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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 December 31, 2010 that may require recognition or disclosure in the financial statements as of and for the three and six months ended December 31, 2010. The Company has evaluated all events and transactions that occurred after December 31, 2010, 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 December 31, 2010 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, 2010. The results of operations for the three and six months ended December 31, 2010 are not necessarily indicative of the results to be expected for any subsequent interim period or for the full fiscal year.
|
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2. New Accounting Pronouncements
In June 2009, the FASB issued updates to ASC 810, Consolidation (ASC 810). These updates amended the accounting standards pertaining to the consolidation of certain variable interest entities, and when and how to determine, or re-determine, whether an entity is a variable interest entity. In addition, the updates modified the approach for determining who has a controlling financial interest in a variable interest entity with a qualitative approach, and requires ongoing assessments of whether an entity is the primary beneficiary of a variable interest entity. The adoption of the updates to ASC 810, which were effective for the Company beginning July 1, 2010, did not affect the Company's financial position or results of operations.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13) which amends ASC Topic 605, Revenue Recognition. This accounting update establishes a hierarchy for determining the value of each element within a multiple deliverable arrangement. ASU 2009-13 was effective for the Company beginning July 1, 2010 and applies to arrangements entered into on or after this date. The adoption of ASU 2009-13 did not have a material impact on the Company's financial position or results of operations.
In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements (ASU 2009-14), which updates ASC Topic 985, Software. ASU 2009-14 clarifies which accounting guidance should be used for purposes of measuring and allocating revenue for arrangements that contain both tangible products and software, and where the software is more than incidental to the tangible product as a whole. ASU 2009-14 was effective for the Company's fiscal year beginning July 1, 2010 and applies to arrangements entered into on or after this date. The adoption of ASU 2009-14 did not have a material impact on the Company's financial position or results of operations.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements (ASU 2010-06). This update requires new disclosures around transfers into and out of Levels 1 and 2 in the fair value hierarchy, and separate disclosures about purchases, sales, issuances, and settlements related to Level 3 measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009 with early adoption permitted, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years with early adoption permitted. The Company has provided the required disclosures regarding the valuation techniques utilized in measuring its Level 3 assets and liabilities and will adopt the provisions of ASU 2010-06 pertaining to transfers into and out of the Level 3 category effective July 1, 2011. See Note 11 for definitions of Levels 1, 2, and 3, and for additional information about the Company's financial assets and liabilities measured at fair value on a recurring basis.
In December 2010, the FASB issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29) which amends ASC Topic 805, Business Combinations. This accounting update specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 is effective for the Company beginning July 1, 2011 and applies to acquisitions entered into on or after this date. The adoption of ASU 2010-29 will not have a material impact on the Company's financial position or results of operations.
|
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3. Acquisitions
On November 1, 2010, the Company completed two acquisitions: (1) 100 percent of the outstanding stock of TechniGraphics, Inc, a provider of imaging and geospatial services to the U.S. government and (2) 100 percent of the outstanding stock of Applied Systems Research, Inc, a provider of technical services and products to the U.S. government. The combined purchase consideration to acquire these two companies was $127.5 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 $95.0 million to goodwill and $36.8 million to other intangible assets, primarily customer contracts. The acquired businesses generated $8.7 million of revenue from November 1, 2010 through December 31, 2010.
|
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4. Intangible Assets
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
December 31,
|
June 30,
|
|
|
| |
|
Customer contracts and related customer relationships |
$ 289,719 |
$ 253,031 |
|
Acquired technologies |
27,177 |
27,177 |
|
Covenants not to compete |
3,051 |
2,373 |
|
Other |
1,634 |
1,631 |
|
|
|
|
|
Intangible assets |
321,581 |
284,212 |
|
Less accumulated amortization |
(195,070 ) |
(175,914 ) |
|
|
|
|
|
Total intangible assets, net |
$ 126,511 |
$ 108,298 |
|
|
|
|
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 December 31, 2010 is 8.5 years, and the weighted-average remaining period of amortization is 6.9 years. The weighted-average period of amortization for acquired technologies as of December 31, 2010 is 6.7 years, and the weighted-average remaining period of amortization is 6.1 years. See Note 3 for information on acquisitions since July 1, 2010.
