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1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of CACI International Inc and subsidiaries (CACI or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and include the assets, liabilities, results of operations and cash flows for the Company, including its subsidiaries and joint ventures that are more than 50 percent owned or otherwise controlled by the Company. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. All intercompany balances and transactions have been eliminated in consolidation.
Under ASC 855, Subsequent Events, the Company is required to assess the existence or occurrence of any events occurring after March 31, 2012 that may require recognition or disclosure in the financial statements as of and for the three and nine months ended March 31, 2012. The Company has evaluated all events and transactions that occurred after March 31, 2012, and found that during this period it did not have any subsequent events requiring financial statement recognition.
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, 2012 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 market data on companies with a corporate rating similar to CACI's that have recently priced credit facilities. The fair value of the Company's $300.0 million of 2.125 percent convertible senior subordinated notes issued May 16, 2007 and that mature on May 16, 2014 (the Notes) is based on quoted market prices. See Note 5.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for fair presentation for 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, 2011. The results of operations for the three and nine months ended March 31, 2012 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.
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2. New Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05), which amends ASC Topic 220, Comprehensive Income. This accounting update requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for the Company beginning July 1, 2012. The adoption of ASU 2011-05 will impact disclosures only and will not impact the Company's financial position or results of operations.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08), which simplifies how an entity tests goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Accordingly, an entity will no longer be required to calculate the fair value of a reporting unit in the step one test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this ASU is not expected to significantly impact the Company's consolidated financial statements.
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3. Acquisitions
During the nine months ended March 31, 2012, the Company completed the acquisitions of Pangia Technologies, LLC (Pangia), Paradigm Holdings, Inc., the parent of Paradigm Solutions Corporation (Paradigm), Advanced Programs Group, LLC (APG) and Tomorrow Communications Ltd (TCL). Pangia is a software engineering services company that provides technical solutions in the areas of computer network operations, information assurance, mission systems, software and systems engineering, and IT infrastructure support. Paradigm provides cybersecurity and enterprise IT solutions to clients in federal civilian agencies, the Department of Defense, and the Intelligence Community. APG is a provider of Oracle e-Business Services in the Federal market. TCL, based in the United Kingdom, specializes in the design, implementation and on-going management and support of data networks operated by large commercial companies. The combined purchase consideration to acquire these four companies was approximately $187 million. The Company has completed its valuation of the businesses acquired and has recognized fair values of the assets acquired and liabilities assumed. The Company has allocated approximately $139 million to goodwill and approximately $42 million to other intangible assets, primarily customer contracts. The acquired businesses generated $58.6 million of revenue from their dates of acquisition (July 1, 2011 for Pangia, September 1, 2011 for Paradigm, October 3, 2011 for APG, and February 1, 2012 for TCL) through March 31, 2012.
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4. Intangible Assets
Intangible assets increased due to the acquisition of four businesses (see Note 3) and consisted of the following (in thousands):
| March 31, | June 30, | |||||
| 2012 | 2011 | |||||
| Customer contracts and related customer relationships | $ | 330,558 | $ | 291,174 | ||
| Acquired technologies | 27,177 | 27,177 | ||||
| Covenants not to compete | 3,409 | 3,070 | ||||
| Other | 1,639 | 1,637 | ||||
| Intangible assets | 362,783 | 323,058 | ||||
| Less accumulated amortization | (240,600 | ) | (214,956 | ) | ||
| Total intangible assets, net | $ | 122,183 | $ | 108,102 | ||
Intangible assets are primarily amortized on an accelerated basis over periods ranging from 12 to 120 months. The weighted-average period of amortization for all customer contracts and related customer relationships as of March 31, 2012 is 8.7 years, and the weighted-average remaining period of amortization is 7.4 years. The weighted-average period of amortization for acquired technologies as of March 31, 2012 is 6.7 years, and the weighted-average remaining period of amortization is 5.9 years.
