and certain reserves. Any potential adjustments made could
be material in relation to the preliminary values presented in the table below
. Based on the Company’s preliminary valuation, the total estimated consideration
of $547.9 million
has been allocated to assets acquired and liabilities assumed as follows (in t
housands):
Cash and cash equivalents
|
|
$
|
2,596
|
|
Accounts receivable
|
|
|
210,441
|
|
Prepaid expenses and other current assets
|
|
|
11,574
|
|
Property and equipment
|
|
|
21,938
|
|
Intangible assets
|
|
|
110,500
|
|
Goodwill
|
|
|
385,755
|
|
Other long-term assets
|
|
|
437
|
|
Accounts payable
|
|
|
(57,616
|
)
|
Accrued compensation and benefits
|
|
|
(38,953
|
)
|
Other accrued expenses and current liabilities
|
|
|
(37,855
|
)
|
Deferred income taxes
|
|
|
(55,641
|
)
|
Other long-term liabilities
|
|
|
(5,280
|
)
|
Total estimated consideration
|
|
$
|
547,896
|
|
The goodwill of $385.8 million is largely attributable to the assembled workforce of NSS and expected synergies between the Company and NSS. The estimated fair value attributed to intangible assets, which consists of customer contracts and related customer relationships, is being amortized on an accelerated basis over approximately 15 years. The fair value attributed to the intangible assets acquired was based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques. Of the value attributed to goodwill and intangible assets, $47.7 million is deductible for income tax purposes.
From the February 1, 2016 acquisition date through March 31, 2016, NSS generated $171.9 million of revenue and $5.6 million of net income. NSS’ net income includes the impact of $1.7 million of amortization of customer contracts and customer relationships. NSS’ net income does not include the impact of acquisition-related expenses incurred by CACI.
CACI incurred $7.3 million of acquisition-related expenses during the nine months ended March 31, 2016, which are included in indirect costs and selling expenses. Additionally, CACI incurred $3.2 million of integration and restructuring costs from the acquisition date through March 31, 2016.
The following pro forma results are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the years presented or the results which may occur in the future. The following unaudited pro forma results of operations assume the NSS acquisition had occurred on July 1, 2014 (in thousands except per share amounts):
|
|
Nine Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
3,305,097
|
|
|
$
|
3,270,509
|
|
Net loss attributable to CACI
|
|
|
(343,467
|
)
|
|
|
(58,454
|
)
|
Basic EPS
|
|
|
(14.17
|
)
|
|
|
(2.45
|
)
|
Diluted EPS
|
|
|
(14.17
|
)
|
|
|
(2.45
|
)
|
Pro forma net losses shown above include NSS’ historical goodwill impairment expense of $476.2 million and $158.7 million for the nine months ended March 31, 2016 and 2015, respectively. Significant pro forma adjustments incorporated into the pro forma results above include the recognition of additional amortization expense related to acquired intangible assets and additional interest expense related to debt incurred to finance the acquisition. In addition, significant nonrecurring adjustments include the elimination of non-recurring acquisition-related expenses incurred during the nine months ended March 31, 2016.
10
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Other Acquisitions
The Company also completed the following acquisitions during the nine months ended March 31, 2016:
|
·
|
On July 1, 2015, CACI Limited acquired 100 percent of the outstanding shares of Rockshore Group Ltd (Rockshore) and was integrated into the international operating segment. Rockshore uses its expertise in data aggregation, event processing, and business logic integration to provide real-time event processing and situational awareness to the telecom, aviation, and rail sectors.
|
|
·
|
On December 4, 2015, the Company acquired 100 percent of the outstanding shares of a business in the United States which provides security technology services and was integrated into the domestic operating segment.
|
|
·
|
On March 1, 2016, CACI Limited acquired 100 percent of the outstanding shares of Purple Secure Systems Limited and was integrated into the international operating segment. Purple Secure Systems Limited is a provider of agile systems and software for national security, defense and government organizations.
|
|
·
|
On March 2, 2016, CACI Limited acquired 100 percent of the outstanding shares of Stream:20 Limited and was integrated into the international operating segment. Stream:20 Limited provides digital marketing and digital transformation consultancy services to commercial companies working in a variety of sectors.
|
The combined purchase consideration for these acquisitions was $55.4 million, which includes $31.8 million of initial cash payments, $8.2 million of deferred consideration and $15.4 estimated fair value of contingent consideration to be paid upon achieving certain metrics. The Company recognized fair values of the assets acquired and liabilities assumed and preliminarily allocated $40.3 million to goodwill and $8.1 million to intangible assets. The intangible assets primarily consist of customer relationships and acquired technology.
