NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited consolidated financial statements of CACI International Inc and subsidiaries (CACI or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and include the assets, liabilities, results of operations, comprehensive income and cash flows for the Company, including its subsidiaries and ventures that are majority-owned or otherwise controlled by the Company. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. All intercompany balances and transactions have been eliminated in consolidation.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and amounts included in other current assets and current liabilities that meet the definition of a financial instrument approximate fair value because of the short-term nature of these amounts. The fair value of the Company’s debt outstanding as of September 30, 2017 under its bank credit facility approximates its carrying value. The fair value of the Company’s debt under its bank credit facility was estimated using Level 2 inputs based on market data of companies with a corporate rating similar to CACI’s that have recently priced credit facilities. See Notes 5 and 11.
In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for the fair presentation of the periods presented. It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s latest annual report to the SEC on Form 10-K for the year ended June 30, 2017. The results of operations for the three months ended September 30, 2017 are not necessarily indicative of the results to be expected for any subsequent interim period or for the full fiscal year.
2.
|
Recent Accounting Pronouncements
|
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01,
Clarifying the Definition of a Business
, which revises the definition of a business and provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2017. The Company believes that the evaluation of whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses will be simplified under the new standard.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which amends the existing guidance on accounting for leases. The new standard requires lessees to put virtually all leases on the balance sheet by recognizing lease assets and lease liabilities. Lessor accounting is largely unchanged from that applied under previous guidance. The amended guidance is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2018, and requires a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, as amended (ASC 606), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. On July 9, 2015, the FASB approved a one-year deferral of the effective date of ASU 2014-09 to annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2017, using either a full retrospective approach or a modified approach.
The Company plans to adopt the standard on July 1, 2018 and apply it on a modified retrospective basis, whereby the cumulative effect of applying the standard will be recognized through shareholders’ equity on the date of adoption. We are in the process of identifying the changes to accounting policies, business processes, systems, disclosures, and controls to support the adoption of the new standard.
7
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
We expect the standard will impact the pattern of revenue recognition for some of our contracts with customers. For our award and incentive fee contracts, we will recognize a constrained amount of variable consideration over time as the per
formance obligation is satisfied rather than defer recognition of the relevant portion of fee until customer notification of the amount earned. Some of our fixed price contracts in which revenue is recognized on a straight-line basis over the performance
period will be converted to recognition of revenue over time by measuring the progress toward complete satisfaction of the performance obligation using input methods, including cost and labor hours. We do not anticipate a material impact to our cost-plus-
fixed fee, fixed price/level-of-effort,
time-and-materials
, or fixed price contracts that currently use percentage-of-completion accounting.
The cumulative catch-up adjustment that will be recorded through shareholders’ equity on July 1, 2018 is still being quantified. We will continue evaluating the impact of the standard on our contract portfolio through the date of adoption.
Intangible assets consisted of the following (in thousands):
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2017
(1)
|
|
|
2017
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Customer contracts and related customer relationships
|
|
$
|
408,554
|
|
|
$
|
635,895
|
|
Acquired technologies
|
|
|
9,477
|
|
|
|
28,503
|
|
Covenants not to compete
|
|
|
310
|
|
|
|
3,305
|
|
Other
|
|
|
800
|
|
|
|
1,545
|
|
Intangible assets
|
|
|
419,141
|
|
|
|
669,248
|
|
Less accumulated amortization
|
|
|
|
|
|
|
|
|
Customer contracts and related customer relationships
|
|
|
(184,664
|
)
|
|
|
(402,934
|
)
|
Acquired technologies
|
|
|
(7,678
|
)
|
|
|
(26,542
|
)
|
Covenants not to compete
|
|
|
(306
|
)
|
|
|
(3,288
|
)
|
Other
|
|
|
(385
|
)
|
|
|
(1,113
|
)
|
Accumulated amortization
|
|
|
(193,033
|
)
|
|
|
(433,877
|
)
|
Total intangible assets, net
|
|
$
|
226,108
|
|
|
$
|
235,371
|
|
__________________
|
(1)
|
During the first quarter of FY18, the Company wrote off $250.7 million in fully amortized intangible assets.