Expected amortization expense for the remainder of the fiscal year ending June 30, 2012, and for each of the fiscal years thereafter, is as follows (in thousands):
| Fiscal year ending June 30, | Amount | |
| 2012 (three months) | $ | 8,603 |
| 2013 | 28,357 | |
| 2014 | 23,385 | |
| 2015 | 17,983 | |
| 2016 | 13,262 | |
| Thereafter | 30,593 | |
| Total intangible assets, net | $ | 122,183 |
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5. Long-term Debt
Long-term debt consisted of the following (in thousands):
| March 31, | June 30, | |||||
| 2012 | 2011 | |||||
| Convertible notes payable | $ | 300,000 | $ | 300,000 | ||
| Bank credit facility – Term Loan | 140,625 | 146,250 | ||||
| Bank credit facility – Revolving Facility | 160,000 | — | ||||
| Principal amount of long-term debt | 600,625 | 446,250 | ||||
| Less unamortized discount | (27,368 | ) | (36,313 | ) | ||
| Total long-term debt | 573,257 | 409,937 | ||||
| Less current portion | (7,500 | ) | (7,500 | ) | ||
| Long-term debt, net of current portion | $ | 565,757 | $ | 402,437 | ||
Bank Credit Facility
The Company has a $750.0 million credit facility (the Credit Facility), which consists of a $600.0 million revolving credit facility (the Revolving Facility) and a $150.0 million term loan (the Term Loan). The Revolving Facility has subfacilities of $50.0 million for same-day swing line loan borrowings and $25.0 million for stand-by letters of credit. The Credit Facility was entered into on October 21, 2010 and replaced the Company's then outstanding term loan and revolving credit facility.
Subsequent to entering into the Credit Facility, CACI amended the Credit Facility to increase its ability to do share repurchases, modify the margins applicable to the determination of the interest rate and the unused fees under the Credit Agreement, extend the maturity date of the Credit Facility from October 21, 2015 to November 18, 2016, and increase from $200.0 million to $300.0 million the permitted aggregate amount of incremental facilities that may be added by amendment to the Credit Facility.
The Revolving Facility is a secured facility that permits continually renewable borrowings of up to $600.0 million. As of March 31, 2012, the Company had $160.0 million outstanding under the Revolving Facility and no outstanding letters of credit. 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 $1.9 million through September 30, 2015 and $3.8 million thereafter until September 30, 2016, with the balance due in full on November 18, 2016.
At any time and so long as no default has occurred, the Company has the right to increase the Term Loan or Revolving Facility in an aggregate principal amount of up to $300.0 million 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 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 margin based upon the Company's consolidated total leverage ratio. As of March 31, 2012, the effective interest rate, excluding the effect of amortization of debt financing costs, for the outstanding borrowings under the Credit Facility was 1.74 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. Since the inception of the Credit Facility, the Company has been in compliance with all of the financial covenants. A majority of the Company's assets serve as collateral under the Credit Facility.
The Company capitalized $7.3 million of debt issuance costs associated with the origination and amendment of the Credit Facility. All debt issuance costs are being amortized from the date incurred to the expiration date of the Credit Facility. The unamortized balance of $5.3 million at March 31, 2012 is included in other assets.
Convertible Notes Payable
Effective May 16, 2007, the Company issued the Notes in a private placement. The Notes were issued at par value and are subordinate to the Company's senior secured debt. Interest on the Notes is payable on May 1 and November 1 of each year.
Holders may convert their notes at a conversion rate of 18.2989 shares of CACI common stock for each $1,000 of note principal (an initial conversion price of $54.65 per share) under the following circumstances: 1) if the last reported sale price of CACI stock is greater than or equal to 130 percent of the applicable conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; 2) during the five consecutive business day period immediately after any ten consecutive trading day period (the note measurement period) in which the average of the trading price per $1,000 principal amount of convertible note was equal to or less than 97 percent of the average product of the closing price of a share of the Company's common stock and the conversion rate of each date during the note measurement period; 3) upon the occurrence of certain corporate events constituting a fundamental change, as defined in the indenture governing the Notes; or 4) during the last three-month period prior to maturity. CACI is required to satisfy 100 percent of the principal amount of these notes solely in cash, with any amounts above the principal amount to be satisfied in common stock. As of March 31, 2012, none of the conditions permitting conversion of the Notes had been satisfied.
In the event of a fundamental change, as defined in the indenture governing the Notes, holders may require the Company to repurchase the Notes at a price equal to the principal amount plus any accrued interest. Also, if certain fundamental changes occur prior to maturity, the Company will in certain circumstances increase the conversion rate by a number of additional shares of common stock or, in lieu thereof, the Company may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that these notes are convertible into shares of the acquiring or surviving company. The Company is not permitted to redeem the Notes.