Intangible assets consisted of the following (in thousands):
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Customer contracts and related customer relationships
|
|
$
|
636,765
|
|
|
$
|
520,213
|
|
Acquired technologies
|
|
|
28,121
|
|
|
|
27,177
|
|
Covenants not to compete
|
|
|
3,362
|
|
|
|
3,417
|
|
Other
|
|
|
1,566
|
|
|
|
1,581
|
|
Intangible assets
|
|
|
669,814
|
|
|
|
552,388
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Customer contracts and related customer relationships
|
|
|
(353,550
|
)
|
|
|
(328,217
|
)
|
Acquired technologies
|
|
|
(25,474
|
)
|
|
|
(24,728
|
)
|
Covenants not to compete
|
|
|
(3,267
|
)
|
|
|
(3,241
|
)
|
Other
|
|
|
(1,047
|
)
|
|
|
(1,020
|
)
|
Less accumulated amortization
|
|
|
(383,338
|
)
|
|
|
(357,206
|
)
|
Total intangible assets, net
|
|
$
|
286,476
|
|
|
$
|
195,182
|
|
Intangible assets are primarily amortized on an accelerated basis over periods ranging from one to fifteen years. The weighted-average period of amortization for all customer contracts and related customer relationships as of March 31, 2016 is 13.9 years, and the weighted-average remaining period of amortization is 12.1 years. The weighted-average period of amortization for acquired technologies as of March 31, 2016 is 10.0 years, and the weighted-average remaining period of amortization is 5.8 years.
11
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Expected amortization expense for the remainder of the fiscal year ending June 30, 2016, and for each of the fiscal years
thereafter, is as follows (in thousands):
Fiscal year ending June 30,
|
|
Amount
|
|
2016 (three months)
|
|
$
|
10,804
|
|
2017
|
|
|
40,795
|
|
2018
|
|
|
36,200
|
|
2019
|
|
|
31,555
|
|
2020
|
|
|
27,073
|
|
Thereafter
|
|
|
140,049
|
|
Total intangible assets, net
|
|
$
|
286,476
|
|
The changes in the carrying amount of goodwill for the year ended June 30, 2015 and the nine months ended March 31, 2016 are as follows (in thousands):
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Balance at June 30, 2014
|
|
$
|
2,099,822
|
|
|
$
|
88,747
|
|
|
$
|
2,188,569
|
|
Goodwill acquired
|
|
|
8,946
|
|
|
|
—
|
|
|
|
8,946
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
(7,699
|
)
|
|
|
(7,699
|
)
|
Balance at June 30, 2015
|
|
|
2,108,768
|
|
|
|
81,048
|
|
|
|
2,189,816
|
|
Goodwill acquired
|
|
|
396,413
|
|
|
|
29,627
|
|
|
|
426,040
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
(5,953
|
)
|
|
|
(5,953
|
)
|
Balance at March 31, 2016
|
|
$
|
2,505,181
|
|
|
$
|
104,722
|
|
|
$
|
2,609,903
|
|
Long-term debt consisted of the following (in thousands):
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Bank credit facility – term loans
|
|
$
|
1,046,324
|
|
|
$
|
779,297
|
|
Bank credit facility – revolver loans
|
|
|
457,000
|
|
|
|
295,000
|
|
Principal amount of long-term debt
|
|
|
1,503,324
|
|
|
|
1,074,297
|
|
Less unamortized debt issuance costs (1)
|
|
|
(17,922
|
)
|
|
|
(10,733
|
)
|
Total long-term debt
|
|
|
1,485,402
|
|
|
|
1,063,564
|
|
Less current portion
|
|
|
(53,965
|
)
|
|
|
(38,965
|
)
|
Long-term debt, net of current portion
|
|
$
|
1,431,437
|
|
|
$
|
1,024,599
|
|
|
(1)
|
Balance as of June 30, 2015 has been adjusted for the reclassification of debt issuance costs related to the adoption of ASU 2015-03. See Note 2 for additional information.
|
Bank Credit Facility
The Company has a $1,981.3 million credit facility (the Credit Facility), which consists of an $850.0 million revolving credit facility (the Revolving Facility) and a $1,131.3 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.