|
Intangible assets are primarily amortized on an accelerated basis over periods ranging from one to fifteen years. The weighted-average period of amortization for all customer contracts and related customer relationships as of September 30, 2017 is 14.2 years, and the weighted-average remaining period of amortization is 11.0 years. The weighted-average period of amortization for acquired technologies as of September 30, 2017 is 9.5 years, and the weighted-average remaining period of amortization is 6.2 years.
Expected amortization expense for the remainder of the fiscal year ending June 30, 2018, and for each of the fiscal years thereafter, is as follows (in thousands):
Fiscal year ending June 30,
|
|
Amount
|
|
2018 (nine months)
|
|
$
|
26,888
|
|
2019
|
|
|
31,631
|
|
2020
|
|
|
27,153
|
|
2021
|
|
|
23,952
|
|
2022
|
|
|
20,657
|
|
Thereafter
|
|
|
95,827
|
|
Total intangible assets, net
|
|
$
|
226,108
|
|
8
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The changes in the carrying amount of goodwill for the year ended June 30, 2017 and the three months ended September 30, 2017 are as follows (in thousands):
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Balance at June 30, 2016
|
|
$
|
2,487,148
|
|
|
$
|
98,195
|
|
|
$
|
2,585,343
|
|
Goodwill acquired
(1)
|
|
|
(7,652
|
)
|
|
|
2,220
|
|
|
|
(5,432
|
)
|
Foreign currency translation
|
|
|
—
|
|
|
|
(2,476
|
)
|
|
|
(2,476
|
)
|
Balance at June 30, 2017
|
|
|
2,479,496
|
|
|
|
97,939
|
|
|
|
2,577,435
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
2,995
|
|
|
|
2,995
|
|
Balance at September 30, 2017
|
|
$
|
2,479,496
|
|
|
$
|
100,934
|
|
|
$
|
2,580,430
|
|
__________________
|
(1)
|
Includes goodwill initially allocated to new business acquisitions as well as purchase accounting adjustments.
|
Long-term debt consisted of the following (in thousands):
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Bank credit facility – term loans
|
|
$
|
965,376
|
|
|
$
|
978,867
|
|
Bank credit facility – revolver loans
|
|
|
215,000
|
|
|
|
265,000
|
|
Principal amount of long-term debt
|
|
|
1,180,376
|
|
|
|
1,243,867
|
|
Less unamortized debt issuance costs
|
|
|
(11,196
|
)
|
|
|
(12,304
|
)
|
Total long-term debt
|
|
|
1,169,180
|
|
|
|
1,231,563
|
|
Less current portion
|
|
|
(67,456
|
)
|
|
|
(53,965
|
)
|
Long-term debt, net of current portion
|
|
$
|
1,101,724
|
|
|
$
|
1,177,598
|
|
Bank Credit Facility
The Company has a $1,981.3 million credit facility (the Credit Facility), which consists of an $850.0 million revolving credit facility (the Revolving Facility) and a $1,131.3 million term loan (the Term Loan). The Revolving Facility has subfacilities of $100.0 million for same-day swing line loan borrowings and $25.0 million for stand-by letters of credit. At any time and so long as no default has occurred, the Company has the right to increase the Revolving Facility or the Term Loan in an aggregate principal amount of up to the greater of $400.0 million or an amount subject to 2.75 times senior secured leverage, calculated assuming the Revolving Facility is fully drawn, with applicable lender approvals. The Credit Facility is available to refinance existing indebtedness and for general corporate purposes, including working capital expenses and capital expenditures.