The Company separately accounts for the liability and the equity (conversion option) components of the Notes and recognizes interest expense on the Notes using an interest rate in effect for comparable debt instruments that do not contain conversion features. The effective interest rate for the Notes excluding the conversion option was determined to be 6.9 percent.
The fair value of the liability component of the Notes was calculated to be $221.9 million at May 16, 2007, the date of issuance. The excess of the $300.0 million of gross proceeds over the $221.9 million fair value of the liability component, or $78.1 million, represents the fair value of the equity component, which was recorded, net of income tax effect, as additional paid-in capital within shareholders' equity. This $78.1 million difference represents a debt discount that is amortized over the seven-year term of the Notes as a non-cash component of interest expense. For the three and nine months ended March 31, 2012 and 2011, the components of interest expense related to the Notes were as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||
| March 31, | March 31, | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| Coupon interest | $ | 1,594 | $ | 1,594 | $ | 4,781 | $ | 4,781 |
| Non-cash amortization of discount | 3,036 | 2,837 | 8,946 | 8,359 | ||||
| Amortization of issuance costs | 205 | 205 | 615 | 615 | ||||
| Total | $ | 4,835 | $ | 4,636 | $ | 14,342 | $ | 13,755 |
The balance of the unamortized discount as of March 31, 2012 and June 30, 2011, was $27.4 million and $36.3 million, respectively. The discount will continue to be amortized as additional, non-cash interest expense over the remaining term of the Notes (through May 1, 2014) using the effective interest method as follows (in thousands):
| Amount Amortized | ||
| Fiscal year ending June 30, | During Period | |
| 2012 (three months) | $ | 3,078 |
| 2013 | 12,868 | |
| 2014 | 11,422 | |
| $ | 27,368 |
The fair value of the Notes as of March 31, 2012 measured using Level 1 inputs (see Note 11) was $372.1 million based on quoted market values.
The contingently issuable shares that may result from the conversion of the Notes were included in CACI's diluted share count for the three and nine month periods ended March 31, 2012 and 2011 because CACI's average stock price for those periods was above the conversion price of $54.65 per share (see Note 8). Of total debt issuance costs of $7.8 million, $5.8 million is being amortized to interest expense over seven years. The remaining $2.0 million of debt issuance costs attributable to the embedded conversion option was recorded in additional paid-in capital. Upon closing of the sale of the Notes, $45.5 million of the net proceeds was used to concurrently repurchase one million shares of CACI's common stock.
In connection with the issuance of the Notes, the Company purchased in a private transaction at a cost of $84.4 million call options (the Call Options) to purchase approximately 5.5 million shares of its common stock at a price equal to the conversion price of $54.65 per share. The cost of the Call Options was recorded as a reduction of additional paid-in capital. The Call Options allow CACI to receive shares of its common stock from the counterparties equal to the amount of common stock related to the excess conversion value that CACI would pay the holders of the Notes upon conversion.
For income tax reporting purposes, the Notes and the Call Options are integrated. This created an original issue discount for income tax reporting purposes, and therefore the cost of the Call Options is being accounted for as interest expense over the term of the Notes for income tax reporting purposes. The associated income tax benefit of $32.8 million to be realized for income tax reporting purposes over the term of the Notes was recorded as an increase in additional paid-in capital and a long-term deferred tax asset. The majority of this deferred tax asset is offset in the Company's balance sheet by the $30.7 million deferred tax liability associated with the non-cash interest expense to be recorded for financial reporting purposes.
In addition, the Company sold warrants (the Warrants) to issue approximately 5.5 million shares of CACI common stock at an exercise price of $68.31 per share. The proceeds from the sale of the Warrants totaled $56.5 million and were recorded as an increase to additional paid-in capital.
On a combined basis, the Call Options and the Warrants are intended to reduce the potential dilution of CACI's common stock in the event that the Notes are converted by effectively increasing the conversion price of these notes from $54.65 to $68.31. The Call Options are anti-dilutive and are therefore excluded from the calculation of diluted shares outstanding. The Warrants will result in additional diluted shares outstanding if CACI's average common stock price exceeds $68.31. The Call Options and the Warrants are separate and legally distinct instruments that bind CACI and the counterparties and have no binding effect on the holders of the Notes.
