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CACI INTERNATIONAL INC /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements
There are statements made herein which do not address historical facts and,
therefore, could be interpreted to be forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Such statements
are subject to factors that could cause actual results to differ materially from
anticipated results. The factors that could cause actual results to differ
materially from those anticipated include, but are not limited to, the
following: regional and national economic conditions in the United States and
globally (including the impact of uncertainty regarding U.S. debt limits and
actions taken related thereto); terrorist activities or war; changes in interest
rates; currency fluctuations; significant fluctuations in the equity markets;
changes in our effective tax rate; valuation of contingent consideration in
connection with business combinations; failure to achieve contract awards in
connection with re-competes for present business and/or competition for new
business; the risks and uncertainties associated with client interest in and
purchases of new products and/or services; continued funding of U.S. government
or other public sector projects, based on a change in spending patterns, or in
the event of a priority need for funds, such as homeland security, the war on
terrorism, or an economic stimulus package; government contract procurement
(such as bid protest, small business set asides, loss of work due to
organizational conflicts of interest, etc.) and termination risks; the results
of government investigations into allegations of improper actions related to the
provision of services in support of U.S. military operations in Iraq; the
results of government audits and reviews conducted by the Defense Contract Audit
Agency, the Defense Contract Management Agency, or other governmental entities
with cognizant oversight; individual business decisions of our clients; paradigm
shifts in technology; competitive factors such as pricing pressures and/or
competition to hire and retain employees (particularly those with security
clearances); market speculation regarding our continued independence; material
changes in laws or regulations applicable to our businesses, particularly in
connection with (i) government contracts for services, (ii) outsourcing of
activities that have been performed by the government, and (iii) competition for
task orders under Government Wide Acquisition Contracts (GWACs) and/or schedule
contracts with the General Services Administration; the ability to successfully
integrate the operations of our recent and any future acquisitions; our own
ability to achieve the objectives of near term or long range business plans; and
other risks described in our Securities and Exchange Commission filings.
Overview
The following discussion and analysis of our financial condition and results of
operations is provided to enhance the understanding of, and should be read
together with, our unaudited condensed consolidated financial statements and the
notes to those statements that appear elsewhere in this Quarterly Report on Form
10-Q.
We are a leading provider of professional services and information technology
solutions to the U.S. government. We derived 94.6 percent and 94.8 percent of
our revenue during the nine months ended March 31, 2012 and 2011, respectively,
from contracts with U.S. government agencies. These were derived through both
prime and subcontractor relationships. We also provide services to state and
local governments and commercial customers. Our major service offerings are as
follows:
• Enterprise IT solutions - We support our clients' critical networked
operational missions by providing tailored, end-to-end, enterprise-wide
solutions and services for the design, development, integration, deployment,
operations and management, sustainment, and security of our clients'
infrastructure. Our operational, analytic, consultancy, and transformational
services make effective use of leading-edge practices, standards, and
innovations to enable and optimize the full lifecycle of the enterprise IT
environment - improving the services, increasing the efficiency, and reducing
the total cost and complexity of heterogeneous, networked, and
geographically-dispersed operations. Our capabilities in data center design
and management, cloud computing, virtualization, application development and
hosting, mobility solutions, and advanced service desk management provide
secure and efficient operational environments for our customers.
• Knowledge management solutions - We deliver a full spectrum of solutions and
services that automate the knowledge management lifecycle, from data capture
through information analysis and understanding. We provide commercially-based
products, custom solutions development, and operations and maintenance
services that facilitate information access and sharing, foster innovation
and learning, locate and leverage expertise, manage intellectual capital and
assets, and help navigate from data to decision. Our information technology
solutions are complemented by a suite of analytical expertise support
offerings for our clients in the homeland security and intelligence
communities, Department of Defense (DoD), and Department of Justice (DoJ).