The Revolving Facility is a secured facility that permits continuously renewable borrowings of up to $850.0 million. As of September 30, 2017, the Company had $215.0 million outstanding under the Revolving Facility, no borrowings on the swing line and an outstanding letter of credit of $0.4 million. The Company pays a quarterly facility fee for the unused portion of the Revolving Facility.
The Term Loan is a five-year secured facility under which principal payments are due in quarterly installments of $13.5 million through June 30, 2018 and $27.0 million thereafter until the balance is due in full on June 1, 2020. As of September 30, 2017, the Company had $965.4 million outstanding under the Term Loan.
The interest rates applicable to loans under the Credit Facility are floating interest rates that, at the Company’s option, equal a base rate or a Eurodollar rate plus, in each case, an applicable rate based upon the Company’s consolidated total leverage ratio. As of September 30, 2017, the effective interest rate, including the impact of the Company’s floating-to-fixed interest rate swap agreements and excluding the effect of amortization of debt financing costs, for the outstanding borrowings under the Credit Facility was 3.26 percent.
9
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 inc
ur 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 enga
ge in mergers, acquisitions or other business combinations, in each case except as expressly permitted under the Credit Facility. As of September 30, 2017, the Company was in compliance with all of the financial covenants. A majority of the Company’s ass
ets serve as collateral under the Credit Facility.
All debt issuance costs are being amortized from the date incurred to the expiration date of the Credit Facility.
Cash Flow Hedges
The Company periodically uses derivative financial instruments as part of a strategy to manage exposure to market risks associated with interest rate fluctuations. The Company has entered into several floating-to-fixed interest rate swap agreements for an aggregate notional amount of $800.0 million which hedge a portion of the Company’s floating rate indebtedness. The swaps mature at various dates through 2022. The Company has designated the swaps as cash flow hedges. Unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The interest rate swap agreements are highly correlated to the changes in interest rates to which the Company is exposed. Unrealized gains and losses on these swaps are designated as effective or ineffective. Realized gains and losses in connection with each required interest payment are reclassified from accumulated other comprehensive income or loss to interest expense. The Company does not hold or issue derivative financial instruments for trading purposes.
The effect of derivative instruments in the consolidated statements of operations and accumulated other comprehensive loss for the three months ended September 30, 2017 and 2016 is as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
(346
|
)
|
|
$
|
605
|
|
Amounts reclassified to earnings from accumulated other
comprehensive loss
|
|
|
854
|
|
|
|
2,249
|
|
Net current period other comprehensive income
|
|
$
|
508
|
|
|
$
|
2,854
|
|
The aggregate maturities of long-term debt at September 30, 2017 are as follows (in thousands):
Twelve months ending September 30,
|
|
|
|
|
2018
|
|
$
|
67,456
|
|
2019
|
|
|
107,930
|
|
2020
|
|
|
1,004,990
|
|
Principal amount of long-term debt
|
|
|
1,180,376
|
|
Less unamortized debt issuance costs
|
|
|
(11,196
|
)
|
Total long-term debt
|
|
$
|
1,169,180
|
|
6
.
|
Commitments and Contingencies
|
The Company is involved in various lawsuits, claims, and administrative proceedings arising in the normal course of business. Management is of the opinion that any liability or loss associated with such matters, either individually or in the aggregate, will not have a material adverse effect on the Company’s operations and liquidity.
10
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Government Contracting
Payments to the Company on cost-plus-fee and time-and-materials contracts are subject to adjustment upon audit by the Defense Contract Audit Agency (DCAA) and other government agencies that do not utilize DCAA’s services. The DCAA is nearing completion of audits of the Company’s incurred cost submissions for its fiscal years 2012 and 2013, and continues its audits of incurred cost submission for fiscal years 2011 through 2013 associated with CACI’s acquisition of NSS. An intelligence agency just recently completed its audit of direct costs on selected contracts for fiscal years 2013 through 2015. We are still negotiating the results of prior years’ audits with the respective cognizant contracting officers and believe our reserves for such are adequate. In the opinion of management, adjustments that may result from these audits and the audits not yet started are not expected to have a material effect on the Company’s financial position, results of operations, or cash flows as the Company has accrued its best estimate of potential disallowances. Additionally, the DCAA continually reviews the cost accounting and other practices of government contractors, including the Company. In the course of those reviews, cost accounting and other issues are identified, discussed and settled.