JV Bank Credit Facility
eVenture Technologies LLC (eVentures), a joint venture between the Company and ActioNet, Inc., entered into a $1.5 million revolving credit facility (the JV Facility). The JV Facility was a four-year, guaranteed facility that permitted continuously renewable borrowings of up to $1.5 million with an expiration date of the earliest of September 14, 2011; the date of any restatement, refinancing, or replacement of the Credit Facility without the lender acting as the sole and exclusive administrative agent; or termination of the Credit Facility. The JV Facility expired on September 14, 2011. eVentures had no borrowings outstanding under the JV Facility during the nine months ended March 31, 2012.
The aggregate maturities of long-term debt at March 31, 2012 are as follows (in thousands):
| Twelve months ending March 31, | |||
| 2013 | $ | 7,500 | |
| 2014 | 7,500 | ||
| 2015 | 307,500 | ||
| 2016 | 11,250 | ||
| 2017 | 266,875 | ||
| 600,625 | |||
| Less unamortized discount | (27,368 | ) | |
| Total long-term debt | $ | 573,257 |
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6. Commitments and Contingencies
General Legal Matters
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.
Iraq Investigations
On April 26, 2004, the Company received information indicating that one of its employees was identified in a report authored by U.S. Army Major General Antonio M. Taguba as being connected to allegations of abuse of Iraqi detainees at the Abu Ghraib prison facility. To date, despite the Taguba Report and the subsequently-issued Fay Report addressing alleged inappropriate conduct at Abu Ghraib, no present or former employee of the Company has been officially charged with any offense in connection with the Abu Ghraib allegations.
The Company does not believe the outcome of this matter will have a material adverse effect on its financial statements.
Government Contracting
Payments to the Company on cost-plus-fee and time-and-materials contracts are subject to adjustment upon audit by the Defense Contract Audit Agency (DCAA). The DCAA is currently in the process of auditing the Company's incurred cost submissions for the years ended June 30, 2006 and 2007. In the opinion of management, audit adjustments that may result from audits not yet completed or started are not expected to have a material effect on the 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.
In December 2010, the Defense Contract Management Agency (DCMA) issued a letter to the Company with its determination that the Company improperly allocated certain legal costs incurred arising out of the Company's work in Iraq from 2003 to 2005. The Company does not agree with the DCMA's findings and, on March 9, 2011, filed a Notice of Appeal in the Armed Services Board of Contract Appeals. The Company's appeal is pending. The Company has accrued its current best estimate of the potential outcome within its estimated range of zero to $2.9 million.
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 has not accrued any liability for this matter as based on its present knowledge of the facts, it does not believe an unfavorable outcome is probable.
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 is reviewing this matter and has not accrued any liability as based on its present knowledge of the facts, it does not believe an unfavorable outcome is 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 between $1.5 million and $3.5 million.
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7. 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, | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| Stock-based compensation included in indirect costs and | ||||||||
| selling expenses: | ||||||||
| Non-qualified stock option and stock settled stock | ||||||||
| appreciation right (SSAR) expense | $ | 422 | $ | 959 | $ | 1,439 | $ | 2,759 |
| Restricted stock and restricted stock unit (RSU) | ||||||||
| expense | 3,430 | 3,737 | 9,656 | 10,350 | ||||
| Total stock-based compensation expense | $ | 3,852 | $ | 4,696 | $ | 11,095 | $ | 13,109 |
| Income tax benefit recognized for stock-based | ||||||||
| compensation expense | $ | 1,483 | $ | 1,631 | $ | 4,360 | $ | 4,799 |
Under the terms of its 2006 Stock Incentive Plan (the 2006 Plan), the Company may issue, among others, non-qualified stock options, restricted stock, RSUs, SSARs, and performance awards, collectively referred to herein as equity instruments. During the periods presented, all equity instrument grants were made in the form of RSUs. Other than performance-based RSUs which contain a market-based element, the fair value of RSU grants was determined based on the closing price of a share of the 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 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 2011, the Company made its annual grant to its key employees consisting of 721,540 Performance Restricted Stock Units (PRSUs), representing the maximum amount which could be earned. The PRSUs are subject to both performance and market conditions. No PRSUs will be earned if the Net After Tax Profit for the fiscal year ending June 30, 2012 is less than the Net After Tax Profit for the fiscal year ended June 30, 2011. The number of PRSUs earned by the grantee is dependent on the increase or decrease of the 90 calendar day average price per share of common stock of the Company for the period ended September 1, 2011 compared to the 90 calendar day average price per share of common stock of the Company for the period ending September 1, 2012. In addition to the performance and market conditions, there is a service vesting condition which stipulates that 50 percent of the award will vest on the third anniversary of the grant date and 50 percent of the award will vest on the fourth anniversary of the grant date, in both cases dependent upon continuing service by the grantee as an employee of the Company, unless the grantee is eligible for earlier vesting upon retirement, as defined.