• Business systems solutions - CACI provides the full range of professional
services required to plan, manage, architect, develop, deploy, and sustain
the complex, integrated system solutions that the DoD and federal civilian
agencies need to accomplish their transformation goals and achieve
ever-increasing efficiency and effectiveness in their mission functions and
business operations. Working in the domains of procurement, financial
management, human capital management, and
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logistics and supply chain management, we have implemented enterprise-level
system solutions for well over 100 federal agencies. From complex
commercial-off-the-shelf enterprise resource planning integrations to custom
service-oriented architecture-based solutions that address unique federal
mission support needs, we bring disciplined industry best practices, advanced
technology, and a deep understanding of federal processes and their unique
compliance constraints.
• Logistics and material readiness solutions and services - We offer a full suite of solutions and service offerings that plan for, implement, and
control the efficient, effective, and secure flow and storage of goods,
services, and information in support of U.S. government agencies. We develop
and manage logistics information systems, specialized simulation and modeling
toolsets, and provide logistics engineering services. Our operational
capabilities span the supply chain, including advanced logistics planning,
demand forecasting, total asset visibility (including the use of Radio
Frequency Identification technology), and life cycle support for weapons
systems. Our logistics services are a critical enabler in support of defense
readiness and combat sustainability objectives.
• C4ISR solutions and services - We provide rapid response services in support
of military missions in a coordinated and controlled operational setting. We
support the military efforts to ensure delivery and sustainment of
integrated, enterprise-wide, Command, Control, Communications, Computers,
Intelligence, Surveillance and Reconnaissance (C4ISR) programs. We integrate
sensors, mission applications, and systems that connect with DoD data
networks.
• Cyberspace solutions - Our solutions and services support the full lifecycle
of preparing for, protecting against, detecting, reacting to, and actively
responding to the full range of cyber threats. We achieve this through
comprehensive, consistently managed, risk-based, and cost-effective
capabilities, controls, and measures to protect information, systems, and networks operated by the U.S. government. We proactively support information
operations and the operational use and availability/reliability of
information.
• Integrated security and intelligence solutions - The United States, its
partners and its allies around the world face state, non-state, and transnational adversaries that do not recognize political boundaries; do not
recognize international law; and will seek, through asymmetric and irregular
means, ways to strike at seams in our national security. We assist clients in
developing integrated solutions that close gaps between security,
intelligence, and law enforcement in order to address complex threats to our
national security.
• Geospatial solutions - We support the collection, processing, exploitation,
analysis and dissemination of geospatial information relating to Defense,
Intelligence, Homeland Security, and commercial applications. We use imagery
and other collected data from Government and commercial sources to produce
hardcopy and digital maps, and other value added enhanced imagery and
3-dimensional products. Our geospatial solutions employ advanced analytical
training, focused tools and applications development, and feature database
extraction and maintenance. We provide time-proven expertise in multi-source
data analysis and conflation, diverse sensor exploitation, intelligence
analysis, and geographic information system (GIS) integration and deployment.
We offer mobile solutions and secure web-based data accessibility and
subscription services on an enterprise scale.
• Investigation and litigation support solutions - We support government
investigations and litigations in pursuit of saving taxpayer dollars with
full service technology solutions. Using comprehensive training to carefully
honed processes and procedures, we help attorneys acquire, organize, develop,
control, and present evidence throughout the course of litigations, from
pre-filing investigation, through complaint, discovery, and trial, to
post-trial briefs, review, and appeals. Our portfolio of legal-support
offerings includes: cloud hosting (on-line, evidentiary information
management to rapidly enable data storage and accessibility); e-discovery
consulting and support; data forensic extraction and analysis; document/data
capture and processing; database development, population, and maintenance;
pre-trial, trial and post-trial support; case management; training; claims
management; and Freedom of Information Act (FOIA) support.
• Healthcare IT solutions - We meet the steadily accelerating demand for new
healthcare strategies and technology required by government, industry, and
patients. We assist the federal medical community in focusing on the patient,
ensuring that systems and processes at the backbone of health organizations
are running efficiently. We provide both functional subject matter expertise
and health IT services to the Department of Veterans Affairs, the Department
of Defense Military Health System, and the Department of Health and Human
Services. Our capabilities include medical logistics and facility management,
design, development and integration of healthcare information technology
systems, including virtual electronic health records, information assurance,
and security of personally identifiable information.