Expected amortization expense for the remainder of the fiscal year ending June 30, 2011, and for each of the fiscal years thereafter, is as follows (in thousands):
|
|
|
|
Fiscal year ending June 30, |
Amount
|
|
2011 (six months) |
$ 19,790 |
|
2012 |
28,966 |
|
2013 |
21,440 |
|
2014 |
17,653 |
|
2015 |
13,132 |
|
Thereafter |
25,530 |
|
|
|
|
Total intangible assets, net |
$ 126,511 |
|
|
|
|
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5. Long-term Debt
Long-term debt consisted of the following (in thousands):
|
|
December 31,
|
June 30,
| ||
|
|
| |||
|
Convertible notes payable |
$ 300,000 |
$ 300,000 | ||
|
Bank credit facility – term loans |
150,000 |
278,653 | ||
|
|
|
| ||
|
Principal amount of long-term debt |
450,000 |
578,653 | ||
|
Less unamortized discount |
(42,026 ) |
(47,549 ) | ||
|
|
|
| ||
|
Total long-term debt |
407,974 |
531,104 | ||
|
Less current portion |
(7,500 ) |
(278,653 ) | ||
|
|
|
| ||
|
Long-term debt, net of current portion |
$ 400,474 |
$ 252,451 | ||
|
|
|
| ||
Bank Credit Facility
As of December 31, 2010, the Company had a $750.0 million credit facility (the Credit Facility), which consisted 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.
The Revolving Facility is a secured facility that permits continuously renewable borrowings of up to $600.0 million, with an expiration date of October 21, 2015. As of December 31, 2010, the Company had no borrowings 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 December 31, 2013 and $3.8 million from January 1, 2014 through September 30, 2015, with the balance due in full on October 21, 2015.
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 $200.0 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 December 31, 2010, the effective interest rate, excluding the effect of amortization of debt financing costs, for the outstanding borrowings under the Credit Facility was 2.53 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 $6.0 million of debt issuance costs associated with the origination of the Credit Facility. All debt financing costs are being amortized from the date incurred to the expiration date of the Credit Facility. The unamortized balance of $5.8 million at December 31, 2010 is included in other assets. Unamortized debt issuance costs of $0.5 million associated with the Company's former credit facility were expensed in full upon the October 21, 2010 termination of such facility.
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 December 31, 2010, 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 has been recorded, net of income tax effect, as additional paid-in capital within shareholders' equity. This $78.1 million difference represents a debt discount that is amortized over the seven-year term of the Notes as a non-cash component of interest expense. For the three and six months ended December 31, 2010 and 2009, the components of interest expense related to the Notes were as follows (in thousands):
|
|
Three Months Ended |
Six Months Ended | ||
|
|
|
| ||
|
|
2010
|
2009
|
2010
|
2009
|
|
Coupon interest |
$ 1,594 |
$ 1,594 |
$ 3,188 |
$ 3,188 |
|
Non-cash amortization of discount |
2,780 |
2,597 |
5,522 |
5,160 |
|
Amortization of issuance costs |
205 |
205 |
410 |
410 |
|
|
|
|
|
|
|
Total |
$ 4,579 |
$ 4,396 |
$ 9,120 |
$ 8,758 |
|
|
|
|
|
|
The balance of the unamortized discount as of December 31, 2010 and June 30, 2010, was $42.0 million and $47.5 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):
|
|
| |
|
Fiscal year ending June 30, |
Amount Amortized During Period | |
|
2011 (six months) |
$ 5,713 | |
|
2012 |
12,024 | |
|
2013 |
12,868 | |
|
2014 |
11,421 | |
|
|
| |
|
|
$ 42,026 | |
|
|
| |
The fair value of the Notes as of December 31, 2010 was $344.1 million based on quoted market values.
The contingently issuable shares are not included in CACI's diluted share count for the three or six months ended December 31, 2010 or 2009, because CACI's average stock price during those periods was below the conversion price. 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 is a four-year, guaranteed facility that permits 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. Borrowings under the JV Facility bear interest at the lender's prime rate plus 1.0 percent. eVentures pays a fee of 0.25 percent on the unused portion of the JV Facility. As of December 31, 2010, eVentures had no borrowings outstanding under the JV Facility.
Cash Flow Hedges
The Company periodically uses derivative financial instruments as part of a strategy to manage exposure to market risks associated with interest rate fluctuations. In 2007, the Company entered into two interest rate swap agreements and in 2008, the Company entered into an interest rate cap agreement. Both agreements qualified as effective hedges and both expired during the Company's fiscal year ended June 30, 2010. The Company does not hold or issue derivative financial instruments for trading purposes.