The total number of shares authorized by shareholders for grants under the 2006 Plan and its predecessor plan is 12,450,000 as of March 31, 2012. 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, 2012, cumulative grants of 12,304,409 equity instruments underlying the shares authorized have been awarded, and 2,569,634 of these instruments have been forfeited.
| SSARs/ | |||||
| Non-qualified | RSUs/ | ||||
| Stock Options | Restricted Shares | ||||
| Outstanding, June 30, 2011 | 2,110,304 | 1,322,101 | |||
| Granted | — | 815,918 | |||
| Exercised/Issued | (363,156 | ) | (259,856 | ) | |
| Forfeited/Lapsed | (61,300 | ) | (222,040 | ) | |
| Outstanding, March 31, 2012 | 1,685,848 | 1,656,123 | |||
| Weighted average grant date fair value for RSUs/restricted shares | $ | 47.31 | |||
As of March 31, 2012, there was $1.4 million of total unrecognized compensation cost related to SSARs and stock options scheduled to be recognized over a weighted average period of 1.1 years, and $27.6 million of total unrecognized compensation cost related to restricted shares and RSUs scheduled to be recognized over a weighted-average period of 2.7 years.
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8. Earnings Per Share
ASC 260, Earnings Per Share (ASC 260), requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share exclude dilution and are computed by dividing income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock but not securities that are anti-dilutive, including stock options and SSARs with an exercise price greater than the average market price of the 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. The total number of weighted-average common stock equivalents excluded from the diluted per share computations due to their anti-dilutive effects were 0.6 million and 1.7 million for the three months ended March 31, 2012 and 2011, respectively, and 0.7 million and 2.0 million for the nine months ended March 31, 2012 and 2011, respectively. The PRSUs granted in September 2011 are excluded from the calculation of diluted earnings per share as the underlying shares are considered to be contingently issuable shares. These shares will be included in the calculation of diluted earnings per share beginning in the first reporting period in which the performance metric is achieved. The shares underlying the Notes were included in the computation of diluted earnings per share for the three and nine months ended March 31, 2012 and 2011 because the average share price was above the conversion price during those periods. The Warrants were excluded from the computation of diluted earnings per share during all periods presented because the Warrants' exercise price of $68.31 was greater than the average market price of a share of Company common stock during the three and nine month periods ended March 31, 2012 and 2011. 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, | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| Net income attributable to CACI | $ | 40,856 | $ | 36,427 | $ | 124,057 | $ | 98,317 |
| Weighted average number of basic shares outstanding | ||||||||
| during the period | 26,537 | 30,373 | 27,303 | 30,321 | ||||
| Dilutive effect of SSARs/stock options and | ||||||||
| RSUs/restricted shares after application of treasury | ||||||||
| stock method | 932 | 712 | 893 | 709 | ||||
| Dilutive effect of the Notes | 441 | 215 | 148 | 72 | ||||
| Dilutive effect of accelerated share repurchase | ||||||||
| agreement | 176 | — | 58 | — | ||||
| Weighted average number of diluted shares outstanding | ||||||||
| during the period | 28,086 | 31,300 | 28,402 | 31,102 | ||||
| Basic earnings per share | $ | 1.54 | $ | 1.20 | $ | 4.54 | $ | 3.24 |
| Diluted earnings per share | $ | 1.45 | $ | 1.16 | $ | 4.37 | $ | 3.16 |
On August 29, 2011, the Company entered into an accelerated share repurchase agreement with Bank of America N.A. (BofA) under which it paid $209.7 million for 4 million shares of the Company's common stock. The Company's effective per share purchase price will be based generally on the average of the daily volume weighted average prices per share of our common stock, less a discount, calculated during an averaging period which began August 25, 2011 and will last up to eleven months. The total amount ultimately paid for these shares will not be known until the averaging period ends and a final settlement occurs. Upon final settlement, the Company will either receive a settlement amount or be required to remit a settlement amount, in cash or common stock, at its option. The Company recorded the $209.7 million payment to BofA as treasury stock in its consolidated balance sheet as of March 31, 2012. If the transaction had settled on March 31, 2012, the Company would have issued approximately 0.2 million shares under the agreement if it elected to settle in shares of common stock. These shares were included in the weighted average diluted earnings per share calculation.