12
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Credit Facility was amended
during the third quarter of FY16
in connection with the Company’s
acquisition of NSS (
s
ee Note 3). CACI financed the transaction by borrowing $250.0 million under its existing Revolving Facility and by entering into an eighth amendment and first incremental facility amendment to its Credit Facility to allow for the inc
urrence of $300.0 million in additional Term Loans.
The Revolving Facility is a secured facility that permits continuously renewable borrowings of up to $850.0 million. As of March 31, 2016, the Company had $457.0 million outstanding under the Revolving Facility, no borrowings on the swing line and an outstanding letter of credit of $0.4 million. The Company pays a quarterly facility fee for the unused portion of the Revolving Facility.
The Term Loan is a five-year secured facility under which principal payments are due in quarterly installments of $13.5 million through June 30, 2018 and $27.0 million thereafter until the balance is due in full on June 1, 2020. As of March 31, 2016, the Company had $1,046.3 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 March 31, 2016, 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 3.0 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 March 31, 2016, 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.
The Company recorded $18.7 million of debt issuance costs as of March 31, 2016. All debt issuance costs are being amortized from the date incurred to the expiration date of the Credit Facility. As of March 31, 2016, the unamortized balance of $17.9 million is included as a reduction to the carrying value of long-term debt.
Convertible Notes Payable
Effective May 16, 2007, the Company issued at par value $300.0 million convertible notes (the Convertible Notes) which matured on May 1, 2014. Upon maturity, the aggregate conversion value was $406.8 million. Accordingly, the Company paid note holders the outstanding principal value totaling $300.0 million in cash and issued approximately 1.4 million shares of our common stock for the remaining aggregate conversion value. Concurrently with the issuance of our common stock upon conversion, the Company received 1.4 million shares of our common stock pursuant to the terms of the call option hedge transaction described below. The Company included these shares within treasury stock on our consolidated balance sheet.
In connection with the issuance of the Convertible Notes in May 2007, we entered into separate call option hedge and warrant transactions to reduce the potential dilutive impact upon the conversion of the Convertible Notes. The Call Options and the Warrants (each as defined below) are separate and legally distinct instruments that bind CACI and the counterparties and have no binding effect on the holders of the Convertible Notes.
Call Options and Warrants
The Company purchased in a private transaction at a cost of $84.4 million call options (the Call Options) to purchase approximately 5.5 million shares of its common stock at a price equal to the conversion price of $54.65 per share. The cost of the Call Options was recorded as a reduction of additional paid-in capital. The Call Options allowed CACI to receive shares of its common stock from the counterparties equal to the amount of common stock related to the excess conversion value that CACI would pay the holders of the Convertible Notes upon conversion. The Company exercised the call options upon the maturity and conversion of the Convertible Notes and received 1.4 million shares of our common stock.
In addition, the Company sold warrants (the Warrants) to issue approximately 5.5 million shares of CACI common stock at a strike price of $68.31 per share. The proceeds from the sale of the Warrants totaled $56.5 million and were recorded as an increase to additional paid-in capital. The Warrants settled daily over 90 trading days which began in August 2014 and ended in December 2014. We issued 497,550 shares for settlement of the Warrants.
13
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 $600.0 million which hedge a portion of the Company’s floating rate indebtedness. The swaps mature at various dates through 2020. 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 and nine months ended March 31, 2016 and 2015 is as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
(5,621
|
)
|
|
$
|
(5,050
|
)
|
|
$
|
(9,637
|
)
|
|
$
|
(9,064
|
)
|
Amounts reclassified to earnings from accumulated other
comprehensive loss
|
|
|
2,040
|
|
|
|
1,908
|
|
|
|
6,854
|
|
|
|
5,104
|
|
Net current period other comprehensive income (loss)
|
|
$
|
(3,581
|
)
|
|
$
|
(3,142
|
)
|
|
$
|
(2,783
|
)
|
|
$
|
(3,960
|
)
|
The aggregate maturities of long-term debt at March 31, 2016 are as follows (in thousands):
Twelve months ending March 31,
|
|
|
|
|
2017
|
|
$
|
53,965
|
|
2018
|
|
|
53,965
|
|
2019
|
|
|
94,438
|
|
2020
|
|
|
107,930
|
|
2021
|
|
|
1,193,026
|
|
Principal amount of long-term debt
|
|
|
1,503,324
|
|
Less unamortized debt issuance costs
|
|
|
(17,922
|
)
|
Total long-term debt
|
|
$
|
1,485,402
|
|
7
.