The effects of derivative instruments in the condensed consolidated statements of operations and accumulated other comprehensive loss for the three and six months ended December 31, 2010 and 2009 is as follows (in thousands):
|
|
Derivatives in ASC 815 cash flow | |||
|
|
| |||
|
|
Interest Rate Swaps | |||
|
|
| |||
|
|
Three Months Ended |
Six Months Ended | ||
|
|
2010
|
2009
|
2010
|
2009
|
|
Gain recognized in comprehensive income (effective portion) |
$ — |
$ 574 |
$ — |
$ 1,045 |
|
|
|
|
|
|
|
Loss reclassified to earnings from accumulated other comprehensive loss (effective portion) |
$ — |
$ (944 ) |
$ — |
$ (1,817 ) |
|
Gain recognized in earnings (ineffective portion) |
— |
— |
— |
— |
|
|
|
|
|
|
|
|
$ — |
$ (944 ) |
$ — |
$ (1,817 ) |
|
|
|
|
|
|
As of December 31, 2010, the Company had no outstanding derivative instruments.
The aggregate maturities of long-term debt at December 31, 2010 are as follows (in thousands):
|
|
|
|
Twelve months ending December 31, |
|
|
2011 |
$ 7,500 |
|
2012 |
7,500 |
|
2013 |
7,500 |
|
2014 |
315,000 |
|
2015 |
112,500 |
|
|
|
|
|
450,000 |
|
Less unamortized discount |
(42,026 ) |
|
|
|
|
Total long-term debt |
$ 407,974 |
|
|
|
|
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6. Commitments and Contingencies
General Legal Matters
The Company is involved in various legal matters including 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 year ended June 30, 2006. 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 April 2007, the DCAA conducted a contract review and questioned certain costs on a contract in which the Company is a subcontractor. The Company believes that all costs allocated to this contract were appropriately allocated, but has accrued its current best estimate of the potential outcome within its estimated range of zero to $3.4 million.
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 in connection with the Iraq investigations described above. The Company does not agree with the DCMA's findings and intends to file an appeal. The Company has accrued its current best estimate of the potential outcome within its estimated range of zero to $2.9 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
|
Six Months Ended
| ||
|
|
2010
|
2009
|
2010
|
2009
|
|
Stock-based compensation included in indirect costs and selling expenses: |
|
|
|
|
|
Non-qualified stock option and stock settled stock appreciation right (SSAR) expense |
$ 413 |
$ 2,309 |
$ 1,800 |
$ 4,619 |
|
Restricted stock and restricted stock unit (RSU) expense.. |
3,094 |
3,765 |
6,613 |
8,126 |
|
|
|
|
|
|
|
Total stock-based compensation expense |
$ 3,507 |
$ 6,074 |
$ 8,413 |
$ 12,745 |
|
|
|
|
|
|
|
Income tax benefit recognized for stock-based compensation expense |
$ 1,312 |
$ 2,134 |
$ 3,168 |
$ 4,676 |
|
|
|
|
|
|
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. The 2006 Plan was approved by the Company's stockholders in November 2006 and replaced the 1996 Stock Incentive Plan (the 1996 Plan) which was due to expire at the end of a ten-year period. During the periods presented, the exercise price of all SSAR and non-qualified stock option grants and the value of restricted stock and RSU grants that do not contain market conditions were set at the closing price of a share of the Company's common stock on the date of grant, as reported by the New York Stock Exchange. RSU grants which contain market conditions were valued using a Monte Carlo simulation method that takes into account all possible outcomes. Annual grants under the 2006 Plan (and previous grants under the 1996 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 2010, the Company made its annual grant to its key employees consisting of 727,880 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, 2011 is less than the Net After Tax Profit for the fiscal year ended June 30, 2010. 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, 2010 compared to the 90 calendar day average price per share of common stock of the Company for the period ending September 1, 2011. 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 1996 and 2006 Plans is 10,950,000 as of December 31, 2010. The aggregate number of grants that may be made may exceed this approved amount as forfeited SSARs, stock options, restricted stock and RSUs, and vested but unexercised SSARs and stock options that expire, become available for future grants. As of December 31, 2010, cumulative grants of 11,432,387 equity instruments underlying the shares authorized have been awarded, and 2,177,182 of these instruments have been forfeited.
Activity related to SSARs/non-qualified stock options and RSUs/restricted shares issued under the 1996 and 2006 Plans during the six months ended December 31, 2010 is as follows:
|
|
|
|
|
|
SSARs/ Non-qualified
|
RSUs/
|
|
Outstanding, June 30, 2010 |
3,086,428 |
949,630 |
|
Granted |
— |
744,008 |
|
Exercised/Issued |
(358,889 ) |
(335,257 ) |
|
Forfeited/Lapsed |
(76,850 ) |
(68,127 ) |
|
|
|
|
|
Outstanding, December 31, 2010 |
2,650,689 |
1,290,254 |
|
|
|
|
|
Weighted average grant date fair value for RSUs/restricted shares |
|
$ 42.70 |
|
|
|
|
As of December 31, 2010, there was $5.4 million of total unrecognized compensation cost related to SSARs and stock options scheduled to be recognized over a weighted average period of 1.8 years, and $22.9 million of total unrecognized compensation cost related to restricted shares and RSUs scheduled to be recognized over a weighted-average period of 2.6 years.