Shares outstanding during the three and nine months ended March 31, 2012, reflect the repurchase of shares of CACI's common stock under the accelerated share repurchase agreement described above and other share repurchase programs approved by the Company's Board of Directors. Shares outstanding during the three and nine months ended March 31, 2011 reflect the repurchase of shares under other approved share repurchase programs.
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9. Income Taxes
The Company is subject to income taxes in the U.S. and various state and foreign jurisdictions. Tax statutes and regulations within each jurisdiction are subject to interpretation and require the application of significant judgment. The Company is currently under examination by three state jurisdictions and one foreign jurisdiction for years ended June 30, 2003 through June 30, 2009. The Company does not expect the resolution of these examinations to have a material impact on its results of operations, financial condition or cash flows.
The Company's total liability for unrecognized tax benefits as of March 31, 2012 and June 30, 2011 was $6.7 million and $5.9 million, respectively. Of the $6.7 million unrecognized tax benefit at March 31, 2012, $2.2 million, if recognized, would impact the Company's effective tax rate.
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10. Business Segment Information
The Company reports operating results and financial data in two segments: domestic operations and international operations. Domestic operations provide professional services and information technology solutions to its customers. Its customers are primarily U.S. federal government agencies. The Company does not measure revenue or profit by its major service offerings, either for internal management or external financial reporting purposes, as it would be impractical to do so. In many cases more than one offering is provided under a single contract, to a single customer, or by a single employee or group of employees, and segregating the costs of the service offerings in situations for which it is not required would be difficult and costly. The Company also serves customers in the commercial and state and local government sectors and, from time to time, serves a number of agencies of foreign governments. 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 through the Company's knowledge management solutions, business systems solutions, and enterprise IT solutions lines of business. 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 | International | Total | ||||
| Three Months Ended March 31, 2012 | ||||||
| Revenue from external customers | $ | 897,403 | $ | 30,559 | $ | 927,962 |
| Net income attributable to CACI | 38,901 | 1,955 | 40,856 | |||
| Three Months Ended March 31, 2011 | ||||||
| Revenue from external customers | $ | 881,075 | $ | 32,294 | $ | 913,369 |
| Net income attributable to CACI | 33,585 | 2,842 | 36,427 | |||
| Nine Months Ended March 31, 2012 | ||||||
| Revenue from external customers | $ | 2,742,359 | $ | 83,241 | $ | 2,825,600 |
| Net income attributable to CACI | 118,730 | 5,327 | 124,057 | |||
| Nine Months Ended March 31, 2011 | ||||||
| Revenue from external customers | $ | 2,525,505 | $ | 89,113 | $ | 2,614,618 |
| Net income attributable to CACI | 92,133 | 6,184 | 98,317 |
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11. 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:
The Company's financial instruments measured at fair value included non-corporate owned life insurance (COLI) money market investments and mutual funds held in the Company's supplemental retirement savings plan (the Supplemental Savings Plan), and contingent consideration in connection with past acquisitions. Contingent consideration recorded at March 31, 2012 related to the February 1, 2012 acquisition of TCL (see Note 3). Contingent consideration recorded as of June 30, 2011 related to three acquisitions completed during the year ended June 30, 2010. The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and June 30, 2011, and the level they fall within the fair value hierarchy (in thousands):
| March 31, | June 30, | |||||
| Financial Statement | Fair Value | 2012 | 2011 | |||
| Description of Financial Instrument | Classification | Hierarchy | Fair Value | |||
| Non-COLI assets held in connection | Long-term asset | Level 1 | $ | 5,155 | $ | 6,514 |
| with the Supplemental Savings Plan | ||||||
| Contingent Consideration | Current liability | Level 3 | $ | 3,098 | $ | 20,839 |
| Contingent Consideration | Long-term liability | Level 3 | $ | 2,983 | $ | — |
Changes in the fair value of the assets held in connection with the Supplemental Savings Plan are recorded in indirect costs and selling expenses.