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 has provided documents responsive to the subpoena and is cooperating fully with the government’s investigation. The Company has accrued its current best estimate of the likely outcome within its estimated range of zero to $3.9 million.
7
.
|
Stock-Based Compensation
|
Stock-based compensation expense recognized, together with the income tax benefits recognized, is as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Stock-based compensation related to RSUs included in
indirect costs and selling expense
|
|
$
|
6,351
|
|
|
$
|
4,897
|
|
Income tax benefit recognized for stock-based compensation expense
|
|
$
|
1,587
|
|
|
$
|
1,757
|
|
Under the terms of the 2016 Amended and Restated Incentive Compensation Plan (the 2016 Plan), the Company may issue, among others, non-qualified stock options, restricted stock, RSUs, SSARs, and performance awards, collectively referred to herein as equity instruments. The 2016 Plan was approved by the Company’s stockholders in November 2016 and amended and restated the 2006 Stock Incentive Plan (the 2006 Plan) which was due to expire at the end of the ten-year period. Previous grants that were made under the 2006 Plan, and equity instruments granted prior to approval of the 2016 Plan continue to be governed by the terms of the 2006 Plan. During the periods presented all equity instrument grants were made in the form of RSUs. Other than performance-based RSUs (PRSUs) which contain a market-based element, the fair value of RSU grants was determined based on the closing price of a share of the Company’s common stock on the date of grant. The fair value of RSUs with market-based vesting features was also measured on the grant date, but was done so using a binomial lattice model.
Annual grants under the 2016 Plan, and previously 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.
I
n September 2014, the Company made its annual grant to key employees consisting of 180,570 PRSUs. The final number of such PRSUs that are earned by participants and vest is based on the achievement of a specified earnings per share (EPS) for the year ended June 30, 2015 and on the average share price of Company stock for the 90 day period ending September 23, 2015, 2016 and 2017 as compared to the average share price for the 90 day period ended September 23, 2014. The specified EPS for the year ended June 30, 2015 was met and the average share price of the Company’s stock for the 90 day periods ending September 23, 2015, 2016 and 2017 exceeded the average share price of the Company’s stock for the 90 day period ended September 23, 2014, resulting in an additional 63,642 RSUs earned by participants.
In September 2015, the Company made its annual grant to key employees consisting of 208,160 PRSUs. The final number of such PRSUs that are earned by participants and vest is based on the achievement of a specified EPS for the year ending June 30, 2016 and on the average share price of Company stock for the 90 day periods ending September 18, 2016, 2017 and 2018 as compared to the average share price for the 90 day period ended September 18, 2015. The specified EPS for the year ended June 30, 2016 was met and the average share price of the Company’s stock for the 90 day period ending September 18, 2016 and 2017 exceeded the average share price of the Company’s stock for the 90 day period ended September 18, 2015, resulting in an additional 48,068 RSUs earned by participants.
11
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
In September 2016, the
Company made its annual grant to key employees consisting of 193,420 PRSUs. The final number of such PRSUs that are earned by participants and vest is based on the achievement of a specified EPS for the year ended June 30, 2017 and on the average share pr
ice of Company stock for the 90 day period ending September 30, 2017, 2018 and 2019 as compared to the average share price for the 90 day period ended September 30, 2016. The specified EPS for the year ended June 30, 2017 was met and the average share pri
ce of the Company’s stock for the 90 day period ending September 30, 2017 exceeded the average share price of the Company’s stock for the 90 day period ended September 30, 2016, resulting in an additional 21,824 RSUs earned by participants.