|
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 currently nearing completion of its audit of the Company’s incurred cost submissions for the years ended June 30, 2009 and 2010, and an intelligence agency is currently nearing completion of its audit of direct costs on selected contracts through our fiscal year ended June 30, 2012. DCAA audits of our incurred cost submissions for the years ended June 30, 2011 and 2012 have commenced, and an intelligence agency has commenced audits of direct costs on selected contracts through our fiscal year ended June 30, 2015. 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.
14
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
On March 26, 2012, the Company received a subpoena from the Defense Criminal Investigative Service
seeking documents related to one of the Company’s contracts for the period of January 1, 2007 through March 26, 2012. The Company is providing documents responsive to the subpoena and cooperating fully with the government’s investigation. The Company ha
s accrued its current best estimate of the potential outcome within its estimated range of zero to $1.8 million.
On April 9, 2012, the Company received a letter from the Department of Justice (DoJ) informing the Company that the DoJ is investigating whether the Company violated the civil False Claims Act by submitting false claims to receive federal funds pursuant to a GSA contract. Specifically, the DoJ is investigating whether the Company failed to comply with contract requirements and applicable regulations by improperly billing for certain contracting personnel under the contract. The Company has not accrued any liability as based on its present knowledge of the facts, it does not believe an unfavorable outcome is probable.
We are pursuing an appeal at the ASBCA of a determination made by the Army Contracting Command in response to an audit performed on behalf of the Special Inspector General for Afghanistan Reconstruction (SIGAR) of two task orders under which we performed work in Afghanistan. We are appealing the Army’s determination that our methods for computing employee danger pay were incorrect, and needs to be changed. The Company has accrued its current best estimate of the settlement with the Army for $0.1 million; however,
i
n view of the inherent difficulty of predicting the outcome of the appeal the Company is
unable to reasonably estimate a range of possible losses.
We are also pursuing appeals at the ASBCA of determinations and demands made by the DCMA associated with questioned direct costs from DCAA audits of our incurred cost submissions for our fiscal years ending June 30 2006, 2007, and 2008. The Company has not accrued any liabilities for these determinations and demands and does not believe unfavorable outcomes are probable.
German Value-Added Taxes
The Company is under audit by the German tax authorities for issues related to value-added tax returns. At this time, the Company has not been assessed any deficiency and, based on sound factual and legal precedent, believes it is in compliance with the applicable value-added tax regulations. The Company has not accrued any liability for this matter because an unfavorable outcome is not considered probable. The Company estimates the range of reasonably possible losses to be from zero to $3.7 million.
Virginia Sales and Use Tax Audit
The Company is under audit for sales and use tax related issues by the Commonwealth of Virginia. The Company has accrued its current best estimate of the potential outcome within its estimated range of $3.0 million to $5.3 million.
8
.
|
Stock-Based Compensation
|
Stock-based compensation expense recognized, together with the income tax benefits recognized, is as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total stock-based compensation related to RSUs
included in indirect costs and selling expense
|
|
$
|
4,856
|
|
|
$
|
3,857
|
|
|
$
|
13,329
|
|
|
$
|
10,051
|
|
Income tax benefit recognized for stock-based
compensation expense
|
|
$
|
1,719
|
|
|
$
|
1,378
|
|
|
$
|
4,897
|
|
|
$
|
3,737
|
|
Under the terms of its 2006 Stock Incentive Plan (the 2006 Plan), the Company may issue, among others, non-qualified stock options, restricted stock, RSUs, SSARs, and performance awards, collectively referred to herein as equity instruments. During the periods presented all equity instrument grants were made in the form of RSUs. Other than performance-based RSUs (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.