Contingent consideration in each acquisition related to the requirement that the Company pay contingent consideration in the event the acquired businesses achieved certain specified earnings results during the specified periods subsequent to each acquisition (one year in the case of TCL and two years in the case of the three acquisitions completed during the year ended June 30, 2010). The Company determines the fair value of contingent consideration as of each acquisition date using a valuation model which includes the evaluation of all possible outcomes and the application of an appropriate discount rate. At the end of each reporting period, the fair value of the contingent consideration is remeasured and any changes are recorded in indirect costs and selling expenses. During the three months ending March 31, 2012, this remeasurement did not result in a significant change to the liability recorded. During the nine months ended March 31, 2012, this remeasurement resulted in a $0.5 million decrease in the liability recorded. For the three and nine months ended March 31, 2011, this remeasurement resulted in a $2.6 million decrease and a $1.5 million decrease, respectively, in the liability recorded. The maximum contingent consideration associated with the TCL acquisition is approximately $6.2 million. During the nine month period ended March 31, 2012, the contingent consideration obligations for all three of the acquisitions completed during the year ended June 30, 2010 were fixed, with payments of $20.3 million made in settlement of earned contingent consideration in connection with two of the acquisitions and the determination that no further payments were due in connection with the third acquisition.
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12. Subsequent Events
On April 5, 2012, the Company entered into floating-to-fixed interest rate swap agreements for an aggregate notional amount of $100 million related to a portion of the Company's floating rate indebtedness. The agreements are effective beginning July 1, 2013 and mature July 1, 2017. The swap agreements were designated as cash flow hedges and will be recorded at fair value in the consolidated balance sheets. Related gains or losses will be recorded in stockholders' equity as a component of other comprehensive income. The objective of these hedges is to manage the variability of interest payments related to the portion of the variable-rate debt designated as being hedged.
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| March 31, | June 30, | |||||
| 2012 | 2011 | |||||
| Customer contracts and related customer relationships | $ | 330,558 | $ | 291,174 | ||
| Acquired technologies | 27,177 | 27,177 | ||||
| Covenants not to compete | 3,409 | 3,070 | ||||
| Other | 1,639 | 1,637 | ||||
| Intangible assets | 362,783 | 323,058 | ||||
| Less accumulated amortization | (240,600 | ) | (214,956 | ) | ||
| Total intangible assets, net | $ | 122,183 | $ | 108,102 | ||
| Fiscal year ending June 30, | Amount | |
| 2012 (three months) | $ | 8,603 |
| 2013 | 28,357 | |
| 2014 | 23,385 | |
| 2015 | 17,983 | |
| 2016 | 13,262 | |
| Thereafter | 30,593 | |
| Total intangible assets, net | $ | 122,183 |
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| March 31, | June 30, | |||||
| 2012 | 2011 | |||||
| Convertible notes payable | $ | 300,000 | $ | 300,000 | ||
| Bank credit facility – Term Loan | 140,625 | 146,250 | ||||
| Bank credit facility – Revolving Facility | 160,000 | — | ||||
| Principal amount of long-term debt | 600,625 | 446,250 | ||||
| Less unamortized discount | (27,368 | ) | (36,313 | ) | ||
| Total long-term debt | 573,257 | 409,937 | ||||
| Less current portion | (7,500 | ) | (7,500 | ) | ||
| Long-term debt, net of current portion | $ | 565,757 | $ | 402,437 | ||
| Three Months Ended | Nine Months Ended | |||||||
| March 31, | March 31, | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| Coupon interest | $ | 1,594 | $ | 1,594 | $ | 4,781 | $ | 4,781 |
| Non-cash amortization of discount | 3,036 | 2,837 | 8,946 | 8,359 | ||||
| Amortization of issuance costs | 205 | 205 | 615 | 615 | ||||