• Identity management solutions - We provide solutions that enable our clients
to manage detect, and protect identities of individuals, entities,
organizations, groups, nation states, networks, and associations in both the
physical and digital worlds. Our solutions capitalize on our vast experience
supporting the Intelligence Community, war fighters, and law enforcement in
areas such as biometric collection and identification, human factors
analysis, forensics, large-volume identity-related data exploitation and
assessment, information management, and managed security services.
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• Program management and system engineering and technical assistance (SETA)
services - We support U.S. government Program Executive Offices and Program
Management Offices via subject matter experts and comprehensive technical
management processes that optimize program resources. This includes
translating operational requirements into configured systems, integrating
technical inputs, characterizing and managing risk, transitioning technology
into program efforts, and verifying that designs meet operational needs,
through the application of internationally recognized and accepted standards.
Additionally, we provide SETA and advisory and assistance services that
include contract and acquisition management, operations support, architecture
and system engineering services, project and portfolio management, strategy
and policy support, and complex trade analyses.
We carefully follow federal contracting trends and activities and continually
evolve our growth strategy to take these into consideration. Following the
announcement of the DoD's new strategy guidance in January 2012 and the
President's five-year defense budget request in February 2012, we updated our
analysis of our addressable market and believe it remains at roughly $230 to
$250 billion. Our analysis was driven by the following:
• The reduction of Overseas Contingency Operations funding and a slower overall
baseline budget growth rate that is consistent with our original CACI
addressable market analysis.
• DoD's stated strategy for more disciplined use of Defense dollars that
identifies better use of information technology, better use of business
systems and enterprise systems, and better inventory management as key
actions to accomplish this objective. These are established CACI market areas
in which we are executing today.
• DoD's stated strategy to protect new capabilities and investments that identifies counter-terrorism through Special Operations Forces and advanced
intelligence, surveillance, and reconnaissance (ISR) systems, and cyber
operations, as key areas where DoD will preserve and grow its investments for
future capabilities. These are CACI market areas in which we are well
established and in which we have been investing for growth over the last
several years.
We will continue to analyze our addressable market and the potential impact on
future business opportunities as our customers in the DoD reprioritize in order
to align with the January 2012 strategy guidance and our customers in the
federal civilian agencies continue to operate in a constrained fiscal
environment. In February 2012, the Administration submitted a budget request
with discretionary spending priorities imposed by the Budget Control Act of 2011
(the Budget Act), including a reduction of defense spending of $489 billion over
a ten-year period starting in the government's fiscal year 2013. The possibility
exists that, absent the current Congress and Administration changing or delaying
a pending sequestration of appropriations in the government's fiscal year 2013
as mandated by the Budget Act, many of our customers throughout the federal
government would have their budgets significantly reduced across the board in
January 2013. This would have significant consequences on the professional
services and information technology solutions we provide to the U.S. government
as well as our industry in general.
We also face some uncertainties due to the current general business environment
and we continue to see a number of protests of major contract awards and delays
in government procurement activities. In addition, many of our federal
government contracts require us to employ personnel with security clearances,
specific levels of education and specific past work experience. Depending on the
level of clearance, security clearances can be difficult and time-consuming to
obtain and competition for skilled personnel in the information technology
services industry is intense. In addition, a shift of expenditures away from
programs that we support could cause federal government agencies to reduce their
purchases under contracts, to exercise their right to terminate contracts at any
time without penalty, or to decide not to exercise options to renew contracts.
Additional factors that could affect our federal government contracting business
include an increase in set-asides for small businesses and budgetary priorities
limiting or delaying federal government spending in general. In addition, future
gains or losses on assets invested in corporate-owned life insurance policies
could cause fluctuations in our income tax expense.