15
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
In September 2
014, the Company made its annual grant to key employees consisting of 180,570 PRSUs. The final number of such PRSUs that are earned by participants and vest is based on the achievement of a specified earnings per share (EPS) for the year ended June 30, 20
15 and on the average share price of Company stock for the 90 day period ending September 23, 2015, 2016 and 2017 as compared to the average share price for the 90 day period ended September 23, 2014. The specified EPS for the year ended June 30, 2015 was
met and the average share price of the Company’s stock for the 90 day period ending September 23, 2015 exceeded the average share price of the Company’s stock for the 90 day period ended September 23, 2014 resulting in an additional 7,884 RSUs earned by p
articipants.
Annual grants under 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. In September 2015, the Company made its annual grant to its key employees consisting of 208,160 PRSUs. The final number of such performance-based RSUs which will be considered earned by the participants and eventually vest is based on the achievement of a specified earnings per share (EPS) for the year ending June 30, 2016 and on the average share price of Company stock for the 90 day periods ending September 18, 2016, 2017 and 2018 as compared to the average share price for the 90 day period ended September 18, 2015. No PRSUs will be earned if the specified EPS for the fiscal year ending June 30, 2016 is not met. If EPS for the year ending June 30, 2016 exceeds the specified EPS and the average share price of the Company’s stock for the 90 day periods ending September 18, 2016, 2017 and 2018 exceeds the average share price of the Company’s stock for the 90 day period ended September 18, 2015 by 100 percent or more, then an additional 208,160 RSUs could be earned by participants. This is the maximum number of additional RSUs that can be earned related to the September 2015 annual grant. In addition to the performance and market conditions, there is a service vesting condition which stipulates that 50 percent of the earned award will vest on September 18, 2018 and 50 percent of the earned award will vest on September 18, 2019, in both cases dependent upon continuing service by the grantee as an employee of the Company, unless the grantee is eligible for earlier vesting upon retirement or certain other events.
The total number of shares authorized by shareholders for grants under the 2006 Plan and its predecessor plan is 12,450,000 as of March 31, 2016. The aggregate number of grants that may be made may exceed this approved amount as forfeited SSARs, stock options, restricted stock and RSUs, and vested but unexercised SSARs and stock options that expire, become available for future grants. As of March 31, 2016, cumulative grants of 13,758,930 equity instruments underlying the shares authorized have been awarded, and 4,202,991 of these instruments have been forfeited.
Activity related to SSARs/non-qualified stock options and RSUs during the nine months ended March 31, 2016 is as follows:
|
|
SSARs/
Non-qualified
Stock Options
|
|
|
RSUs
|
|
Outstanding, June 30, 2015
|
|
|
42,660
|
|
|
|
864,566
|
|
Granted
|
|
|
—
|
|
|
|
270,767
|
|
Exercised/Issued
|
|
|
(35,860
|
)
|
|
|
(189,105
|
)
|
Forfeited/Lapsed
|
|
|
(6,800
|
)
|
|
|
(39,256
|
)
|
Outstanding, March 31, 2016
|
|
|
—
|
|
|
|
906,972
|
|
Weighted-average grant date fair value for RSUs
|
|
|
|
|
|
$
|
80.42
|
|
As of March 31, 2016, there was $37.6 million of total unrecognized compensation costs related to RSUs scheduled to be recognized over a weighted-average period of 2.6 years.