| Total | $ | 4,835 | $ | 4,636 | $ | 14,342 | $ | 13,755 |
| Amount Amortized | ||
| Fiscal year ending June 30, | During Period | |
| 2012 (three months) | $ | 3,078 |
| 2013 | 12,868 | |
| 2014 | 11,422 | |
| $ | 27,368 |
| Twelve months ending March 31, | |||
| 2013 | $ | 7,500 | |
| 2014 | 7,500 | ||
| 2015 | 307,500 | ||
| 2016 | 11,250 | ||
| 2017 | 266,875 | ||
| 600,625 | |||
| Less unamortized discount | (27,368 | ) | |
| Total long-term debt | $ | 573,257 |
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| Three Months Ended | Nine Months Ended | |||||||
| March 31, | March 31, | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| Stock-based compensation included in indirect costs and | ||||||||
| selling expenses: | ||||||||
| Non-qualified stock option and stock settled stock | ||||||||
| appreciation right (SSAR) expense | $ | 422 | $ | 959 | $ | 1,439 | $ | 2,759 |
| Restricted stock and restricted stock unit (RSU) | ||||||||
| expense | 3,430 | 3,737 | 9,656 | 10,350 | ||||
| Total stock-based compensation expense | $ | 3,852 | $ | 4,696 | $ | 11,095 | $ | 13,109 |
| Income tax benefit recognized for stock-based | ||||||||
| compensation expense | $ | 1,483 | $ | 1,631 | $ | 4,360 | $ | 4,799 |
| SSARs/ | |||||
| Non-qualified | RSUs/ | ||||
| Stock Options | Restricted Shares | ||||
| Outstanding, June 30, 2011 | 2,110,304 | 1,322,101 | |||
| Granted | — | 815,918 | |||
| Exercised/Issued | (363,156 | ) | (259,856 | ) | |
| Forfeited/Lapsed | (61,300 | ) | (222,040 | ) | |
| Outstanding, March 31, 2012 | 1,685,848 | 1,656,123 | |||
| Weighted average grant date fair value for RSUs/restricted shares | $ | 47.31 | |||
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| Three Months Ended | Nine Months Ended | |||||||
| March 31, | March 31, | |||||||
| 2012 | 2011 | 2012 | 2011 | |||||
| Net income attributable to CACI | $ | 40,856 | $ | 36,427 | $ | 124,057 | $ | 98,317 |
| Weighted average number of basic shares outstanding | ||||||||
| during the period | 26,537 | 30,373 | 27,303 | 30,321 | ||||
| Dilutive effect of SSARs/stock options and | ||||||||
| RSUs/restricted shares after application of treasury | ||||||||
| stock method | 932 | 712 | 893 | 709 | ||||
| Dilutive effect of the Notes | 441 | 215 | 148 | 72 | ||||
| Dilutive effect of accelerated share repurchase | ||||||||
| agreement | 176 | — | 58 | — | ||||
| Weighted average number of diluted shares outstanding | ||||||||
| during the period | 28,086 | 31,300 | 28,402 | 31,102 | ||||
| Basic earnings per share | $ | 1.54 | $ | 1.20 | $ | 4.54 | $ | 3.24 |
| Diluted earnings per share | $ | 1.45 | $ | 1.16 | $ | 4.37 | $ | 3.16 |
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| Domestic | International | Total | ||||
| Three Months Ended March 31, 2012 | ||||||
| Revenue from external customers | $ | 897,403 | $ | 30,559 | $ | 927,962 |
| Net income attributable to CACI | 38,901 | 1,955 | 40,856 | |||
| Three Months Ended March 31, 2011 | ||||||
| Revenue from external customers | $ | 881,075 | $ | 32,294 | $ | 913,369 |
| Net income attributable to CACI | 33,585 | 2,842 | 36,427 | |||
| Nine Months Ended March 31, 2012 | ||||||
| Revenue from external customers | $ | 2,742,359 | $ | 83,241 | $ | 2,825,600 |
| Net income attributable to CACI | 118,730 | 5,327 | 124,057 | |||
| Nine Months Ended March 31, 2011 | ||||||
| Revenue from external customers | $ | 2,525,505 | $ | 89,113 | $ | 2,614,618 |
| Net income attributable to CACI | 92,133 | 6,184 | 98,317 |
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| March 31, | June 30, | |||||
| Financial Statement | Fair Value | 2012 | 2011 | |||
| Description of Financial Instrument | Classification | Hierarchy | Fair Value | |||
| Non-COLI assets held in connection | Long-term asset | Level 1 | $ | 5,155 | $ | 6,514 |
| with the Supplemental Savings Plan | ||||||
| Contingent Consideration | Current liability | Level 3 | $ | 3,098 | $ | 20,839 |
| Contingent Consideration | Long-term liability | Level 3 | $ | 2,983 | $ | — |
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