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Results of Operations for the Three Months Ended March 31, 2012 and 2011
Revenue. The table below sets forth revenue by customer type with related
percentages of total revenue for the three months ended March 31, 2012 and 2011,
respectively:
Three Months Ended March 31, Change
(dollars in thousands) 2012 2011 $ %
Department of Defense (DoD) $ 718,982 77.5 % $ 735,639 80.5 % $ (16,657 ) (2.3 )%
Federal civilian agencies
159,201 17.2 129,349 14.2 29,852 23.1
Commercial and other 46,667 5.0 44,917 4.9 1,750 3.9
State and local governments 3,112 0.3 3,464 0.4 (352 ) (10.2 )
Total $ 927,962 100.0 % $ 913,369 100.0 % $ 14,593 1.6 %
For the three months ended March 31, 2012, total revenue increased by 1.6
percent, or $14.6 million, over the same period a year ago. This increase in
revenue is attributable to acquired revenue and an increase in organic direct
labor, offset by a decline in other direct costs (ODCs). ODCs include work which
we subcontract to third parties to meet customer needs. Revenue generated from
the date a business is acquired though the first anniversary of that date is
considered acquired revenue. Our acquired revenue in the three months ended
March 31, 2012 was $28.1 million. Revenue from existing operations decreased by
1.5 percent, or $13.5 million, for the three months ended March 31, 2012 driven
by the decrease in ODCs.
DoD revenue decreased 2.3 percent, or $16.7 million, for the three months ended
March 31, 2012, as compared to the same period a year ago. The aforementioned
acquisitions generated $9.6 million of DoD revenue during the quarter. DoD
revenue includes services provided to the U.S. Army, our largest customer, that
focus on supporting readiness, tactical military intelligence, and
communications of the commands engaged in operations throughout the world in
support of U.S. strategic objectives. DoD revenue also includes work with the
U.S. Navy and other DoD agencies across all of our major service offerings. The
decrease in DoD revenue is primarily attributable to a decrease in ODCs related
to reductions in government activity in Southwest Asia.
Revenue from federal civilian agencies increased 23.1 percent, or $29.9 million,
for the three months ended March 31, 2012, as compared to the same period a year
ago. The aforementioned acquisitions accounted for 41.7 percent of this total
growth, contributing $12.5 million. Approximately 16.0 percent of the federal
civilian agency revenue for the quarter was derived from DoJ, for whom we
provide litigation support services. Revenue from DoJ was $25.4 million and
$21.6 million for the three months ended March 31, 2012 and 2011, respectively.
Federal civilian agency revenue also includes services provided to non-DoD
national intelligence agencies.
Commercial and other revenue increased 3.9 percent, or $1.8 million, during the
three months ended March 31, 2012, as compared to the same period a year ago.
Commercial revenue is derived from both international and domestic operations.
International operations accounted for 65.5 percent, or $30.6 million, of total
commercial revenue, while domestic operations accounted for 34.5 percent, or
$16.1 million. Our U.K. revenue decreased by $1.7 million due primarily to cuts
in U.K. government spending and the completion of several large U.K. contracts,
partially offset by revenue from acquisitions of $5.8 million.
Revenue from state and local governments decreased by 10.2 percent, or $0.4
million, for the three months ended March 31, 2012, as compared to the same
period a year ago. Revenue from state and local governments represented less
than one percent of our total revenue for both the three months ended March 31,
2012 and 2011.
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Income from Operations. The following table sets forth the relative percentage
that certain items of expense and earnings bore to revenue for the three months
ended March 31, 2012 and 2011, respectively.