16
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, including stock options and SSARs with an exercise price greater than the average market price of the Company’s common stock. Using the treasury stock method, diluted earnings per share include the incremental effect of SSARs, stock options, restricted shares, and those RSUs that are no longer subject to a market or performance condition. There were no anti-dilutive common stock equivalents for the three or nine months ended March 31, 2016 and 2015. The PRSUs granted in September 2015 are excluded from the calculation of diluted earnings per share as the underlying shares are considered to be contingently issuable shares. These shares will be included in the calculation of diluted earnings per share beginning in the first reporting period in which the performance metric is achieved. The Warrants were included in the computation of diluted earnings per share during the three and nine months ended March 31, 2015 because the strike price was lower than the average market price of a share of the Company stock during the period. The chart below shows the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income attributable to CACI
|
|
$
|
34,028
|
|
|
$
|
29,039
|
|
|
$
|
98,168
|
|
|
$
|
84,811
|
|
Weighted-average number of basic shares outstanding
during the period
|
|
|
24,277
|
|
|
|
24,165
|
|
|
|
24,243
|
|
|
|
23,871
|
|
Dilutive effect of SSARs/stock options and RSUs after
application of treasury stock method
|
|
|
439
|
|
|
|
362
|
|
|
|
432
|
|
|
|
367
|
|
Dilutive effect of the Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
Weighted-average number of diluted shares outstanding
during the period
|
|
|
24,716
|
|
|
|
24,527
|
|
|
|
24,675
|
|
|
|
24,313
|
|
Basic earnings per share
|
|
$
|
1.40
|
|
|
$
|
1.20
|
|
|
$
|
4.05
|
|
|
$
|
3.55
|
|
Diluted earnings per share
|
|
$
|
1.38
|
|
|
$
|
1.18
|
|
|
$
|
3.98
|
|
|
$
|
3.49
|
|
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’s total liability for unrecognized tax benefits as of March 31, 2016 and June 30, 2015 was $0.4 million and $6.2 million, respectively. The $0.4 million unrecognized tax benefit at March 31, 2016, if recognized, would impact the Company’s effective tax rate. During the nine months ended March 31, 2016, unrecognized tax benefits decreased because the Company settled its U.K. audit with the local tax authorities.
17
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
11.
|
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 state and local governments and 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 attributable to CACI. Summarized financial information concerning the Company’s reportable segments is as follows (in thousands):
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
940,714
|
|
|
$
|
36,560
|
|
|
$
|
977,274
|
|
Net income attributable to CACI
|
|
|
30,624
|
|
|
|
3,404
|
|
|
|
34,028
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
781,618
|
|
|
$
|
36,179
|
|
|
$
|
817,797
|
|
Net income attributable to CACI
|
|
|
26,237
|
|
|
|
2,802
|
|
|
|
29,039
|
|
Nine Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
2,519,934
|
|
|
$
|
110,219
|
|
|
$
|
2,630,153
|
|
Net income attributable to CACI
|
|
|
88,390
|
|
|
|
9,778
|
|
|
|
98,168
|
|
Nine Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
2,340,501
|
|
|
$
|
107,445
|
|
|
$
|
2,447,946
|
|
Net income attributable to CACI
|
|
|
76,454
|
|
|
|
8,357
|
|
|
|
84,811
|
|
As of March 31, 2016, there were material changes in total assets by reportable segment since June 30, 2015 due to FY16 acquisitions (see Note 3). Segment assets are as follows (in thousands):
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
(1)
|
|
Domestic
|
|
$
|
3,782,024
|
|
|
$
|
3,055,782
|
|
International
|
|
|
197,394
|
|
|
|
186,248
|
|
Total
|
|
$
|
3,979,418
|
|
|
$
|
3,242,030
|
|
|
(1)
|
Balances have been adjusted for the reclassification of debt issuance costs and deferred taxes related to the adoption of ASU 2015-03 and ASU 2015-17. See Note 2 for additional information.
|
12.
|
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 follow
s:
|
·
|
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 March 31, 2016 and June 30, 2015, and the level they fall within the fair value hierarchy (in thousands):
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
Financial Statement
|
|
Fair Value
|
|
2016
|
|
|
2015
|
|
Description of Financial Instrument
|
|
Classification
|
|
Hierarchy
|
|
Fair Value
|
|
Contingent consideration
|
|
Other long-term liabilities
|
|
Level 3
|
|
$
|
15,707
|
|
|
$
|
—
|
|
Interest rate swap agreements
|
|
Other long-term liabilities
|
|
Level 2
|
|
$
|
16,317
|
|
|
$
|
11,728
|
|
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 the nine months ended March 31, 2016 (see Note 3) 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 nine months ended March 31, 2016, this remeasurement did not result in a significant change to the liability recorded.
In April 2016, the Company entered into four additional floating-to-fixed interest rate swap agreement for an aggregate notional amount of $300.0 million. These swaps will become effective during FY17 and mature at various dates through FY22. The Company has designated these swaps as cash flow hedges.
19