In September 2017, the Company made its annual grant to key employees consisting of 146,550 PRSUs. The final number of such PRSUs that are earned by participants and vest is based on the achievement of a specified EPS for the year ended June 30, 2018 and on the average share price of Company stock for the 90 day period ending September 15, 2018, 2019 and 2020 as compared to the average share price for the 90 day period ended September 15, 2017. If the specified EPS for the year ended June 30, 2018 is met and if the average share price of the Company’s stock for the 90 day period ending September 15, 2018, 2019 and 2020 exceeds the average share price of the Company’s stock for the 90 day period ended September 15, 2017 by 100 percent or more, then an additional 146,550 could be earned by participants. This is the maximum number of additional RSUs that can be earned related to the September 2017 annual grant. In addition to the performance and market conditions, there is a service vesting condition which stipulates that 50 percent of the earned award will vest on October 1, 2020 and 50 percent of the earned award will vest on October 1, 2021, in both cases dependent upon continuing service by the grantee as an employee of the Company, unless the grantee is eligible for earlier vesting upon retirement or certain other events.
As of September 30, 2017, the total number of shares authorized by shareholders for grants under the 2016 Plan and its predecessor plan is 1,200,000 plus any forfeitures from the 2006 Plan. The aggregate number of grants that may be made may exceed this approved amount as forfeited SSARs, stock options, restricted stock and RSUs, and vested but unexercised SSARs and stock options that expire, become available for future grants. As of September 30, 2017, cumulative grants of 259,621 equity instruments underlying the shares authorized have been awarded, and 64,730 of these instruments have been forfeited.
Activity related to RSUs during the three months ended September 30, 2017 is as follows:
|
|
RSUs
|
|
Unvested at June 30, 2017
|
|
|
834,607
|
|
Granted
|
|
|
217,865
|
|
Vested
|
|
|
(248,671
|
)
|
Forfeited
|
|
|
(12,561
|
)
|
Unvested at September 30, 2017
|
|
|
791,240
|
|
Weighted-average grant date fair value for RSUs
|
|
$
|
151.33
|
|
As of September 30, 2017, there was $51.1 million of total unrecognized compensation costs related to RSUs scheduled to be recognized over a weighted-average period of 3.1 years.
12
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
ASC 260, Earnings Per Share (ASC 260), requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock but not securities that are anti-dilutive. Using the treasury stock method, diluted earnings per share include the incremental effect of RSUs that are no longer subject to a market or performance condition. The PRSUs granted in September 2017 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
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
42,046
|
|
|
$
|
36,663
|
|
Weighted-average number of basic shares outstanding
during the period
|
|
|
24,487
|
|
|
|
24,340
|
|
Dilutive effect of RSUs after application of treasury stock method
|
|
|
756
|
|
|
|
588
|
|
Weighted-average number of diluted shares outstanding
during the period
|
|
|
25,243
|
|
|
|
24,928
|
|
Basic earnings per share
|
|
$
|
1.72
|
|
|
$
|
1.51
|
|
Diluted earnings per share
|
|
$
|
1.67
|
|
|
$
|
1.47
|
|
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 two state jurisdictions for the years 2010 through 2017. The Company does not expect resolution of these examinations to have a material impact on its results of operations, financial condition or cash flows.
The Company’s total liability for unrecognized tax benefits as of September 30, 2017 and June 30, 2017 was $1.7 million for both periods. The $1.7 million unrecognized tax benefit at September 30, 2017, if recognized, would impact the Company’s effective tax rate.