Dollar Amount Percentage of Revenue
Three Months Ended Three Months Ended
March 31, March 31, Change
(dollars in thousands) 2012 2011 2012 2011 $ %
Revenue $ 927,962 $ 913,369 100.0 % 100.0 % $ 14,593 1.6 %
Costs of revenue
Direct costs 632,570 645,404 68.2 70.6 (12,834 ) (2.0 )
Indirect costs and selling
expenses 208,843 191,403 22.5 21.0 17,440 9.1
Depreciation and amortization 13,768 14,777 1.5 1.6 (1,009 ) (6.8 )
Total costs of revenue 855,181 851,584 92.2 93.2 3,597 0.4
Income from operations 72,781 61,785 7.8 6.8 10,996 17.8
Interest expense and other, net 6,175 5,674 0.6 0.6 501 8.8
Income before income taxes 66,606 56,111 7.2 6.2 10,495 18.7
Income taxes 25,475 19,397 2.8 2.2 6,078 31.3
Net income including portion
attributable to noncontrolling
interest in earnings of joint
venture 41,131 36,714 4.4 4.0 4,417 12.0
Noncontrolling interest in
earnings of joint venture (275 ) (287 ) - - 12 (4.2 )
Net income attributable to CACI $ 40,856 $ 36,427 4.4 % 4.0 % $ 4,429 12.2 %
Income from operations for the three months ended March 31, 2012 was $72.8
million. This was an increase of $11.0 million, or 17.8 percent, from income
from operations of $61.8 million for the three months ended March 31, 2011. Our
operating margin of 7.8 percent for the period ended March 31, 2012 increased
from 6.8 percent during the period ended March 31, 2011. This growth in
operating margin was driven primarily by a changing mix of our direct costs and
greater than expected profitability on a large fixed price contract. Direct
labor, the more profitable component of direct costs, increased 8.1% while ODCs
decreased 7.7%.
As a percentage of revenue, direct costs were 68.2 percent and 70.6 percent for
the three months ended March 31, 2012 and 2011, respectively. Direct costs
include direct labor and ODCs, which include, among other costs, subcontractor
labor and materials along with equipment purchases and travel expenses. ODCs,
which are common in our industry, typically are incurred in response to specific
client tasks and may vary from period to period. The single largest component of
direct costs, direct labor, was $252.2 million and $233.3 million for the three
months ended March 31, 2012 and 2011, respectively. This increase in direct
labor was attributable to both acquisitions and organic growth. ODCs were $380.3
million and $412.1 million during the three months ended March 31, 2012 and
2011, respectively. This decrease was primarily driven by a decrease in ODCs
related to reductions in government activity in Southwest Asia.
Indirect costs and selling expenses include fringe benefits, marketing and bid
and proposal costs, indirect labor, and other discretionary expenses. As a
percentage of revenue, indirect costs and selling expenses were 22.5 percent and
21.0 percent for the three months ended March 31, 2012 and 2011, respectively.
Total stock compensation expense, a component of indirect costs, was $3.9
million and $4.7 million for the three months ended March 31, 2012 and 2011,
respectively. This decrease in stock compensation expense was due primarily to a
higher level of forfeitures during the three months ended March 31, 2012 as
compared to the three months ended March 31, 2011.
Depreciation and amortization expense was $13.8 million and $14.8 million for
the three months ended March 31, 2012 and 2011, respectively. The decrease of
$1.0 million, or 6.8 percent, was attributable to decreased amortization of
intangible assets.
Interest expense and other, net increased $0.5 million, or 8.8 percent, during
the three months ended March 31, 2012 as compared to the same period a year ago.
The increase was primarily attributable to an increase in interest expense
related to higher outstanding debt during the period.
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The effective tax rate was 38.4 percent and 34.7 percent during the three months
ended March 31, 2012 and 2011, respectively. The tax rates reported during the
third quarters of both FY2012 and FY2011 were favorably impacted by non-taxable
gains on assets invested in corporate-owned life insurance (COLI) policies
during the nine months ended March 31, 2012 and 2011. If gains or losses on
these investments throughout the rest of the current fiscal year vary from our
estimates, our effective tax rate will fluctuate in the fourth quarter of the
year ending June 30, 2012.
Results of Operations for the Nine Months Ended March 31, 2012 and 2011
Revenue. The table below sets forth revenue by customer type with related
percentages of total revenue for the nine months ended March 31, 2012 and 2011,
respectively:
Nine Months Ended March 31, Change
(amounts in thousands) 2012 2011 $ %
Department of Defense $ 2,220,916 78.6 % $ 2,078,870 79.5 % $ 142,046 6.8 %
Federal civilian agencies 452,342 16.0 399,251 15.3 53,091 13.3
Commercial and other 141,372 5.0 126,179 4.8 15,193 12.0
State and local governments 10,970 0.4 10,318 0.4 652 6.3
Total $ 2,825,600 100.0 % $ 2,614,618 100.0 % $ 210,982 8.1 %
For the nine months ended March 31, 2012, total revenue increased by 8.1
percent, or $211.0 million, over the same period a year ago. This growth in
revenue resulted from both organic growth and acquired revenue. Our acquired
revenue in the nine months ended March 31, 2012 was $78.7 million. Revenue from
existing operations increased by 5.1 percent, or $132.3 million, for the nine
months ended March 31, 2012. This organic growth was driven primarily by an
increase in our direct labor. In addition, during the nine months ended
March 31, 2012, we had a commercial product sale that generated $12.0 million in
revenue.