|
|||
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. 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 PRSUs granted in September 2010 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 chart below shows the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
Three Months Ended
|
Six Months Ended
| ||
|
|
2010
|
2009
|
2010
|
2009
|
|
Net income attributable to CACI |
$ 33,235 |
$ 26,052 |
$ 61,890 |
$ 49,907 |
|
|
|
|
|
|
|
Weighted average number of basic shares outstanding during the period |
30,288 |
30,109 |
30,296 |
30,071 |
|
Dilutive effect of SSARs/stock options and RSUs/restricted shares after application of treasury stock method |
618 |
471 |
708 |
451 |
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding during the period |
30,906 |
30,580 |
31,004 |
30,522 |
|
|
|
|
|
|
|
Basic earnings per share |
$ 1.10 |
$ 0.87 |
$ 2.04 |
$ 1.66 |
|
|
|
|
|
|
|
Diluted earnings per share |
$ 1.08 |
$ 0.85 |
$ 2.00 |
$ 1.64 |
|
|
|
|
|
|
|
|||
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. During the Company's year ended June 30, 2010, the Internal Revenue Service completed its field audit of the Company's consolidated federal income tax returns for the years ended June 30, 2005 through 2007 and earlier years in connection with amended returns and carryback claims filed by the Company. The Company received the refunds reflected on its amended returns and carryback claims, as adjusted for the results of the field audit, during the three month period ended September 30, 2010. The Company is currently under examination by the Internal Revenue Service for the year ended June 30, 2008 and by four 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 December 31, 2010 and June 30, 2010 was $6.7 million and $5.2 million, respectively. Of the $6.7 million unrecognized tax benefit at December 31, 2010, $3.0 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 data information and knowledge management services, business systems solutions, and enterprise IT and network services 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 December 31, 2010 |
|
|
|
|
Revenue from external customers |
$ 838,695 |
$ 28,583 |
$ 867,278 |
|
Net income attributable to CACI |
31,443 |
1,792 |
33,235 |
|
Three Months Ended December 31, 2009 |
|
|
|
|
Revenue from external customers |
$ 745,860 |
$ 30,867 |
$ 776,727 |
|
Net income attributable to CACI |
23,977 |
2,075 |
26,052 |
|
Six Months Ended December 31, 2010 |
|
|
|
|
Revenue from external customers |
$ 1,644,430 |
$ 56,819 |
$ 1,701,249 |
|
Net income attributable to CACI |
58,548 |
3,342 |
61,890 |
|
Six Months Ended December 31, 2009 |
|
|
|
|
Revenue from external customers |
$ 1,457,623 |
$ 58,622 |
$ 1,516,245 |
|
Net income attributable to CACI |
45,826 |
4,081 |
49,907 |
|
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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:
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.
As of December 31, 2010, 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), the obligations to participants under the same plan, and contingent consideration in connection with business combinations 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 December 31, 2010, and the level they fall within the fair value hierarchy (in thousands):
|
Description of Financial Instrument |
|
Financial Statement Classification |
|
Fair Value Hierarchy |
|
Fair Value |
|
|
|
|
|
|
|
|
|
Non-COLI assets held in connection with the Supplemental Savings Plan |
|
Long-term asset |
|
Level 1 |
|
$ 4,489 |
|
Obligations under the Supplemental Savings Plan |
|
Current liability |
|
Level 2 |
|
$ 4,605 |
|
Obligations under the Supplemental Savings Plan |
|
Long-term liability |
|
Level 2 |
|
$ 59,292 |
|
Contingent consideration Contingent consideration
|
|
Current liability Long-term liability |
|
Level 3 Level 3
|
|
$ 33,778 $ 1,117 |
Changes in the fair value of the assets held in connection with the Supplemental Savings Plan, as well as changes in the related deferred compensation obligation, are recorded in indirect costs and selling expenses.
During the year ended June 30, 2010, the Company completed three acquisitions, all of which contained provisions requiring that the Company pay contingent consideration in the event the acquired businesses achieved certain specified earnings results during the two 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 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 ended December 31, 2010, this remeasurement resulted in a $0.6 million decrease in the liability recorded. For the six months ended December 31, 2010 this remeasurement resulted in a $1.1 million increase in the liability recorded.