The effective tax rate was 25.0 percent and 35.9 percent during the three months ended September 30, 2017 and 2016, respectively. Excess tax benefits under ASU 2016-09 reduced the effective tax rate during the three months ended September 30, 2017 and 2016 by 11.8 percent and 1.5 percent, respectively. We do not expect any other tax rate changes due to vesting of stock compensation in FY18. The effective tax rate for both periods was also reduced by gains from the change in value of assets invested in corporate owned life insurance (COLI) policies. If gains or losses on the COLI investments throughout the rest of the current fiscal year vary from our estimates, our effective tax rate will fluctuate in future quarters for the year ending June 30, 2018. The tax rate for the three months ended September 30, 2017 was also favorably effected by the research and development tax credit
13
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
10.
|
Business Segment Information
|
The Company reports operating results and financial data in two segments: domestic operations and international operations. Domestic operations provide information solutions and services to its customers. Its customers are primarily U.S. federal government agencies. Other customers of the Company’s domestic operations include state and local governments and commercial enterprises. The Company places employees in locations around the world in support of its clients. International operations offer services to both commercial and non-U.S. government customers primarily within the Company’s business systems and enterprise IT markets. The Company evaluates the performance of its operating segments based on net income. Summarized financial information concerning the Company’s reportable segments is as follows (in thousands):
|
|
Domestic Operations
|
|
|
International Operations
|
|
|
Total
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
1,050,883
|
|
|
$
|
34,931
|
|
|
$
|
1,085,814
|
|
Net income
|
|
|
38,833
|
|
|
|
3,213
|
|
|
|
42,046
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
$
|
1,038,891
|
|
|
$
|
34,389
|
|
|
$
|
1,073,280
|
|
Net income
|
|
|
33,642
|
|
|
|
3,021
|
|
|
|
36,663
|
|
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.
|
The Company’s financial instruments measured at fair value included interest rate swap agreements and contingent consideration in connection with business combinations. The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and June 30, 2017, and the level they fall within the fair value hierarchy (in thousands):
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
Financial Statement
|
|
Fair Value
|
|
2017
|
|
|
2017
|
|
Description of Financial Instrument
|
|
Classification
|
|
Hierarchy
|
|
Fair Value
|
|
Contingent consideration
|
|
Other accrued expenses and
current liabilities
|
|
Level 3
|
|
$
|
11,063
|
|
|
$
|
14,889
|
|
Contingent consideration
|
|
Other long-term liabilities
|
|
Level 3
|
|
$
|
—
|
|
|
$
|
658
|
|
Interest rate swap agreements
|
|
Other long-term assets
|
|
Level 2
|
|
$
|
5,546
|
|
|
$
|
5,559
|
|
Interest rate swap agreements
|
|
Other accrued expenses and
current liabilities
|
|
Level 2
|
|
$
|
202
|
|
|
$
|
3
|
|
Interest rate swap agreements
|
|
Other long-term liabilities
|
|
Level 2
|
|
$
|
2,061
|
|
|
$
|
3,110
|
|
14
CACI INTERNATIONAL INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Changes in the fair value of the interest rate swap agreements are recorded as a component of accumulated
other comprehensive income or loss.
Various acquisitions completed during prior fiscal years contained provisions requiring that the Company pay contingent consideration in the event the acquired businesses achieved certain specified earnings results during the two and three year periods subsequent to each acquisition. The Company determined the fair value of the contingent consideration as of each acquisition date using a valuation model which included the evaluation of the most likely outcome and the application of an appropriate discount rate. At the end of each reporting period, the fair value of the contingent consideration was remeasured and any changes were recorded in indirect costs and selling expenses. During the three months ended September 30, 2017 and 2016, respectively, this remeasurement resulted in a $0.9 million and $0.4 million change to the liability recorded.
On October 1, 2017, CACI Limited acquired 100 percent of the outstanding shares of a United Kingdom IT consulting services and software engineering company. The purchase consideration is approximately $8.8 million, which includes initial cash payments, deferred consideration and an estimated net working capital payment.
On November 1, 2017, CACI Limited acquired 100 percent of the outstanding shares of a London-based software and mapping data company. The company provides geographical information systems, logistics and route optimization software and related map data. The purchase consideration is approximately $6.6 million, which includes initial cash payments, deferred consideration and an estimated net working capital payment.
15