DoD revenue increased 6.8 percent, or $142.0 million, for the nine months ended
March 31, 2012, as compared to the same period a year ago. $39.4 million of the
increase was attributable to acquired DoD revenue and the remaining $102.6
million of the increase was attributable to revenue from existing operations.
Revenue from federal civilian agencies increased 13.3 percent, or $53.1 million,
for the nine months ended March 31, 2012, as compared to the same period a year
ago. Of the federal civilian agency revenue growth, $26.9 million was
attributable to existing operations and $26.2 million was attributable to
acquisitions. Approximately 16.7 percent of the federal civilian agency revenue
for the year was derived from DoJ, for whom we provide litigation support
services. Revenue from DoJ was $75.6 million and $68.2 million for the nine
months ended March 31, 2012 and 2011, respectively. Federal civilian agency
revenue also includes services provided to non-DoD national intelligence
agencies.
Commercial revenue increased 12.0 percent, or $15.2 million, during the nine
months ended March 31, 2012, as compared to the same period a year ago.
Commercial revenue is derived from both international and domestic operations.
International operations accounted for 58.9 percent, or $83.2 million, of total
commercial revenue, while domestic operations accounted for 41.1 percent, or
$58.2 million. Our U.K. revenue decreased by $5.9 million, due primarily to cuts
in U.K. government spending and the completion of several large U.K. contracts,
partially offset by revenue from our U.K. acquisitions of $8.2 million. The
remaining increase in commercial revenue came primarily from the $12.0 million
product sale during the first quarter of the fiscal year and commercial revenue
from U.S. acquisitions of $4.5 million.
Revenue from state and local governments increased by 6.3 percent, or $0.7
million, for the nine months ended March 31, 2012, as compared to the same
period a year ago. Revenue from state and local governments represented less
than one percent of our total revenue for both the nine months ended March 31,
2012 and 2011.
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Income from Operations. The following table sets forth the relative percentage
that certain items of expense and earnings bore to revenue for the nine months
ended March 31, 2012 and 2011, respectively.
Dollar Amount Percentage of Revenue
Nine Months Ended Nine Months Ended
March 31, March 31, Change
(dollars in thousands) 2012 2011 2012 2011 $ %
Revenue $ 2,825,600 $ 2,614,618 100.0 % 100.0 % $ 210,982 8.1 %
Costs of revenue
Direct costs 1,946,899 1,843,410 68.9 70.5 103,489 5.6
Indirect costs and selling
expenses 613,666 555,972 21.7 21.3 57,694 10.4
Depreciation and amortization 41,894 41,919 1.5 1.6 (25 ) (0.1 )
Total costs of revenue 2,602,459 2,441,301 92.1 93.4 161,158 6.6
Income from operations 223,141 173,317 7.9 6.6 49,824 28.7
Interest expense and other, net 18,313 17,498 0.7 0.6 815 4.7
Income before income taxes 204,828 155,819 7.2 6.0 49,009 31.5
Income taxes 80,304 56,781 2.8 2.2 23,523 41.4
Net income including portion
attributable to noncontrolling
interest in earnings of joint
venture 124,524 99,038 4.4 3.8 25,486 25.7
Noncontrolling interest in
earnings of joint venture (467 ) (721 ) - - 254 (35.2 )
Net income attributable to CACI $ 124,057 $ 98,317 4.4 % 3.8 % $ 25,740 26.2 %
Income from operations for the nine months ended March 31, 2012 was $223.1
million. This is an increase of $49.8 million, or 28.7 percent, from income from
operations of $173.3 million for the nine months ended March 31, 2011. Our
operating margin was 7.9 percent up from 6.6 percent during the same period a
year ago. Operating margin was favorably impacted by a changing mix of our
direct costs and the greater than expected profitability on a large fixed price
contract and the commercial product sale described previously.
As a percentage of revenue, direct costs were 68.9 percent and 70.5 percent for
the nine months ended March 31, 2012 and 2011, respectively. Direct costs
include direct labor and ODCs, which include, among other costs, subcontractor
labor and materials along with equipment purchases and travel expenses. ODCs,
which are common in our industry, typically are incurred in response to specific
client tasks and may vary from period to period. Direct labor was $725.8 million
and $656.1 million for the nine months ended March 31, 2012 and 2011,
respectively. This increase in direct labor was attributable to both organic
growth and acquisitions. ODCs were $1.2 billion during both the nine months
ended March 31, 2012 and 2011.
Indirect costs and selling expenses include fringe benefits, marketing and bid
and proposal costs, indirect labor, and other discretionary expenses. As a
percentage of revenue, indirect costs and selling expenses were 21.7 percent and
21.3 percent for the nine months ended March 31, 2012 and 2011, respectively.
Stock compensation expense, a component of indirect costs, was $11.1 million and
$13.1 million for the nine months ended March 31, 2012 and 2011, respectively.
The decrease in stock compensation expense is primarily attributable to
performance RSUs issued in FY2009 and FY2010 requiring stock compensation
expense to be recorded on an accelerated basis along with a higher level of
forfeitures in the current fiscal year.
Depreciation and amortization expense was $41.9 million for both the nine months
ended March 31, 2012 and 2011.
Interest expense and other, net increased $0.8 million, or 4.7 percent, during
the nine months ended March 31, 2012 as compared to the same period a year ago.
The increase was primarily attributable to an increase in interest expense
related to higher outstanding debt which was partially offset by a decrease in
amortization of deferred financing costs.
The effective tax rate was 39.3 percent and 36.6 percent during the nine months
ended March 31, 2012 and 2011, respectively. The tax rates reported for the
first nine months of both FY2012 and FY2011 were favorably impacted by
non-taxable gains on assets invested in COLI policies during the nine months
ended March 31, 2012 and 2011. If gains or losses on those investments
throughout the rest of the current fiscal year vary from our estimates, our
effective tax rate will fluctuate in the fourth quarter of the year ending
June 30, 2012.
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Liquidity and Capital Resources
Historically, our positive cash flow from operations and our available credit
facilities have provided adequate liquidity and working capital to fund our
operational needs.
We have 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 our then outstanding term loan and revolving
credit facility.
Subsequent to entering into the Credit Facility, we amended the Credit Facility
to increase our 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, we had $160.0 million
outstanding under the Revolving Facility and no outstanding letters of credit.
We pay 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, we have 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 our option, equal a base rate or a Eurodollar rate plus,
in each case, an applicable margin based upon our 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 us 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 our 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, we have been in
compliance with all of the financial covenants. A majority of our assets serve
as collateral under the Credit Facility.
We 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.
On August 29, 2011, we entered into an accelerated share repurchase agreement
with Bank of America N.A. (BofA), under which we paid $209.7 million for
4 million shares of our common stock. Our 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, we
will either receive a settlement amount or be required to remit a settlement
amount, in cash or common stock, at our option.
On April 5, 2012, we entered into floating-to-fixed interest rate swap
agreements for an aggregate notional amount of $100 million related to a portion
of our 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. 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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Effective May 16, 2007, we issued the Notes, which mature on May 1, 2014, in a
private placement pursuant to Rule 144A of the Securities Act of 1933. The Notes
are subordinate to our senior secured debt, and 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
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 our common stock and the conversion rate of each date during the note
measurement period; 3) upon the occurrence of certain corporate events, as
defined; or 4) during the last three-month period prior to maturity. We are
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, holders may require us 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, we will
in certain circumstances increase the conversion rate by a number of additional
shares of common stock or, in lieu thereof, we 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.
We are not permitted to redeem the Notes.
In connection with the issuance of the Notes, we 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 our common stock at a price equal
to the conversion price of $54.65 per share. The Call Options allow us to
receive shares of our common stock from the counterparties equal to the amount
of common stock related to the excess conversion value that we would pay the
holders of the Notes upon conversion. In addition, we 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. 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 and the Warrants
are separate and legally distinct instruments that bind us and the
counterparties and have no binding effect on the holders of the Notes.
Cash and cash equivalents were $48.9 million and $164.8 million as of March 31,
2012 and June 30, 2011, respectively. The decrease in cash and cash equivalents
was primarily attributable to cash used for acquisitions and the repurchase of
company stock pursuant to an accelerated share repurchase plan. Working capital
was $301.0 million and $334.9 million as of March 31, 2012 and June 30, 2011,
respectively. Our operating cash flow was $144.8 million for the nine months
ended March 31, 2012 compared to $145.7 million for the same period a year ago.
Days-sales outstanding was 63 at March 31, 2012, compared to 54 for the same
period a year ago. This increase was due in part to our decision to temporarily
discontinue a prompt pay discount program as we determined that the cost of the
program exceeded the benefit of accelerating cash collections and payment delays
due to contract negotiations and funding realignments with three specific
customers, all of which are expected to be resolved before the end of our fiscal
year ending June 30, 2012.
We used cash in investing activities of $193.7 million and $142.3 million for
the nine months ended March 31, 2012 and 2011, respectively. This increase for
the nine months ended March 31, 2012 as compared to the same period a year ago
was primarily attributable to the four acquisitions completed during the nine
months ended March 31, 2012.
Cash used in financing activities was $66.9 million in the nine months ended
March 31, 2012 as compared to $160.9 million in the nine months ended March 31,
2011. During the nine months ended March 31, 2011, we prepaid our then
outstanding term loan in connection with entering into the Credit Facility and
used $44.3 million to repurchase 0.9 million shares of our common stock. During
the nine months ended March 31, 2012, we paid $20.3 million in settlement of
contingent consideration for acquisitions completed during the year ended
June 30, 2010. As of March 31, 2012 we had net borrowings of $160.0 million
under the Revolving Facility. These borrowings along with our available cash
balance funded our repurchase of four million shares of company stock for $209.7
million.
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Cash flows from financing activities include proceeds received from the exercise
of stock options and purchases of stock under our Employee Stock Purchase Plan
totaling $10.5 million and $21.4 million during the nine months ended March 31,
2012 and 2011, respectively.
We believe that the combination of internally generated funds, available bank
borrowings and cash and cash equivalents on hand will provide the required
liquidity and capital resources necessary to fund on-going operations, customary
capital expenditures, debt service obligations, and other working capital
requirements over the next twelve months. Over the longer term, our ability to
generate sufficient cash flows from operations necessary to fulfill the
obligations under the Credit Facility and the Notes will depend on our future
financial performance which will be affected by many factors outside of our
control, including worldwide economic and financial market conditions.
Off-Balance Sheet Arrangements and Contractual Obligations
We use off-balance sheet arrangements to finance the lease of operating
facilities. We have financed the use of all of our current office and warehouse
facilities through operating leases. Operating leases are also used to finance
the use of computers, servers, phone systems, and to a lesser extent, other
fixed assets, such as furnishings, that are obtained in connection with business
acquisitions. We generally assume the lease rights and obligations of companies
acquired in business combinations and continue financing equipment under
operating leases until the end of the lease term following the acquisition date.
We generally do not finance capital expenditures with operating leases, but
instead finance such purchases with available cash balances. For additional
information regarding our operating lease commitments, see Note 14 in the Notes
to Consolidated Financial Statements contained in our Annual Report on Form 10-K
for the year ended June 30, 2011. The Credit Facility provides for stand-by
letters of credit aggregating up to $25.0 million that reduce the funds
available under the Revolving Facility when issued. As of March 31, 2012, we had
no outstanding letters of credit. We have no other material off-balance sheet
financing arrangements.
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